<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NEW TENNECO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 6719 76-0515284
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
1275 KING STREET
GREENWICH, CONNECTICUT 06831
(203) 863-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KARL A. STEWART
VICE PRESIDENT AND SECRETARY
1275 KING STREET
GREENWICH, CONNECTICUT 06831
(203) 863-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and all other conditions to the exchange offers described in the
enclosed Prospectus have been satisfied or waived.
----------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities............. $1,950,000,000 106.1%(1) $2,069,000,000 $626,970
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee,
pursuant to Rule 457(f) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS AND CONSENT SOLICITATION (Subject to Completion, dated October 11,
1996)
$1,950,000,000
New Tenneco Inc.
(to be renamed Tenneco Inc.)
Offer to Exchange and Consent Solicitation
----------
New Tenneco Inc., a Delaware corporation ("New Tenneco"), hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and
Consent Solicitation (this "Prospectus") and in the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange up to $1,950,000,000
aggregate principal amount of the newly issued notes and debentures listed
below of New Tenneco (the "New Securities") for any and all of the
$1,950,000,000 aggregate principal amount of certain outstanding notes and
debentures issued by Tenneco Inc., a Delaware corporation ("Tenneco") and the
indirect parent company of New Tenneco, listed below (the "Old Securities")
(such offers, together with the related Consent Solicitation (as defined), are
referred to individually as an "Exchange Offer" and collectively as the
"Exchange Offers").
The following table sets forth the various series of Old Securities and
indicates the New Securities to be received by the holders of Old Securities
upon acceptance for exchange thereof by New Tenneco. See "The Exchange Offers."
<TABLE>
<CAPTION>
OUTSTANDING
AGGREGATE
PRINCIPAL FOR EACH $1,000 PRINCIPAL AMOUNT THE EXCHANGING HOLDERS WILL RECEIVE $1,000
CUSIP NO. AMOUNT OF THE FOLLOWING OLD SECURITIES: PRINCIPAL AMOUNT OF THE FOLLOWING NEW SECURITIES:
- --------- ----------- -------------------------------- -------------------------------------------------
<S> <C> <C> <C>
[to be provided by amendment]
</TABLE>
Interest on the Old Securities exchanged in the Exchange Offers will continue
to accrue up to, but excluding, the applicable Exchange Date (as defined) and
will be paid in cash in immediately available same-day funds to exchanging
holders concurrently with the delivery of the New Securities. Interest on the
New Securities issued in exchange for the Old Securities will accrue from, and
including, the applicable Exchange Date at the applicable interest rate on such
New Securities. Upon the terms and subject to the conditions of the Exchange
Offers (including, if any Exchange Offer is extended or amended, the terms and
conditions of any such extension or amendment) and applicable law, New Tenneco
will accept for exchange Old Securities validly tendered (and not withdrawn)
pursuant to an Exchange Offer and will acquire such Old Securities by issuing
New Securities therefor on the third New York Stock Exchange ("NYSE") trading
day following the applicable expiration time of the Exchange Offer, or as soon
thereafter as practicable (the "Exchange Date").
(cover page continues)
EACH OF THE EXCHANGE OFFERS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , , 1996,
UNLESS EXTENDED OR EARLIER TERMINATED.
Application will be made for listing the New Securities on the NYSE.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING THE EXCHANGE OFFERS.
----------
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.
----------
To accept an Exchange Offer, holders of Old Securities should contact Morgan
Stanley & Co. Incorporated, which is acting as Dealer Manager for the Exchange
Offers ("Morgan Stanley" or the "Dealer Manager"). Requests for copies of the
Exchange Offer materials should be directed to Georgeson & Company, Inc. (the
"Information Agent") at the telephone number set forth on the back cover of
this Prospectus. None of New Tenneco, Tenneco and Morgan Stanley makes any
recommendation as to whether or not holders should exchange their Old
Securities pursuant to the Exchange Offers and provide Consents (as defined) to
the Proposed Amendments (as defined).
----------
The Dealer Manager for the Exchange Offers is
MORGAN STANLEY & CO.
Incorporated
, 1996
<PAGE>
(continuation of cover page)
Concurrently with the Exchange Offers, New Tenneco, on behalf of Tenneco, is
soliciting (the "Consent Solicitation") consents from the holders of the Old
Securities (together with the consents being solicited by Tenneco pursuant to
the Tender Offers (as defined), the "Consents") to certain amendments (the
"Proposed Amendments") to the indenture pursuant to which the Old Securities
were issued. Holders of Old Securities who tender such Old Securities for
exchange pursuant to the Exchange Offers will be required, as a condition to a
valid tender, to have given their Consent to all of the Proposed Amendments
with respect to such Old Securities. No separate payments will be made for
Consents given pursuant hereto. See "The Exchange Offers--The Consent
Solicitation."
The Exchange Offers are one component of a plan (the "Debt Realignment")
designed to restructure the indebtedness for money borrowed of Tenneco and
certain of its subsidiaries as part of the proposed reorganization of Tenneco
(the "Transaction") pursuant to which, among other things, (i) Tenneco will
spin off (the "Distributions") New Tenneco, which will own Tenneco's
automotive parts, packaging and administrative services businesses, and
Newport News Shipbuilding Inc., which will own Tenneco's shipbuilding
business, and (ii) an indirect wholly owned subsidiary of El Paso Natural Gas
Company ("El Paso") will merge with and into Tenneco (the "Merger"), with
Tenneco surviving the Merger as a subsidiary of El Paso. Upon consummation of
the Merger, Tenneco will be renamed El Paso Tennessee Pipeline Co. and New
Tenneco will be renamed Tenneco Inc. See "Description of the Transaction."
New Tenneco will not be required to accept for exchange any Old Securities
tendered for exchange, and may terminate any Exchange Offer, if, among other
things: (i) Consents to the Proposed Amendments are not received from the
registered holders of at least a majority of the aggregate principal amount of
the Old Securities and the other debt securities outstanding under the Tenneco
indenture, taken together (which represent the consents required to amend the
Tenneco indenture); (ii) all conditions to the Tender Offers have not been
satisfied; or (iii) any material condition to the consummation of the
Distributions or the Merger remains unsatisfied. See "The Exchange Offers--
Conditions to the Exchange Offers."
New Tenneco expressly reserves the right, in its sole discretion, subject to
applicable law, at any time and from time to time, to (i) terminate any of the
Exchange Offers and not accept for exchange any Old Securities if any
conditions to the Exchange Offers are not satisfied and not waived by New
Tenneco, (ii) waive any condition to any Exchange Offer and accept all Old
Securities previously tendered for exchange pursuant to such Exchange Offer,
(iii) extend the expiration of any of the Exchange Offers and retain all Old
Securities tendered for exchange pursuant thereto, subject, however, to the
withdrawal rights of holders as described under "The Exchange Offers--
Withdrawal Rights," and/or (iv) amend the terms of any of the Exchange Offers.
Any amendment of an Exchange Offer will apply to all Old Securities of the
same series tendered for exchange pursuant to such Exchange Offer. See "The
Exchange Offers--Expiration Time; Extensions; Termination; Amendments."
The New Securities will be senior unsecured obligations of New Tenneco and
will rank pari passu with all existing and future senior unsecured
indebtedness of New Tenneco. The terms of each series of New Securities will
be substantially the same in all material respects as the terms of the
corresponding series of Old Securities except that (i) the New Securities will
be issued by New Tenneco, (ii) the interest rate on each series of the New
Securities will be higher than the interest rate on each corresponding series
of Old Securities as set forth herein, and (iii) the New Indenture (as
defined) contains a negative pledge covenant, events of default and other
provisions which differ, in certain respects, from the corresponding
provisions in the Tenneco indenture. See "Description of the New Securities."
ii
<PAGE>
(continuation of cover page)
If the Proposed Amendments become effective, each holder of Old Securities
that are not properly tendered and accepted for exchange hereunder will be
bound by the Proposed Amendments regardless of whether such holder consented
to the Proposed Amendments. After giving effect to the Proposed Amendments and
the Transaction, the Old Securities that are not exchanged pursuant to the
Exchange Offers will remain obligations of Tenneco only and will not be
guaranteed by or be an obligation of New Tenneco, El Paso or any other entity.
See "Risk Factors."
Consummation of the Exchange Offers and the other components of the
Transaction, and the adoption of the Proposed Amendments, may have adverse
consequences for holders of Old Securities who elect not to tender in the
Exchange Offers, including the following: (i) the Tenneco indenture will be
amended to specifically permit the Distributions and the Merger and certain
transactions contemplated thereby without compliance with certain existing
covenants relating to sales or other dispositions of assets (the application
of which New Tenneco believe, in any event, is uncertain in these
circumstances); (ii) the Tenneco indenture will be amended to change or
eliminate certain covenants, events of default and other provisions therein;
(iii) upon consummation of the Transaction, any Old Securities then
outstanding will remain unsecured obligations of Tenneco, the consolidated
assets, revenues, net income and scope of business of which will be
significantly reduced and changed by reason of the Transaction, and Tenneco
will then have, and may thereafter incur, substantial new debt; (iv) the Old
Securities that remain outstanding after consummation of the Exchange Offers
and the other components of the Transaction may have lower debt ratings than
they had prior to the Transaction (the Old Securities are currently rated Baa2
(under review with direction uncertain) by Moody's Investors Service, Inc.
("Moody's") and BBB- (on CreditWatch with developing implications) by Standard
& Poor's Corporation ("S&P")); and (v) the Old Securities that are listed on
the NYSE may be delisted and the trading market for such Old Securities could
become more limited, which could adversely affect the market price of such Old
Securities. See "Risk Factors'' and ""The Exchange Offers--The Consent
Solicitation."
Tenders of Old Securities may be withdrawn at any time at or prior to the
expiration of the applicable Exchange Offer, but are thereafter irrevocable
unless the related Exchange Offer is terminated without any Old Securities
being purchased thereunder. A withdrawal of Old Securities tendered for
exchange at or prior to the expiration of the applicable Exchange Offer will
be deemed a revocation of the related Consent. See "The Exchange Offers--The
Consent Solicitation" and "The Exchange Offers--Withdrawal Rights."
----------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE MATTERS
DESCRIBED IN THIS PROSPECTUS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
(INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN). IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NEW TENNECO OR THE DEALER MANAGER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF NEW TENNECO SINCE
SUCH DATE.
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NEW SECURITIES MAY BE REQUIRED TO DELIVER A
PROSPECTUS.
----------------
THE EXCHANGE OFFERS (INCLUDING THE CONSENT SOLICITATION) ARE NOT BEING MADE
TO (NOR WILL THE SURRENDER OF OLD SECURITIES FOR EXCHANGE BE ACCEPTED FROM OR
ON BEHALF OF) HOLDERS OF OLD SECURITIES IN ANY JURISDICTION IN WHICH THE
MAKING OR ACCEPTANCE OF ANY EXCHANGE OFFER (INCLUDING THE CONSENT
SOLICITATION) WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
iii
<PAGE>
AVAILABLE INFORMATION
New Tenneco has filed with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the New Securities offered
hereby (together with all amendments thereto, the "Registration Statement").
New Tenneco has also filed with the Commission a registration statement under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to New Tenneco's common stock and associated preferred stock purchase
rights to be distributed to Tenneco common stockholders in the Distributions.
This Prospectus does not contain all of the information set forth in such
registration statements and the exhibits and schedules thereto. For further
information with respect to New Tenneco and the New Securities, reference is
made to such registration statements and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed or
incorporated by reference as an exhibit to the Registration Statement and each
such statement is qualified in all respects by such reference.
Tenneco is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Following the Distributions, New Tenneco will
be subject to the informational requirements of the Exchange Act and, in
accordance therewith, will file periodic reports and other information with
the Commission.
The Registration Statement, and exhibits and schedules thereto, filed by New
Tenneco, and the reports, proxy statements and other information filed with
the Commission by Tenneco can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates or may be accessed electronically on the
Commission's website at (http://www.sec.gov). Securities of Tenneco are listed
on the NYSE and the Chicago and Pacific Stock Exchanges, and reports and other
information concerning Tenneco can be inspected at such exchanges. Application
will be made to list the New Securities on the NYSE, and reports and other
information concerning New Tenneco can be inspected at the NYSE, 20 Broad
Street, New York, New York 10005.
Additional information concerning the Transaction is contained in the Joint
Proxy Statement/Prospectus of Tenneco and El Paso, dated , 1996, included
as part of El Paso's Registration Statement on Form S-4, as amended (File No.
333-10911) filed with the Commission in connection with the Transaction (the
"Joint Proxy Statement"). The Joint Proxy Statement is being distributed to
Tenneco's stockholders in connection with their consideration of the
Transaction at a special meeting of Tenneco stockholders (the "Tenneco Special
Meeting"), presently scheduled to be held on , 1996, and is available
upon written or oral request to Karl A. Stewart, Vice President and Secretary,
Tenneco Inc., 1275 King Street, Greenwich, Connecticut 06831, telephone (203)
863-1000.
iv
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed with the Commission by Tenneco
pursuant to the Exchange Act are incorporated by reference into this
Prospectus and shall be deemed to be a part hereof:
(a) Tenneco's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended by Tenneco's Form 10-K/A dated August 27,
1996;
(b) Tenneco's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1996 and June 30, 1996;
(c) Tenneco's Definitive Proxy Statement for the Annual Meeting of
Stockholders held on May 14, 1996; and
(d) Tenneco's Current Reports on Form 8-K dated November 17, 1995,
February 2, 1996, March 21, 1996, June 6, 1996, and June 19, 1996.
All documents subsequently filed by Tenneco and New Tenneco pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the securities
offered hereby shall be deemed incorporated in this Prospectus by reference
and to be a part of this Prospectus from the date of the filing of such
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document that also is incorporated
or 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.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WITH RESPECT TO TENNECO
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
(EXCLUDING EXHIBITS THERETO, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE TO
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF OLD SECURITIES, TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO KARL A. STEWART, VICE
PRESIDENT AND SECRETARY, TENNECO INC., 1275 KING STREET, GREENWICH,
CONNECTICUT 06831, TELEPHONE (203) 863-1000. TO ENSURE TIMELY DELIVERY OF SUCH
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1996.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning, among other
things, New Tenneco's prospects, developments and business strategies for its
operations, all of which are subject to risks and uncertainties. These
forward-looking statements are identified by their use of such terms and
phrases as "intends," "goal," "expects," "expect," "expected," "plans,"
"anticipates," "should," "designed to," "foreseeable future" and "believes"
and are generally followed by a cross reference to "Risk Factors." New
Tenneco's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include (a) the factors discussed in the section or sections under "Risk
Factors" that are referred to in the cross reference that follows the forward-
looking statement as well as other factors discussed under "Risk Factors," (b)
the factors discussed under "Description of New Tenneco," and (c) the
following additional factors: (i) the general economic and competitive
conditions in the markets and countries where New Tenneco operates; (ii)
changes in capital availability or costs such as changes in interest rates,
market perceptions of the industries in which New Tenneco operates or security
ratings; (iii) fluctuations in demand for certain of New Tenneco's products;
(iv) the
v
<PAGE>
cost of compliance with changes in regulations, including environmental
regulations; (v) employee workforce factors, including collective bargaining
agreements or work stoppages; (vi) growth strategies through acquisitions and
investments in joint ventures may face legal and regulatory delays and other
unforeseeable obstacles beyond New Tenneco's control; (vii) cost control
efforts may be affected by the timing of related work force reductions and
might be further offset by unusual and unexpected items resulting from such
events as unexpected environmental remediation costs in excess of reserves;
(viii) future operating results and success of business ventures in the United
States and foreign markets may be subject to the effects of, and changes in,
United States and foreign trade and monetary policies, laws and regulations,
political and governmental changes, inflation and exchange rates, taxes, and
operating conditions; and (ix) authoritative generally accepted accounting
principle or policy changes from such standard setting bodies as the Financial
Accounting Standards Board and the Commission.
When a forward-looking statement includes a statement of the assumptions or
basis underlying the forward-looking statement, New Tenneco cautions that,
while it believes such assumptions or basis to be reasonable and makes them in
good faith, assumed facts or basis almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, New Tenneco or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
vi
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... iv
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................... v
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995......................... v
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 17
Risk Factors Relating to Holders Tendering in the Exchange Offers....... 17
Risk Factors Relating to Holders Not Tendering in the Exchange Offers... 19
THE EXCHANGE OFFERS....................................................... 22
Terms of the Exchange Offers............................................ 22
The Consent Solicitations............................................... 23
Expiration Time; Extensions; Termination; Amendments.................... 23
Effect of Tender........................................................ 24
Acceptance of Old Securities Tendered for Exchange; Delivery of New Se-
curities............................................................... 25
Procedures for Tendering Old Securities for Exchange and Giving Con-
sents.................................................................. 25
Conditions to the Exchange Offers....................................... 30
Withdrawal Rights....................................................... 31
Dealer Manager.......................................................... 32
Exchange Agent.......................................................... 32
Information Agent....................................................... 32
Trustee ................................................................ 32
Fees and Expenses....................................................... 32
MARKET AND TRADING INFORMATION............................................ 33
ACCOUNTING TREATMENT OF THE EXCHANGE OFFERS............................... 34
THE PROPOSED AMENDMENTS................................................... 34
DESCRIPTION OF THE NEW SECURITIES......................................... 43
General................................................................. 43
New Securities.......................................................... 43
Certain Covenants of New Tenneco........................................ 43
Consolidation, Merger and Sale of Assets................................ 46
Events of Default....................................................... 46
Modification of the New Indenture....................................... 47
Defeasance and Covenant Defeasance...................................... 47
The New Trustee......................................................... 48
Global Securities....................................................... 48
Physical Securities..................................................... 48
Book-Entry System....................................................... 48
DESCRIPTION OF THE TRANSACTION............................................ 50
THE NPS ISSUANCE.......................................................... 51
DEBT AND CASH REALIGNMENT................................................. 51
Debt Realignment........................................................ 52
Capital Expenditure Adjustment.......................................... 53
Cash Realignment ....................................................... 53
CORPORATE RESTRUCTURING TRANSACTIONS ..................................... 53
THE DISTRIBUTIONS......................................................... 55
Manner of Distribution.................................................. 55
Certain Other Pre-Distribution Transactions............................. 55
Relationship Among Tenneco, New Tenneco and Newport News After the Dis-
tributions............................................................. 55
Conditions to Consummation of the Distributions......................... 60
Amendment or Termination of the Distributions........................... 60
</TABLE>
vii
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MERGER................................................................ 62
General................................................................. 62
Effects of the Merger................................................... 62
Certain Other Pre-Merger Transactions .................................. 62
El Paso Guaranty of Tenneco Performance................................. 63
Conditions Precedent.................................................... 63
Employee Benefits ...................................................... 64
Amendment or Termination of the Merger Agreement........................ 65
Waiver.................................................................. 66
Termination Fee......................................................... 66
Consulting Arrangement.................................................. 67
THE CHARTER AMENDMENT..................................................... 67
DESCRIPTION OF NEW TENNECO................................................ 68
Introduction............................................................ 68
Business Strategy....................................................... 68
Tenneco Automotive...................................................... 70
Tenneco Packaging....................................................... 78
Tenneco Business Services............................................... 84
Properties.............................................................. 84
Environmental Matters................................................... 85
Legal Proceedings....................................................... 86
New Tenneco Credit Facility............................................. 86
Management.............................................................. 87
Capitalization.......................................................... 100
Unaudited Pro Forma Combined Financial Statements....................... 101
Combined Selected Financial Data........................................ 107
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 108
DESCRIPTION OF TENNECO.................................................... 122
Capitalization ......................................................... 123
Unaudited Pro Forma Consolidated Financial Statements................... 124
Selected Consolidated Financial Data.................................... 131
DESCRIPTION OF TENNECO ENERGY............................................. 133
General................................................................. 133
Interstate Pipeline Operations.......................................... 133
Gas Marketing, Intrastate Pipelines and Related Services................ 137
International, Power Generation and Ventures............................ 138
Discontinued and Other Operations....................................... 138
Employees............................................................... 139
Properties.............................................................. 139
Operations of the Energy Business After the Merger...................... 139
Environmental Matters .................................................. 139
Legal Proceedings....................................................... 142
Tenneco Credit Facility................................................. 142
Management.............................................................. 142
Combined Selected Financial Data ....................................... 144
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Energy Business................................... 145
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS............................ 153
General................................................................. 153
Tax Considerations for Holders Who Tender in the Exchange Offers........ 153
Tax Considerations for Holders Who Do Not Tender in the Exchange Offers. 154
Backup Withholding...................................................... 155
LEGAL MATTERS............................................................. 155
EXPERTS................................................................... 155
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULES...................... F-1
</TABLE>
viii
<PAGE>
SUMMARY
New Tenneco has announced its offer to exchange the New Securities set forth
below for any and all of the Old Securities set forth below and its
solicitation of Consents with respect to the Old Securities upon the terms and
subject to the conditions set forth herein. Morgan Stanley has been named
exclusive Dealer Manager for the Exchange Offers (including the Consent
Solicitation). For your convenience, the Exchange Offers are summarized below.
The following summary is not intended to be complete and is qualified in its
entirety by reference to the more detailed information included or incorporated
by reference in this Prospectus. Holders of Old Securities are urged to read
carefully this Prospectus (including the documents incorporated by reference in
their entirety).
THE EXCHANGE OFFERS
THE EXCHANGE OFFERS: New Tenneco is offering to exchange the New
Securities described below for the Old Securities
described below:
<TABLE>
<CAPTION>
OUTSTANDING FOR EACH $1,000 PRINCIPAL THE EXCHANGING HOLDERS WILL
AGGREGATE AMOUNT RECEIVE $1,000
PRINCIPAL OF THE FOLLOWING OLD PRINCIPAL AMOUNT OF THE
CUSIP NO. AMOUNT SECURITIES: FOLLOWING NEW SECURITIES:
- --------- ----------- ------------------------- ---------------------------
<S> <C> <C> <C>
[to be provided by amendment]
</TABLE>
The terms of each series of New Securities will
be substantially the same in all material
respects as the terms of the corresponding series
of Old Securities, except that (i) the New
Securities will be issued by New Tenneco, (ii)
the interest rate on each series of New
Securities will be higher than the interest rate
on each corresponding series of Old Securities as
set forth herein, and (iii) the New Indenture
contains a negative pledge covenant, events of
default and other provisions which differ, in
certain respects, from the corresponding
provisions in the indenture under which the Old
Securities were issued. See "Description of the
New Securities."
Also as part of the Debt Realignment, Tenneco is
making offers (under separate cover) to purchase
for cash (the "Tender Offers") certain debt
securities of Tenneco and its subsidiaries,
Tennessee Gas Pipeline Company ("Tennessee") and
Tenneco Credit Corporation ("TCC"), and in
connection therewith is soliciting consents to
certain amendments to the indentures under which
such securities were issued. The Tenneco debt
securities that are the
1
<PAGE>
subject of Tender Offers (the "Other Securities")
were issued under the same indenture as the Old
Securities. To tender Other Securities pursuant
to the Tender Offers, the holders thereof will be
required to consent to the Proposed Amendments.
The Tender Offers are not being made pursuant to
this Prospectus. The Tender Offers, when
commenced, will only be made by means of a
separate offer to purchase and consent
solicitation. In addition, the Debt Realignment
contemplates the redemption, payment, prepayment
and defeasance of other indebtedness issued by
Tennessee and TCC.
EXPIRATION TIME: Each of the Exchange Offers shall expire at 5:00
p.m., New York City time, on ,
, 1996, unless extended by New Tenneco in
its sole discretion (such date and time or the
latest date and time to which an Exchange Offer
is extended being referred to herein as the
"Expiration Time" for such Exchange Offer) or
earlier terminated. See "The Exchange Offers--
Expiration Time; Extensions; Termination;
Amendments."
EXCHANGE DATE: Upon the terms and subject to the conditions of
the Exchange Offers (including, if any Exchange
Offer is extended or amended, the terms and
conditions of any such extension or amendment)
and applicable law, New Tenneco will accept for
exchange Old Securities validly tendered (and not
withdrawn) at or prior to the Expiration Time
pursuant to an Exchange Offer and thereafter will
acquire such Old Securities by issuing New
Securities in exchange therefor on the third NYSE
trading day following the applicable Expiration
Time, or as soon thereafter as practicable (i.e.,
Exchange Date). See "The Exchange Offers--
Acceptance of Old Securities Tendered for
Exchange; Delivery of New Securities."
INTEREST ON NEW SECURITIES; Interest on the New Securities issued in exchange
ACCRUED INTEREST ON OLD for the Old Securities will accrue from, and
SECURITIES: including, the applicable Exchange Date at the
applicable interest rate on such New Securities.
Interest on Old Securities exchanged in an
Exchange Offer will continue to accrue up to, but
excluding, the applicable Exchange Date and will
be paid in cash in immediately available same-day
funds to exchanging holders concurrently with the
delivery of New Securities; provided, however,
that if the Exchange Date for any series of Old
Securities occurs before an interest payment date
for such series of Old Securities but after the
record date relating to such interest payment
date, then Tenneco (rather than New Tenneco) will
pay accrued interest up to, but excluding, the
applicable Exchange Date on such series of Old
Securities to the holders of such Old Securities
as of such record date on the applicable Exchange
Date (rather than on the regularly scheduled
interest payment date). See "The Exchange
Offers--Acceptance of Old Securities Tendered for
Exchange; Delivery of New Securities."
2
<PAGE>
PROCEDURES FOR Holders will not be entitled to participate in
TENDERING SECURITIES the Exchange Offers unless they tender their Old
AND GIVING CONSENTS: Securities and deliver Consents to the Proposed
Amendments with respect to such Old Securities.
THE TENDER OF OLD SECURITIES PURSUANT TO THE
EXCHANGE OFFERS WILL CONSTITUTE THE GIVING OF A
CONSENT TO THE PROPOSED AMENDMENTS WITH RESPECT
TO SUCH OLD SECURITIES.
Any beneficial owner whose Old Securities are
held of record by a custodian bank, depositary,
broker, trust company or other nominee and who
wishes to exchange Old Securities should promptly
instruct such record holder to tender such Old
Securities on the beneficial owner's behalf
according to one of the procedures described
below.
TENDER OF OLD SECURITIES HELD WITH DTC. Pursuant
to authority granted by The Depository Trust
Company ("DTC"), any DTC participant that has Old
Securities credited to its DTC account may
directly tender such Old Securities as if it were
the record holder thereof (and references herein
to registered or record holders shall include
such participants) by (i) effecting a book-entry
transfer of all Old Securities to be tendered in
the Exchange Offers into the account of The Chase
Manhattan Bank (the "Exchange Agent") at DTC, and
(ii) either (a) effecting an Agent's Message (as
defined), or (b) completing and signing the
Letter of Transmittal in accordance with the
instructions set forth therein and delivering
such properly completed and signed Letter of
Transmittal, together with any signature
guarantees and other documents required thereby,
to the Exchange Agent at its address set forth on
the back cover page of this Prospectus.
DTC participants may, in lieu of physically
completing, signing and delivering to the
Exchange Agent the Letter of Transmittal,
electronically transmit their acceptance of any
Exchange Offer (and thereby provide their Consent
to the Proposed Amendments) through the DTC
Automated Tender Offer Program ("ATOP") by
causing DTC to transfer Old Securities to the
Exchange Agent's DTC account in accordance with
DTC's ATOP procedures for transfer. DTC will then
send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message
transmitted by DTC to, and received by, the
Exchange Agent and forming a part of the book-
entry confirmation, which states that DTC has
received an express acknowledgement from a DTC
participant tendering Old Securities that such
participant has received and agrees to be bound
by the terms of the Letter of Transmittal
(including, without limitation, the fact that
such participant has consented to the Proposed
Amendments in accordance with the terms of such
Letter of Transmittal) and that each of New
Tenneco and Tenneco may enforce such agreement
against such participant.
3
<PAGE>
BOOK-ENTRY DELIVERY PROCEDURES FOR HOLDERS
TENDERING OLD SECURITIES HELD WITH DTC. The
Exchange Agent will establish accounts with
respect to the Old Securities at DTC for purposes
of the Exchange Offers. Any participant in DTC
may make book-entry delivery of Old Securities by
causing DTC to transfer Old Securities into the
Exchange Agent's account in accordance with DTC's
procedure for such transfer. DTC will then send
an Agent's Message to the Exchange Agent. Timely
book-entry delivery of Old Securities pursuant to
the Exchange Offers requires receipt of a book-
entry confirmation by the Exchange Agent at or
prior to the applicable Expiration Time. However,
although delivery of Old Securities may be
effected through book-entry transfer into the
Exchange Agent's account at DTC, an Agent's
Message in connection with a book-entry transfer
or a properly completed Letter of Transmittal (or
facsimile thereof), together with any signature
guarantees and any other documents required
thereby, must, in any case, be delivered to and
received by the Exchange Agent at or prior to the
applicable Expiration Time. Delivery of documents
to DTC does not constitute delivery to the
Exchange Agent.
TENDER OF OLD SECURITIES HELD IN PHYSICAL FORM. A
holder of Old Securities held in physical form
must comply with the following instructions to
tender Old Securities in any of the Exchange
Offers: (i) complete and sign the Letter of
Transmittal in accordance with the instructions
set forth therein; and (ii) deliver the properly
completed and duly executed Letter of
Transmittal, together with any required signature
guarantees and other documents required thereby,
and the Old Securities covered thereby in
physical form to the Exchange Agent at the
address set forth on the back cover page of this
Prospectus at or prior to the applicable
Expiration Time.
LETTERS OF TRANSMITTAL AND OLD SECURITIES IN
PHYSICAL FORM MUST BE SENT ONLY TO THE EXCHANGE
AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR
PHYSICAL SECURITIES TO TENNECO, NEW TENNECO, THE
INFORMATION AGENT, DTC OR THE DEALER MANAGER. THE
METHOD OF DELIVERY OF SUCH DOCUMENTS TO THE
EXCHANGE AGENT, INCLUDING DELIVERY THROUGH DTC
AND ANY ACCEPTANCE OF AN AGENT'S MESSAGE
TRANSMITTED THROUGH ATOP, IS AT THE ELECTION AND
RISK OF THE HOLDER TENDERING THE OLD SECURITIES.
IT IS RECOMMENDED THAT HOLDERS TENDERING THEIR
OLD SECURITIES IN PHYSICAL FORM DELIVER SUCH OLD
SECURITIES TO THE EXCHANGE AGENT AT THE ADDRESS
SET FORTH IN THE BACK COVER PAGE OF THIS
PROSPECTUS BY REGISTERED INSURED MAIL.
GUARANTEED DELIVERY Holders of Old Securities who wish to tender
PROCEDURES: their Old Securities and (i) whose Old Securities
are not immediately available, (ii) who cannot
deliver certificates representing their Old
Securities, the
4
<PAGE>
Letter of Transmittal or any other required
documents to the Exchange Agent, or (iii) who
cannot complete the procedures for book-entry
delivery of Old Securities, at or prior to the
Expiration Time must tender their Old Securities
according to the guaranteed delivery procedures
set forth herein at or prior to the Expiration
Time. See "The Exchange Offers--Procedures for
Tendering Old Securities for Exchange and Giving
Consents--Guaranteed Delivery Procedures."
THE CONSENT As part of the Exchange Offers, New Tenneco, on
SOLICITATION: behalf of Tenneco, is soliciting Consents from
the holders of Old Securities to the Proposed
Amendments. In connection with the Tender Offers,
Tenneco is concurrently soliciting Consents from
the holders of the Other Securities to the
Proposed Amendments. See "The Exchange Offers--
The Consent Solicitation" and "The Proposed
Amendments." Unless the context otherwise
requires, all references herein to an Exchange
Offer shall be deemed to include the Consent
Solicitation. THE PROPER TENDER OF OLD SECURITIES
FOR EXCHANGE PURSUANT TO ONE OF THE PROCEDURES
SET FORTH HEREIN WILL CONSTITUTE THE GIVING OF A
CONSENT WITH RESPECT TO SUCH OLD SECURITIES.
The Old Securities and Other Securities were
issued pursuant to an indenture, dated as of
March 15, 1988 (the "Old Indenture"), between
Tenneco and The Chase Manhattan Bank, as trustee
(the "Old Trustee"). Tenneco and the Old Trustee
intend to execute a supplemental indenture to the
Old Indenture (the "Supplemental Indenture"),
providing for the Proposed Amendments, which will
become operative after receipt of the Requisite
Consents (as defined) and upon acceptance for
exchange or payment, as the case may be, of the
Old Securities and/or the Other Securities
relating to such Consents.
REQUISITE CONSENTS: Consents of registered holders of a majority of
the outstanding aggregate principal amount of the
Old Securities and the Other Securities (which
together constitute all the issued and
outstanding securities under the Old Indenture)
are required (the "Requisite Consents") to amend
the Old Indenture (the "Minimum Tender
Condition").
PROPOSED AMENDMENTS: (i) Addition of provisions to the Old Indenture
that would specifically permit Tenneco to
consummate the Distributions and the
transactions contemplated thereby without
compliance with a covenant that, if held to
apply, might otherwise require each of New
Tenneco and Newport News to become a co-
obligor of securities issued under the Old
Indenture in connection therewith (the
application of which New Tenneco and Tenneco
believe, in any event, is uncertain in these
circumstances);
5
<PAGE>
(ii) Modification of the negative pledge covenant
to (A) apply only to the principal
properties of Tenneco and its subsidiaries
located in the United States or Canada
(rather than all properties and assets), (B)
permit liens incurred in connection with
improvements to properties, (C) increase the
amount of debt that may be secured by a lien
notwithstanding the provisions of the
negative pledge covenant and (D) not apply
to liens existing, or arising under an
"after-acquired" property or similar
provision existing, as of the date of the
Supplemental Indenture;
(iii) Elimination of certain events of default
that would otherwise arise from the default
by Tenneco or one or more of its
subsidiaries under other debt obligations;
and
(iv) Modification of the provisions governing
defeasance of the Old Securities to, among
other things, allow the defeasance of
securities that are to become due and
payable or are to be redeemed within one
year of such defeasance without requiring
Tenneco to deliver an Internal Revenue
Service ("IRS") ruling or a tax opinion as
to the tax consequences of the defeasance.
If the Proposed Amendments become effective with
respect to the Old Indenture, they will apply to
all Old Securities issued under the Old
Indenture, and each holder of such Old Securities
not tendered or accepted for exchange pursuant to
the Exchange Offers will be bound by the Proposed
Amendments regardless of whether such holder
consented to the Proposed Amendments.
CERTAIN CONDITIONS Notwithstanding any other provision of the
PRECEDENT TO THE Exchange Offers (or any extensions or amendments
EXCHANGE OFFERS: thereof), New Tenneco will not be required to
accept any Old Securities tendered for exchange
or issue any New Securities in exchange therefor,
and may terminate any Exchange Offer, if, among
other things:
(i) the Minimum Tender Condition shall not have
been satisfied;
(ii) all conditions to the Tender Offers shall
not have been satisfied; or
(iii) any material condition to the consummation
of the Distributions or the Merger remains
unsatisfied (including the approval of the
Transaction by Tenneco stockholders as more
fully described herein). See "The Exchange
Offers--Conditions to the Exchange Offers."
WAIVERS; EXTENSIONS; New Tenneco also expressly reserves the right, in
AMENDMENTS: its sole discretion, subject to applicable law,
at any time or from time to time, to (i) waive
any condition to any Exchange Offer and accept
all Old Securities previously tendered for
exchange pursuant to such Exchange Offer, (ii)
extend the Expiration Time of any of the Exchange
Offers and retain all Old Securities tendered for
exchange pursuant thereto subject, however, to
the withdrawal rights of
6
<PAGE>
holders as described under "The Exchange Offers--
Withdrawal Rights," and/or (iii) amend the terms
of any of the Exchange Offers. Any amendment
applicable to any of the Exchange Offers will
apply to all Old Securities of the same series
tendered pursuant to such Exchange Offer. See
"The Exchange Offers--Expiration Time;
Extensions; Termination; Amendments."
WITHDRAWAL RIGHTS AND Tenders of Old Securities for exchange may be
REVOCATION OF withdrawn at any time at or prior to the
CONSENTS: applicable Expiration Time by following the
procedures described herein, but are thereafter
irrevocable unless the related Exchange Offer is
terminated without any Old Securities being
accepted for exchange thereunder. A proper
withdrawal of tendered Old Securities at or prior
to the applicable Expiration Time shall be deemed
a revocation of the related Consent. See "The
Exchange Offers--The Consent Solicitation" and
"The Exchange Offers--Withdrawal Rights."
DEALER MANAGER: Morgan Stanley & Co. Incorporated.
EXCHANGE AGENT: The Chase Manhattan Bank.
INFORMATION AGENT: Georgeson & Company, Inc.
TERMS OF THE NEW SECURITIES
The terms of each series of New Securities will be substantially the same in
all material respects as the terms of the corresponding series of Old
Securities except that (i) the New Securities will be issued by New Tenneco,
(ii) the interest rate on each series of New Securities will be higher than the
interest rate on each corresponding series of Old Securities as set forth
herein, and (iii) the New Indenture contains a negative pledge covenant, events
of default and other provisions which differ, in certain respects, from the
corresponding provisions in the Old Indenture. See "Description of the New
Securities."
ISSUER: New Tenneco Inc. (to be renamed Tenneco Inc.).
RANKING: The New Securities will be senior unsecured
obligations of New Tenneco and will rank pari
passu with all existing and future senior
unsecured indebtedness of New Tenneco.
NEW SECURITIES
<TABLE>
<CAPTION>
<S> <C>
SERIES OF NEW SECURITIES INTEREST PAYMENT DATES
------------------------ ----------------------
</TABLE>
[to be provided by amendment]
For more detailed information regarding the New Securities, see "Description of
the New Securities."
7
<PAGE>
THE COMPANIES
Unless the context otherwise requires, as used herein (i) the term "New
Tenneco" refers to (A) New Tenneco Inc. (to be renamed Tenneco Inc. upon
consummation of the Merger) and its subsidiaries, for all periods after
consummation of the Distributions, and (B) the entities through which Tenneco
and its subsidiaries operated the Industrial Business (as defined), for all
periods prior to consummation of the Distributions; and (ii) the term "Tenneco"
refers to (A) the entity surviving the Merger (to be renamed El Paso Tennessee
Pipeline Co. upon consummation of the Merger) and its subsidiaries, for all
periods after consummation of the Merger, and (B) Tenneco Inc. and its
subsidiaries, for all periods prior to consummation of the Merger. See "Risk
Factors" for a discussion of certain factors that should be considered in
connection with the Exchange Offers.
TENNECO PRIOR TO THE TRANSACTION
Tenneco is a diversified industrial company conducting all of its operations
through its subsidiaries. The major businesses of Tenneco presently consist of
(i) the interstate and intrastate transportation and marketing of natural gas,
(ii) the manufacture and sale of automotive exhaust and ride control systems,
(iii) the manufacture and sale of packaging materials, cartons, containers and
specialty packaging products for consumer, institutional and commercial
markets, and (iv) the design, construction, repair, and overhauling of ships
(primarily nuclear-powered aircraft carriers and submarines for the United
States Navy).
In 1987, Tenneco was incorporated in Delaware and acquired all of the
outstanding shares of Tennessee Gas Pipeline Company (which at the time was
named Tenneco Inc.). Tenneco's principal executive offices are located at 1275
King Street, Greenwich, Connecticut 06831, and its telephone number at that
address is (203) 863-1000. For further information concerning Tenneco, see "--
Summary Historical and Pro Forma Consolidated Financial Data of Tenneco,"
"Available Information," "Incorporation of Certain Information by Reference"
and "Description of Tenneco."
NEW TENNECO
New Tenneco is a newly formed Delaware corporation which, upon completion of
the Distributions, will be an independent, publicly held company (symbol
"TEN"). New Tenneco will own and operate, directly and through its direct and
indirect subsidiaries, substantially all of the assets of, and will assume
substantially all of the liabilities associated with, the Tenneco Automotive
business ("Tenneco Automotive"), the Tenneco Packaging business ("Tenneco
Packaging") and Tenneco's administrative services business ("TBS" and,
collectively with Tenneco Automotive and Tenneco Packaging, the "Industrial
Business"). Upon consummation of the Merger, New Tenneco will change its name
to Tenneco Inc.
Although the separation of the Industrial Business from the remainder of the
businesses, operations and companies currently constituting the "Tenneco Group"
has been structured as a "spin-off" of New Tenneco for legal, tax and other
reasons, New Tenneco will succeed to certain important aspects of the existing
Tenneco business, organization and affairs, namely: (i) New Tenneco will be
renamed "Tenneco Inc." upon the consummation of the Merger; (ii) New Tenneco
will be headquartered at Tenneco's current headquarters in Greenwich,
Connecticut; (iii) New Tenneco's Board of Directors will consist of those
persons currently constituting the Tenneco Board of Directors; (iv) New
Tenneco's executive management will consist substantially of the current
Tenneco executive management; and (v) the Industrial Business to be conducted
by New Tenneco will consist largely of Tenneco Automotive and Tenneco
Packaging.
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for both the original equipment market and the
replacement market, or aftermarket. Tenneco Automotive is a global business
that sells its products in over 100 countries. Tenneco Automotive manufactures
and markets its automotive exhaust systems primarily under the Walker(R) brand
name and its ride control systems primarily under the Monroe(R) brand name.
Tenneco Packaging is among the world's leading and most diversified packaging
companies, manufacturing packaging products for consumer, institutional and
industrial markets. The paperboard business group manufactures corrugated
containers, folding cartons and containerboard, has a joint venture in recycled
paperboard, and offers high value-added products such as enhanced graphics
packaging and displays and kraft honeycomb products. Its specialty products
group produces disposable aluminum, foam and clear plastic food
8
<PAGE>
containers, molded fiber and pressed paperboard products, as well as
polyethylene bags and industrial stretch wrap. Tenneco Packaging's consumer
products include such recognized brand names as Hefty(R), Baggies(R) and E-Z
Foil(R).
Tenneco's administrative services business--TBS--designs, implements and
administers shared administrative service programs for the Tenneco businesses
as well as, on an "as requested" basis, for former Tenneco business entities.
New Tenneco's principal executive offices are located at 1275 King Street,
Greenwich, Connecticut 06831 and its telephone number at that address is (203)
863-1000. See "Description of New Tenneco."
TENNECO AFTER GIVING EFFECT TO THE TRANSACTION
General. Under the terms of the Merger, after the Distributions an indirect
wholly owned subsidiary of El Paso will be merged with and into Tenneco, which
will then consist only of the remaining assets, liabilities and operations of
Tenneco and its subsidiaries other than those relating to the Industrial
Business or Tenneco's shipbuilding business (the "Shipbuilding Business")
(collectively, "Tenneco Energy" or the "Energy Business"). Upon consummation of
the Merger Tenneco will change its name to "El Paso Tennessee Pipeline Co."
The Energy Business as currently conducted consists principally of the
interstate transportation of natural gas, as well as certain other related
business operations not generally subject to regulation by the Federal Energy
Regulatory Commission (the "FERC"), such as gas marketing, intrastate pipeline
operations, international pipelines and power generation, domestic power
generation operations and oil and gas ventures. The Energy Business also
includes certain assets and liabilities of Tenneco and its subsidiaries that do
not relate to the Industrial Business or Shipbuilding Business, including
assets and liabilities relating to those business operations that have been
discontinued or sold.
Tenneco Energy's principal interstate pipeline operations consist of the
pipeline systems of Tennessee and its wholly owned subsidiaries, Midwestern Gas
Transmission Company ("Midwestern") and East Tennessee Natural Gas Company
("East Tennessee"). The interstate systems, which include approximately 16,300
miles of pipeline, gathering lines and sales laterals, serve markets located
primarily in the Eastern United States. Tenneco Energy Resources Corporation, a
wholly owned subsidiary of Tenneco and Tennessee, and its subsidiaries operate
approximately 1,300 miles of intrastate pipelines serving the Texas Gulf Coast
and West Texas markets. Tenneco Energy's businesses include buying, selling,
storing, processing and transporting natural gas and price risk management
services. Also, Tenneco Energy is engaged in various international energy-
related projects, invests in oil and gas properties and finances independent
producers engaged in exploration and development projects. See "--Summary
Combined Financial Data of Tenneco Energy" and "Description of Tenneco Energy."
Operation of Tenneco After the Merger. El Paso is currently engaged in a
comprehensive review of the business and operations of Tenneco Energy.
Following the completion of such review and consummation of the Merger, El Paso
has indicated that it plans to integrate, for the most part, the operations of
Tenneco Energy with those of El Paso in order to increase operating and
administrative efficiency through consolidation and reengineering of
facilities, workforce reductions and coordination of purchasing, sales and
marketing activities. El Paso has indicated that it anticipates that the
complementary interstate and intrastate pipeline operations and gas marketing
activities of El Paso and Tenneco Energy should provide the combined company
with increased operating flexibility and access to additional customers and
markets. However, no assurance can be given as to whether, or to what extent,
the operations of Tenneco Energy as a subsidiary of El Paso will differ from
the operations of Tenneco Energy as a part of Tenneco. See "Risk Factors."
Following consummation of the Transaction, it is expected that Tenneco Energy's
principal executive offices will be located at 1010 Milam Street, Houston,
Texas, and its telephone number at that address will be (713) 757-2131.
El Paso has indicated that it intends to undertake various transactions (the
"Refinancing Transactions") in order to reduce the amount of Tenneco debt that
will be outstanding after consummation of the Transaction including (i) the
monetization of certain assets of the Energy Business for anticipated net
proceeds of approximately $500 million, and (ii) a public equity offering by El
Paso of approximately $200 million and the use of the net proceeds thereof to
purchase a subordinated series of junior preferred stock (the "Subordinated
Junior Preferred Stock") from Tenneco. In addition, as market conditions allow,
El Paso may refinance some portion of Tenneco's post-Transaction debt through a
sale of senior debt of Tenneco and/or Tennessee to the public. There can be no
assurance as to whether any of the Refinancing Transactions will occur or as to
the price, terms or provisions of any of such transactions. See "Risk Factors"
and "Description of Tenneco--Unaudited Pro Forma Consolidated Financial
Statements."
9
<PAGE>
DESCRIPTION OF THE TRANSACTION
For the past several years, Tenneco has been undergoing a corporate
transformation from a highly diversified industrial corporation to a global
manufacturing company focused on its automotive and packaging businesses. The
Transaction, of which the Exchange Offers are one component, is designed to
complete this process. Consummation of the Transaction is conditioned upon,
among other things, the approval by Tenneco stockholders of the Transaction.
The Transaction will be submitted as a single, unified proposal at the Tenneco
Special Meeting, presently scheduled to be held on December , 1996.
The following sets forth the principal transactions which constitute part of,
and will be undertaken to consummate, the Transaction.
. New Preferred Stock Issuance. Tenneco will issue in a registered public
offering shares of one or more new series of junior preferred stock of
Tenneco (the "Tenneco Junior Preferred Stock") in an amount calculated,
to the extent possible, to have an aggregate value equal to approximately
25% of the total value of all shares of Tenneco capital stock outstanding
upon consummation of the Merger (the "NPS Issuance"). The proceeds (the
"NPS Issuance Proceeds") to Tenneco from the sale of the Tenneco Junior
Preferred Stock in the NPS Issuance (which are estimated to be
approximately $275 million) will, net of underwriting commissions and
other expenses, be used to repay certain existing indebtedness of Tenneco
and certain of its subsidiaries in connection with the Debt Realignment.
. Debt Realignment. Pursuant to the Debt Realignment, the indebtedness for
money borrowed of Tenneco and certain of its consolidated subsidiaries
(the "Tenneco Energy Consolidated Debt," which had a total book value of
approximately $4,443 million at June 30, 1996), will be restructured and
refinanced through the Exchange Offers and Tender Offers, as well as a
series of payments, redemptions, prepayments and defeasances. The Debt
Realignment is intended to reduce the total amount of the Tenneco Energy
Consolidated Debt to an amount that, when added to the total amount of
certain other liabilities and obligations of Tenneco Energy outstanding
as of the effective time (the "Merger Effective Time") of the Merger (as
so added, the "Actual Energy Debt Amount," described more fully herein),
equals $2.65 billion, less the NPS Issuance Proceeds and subject to
certain other adjustments described herein (the "Base Debt Amount"). If
the Actual Energy Debt Amount varies from the Base Debt Amount, the
amount of such variance will be accounted for in a post-Transaction cash
payment (the "Debt Cash Adjustment") (i) from New Tenneco to Tenneco, in
the event the Actual Energy Debt Amount exceeds the Base Debt Amount, or
(ii) from Tenneco to New Tenneco, in the event the Actual Energy Debt
Amount is less than the Base Debt Amount. See "Debt and Cash
Realignment." If the Transaction and the Refinancing Transactions had
been consummated on June 30, 1996, on a pro forma basis (assuming 100%
acceptance of the Exchange Offers), Tenneco and New Tenneco would have
had indebtedness for money borrowed of approximately $2,544 million,
($1,844 million after giving effect to the Refinancing Transactions) and
$2,145 million, respectively. See "Description of New Tenneco--Unaudited
Pro Forma Combined Financial Statements" and "Description of Tenneco--
Unaudited Pro Forma Consolidated Financial Statements."
. Corporate Restructuring Transactions. Tenneco and its subsidiaries will
undertake various intercompany transfers and distributions (collectively,
the "Corporate Restructuring Transactions") designed to restructure,
divide and separate their existing businesses and assets so that, upon
consummation of the Distributions, substantially all the assets,
liabilities and operations of (i) the Industrial Business will be
directly and indirectly owned and operated by New Tenneco, and (ii) the
Shipbuilding Business will be directly and indirectly owned and operated
by Newport News Shipbuilding Inc., a Delaware corporation which is
currently a wholly owned subsidiary of Tenneco ("Newport News"). See
"Corporate Restructuring Transactions."
10
<PAGE>
. Cash Realignment. The total amount of cash and cash equivalents of
Tenneco and its consolidated subsidiaries (which, as of June 30, 1996,
totalled approximately $229 million) as of the Merger Effective Time will
be allocated $25 million to Tenneco, $5 million to Newport News and the
balance to New Tenneco (the "Cash Realignment"). See "Debt and Cash
Realignment."
. The Charter Amendment. Tenneco will file an amendment (the "Charter
Amendment") to its Certificate of Incorporation, as amended (the "Tenneco
Charter"), to eliminate the rights, powers and preferences of its junior
preferred stock other than those set forth in the certificate of
designation establishing any series of then outstanding junior preferred
stock. See "The Charter Amendment."
. The Distributions. On the effective date of the Distributions (the
"Distribution Date"), Tenneco will distribute to all holders of Tenneco
common stock, par value $5.00 per share ("Tenneco Common Stock"), of
record as of the close of business on a record date to be specified by
the Tenneco Board of Directors (the "Distribution Record Date," which
Tenneco presently estimates will be on or about the Distribution Date)
(i) one share of New Tenneco common stock, $.01 par value per share (the
"New Tenneco Common Stock"), for every share of Tenneco Common Stock held
(the "Industrial Distribution"), and (ii) one share of Newport News
common stock, $.01 par value per share (the "Newport News Common Stock"),
for every five shares of Tenneco Common Stock held (the "Newport News
Distribution"). Cash will be paid in lieu of fractional shares. The
Distributions will be effected pursuant to a Distribution Agreement,
dated as of , 1996 (as the same may be amended from time to time, the
"Distribution Agreement"), among Tenneco, New Tenneco and Newport News.
The Distribution Agreement and various agreements to be entered into in
connection therewith (the "Ancillary Agreements") will govern the post-
Transaction allocation of various other rights and obligations among
Tenneco, New Tenneco and Newport News. See "The Distributions."
. The Merger. El Paso Merger Company, an indirect wholly owned subsidiary
of El Paso ("El Paso Subsidiary") will be merged with and into Tenneco,
which will then consist solely of the Energy Business. The Merger will be
effected pursuant to an Agreement and Plan of Merger dated as of June 19,
1996 (as the same may be amended from time to time, the "Merger
Agreement"), among Tenneco, El Paso and El Paso Subsidiary. Tenneco will
survive the Merger, with 100% of its common equity and approximately 75%
of its combined equity value at that time held indirectly by El Paso (and
the remainder held by the holders of the Tenneco Junior Preferred Stock
issued pursuant to the NPS Issuance). See "The Merger."
For a more detailed description of the Transaction, see "Description of the
Transaction," "The NPS Issuance," "Corporate Restructuring Transactions," "Debt
and Cash Realignment," "The Distributions" and "The Merger." For information
with respect to the effect of the Transaction on, and the anticipated post-
Merger operation of, New Tenneco and Tenneco, see "Description of New Tenneco"
and "Description of Tenneco Energy." Holders of Old Securities are also
referred to the Joint Proxy Statement, copies of which are available, without
charge, to any such holder upon written or oral request to Karl A. Stewart,
Vice President and Secretary, Tenneco Inc., 1275 King Street, Greenwich,
Connecticut 06831, telephone (203) 863-1000.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF NEW TENNECO
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of New Tenneco. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of New Tenneco. In the opinion of New Tenneco's
management, the summary combined financial data of New Tenneco as of December
31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991 and
as of and for the six months ended June 30, 1996 and 1995 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the six
months ended June 30, 1996 should not be regarded as indicative of the results
that may be expected for the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995, have been
prepared to reflect (i) the acquisition of The Pullman Company and its Clevite
products division ("Clevite") in July 1996 and the acquisition of the Amoco
Foam Products Company, a unit of Amoco Chemical Company ("Amoco Foam
Products"), in August 1996; (ii) the effect on New Tenneco of the Cash
Realignment and Debt Realignment (including the Exchange Offers); (iii) the
effect on New Tenneco of the Corporate Restructuring Transactions and other
transactions pursuant to the provisions of the Distribution Agreement and
Merger Agreement; and (iv) the issuance of New Tenneco Common Stock as part of
the Industrial Distribution. The unaudited pro forma combined financial data
for the year ended December 31, 1995 also reflects the pro forma results of
operations of the Mobil Plastics Division of Mobil Oil Corporation ("Mobil
Plastics") prior to its acquisition in November 1995. The Clevite and Amoco
Foam Products acquisitions do not meet the Commission's criteria for inclusion
of separate historical financial statements. The unaudited pro forma combined
Statements of Income Data have been prepared as if the Transaction occurred on
January 1, 1995; the unaudited pro forma combined Balance Sheet Data have been
prepared as if the Transaction occurred on June 30, 1996. The summary pro forma
combined financial data are not necessarily indicative of the results of
operations of New Tenneco had the transactions reflected therein actually been
consummated on the dates assumed and are not necessarily indicative of the
results of operations for any future period.
This information should be read in conjunction with "Description of New
Tenneco--Unaudited Pro Forma Combined Financial Statements," the "Combined
Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and New Tenneco's Combined Financial
Statements, and notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLIONS) -------------------------- ---------------------------------------------------------
PRO FORMA PRO FORMA
1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
--------- ------- ------- --------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues from
continuing operations--
Automotive............ $1,583 $1,463 $1,263 $2,710 $2,479 $1,989 $1,785 $1,763 $1,668
Packaging............. 1,927 1,775 1,318 4,556 2,752 2,184 2,042 2,078 1,934
Intergroup sales and
other................ (5) (5) (4) (10) (10) (7) (7) (5) (5)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. $3,505 $3,233 $2,577 $7,256 $5,221 $4,166 $3,820 $3,836 $3,597
====== ====== ====== ====== ====== ====== ====== ====== ======
Income from continuing
operations before in-
terest
expense, income taxes
and minority interest--
Automotive............ $ 170 $ 163 $ 134 $ 258 $ 240 $223 $ 222 $ 237 $ 188
Packaging............. 280 256 244 548 430 209 139 221 139
Other................. (5) (5) -- 2 2 24 20 7 3
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. 445 414 378 808 672 456 381 465 330
Interest expense (net of
interest capitalized).. 83 100 74 166 160 104 101 102 111
Income tax expense...... 147 126 124 291 231 114 115 154 80
Minority Interest....... 10 10 12 23 23 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from continuing
operations............. 205 178 168 328 258 238 165 209 139
Loss from discontinued
operations, net of in-
come tax............... -- -- -- -- -- (31) (7) (7) (12)
Cumulative effect of
changes in accounting
principles, net of
income tax............. -- -- -- -- -- (7)(c) -- (99)(c) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 205 $ 178 $ 168 $ 328 $ 258 $ 200 $ 158 $ 103 $ 127
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS SIX MONTHS
EXCEPT PER SHARE ENDED JUNE 30, YEARS ENDED DECEMBER 31,
AMOUNTS) ------------------------- ------------------------------------------------
PRO FORMA PRO FORMA
1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
--------- ------- ------- --------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations per share... $ 1.20 N/A N/A $ 1.89 N/A N/A N/A N/A N/A
====== ======
Net income per share.... $ 1.20 N/A N/A $ 1.89 N/A N/A N/A N/A N/A
====== ======
BALANCE SHEET DATA(B):
Total assets............ $7,617 $6,523 $4,430 N/A $6,117 $3,940 $3,029 $2,812 $2,792
Short-term debt(d)...... 13 530 205 N/A 384 108 94 182 758
Long-term debt(d)....... 2,132 1,573 1,246 N/A 1,648 1,039 1,178 1,675 1,555
Minority interest....... 301 301 297 N/A 301 301 1 1 2
Combined equity......... 2,988 2,168 1,163 N/A 1,852 987 533 (87) (553)
OTHER DATA:
EBITDA(e)............... $ 603 $ 551 $ 458 $1,023 $ 845 $ 598 $ 518 $ 595 $ 463
Ratio of earnings to
fixed charges(f)....... 3.5 2.9 3.4 3.2 2.8 3.2 2.9 3.4 2.4
</TABLE>
- -------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Description of New Tenneco--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(b) During 1995 and 1994, the Automotive and Packaging operating segments of
New Tenneco each completed several acquisitions, the most significant of
which was the Packaging segment's acquisition of Mobil Plastics for $1.3
billion in late 1995. See Note 4 to the Combined Financial Statements of
New Tenneco, included elsewhere herein, for further information on New
Tenneco's acquisitions.
(c) In 1994, New Tenneco adopted Statement of Financial Accounting Standards
("FAS") No. 112, "Employers' Accounting for Postemployment Benefits." In
1992, New Tenneco adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(d) Historical amounts include debt allocated to New Tenneco from Tenneco based
on the portion of Tenneco's investment in New Tenneco which is deemed to be
debt, generally based upon the ratio of New Tenneco's net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of New
Tenneco's debt upon completion of the Debt Realignment, nor debt and
interest that may be incurred by New Tenneco as a separate public entity.
See the Combined Financial Statements of New Tenneco, and notes thereto,
included elsewhere herein.
(e) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon generally accepted accounting principles
("GAAP"); however, the amounts included in the EBITDA calculation are
derived from amounts included in the combined historical or pro forma
Statements of Income. In addition, EBITDA should not be considered as an
alternative to net income, operating income or operating cash flows, as an
indicator of the operating performance of New Tenneco or as an alternative
to operating cash flows as a measure of liquidity.
(f) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense, preferred
stock dividend requirements of subsidiaries, the portion of rental expense
considered representative of the interest factor and capitalized interest.
The historical ratios are based upon the amount of interest expense on
corporate debt allocated to New Tenneco by Tenneco as discussed in (d)
above. The pro forma ratio gives effect to the Debt Realignment discussed
in "Description of New Tenneco--Unaudited Pro Forma Combined Financial
Statements."
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF TENNECO
The summary consolidated financial data set forth below as of and for each of
the fiscal years in the five-year period ended December 31, 1995 were derived
from audited financial statements of Tenneco and its consolidated subsidiaries.
The financial statements as of and for each of the fiscal years in the five-
year period ended December 31, 1995 have been audited by Arthur Andersen LLP,
independent public accountants. The summary consolidated financial data set
forth below as of and for each of the six-month periods ended June 30, 1996 and
1995 were derived from the unaudited condensed financial statements of Tenneco
and its consolidated subsidiaries. In the opinion of Tenneco's management, the
summary historical financial data of Tenneco as of and for the six months ended
June 30, 1996 and 1995 include all adjusting entries (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results of operations for the six months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year.
The summary pro forma consolidated data as of and for the six months ended
June 30, 1996 and for the year ended December 31, 1995 have been prepared to
reflect the Transaction and the Refinancing Transactions. The unaudited pro
forma consolidated Statements of Income Data have been prepared as if the
transaction occurred on January 1, 1995; the unaudited pro forma consolidated
Balance Sheet Data have been prepared as if transaction occurred on June 30,
1996. The summary pro forma consolidated financial data are based, in part,
upon information and assumptions developed by El Paso management. In addition,
the summary pro forma consolidated financial data are not necessarily
indicative of the results of operations of Tenneco had the transactions
reflected therein actually been consummated on the dates assumed and are not
necessarily indicative of the results of operations for any future period. See
"Description of Tenneco--Unaudited Pro Forma Consolidated Financial
Statements."
This information should be read in conjunction with Tenneco's financial
statements, and the notes thereto, contained in the Tenneco Annual Report on
Form 10-K, as amended, for the year ended December 31, 1995 and the Tenneco
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996,
which are incorporated by reference herein. See "Available Information,"
"Incorporation of Certain Information By Reference" and "Description of
Tenneco--Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS SIX MONTHS
EXCEPT PER SHARE AMOUNTS) ENDED JUNE 30, YEARS ENDED DECEMBER 31,
- ------------------------ -------------------------- ---------------------------------------------------------------
PRO FORMA PRO FORMA
1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
--------- ------- ------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA(B):
Net sales and operating
revenues from
continuing operations--
Automotive............. $ -- $1,463 $1,263 $ -- $ 2,479 $ 1,989 $ 1,785 $ 1,763 $ 1,668
Energy................. 1,320 1,366 937 1,864 1,916 2,378 2,862 2,183 2,183
Packaging.............. -- 1,775 1,318 -- 2,752 2,184 2,042 2,078 1,934
Shipbuilding........... -- 915 845 -- 1,756 1,753 1,861 2,265 2,216
Other.................. 4 (2) (2) 5 (4) (6) (5) 31 26
------ ------ ------ ------ --------- --------- --------- --------- ---------
Total................. $1,324 $5,517 $4,361 $1,869 $ 8,899 $ 8,298 $ 8,545 $ 8,320 $ 8,027
====== ====== ====== ====== ========= ========= ========= ========= =========
Income from continuing
operations before in-
terest expense, income
taxes and minority in-
terest--
Automotive............. $ -- $ 163 $ 134 $ -- $ 240 $ 223 $ 222 $ 237 $ 188
Energy................. 138 185 148 269 333 415 411 360 561(c)
Packaging.............. -- 256 244 -- 430 209 139 221 139(c)
Shipbuilding........... -- 81 90 -- 160 200 225 249 225
Other.................. 8 (4) (11) (55) (67) (25) 18 (32) (98)
------ ------ ------ ------ --------- --------- --------- --------- ---------
Total................. 146 681 605 214 1,096 1,022 1,015 1,035 1,015
------ ------ ------ ------ --------- --------- --------- --------- ---------
Interest expense........ 72 179 152 149 306 263 254 221 237
Income tax expense
(benefit).............. 5 175 185 (42) 279 249 298 282 258
Minority interest....... -- 10 11 -- 22 7 -- -- --
------ ------ ------ ------ --------- --------- --------- --------- ---------
Income from continuing $ 69 $ 317 $ 257 $ 107 $ 489 $ 503 $ 463 $ 532 $ 520
operations............. ====== ====== ====== ====== ========= ========= ========= ========= =========
</TABLE>
(Continued on next page)
14
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS SIX MONTHS
EXCEPT PER SHARE AMOUNTS) ENDED JUNE 30, YEARS ENDED DECEMBER 31,
- ------------------------ ------------------------- -----------------------------------------------------------
PRO FORMA PRO FORMA
1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
--------- ------- ------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) per
average share of
common stock--
Continuing operations.. N/A $ 1.83 $ 1.43 N/A $ 2.75 $ 2.72 $ 2.66 $ 3.58 $ 4.10
Discontinued
operations(d)(e)...... N/A 1.99 .46 N/A 1.41 (.27) (.07) (7.93) (10.19)
Extraordinary loss..... N/A -- -- N/A -- (.03) (.15) (.08) --
Cumulative effect of
changes in accounting
principles(f)......... N/A -- -- N/A -- (.22) -- (4.86) --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).... N/A $ 3.82 $ 1.89 N/A $ 4.16 $ 2.20(g) $ 2.44(g) $ (9.29)(g) $ (6.09)
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA(B):
Total assets........... $5,628 $13,262 $12,090 N/A $13,451 $12,251 $11,105 $11,320 $12,985
Short-term debt........ 330 1,146 635 N/A 908 536 431 669 1,132
Long-term debt......... 1,514 3,374 3,309 N/A 3,751 3,568 3,620 4,718 4,593
Minority interest...... 18 320 315 N/A 320 320 150 160 171
Preferred stock with
mandatory redemption
provisions............ -- 112 129 N/A 130 147 163 191 194
Shareowners' equity:
Preferred:
Tenneco Junior
Preferred Stock...... 265 -- -- N/A -- -- -- -- --
Subordinated Junior
Preferred Stock...... 200 -- -- N/A -- -- -- -- --
Series A preferred
stock................ -- -- -- N/A -- -- 9 9 9
Common shareowners'
equity............... 777 3,569 2,911 N/A 3,148 2,900 2,592 1,321 2,765
OTHER DATA:
EBITDA(h).............. $ 276 $ 956 $ 804 $456 $ 1,523 $ 1,321 $ 1,385 $ 1,391 $ 1,350
Ratio of earnings to
fixed charges(i)...... 1.9 2.8 2.6 1.3 2.4 2.7 2.9 3.4 3.0
Ratio of earnings to
fixed charges and
preferred stock
dividends(i).......... 1.5 2.7 2.5 1.1 2.4 2.3 2.3 2.7 2.9
</TABLE>
- -------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993, and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for Tenneco Inc. and
Consolidated Subsidiaries, included in the Tenneco Annual Report on Form
10-K, as amended, for the year ended December 31, 1995, and the Tenneco
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which
are incorporated by reference herein.
(b) During 1995 and 1994, Tenneco completed several acquisitions at its various
operating segments, the most significant of which was Tenneco Packaging's
acquisition of Mobil Plastics for $1.3 billion in late 1995. See Note 2 to
the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries,
included in the Tenneco Annual Report on Form 10-K, as amended, for the
year ended December 31, 1995, which is incorporated by reference herein,
for further information on the Tenneco acquisitions.
(c) For Tenneco Energy, includes a gain of $265 million related to the sale of
its natural gas liquids business, including its interest in an MTBE plant
then under construction. Also, Tenneco Packaging recorded a gain of $42
million related to the sale of three short-line railroads.
(d) Discontinued operations reflected in the above periods include Tenneco's
farm and construction equipment operations, which were discontinued in
March 1996, its chemicals and brakes operations, which were discontinued
during 1994, and its minerals and pulp chemicals operations, which were
discontinued in 1992. In addition, certain additional costs related to
Tenneco's discontinued oil and gas operations were reflected in the 1991
results.
(e) Includes a restructuring charge of $920 million recorded in 1992 relating
to the discontinued farm and construction equipment business. This
restructuring charge was reduced by $20 million in 1993 and $16 million in
1994. Additionally, a $473 million restructuring charge was recorded in
1991, of which $461 million related to the discontinued farm and
construction equipment business.
(f) In 1994, Tenneco adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, Tenneco adopted FAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and FAS No.
109, "Accounting for Income Taxes."
(g) For purposes of computing earnings per share, Series A preferred stock was
included in average common shares outstanding until its conversion into
common stock in December 1994; therefore, the preferred dividends paid were
not deducted from net income (loss) to determine net income (loss) to
common stock. The inclusion of Series A preferred stock in the computation
of earnings per share was antidilutive for the years and certain quarters
in 1994, 1993 and 1992. Other convertible securities and common stock
equivalents outstanding during each of the five years ended December 31,
1995, 1994, 1993, 1992 and 1991 were not materially dilutive.
15
<PAGE>
(h) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based on GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical or pro forma Statements of Income. In addition, EBITDA should
not be considered as an alternative to net income, operating income, as an
indicator of the operating performance of Tenneco or as an alternative to
operating cash flows as a measure of liquidity.
(i) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense, preferred
stock dividend requirements of subsidiaries, the portion of rental expense
considered representative of the interest factor and capitalized interest.
For purposes of computing these ratios, preferred stock dividends have been
included in the calculations on a pre-tax basis. The pro forma ratio gives
effect to the Transaction and Refinancing Transactions discussed in the
"Description of Tenneco--Unaudited Pro Forma Consolidated Financial
Statements" included elsewhere herein.
16
<PAGE>
RISK FACTORS
The following factors and other information described elsewhere herein
should be carefully considered by each prospective investor before deciding to
tender Old Securities for exchange pursuant to the Exchange Offers. Neither
New Tenneco nor Tenneco makes, nor is any other person authorized to make, any
representation as to the future value of either the New Securities or the Old
Securities.
RISK FACTORS RELATING TO HOLDERS TENDERING IN THE EXCHANGE OFFERS
Reduction of Scope of Business Due to the Distributions
Currently, Tenneco, the obligor under the Old Securities, is engaged in, and
directly and indirectly owns the assets comprising each of, the Energy
Business, the Shipbuilding Business and the Industrial Business. Upon
consummation of the Distributions and the other components of the Transaction,
however, New Tenneco, the obligor of the New Securities, will only be engaged
in, and will directly and indirectly own only the assets comprising, the
Industrial Business. Consequently, the cash flow generated from, and the
assets comprising, each of the Energy Business and the Shipbuilding Business
will not be available to satisfy New Tenneco's obligations under the New
Securities. Tenneco will not guarantee the New Securities, and holders who
tender Old Securities in exchange for New Securities will no longer be
creditors of Tenneco. Accordingly, upon consummation of the Transaction, the
holders of the New Securities will have no claims against the assets or
earnings of Tenneco and its subsidiaries. See "Description of the
Transaction."
Uncertainty Regarding Debt Rating of New Securities
New Tenneco has been advised by Moody's and S&P that the New Securities will
have investment grade ratings of [describe] by Moody's and [describe] by S&P.
However, no assurance can be given that the New Securities will actually have
or be able to maintain these investment grade ratings. A reduction in the
rating of the New Securities would have an adverse effect on their value.
New Tenneco's Potential Co-obligor Status
If New Tenneco elects to consummate any of the Exchange Offers despite the
failure of the Minimum Tender Condition, New Tenneco would not only be the
obligor of the New Securities delivered in the Exchange Offers, but may also
be required to become a co-obligor of the Old Securities and any Other
Securities that remain outstanding following consummation of the Tender Offers
and thereby become potentially liable for the obligations under such Old
Securities and such Other Securities. See "The Proposed Amendments."
Uncertainty Regarding Markets For and Prices of New Securities
Although the New Securities are expected to be approved for listing, subject
to issuance, on the NYSE, trading of the New Securities may be limited and
sporadic, and information concerning trading volume and prices may be
difficult to obtain. Depending on the amount of the New Securities outstanding
after the Exchange Offers, the trading market for the New Securities may be
more limited than the trading market for the Old Securities prior to the
Exchange Offers, which might adversely affect the liquidity and market price
of the New Securities. If a market for the New Securities does develop, the
New Securities may trade at a discount, depending on prevailing interest
rates, the market for similar securities, performance of New Tenneco and other
factors. However, there is no assurance that an active market in the New
Securities will develop or be maintained and no assurance as to the prices at
which the New Securities may be traded.
Claims of Other Creditors
Holders of the New Securities will become holders of unsubordinated and
unsecured obligations of New Tenneco ranking pari passu with all existing and
future unsubordinated and unsecured obligations of New
17
<PAGE>
Tenneco. At June 30, 1996, subsidiaries of New Tenneco would have had
approximately $70 million of debt (excluding intercompany debt). Claims of
holders of New Securities will be effectively subordinated to the claims of
holders of the debt of New Tenneco's subsidiaries with respect to the assets
of such subsidiaries.
Potential Liabilities Due to Fraudulent Transfer Considerations and Legal
Dividend Requirements
The Corporate Restructuring Transactions, the Debt Realignment and the
Distributions are subject to review under federal and state fraudulent
conveyance laws. Under these laws, if a court in a lawsuit by an unpaid
creditor or a representative of creditors (such as a trustee in bankruptcy of
Tenneco or New Tenneco as a debtor-in-possession) were to determine that, at
the time of the Distributions or the incurrence of indebtedness or transfer of
assets in connection with the Corporate Restructuring Transactions or the Debt
Realignment, Tenneco, New Tenneco or any of their subsidiaries did not receive
fair consideration or reasonably equivalent value for incurring indebtedness
or transferring assets in connection with the Corporate Restructuring
Transactions or the Debt Realignment, and Tenneco or New Tenneco, or any of
their subsidiaries (i) was insolvent or would be rendered insolvent, (ii) had
unreasonably small capital with which to carry on its business and all
businesses in which it intended to engage, or (iii) intended to incur, or
believed it would incur, debts beyond its ability to repay such debts as they
mature, then such court could order the holders of the New Tenneco Common
Stock to return the value of the stock and any dividends paid thereon, bar
future dividend and redemption payments on the New Tenneco Common Stock, and
invalidate, in whole or in part, the Corporate Restructuring Transactions, the
Debt Realignment or the Distributions, as fraudulent conveyances.
The measure of insolvency for purposes of the fraudulent conveyance laws
will vary depending on which jurisdiction's law is applied. Generally,
however, an entity would be considered insolvent if the present fair saleable
value of its assets is less than (i) the amount of its liabilities (including
contingent liabilities), or (ii) the amount that will be required to pay its
probable liabilities on its existing debts as they become absolute and mature.
No assurance can be given as to what standard a court would apply in
determining insolvency or that a court would not determine that Tenneco, New
Tenneco or any of their subsidiaries was "insolvent" at the time of, or after
giving effect to, the Corporate Restructuring Transactions, the Debt
Realignment and the Distributions.
In addition, the Distributions and the distributions pursuant to the
Corporate Restructuring Transactions and the Debt Realignment are subject to
review under state corporate distribution statutes. Under Section 170 of the
Delaware General Corporation Law (the "DGCL"), a corporation may pay dividends
to its stockholders only either (i) out of its surplus (net assets minus
capital), and not out of capital, or (ii) if there is no such surplus, out of
its net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. Although all distributions are intended to be made
entirely from surplus, no assurance can be given that a court will not later
determine that some or all of the distributions were unlawful.
Prior to the Distributions, the Tenneco Board of Directors expects to obtain
an opinion from a third-party financial advisor regarding the solvency of New
Tenneco and Tenneco and the permissibility of the Distributions under Section
170 of the DGCL. The Tenneco Board of Directors and Tenneco's management
believe that, in accordance with this opinion (i) each of New Tenneco and
Tenneco will be solvent (and thus not insolvent) at the time of, and after
giving effect to, the Distributions (in accordance with the foregoing
definitions), will be able to repay its debts as they mature following the
Distributions and will have sufficient capital to carry on its business, and
(ii) the Distributions will be made entirely out of surplus in accordance with
Section 170 of the DGCL. There is no certainty, however, that a court would
find the solvency opinion rendered by Tenneco's financial advisor to be
binding on creditors of New Tenneco or Tenneco or that a court would reach the
same conclusions set forth in such opinion in determining whether New Tenneco
or Tenneco was insolvent at the time of, or after giving effect to, the
Distributions or whether lawful funds were available for the Distributions. If
a court reached conclusions contrary to such opinion, then such court could
invalidate, in whole or part, the Industrial Distribution as a fraudulent
conveyance.
18
<PAGE>
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement and Ancillary Agreements allocate among Tenneco,
New Tenneco and Newport News responsibility for various debts, liabilities and
obligations. It is possible that a court would disregard this contractual
allocation of debt, liabilities and obligations among the parties and require
New Tenneco to assume responsibility for obligations allocated to another
party, particularly if such other party were to refuse or was unable to pay or
perform any of its allocated obligations. Any such additional responsibility
could have adverse consequences to the holders of New Securities which remain
outstanding after the Transaction including, but not limited to, the
impairment of the ability of New Tenneco to service its debt obligations.
RISK FACTORS RELATING TO HOLDERS NOT TENDERING IN THE EXCHANGE OFFERS
Effect of the Proposed Amendments
If the Proposed Amendments become operative, they will be effective as to
all Old Securities that were not exchanged pursuant to the Exchange Offers
(regardless of whether or not the holder thereof consented to the Proposed
Amendments). Certain of the Proposed Amendments may potentially have adverse
consequences to holders of Old Securities not exchanged pursuant to the
Exchange Offers.
The Proposed Amendments would, among other things, add provisions to the Old
Indenture which would specifically provide that nothing in the Old Indenture
shall prohibit, or place any restrictions or conditions on, consummation of
the Distributions and the transactions contemplated thereby. The effect of
these provisions would be to allow consummation of such transactions without
compliance with covenants that might, if held to apply to such transactions,
otherwise require New Tenneco and Newport News to sign supplemental indentures
and become co-obligors of the Old Securities and Other Securities that remain
outstanding after consummation of the Exchange Offers and Tender Offers (the
application of which, in any event, New Tenneco and Tenneco believe is
uncertain in these circumstances). As a result, such Old Securities and Other
Securities will remain obligations solely of Tenneco following consummation of
the Transaction and holders thereof will have no claims on the assets of New
Tenneco or Newport News.
The Proposed Amendments would also provide further operational flexibility
to Tenneco by (i) modifying the negative pledge covenant contained in the Old
Indenture to (a) apply only to principal properties of Tenneco and its
subsidiaries located in the United States or Canada (rather than all
properties and assets), (b) permit liens incurred in connection with
improvements to properties, (c) increase the amount of debt that may be
secured by a lien notwithstanding the provisions of the negative pledge
covenant, and (d) not apply to liens in existence as of, or arising under an
"after-acquired" property or similar provision in existence as of, the date of
the Supplemental Indenture, and (ii) eliminate certain events of default that
would otherwise from the default by Tenneco or one or more of its subsidiaries
under other debt obligations. Such flexibility might have adverse consequences
for non-tendering holders of Old Securities not exchanged pursuant to the
Exchange Offers. For a description of the Proposed Amendments, see "The
Proposed Amendments."
Potential Adverse Impact of Substantial Leverage on Ability to Meet Interest
and Dividend Obligations
If the Transaction and the Refinancing Transactions had been consummated on
June 30, 1996, on a pro forma basis, Tenneco would have had indebtedness for
money borrowed of approximately $1,844 million (all of which would have been
pari passu with any outstanding Old Securities, and stockholders' equity of
$1,242 million. The degree to which Tenneco is leveraged could have important
consequences to holders of Old Securities not tendering such Old Securities in
the Exchange Offer, including the following: (i) Tenneco's ability to obtain
additional financing for working capital, capital expenditures, acquisitions
or general corporate purposes may be impaired; (ii) a substantial portion of
Tenneco's cash flow from operations must be dedicated to the payment of
interest on its indebtedness, thereby reducing the funds available to Tenneco
for other purposes; (iii) the agreements governing Tenneco's indebtedness
contain certain restrictive financial and operating covenants; (iv) certain
indebtedness of Tenneco will be at variable rates of interest, which will
cause Tenneco to be vulnerable to increases in interest rates; (v) Tenneco may
be hindered in its ability to adjust rapidly to changing
19
<PAGE>
market conditions; and (vi) Tenneco's substantial degree of leverage could
make it more vulnerable in the event of a downturn in general economic
conditions or in its business. See "Description of Tenneco--Unaudited Pro
Forma Consolidated Financial Statements."
Lack of Operating History as Separate Entity and Potential Disruptions in
Operations
Upon consummation of the Distributions, Tenneco (as a subsidiary of El Paso)
will own and operate the Energy Business, New Tenneco will own and operate the
Industrial Business and Newport News will own and operate the Shipbuilding
Business. The Energy Business does not have any recent operating history as a
separate entity and has historically been able to rely on the earnings, assets
and cash flow of the Industrial Business and Shipbuilding Business for capital
requirements and certain administrative services.
In addition, the division of Tenneco and its subsequent acquisition by El
Paso in the Merger may result in some temporary dislocation and inefficiencies
to the business operations, as well as the organization and personnel
structure, of each company, and also will result in the duplication of certain
personnel, administrative and other expenses required for the operation of
independent companies.
Reduction of Debt Ratings of Untendered Old Securities
The ratings of the Old Securities which remain outstanding after
consummation of the Transaction may be lower than the current ratings of the
Old Securities (which are currently rated Baa2 (under review with direction
uncertain) by Moody's and BBB- (on CreditWatch with developing implications)
by S&P). There can be no assurance that any Old Securities that remain
outstanding after consummation of the Exchange Offers will be able to maintain
an investment grade debt rating. In addition, if the issuance of El Paso
common stock to Tenneco stockholders in connection with the Merger (the "Stock
Issuance"), which is being submitted to El Paso's stockholders at a special
meeting presently scheduled to be held on , 1996, is not approved,
the Merger is still expected to be consummated, except that El Paso will issue
to the holders of Tenneco Common Stock depositary receipts representing
interests in a new series of adjustable rate El Paso preferred stock in lieu
of certain shares of El Paso common stock that would have been issued had the
Stock Issuance been approved. The issuance by El Paso of such depositary
receipts could result in a downgrading of the ratings of the securities of El
Paso and its subsidiaries, including the Old Securities that remain
outstanding after consummation of the Exchange Offers. Any reduction in the
rating of such securities would have an adverse effect on their value.
Potential Conflicts of Interest Due to Control by El Paso
After consummation of the Merger, Tenneco will be a subsidiary of El Paso,
which will own 100% of the common equity of Tenneco and will thus control the
management of Tenneco's business and operations. El Paso's interests as a
common equity holder of Tenneco may conflict with the interests of holders of
Old Securities which remain outstanding after consummation of the Exchange
Offers. See "Description of Tenneco Energy--Operation of the Energy Business
after the Merger" and "Description of Tenneco Energy--Unaudited Pro Forma
Combined Financial Statements."
Pursuant to the Merger Agreement, the current directors of El Paso
Subsidiary as of the Merger Effective Time will become the directors of
Tenneco upon consummation of the Merger, provided that the holders of Tenneco
Junior Preferred Stock will have the right to elect one-sixth of the Tenneco
board of directors. In addition, as of the Merger Effective Time it is
expected that substantially all of the executive officers of Tenneco will
resign and become the initial executive officers of New Tenneco and the
executive officers of El Paso Subsidiary as of the Merger Effective Time will
become the executive officers of Tenneco. There can be no assurance that such
transition in the management of Tenneco will not disrupt, at least
temporarily, the operations of the Energy Business.
Uncertainty Surrounding Integration of Operations
El Paso is currently engaged in a comprehensive review of the business and
operations of the Energy Business. Following the completion of such review and
the Merger, El Paso plans to integrate, for the most part, the operations of
Energy Business with those of El Paso in order to increase operating and
administrative
20
<PAGE>
efficiency through consolidation and reengineering of facilities, workforce
reductions and coordination of purchasing, sales and marketing activities. The
future operations of the Energy Business as a subsidiary of El Paso may vary
significantly from its historical operations as a division of Tenneco. While
El Paso believes that operational, financial and administrative synergies can
be achieved through the combination of El Paso and the Energy Business, the
amount and timing of realization of such synergies will depend upon the
ability of El Paso to integrate successfully the businesses and operations of
the companies, and the time period over which such integration is effected.
Reduced Liquidity of Old Securities
The trading market for Old Securities that are not tendered or accepted for
exchange could become more limited due to the reduction in the amount of Old
Securities outstanding after the Exchange Offers, which might adversely affect
the liquidity and market price of such Securities. The following Old
Securities are listed on the NYSE: [to be provided by amendment]. If the
amount of such Old Securities outstanding after the Exchange Offers is
sufficiently small, such Old Securities may be delisted. Under the current
rules of the NYSE, debt securities are subject to delisting if the aggregate
market value or principal amount of publicly held debt securities is less than
$1 million. El Paso has informed Tenneco that it intends to seek to have such
Old Securities delisted following consummation of the Transaction. If a market
develops for the Old Securities that remain outstanding following the Exchange
Offers, such Old Securities may trade at a discount depending on prevailing
interest rates, the market for securities with similar credit features, the
performance of Tenneco and other factors. Furthermore, the prices at which any
such trading occurs in the Old Securities could be extremely volatile if the
amount of such Old Securities outstanding after the Exchange Offers is
substantially reduced. There can be no assurance that an active market in the
Old Securities will develop following consummation of the Exchange Offers and
no assurance as to the prices at which the Old Securities may trade.
Consummation of Refinancing Transactions
El Paso has indicated that it currently intends to enter into the
Refinancing Transactions. However, there can be no assurance that any of the
Refinancing Transactions will occur or as to the price, terms or provisions of
any of such transactions. See "The Energy Business--Operation of the Energy
Business After the Merger" and "Description of Tenneco--Unaudited Pro Forma
Consolidated Financial Statements."
21
<PAGE>
THE EXCHANGE OFFERS
New Tenneco hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the Letter of Transmittal, to exchange New
Securities for any and all of the Old Securities that are validly tendered and
not withdrawn at or prior to the Expiration Time. New Tenneco will accept
tenders of Old Securities only in principal amounts of $1,000 or integral
multiples of $1,000. Each of the Exchange Offers will commence at 9:00 a.m.,
New York City time, on , , 1996, and will expire at 5:00 p.m., New York
City time, on , , 1996, unless extended by New Tenneco in its sole
discretion, subject to the right of New Tenneco, in its sole discretion, to
the extent that it is legally permitted to do so, to terminate or amend any
Exchange Offer at any time as discussed below.
Holders of Old Securities may choose to participate in the Exchange Offers
by following the procedures described herein. Holders of Old Securities who
tender their Old Securities in response to an Exchange Offer will be required,
as a condition to a valid tender, to consent to the Proposed Amendments with
respect to the tendered Old Securities. The proper tender of Old Securities
for exchange pursuant to one of the procedures set forth herein will
constitute the giving of a Consent to the Proposed Amendments and execution of
the Supplemental Indenture with respect to such Old Securities. See "--The
Consent Solicitation."
TERMS OF THE EXCHANGE OFFERS
Subject to the terms and conditions set forth in this Prospectus and in the
Letter of Transmittal, New Tenneco is offering to exchange the New Securities
described below in exchange for the Old Securities described below.
<TABLE>
<CAPTION>
OUTSTANDING
AGGREGATE THE EXCHANGING HOLDERS WILL
PRINCIPAL FOR EACH $1,000 PRINCIPAL AMOUNT RECEIVE $1,000 PRINCIPAL AMOUNT
CUSIP NO.* AMOUNT OF THE FOLLOWING OLD SECURITIES: OF THE FOLLOWING NEW SECURITIES:
- ---------- ------------ -------------------------------- ---------------------------------
<S> <C> <C> <C>
[to be provided by
amendment]
</TABLE>
- --------
* CUSIP numbers are provided solely as a convenience to holders. No
representation is made as to the correctness or accuracy of any CUSIP
numbers set forth herein, and the terms of the Exchange Offers shall not be
affected by any defect in or omission of such CUSIP numbers.
In each case, accrued but unpaid interest on the Old Securities to, but
excluding, the applicable Exchange Date will be paid to the holders of the Old
Securities exchanged pursuant to the Exchange Offers; provided, however, that
if the Exchange Date occurs before an interest payment date for any series of
Old Securities but after the record date relating to such interest payment
date, then Tenneco (rather than New Tenneco) will pay accrued interest up to,
but excluding, the applicable Exchange Date on such series of Old Securities
to the holders of such Old Securities as of such record date, on the
applicable Exchange Date (rather than on the regularly scheduled interest
payment date). Interest will cease to accrue on and after the applicable
Exchange Date for Old Securities exchanged pursuant to the Exchange Offers.
The accrued interest for the Old Securities properly tendered and accepted for
exchange will be paid in immediately available (same-day) funds on the third
NYSE trading day following the applicable Expiration Time or as soon as
possible thereafter (i.e., the Exchange Date). Interest on the New Securities
will accrue at the applicable rate from and including the Exchange Date.
Upon consummation of the Exchange Offers, Tenneco will purchase (and
thereafter extinguish) the Old Securities accepted by New Tenneco for exchange
pursuant to the Exchange Offers, and New Tenneco will then distribute such
proceeds as a dividend to Tenneco.
Holders of Old Securities who tender into the Exchange Offers will be
required, as a condition to a valid tender, to consent to the Proposed
Amendments. The proper tender of Old Securities for exchange pursuant to one
of the procedures set forth herein will constitute the giving of a Consent to
the Proposed Amendments and to the execution of the Supplemental Indenture.
22
<PAGE>
The terms of each series of New Securities will be substantially the same in
all material respects as the terms of the corresponding series of Old
Securities except that (i) the New Securities will be issued by New Tenneco,
(ii) the interest rate on each series of New Securities will be higher than
the interest rate on each corresponding series of Old Securities as set forth
herein and (iii) the New Indenture will contain a negative pledge covenant,
events of default and other provisions which differ, in certain respects, from
the corresponding provisions in the Old Indenture. See "Description of the New
Securities."
THE CONSENT SOLICITATION
As part of the Exchange Offers, New Tenneco, on behalf of Tenneco, is
soliciting Consents to the Proposed Amendments. The Consent Solicitation
(together with the solicitation of Consents being made pursuant to the Tender
Offers) is being made to obtain the Requisite Consents of holders of Old
Securities and Other Securities to the Proposed Amendments. See "--Procedures
for Tendering Old Securities for Exchange and Giving Consents" and "The
Proposed Amendments." NEW TENNECO WILL MAKE NO SEPARATE PAYMENTS FOR CONSENTS
DELIVERED IN THE CONSENT SOLICITATION.
To amend the Old Indenture, the registered holders of at least a majority of
the outstanding aggregate principal amount of all series of the Old Securities
and Other Securities, considered together as a single class, must tender
Consents thereto. There are presently outstanding an aggregate principal
amount of $1,950 million and $675 million of Old Securities and Other
Securities, respectively. Accordingly, the Old Indenture could be amended by
the registered holders of the Old Securities without regard to the registered
holders of the Other Securities.
Tenneco and the Old Trustee intend to execute the Supplemental Indenture
(providing for the Proposed Amendments to the Old Indenture) following the
receipt of the Requisite Consents but prior to acceptance for exchange or
payment, as the case may be, of the related Old Securities and/or Other
Securities. Although the Supplemental Indenture will be executed prior to
acceptance of the Old Securities under the Exchange Offers, the Proposed
Amendments contained therein will not become operative until the date and time
that all Old Securities and/or Other Securities underlying the related
Requisite Consents are accepted for exchange or payment, as the case may be.
If the Proposed Amendments with respect to the Old Indenture become
effective, they will apply to all Old Securities and Other Securities. Each
holder of Old Securities that were not tendered for exchange or accepted
hereunder will be bound by the Proposed Amendments regardless of whether such
holder consented to the Proposed Amendments. Accordingly, consummation of the
Exchange Offers may potentially have adverse consequences on non-tendering
holders of Old Securities. See "Risk Factors."
EXPIRATION TIME; EXTENSIONS; TERMINATION; AMENDMENTS
Each Exchange Offer will expire at 5:00 p.m., New York City Time, on
, 1996, subject to extension or earlier termination by New Tenneco as herein
provided.
New Tenneco expressly reserves the right, in its sole discretion, subject to
applicable law, at any time or from time to time, to (i) terminate any of the
Exchange Offers and not accept for exchange any Old Securities if any of the
conditions set forth below under "--Conditions to the Exchange Offers" are not
satisfied and are not waived by New Tenneco, (ii) waive any condition to any
Exchange Offer and accept all Old Securities previously tendered for exchange
pursuant to such Exchange Offer, (iii) extend the Expiration Time of any of
the Exchange Offers and retain all Old Securities tendered pursuant thereto,
subject, however, to the withdrawal rights of holders, (iv) modify the form of
consideration to be paid pursuant to any Exchange Offer and/or (v) subject to
appropriate notice, amend any Exchange Offer in any respect until the Old
Securities are accepted for exchange. If New Tenneco extends any Exchange
Offer, or if, for any reason, the acceptance for exchange of Old Securities is
delayed, or if New Tenneco is unable to accept for exchange Old Securities
pursuant to any Exchange Offer, then, the Exchange Agent may retain tendered
Old Securities that have not been previously withdrawn on behalf
23
<PAGE>
of New Tenneco, and such Old Securities may not be withdrawn except to the
extent tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights," subject to Rule 14e-1(c) under the Exchange Act (which
requires that a bidder pay the consideration offered or return the securities
deposited by or on behalf of holders of securities promptly after the
termination or withdrawal of a tender offer).
Any extension, termination or amendment of any of the Exchange Offers may be
made by giving written or oral notice thereof to the Exchange Agent, which
will be followed as promptly as practicable by a public announcement thereof.
In the case of an extension, a public announcement will be issued prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Time of the Exchange Offer or Exchange Offers subject to
such extension. Without limiting the manner in which New Tenneco may choose to
make any public announcement, New Tenneco shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
making a release to the Dow Jones News Service or otherwise as required by
law. All Old Securities tendered pursuant to an Exchange Offer prior to any
extension and not subsequently withdrawn will remain subject to such Exchange
Offer.
The terms of any extension or amendment of any Exchange Offer may vary from
the original Exchange Offers depending on such factors as prevailing interest
rates and the principal amount of Old Securities previously tendered or
otherwise accepted for exchange. There can be no assurance that New Tenneco
will exercise its right to extend, terminate or amend any of the Exchange
Offers. New Tenneco expressly reserves the right, in its sole discretion, to
delay acceptance for exchange of Old Securities tendered under any of the
Exchange Offers or the exchange for the Old Securities accepted for exchange
(subject to Rule 14e-1(c) under the Exchange Act) if any of the conditions of
the Exchange Offers shall not have been satisfied or waived or in order to
comply, in whole or in part, with applicable law. If, prior to the Expiration
Time, New Tenneco amends the terms of any Exchange Offer, such amendment will
apply to all Old Securities of the same series tendered pursuant thereto but
will not (unless expressly provided) apply to any other Exchange Offer. New
Tenneco does not presently intend to change the consideration currently
offered.
If New Tenneco makes a material change in the terms of any Exchange Offer or
the information concerning any Exchange Offer or waives any condition of any
Exchange Offer that results in a material change to the circumstances of such
Exchange Offer, New Tenneco will disseminate additional exchange offer
materials if and to the extent required by applicable law and will extend such
Exchange Offer if and to the extent required in order to permit holders of the
Old Securities subject to such Exchange Offer adequate time to consider such
materials. If New Tenneco shall decide, in its sole discretion, to decrease
the principal amount of Old Securities being sought in any Exchange Offer or
to increase or decrease the consideration offered to holders of Old Securities
subject to any Exchange Offer, New Tenneco will, to the extent required by
applicable law, cause such Exchange Offer to be extended, if necessary, so
that such Exchange Offer remains open at least until the expiration of ten
business days from the date that such notice is first published, sent or given
by New Tenneco. For purposes of this paragraph "business day" has the meaning
set forth in Rule 14d-1(c)(6) under the Exchange Act. In addition, with
respect to any other material change in the terms of any Exchange Offer or the
information concerning any Exchange Offer, the minimum period during which any
such Exchange Offer must remain open following such material change depends
upon the facts and circumstances, including the relative materiality of such
terms or information.
EFFECT OF TENDER
Tenders of Old Securities pursuant to the Exchange Offers described herein,
in the Letter of Transmittal and, if applicable, the Notice of Guaranteed
Delivery (as defined) will constitute a binding agreement between the
tendering holder of Old Securities and New Tenneco upon the terms and subject
to the conditions of the Exchange Offers. The acceptance of an Exchange Offer
by a tendering holder of Old Securities will constitute the agreement by such
holder to deliver good and marketable title to the tendered Old Securities
free and clear of all liens, charges, adverse claims, encumbrances, interests
and restrictions of any kind.
24
<PAGE>
ACCEPTANCE OF OLD SECURITIES TENDERED FOR EXCHANGE; DELIVERY OF NEW SECURITIES
Upon the terms and subject to the conditions of the Exchange Offers
(including, if any Exchange Offer is extended or amended, the terms and
conditions if any such extension or amendment) and applicable law, New Tenneco
shall be deemed to have accepted for exchange tendered Old Securities as, if
and when New Tenneco gives oral or written notice to the Exchange Agent of New
Tenneco's acceptance of such Old Securities for exchange. Payment of accrued
interest and delivery of New Securities for Old Securities so accepted will be
made by delivery to the Exchange Agent of New Securities and accrued interest
on the exchanged Old Securities. In all cases, however, New Securities will be
issued in exchange for Old Securities only after timely receipt by the
Exchange Agent at its address on the back cover page hereof of (i)
certificates for all physically delivered Old Securities in proper form for
transfer or confirmation of a book-entry transfer of such Old Securities into
the Exchange Agent's account at DTC pursuant to the procedures set forth
herein, (ii) a properly completed and duly executed Letter of Transmittal or
properly transmitted Agent's Message, and (iii) any other documents required
by the Letter of Transmittal, in each case together with any applicable
signature guarantees.
The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving Old Securities and transmitting payments and/or New
Securities to or at the direction of such holders. Tenders for exchange of Old
Securities will be accepted only in principal amounts equal to $1,000 or
integral multiples of $1,000.
If any tendered Old Securities are not accepted for exchange for any reason,
or if Old Securities in a principal amount in excess of the principal amount
indicated as being tendered on the Letter of Transmittal are submitted, an Old
Security in a principal amount equal to the principal amount not tendered will
be issued, without expense to the tendering holders of Old Securities, as
promptly as practicable following the expiration or termination of the
Exchange Offers.
New Tenneco reserves the right to transfer or assign, in whole at any time
or in part time to time, to one or more of its affiliates, the right to
acquire Old Securities tendered pursuant to any Exchange Offer, but any such
transfer or assignment will not relieve New Tenneco of its obligations under
such Exchange Offers or prejudice the rights of tendering holders to receive
New Securities in exchange for Old Securities validly tendered and accepted
for exchange pursuant to such Exchange Offers.
PROCEDURES FOR TENDERING OLD SECURITIES FOR EXCHANGE AND GIVING CONSENTS
Holders of Old Securities wishing to participate in any of the Exchange
Offers must tender Old Securities in accordance with the procedures set forth
herein and in the Letter of Transmittal at or prior to the Expiration Time.
HOLDERS WHO DESIRE TO TENDER THEIR OLD SECURITIES PURSUANT TO ANY EXCHANGE
OFFER AND RECEIVE NEW SECURITIES IN EXCHANGE THEREFOR AS DESCRIBED HEREIN ARE
REQUIRED TO DELIVER A CONSENT TO THE PROPOSED AMENDMENTS. THE PROPER TENDER OF
OLD SECURITIES PURSUANT TO ONE OF THE PROCEDURES SET FORTH HEREIN WILL
CONSTITUTE THE GIVING OF A CONSENT TO THE PROPOSED AMENDMENTS.
The procedures by which Old Securities may be tendered and Consents given by
beneficial owners that are not registered holders will depend upon the manner
in which the Old Securities are held, as described below.
TENDER OF OLD SECURITIES HELD THROUGH A NOMINEE. Any beneficial owner of Old
Securities that are held of record by a custodian bank, depositary, broker,
trust company or other nominee and who wishes to tender Old Securities should
contact such record holder promptly and instruct such record holder to tender
the Old Securities and deliver a Consent on such beneficial owner's behalf
according to one of the procedures described herein. Pursuant to authority
granted by DTC, any DTC participant that has Old Securities credited to its
DTC
25
<PAGE>
account (and thereby held of record by DTC's nominee) may directly tender such
Old Securities and deliver Consents with respect thereto as if they were the
record holders thereof (and references herein to registered or record holders
shall include such participants). A Letter of Instructions is contained in the
solicitation materials provided along with this Prospectus which may be used
by a beneficial owner to instruct the record holder to tender Old Securities
and deliver Consents.
TENDER OF OLD SECURITIES HELD WITH DTC. The Exchange Agent and DTC have
confirmed that the Exchange Offers are eligible for ATOP. Accordingly, DTC
participants may electronically transmit their acceptance of any Exchange
Offer (and thereby provide their Consent to the Proposed Amendments with
respect to the Old Securities tendered) by causing DTC to transfer Old
Securities to the Exchange Agent in accordance with DTC's ATOP procedures for
transfer. DTC will then send an Agent's Message to the Exchange Agent.
Delivery of tendered Old Securities by a DTC participant must be made to the
Exchange Agent pursuant to the book-entry procedures set forth below or the
tendering DTC participant must comply with the guaranteed delivery procedures
set forth below.
The term "Agent's Message" means a message, transmitted by DTC to, and,
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation (as defined), which states that DTC has received an express
acknowledgment from a DTC participant tendering Old Securities that such
participant has received and agrees to be bound by the terms of the Letter of
Transmittal (including, without limitation, the fact that such participant has
consented to the Proposed Amendments in accordance with the terms of such
Letter of Transmittal) and that each of New Tenneco and Tenneco may enforce
such agreement against such participant.
BOOK-ENTRY DELIVERY PROCEDURES FOR HOLDERS TENDERING OLD SECURITIES HELD
WITH DTC. Within two business days after the date of this Prospectus, the
Exchange Agent will establish accounts with respect to the Old Securities at
DTC for purposes of the Exchange Offers. Any participant in DTC may make book-
entry delivery of Old Securities by causing DTC to transfer such Old
Securities into the Exchange Agent's account at DTC in accordance with DTC's
procedures for such transfer. Timely book-entry delivery requires receipt of a
confirmation of book-entry transfer into the Depositary's account at DTC (a
"Book-Entry Confirmation") by the Exchange Agent at or prior to the Expiration
Time. In addition, although delivery of Old Securities may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's
Message in connection with a book-entry transfer or the Letter of Transmittal
(or a facsimile thereof), together with any required signature guarantees and
other required documents, must, in any case, be delivered or transmitted to
and received by the Exchange Agent at its address set forth on the back cover
page of this Prospectus at or prior to the Expiration Time or the guaranteed
delivery procedures described below must be complied with. A tender for
exchange of Old Securities will not be deemed validly made until such
documents are received by the Exchange Agent. Delivery of a Letter of
Transmittal or other documents to DTC will not constitute a valid delivery to
the Exchange Agent.
TENDER OF OLD SECURITIES HELD IN PHYSICAL FORM. A holder of Old Securities
held in physical form must comply with the following instructions to tender
Old Securities in any of the Exchange Offers: (i) complete and sign the Letter
of Transmittal in accordance with the instructions set forth therein and (ii)
deliver the properly completed and duly executed Letter of Transmittal (or a
facsimile thereof), together with any required signature guarantees and other
required documents, and the Old Securities covered thereby in physical form
suitable for transfer to the Exchange Agent at its address set forth on the
back cover page of this Prospectus at or prior to the Expiration Time. A
holder who desires to tender physical Old Securities and who cannot comply
with the procedures set forth herein for tender on a timely basis or whose
physical Old Securities are not immediately available must comply with the
procedures for guaranteed delivery set forth below.
If tendered physical Old Securities are registered in the name of a person
other than the signer of a Letter of Transmittal, then, in order to validly
tender such Old Securities pursuant to the Exchange Offers, such Old
Securities must be endorsed or accompanied by an appropriate written
instrument or instruments of transfer signed exactly as the name or names of
such registered holder or holders appear on the Old Securities, with the
26
<PAGE>
signature(s) on the Old Securities or instruments of transfer guaranteed as
provided below. In addition, such tender of Old Securities must be accompanied
by a properly executed Consent from, or a valid proxy of, such registered
holder or holders, since Old Securities may not be tendered without also
delivering a Consent with respect to such Old Securities, and only registered
holders are entitled to deliver Consents.
LETTERS OF TRANSMITTAL AND PHYSICAL OLD SECURITIES MUST BE SENT ONLY TO THE
EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR OLD SECURITIES TO
TENNECO, NEW TENNECO, THE INFORMATION AGENT, DTC OR THE DEALER MANAGER.
GUARANTEED DELIVERY PROCEDURES. Holders of Old Securities who wish to tender
their Old Securities and (i) whose Old Securities are not immediately
available, (ii) who cannot deliver their Old Securities, the Letter of
Transmittal or any other required documents to the Exchange Agent at or prior
to the Expiration Time or (iii) who cannot complete the procedure for book-
entry transfer on a timely basis, may effect a tender if:
(a) the tender is made by or through one of the following firms or other
entities identified in Rule 17Ad-15 under the Exchange Act (as such terms
are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker, municipal securities broker, government securities
dealer or government securities broker; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings institution that is a participant in a Securities
Transfer Association recognized program (each an "Eligible Institution");
(b) a properly completed and duly executed Notice of Guaranteed Delivery
and Consent (a "Notice of Guaranteed Delivery"), in the form provided by
New Tenneco herewith, or an Agent's Message with respect to guaranteed
delivery that is accepted by New Tenneco, is received by the Depositary at
or prior to the applicable Expiration Time; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or a properly transmitted Agent's Message, as well as
the certificate(s) representing all tendered Old Securities or confirmation
of a book-entry transfer of such Old Securities into the Exchange Agent's
account at DTC in proper form for transfer, and all other documents
required by such Letter of Transmittal are received by the Exchange Agent
within two NYSE trading days after the Expiration Time.
The Notice of Guaranteed Delivery may be sent by hand delivery, facsimile
transmission or mail to the Exchange Agent at its address on the back cover
page of this Prospectus and must include a guarantee by an Eligible
Institution in the form set forth in the Notice of Guaranteed Delivery
provided by New Tenneco. Failure to complete the guaranteed delivery procedure
outlined above will not, of itself, affect the validity of, or effect a
revocation of, any Consent properly executed by a holder of Old Securities who
attempted to use the guaranteed delivery procedures.
Notwithstanding any other provision hereof, the issuance of New Securities
in exchange for Old Securities tendered and accepted for exchange pursuant to
a Notice of Guaranteed Delivery will, in all cases, occur only after timely
receipt by the Exchange Agent of (i) such Old Securities or confirmation of a
book-entry transfer of such Old Securities as described above, and (ii) a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), together with any other required documents, with any required
signature guarantees or a properly transmitted Agent's Message.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY NEW TENNECO BY REASON OF ANY
DELAY IN MAKING PAYMENT TO ANY PERSON USING THE GUARANTEED DELIVERY
PROCEDURES. THE PAYMENT FOR ANY OLD SECURITY TENDERED PURSUANT TO THE
GUARANTEED DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR AN EQUIVALENT OLD
SECURITY DELIVERED TO THE EXCHANGE AGENT IN ACCORDANCE WITH THE PROVISIONS
HEREOF AT OR PRIOR TO THE APPLICABLE EXPIRATION TIME, EVEN IF THE OLD SECURITY
TO BE DELIVERED PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES IS NOT
DELIVERED TO THE EXCHANGE AGENT IN A TIMELY MANNER AS DESCRIBED ABOVE AND
THEREFORE PAYMENT BY THE EXCHANGE AGENT ON ACCOUNT OF SUCH OLD SECURITY IS NOT
MADE UNTIL AFTER THE EXCHANGE DATE.
27
<PAGE>
PROPER EXECUTION AND DELIVERY OF LETTERS OF TRANSMITTAL. The method of
delivery of Old Securities, any required signature guarantees and all other
required documents, including delivery through DTC and any acceptance of an
Agent's Message transmitted through ATOP, is at the option and risk of the
tendering holders and, except as otherwise provided in the Letter of
Transmittal, delivery will be deemed made when actually received by the
Exchange Agent. If delivery is by mail, New Tenneco recommends that the
mailing be made (i) by registered mail with return receipt requested, properly
insured, and (ii) sufficiently in advance of the applicable Expiration Time to
allow enough time to ensure timely delivery.
Except as otherwise provided below, all signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, must be guaranteed
by an Eligible Institution. Signatures on a Letter of Transmittal need not be
guaranteed if (i) such Letter of Transmittal is signed by the registered
physical holder(s) of Old Securities tendered therewith or by a participant in
DTC whose name appears on a security position listing as the owner of Old
Securities tendered therewith and such holder(s) have not completed the
portion entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal, or (ii) such Old Securities are
tendered for the account of an Eligible Institution. See Instruction 2 in the
Letter of Transmittal.
If the Letter of Transmittal is signed by the registered holder(s) of Old
Securities tendered thereby, the signature(s) must correspond with the name(s)
as written on the face of Old Securities without alteration, enlargement or
any change whatsoever. If any of the Old Securities tendered thereby are held
by two or more registered holders, all such registered holders must sign such
Letter of Transmittal. If any of the Old Securities tendered thereby are
registered in different names on different Old Securities, it will be
necessary to complete, sign and submit as many separate Letters of Transmittal
as there are different registrations of certificates.
If the certificates for New Securities issued pursuant to the Exchange
Offers are to be registered in the name of, or payments are to be made to, a
person other than the person whose signature is on the Letter of Transmittal,
or if Old Securities that are not tendered for exchange pursuant to the
Exchange Offers are to be returned to a person other than the registered
owner, then certificates for such Old Securities must be endorsed or
accompanied by an appropriate instrument of transfer, signed exactly as the
name of the registered owner appears on the certificates, with the signatures
on the certificates or instruments of transfer guaranteed by an Eligible
Institution.
If a Letter of Transmittal is signed by a person other than the registered
holder(s) of Old Securities tendered thereby, then, in order to validly tender
such Old Securities pursuant to the Exchange Offers, such Old Securities must
be endorsed or accompanied by an appropriate written instrument or instruments
of transfer signed exactly as the name(s) of such registered holders(s)
appear(s) on the Old Securities, with the signature(s) on such Old Securities
or instruments of transfer guaranteed by an Eligible Institution. In addition,
such tender of Old Securities must be accompanied by a valid proxy of such
registered holder(s) guaranteed by an Eligible Institution, since Old
Securities may not be tendered without also delivering a Consent with respect
to such Old Securities, and only registered holders are entitled to deliver
Consents.
No alternative, conditional, irregular or contingent tenders or Consents
will be accepted. By executing the Letter of Transmittal (or facsimile
thereof) or transmitting an Agent's Message, the tendering holders of Old
Securities waive any right to receive any notice of the acceptance for
exchange of their Old Securities.
Tendering holders should indicate in the applicable box in the Letter of
Transmittal the name and address to which payments, certificates evidencing
New Securities and/or substitute certificates evidencing Old Securities for
amounts not tendered or not accepted for exchange are to be issued or sent, if
different from the name and address of the person signing such Letter of
Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated and a Substitute Form W-9 for such recipient must be completed. If
no such instructions are given, such payments, New Securities or Old
Securities not tendered or not accepted for exchange, as the case may be, will
be issued to and returned to the registered holder of Old Securities tendered
at the address listed in the register maintained by the Old Trustee
28
<PAGE>
for such Old Securities (or, in the case of Old Securities tendered by book-
entry transfer into the Exchange Agent's account at DTC pursuant to the
procedures set forth herein, such Old Securities will be credited to the
account maintained at DTC from which such Old Securities were delivered).
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of tendered Old
Securities pursuant to the procedures described above will be determined by
New Tenneco in its sole discretion, whose determination will be final and
binding. New Tenneco reserves the absolute right to reject any or all tenders
of Old Securities determined by it not to be in proper form or the acceptance
of which may, in the opinion of counsel for New Tenneco, be unlawful. New
Tenneco also reserves the absolute right, in its sole discretion, subject to
applicable law, to waive any of the conditions of the Exchange Offers as set
forth under "--Conditions to the Exchange Offers" or any defects or
irregularities of any tender as to Old Securities, whether or not similar
defects or irregularities are waived in the case of other tendered Old
Securities. New Tenneco's interpretation of the terms and conditions of the
Exchange Offers (including the instructions in the Letter of Transmittal) will
be final and binding. Unless waived, any irregularities in connection with
tenders must be cured within such time as New Tenneco shall determine. None of
New Tenneco, the Exchange Agent, the Information Agent, DTC and the Dealer
Manager shall be under any duty to give notification of defects in any tenders
and shall not incur liabilities for failure to give such notification. Tenders
of Old Securities will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Securities received by the
Exchange Agent that are not properly tendered and as to which the
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Time.
TRANSFER TAXES. New Tenneco will pay all transfer taxes, if any, applicable
to the transfer and sale of Old Securities to it pursuant to the Exchange
Offers. If, however, New Securities and/or substitute Old Securities for Old
Securities not tendered for exchange or not exchanged are to be delivered to,
or are to be registered or issued in the name of, any person other than the
registered holder of Old Securities tendered, or if tendered Old Securities
are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the transfer or sale of Old Securities to New Tenneco pursuant to the
Exchange Offers, the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
BACKUP U.S. FEDERAL INCOME TAX WITHHOLDING. U.S. federal income tax law
requires that a holder of Old Securities whose tendered Old Securities are
accepted for exchange must provide the Exchange Agent (as payor) with such
holder's correct taxpayer identification number, which, in the case of a
holder who is an individual, is his or her social security number, or
otherwise establish a basis for an exemption from backup withholding. Exempt
holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. If the Exchange Agent is not provided with the correct taxpayer
identification number or an adequate basis for an exemption, the holder may be
subject to a penalty imposed by the IRS and amounts paid to the holder under
an Exchange Offer may be subject to 31% backup withholding. If withholding
results in an overpayment of taxes, a refund may be obtained by such holder
from the IRS.
To prevent backup U.S. federal income tax withholding, each tendering holder
of Old Securities must complete the IRS Substitute Form W-9 provided in the
Letter of Transmittal and provide either (i) his or her correct taxpayer
identification number and certain other information under penalties of
perjury, or (ii) an adequate basis for an exemption. For a discussion of other
federal income tax consequences to holders, see "Certain U.S. Federal Income
Tax Considerations."
29
<PAGE>
CONDITIONS TO THE EXCHANGE OFFERS
Notwithstanding any other provision of the Exchange Offers (or any
extensions or amendments thereof) and in addition to (and not in limitation
of) New Tenneco's rights to extend or amend any Exchange Offer at any time in
its sole discretion, New Tenneco will not be required to accept or exchange
any Old Securities tendered for exchange and may terminate any Exchange Offer
if, at or prior to the Expiration Time:
(i) the Minimum Tender Condition shall not have been satisfied;
(ii) all conditions to the Tender Offers shall not have been satisfied;
(iii) any material condition to the consummation of the Distributions or
the Merger remains unsatisfied (see "The Distributions--Conditions to
Consummation of the Distributions" and "The Merger--Conditions Precedent");
(iv) there shall have been any action taken or threatened, or any
statute, rule, regulation, judgment, order, stay, decree or injunction
promulgated, enacted, entered, enforced or deemed applicable to any
component of the Transaction (including the Exchange Offers and the Tender
Offers) by or before any court or governmental, regulatory or
administrative agency or authority or tribunal, domestic or foreign, which
(a) challenges the making of any component of the Transaction or might
directly or indirectly prohibit, prevent, restrict or delay consummation of
any component of the Transaction or otherwise adversely affects in any
material manner any component of the Transaction, or (b) in the sole
judgment of New Tenneco, could materially adversely affect, before or after
giving effect to the Transaction, the business, financial condition,
income, operations, properties, assets, liabilities or prospects of Tenneco
and its subsidiaries, taken as a whole, New Tenneco and its subsidiaries,
taken as a whole, or Newport News and its subsidiaries, taken as a whole,
or materially impair the contemplated benefits of any component of the
Transaction to Tenneco, New Tenneco or Newport News;
(v) there shall have occurred or be likely to occur any event affecting
the business or financial affairs of Tenneco or any of its subsidiaries
that, in the sole judgment of New Tenneco, would or might prohibit,
prevent, restrict or delay consummation of any component of the
Transaction, or that will, or is reasonably likely to, materially impair
the contemplated benefits of any component of the Transaction to Tenneco,
New Tenneco or Newport News, or might be material to holders of Old
Securities in determining whether to accept the Exchange Offers;
(vi) there shall have occurred (a) any general suspension of or
limitation on trading in securities on the NYSE or in the over-the-counter
market (whether or not mandatory), (b) any significant adverse change in
the price of the Old Securities, (c) a material impairment in the trading
market for debt securities, (d) a declaration of a banking moratorium or
any suspension of payments in respect of banks by federal or state
authorities in the United States (whether or not mandatory), (e) a
commencement of a war, armed hostilities or other national or international
crisis directly or indirectly relating to the United States, (f) any
limitation (whether or not mandatory) by any governmental authority on, or
other event having a reasonable likelihood of affecting, the extension of
credit by banks or other lending institutions in the United States or (g)
any significant adverse change in United States securities or financial
markets generally or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offers, a material acceleration or
worsening thereof; or
(vii) the Old Trustee shall have objected in any respect to, or taken any
action that could, in the sole judgment of New Tenneco, adversely affect
the consummation of any of the Tender Offers, the Exchange Offers, any
other component of the Transaction or Tenneco's ability to effect the
Proposed Amendments, or shall have taken any action that challenges the
validity or effectiveness of the procedures used by New Tenneco in
soliciting the Consents to the Proposed Amendments (including the form
thereof) or in the making of the Exchange Offers or the acceptance of the
Old Securities tendered for exchange or the procedures used by Tenneco in
soliciting Consents to the Proposed Amendments (including the forms
thereof) or in the making of the Tender Offers or the acceptance of the
Other Securities tendered for purchase.
30
<PAGE>
The Tender Offers are subject to substantially the same conditions as the
Exchange Offers, provided however, that the Tender Offers are also subject to
the consummation of the transactions contemplated by the Debt Realignment and
certain of the Tender Offers are subject to the consent of 66 2/3% of the
aggregate principal amount of the securities subject to such Tender Offers.
The foregoing conditions are for the sole benefit of New Tenneco and may be
waived by New Tenneco, in whole or in part, in its sole discretion. Any
determination made by New Tenneco concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
WITHDRAWAL RIGHTS
Tenders of Old Securities may be withdrawn at any time at or prior to the
applicable Expiration Time and thereafter only if the applicable Exchange
Offer is terminated without any Old Securities being exchanged thereunder. A
valid withdrawal of tendered Old Securities effected at or prior to the
Expiration Time shall be deemed a revocation of the related Consent.
Tenders of Old Securities that have not been accepted for exchange may be
withdrawn at or prior to the Expiration Time. For a withdrawal to be
effective, (i) a written notice of withdrawal must be received by the Exchange
Agent at its address set forth on the back cover of this Prospectus, or (ii)
the appropriate procedures of DTC's ATOP system must be complied with. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Securities to be withdrawn, (ii) identify the Old Securities
to be withdrawn (including the certificate number or numbers and principal
amount of such Old Securities), (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Old Securities were tendered (including any required signature guarantees) or
be accompanied by a bond power in the name of the person withdrawing the
tender, in satisfactory form as determined by New Tenneco in its sole
discretion, duly executed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution, and (iv) specify the name in which such
Old Securities are to be registered, if different from the the person who
tendered such Old Securities pursuant to such documents to transfer. If Old
Securities have been tendered pursuant to the procedures for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn Old Securities
and otherwise comply with the procedures of such facility. A purported notice
of withdrawal which lacks any of the required information will not be an
effective withdrawal of a tender previously made. Withdrawal of Old Securities
can only be accomplished in accordance with the foregoing procedures.
Any permitted withdrawals of tenders of Old Securities may not be rescinded,
and any Old Securities so withdrawn will thereafter be deemed not validly
tendered for purposes of the Exchange Offers; provided, however, that
withdrawn Old Securities may again be tendered by completing the procedures
for tendering at or prior to the Expiration Time.
Any Old Securities that have been tendered for exchange but which are
withdrawn will be returned to the holder thereof without cost to such holder
or, in the case of Old Securities tendered by book-entry transfer into the
Exchange Agent's accounts at DTC pursuant to the book-entry transfer
procedures described above, such Old Securities will be credited to an account
maintained with DTC for the Old Securities as soon as practicable after
withdrawal.
ALL QUESTIONS AS TO THE VALIDITY (INCLUDING TIME OF RECEIPT) OF NOTICES OF
WITHDRAWAL WILL BE DETERMINED BY NEW TENNECO, IN ITS SOLE DISCRETION, WHOSE
DETERMINATION WILL BE FINAL AND BINDING. NONE OF TENNECO, NEW TENNECO, THE
EXCHANGE AGENT, DTC, THE DEALER MANAGER AND ANY OTHER PERSON WILL BE UNDER ANY
DUTY TO GIVE NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF
WITHDRAWAL, OR INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
31
<PAGE>
DEALER MANAGER
Tenneco and New Tenneco have engaged Morgan Stanley to act as exclusive
Dealer Manager in connection with the Exchange Offers and to provide certain
financial advisory services to New Tenneco in connection therewith. Any holder
who has questions concerning the terms of the Exchange Offers may contact the
Dealer Manager at the address and telephone number set forth on the back cover
page of this Prospectus.
Tenneco and New Tenneco have agreed to pay the Dealer Manager predetermined
compensation for the Dealer Manager's financial advisory services and to
reimburse the Dealer Manager for its reasonable out-of-pocket expenses,
including reasonable fees and expenses of legal counsel. Tenneco and New
Tenneco have agreed to indemnify the Dealer Manager against certain
liabilities, including certain liabilities under the federal securities laws.
The Dealer Manager has provided in the past, and currently is providing, other
investment banking and financial advisory services to Tenneco and its
affiliates, including services in connection with the Transaction.
Morgan Stanley is also acting as exclusive Dealer Manager in connection with
the Tender Offers, lead underwriter in connection with the NPS Issuance and
one of the placement agents in connection with certain financings to be
undertaken by Newport News in connection with the Transaction.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offers. Letters of Transmittal and all correspondence in connection
with the Exchange Offers should be sent or delivered by each holder or such
holder's broker, dealer, commercial bank, trust company or other nominee to
the Exchange Agent at the address and telephone numbers set forth on the back
cover page of this Prospectus.
Any holder who has questions concerning tender procedures or whose Old
Securities have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address and telephone number set forth on the back cover
page of this Prospectus for instructions.
INFORMATION AGENT
Georgeson & Company, Inc. has been appointed as Information Agent for the
Exchange Offers. Requests for assistance or additional copies of this
Prospectus, the Letter of Transmittal or the Notice of Guaranteed Delivery may
be directed to the Information Agent at the address and telephone number set
forth on the back cover page of this Prospectus. Holders of Old Securities may
also contact their broker, dealer, commercial bank or trust company for
assistance concerning the Exchange Offers.
TRUSTEE
The Chase Manhattan Bank is serving as the Old Trustee under the Old
Indenture and will serve as trustee (the "New Trustee") under the New
Indenture. All deliveries, correspondence and questions sent or presented to
the Old Trustee or the New Trustee relating to the Exchange Offers should be
directed to the applicable persons at the address and telephone number on the
back cover page of this Prospectus.
Tenneco and New Tenneco maintain, or may, in the future, maintain, normal
banking relationships with The Chase Manhattan Bank in the ordinary course of
business.
FEES AND EXPENSES
New Tenneco will pay the Exchange Agent, the Information Agent and the Old
Trustee reasonable and customary fees for their services and will reimburse
them for their reasonable out-of-pocket expenses in connection therewith. New
Tenneco will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this Prospectus and related documents to the beneficial
owners of Old Securities, and in handling or forwarding tenders for their
customers. All such fees and expenses will be paid by New Tenneco.
32
<PAGE>
MARKET AND TRADING INFORMATION
[to be provided by amendment]
33
<PAGE>
ACCOUNTING TREATMENT OF THE EXCHANGE OFFERS
The New Securities will be recorded by New Tenneco based on the fair value
of the New Securities upon consummation of the Exchange Offers. The difference
between the fair value of the New Securities and the net carrying amount of
the Old Securities will be recognized as an extraordinary charge by Tenneco.
As a result of the issuance of FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for transactions occurring after December 31, 1996, the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board is
addressing the issue of the appropriate accounting for substantive
modifications and exchanges of debt. No assurances can be given that the EITF
will reach a concensus which is consistent with New Tenneco's proposed
accounting which is based on current GAAP.
THE PROPOSED AMENDMENTS
It is a condition to exchanging Old Securities that each holder tendering
Old Securities consent to the Proposed Amendments with respect thereto. The
Proposed Amendments are being presented as a single, unified proposal with
respect to the Old Indenture.
Although the Supplemental Indenture will be executed prior to acceptance of
the Old Securities under the Exchange Offers, the Proposed Amendments
contained therein will not become operative until after receipt of the
Requisite Consents and upon acceptance for exchange or payment, as the case
may be, of the Old Securities and/or the Other Securities relating to such
Consents. If the Proposed Amendments become operative, the holders of Old
Securities which remain outstanding will be bound by the Supplemental
Indenture regardless of whether they consented to the Proposed Amendments. See
"Risk Factors."
The following sets forth a brief description, as well as the text, of the
Proposed Amendments for which Consents are being sought pursuant to the
Consent Solicitations. The summaries of provisions of the Old Indenture set
forth below are qualified in their entireties by reference to the full and
complete terms contained in the Old Indenture. Capitalized terms appearing
below in regards to the amendments to the Old Indenture have the meanings
assigned to such terms in the Old Indenture.
The Proposed Amendments would effect the following principal changes: (i)
the Old Indenture would be amended to (a) specifically provide that nothing in
the Old Indenture shall prevent, or place any restrictions or conditions on,
consummation of the transactions contemplated by the Distribution Agreement or
the Merger Agreement and (b) specifically allow Tenneco to consummate such
transactions without complying with the covenant in the Old Indenture (the
"Tenneco Asset Transfer Covenant") that generally provides that Tenneco may
not sell, lease, transfer or otherwise dispose of its property and assets as,
or substantially as, an entirety unless the corporation to which such sale,
lease, transfer or other disposition is made specifically assumes liability
for securities issued thereunder and certain other conditions are met (the
application of which Tenneco believes, in any event, is uncertain in these
circumstances); (ii) the covenant restricting the creation by Tenneco and its
subsidiaries of liens on their properties would be modified to apply only to
(A) principal properties of Tenneco and its subsidiaries that are located in
the United States or Canada, (B) permit liens incurred in connection with
improvements to properties, (C) increase the amount of debt that may be
secured by a lien notwithstanding the provisions of the negative pledge
covenant, and (D) not apply to liens in existence as of, or arising under an
"after-acquired" property or similar provision in existence as of, the date of
the Supplemental Indenture; (iii) certain events of default arising from the
default by Tenneco or one or more of its subsidiaries under other debt
obligations would be eliminated; (iv) the defeasance provisions of the Old
Indenture would be amended to among other things, allow the defeasance of
securities that are to become due and payable or are to be redeemed within one
year of such defeasance without requiring Tenneco to deliver an IRS ruling or
a tax opinion as to the tax consequences of the defeasance; and (v)
definitions of certain terms used in connection with the foregoing amendments
would be added to the Old Indenture.
Set forth below are the Proposed Amendments to the Old Indenture in the form
that will be adopted in the Supplemental Indenture as described above. A copy
of the proposed Supplemental Indenture is an exhibit to the Registration
Statement of which this Prospectus is a part, is on file with the Old Trustee
and is available for inspection by all of the holders of Old Securities at the
Old Trustee's address as set forth on the back cover page of this Prospectus.
Unless otherwise indicated, article and section references are to the Old
Indenture.
34
<PAGE>
DEFINITIONS
(S) 1.01 of the Supplemental Indenture. The definition of "Consolidated Net
Tangible Assets" is hereby amended to read as follows:
Consolidated Net Tangible Assets
The term "Consolidated Net Tangible Assets" shall mean, at any date of
determination, the total amount of assets after deducting therefrom (i) all
current liabilities (excluding (A) any current liabilities that by their
terms are extendable or renewable at the option of the obligor thereon to a
time more than 12 months after the time as of which the amount thereof is
being computed, and (B) current maturities of long- term debt), and (ii)
the value (net of any applicable reserves) of all goodwill, trade names,
trademarks, patents and other like intangible assets, all as set forth on
the consolidated balance sheet of the Company and its consolidated
subsidiaries for the Company's most recently completed fiscal quarter,
prepared in accordance with generally accepted accounting principles.
(S) 1.02 of the Supplemental Indenture. The following definitions are hereby
added to Article 1 of the Original Indenture (which, for purposes of the
Supplemental Indenture, shall be defined as the Old Indenture):
Distribution Agreement
The term "Distribution Agreement" means the Distribution Agreement dated
as of 1996, among the Company, New Tenneco Inc. and Newport News
Shipbuilding Inc., as the same may be amended, modified or supplemented
from time to time.
Excluded Conveyance:
The term "Excluded Conveyance" shall mean any transaction contemplated by
the Distribution Agreement or the Merger Agreement.
Merger Agreement:
The term "Merger Agreement" means the Agreement and Plan of Merger dated
as of June 19, 1996, among El Paso Natural Gas Company, El Paso Merger
Company and the Company, as the same may be amended, modified or
supplemented from time to time.
Principal Property:
The term "Principal Property" shall mean (i) any pipeline assets of the
Company or any Subsidiary, including any related facilities employed in the
transportation, distribution or marketing of natural gas, that are located
within the continental United States of America or Canada, and (ii) any
processing or manufacturing plant owned or leased by the Company or any
Subsidiary that is located within the continental United States of America
or Canada, except in the case of either clause (i) or (ii), any such assets
or plant which in the opinion of the Board of Directors is not a Principal
Property in relation to the activities of the Company and its Subsidiaries
as a whole.
Stated Maturity:
The term "Stated Maturity," when used with respect to any Security or any
installment of interest thereon, shall mean the date specified in such
Security as the fixed date on which the principal of such Security or such
installment of interest is due and payable.
MODIFICATION OF NEGATIVE PLEDGE COVENANT
(S) 1.03 of the Supplemental Indenture. Section 4.04 of the Original
Indenture is hereby amended and restated in its entirety to read as follows:
35
<PAGE>
(S) 4.04. The Company will not, nor will it permit any Subsidiary to,
create, assume, incur or suffer to exist any Lien upon any Principal
Property, whether owned or leased on [the date of execution of the
Supplemental Indenture] or hereafter acquired, to secure any Debt of the
Company or any other Person (other than the Securities), without in any
such case making effective provision whereby all of the Securities
outstanding shall (so long as such other Debt shall be so secured) be
directly secured equally and ratably with (or prior to) such Debt,
excluding, however, the following:
(i) any Lien upon any property or assets of the Company or any
Subsidiary in existence on [the date of execution of the Supplemental
Indenture] or created pursuant to an "after-acquired property" clause
or similar term (including Liens created upon substitution of cash or
collateral of similar value) in existence on [the date of execution of
the Supplemental Indenture] of any mortgage, pledge agreement, security
agreement or other similar instrument in existence on [the date of
execution of the Supplemental Indenture];
(ii) any Lien upon any property or assets created at the time of the
acquisition of such property or assets by the Company or any Subsidiary
or within one year after such time to secure all or a portion of the
purchase price for such property or assets or Debt incurred to finance
such purchase price, whether such Debt was incurred prior to, at the
time of or within one year of such acquisition;
(iii) any Lien upon any property or assets existing thereon at the
time of the acquisition thereof by the Company or any Subsidiary
(whether or not the obligations secured thereby are assumed by the
Company or any Subsidiary);
(iv) any Lien upon any property or assets of a person existing
thereon at the time such person becomes a Subsidiary by acquisition,
merger or otherwise;
(v) the assumption by the Company or any Subsidiary of obligations
secured by any Lien existing at the time of the acquisition by the
Company or any Subsidiary of the property or assets subject to such
Lien or at the time of the acquisition of the person which owns such
property or assets;
(vi) any Lien on property to secure all or part of the cost of
construction or improvements thereon or to secure Debt incurred prior
to, at the time of, or within one year after completion of such
construction or making of such improvements, to provide funds for any
such purpose;
(vii) any Lien on any oil, gas, mineral and processing and other
plant properties to secure the payment of costs, expenses or
liabilities incurred under any lease or grant or operating or other
similar agreement in connection with or incident to the exploration,
development, maintenance or operation of such properties;
(viii) any Lien arising from or in connection with a conveyance by
the Company or any Subsidiary of any production payment with respect to
oil, gas, natural gas, carbon dioxide, sulphur, helium, coal, metals,
minerals, steam, timber or other natural resources;
(ix) any Lien in favor of the Company or any Subsidiary;
(x) any Lien created or assumed by the Company or any Subsidiary in
connection with the issuance of Debt the interest on which is
excludable from gross income of the holder of such Debt pursuant to the
Internal Revenue Code of 1986, as amended, or any successor statute,
for the purpose of financing, in whole or in part, the acquisition or
construction of property or assets to be used by the Company or any
Subsidiary;
(xi) Liens upon rights-of-way for pipeline purposes;
(xii) any governmental Lien, mechanics', materialmen's, carriers' or
similar Lien incurred in the ordinary course of business which is not
yet due or which is being contested in good faith by appropriate
proceedings and any undetermined Lien which is incidental to
construction;
(xiii) the right reserved to, or vested in, any municipality or
public authority by the terms of any right, power, franchise, grant,
license, permit or by any provision of law, to purchase or recapture or
to designate a purchaser of, any property;
36
<PAGE>
(xiv) Liens of taxes and assessments which are (A) for the then
current year, (B) not at the time delinquent, or (C) delinquent but the
validity of which is being contested at the time by the Company or any
Subsidiary in good faith;
(xv) Liens of, or to secure performance of, leases;
(xvi) any Lien upon, or deposits of, any assets in favor of any
surety company or clerk of court for the purpose of obtaining indemnity
or stay of judicial proceedings;
(xvii) any Lien upon property or assets acquired or sold by the
Company or any Subsidiary resulting from the exercise of any rights
arising out of defaults on receivables;
(xviii) any Lien incurred in the ordinary course of business in
connection with workmen's compensation, unemployment insurance,
temporary disability, social security, retiree health or similar laws
or regulations or to secure obligations imposed by statute or
governmental regulations;
(xix) any Lien upon property or assets of any foreign Subsidiary to
secure Debt of that foreign Subsidiary;
(xx) any Lien upon any property or assets in accordance with
customary banking practice to secure any Debt incurred by the Company
or any Subsidiary in connection with the exporting of goods to, or
between, or the marketing of goods in, or the importing of goods from,
foreign countries;
(xxi) any Lien upon any additions, improvements, replacements,
repairs, fixtures, appurtenances or component parts thereof attaching
to or required to be attached to property or assets pursuant to the
terms of any mortgage, pledge agreement, security agreement or other
similar instrument, creating a Lien upon such property or assets
permitted by clauses (i) through (xx) inclusive of this (S)4.04; or
(xxii) any extension, renewal, refinancing, refunding or replacement
(or successive extensions, renewals, refinancings, refundings or
replacements) of any Lien, in whole or in part, that is referred to in
clauses (i) through (xxi) inclusive of this (S)4.04; provided, however,
that the principal amount of Debt so secured pursuant to this clause
(xxii) shall not exceed the principal amount of Debt so secured (plus
the aggregate amount of premiums, other payments, costs, and expenses
required to be paid or incurred in connection with such extension,
renewal, refinancing, refunding or replacement) at the time of such
extension, renewal, refinancing, refunding or replacement, and that
such extension, renewal, refinancing, refunding or replacement shall be
limited to all or a part of the property (including improvements,
alterations and repairs on such property) subject to the encumbrance so
extended, renewed, refinanced, refunded or replaced (plus improvements,
alterations and repairs on such property).
Notwithstanding the foregoing provisions of this (S)4.04, the Company
may, and may permit any Subsidiary to, create, assume, incur or suffer to
exist any Lien upon any Principal Property to secure Debt of the Company or
any other person (other than the Securities) which is not excepted by
clauses (i) through (xxii) inclusive above without securing the Securities,
provided that the aggregate principal amount of all Debt then outstanding
secured by such Lien and all similar Liens does not exceed 15% of
Consolidated Net Tangible Assets. For the purpose of this (S)4.04, no Lien
to secure any Debt will be deemed to be created, assumed, incurred or
suffered to exist by any Lien in favor of the United States of America or
any state thereof, or any other country, or any political subdivision of
any of the foregoing, to secure partial, progress, advance or other
payments pursuant to the provisions of any contract or statute, or any Lien
securing industrial development, pollution control or similar revenue
bonds.
ELIMINATION OF CROSS-DEFAULT PROVISIONS
(S) 1.04 of the Supplemental Indenture. Clauses (g), (h) and (i) of Section
5.01 of the Original Indenture are hereby deleted and replaced with the
following:
(g) [Intentionally omitted]
(h) [Intentionally omitted]
37
<PAGE>
(i) [Intentionally omitted]
MODIFICATION OF DEFEASANCE PROVISIONS
(S) 1.05 of the Supplemental Indenture. Article 9 of the Original Indenture
is hereby amended and restated in its entirety to read as follows:
ARTICLE 9
Satisfaction and Discharge of Indenture; Unclaimed Moneys
(S) 9.01 Satisfaction and Discharge of Indenture. (A) If at any time
(a) the Company shall have paid or caused to be paid the principal of
and interest on all the Securities of any series outstanding hereunder
(other than Securities of such series which have been destroyed, lost or
stolen and which have been replaced or paid as provided in (S)2.10) as
and when the same shall have become due and payable, or
(b) the Company shall have delivered to the Trustee for cancellation
all Securities of any series theretofore authenticated (other than any
Securities of such series which shall have been destroyed, lost or stolen
and which shall have been replaced or paid as provided in (S)2.10), or
(c) in the case of any series of Securities where the exact amount
(including the currency of payment) of principal of and interest due on
which can be determined at the time of making the deposit referred to in
clause (ii) below, (i) all the Securities of such series not theretofore
delivered to the Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one year
or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and
(ii) the Company shall have irrevocably deposited or caused to be
deposited with the Trustee as trust funds the entire amount in cash
(other than moneys repaid by the Trustee or any paying agent to the
Company in accordance with (S)9.04) or, in the case of any series of
Securities the payments on which may only be made in legal coin or
currency of the United States, U.S. Government Obligations, maturing as
to principal and interest at such times and in such amounts as will
insure the availability of cash, or a combination thereof, sufficient in
the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, to pay (A) the principal and interest on all Securities of such
series on each date that such principal or interest is due and payable
and (B) any mandatory sinking fund payments on the dates on which such
payments are due and payable in accordance with the terms of the
Indenture and the Securities of such series,
and if, in any such case, the Company shall also pay or cause to be paid all
other sums payable hereunder by the Company, then this Indenture shall cease
to be of further effect (except as to (i) rights of registration of transfer
and exchange of Securities of such Series and the Company's right of optional
redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost
or stolen Securities, (iii) rights of holders of Securities to receive
payments of principal thereof and interest thereon, upon the original stated
due dates therefor or on the specified redemption dates therefor (but not upon
acceleration), and remaining rights of the holders to receive mandatory
sinking fund payments, if any, (iv) the rights, obligations, duties and
immunities of the Trustee hereunder, (v) the rights of the holders of
Securities of such series as beneficiaries hereof with respect to the property
so deposited with the Trustee payable to all or any of them, and (vi) the
obligations of the Company under (S)4.02), and the Trustee, on demand of the
Company accompanied by an officers' certificate and an opinion of counsel and
at the cost and expense of the Company, shall execute proper instruments
acknowledging such satisfaction of and discharging this Indenture; provided,
that the rights of holders of the Securities to receive amounts in respect of
principal of and interest on the Securities held by them shall not be delayed
longer than required by then-applicable mandatory rules or policies of any
securities exchange upon which the Securities are listed.
38
<PAGE>
(B) The following provisions shall apply to the Securities of each series
unless specifically otherwise provided in a resolution of the Board of
Directors certified by a secretary or assistant secretary of the Company,
officers' certificate or indenture supplemental hereto provided pursuant to
(S)2.02. In addition to discharge of the Indenture pursuant to subsection (A)
above of this (S)9.01, in the case of any series of Securities the exact
amounts (including the currency of payment) of principal of and interest due
on which can be determined at the time of making the deposit referred to in
clause (a) below, the Company shall be deemed to have paid and discharged the
entire indebtedness on all the Securities of such a series thereto on the 91st
day after the date of the deposit referred to in subparagraph (a) below, and
the provisions of this Indenture with respect to the Securities of such series
shall no longer be in effect (except as to (i) rights of registration of
transfer and exchange of Securities of such series and the Company's right of
optional redemption, if any, (ii) substitution of mutilated, defaced,
destroyed, lost or stolen Securities, (iii) rights of holders of Securities to
receive payments of principal thereof and interest thereon, upon the original
stated due dates therefor or on the specified redemption dates therefor (but
not upon acceleration), and remaining rights of the holders to receive
mandatory sinking fund payments, if any, (iv) the rights, obligations, duties
and immunities of the Trustee hereunder, (v) the rights of the holders of
Securities of such series as beneficiaries hereof with respect to the property
so deposited with the Trustee payable to all or any of them and (vi) the
obligations of the Company under (S)4.02), and the Trustee, at the expense of
the Company, shall at the Company's request, execute proper instruments
acknowledging the same, if:
(a) the Company has irrevocably deposited or caused to be irrevocably
deposited with the Trustee as trust funds in trust, specifically pledged as
security for, and dedicated solely to, the benefit of the holders of the
Securities of such series (i) cash in an amount, or (ii) in the case of any
series of Securities the payments on which may only be made in legal coin or
currency of the United States, U.S. Government Obligations, maturing as to
principal and interest at such times and in such amounts as will insure the
availability of cash, or (iii) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
(A) the principal and interest on all Securities of such series on each date
that such principal or interest is due and payable, and (B) any mandatory
sinking fund payments on the dates on which such payments are due and payable
in accordance with the terms of the Indenture and the Securities of such
series;
(b) the Company has delivered to the Trustee an opinion of counsel based on
the fact that (x) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling, or (y) since the date hereof,
there has been a change in the applicable federal income tax law, in either
case to the effect that, and such opinion shall confirm that, the holders of
the Securities of such series will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount and in
the same manner and at the same times, as would have been the case if such
deposit, defeasance and discharge had not occurred; and
(c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the defeasance contemplated by this provision have been complied
with.
(C) The Company shall be released from its obligations under (S)4.04, (S)7.02
and (S)11.01 with respect to the Securities of any series outstanding on and
after the date the conditions set forth below are satisfied (hereinafter,
"covenant defeasance"). For this purpose, such covenant defeasance means that,
with respect to the outstanding Securities of any series, the Company may omit
to comply with and shall have no liability in respect of any term, condition
or limitation set forth in any such Section, whether directly or indirectly by
reason of any reference elsewhere herein to such Section or by reason of any
reference in such Section to any other provision herein or in any other
document and such omission to comply shall not constitute a default under
(S)5.01, but the remainder of this Indenture and such Securities shall be
unaffected thereby. The following shall be the conditions to application of
this subsection (C) of this (S)9.01:
(a) The Company has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to, the
benefit of the holders of the Securities of such series, (i) cash in an
amount, or (ii) in the case of
39
<PAGE>
any series of Securities the payments on which may only be made in legal coin
or currency of the United States, U.S. Government Obligations maturing as to
principal and interest at such times and in such amounts as will insure the
availability of cash, or (iii) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
(A) the principal and interest on all Securities of such series, and (B) any
mandatory sinking fund payments on the day on which such payments are due and
payable in accordance with the terms of the Indenture and the Securities of
such series.
(b) The Company shall have delivered to the Trustee an officers' certificate
stating that all conditions precedent provided for relating to the covenant
defeasance contemplated by this provision have been complied with.
(S) 9.02 Application by Trustee of Funds Deposited for Payment of
Securities. Subject to (S)9.04, all moneys or U.S. Government Obligations
deposited with the Trustee (or other trustee) pursuant to (S)9.01 (and all
funds earned on such moneys or U.S. Government Obligations) shall be held in
trust and applied by it to the payment, either directly or through any paying
agent (including the Company acting as its own paying agent), to the holders
of the particular Securities of such series for the payment or redemption of
which such moneys have been deposited with the Trustee, of all sums due and to
become due thereon for principal and interest; but such money need not be
segregated from other funds except to the extent required by law. Subject to
(S)9.01, the Trustee promptly shall pay to the Company upon request any excess
moneys held by them at any time.
(S) 9.03 Repayment of Moneys Held by Paying Agent. In connection with the
satisfaction and discharge of this Indenture with respect to Securities of any
series, all moneys then held by any paying agent under the provisions of this
Indenture with respect to such series of Securities shall, upon demand of the
Company, be repaid to it or paid to the Trustee and thereupon such paying
agent shall be released from all further liability with respect to such
moneys.
(S) 9.04 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two
Years. Any moneys deposited with or paid to the Trustee or any paying agent
for the payment of the principal of or interest on any Security of any series
and not applied but remaining unclaimed for two years after the date upon
which such principal or interest shall have become due and payable, shall,
upon the written request of the Company and unless otherwise required by
mandatory provisions of applicable escheat or abandoned or unclaimed property
law, be repaid to the Company by the Trustee for such series or such paying
agent, and the holder of the Securities of such series shall, unless otherwise
required by mandatory provisions of applicable escheat or abandoned or
unclaimed property laws, thereafter look only to the Company for any payment
which such holder may be entitled to collect, and all liability of the Trustee
or any paying agent with respect to such moneys shall thereupon cease;
provided, however, that the Trustee or such paying agent, before being
required to make any such repayment with respect to moneys deposited with it
for any payment (a) in respect of registered Securities of any series, shall
at the expense of the Company, mail by first-class mail to holders of such
Securities at their addresses as they shall appear on the Security register,
and (b) in respect of unregistered Securities of any series, shall at the
expense of the Company cause to be published once, in The Wall Street Journal
(Eastern Edition), notice, that such moneys remain and that, after a date
specified therein, which shall not be less than 30 days from the date of such
mailing or publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
40
<PAGE>
AMENDMENTS TO THE TENNECO ASSET TRANSFER COVENANT
(S) 1.06 of the Supplemental Indenture. Article 11 of the Original Indenture
is hereby amended and restated to read in its entirety as follows:
(S) 11.01. Nothing contained in this Indenture or in the Securities shall
be deemed to prevent the consolidation or merger of the Company with or
into any other person, or the merger into the Company of any other person,
or the sale, lease, transfer or other disposition by the Company of its
property and assets as, or substantially as, an entirety; provided,
however, that (1) in case of any such consolidation or merger, the person
resulting from such consolidation or any person other than the Company into
which such merger shall be made shall succeed to and be substituted for the
Company with the same effect as if it had been named herein as the party of
the first part hereto and shall become liable and be bound for, and shall
expressly assume, by indenture supplemental hereto in form reasonably
satisfactory to the Trustee executed and delivered to the Trustee, the due
and punctual payment of the principal of, and the premium, if any, and
interest on, all the Securities then outstanding and the performance and
observance of each and every covenant and condition of this Indenture on
the part of the Company to be performed or observed, and (2) in case of any
such sale, lease, transfer or other disposition of the property and assets
of the Company as, or substantially as, an entirety, the person to which
such property and assets shall be sold, leased, transferred or otherwise
disposed of shall execute and deliver to the Trustee a proper indenture
supplemental hereto in form reasonably satisfactory to the Trustee, whereby
such person shall assume the due and punctual payment of the principal of,
and the premium, if any, and interest on, all the Securities then
outstanding and the performance and observance of each and every covenant
and condition of this Indenture on the part of the Company to be performed
or observed, to the same extent that the Company be bound and liable.
Notwithstanding the foregoing, any person that acquires such properties and
assets in an Excluded Conveyance shall not be required to assume any
payment on the Securities or performance or observance of any covenants or
conditions of this Indenture.
(S) 11.02. Upon any consolidation or merger, or any sale, lease, transfer
or other disposition of the property and assets of the Company as, or
substantially as, an entirety, in accordance with the provisions of this
Article 11, the person formed by such consolidation or into which the
Company shall have been merged or to which such sale, lease, transfer or
other disposition (other than an Excluded Conveyance in which the persons
that acquire such properties and assets do not expressly assume any payment
on the Securities or performance or observance of any covenants or
conditions of this Indenture) shall have been made shall succeed to and be
substituted for the Company with the same effect as if it had been named
herein as a party hereto, and thereafter from time to time such person may
exercise each and every right and power of the Company under this
Indenture, in the name of the Company or in its own name; and any act or
proceeding by and provision of this Indenture required or permitted to be
done by any board or officer of the Company may be done with like force and
effect by the like board or officer of any person that shall at the time be
the successor of the Company hereunder. Upon compliance with the conditions
set forth in this Article 11, in connection with the sale, lease, transfer
or other disposition by the Company of its property and assets as, or
substantially as, an entirety, the Company shall automatically be released
and discharged from all its obligations under the Securities and this
Indenture and, upon request of the Company, the Trustee shall execute and
deliver a writing to the Company in form satisfactory to it acknowledging
such release and discharge.
AMENDMENT TO SPECIFICALLY PERMIT DISTRIBUTIONS
(S)1.07 of the Supplemental Indenture. Section 13.09 is hereby added to the
Original Indenture to read in its entirety as follows:
(S)13.09 Notwithstanding anything to the contrary herein, nothing
contained in this Indenture or in any of the Securities shall be deemed to
prevent, or place any restrictions or conditions on, the consummation
41
<PAGE>
by the Company or any of its Subsidiaries of any of the transactions
contemplated by the Distribution Agreement or the Merger Agreement. Without
limiting the generality of the foregoing, the Company may sell, lease,
transfer or otherwise dispose of any of its property or assets (including,
but not limited to, those related to its automotive, packaging and
shipbuilding businesses) in connection with the transactions contemplated
by the Distribution Agreement or the Merger Agreement and the corporation
or corporations or other person or persons to which such sale, lease,
transfer or other disposition is made shall not be required to assume any
obligations under this Indenture or under the Securities.
42
<PAGE>
DESCRIPTION OF THE NEW SECURITIES
The New Securities are to be issued under an Indenture (as amended and
supplemented from time to time the "New Indenture") between New Tenneco and
the New Trustee, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summaries of
certain provisions of the New Indenture do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the detailed
provisions of the New Indenture, including the definitions of certain terms
contained in the New Indenture and capitalized in this Prospectus. Wherever
particular sections or defined terms of the New Indenture are referred to in
this Prospectus, such sections or defined terms are incorporated herein by
reference. As used under this caption, the term "Debt Securities" means all
evidences of indebtedness for money borrowed which may be issued under the New
Indenture.
GENERAL
The New Indenture does not limit the amount of Debt Securities that may be
issued thereunder and provides that Debt Securities may be issued thereunder
from time to time in one or more series as from time to time authorized by New
Tenneco. The Debt Securities will be unsubordinated and unsecured senior
obligations of New Tenneco and will rank pari passu with other unsubordinated
and unsecured senior obligations of New Tenneco.
The New Indenture does not limit the amount of other indebtedness or
securities which may be issued by New Tenneco or its Subsidiaries, although
the issuance, assumption or guarantee of indebtedness secured by certain
property is subject to the restrictions described under "--Certain Covenants
of New Tenneco." There are no provisions of the New Indenture which afford
holders of the New Securities protection in the event of a highly leveraged
transaction involving New Tenneco.
NEW SECURITIES
[to be provided by amendment]
CERTAIN COVENANTS OF NEW TENNECO
Negative Pledge. If New Tenneco or any Restricted Subsidiary (as defined
below) shall issue, assume, incur or guarantee any debt secured by a Mortgage
(as defined below) on any Principal Manufacturing Property (as defined below)
of New Tenneco or any Restricted Subsidiary or on any shares of capital stock
or debt of any Restricted Subsidiary, New Tenneco will secure, or cause such
Restricted Subsidiary to secure, the outstanding Debt Securities equally and
ratably with such secured debt, unless after giving effect thereto the
aggregate amount of all such secured debt together with all Attributable Debt
(as defined below) of New Tenneco and its Subsidiaries in respect of sale and
leaseback transactions involving Principal Manufacturing Properties would not
exceed 15% of the Consolidated Net Tangible Assets (as defined below) of New
Tenneco and its Consolidated Subsidiaries. This restriction will not apply in
the case of
(a) the creation of Mortgages on any Principal Manufacturing Property
acquired by New Tenneco or a Restricted Subsidiary after the date of the
New Indenture to secure or provide for the payment or financing of all or
any part of the purchase price thereof or construction of fixed
improvements thereon (prior to, at the time of or within 180 days after the
latest of the acquisition, completion of construction or commencement of
commercial operation thereof), or existing Mortgages on any Principal
Manufacturing Property acquired by New Tenneco or a Restricted Subsidiary
(whether or not such Mortgages are assumed), provided the Mortgage shall
not apply to any property theretofore owned by New Tenneco or a Restricted
Subsidiary, other than any theretofore unimproved real property;
(b) any Mortgages on any Principal Manufacturing Property of a
corporation which is merged into or consolidated with New Tenneco or a
Restricted Subsidiary or substantially all of the assets of which are
acquired by New Tenneco or a Restricted Subsidiary (whether or not the
obligations secured thereby are assumed by New Tenneco or a Restricted
Subsidiary);
43
<PAGE>
(c) Mortgages in favor of governmental bodies of the United States or any
State thereof or any other country or any political subdivision thereof to
secure partial, progress, advance or other payments pursuant to any
contract or statute, or to secure any debt incurred or guaranteed for the
purpose of financing all or any part of the cost of acquiring, constructing
or improving the property subject to such Mortgages;
(d) Mortgages on particular property (or any proceeds of the sale
thereof) to secure all or any part of the cost of exploration, drilling,
mining, development, maintenance or operation thereof intended to obtain or
increase the production and sale or other disposition of oil, gas, coal,
natural gas, carbon dioxide, sulphur, helium, metals, minerals, steam,
timber, or other natural resources therefrom, or any debt created, issued,
assumed or guaranteed to provide funds for any or all such purposes;
(e) Mortgages securing Debt (as defined below) of a Restricted Subsidiary
owing to New Tenneco or another Restricted Subsidiary;
(f) Mortgages on any Principal Manufacturing Property of New Tenneco or a
Restricted Subsidiary which Mortgages were in existence on the date of the
New Indenture; provided, however, that each such Mortgage shall be limited
to all or a part of the property which secured such Mortgage at such date
(plus improvements and construction on such property);
(g) certain extensions, renewals or replacements of Mortgages referred to
in the foregoing clauses; and
(h) Permitted Mortgages.
(Section 3.6 of the New Indenture.) The New Indenture will not restrict the
incurrence of unsecured debt by New Tenneco or any Subsidiary.
Restrictions on Sale and Leaseback Transactions. Neither New Tenneco nor any
Restricted Subsidiary may, after the effective date of the New Indenture,
enter into any sale and leaseback transaction involving any Principal
Manufacturing Property which has been or is to be sold or transferred by New
Tenneco or any Restricted Subsidiary, unless
(a) New Tenneco or such Restricted Subsidiary would be entitled to create
debt secured by a Mortgage on such property as described in clauses (a)-(i)
under "Negative Pledge" in an amount equal to the Attributable Debt with
respect to the sale and leaseback transaction without equally and ratably
securing the outstanding Debt Securities;
(b) during the period commencing 12 months prior to and ending 12 months
after a sale and leaseback transaction, New Tenneco or such Restricted
Subsidiary expends for facilities comprising a Principal Manufacturing
Property (or part thereof) all or a part of the net proceeds of such sale
and leaseback transaction and elects to designate such amount as a credit
against such sale and leaseback transaction; or
(c) to the extent not credited as described above, New Tenneco applies to
the retirement of long-term indebtedness of New Tenneco or any Restricted
Subsidiary an amount equal to the Attributable Debt with respect to such
sale and leaseback transaction.
(Section 3.6 of the New Indenture.) This restriction will not apply to any
sale and leaseback transaction (a) between New Tenneco and a Restricted
Subsidiary or between Restricted Subsidiaries, (b) involving the taking back
of a lease for a period of three years or less or (c) if after giving effect
to a sale and leaseback transaction, permitted secured debt plus Attributable
Debt of New Tenneco and its Subsidiaries (as defined below) in respect of sale
and leaseback transactions involving Principal Manufacturing Properties would
not exceed 15% of the Consolidated Net Tangible Assets of New Tenneco and its
consolidated Subsidiaries.
Except as may be applicable to a particular series of Debt Securities that
may be issued in the future, there are no covenants or other provisions in the
New Indenture providing for a put or increased interest or that would
otherwise afford holders of Debt Securities additional protection in the event
of a recapitalization transaction, a change of control of New Tenneco or a
highly leveraged transaction.
44
<PAGE>
The following terms which are used in the New Indenture have the meanings
set forth below:
"Attributable Debt" means the total net amount of the rent required to be
paid during the remaining term of any lease, discounted at the weighted
average rate per annum then borne by the outstanding Debt Securities. (Section
1.1 of the New Indenture.)
"Consolidated Net Tangible Assets" means the total assets shown on the
consolidated balance sheet of New Tenneco and its consolidated Subsidiaries
for the most recent fiscal quarter, after deducting the amount of all current
liabilities and intangible assets. (Section 1.1 of the New Indenture.)
"Debt" of any person shall mean any debt for money borrowed which is issued,
assumed, incurred or guaranteed in any manner by such person. (Section 1.1 of
the New Indenture.)
"Mortgage" means any mortgage, pledge, lien or other encumbrance securing
Debt of any person. (Section 1.1 of the New Indenture.)
"Permitted Mortgage" means:
(a) any governmental, mechanics', materialmen's, carriers' or similar
lien created in the ordinary course of business which is not yet due or
which is being contested in good faith by appropriate proceedings and any
undetermined lien which is incidental to construction;
(b) any right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant, license,
permit or by any provision of law, to purchase or recapture or to designate
a purchaser of, any property;
(c) any lien of taxes and assessments which is (A) for the current year,
or (B) not at the time delinquent or (C) delinquent but the validity of
which is being contested at the time by New Tenneco or any Subsidiary in
good faith;
(d) any lien arising from or in connection with a conveyance by New
Tenneco or any Subsidiary of any production payment with respect to oil,
gas, natural gas, carbon dioxide, sulphur, helium, coal, metals, minerals,
steam, timber or other natural resources;
(e) any lien to secure obligations imposed by statute or governmental
regulations; or
(f) any lien of, or to secure performance of, leases (other than leases
relating to a sale and leaseback transaction). (Section 1.1 of the New
Indenture.)
"Principal Manufacturing Property" means any manufacturing plant or testing
or research and development facility of New Tenneco or a Subsidiary located in
the United States unless the New Tenneco Board determines that such plant or
facility is not of material importance to the total business conducted by New
Tenneco and its consolidated Subsidiaries. "Principal Manufacturing Property"
shall include, without limitation, additions, improvements, replacements,
repairs, fixtures, appurtenances or component parts of any such plant or
facility attaching to or required to be attached to property or assets
pursuant to the terms of any Mortgage (including, without limitation, pursuant
to any "after-acquired property" clause or similar term thereof). (Section 1.1
of the New Indenture.)
"Restricted Subsidiary" means any Subsidiary owning or leasing any Principal
Manufacturing Property. (Section 1.1 of the New Indenture.)
"Subsidiary" means any corporation, partnership or other entity of which
more than 50% of the outstanding voting stock or equity interests is directly
or indirectly owned or controlled by New Tenneco. (Section 1.1 of the New
Indenture.)
45
<PAGE>
CONSOLIDATION, MERGER AND SALE OF ASSETS
New Tenneco may not merge or consolidate with any other person or sell,
lease or convey substantially all of its assets to any person, unless (i)
either New Tenneco is the continuing entity or the successor or transferee or
lessee is a corporation organized under the laws of the United States, any
State thereof or the District of Columbia and expressly assumes New Tenneco's
obligations under the Debt Securities and the New Indenture, and (ii)
immediately 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, exists. (Section 9.1 of the New Indenture.) Upon any such
consolidation, merger, sale, lease or conveyance the successor corporation
formed by such consolidation, or into which New Tenneco is merged or to which
such sale, lease or conveyance is made, shall succeed to, and be substituted
for, New Tenneco under the New Indenture and under the Debt Securities.
(Section 9.2 of the New Indenture.)
EVENTS OF DEFAULT
Any one of the following events will constitute an Event of Default under
the New Indenture with respect to Debt Securities of any series: (i) failure
to pay any interest on any Debt Security of that series when due and
continuance of such default for 30 days; (ii) failure to pay principal of any
Debt Security of that series when due, either at maturity, upon any
redemption, by declaration or otherwise; (iii) failure to observe or perform
any other of the covenants or agreements of New Tenneco in the New Indenture
(other than a covenant the default or breach of which is otherwise
specifically dealt with in the New Indenture) for 60 days after written notice
as provided in the New Indenture; (iv) certain events of bankruptcy,
insolvency or reorganization of New Tenneco; or (v) any other Event of Default
provided in a supplemental indenture with respect to Debt Securities of that
series. (Section 5.1 of the New Indenture.)
If any Event of Default occurs and is continuing, either the New Trustee or
the holders of at least 25% in aggregate principal amount of the outstanding
Debt Securities of each affected series (or, in certain instances, all
series), voting as a single class, by written notice to New Tenneco (and to
the New Trustee, if given by such holders of Debt Securities), may declare the
principal amount of (or, if the Debt Securities of an affected series are
original issue discount debt securities, such portion of the principal amount
as may be specified therefor) and accrued interest on all the Debt Securities
of each affected series to be due and payable immediately. At any time after a
declaration of acceleration with respect to Debt Securities of any series has
been made, but before a judgment or decree based on such acceleration has been
obtained, the holders of a majority in aggregate principal amount of
outstanding Debt Securities of that series may, under certain circumstances,
rescind and annul such acceleration. (Section 5.1 of the New Indenture.)
The New Indenture provides that the New Trustee will, within 90 days after
the occurrence of a default with respect to the Debt Securities of any series,
give to the holders of the Debt Securities of that series notice of all
defaults known to it unless such default shall have been cured or waived;
provided that except in the case of a default in payment on the Debt
Securities of that series, the New Trustee may withhold the notice if and so
long as it in good faith determines that withholding such notice is in the
interests of the holders of the Debt Securities of that series. (Section 5.11
of the New Indenture.)
The New Indenture provides that the holders of a majority in aggregate
principal amount of the outstanding Debt Securities of each series affected
(with all such series voting as a single class) may direct the time, method
and place of conducting any proceeding for any remedy available to the New
Trustee for such series, or exercising any trust or power conferred on the New
Trustee. (Section 5.9 of the New Indenture.)
The holders of a majority in aggregate principal amount outstanding of all
series of Debt Securities with respect to which an Event of Default has
occurred (voting as a single class) by notice to the New Trustee may waive, on
behalf of the holders of all Debt Securities of all such series, any past
default or Event of Default with respect to that series and its consequences
except in respect of a convenant or provision of the New Indenture which
cannot under the terms of the New Indenture be amended or modified without the
consent of the holder of each outstanding Debt Security affected. (Section
5.10 of the New Indenture.)
46
<PAGE>
The New Indenture includes a covenant that New Tenneco will file annually
with the New Trustee a certificate as to New Tenneco's compliance with all
conditions and covenants of the New Indenture. (Section 3.5 of the New
Indenture.)
MODIFICATION OF THE NEW INDENTURE
The New Indenture contains provisions permitting New Tenneco and the New
Trustee to enter into one or more supplemental indentures without the consent
of the holders of any of the Debt Securities in order (i) to transfer or
pledge any property to the New Trustee as security for the Debt Securities of
any series; (ii) to evidence the succession of another corporation to New
Tenneco and the assumption of the covenants of New Tenneco by a successor to
New Tenneco; (iii) to add to the covenants of New Tenneco such further
covenants or provisions so as to further protect the holders of Debt
Securities; (iv) to establish the form or terms of Debt Securities; (v) to
evidence and provide for successor New Trustees; or (vi) to cure any ambiguity
or correct or supplement any defective provisions or to make any other
provisions as New Tenneco deems necessary or desirable, provided such action
does not adversely affect the interests of any holder of Debt Securities of
any series. (Section 8.1 of the New Indenture.)
The New Indenture also contains provisions permitting New Tenneco and the
New Trustee, with the consent of the holders of a majority in aggregate
principal amount of the outstanding Debt Securities affected by such
supplemental indenture (voting as one class), to execute supplemental
indentures adding any provisions to or changing or eliminating any of the
provisions of the New Indenture or any supplemental indenture or modifying the
rights of the holders of Debt Securities of such series, except that no such
supplemental indenture may, without the consent of the holder of each Debt
Security so affected, (i) extend the time for payment of principal or interest
on any Debt Security; (ii) reduce the principal of, or the rate of interest
on, any Debt Security; (iii) reduce the amount of premium, if any, payable
upon the redemption of any Debt Security; (iv) reduce the amount of principal
payable upon acceleration of the maturity of any original issue discount
security; (v) change the currency or currency unit in which any Debt Security
or any premium or interest thereon is payable; (vi) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Debt Security; or (vii) reduce the percentage in principal amount of the
outstanding Debt Securities affected thereby the consent of whose holders is
required for modification or amendment of the New Indenture. (Section 8.2 of
the New Indenture.)
DEFEASANCE AND COVENANT DEFEASANCE
The New Indenture provides that New Tenneco, at its option, (a) will be
discharged from any and all obligations in respect of the Debt Securities of
any series (except for certain obligations to register the transfer or
exchange of Debt Securities of such series, replace stolen, lost or mutilated
Debt Securities of such series, maintain paying agencies and hold moneys for
payment in trust) ("defeasance") or (b) need not comply with certain
convenants of the Indenture, including those described under "Certain
Convenants of New Tenneco" and "--Consolidation, Merger and Sale of Assets,"
and the occurrence of an event described in clause (iii) under "--Events of
Default" shall no longer be an Event of Default ("covenant defeasance"), in
each case, if New Tenneco deposits, in trust, with the New Trustee money or
U.S. Government Obligations (as defined below) which through the payment of
interest and principal in accordance with their terms will provide money, in
an amount sufficient to pay all the principal of (and premium, if any) and
interest on the Debt Securities of such series, and any mandatory sinking fund
or analogous payments, on the dates such payments are due in accordance with
the terms of the Debt Securities of such series. If such defeasance is to
occur at least one year prior to the date such Debt Securities become due and
payable or are to be redeemed such defeasance or covenant defeasance may only
be established if New Tenneco shall have delivered an opinion of counsel to
the effect that the holders of Debt Securities will not recognize income, gain
or loss for federal income tax purposes as a result of such deposit or
defeasance and will be subject to federal income tax on the same amount, in
the same manner and at the same times as if such defeasance had not occurred.
In the case of defeasance as described in clause (a) above, such opinion of
counsel must be based upon a ruling of the IRS or a change in applicable
federal income tax law
47
<PAGE>
occurring after the date of the New Indenture. "U.S. Government Obligations"
means obligations issued or guaranteed as to principal and interest by the
United States or by an entity controlled or supervised by or acting as an
instrumentality of the United States Government. (Article 10 of the New
Indenture.)
THE NEW TRUSTEE
The Chase Manhattan Bank is the New Trustee under the New Indenture. New
Tenneco may also maintain banking and other commercial relationships with the
New Trustee in the ordinary course of business.
GLOBAL SECURITIES
Unless an exchanging holder of Old Securities requests New Securities in
physical form, each New Security will be issued in the form of one or more
global securities ("Global Securities") that will be deposited with, or on
behalf of, DTC (the "Depository"). Unless and until it is exchanged in whole
or in part for New Securities of that series in definitive form, a Global
Security may not be transferred except as a whole to a nominee of the
Depository for such Global Security, or by a nominee of the Depository to the
Depository or another nominee of the Depository, or by the Depository or any
such nominee to a successor Depository or a nominee of such successor
Depository.
PHYSICAL SECURITIES
If a holder of Old Securities so requests, New Securities initially issued
to such holder may be in physical form. Following initial issuance, physical
New Securities will be issued to a holder of New Securities upon request to
New Tenneco and the New Trustee subject to compliance with the procedures
therefor of the Depository. If the Depository is at any time unwilling or
unable to continue as a depositary for the Global Securities and a successor
depositary is not appointed by New Tenneco within 90 days, New Tenneco will
issue certificated Debt Securities in exchange for the Global Securities.
BOOK-ENTRY SYSTEM
Each Global Security will be registered in the name of Cede & Co., the
nominee of the Depository. Accordingly, beneficial interests in the Global
Securities will be shown on, and transfer thereof will be effected only
through, records maintained by the Depository and its participants.
The Depository has advised New Tenneco and the Dealer Manager as follows:
the Depository is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant not the provisions of Section 17A of the
Exchange Act. The Depository holds securities that its participants ("Direct
Participants") deposit with the Depository. The Depository also facilitates
the settlement among Direct Participants of securities transactions, such as
transfers and pledges, in deposited securities through electronic computerized
book-entry changes in such Direct Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations. The Depository is owned by a
number of its Direct Participants and by the NYSE, the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the Depository's book-entry system is also available to others such as
securities brokers and dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to the
Depositary and its Direct and Indirect Participants are on file with the
Commission.
The Depository advises that its established procedures provide that (i) upon
issuance of the Global Securities by New Tenneco, the Depository will credit
the accounts of Direct Participants designated by New Tenneco with the
principal amounts of the New Securities issued pursuant to the Exchange Offers
and (ii) ownership of
48
<PAGE>
interests in the Global Securities will be shown on, and the transfer of the
ownership will be effected only through, records maintained by the Depository,
the Direct Participants and the Indirect Participants.
So long as a nominee of the Depository is the registered owner of the Global
Securities, such nominee for all purposes will be considered the sole owner or
holder of such Global Securities under the New Indenture.
Neither New Tenneco, the New Trustee, any paying agent nor the registrar
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Securities, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Principal and interest payments on the New Securities registered in the name
of the Depository's nominee will be made in immediately available funds to the
Depository's nominee as the registered owner of the Global Securities. Under
the terms of the New Securities, New Tenneco and the New Trustee will treat
the persons in whose names the New Securities are registered as the owners of
such New Securities for the purpose of receiving payment of principal and
interest on such New Securities and for all other purposes whatsoever.
Therefore, neither New Tenneco, the New Trustee nor any paying agent has any
direct responsibility or liability for the payment of principal or interest on
the New Securities to owners of beneficial interests in the Global Securities.
The Depositary has advised New Tenneco and the New Trustee that its current
practice is, upon receipt of any payment of principal or interest, to credit
Direct Participants' accounts on the payment date in accordance with their
respective holdings of beneficial interests in the Global Securities as shown
on the Depository's records. Payments by Direct and Indirect Participants to
owners of beneficial interests in the Global Securities will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Direct and Indirect Participants
and not of the Depository, the New Trustee, or New Tenneco, subject to any
statutory requirements that may be in effect from time to time. Payment of
principal and interest to the Depository is the responsibility of New Tenneco
or the New Trustee, disbursement of such payments to the owners of beneficial
interests in the Global Securities shall be the responsibility of the
Depository and Direct and Indirect Participants.
So long as the Depository continues to make its Same-Day Funds Settlement
System available to New Tenneco, all payments of principal and interest on the
Global Securities will be made by New Tenneco in immediately available funds.
49
<PAGE>
DESCRIPTION OF THE TRANSACTION
The Distributions, Merger and Charter Amendment are separate parts of the
Transaction, none of which will be consummated unless the Transaction as a
whole is approved at the Tenneco Special Meeting (although Tenneco may elect
subsequently to proceed with one or more of the transactions included in the
Transaction which do not require stockholder approval if the Transaction is
not approved). The Distributions will not be consummated until all other
conditions to the Merger have been satisfied (or can be contemporaneously
satisfied), other than the filing of a Certificate of Merger with the
Secretary of State of Delaware.
The principal transactions which will be undertaken to consummate the
Transaction include the (i) NPS Issuance, (ii) Debt Realignment, (iii)
Corporate Restructuring Transactions, (iv) Cash Realignment, (v) Charter
Amendment, (vi) Distributions, and (vii) Merger.
The Transaction is being submitted as a single, unified proposal to
Tenneco's existing stockholders for consideration at the Tenneco Special
Meeting. Approval of the Transaction requires the affirmative vote of (i)
holders of a majority of the outstanding shares of the Tenneco Common Stock,
and Tenneco's $7.40 Cumulative Preferred Stock (the "$7.40 Preferred Stock"),
voting together as a class, and (ii) holders of a majority of the shares of
$7.40 Preferred Stock and Tenneco's $4.50 Cumulative Preferred Stock (the
"$4.50 Preferred Stock"), voting together as a class. If the Tenneco Junior
Preferred Stock is issued prior to effectiveness of the Charter Amendment, the
holders thereof will be entitled to vote on the Distributions and the Charter
Amendment. In such event, Tenneco will obtain the consent of the initial
record holders of the Tenneco Junior Preferred Stock to the Distributions and
the Charter Amendment in connection with the NPS Issuance.
50
<PAGE>
The following sections entitled "The NPS Issuance," "Debt and Cash
Realignment," "Corporate Restructuring Transactions," "The Distributions" and
"The Merger" contain descriptions of certain provisions of the Distribution
Agreement and Merger Agreement. These descriptions are only summaries and do
not purport to be complete. These descriptions are qualified in their entirety
by reference to the complete text of the Distribution Agreement and the Merger
Agreement. Copies of the Distribution Agreement and Merger Agreement as
currently in effect are filed as exhibits to the Registration Statement of
which this Prospectus is a part.
THE NPS ISSUANCE
Prior to the Merger, Tenneco will issue new shares of Tenneco Junior
Preferred Stock in one or more series pursuant to the NPS Issuance in an
amount calculated to have, to the extent possible, an aggregate value as of
the Merger Effective Time that is equal to approximately 25% (but in any event
more than 20%) of the total value of all shares of Tenneco capital stock then
outstanding. Holders of the Tenneco Junior Preferred Stock issued pursuant to
the NPS Issuance will possess the right to elect, voting as a class, a number
of directors of Tenneco representing one-sixth of the members of the Board of
Directors of Tenneco and the Tenneco Board of Directors will be set at six or
an integral multiple of six. The proceeds of the NPS Issuance (the "NPS
Issuance Proceeds") are estimated to be approximately $275 million. Tenneco
expects to use the net NPS Issuance Proceeds (presently estimated to be
approximately $265 million) to repay a portion of the outstanding Tenneco
Energy Consolidated Debt pursuant to the Debt Realignment.
Under the existing terms of the Tenneco Charter, the approval of a majority
of the outstanding Tenneco Junior Preferred Stock will be required to effect
the Distributions and the approval of two-thirds of the outstanding Junior
Preferred Stock will be required to effect the Charter Amendment if the
Tenneco Junior Preferred Stock is issued prior to the Charter Amendment
becoming effective (which is expected to occur immediately following the
Tenneco Special Meeting, assuming its approval thereat). Accordingly, if the
NPS Issuance occurs prior to the effectiveness of the Charter Amendment, as
part of the NPS Issuance, the Charter Amendment and Distributions will be
submitted for approval by the initial record holders of the Tenneco Junior
Preferred Stock issued pursuant to the NPS Issuance (which will be the
underwriters for the public offering) by written consent in lieu of a meeting.
Notwithstanding such approval, persons who become record holders of the
Tenneco Junior Preferred Stock on or prior to the date of the Tenneco Special
Meeting will have the right to demand appraisal of their shares of Tenneco
Junior Preferred Stock at or prior to the Tenneco Special Meeting.
The shares of Tenneco Junior Preferred Stock issued pursuant to the NPS
Issuance will not be converted or otherwise exchanged in the Merger and will
remain outstanding immediately following consummation thereof (held by the
persons who were the holders of such shares prior to the Merger), and the
holders thereof will receive no consideration in respect thereof in connection
with the Merger.
DEBT AND CASH REALIGNMENT
In general, from and after the Distributions each of Tenneco, New Tenneco
and Newport News will be responsible for the debts, liabilities and
obligations related to the business or businesses that it owns and operates
following consummation of the Corporate Restructuring Transactions. See
"Corporate Restructuring Transactions" and "The Distributions." Tenneco's
historical practice, however, has been to generally incur indebtedness for its
consolidated group at the parent company level or at the level of a limited
number of subsidiaries, rather than at the operating company level, and to
centrally manage various cash functions. Accordingly, the Merger Agreement,
Distribution Agreement, and Ancillary Agreements provide for (i) the pre-
Distribution restructuring of the Tenneco Energy Consolidated Debt pursuant to
the Debt Realignment, (ii) the allocation among each of Tenneco, New Tenneco
and Newport News of the total amount of cash and cash equivalents on hand as
of the Merger Effective Time pursuant to the Cash Realignment, and (iii) the
allocation of responsibility for certain capital expenditures related to the
Energy Business.
51
<PAGE>
DEBT REALIGNMENT
The Merger Agreement requires Tenneco to, or to cause its relevant
subsidiaries to, obtain the requisite consents of the various lenders to
permit consummation of the Transaction and tender for, exchange, redeem,
prepay, defease or let mature the Tenneco Energy Consolidated Debt prior to
the Distributions.
The Debt Realignment is intended to reduce the total amount of the Tenneco
Energy Consolidated Debt to an amount that, when added to the total amount of
certain other obligations of Tenneco Energy, as of the Merger Effective Time,
is equal to the Base Debt Amount. As of June 30, 1996, the total book value of
Tenneco Energy Consolidated Debt was approximately $4,443 million, including
$624 million of short-term debt (excluding the current portion of long-term
debt), $75 million of non-public debt and $3,734 million book value ($3,955
million principal amount) of publicly held debt, including the Old Securities
and the Other Securities (the "Public Debt"). The short-term debt consists
primarily of commercial paper and bank borrowings under Tenneco's current
credit facilities. The Public Debt includes an aggregate of $2,619 million,
$436 million and $679 million book value ($2,625 million, $650 million and
$680 million principal amount) of debt issued in various series under several
different indentures by Tenneco, Tennessee and TCC, respectively.
The short-term debt will be retired with cash and some of the non-public
debt is expected to remain in place subject to the consent of the lenders. In
addition to the Exchange Offers, Tenneco and its subsidiaries will defease or
let mature approximately $428 million of Public Debt and offer to purchase for
cash approximately $1,580 million of aggregate principal amount of Other
Securities pursuant to the Tender Offers. The defeasances, Tender Offers and
related extinguishments described above, as well as the retirement of existing
short-term and non-public debt, will be financed by internally generated cash,
borrowings by Tenneco under a new credit facility (the "Tenneco Credit
Facility") to be entered into by Tenneco in connection with the Transaction
(the "Tenneco Revolving Debt"), the net NPS Issuance Proceeds, the sale of
certain TCC receivables and a cash dividend of $600 million to be paid by
Newport News to Tenneco or one of its subsidiaries principally using
borrowings under one or more credit facilities and/or financings to be
effected by Newport News (the "Newport News Financings"). The balance of the
funding will be financed by a cash dividend to be paid by New Tenneco to
Tenneco principally using borrowings under a $1.75 billion credit facility to
be entered into by New Tenneco (the "New Tenneco Credit Facility"). Upon
consummation of the Exchange Offers, Tenneco will then purchase for cash (and
subsequently extinguish) the Old Securities held by New Tenneco (which cash
will then be distributed to Tenneco as a dividend).
Accordingly, after giving effect to the Debt Realignment, Tenneco and its
remaining subsidiaries after giving effect to the Transaction (the "Energy
Group") will remain responsible for all of the Tenneco Energy Consolidated
Debt which remains outstanding and any Tenneco Revolving Debt, Newport News
will be responsible for all borrowings under the Newport News Financings and
New Tenneco will be responsible for the New Securities and all borrowings
under the New Tenneco Credit Facility. Completion of the Debt Realignment is a
condition to the obligation of Tenneco and El Paso to consummate the Merger.
The Debt and Cash Allocation Agreement to be entered into among Tenneco, New
Tenneco and Newport News in connection with the Distributions (the "Debt and
Cash Allocation Agreement") contemplates that, as of the Merger Effective
Time, the Actual Energy Debt Amount will be limited to the Base Debt Amount.
The Base Debt Amount will equal $2.65 billion less the NPS Issuance Proceeds,
(i) plus the sum of the: (a) the amount of all cash payments made by Tenneco
and its subsidiaries during the period from June 19, 1996 to the Merger
Effective Time (the "Merger Interim Period") in respect of gas purchase
contracts as a result or in respect of any settlement, judgment or
satisfaction of a bond in excess of the market price for gas received under
such contracts by Tenneco and its subsidiaries reduced by the amount of any
cash payments received by Tenneco and its subsidiaries from customers,
insurers or other third parties in respect of any such settlement, judgment or
satisfaction of a bond (other than refunds prior to the Merger Effective Time)
or with respect to any gas supply realignment ("GSR") costs recovered (and not
refunded) on or prior to the Merger Effective Time; (b) the amount of any
purchase price paid by Tenneco or its subsidiaries during the Merger Interim
Period to acquire an additional interest in certain existing pipeline
operations; and (c) the amount of all cash payments made by any
52
<PAGE>
member of the Energy Group during the Merger Interim Period in settlement of
any significant claim, action, suit or proceeding to the extent such matter
would be an Energy Liability (as defined herein) and with the consent of El
Paso, which shall not be arbitrarily withheld, reduced by the amount of any
payments by or recoveries from third parties received by Tenneco or its
subsidiaries during the Merger Interim Period relating to any such settlement,
and (ii) less the amount, calculated as of the Merger Effective Time, of any
rate refunds, including interest, which become payable to customers pursuant
to the finally approved settlement at FERC Docket RP95-112 and which have not
been paid as of the Merger Effective Time, whether such amounts are to be paid
to customers or credited against GSR costs pursuant to such settlement. The
Actual Energy Debt Amount will include the following amounts, as of the Merger
Effective Time: (i) outstanding amounts under the Tenneco Revolving Debt (plus
accrued and accreted interest and fees); (ii) the value of any remaining
Public Debt; (iii) the outstanding amount of other Tenneco Energy Consolidated
Debt (plus accrued and accreted interest and fees); (iv) the unpaid amount of
Transaction expenses incurred by Tenneco and its subsidiaries; (v) any sales
and use, gross receipt or other transfer taxes applicable to the Transaction;
(vi) certain income taxes resulting from the Transaction; (vii) the
outstanding amount of any off-balance sheet indebtedness incurred after the
date of the Merger Agreement to finance the acquisition by Tenneco of an
additional interest in the pipeline operations referred to above; and (viii)
unpaid dividends on Tenneco stock which have a record date before the Merger
Effective Time.
Pursuant to the Debt Cash Adjustment, if the post-Transaction audit
conducted by the parties determines that the Actual Energy Debt Amount as of
the Merger Effective Time exceeds the Base Debt Amount, New Tenneco will be
required to pay the excess to Tenneco in cash. Likewise, Tenneco will be
required to pay to New Tenneco in cash the amount, if any, by which such
Actual Energy Debt Amount is less than the Base Debt Amount.
CAPITAL EXPENDITURE ADJUSTMENT
Also as part of the Debt Realignment, Tenneco has agreed to make certain
minimum capital expenditures with respect to the Energy Business pending
consummation of the Transaction. If the actual amount of such capital
expenditures exceeds the required amount, after consummation of the
Transaction Tenneco will be required to pay the excess to New Tenneco in cash.
Likewise, New Tenneco will be required to pay to Tenneco in cash the amount,
if any, by which such actual capital expenditures are less than the required
amount. The required amount of Energy Business capital expenditures is equal
to $333,200,000 for 1996, plus $27,750,000 per month for each month (or pro
rata portion) from January 1, 1997 to the Merger Effective Time.
CASH REALIGNMENT
Pursuant to the Cash Realignment, as of the Merger Effective Time, Tenneco
will be allocated $25 million of cash and cash equivalents, Newport News will
be allocated $5 million of cash and cash equivalents and New Tenneco will be
allocated all remaining cash and cash equivalents on hand. Following the post-
Transaction audit described above, New Tenneco will be required to pay to
Tenneco or Newport News, as the case may be, the amount of any shortfall as of
the Merger Effective Time from the above-reflected allocation. Likewise,
Tenneco and Newport News will each be required to pay to New Tenneco any
excess cash and cash equivalents as of the Merger Effective Time determined
pursuant to such audit.
CORPORATE RESTRUCTURING TRANSACTIONS
Pursuant to the Distribution Agreement, prior to consummation of the
Distributions, Tenneco will effect the Corporate Restructuring Transactions
through a series of intercompany transfers and distributions. Upon completion
of the Corporate Restructuring Transactions, Tenneco's existing businesses and
assets will be restructured, divided and separated so that, upon consummation
of the Distributions, substantially all the assets, liabilities and operations
of (i) the Industrial Business will be owned and operated, directly and
indirectly, by New Tenneco, and (ii) the Shipbuilding Business will be owned
and operated, directly and indirectly, by Newport News. As a result of the
Corporate Restructuring Transactions, upon consummation of the Distributions
the
53
<PAGE>
remaining assets, liabilities and operations of Tenneco and its remaining
subsidiaries will consist solely of those related to the Energy Business,
which includes liabilities and limited assets relating to discontinued Tenneco
operations not related to the Industrial Business or the Shipbuilding
Business.
The assets which will be owned by New Tenneco upon consummation of the
Corporate Restructuring Transactions (the "Industrial Assets") are generally
those related to the past and current conduct of the Industrial Business, as
reflected on the New Tenneco June 30, 1996 pro forma balance sheet attached as
an exhibit to the Distribution Agreement (plus any subsequently acquired asset
which is of a nature or type that would have resulted in such asset being
included thereon had it been acquired prior to the date thereof), plus all
rights expressly allocated to New Tenneco and its subsidiaries under the
Distribution Agreement or any Ancillary Agreement. As part of the Corporate
Restructuring Transactions, New Tenneco will acquire various corporate assets
of Tenneco such as the "Tenneco" trademark and associated rights, other
intellectual property and certain office space and related equipment. The
assets which will be owned by Newport News (the "Shipbuilding Assets") upon
consummation of the Corporate Restructuring Transactions are generally those
related to the past and current conduct of the Shipbuilding Business, as
reflected on the Newport News June 30, 1996 pro forma balance sheet attached
as an exhibit to the Distribution Agreement (plus any subsequently acquired
asset which is of a nature or type that would have resulted in such asset
being included thereon had it been acquired prior to the date thereof), plus
all rights expressly allocated to Newport News and its subsidiaries under the
Distribution Agreement or any Ancillary Agreement. The remaining assets of
Tenneco (the "Energy Assets") will continue to be owned and operated by
Tenneco following the Transaction. See "Description of Tenneco Energy."
The liabilities to be retained or assumed by New Tenneco pursuant to the
Distribution Agreement (the "Industrial Liabilities") generally include (i)
those liabilities related to the Industrial Assets and the current and past
conduct of the Industrial Business, including liabilities reflected on the New
Tenneco June 30, 1996 pro forma balance sheet which remain outstanding as of
the date the Distributions will be effected (the "Distribution Date") (plus
subsequently incurred or accrued liabilities determined on a basis consistent
with the determination of liabilities thereon) and (ii) those liabilities
expressly allocated to New Tenneco or its subsidiaries under the Distribution
Agreement or any Ancillary Agreement.
The liabilities to be retained or assumed by Newport News pursuant to the
Distribution Agreement (the "Shipbuilding Liabilities") generally include (i)
those liabilities related to the Shipbuilding Assets and the current and past
conduct of the Shipbuilding Business, including liabilities reflected on the
aforementioned Newport News June 30, 1996 pro forma balance sheet which remain
outstanding as of the Distribution Date (plus subsequently incurred or accrued
liabilities determined on a basis consistent with the determination of
liabilities thereon) and (ii) those liabilities expressly allocated to Newport
News or its subsidiaries under the Distribution Agreement or any Ancillary
Agreement.
The liabilities to be retained or assumed by Tenneco pursuant to the
Distribution Agreement (the "Energy Liabilities") generally include (i) those
liabilities related to the Energy Assets and the current and past conduct of
the Energy Business, including liabilities reflected on the Energy Business
June 30, 1996 pro forma balance sheet attached as an exhibit to the
Distribution Agreement and included elsewhere herein which remain outstanding
as of the Distribution Date (plus subsequently incurred or accrued liabilities
determined on a basis consistent with the determination of liabilities
thereon), (ii) those liabilities expressly allocated to Tenneco or its
subsidiaries under the Distribution Agreement or any Ancillary Agreement, and
(iii) all other liabilities of Tenneco or any other member of the Energy Group
which do not constitute Industrial Liabilities or Shipbuilding Liabilities.
For a description of certain liabilities that will be expressly allocated
among Tenneco, New Tenneco and Newport News by the Distribution Agreement and
Ancillary Agreements, including liabilities for the Tenneco Energy
Consolidated Debt, taxes and certain employee benefits, see "Debt and Cash
Realignment," "The Distributions--Certain Other Pre-Distribution Transactions"
and "The Distributions--Relationship Among Tenneco, New Tenneco and Newport
News After the Distributions."
54
<PAGE>
THE DISTRIBUTIONS
MANNER OF DISTRIBUTION
Pursuant to the Distribution Agreement, the Tenneco Board of Directors will
declare the special distribution to effect the Distributions and will set the
Distribution date ((the "Distribution Date") which should be immediately prior
to the Merger Effective Time). Subject to the conditions summarized below, on
the Distribution Date, Tenneco will distribute, pro rata to all holders of
record of Tenneco Common Stock as of such date, (i) one share of New Tenneco
Common Stock for every share of Tenneco Common Stock so held, and (ii) one
share of Newport News Common Stock for every five shares of Tenneco Common
Stock so held.
CERTAIN OTHER PRE-DISTRIBUTION TRANSACTIONS
Settlement of Intercompany Accounts. Pursuant to the Distribution Agreement,
all intercompany receivables, payables and loans (unless specifically provided
for in any Ancillary Agreement) between entities which will be members of
separate business groups following consummation of the Distributions must be
settled, capitalized or converted into ordinary trade accounts as of the close
of business on the Distribution Date. Further, all intercompany agreements
between members of separate business groups (other than those contemplated by
the Transaction) will be terminated.
Certain Consent Requirements. Pursuant to the Distribution Agreement, each
party has agreed to use its best efforts to obtain any third-party consents or
approvals that are required to consummate the transactions contemplated
thereby. As described elsewhere herein, Tenneco is seeking Consents to the
Proposed Amendments in connection with the Exchange Offers and Tender Offers.
In addition, Tenneco and its subsidiaries will be required to obtain the
consent of the holders of certain other issues of Tenneco consolidated debt in
connection with the Distributions. Tenneco presently believes that it will be
able to obtain in a timely manner all required third-party consents with
respect to its material contractual obligations in connection with the
Distributions.
Other. The Distribution Agreement also requires that a variety of other
actions be taken by Tenneco and/or its subsidiaries prior to consummation of
the Distributions, including, without limitation, (i) certain corporate
organizational actions with respect to New Tenneco and Newport News, (ii) the
transfer and assignment of certain licenses and permits among the Energy
Group, New Tenneco and its subsidiaries after giving effect to the Transaction
(the "Industrial Group") and Newport News and its subsidiaries after giving
effect to the Transaction (the "Shipbuilding Group"), (iii) assignment and
assumption of agreements that relate exclusively to the Energy Business, the
Industrial Business or the Shipbuilding Business to the Energy Group, the
Industrial Group or the Shipbuilding Group, as appropriate (with joint
agreements to be assigned and assumed in part), and (iv) the preparation and
filing of NYSE listing applications for New Tenneco Common Stock and Newport
News Common Stock and necessary federal and state securities laws filings.
RELATIONSHIP AMONG TENNECO, NEW TENNECO AND NEWPORT NEWS AFTER THE
DISTRIBUTIONS
Tenneco, New Tenneco and Newport News have entered into the Distribution
Agreement, which governs certain aspects of their relationships both prior to
and following the Distributions. See "--Certain Other Pre-Distribution
Transactions." In addition, prior to the Distributions, Tenneco, New Tenneco
and/or Newport News (and their appropriate subsidiaries) will enter into the
Ancillary Agreements which are intended to further effect the disaffiliation
of the Energy Business, the Industrial Business and the Shipbuilding Business
and to govern certain additional aspects of their ongoing relationships.
Terms of the Distribution Agreement. In addition to providing for the terms
of the Distributions and the various actions to be taken prior to the
Distributions, the Distribution Agreement contains other agreements governing
the relationship among Tenneco, New Tenneco and Newport News prior to and
following the Distributions.
The Distribution Agreement provides that, from and after the Distribution
Date, (i) Tenneco shall (and shall cause the other members of the Energy Group
to) assume, pay, perform and discharge all Energy Liabilities in accordance
with their terms, (ii) New Tenneco shall (and shall cause the other members of
the Industrial Group to) assume, pay, perform and discharge all Industrial
Liabilities in accordance with their terms, and (iii) Newport News shall (and
shall cause the other members of the Shipbuilding Group to) assume, pay,
perform and discharge all Shipbuilding Liabilities in accordance with their
terms.
55
<PAGE>
In addition, the Distribution Agreement provides for cross-indemnities that
require (i) Tenneco to indemnify New Tenneco and Newport News (and their
respective subsidiaries and certain other related parties) against all losses
arising out of or in connection with the Energy Liabilities or the breach of
the Distribution Agreement or any Ancillary Agreement by Tenneco, (ii) New
Tenneco to indemnify Tenneco and Newport News (and their respective
subsidiaries and certain other related parties) against all losses arising out
of or in connection with the Industrial Liabilities or the breach of the
Distribution Agreement or any Ancillary Agreement by New Tenneco, and (iii)
Newport News to indemnify Tenneco and New Tenneco (and their respective
subsidiaries and certain other related parties) against all losses arising out
of or in connection with the Shipbuilding Liabilities or the breach of the
Distribution Agreement or any Ancillary Agreement by Newport News.
Notwithstanding the foregoing cross-indemnification provisions, New Tenneco
and Newport News have agreed to certain other arrangements with respect to
certain inquiries from the Defense Contract Audit Agency (the "DCAA")
concerning the disposition of the Tenneco Inc. Retirement Plan (the "Tenneco
Retirement Plan"), which covers salaried employees of Newport News and other
Tenneco divisions. The DCAA has been advised that (i) the Tenneco Retirement
Plan will retain the liability for all benefits accrued by Newport News'
employees through the Distribution Date, (ii) Newport News' employees will not
accrue additional benefits under the Tenneco Retirement Plan after the
Distribution Date, and (iii) no liabilities or assets of the Tenneco
Retirement Plan will be transferred from the Tenneco Retirement Plan to any
plan maintained by Newport News. A determination of the ratio of assets to
liabilities of the Tenneco Retirement Plan attributable to Newport News will
be based on facts, assumptions and legal issues which are complicated and
uncertain; however, it is likely that the Government will assert a claim
against Newport News and/or New Tenneco with respect to the amount, if any, by
which the assets of the Tenneco Retirement Plan attributable to Newport News'
employees are alleged to exceed the liabilities. New Tenneco, with the full
cooperation of Newport News, will defend against any claim by the Government
and, in the event there nevertheless is a determination that an amount with
respect to this matter is due to the Government, New Tenneco and Newport News
will share the obligation for such amount and related defense expenses in the
ratio of 80% and 20%, respectively. Although at this preliminary stage it is
impossible to predict with certainty any eventual outcome regarding this
matter, New Tenneco does not believe that this matter will have a material
adverse effect on its financial condition or results of operations.
Pursuant to the Distribution Agreement, each of the parties has agreed to
use all reasonable efforts to take or cause to be taken all action, and do or
cause to be done all things, reasonably necessary, proper or advisable to
consummate the transactions contemplated by and carry out the purposes of the
Distribution Agreement. As such, the Distribution Agreement provides that if
any contemplated pre-Transaction transfers and assignments have not been
effected on or prior to the Distribution Date, the parties will cooperate to
effect such transfers as quickly thereafter as practicable. The entity
retaining any asset or liability which should have been transferred prior to
the Distribution Date will continue to hold that asset for the benefit of the
party entitled thereto or that liability for the account of the party required
to assume it, and must take such other action as may be reasonably requested
by the party to whom such asset was to be transferred or by whom such
liability was to be assumed in order to place such party, insofar as
reasonably possible, in the same position as would have existed had such asset
or liability been transferred or assumed as contemplated by the Distribution
Agreement.
The Distribution Agreement provides for the transfer of books and records
among Tenneco, New Tenneco and Newport News and their respective subsidiaries
and grants to each party access to certain information in the possession of
the others (subject to certain confidentiality requirements). In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each party to obtain the consent
of the others prior to waiving any shared privilege.
Terms of the Ancillary Agreements. Below are descriptions of the principal
Ancillary Agreements to be entered into by Tenneco, New Tenneco and/or Newport
News (and, in certain circumstances, their appropriate subsidiaries) prior to
consummation of the Distributions.
Benefits Agreement
The Benefits Agreement to be entered into by and among Tenneco, New Tenneco
and Newport News (the "Benefits Agreement") will define certain labor,
employment, compensation and benefit matters in connection with the
Distributions and the transactions contemplated thereby. Pursuant to the
Benefits
56
<PAGE>
Agreement, from and after the Distribution Date, each of Tenneco, New Tenneco
and Newport News will continue employment of each of their respective
retained employees (subject to their rights to terminate said employees) with
the same compensation as prior to the Distribution Date, continue to honor
all related existing collective bargaining agreements, recognize related
incumbent labor organizations and continue sponsorship of hourly employee
benefit plans. New Tenneco will become the sole sponsor of the Tenneco Inc.
Retirement Plan (the"TRP") and of the Tenneco Inc. Thrift Plan (the "Tenneco
Thrift Plan") from and after the Distribution Date, and Tenneco and Newport
News will establish defined contribution plans for the benefit of each of
their respective employees to which the account balances of retained and
former employees of Tenneco and Newport News in the Tenneco Thrift Plan will
be transferred. The benefits accrued by Tenneco and Newport News employees in
the TRP will be frozen as of the last day of the calendar month including the
Distribution Date, and New Tenneco will amend the TRP to provide that all
benefits accrued through that day by Tenneco and Newport News employees are
fully vested and non-forfeitable. Tenneco will retain and assume employment
contracts with certain individuals. All liabilities under the Tenneco Inc.
Benefit Equalization Plan and the Supplemental Executive Retirement Plan will
be assumed by New Tenneco pursuant to the Benefits Agreement; however, New
Tenneco is entitled to reimbursement for certain payments thereunder from
Tenneco and Newport News. Generally, each of Tenneco, New Tenneco and Newport
News will retain liabilities with respect to the welfare benefits of its
current and former employees and their dependents, but Tenneco will assume
all liabilities for retiree medical benefits of the employees of discontinued
operations and their dependents. In addition, as of the Distribution Date,
participation by retained and former employees of Tenneco and Newport News in
the Tenneco Inc. Deferred Compensation Plan and the 1993 Deferred
Compensation Plan will be discontinued.
Debt and Cash Allocation Agreement
The Debt and Cash Allocation Agreement will govern the allocation among the
parties of the cash and cash equivalents of Tenneco and its consolidated
subsidiaries on hand as of the Merger Effective Time and responsibility for
certain capital expenditures related to the Energy Business, as described
under "Debt and Cash Realignment." The Debt and Cash Allocation Agreement
will also (i) require Newport News to make a $600 million dividend to Tenneco
or one or more of its subsidiaries to be used in connection with the Debt
Realignment, (ii) govern certain terms of the Tenneco Revolving Debt, (iii)
govern the conduct of the post-Transaction audit to be undertaken to
ascertain the Actual Energy Debt Amount and the amount of cash and cash
equivalents held by each of Tenneco, New Tenneco and Newport News upon
consummation of the Transaction, and (iv) require New Tenneco to pay in cash
to Tenneco the amount, if any, by which the Actual Energy Debt Amount exceeds
the Base Debt Amount (and require Tenneco to pay in cash to New Tenneco the
amount, if any, by which the Actual Energy Debt Amount is less than the Base
Debt Amount). See "Debt and Cash Realignment."
Insurance Agreement
Tenneco has historically maintained at the parent-company level various
insurance policies for the benefit or protection of itself and its
subsidiaries. The Insurance Agreement to be entered into among Tenneco,
Newport News and New Tenneco (the "Insurance Agreement") in connection with
the Distributions will provide for the respective continuing rights and
obligations from and after the Distribution Date of the parties with respect
to these insurance policies (other than directors' and officers' liability
insurance policies, which are addressed by the Merger Agreement).
In general, following consummation of the Transaction, policies which
relate exclusively to the Energy Business or a member of the Energy Group
will be retained by Tenneco, policies which relate exclusively to the
Industrial Business or a member of the Industrial Group will be retained by
New Tenneco and policies which relate exclusively to the Shipbuilding
Business or a member of the Shipbuilding Group will be retained by Newport
News.
Pursuant to the Insurance Agreement, any non-exclusive Tenneco policies
which are in effect as of the Distribution Date (other than those which are
cost plus, fronting, high deductible or retrospective premium
57
<PAGE>
programs, as described below) will either be transferred into the name of New
Tenneco or cancelled, at New Tenneco's option. In general, "go-forward"
coverage under these policies for the Energy Group and Shipbuilding Group
(and certain related persons) will be terminated as follows: (i) coverage
under "claims-made" policies (i.e., those policies which provide coverage for
claims made during a specified period) will be terminated on the Distribution
Date for any claims not made prior thereto; and (ii) coverage under
"occurrence-based" policies (i.e., those policies which provide coverage for
acts or omissions occurring during a specified period) will be terminated on
the Distribution Date for acts or omissions occurring thereafter. However,
the Energy Group, Industrial Group and Shipbuilding Group (and certain
related persons) will all continue to have access to these policies ("go-
backward" coverage) for claims made prior to the Distribution Date, in the
case of claims-made policies, and for acts or omissions which occurred prior
to the Distribution Date, in the case of occurrence-based policies (subject
to certain obligations to replace exhausted policy limits). Each respective
group will be liable for and get the benefit of premiums, costs and charges
under these policies that relate to its coverage thereunder.
Pursuant to the Insurance Agreement, policies which are cost plus,
fronting, high deductible or retrospective premium programs will be retained
by the Energy Group following the Distributions and shall provide no go-
forward coverage to the Industrial Group or Shipbuilding Group. However, go-
backward coverage will continue to be available to these groups, subject to
an obligation to reimburse Tenneco for premiums, costs and charges under
these policies related to their respective coverages following the
Distributions. Following the Distributions, Tenneco will be required to
maintain in place certain letters of credit and surety bonds securing
obligations under these policies.
Tax Sharing Agreement
The Tax Sharing Agreement to be entered into among Tenneco, Newport News,
New Tenneco and El Paso (the "Tax Sharing Agreement") will provide for the
allocation among the parties of tax liabilities arising prior to, as a result
of, and subsequent to the Distributions. As a general rule, Tenneco will be
liable for all taxes not specifically allocated to New Tenneco or Newport
News under the specific terms of the Tax Sharing Agreement. Generally, New
Tenneco will be liable for taxes imposed exclusively on the Industrial Group,
and Newport News will be liable for taxes imposed exclusively on the
Shipbuilding Group (including for pre-Distribution periods, taxes imposed on
Newport News, formerly known as Tenneco InterAmerica Inc.). Federal income
taxes imposed on the combined activities of Tenneco, the Industrial Group,
and the Shipbuilding Group will be allocated among the business groups
according to their respective shares of consolidated taxable income, except
that (i) tax benefits attributable to the Debt Realignment ("Debt Discharge
Items"), presently anticipated to total approximately $120 million, will be
specifically allocated to the Industrial Group, and (ii) tax benefits
attributable to certain items included in the Base Debt Amount ("Base Debt
Amount Adjustment Items") will be specifically allocated to Tenneco. In the
case of state income taxes imposed on the combined activities of the business
groups, Tenneco will be responsible for payment of the combined tax to the
state tax authority, and New Tenneco and Newport News will pay Tenneco a
deemed tax equal to the tax that would be imposed if the Industrial Group and
the Shipbuilding Group had filed combined returns for their respective
groups, except that Debt Discharge Items and Base Debt Amount Adjustment
Items will be specifically allocated to New Tenneco and Tenneco,
respectively.
In general, Tenneco will be responsible for any taxes imposed on or
resulting from the Transaction ("Transaction Taxes"). New Tenneco will be
responsible for any Transaction Taxes resulting from any inaccuracy in
factual statements or representations in connection with the IRS ruling
letter (the "IRS Ruling Letter") or the tax opinion to be received by Tenneco
in connection with the Transaction (the "Tax Opinion") to the extent
attributable to facts in existence prior to the Merger, but excluding facts
relating to the Shipbuilding Group or El Paso. Newport News and El Paso will
each be responsible for the accuracy of any factual statements or
representations relating to them or their respective affiliates. Each of New
Tenneco, Newport News, and El Paso will be responsible for any Transaction
Tax to the extent such tax is attributable to action taken by that entity
which is inconsistent with tax treatment contemplated in the IRS Ruling
Letter or Tax Opinion. Certain Transaction Taxes (i.e., transfer taxes, and
federal and state income taxes imposed on
58
<PAGE>
those Corporate Restructuring Transactions which are known to be taxable) are
included in the determination of the Actual Energy Debt Amount and
consequently may be economically borne by New Tenneco (because New Tenneco
must pay to Tenneco in cash the amount, if any, by which the Actual Energy
Debt Amount exceeds the Base Debt Amount). If between the date of the Merger
Agreement and the Merger Effective Time, there is a change in law (as defined
in the Tax Sharing Agreement) and as a result of such change in law Tenneco
is required to restore certain deferred gains to income, then any resulting
tax shall be shared equally between New Tenneco and Tenneco.
Transition Services Agreement
TBS currently provides certain administrative services to Tenneco,
including mainframe computing services, backup, recovery and related
operations, consulting services and payroll services. Under the Transition
Services Agreement entered into among Tenneco, TBS and El Paso (the
"Transition Services Agreement"), at the request of El Paso at least 45 days
prior to the Merger Effective Time, TBS (which will, following the
Distributions, be a subsidiary of New Tenneco) will continue to provide the
services specified in El Paso's request for a period of 12 months from the
Merger Effective Time at a price to be negotiated among the parties and based
on the market rate for comparable services. If elected, any or all of the
services may be terminated by Tenneco on 45 days notice to TBS.
TBS Services Agreements
TBS has entered into, or will enter into, a series of separate services
agreements (the "Service Agreements"), as described below, with Newport News
and Tenneco (and its subsidiaries), which together will constitute the "TBS
Services Agreement" which is to be delivered as an "Ancillary Document" under
the Distribution Agreement.
One of the Service Agreements between TBS and Newport News will be for
mainframe data processing services (the "NNS Processing Services Agreement").
Under the NNS Processing Services Agreement, TBS will supply, as a vendor,
mainframe data processing services to Newport News for a period from the
Merger Effective Time through December 31, 1998, and thereafter only by
mutual agreement. The rate of compensation to TBS for services will be $9.1
million in 1997 and $9.6 million in 1998, payable in monthly installments,
subject to adjustment if Newport News requests a change in the scope of
services. TBS will lease the space currently used by it at the Newport News
headquarters for the period from the Merger Effective Time through December
31, 1998, with an option for TBS to extend for one-month periods for up to 12
months, for continued use by TBS as its mainframe data processing facility.
The rent under such lease will be approximately $1.2 million per year plus
pass-throughs of certain occupancy-related costs.
TBS has also entered into a supplier participation agreement (the "NNS
Supplier Participation Agreement") with Newport News to govern the procedures
under which Newport News will continue to participate with New Tenneco in
vendor purchase agreements between TBS and various suppliers of goods and
services. The NNS Supplier Participation Agreement will provide for continued
participation of Newport News in various purchase programs, absent a
termination for cause, for the full existing terms of the agreements with
each such vendor. Under this Agreement, as is the case currently, purchases
of goods and services will be made directly by Newport News at prices
negotiated by TBS which are applicable to all participating purchasers. TBS
will charge Newport News a fixed fee of $5,000 per month for TBS contract
administration services including data collection, negotiations, progress
reporting, benefits reporting, follow-up and consulting in connection with
the vendor agreements.
Additionally, as described above, a separate Service Agreement may be
entered into with Tenneco for transition services to be supplied by TBS to
Tenneco and its subsidiaries. The services covered and the compensation for
such services would depend on the services elected by Tenneco, and the
negotiations among the parties pursuant to the Transition Services Agreement.
Trademark Transition License Agreements
Upon consummation of the Corporate Restructuring Transactions, New Tenneco
will hold the rights to various trademarks, servicemarks, tradenames and
similar intellectual property, including rights in the marks
59
<PAGE>
"Tenneco" "Ten" and "Tenn" (but not "Tennessee"), alone and in combination
with other terms and/or symbols and variations thereof (collectively, the
"Trademarks"), in the United States and elsewhere throughout the world. In
connection with the Distributions, Trademark Transition License Agreements
will be entered into as of the Distribution Date between both (i) New Tenneco
and Tenneco, and (ii) New Tenneco and Newport News. Pursuant to these
agreements, New Tenneco will grant to each of Tenneco and Newport News a
limited, non-exclusive, royalty-free license to use the Trademarks, with
respect to specified goods and services as follows: (a) Tenneco and Newport
News will be permitted to use the Trademarks in their corporate names for 30
days after the date of the agreements (and, pursuant to the Distribution
Agreement, each have agreed to remove the Trademarks from such corporate
names within 30 days after the Distribution Date), (b) Tenneco and Newport
News will be permitted to use their existing supplies and documents which
have the Trademarks imprinted on them for six months after the date of the
agreements, and (c) Tenneco and Newport News will be permitted to use the
Trademarks on existing signs, displays or other identifications for a period
(after the date of the agreements) of two years (in the case of Tenneco) and
one year (in the case of Newport News) after the date of the agreements.
However, so long as Tenneco or Newport News continues to use the Trademarks,
it must maintain certain quality standards prescribed by New Tenneco in the
conduct of business operations in which the Trademarks are used. In addition,
under these agreements each of Tenneco and Newport News will agree to
indemnify New Tenneco from any claims that arise as a result of its use of
the Trademarks or any breach of its agreement and neither Tenneco nor Newport
News may adopt or use at any time a word or mark likely to be similar to or
confused with the Trademarks. Each Trademark Transition License Agreement
shall be immediately terminable by New Tenneco upon a material breach of the
agreement by Tenneco or Newport News, as the case may be.
CONDITIONS TO CONSUMMATION OF THE DISTRIBUTIONS
The Distributions are conditioned on, among other things, approval of the
Transaction by the holders of Tenneco Stock (as defined) at the Tenneco
Special Meeting and by the holders of Tenneco Junior Preferred Stock, if
issued prior to effectiveness of the Charter Amendment, and formal declaration
of the Distributions by the Tenneco Board of Directors. Other conditions to
the Distributions include (i) execution and delivery of certain of the
Ancillary Agreements and consummation of the various pre-Distribution
transactions (such as the Corporate Restructuring Transactions and the Debt
Realignment), (ii) receipt of the IRS Ruling Letter to the effect that for
federal income tax purposes the Distributions will be tax-free to Tenneco and
its stockholders under Section 355 of the Code and that certain internal spin-
off transactions involving Tenneco or its subsidiaries to be effected pursuant
to the Corporate Restructuring Transactions will also be tax-free,
(iii) approval of the New Tenneco Common Stock and Newport News Common Stock
to be distributed for listing on the NYSE, (iv) registration of the New
Tenneco Common Stock and Newport News Common Stock under the Exchange Act, (v)
receipt of all material consents to the Corporate Restructuring Transactions,
the Distributions and transactions contemplated in the Distribution Agreement,
(vi) performance of the various covenants required to be performed prior to
the Distribution Date (see "--Certain Other Pre-Distribution Transactions" and
"--Relationship Among Tenneco, New Tenneco and Newport News After the
Distributions"), and (vii) lack of prohibition of the Distributions by any law
or governmental authority. Even if all the conditions to the Distributions are
satisfied, Tenneco has reserved the right to, under certain circumstances,
amend or terminate the Distribution Agreement and the transactions
contemplated thereby. The Tenneco Board of Directors has not attempted to
identify or establish objective criteria for evaluating the particular types
of events or conditions that would cause the Tenneco Board of Directors to
consider amending or terminating the Distributions. See "--Amendment or
Termination of the Distributions." Although the foregoing conditions may be
waived by Tenneco to the extent permitted by law, the Tenneco Board of
Directors presently has no intention to proceed with the Distributions unless
each of these conditions is satisfied.
AMENDMENT OR TERMINATION OF THE DISTRIBUTIONS
Prior to the Distributions, the Distribution Agreement may be terminated and
the Distributions may be amended, modified or abandoned by Tenneco without the
approval of its stockholders or of New Tenneco or
60
<PAGE>
Newport News, subject to the consent of El Paso as described below. If any
amendment or modification prior to the termination of the Merger Agreement or
consummation of the Merger adversely affects the Energy Business (other than
to a de minimis extent) or materially delays or prevents the consummation of
the Merger, such amendment or modification can be effectuated only with prior
consent of El Paso. Termination of the Distribution Agreement prior to the
termination of the Merger Agreement or consummation of the Merger can be
effectuated only with the prior written consent of El Paso.
After consummation of the Distributions, the Distribution Agreement may be
amended or terminated only by a written agreement signed by Tenneco, New
Tenneco and Newport News. Certain amendments or terminations after the
Distributions also require the consent of third-party beneficiaries to the
extent that the Distribution Agreement has expressly guaranteed them such
rights.
61
<PAGE>
THE MERGER
GENERAL
On June 19, 1996 the respective Boards of Directors of El Paso, El Paso
Subsidiary and Tenneco each approved, and El Paso, El Paso Subsidiary and
Tenneco each executed and delivered, the Merger Agreement. The Merger
Agreement provides that, at the Merger Effective Time, El Paso Subsidiary will
be merged with and into Tenneco, with Tenneco continuing as the surviving
corporation of the Merger and as a subsidiary of El Paso, and the separate
existence of El Paso Subsidiary will cease.
The consideration to be paid by El Paso in the Merger consists of (i) the
retention by Tenneco of any outstanding Tenneco Energy Consolidated Debt as of
the Merger Effective Time (subject to the Debt Cash Adjustment) and Tenneco's
obligations to the holders of the Tenneco Junior Preferred Stock issued in the
NPS Issuance, (ii) the retention by Tenneco after the Merger of liabilities
related to certain discontinued businesses of Tenneco estimated by El Paso at
approximately $600 million, and (iii) the issuance of El Paso equity
securities with an aggregate value equal to approximately $750 million
(subject to the effect of a collar on the market price of El Paso's common
stock, par value $3.00 per share ("El Paso Common Stock")), to the holders of
Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock
(collectively, the "Tenneco Stock").
Pursuant to the provisions of the Merger Agreement (unless the parties
otherwise agree), as soon as practicable (and in any event within two business
days) after the satisfaction or waiver of certain conditions summarized
herein, the closing of the transactions contemplated by the Merger Agreement
will take place (the "Closing") and a Certificate of Merger will be prepared,
executed and acknowledged and thereafter delivered to the Secretary of State
of Delaware for filing pursuant to the DGCL. The Merger shall become effective
at the Merger Effective Time, which shall be the time of the filing of the
Certificate of Merger with the Secretary of State of Delaware (or such later
date or time set forth therein). As used herein, the term "Closing Date"
refers to the date on which the Closing occurs.
EFFECTS OF THE MERGER
The Merger will have the effects specified in the DGCL. In addition, the
Merger Agreement provides that the Tenneco Charter will be amended as of the
Merger Effective Time, altering the authorized capital stock of Tenneco,
eliminating the class of preferred stock and renaming the class of junior
preferred stock (including the shares thereof issued in the NPS Issuance) as
preferred stock, eliminating certain restrictions on business combinations
with interested stockholders, modifying the number of members of and the
structure of the Tenneco Board of Directors and eliminating provisions
regarding transactions between Tenneco and members of its Board with interests
in the transactions. The Merger Agreement also provides that the bylaws of El
Paso Subsidiary, as in effect immediately prior to the Merger Effective Time
and amended to include specified provisions regarding the indemnification of
and advancement of expenses to directors and officers, shall become the bylaws
of Tenneco. In addition, the Merger Agreement provides that the directors of
El Paso Subsidiary at the Merger Effective Time will be the initial directors
of Tenneco after the Merger.
CERTAIN OTHER PRE-MERGER TRANSACTIONS
The Merger Agreement requires that the Distributions be consummated before
the Merger Effective Time with only such changes or modifications as do not
adversely affect, other than to a de minimis extent, the Energy Business.
Accordingly, the pre-Distribution transactions and conditions must generally
be consummated or satisfied, as the case may be, substantially as described
herein prior to the Merger.
Notwithstanding the foregoing, the Merger Agreement contemplates that under
certain circumstances Tenneco may enter into negotiations and/or an agreement
regarding a sale, merger or other disposition transaction involving either or
both of the Shipbuilding Business and Industrial Business, or any portion
thereof (an "S/I Transaction"), and thereby abandon one or both of the
Distributions. With prior notice to El Paso,
62
<PAGE>
Tenneco may enter into an S/I Transaction so long as such transaction is not
adverse, other than to a de minimis extent, to El Paso or the Energy Business
and would not render the Merger impossible or impracticable or materially
delay the consummation thereof. If the S/I Transaction would have any of the
foregoing effects, the transaction may nonetheless be pursued prior to
approval of the Merger by Tenneco stockholders if the Tenneco Board of
Directors determines in good faith after consultation with counsel that there
is a substantial risk that failure to do so would constitute a breach of its
fiduciary duties under applicable law.
EL PASO GUARANTY OF TENNECO PERFORMANCE
Pursuant to the Merger Agreement and certain instruments to be executed in
connection therewith, from and after the Merger Effective Time, El Paso will
guarantee the full and timely payment and performance by Tenneco and the other
members of the Energy Group of their obligations under the Merger Agreement,
Distribution Agreement and each and every other agreement to be entered into
pursuant thereto. Such agreements will not require El Paso to guarantee any of
Tenneco's obligations under any of the Old Securities.
CONDITIONS PRECEDENT
Conditions to Obligations of the Parties
The respective obligations of each of Tenneco, El Paso and El Paso
Subsidiary to consummate the transactions contemplated by the Merger Agreement
are subject to the satisfaction, at or prior to the Closing, of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:
(i) the Transaction shall have been approved and adopted by the requisite
vote of the stockholders of Tenneco, in accordance with the DGCL and the
Tenneco Charter;
(ii) any waiting period applicable to the consummation of the
transactions contemplated by the Merger Agreement under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, shall have expired
or been terminated (which condition has been satisfied);
(iii) all authorizations, consents, orders and approvals of, and
declarations or filings with, and expiration of waiting periods imposed by,
any governmental authority or other person shall have been obtained or
filed and shall be in full force and effect (subject to certain
limitations), other than those which if not obtained or filed would not
have a material adverse effect on El Paso and its consolidated
subsidiaries, the Energy Business or the ability of any party to consummate
the transactions contemplated by the Merger Agreement prior to the June 30,
1997 (the "Termination Date");
(iv) no governmental authority shall have enacted, issued, promulgated,
enforced or entered any statute or rule, regulation, injunction or other
order (whether temporary, preliminary or permanent) which materially
restricts, prevents or prohibits consummation of the Merger or the other
transactions contemplated by the Merger Agreement;
(v) the securities of El Paso issuable to the holders of Tenneco Stock in
the Merger shall have been approved for listing on the NYSE, subject to
official notice of issuance;
(vi) Tenneco shall have received (a) the IRS Ruling Letter as described
under "The Distributions--Conditions to Consummation of the Distributions,"
and (b) to the extent not covered by the IRS Ruling Letter, the Tax Opinion
that, among other things, the Merger will qualify as a tax-free
reorganization under Section 368(a)(1)(B) of the Code;
(vii) the Distributions, the Debt Realignment and the other transactions
contemplated by the Distribution Agreement shall have been effected; and
(viii) the NPS Issuance shall have been consummated.
63
<PAGE>
Conditions to Obligations of Tenneco
The obligations of Tenneco to consummate the transactions contemplated by
the Merger Agreement are also subject to the satisfaction, at the Closing, of
the following conditions, any or all of which may be waived, in whole or in
part, by Tenneco:
(i) the representations and warranties of El Paso and El Paso Subsidiary
in the Merger Agreement shall be true and correct as of the Closing Date
with the same effect as if made on and as of the Closing Date (except for
changes permitted by the Merger Agreement and failures to remain true and
correct which do not have a material adverse effect on El Paso and its
consolidated subsidiaries and will not prevent consummation of the
transactions contemplated by the Merger Agreement by El Paso or El Paso
Subsidiary prior to the Termination Date);
(ii) each of El Paso and El Paso Subsidiary shall have performed in all
material respects their respective obligations under the Merger Agreement
to be performed at or prior to the Closing; and
(iii) delivery to Tenneco by El Paso and El Paso Subsidiary of officers'
certificates with respect to the matters identified in clauses (i) and (ii)
and certain other corporate proceedings.
Conditions to Obligations of El Paso and El Paso Subsidiary
The obligations of El Paso and El Paso Subsidiary to effect the transactions
contemplated by the Merger Agreement are also subject to the satisfaction, at
the Closing, of the following conditions any or all of which may be waived, in
whole or in part, by El Paso and El Paso Subsidiary:
(i) the representations and warranties of Tenneco contained in the Merger
Agreement shall be true and correct as of the Closing Date with the same
effect as if made on and as of the Closing Date (except for changes
permitted by the Merger Agreement and failures to remain true and correct
which do not have a material adverse effect on the Energy Business and will
not prevent consummation of the transactions contemplated by the Merger
Agreement by Tenneco prior to the Termination Date);
(ii) Tenneco shall have performed in all material respects its
obligations under the terms of the Merger Agreement to be performed at or
prior to the Closing;
(iii) El Paso shall not have reasonably determined, in good faith after
consultation with Tenneco and its advisors, that as a result of an
announcement or introduction of legislation by certain U.S. government
officials identified in the Merger Agreement there exists a reasonable
likelihood that the Distributions or the Merger would not be tax-free for
federal income tax purposes to Tenneco and El Paso; and
(iv) delivery to El Paso by Tenneco of officers' certificates with
respect to the matters identified in clauses (i) and (ii) and certain other
corporate proceedings.
EMPLOYEE BENEFITS
The Merger Agreement requires Tenneco to enter into the Benefits Agreement
and to perform its obligations thereunder. See "The Distributions--
Relationship Among Tenneco, New Tenneco and Newport News After the
Distributions." In addition, pursuant to the Merger Agreement, El Paso has
agreed to provide (or cause Tenneco to provide) certain benefits to certain
employees and former employees of Tenneco and their dependents from and after
the Merger Effective Time.
El Paso has agreed to provide severance benefits, vacation pay, outplacement
services and other benefits to certain employees of the Energy Business who
are terminated within one year of the Merger Effective Time (other than for
death, disability or cause). Pursuant to this agreement, approximately 50
high-level employees of the Energy Business would be eligible to receive
severance benefits ranging from 12 to 24 months' base pay and approximately
3,200 other employees of the Energy Business would be eligible to receive
severance benefits ranging from six to 52 weeks' base pay. Additionally, El
Paso has agreed to provide health care coverage to
64
<PAGE>
these employees on an optional basis (with the costs being shared by the
employee as are shared by similarly situated active El Paso employees) for a
period equal to the months of pay received as severance, up to 12 months.
El Paso has also agreed to provide retiree medical and life benefits for at
least ten years from the Merger Effective Time to former employees of Tenneco
and their dependents and to current employees who are eligible to retire as of
the Merger Effective Time and who retire within a window period after the
Merger Effective Time to be selected by El Paso, which will be not less than
six months. However, El Paso may institute changes to the retiree medical plan
to implement appropriate cost containment features and other methods of
providing comparable benefits.
El Paso has further agreed to provide retention payments to key and other
Energy Business employees. Under the executive retention program, certain key
employees will be paid an aggregate of $9 million if they cooperate with the
effort to sell the Energy Business and remain full-time active employees until
the Merger Effective Time. Additionally, a separate retention program will
implemented for approximately 200 lower management and staff level employees
with similar conditions and an aggregate of $4 million in payments.
Employees of the Energy Business will also receive credit for past service
with Tenneco in determining entitlements under certain El Paso benefit
programs. El Paso has also agreed to satisfy certain obligations owed by
Tenneco to specific individuals.
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Merger
Effective Time, whether before or after the approval of the Merger Agreement
or the Merger by the stockholders of Tenneco and the approval of the issuance
of El Paso Common Stock in the Merger by the stockholders of El Paso (which is
being submitted to such stockholders at a special meeting to be held on or
about , 1996), by: (i) the mutual written consent of El Paso and Tenneco
authorized by their respective Boards of Directors; (ii) El Paso or Tenneco,
if the Merger is not consummated by the Termination Date (other than for the
terminating party's failure to observe any of the covenants, agreements and
conditions of the Merger Agreement to be performed or observed by such party
prior to the Closing Date); (iii) El Paso or Tenneco, if there has been a
material breach on the part of the other party of any covenant, representation
or warranty set forth in the Merger Agreement, or any failure on the part of
the other party to comply with its obligations under the Merger Agreement, or
any other circumstances have occurred such that the conditions to El Paso's or
Tenneco's consummation of the Merger, respectively, could not be satisfied on
or prior to the Termination Date; (iv) El Paso or Tenneco, if the stockholders
of Tenneco at the Tenneco Special Meeting do not approve the Transaction; (v)
El Paso, if the Board of Directors of Tenneco withdraws, amends or modifies in
a manner adverse to El Paso its favorable recommendation to its stockholders
of the Transaction or promulgates any favorable recommendation with respect to
certain business combination transactions not involving El Paso (other than in
response to a situation described in clause (iii) above); (vi) Tenneco, if the
Board of Directors of El Paso withdraws, amends or modifies in a manner
adverse to Tenneco its favorable recommendation to its stockholders or
approves an agreement for or recommends to its stockholders a business
combination transaction not involving Tenneco (other than in response to a
situation described in clause (iii) above); (vii) El Paso or Tenneco, under
certain circumstances where, prior to approval of the Transaction by Tenneco
stockholders, Tenneco enters into an S/I Transaction which would adversely
impact El Paso or the Energy Business, or render the Merger impossible or
impracticable or prevent or materially delay consummation of the Merger;
(viii) El Paso, if there has occurred any event, change or effect which, in
the aggregate with all other events, changes or effects, reduces the value of
the Energy Business by more than $75 million (excluding negative events,
changes or effects which result from (A) any action by El Paso or certain
affiliated parties, (B) changes in general economic, financial markets or
industrial conditions, or (C) matters related to the GSR Ruling (as defined
below)); (ix) Tenneco if there has occurred any event, change or effect which,
in the aggregate with all other events, changes or effects, reduces the value
of El Paso by more than $75 million (excluding negative events, changes or
effects which result from (A) any action by Tenneco or certain
65
<PAGE>
affiliated parties, or (B) changes in general economic, financial markets or
industrial conditions); (x) El Paso, if the FERC ALJ in a pending proceeding
(the "GSR Proceeding") issues a ruling on the eligibility of certain GSR costs
(the "GSR Ruling") which have a specified adverse effect on the Energy
Business, so long as El Paso has not materially breached its obligations under
the Merger Agreement to cooperate with Tenneco in working towards a favorable
resolution thereof; or (xi) Tenneco or El Paso (but only prior to approval of
the Transaction by Tenneco's stockholders) if Tenneco receives a "Higher
Proposal" (which is a proposal for an acquisition or similar transaction
involving Tenneco and/or the Energy Business if (A) it is reasonably likely to
result in the consummation of such a transaction which is more favorable, from
a financial point of view, to Tenneco stockholders, and (B) Tenneco's Board of
Directors determines, in good faith after consultation with independent legal
counsel, that there is a substantial risk that failure to pursue such
transaction would be found to constitute a breach of its fiduciary duties
under applicable law) that it advises El Paso in writing that it wishes to
accept and El Paso does not make, within five business days of receipt of such
written notice, an offer that the Board of Directors of Tenneco believes, in
good faith after consultation with its financial advisors, is at least as
favorable, from a financial point of view, to the stockholders of Tenneco as
such Higher Proposal.
If the Merger Agreement is terminated as permitted above, the Merger
Agreement will become void and there will be no liability or obligation on the
part of the terminating party, or the directors, officers, stockholders,
employees, agents, consultants or representatives of such party, except that
(a) such termination shall not relieve any other party of any damages or other
amounts for which it would otherwise be liable, and (b) such termination shall
not relieve Tenneco of its obligation to pay to El Paso a termination fee
under certain circumstances. See "--Termination Fee."
Prior to the Merger Effective Time, whether before or after approval and
adoption of the Transaction by the stockholders of Tenneco, the provisions of
the Merger Agreement may be amended by a written agreement executed and
delivered by the parties thereto, subject to applicable law. After the Merger
Effective Time, the provisions of the Merger Agreement may be amended only by
a written agreement executed and delivered by El Paso, Tenneco (as the
surviving corporation of the Merger) and New Tenneco.
WAIVER
Any time prior to the Merger Effective Time, any party to the Merger
Agreement may, by action of its Board of Directors set forth in writing, to
the extent legally permissible, extend the time for performance of any of the
obligations or other acts of the other parties thereto, waive any inaccuracies
in the representations and warranties of the other parties contained therein
or in any document delivered pursuant thereto, and waive compliance by any of
the other parties thereto with any of the agreement or conditions contained
therein.
TERMINATION FEE
The Merger Agreement requires Tenneco to pay to El Paso a termination fee of
$25 million (the "Termination Fee"), plus up to $10 million in actual out of
pocket expenses incurred and payable to third parties by El Paso, if the
Merger Agreement is terminated: (i) by El Paso or Tenneco, if prior to
approval of the Transaction by Tenneco stockholders Tenneco enters into an S/I
Transaction which would adversely impact El Paso or the Energy Business or
would prevent or materially delay consummation of the Merger upon a good faith
determination (after consultation with and based upon advice of independent
counsel) by Tenneco's Board of Directors that there is a substantial risk that
the failure to do so would result in a breach of its fiduciary duties under
applicable law; (ii) by El Paso or Tenneco if the holders of Tenneco Stock do
not adopt and approve the Transaction; or (iii) by Tenneco or El Paso (but
only prior to approval of the Transaction by Tenneco's stockholders), if
Tenneco receives a Higher Proposal that it advises El Paso in writing that it
wishes to accept and El Paso does not make, within five business days of
receipt of such written notice, an offer that the Board of Directors of
Tenneco believes, in good faith after consultation with its financial
advisors, is at least as favorable, from a financial point of view, to the
stockholders of Tenneco as such Higher Proposal. The Termination Fee shall be
payable by Tenneco in exchange for a complete release of any liabilities from
El Paso.
66
<PAGE>
CONSULTING ARRANGEMENT
Tenneco and El Paso have entered into a consulting agreement (the
"Consulting Agreement") pursuant to which El Paso is providing certain
consulting services to Tenneco for the six-month term of the Consulting
Agreement with respect to enhancing the Energy Business' relationships with
customers, plaintiffs in material litigation and regulatory authorities. As
consideration for these services, El Paso is entitled to an aggregate
consulting fee of $60 million. Under the terms of the Consulting Agreement,
however, this fee is due and payable by Tenneco only if the Merger Agreement
is terminated by El Paso or Tenneco in the manner described in either (i) or
(iii) of the prior paragraph, or the manner described in (ii) of the prior
paragraph if Tenneco's Board of Directors withdraws, amends or modifies its
recommendation of the Transaction.
THE CHARTER AMENDMENT
If the Transaction is approved at the Tenneco Special Meeting, the Tenneco
Charter will be amended immediately thereafter (and prior to the Merger
Effective Time) to eliminate the rights, powers and preferences of the
authorized class of Tenneco junior preferred stock other than those set forth
in the certificate of designation establishing any series of then outstanding
junior preferred stock.
The Charter Amendment would allow the Tenneco Board of Directors additional
flexibility in establishing the powers, preferences and relative and other
special rights, including voting rights, of any series of the Tenneco junior
preferred stock issued in the future, and to take any of the foregoing actions
without first obtaining the consent of holders of any outstanding Tenneco
junior preferred stock, unless otherwise required by law and unless the
Tenneco Board of Directors elected to provide voting rights with respect to
any of the foregoing actions pursuant to the terms of any series of Tenneco
junior preferred stock issued in the future.
67
<PAGE>
DESCRIPTION OF NEW TENNECO
INTRODUCTION
New Tenneco is a newly formed Delaware corporation which, upon completion of
the Industrial Distribution, will be an independent, publicly held company
(symbol "TEN"). New Tenneco will own and operate, directly and through its
direct and indirect subsidiaries, substantially all of the assets of, and will
assume substantially all of the liabilities associated with, the principal
industrial businesses of Tenneco: Tenneco Automotive and Tenneco Packaging.
New Tenneco will also own and operate the administrative services unit of
Tenneco: TBS. Upon consummation of the Merger, New Tenneco will change its
name to "Tenneco Inc."
Although the separation of the Industrial Business from the remainder of the
businesses, operations and companies currently constituting the "Tenneco
Group" has been structured as a "spin-off" of New Tenneco pursuant to the
Industrial Distribution for legal, tax and other reasons, New Tenneco will
succeed to certain important aspects of the existing Tenneco business,
organization and affairs, namely: (i) New Tenneco will be renamed "Tenneco
Inc." upon the consummation of the Merger; (ii) New Tenneco will be
headquartered at Tenneco's current headquarters in Greenwich, Connecticut;
(iii) the New Tenneco Board will consist of those persons currently
constituting the Tenneco Board; (iv) New Tenneco's executive management will
consist substantially of the current Tenneco executive management; and (v) the
Industrial Business to be conducted by New Tenneco will consist largely of
Tenneco Automotive and Tenneco Packaging.
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for both the original equipment ("OE") market
and the replacement market, or aftermarket. Tenneco Automotive is a global
business that sells its products in over 100 countries. Tenneco Automotive
manufactures and markets its automotive exhaust systems primarily under the
Walker(R) brand name and its ride control systems primarily under the
Monroe(R) brand name.
Tenneco Packaging is among the world's leading and most diversified
packaging companies, manufacturing packaging products for consumer,
institutional and industrial markets. The paperboard business group
manufactures corrugated containers, folding cartons and containerboard, has a
joint venture in recycled paperboard, and offers high value-added products
such as enhanced graphics packaging and displays and kraft honeycomb products.
Its specialty products group produces disposable aluminum, foam and clear
plastic food containers, molded fiber and pressed paperboard products, as well
as polyethylene bags and industrial stretch wrap. Tenneco Packaging's consumer
products include such recognized brand names as Hefty(R), Baggies(R) and E-Z
Foil(R).
TBS designs, implements and administers shared administrative service
programs for the Tenneco businesses as well as, on an "as requested" basis,
for former Tenneco business entities.
BUSINESS STRATEGY
New Tenneco
The Distributions and the Merger represent the most important step to date
in accomplishing Tenneco's overall strategic objective of transforming itself
from a highly diversified industrial corporation to a global manufacturing
company focused on Tenneco Automotive and Tenneco Packaging. For the past
several years, Tenneco's management team has redeployed resources from slower
growth, more cyclical businesses to these higher growth businesses. The
Distributions are expected to provide New Tenneco with greater flexibility to
pursue additional growth opportunities for Tenneco Automotive and Tenneco
Packaging as a result of the increased management focus and additional
financial flexibility at New Tenneco. These additional growth opportunities
are expected to include, among other things, strategic acquisitions, joint
ventures, strategic alliances and further organic growth from additional
product development and international expansion initiatives.
68
<PAGE>
Management Focus. As a result of the Distributions and the Merger, Tenneco's
executive management team will be able to focus all of its efforts on
exploring and implementing the most appropriate growth opportunities for
Tenneco Automotive and Tenneco Packaging.
Implementation of Management Programs. Tenneco's strategy of focusing on the
Industrial Business will allow New Tenneco to further refine and implement
certain management processes that have been developed over the past several
years in order to improve operating performance. These programs include: (i)
the Cost of Quality program through which New Tenneco has successfully reduced
the failure costs in its manufacturing and administrative processes; (ii) the
working capital initiative through which New Tenneco plans to further reduce
its working capital requirements; and (iii) the shared services program,
administered by TBS, through which New Tenneco plans on further improving
efficiency and reducing the cost of general and administrative support
functions. New Tenneco believes that Tenneco Automotive and Tenneco Packaging
are particularly well-suited to benefit from these types of programs due to
the fragmented, non-regulated nature of the industries in which they operate.
Strategic Acquisitions. Strategic acquisitions have been, and will continue
to be, an important element of New Tenneco's overall growth strategy.
Tenneco's current executive management team, which will continue to serve as
New Tenneco's executive management team following the Industrial Distribution,
has a proven track record of identifying, structuring and integrating
strategic acquisitions. As a result of management's experience in implementing
strategic acquisitions, New Tenneco has developed comprehensive plans to
efficiently integrate new companies into its existing corporate
infrastructure. New Tenneco intends to continue to pursue appropriate
acquisition opportunities in which management can substantially improve the
profitability of strategically related businesses by, among other things,
rationalizing similar product lines and eliminating certain lower margin
product lines; reconfiguring and upgrading manufacturing facilities; moving
production to the lowest cost facilities; reducing selling, distribution,
purchasing and administrative costs; increasing market share within either a
geographic or product market; and acquiring businesses that possess leading
brand name products.
Continued growth in revenues and earnings at the pace sought by New Tenneco
will require continued success in completing major acquisitions and similar
expansion efforts, and then successfully integrating the acquired businesses
and operations into New Tenneco. The identity, timing, frequency, terms and
other factors involved in the overall acquisition/expansion program, and those
relating to any particular major acquisition, will impact, positively or
negatively, New Tenneco's success in achieving its financial and other goals.
Although certain factors in this regard will be beyond New Tenneco's control,
its executive management team believes that New Tenneco will have the
requisite significant opportunities, and the expertise, resources and
commitment to successfully act on an appropriate number of those
opportunities, to achieve its goals.
Employee Incentives. In addition, the Distributions and the Merger will
allow Tenneco's executive management team to develop incentive compensation
systems for employees that are more closely aligned with the operational
success of Tenneco Automotive and Tenneco Packaging.
Tenneco Automotive
Tenneco Automotive's primary goal is to enhance its leadership position in
the global automotive parts industry in which it is currently one of the
world's leading manufacturers of exhaust and ride control systems. Tenneco
Automotive intends to capitalize on certain significant existing and emerging
trends in the automotive industry, including (i) the consolidation and
globalization of the original equipment manufacturer ("OEM") supplier base,
(ii) increased OEM outsourcing, particularly of more complex components,
assemblies, modules and complete systems to sophisticated, independent
suppliers and (iii) growth of emerging markets for both original equipment and
replacement markets. Key components of Tenneco Automotive's strategy include:
(a) capitalizing on brand-name strength; (b) retaining and enhancing market
shares; (c) continuing development of high value-added products; (d)
increasing ability to deliver full-system capabilities (rather than merely
component parts); (e) continuing international expansion and strategic
acquisitions; (f) maintaining operating cost leadership; and (g) continuing
focus on the customer.
69
<PAGE>
Tenneco Packaging
Tenneco Packaging's primary goal is to maintain and enhance its position as
a leading specialty packaging company offering a broad line of products suited
to provide customers with the best packaging solutions. Tenneco Packaging
intends to capitalize on certain significant existing and emerging trends in
the packaging industry, including (i) increasing materials substitution, (ii)
changing fiber availability and (iii) global demand growth. Key components of
Tenneco Packaging's strategy include: (a) continued development and growth of
multi-material uses, broad product lines and packaging offering customers
enhanced functionality and value; (b) fiber flexibility (primarily in the mix
of virgin and recycled fiber sources); (c) growth through domestic and
international acquisitions and joint ventures; (d) internal growth in base
businesses; (e) reduction of sensitivity to changes in economic cyclicality
through the pursuit of specialty and other high value-added product growth;
and (f) maintenance of market leadership positions in its primary business
groups.
TENNECO AUTOMOTIVE
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for the OE market and aftermarket. Tenneco
Automotive is a global business that sells its products in over 100 countries,
manufacturing and marketing its automotive exhaust systems primarily under the
Walker(R) brand name and its ride control equipment primarily under the
Monroe(R) brand name.
Overview of Automotive Parts Industry
The global market for automotive parts was approximately $435.3 billion in
1995, comprised of $352 billion in OE sales and $83.3 billion in aftermarket
sales. This market is expected to grow by 7.6% to $468.4 billion in 1996 and
by approximately 7.2% per year through 2000 resulting in a total market size
of approximately $617.6 billion in that year. As the North American and
Western European automotive markets are relatively mature (expected to grow at
an estimated rate of 7.0% and 6.0%, respectively through 2000), OEMs and
automotive parts suppliers are increasingly focusing on emerging markets for
additional growth opportunities, particularly China, Eastern Europe, India and
Latin America.
Automotive parts are generally segmented into two categories: (i) OE sales
in which parts are sold in large quantities directly to the vehicle
manufacturers and (ii) aftermarket sales in which parts are sold in varying
quantities to a wide range of wholesalers, retailers and repair shops as
replacement parts in the aftermarket. Demand for automotive parts in the OE
market is driven by the number of new vehicle sales which in turn are
determined by prevailing economic conditions. Factors affecting demand in the
aftermarket include the number of vehicles on the road, the average useful
life of parts, the average age of such vehicles and number of miles driven.
Industry Trends
Currently, there are significant existing and emerging trends that are
dramatically reshaping the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and
relationships of its participants. Key trends affecting automotive parts
suppliers include:
Consolidation of Parts Suppliers. The automotive parts industry,
particularly with respect to OE suppliers, has been rapidly consolidating for
the last several years. The number of Tier I suppliers has decreased from
3,000 to 1,500 since 1990. By the year 2000, the number of suppliers is
expected to decrease by nearly 75%, leaving approximately 400 Tier I
suppliers. The primary reasons for this consolidation include: (i) an
increasing desire by OEMs to work with fewer, larger suppliers that can
provide fully-integrated systems and (ii) the inability of smaller suppliers
to compete on price with the larger companies who benefit from purchasing and
distribution economies of scale.
Full-System Integration by Parts Suppliers. OEMs are moving towards
outsourcing entire automotive parts systems in order to take advantage of the
lower cost structure of the automotive parts suppliers. Development of
70
<PAGE>
advanced electronics has enabled formerly independent components to become
"interactive," leading to a shift in demand from individual parts to fully-
integrated systems. OEMs seem to have accepted the need to work more closely
with suppliers, whose roles are now being transformed from "parts suppliers"
to "developers of modules and systems." This shift has created the role of the
systems integrator, who will increasingly have the ability to execute a number
of activities, such as design, product development, engineering, testing of
component systems, and purchasing from Tier II suppliers. It is estimated that
there will be approximately 60 systems integrators by the year 2005. This
emerging structure should allow the vehicle manufacturers to concentrate on
the activities which are core to their success such as product planning and
marketing, thus limiting their involvement to setting the "look and feel" and
cost parameters for new vehicle platforms. OEMs are also stimulating further
manufacturing cost improvements by implementing strategies that would provide
parts suppliers with greater input and allow them to share in the benefits of
cost savings and productivity enhancements, thus strengthening the role and
potential margins of the surviving Tier I suppliers.
Globalization of the Automotive Industry. As a result of several factors,
OEMs are increasingly requiring "global" parts suppliers with global
management expertise. As the customer base of OEMs changes, and emerging
markets become more important to achieving growth, suppliers must be prepared
to provide products any place in the world. This requires a worldwide approach
to engineering, sales and distribution.
. Location of Production Closer to End Markets. OEMs have relocated
production globally on an "on-site" basis that is closer to end markets.
This international expansion allows suppliers to pursue sales in
developing markets, to take advantage of relatively lower labor costs
and, to some extent, to offset the counter-cyclicality of the European
and North American markets.
. Growing Importance of Emerging Markets. As the North American and Western
European automotive markets are relatively mature, OEMs are increasingly
focusing on emerging markets for growth opportunities, particularly
China, Eastern Europe, India and Latin America. The increased focus on
the OE markets has in turn increased the growth opportunities in the
aftermarket.
. Increasing Requirement of Government for Local Parts Content. Many
governments are beginning to require certain percentages of local
content.
Standardization of OEM Vehicle Platforms. OEMs are increasingly designing
"world cars" with standard bases and localized features, while also developing
niche market products such as multipurpose vehicles, four-wheel drive and
sports cars for mature markets. OEMs have learned that they can realize
significant economies of scale by limiting variations across items such as
steering columns, brake systems, transmissions, axles, exhaust systems,
support structures, fasteners, and power window and door lock mechanisms. This
shift towards standardization will have a large impact on components
manufacturers, who, according to industry estimates, can expect a 10-15%
reduction in production costs by 1997 if the OEMs reduce components variations
by 30%. This should result in not only higher production volumes per unit and
greater economies of scale, but also lower investment costs for molds and
dies, reduced development and prototype costs and more efficient die changes
and retooling.
Aftermarket. There are several factors that are positively affecting the
North American demand for automotive parts in the aftermarket, including:
. The average age of vehicles on the road is at an industry record-high of
8.4 years.
. The aggregate number of annual miles driven by all vehicles has increased
by 38% from 1.65 billion miles in 1988 to 2.29 billion miles in 1995.
. The size of the vehicle fleet has increased approximately from 157
million registrations in 1988 to 188 million registrations in 1995.
. On the other hand, a factor negatively affecting the demand for
aftermarket parts is the increasing average useful life of most OEM
automotive parts as a result of technological advancements.
71
<PAGE>
Emphasis on Clean Air and Efficiency. The enactment of strict environmental
regulations regarding both pollution and recycling content has led suppliers
and OEMs to design products and develop materials to comply with increasingly
stringent requirements. The Clean Air Act Amendments of 1990 require
substantial reductions in automobile tailpipe emissions, longer warranties on
certain parts of an automobile's pollution-control equipment and additional
equipment to control fuel-vapor emissions. Manufacturers have responded by
focusing their efforts towards technological development, thus lowering costs
while minimizing industrial waste and pollution. Automakers are designing
vehicles that will be easier to dismantle and recycle at the end of their
useful lives and nearly all component manufacturers now deliver parts and
components in reusable shipping containers to reduce the amount of waste
produced at an assembly plant.
Overview of Tenneco Automotive
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for the OE market and the aftermarket.
Tenneco Automotive is a global business that sells its products in over 100
markets worldwide. Tenneco Automotive manufactures and markets its automotive
exhaust systems primarily under the Walker(R) brand name, and its ride control
equipment is primarily manufactured under the Monroe(R) brand name.
The following table sets forth information relating to the net sales of both
of Tenneco Automotive's primary product groups:
<TABLE>
<CAPTION>
NET SALES ($ IN MILLIONS)
----------------------------------
SIX MONTHS YEAR ENDED DECEMBER
ENDED 31,
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
EXHAUST SYSTEMS PRODUCTS GROUP
Aftermarket............................... $ 348 $ 637 $ 609 $ 562
OE Market................................. 499 829 465 385
------ ------ ------ ------
$ 847 $1,466 $1,074 $ 947
------ ------ ------ ------
RIDE CONTROL PRODUCTS GROUP
Aftermarket............................... $ 406 $ 687 $ 644 $ 580
OE Market................................. 210 326 271 258
------ ------ ------ ------
$ 616 $1,013 $ 915 $ 838
------ ------ ------ ------
Total Tenneco Automotive................ $1,463 $2,479 $1,989 $1,785
====== ====== ====== ======
</TABLE>
Brands. Tenneco Automotive has established leading brand-name products.
Monroe(R) and Walker(R) are two of the most recognized brand names in the
automotive parts industry. As Tenneco Automotive acquires related product
lines, it is envisioned that they will be incorporated within these existing
product families.
Customers. Tenneco Automotive has developed long-standing business
relationships with many of its customers around the world, working with its
customers in all stages of production, including design, development,
component sourcing, quality assurance, manufacturing and delivery. Tenneco
Automotive has a strong and established reputation with its customers for
providing high quality products at competitive prices as well as for timely
delivery and customer service. Attention to these customer priorities has been
recognized by numerous customers who have awarded Tenneco Automotive supplier
quality awards.
72
<PAGE>
Tenneco Automotive serves both the OE market and the aftermarket since the
investment and technology required to produce products for the OEMs can be
profitably parlayed into the higher margin aftermarket. Tenneco Automotive
serves over 25 different OEM customers on a global basis, including the
following:
NORTH AMERICA EUROPE JAPAN
CAMI BMW Mazda
Chrysler DAF Nissan
Ford Daihatsu Suzuki
General Motors Fiat Toyota
Honda Ford
Mazda Jaguar AUSTRALIA
Mitsubishi Lada Ford
Nissan Leyland General Motors
NUMMI Mercedes-Benz Mitsubishi
Toyota Mitsubishi Toyota
Nissan
SOUTH AMERICA Opel
Fiat Peugeot/Citroen
Ford Porsche
General Motors Renault/Matra
Volkswagen Rover/Land Rover
Saab/Scania
Toyota
Volkswagen/Audi/SEAT/Skoda
Volvo
Tenneco Automotive's aftermarket customers include such wholesalers and
retailers as National Auto Parts Association (NAPA), Big A Stores, Midas
International Corp. ("Midas"), Speedy Muffler King and Western Auto in North
America, and Midas, Pit Stop and Kwik-Fit in Europe.
Exhaust Systems
Tenneco Automotive designs, manufactures and distributes exhaust systems
primarily under the Walker(R) brand name. These products include a variety of
automotive exhaust systems and emission control products, including mufflers,
catalytic converters, tubular exhaust manifolds, pipe, exhaust accessories and
electronic noise cancellation products. Founded in 1888 and a division of
Tenneco Automotive since 1967, the Walker business group ("Walker") is the
replacement market leader for exhaust systems in North America, Europe and
Australia. Walker is a leading supplier in the OE market in the U.S. as well,
supplying exhaust systems used in 9 of the 10 top-selling 1994 new car models
sold in the U.S. Walker has long been the European market leader in the
replacement market for exhaust systems, and with the acquisition of Heinrich
Gillet GmbH & Company ("Gillet") in 1994, Walker became Europe's leading OE
supplier.
Exhaust systems play a critical role in safely conveying noxious gases away
from the passenger compartment, reducing the level of pollutants and reducing
engine exhaust noise to an acceptable level. Precise engineering of the
manifold, pipe, catalytic converter and muffler leads to a pleasant, tuned
engine sound, minimal pollutants and optimized engine performance.
Manufacturing and Engineering. With plants in North America, Europe, South
America, South Africa, Asia and Australia, Walker locates its manufacturing
facilities in close proximity to its OE customers to provide just-in-time
delivery. In the U.S., Walker operates 10 manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities.
Walker also has two research and development facilities in the U.S. In
addition, Walker operates 26 manufacturing facilities located in Argentina,
Australia, Canada, China, the Czech Republic, the United Kingdom, Mexico,
Denmark, Germany, France, Spain, Portugal, South Africa and
73
<PAGE>
Sweden. Walker is in the process of establishing a production line in Brazil.
It also has one engineering and technical center at its facility in Germany
and one at its facility in Australia. Its engineering facilities include full
anechoic chambers in the U.S. and Europe.
Strategic Acquisitions/Joint Ventures. As part of its international growth
strategy, Walker acquired ownership of Gillet, a manufacturer of exhaust
systems, in November 1994. The acquisition of Gillet, Europe's largest OE
exhaust supplier, recast Tenneco Automotive as the market leader in exhaust
systems for the OE market in Europe. The acquisition also brought many new OE
customers and orders to the Walker business. Before Gillet, Walker had only
Toyota as a European OE exhaust customer. As a result of the acquisition of
Gillet, a variety of new customers have been added, including: Audi, Ford-
Europe, Opel (General Motors), Mercedes Benz, Peugeot/Citroen, Renault, Seat,
Skoda and Volkswagen. Significantly, following the Gillet acquisition, Ford
selected Walker as a supplier for its 1997 "world" car.
In 1995, Walker acquired ownership of Manufacturas Fonos, S.L. ( "Fonos"),
Spain's largest participant in the exhaust systems aftermarket, and Perfection
Automotive Products, a U.S. catalytic converter producer, further expanding
Walker's presence in the exhaust systems replacement market. In 1996, Walker
established a joint venture in China (Dalian) to supply exhaust systems to the
northern Chinese automotive market.
The following table sets forth information relating to Tenneco Automotive's
sales of exhaust systems:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
--------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------
1996 1995 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Sales
Aftermarket.................... 42% 46% 48% 52%
OE Market...................... 58 54 52 48
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Foreign Sales
Aftermarket.................... 40% 42% 68% 70%
OE Market...................... 60 58 32 30
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Total Sales by Geographic Area
United States.................. 42% 42% 58% 60%
European Union................. 44 45 24 23
Canada......................... 8 7 10 12
Other areas.................... 6 6 8 5
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
</TABLE>
Ride Control Products
Tenneco Automotive designs, manufactures and distributes ride control
equipment primarily under the Monroe(R) brand name. Tenneco Automotive's ride
control equipment consists of hydraulic shock absorbers, air adjustable shock
absorbers, spring assisted shock absorbers, gas charged shock absorbers and
struts, replacement cartridges and electronically adjustable suspension
systems. Tenneco Automotive manufactures and markets replacement shock
absorbers for virtually all domestic and foreign makes of automobiles. In
addition, Tenneco Automotive manufactures and markets shock absorbers and
struts for use as original equipment on passenger cars and trucks, as well as
for other uses. Founded in 1916, the Monroe business group ("Monroe")
introduced the world's first shock absorber in 1926 and became part of Tenneco
Automotive in 1977. Tenneco Automotive is the market leader for ride control
equipment in the aftermarket in North America, Europe and Australia, as well
as in the OE market in Australia.
74
<PAGE>
Superior ride control is governed by a vehicle's suspension system,
including its shocks and struts. Shocks and struts are components that help
maintain vertical loads placed on a vehicle's tires to help keep the tires in
contact with the road. A vehicle's ability to steer, brake and accelerate
depends on the adhesion, or friction, between the vehicle's tires and the
road. Adhesion is directly influenced by shock absorber and strut performance.
Worn or low quality shocks and struts allow weight to transfer from side to
side (roll), from front to rear (sway) and up and down (bounce). Monroe shocks
maintain vertical loads placed on tires by providing resistance to vehicle
bounce, sway and roll. Variations in tire to road contact affect a vehicle's
handling and braking performance and the safe operation of a vehicle; thus, by
enhancing the tire to road contact, Monroe's ride control products actually
function as safety components of a vehicle rather than merely providing a
comfortable ride.
Manufacturing and Engineering. Monroe has ten manufacturing facilities in
the United States and 41 foreign manufacturing operations in Australia,
Belgium, Brazil, Canada, the Czech Republic, Mexico, the United Kingdom, Spain
and New Zealand. Monroe also has controlling interests in joint ventures that
own manufacturing operations in China and India, as set forth below. In
designing its shock absorbers and struts, Monroe uses advanced engineering and
test capabilities to provide product reliability, endurance and performance.
Monroe's engineering capabilities feature state-of-the-art testing equipment,
advanced computer aided design equipment, and the talents of over 100
engineers. Monroe's dedication to innovative solutions has led to such
technological advances as adaptive dampening systems; manual, hydraulic and
electronically adjustable suspensions; semi-active and active systems; and air
and hydraulic leveling systems. Conventional shocks and struts were only able
to provide either ride comfort or vehicle control. Monroe's innovative new
grooved-tube, gas-charged shocks and struts enable both ride comfort and
vehicle control, resulting in improved handling (less roll), reduced
vibration, a wider range of vehicle control and a lessening of the reduction
in performance as the struts become overheated (fade). This new technology,
together with Monroe's Position Sensitive Dampening(R) valve can be found in
Monroe's premium quality Sensa-Trac(R) shocks.
Strategic Acquisitions/Joint Ventures. As a means of expanding its product
lines and offering OEMs a complete modular ride control system, in July 1996,
Tenneco Automotive acquired Clevite. Clevite is a leading OE manufacturer of
elastomeric vibration control components, including bushings and engine
mounts, for the auto, light truck and heavy truck markets. With this
acquisition, Tenneco Automotive now has the full capability to deliver
complete suspension systems to the OEMs. The Clevite acquisition also
complements Tenneco Automotive's interest in global growth opportunities, as
both Clevite and Monroe have manufacturing operations in Mexico and Brazil. In
addition to the operations mentioned in the preceding paragraph, Tenneco
Automotive has a 51% interest in a joint venture that has three ride control
manufacturing facilities in India and a 51% interest in a joint venture that
has one ride control manufacturing facility in China. It is anticipated that
the joint venture in India will also manufacture exhaust systems.
75
<PAGE>
The following table sets forth information relating to Tenneco Automotive's
sales of ride control equipment:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
--------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------
1996 1995 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Sales
Aftermarket.................... 72% 70% 72% 72%
OE Market...................... 28 30 28 28
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Foreign Sales
Aftermarket.................... 61% 66% 69% 63%
OE Market...................... 39 34 31 37
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Total Sales by Geographic Area
United States.................. 45% 48% 49% 50%
European Union................. 36 36 32 29
Canada......................... 4 3 5 7
Other areas.................... 15 13 14 14
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
</TABLE>
Sales and Marketing
Both of the exhaust and ride control systems groups utilize similar sales
and marketing systems to distribute Tenneco Automotive products. Both groups
take advantage of a dedicated sales force and consumer brand marketing
professionals together with extensive marketing support, including trade and
consumer marketing, promotions and general advertising. Tenneco Automotive
believes that it maintains the highest customer order fill rate in the
industry, consistently exceeding 95%.
Tenneco Automotive sells its OEM products directly. With respect to the
aftermarket, Tenneco Automotive employs three primary distribution techniques:
(i) the traditional three-step distribution system: warehouse distributors,
jobbers and installers; (ii) direct sales to retailers; and (iii) sales to
buying groups.
Strategy
Tenneco Automotive's primary goal is to enhance its leadership position in
the global automotive parts industry in which it is currently one of the
leading manufacturers of exhaust and ride control systems. Tenneco Automotive
intends to capitalize on certain significant existing and emerging trends in
the automotive industry, including (i) the consolidation and globalization of
the OEM supplier base, (ii) increased OEM outsourcing, particularly of more
complex components, assemblies, modules and complete systems to sophisticated,
independent suppliers and (iii) growth of emerging markets for both original
equipment and replacement markets. Key components of Tenneco Automotive's
strategy include:
Branding. Tenneco Automotive, whose major strategic strength is the
performance of its leading Monroe and Walker brand names and their market
shares, intends to emphasize product differentiation to give consumers added
reasons for specifying their brands. For example, Monroe introduced a premium
grade shock and strut called Sensa-Trac(R) in 1994, which helped it regain its
technological leadership in the ride control market, and Walker's
Advantage(TM) and Dyno Max(TM) brands are the leading brands in their product
categories. Tenneco Automotive also plans on capitalizing on its brand
strength by incorporating newly acquired product lines within existing product
families, as it did with Gillet.
76
<PAGE>
Maintain Focus on Core Business. Tenneco Automotive intends to retain market
share in its core businesses with its primary customers while increasing
market share with customers with whom it has not fully realized its potential
market penetration. These objectives are designed to enable Tenneco Automotive
to respond better to the OEMs' evolving purchasing requirements, where in
addition to manufacturing, the supplier is required to provide design,
engineering and project management support for a complete package of
integrated products.
Continue to Develop High Value-Added Products. Tenneco Automotive intends to
continue to manufacture high value-added products and to develop strategic
alliances with Tier I and Tier II suppliers in order to facilitate development
of these value-added products, including the development of highly engineered
or complex assemblies or systems. Tenneco Automotive intends to expand its
product lines by continuing to identify and fill new fast-growing niche
markets, by developing new products for existing markets, by acquiring
companies with product portfolios that complement the products currently
applied by Tenneco Automotive and by establishing strategic alliances with
other suppliers.
Increase Ability to Provide Full-System Capabilities. The automotive parts
industry is encountering a consolidation of parts suppliers as OEMs require
suppliers to provide design assistance and innovation and full-system
capabilities rather than just specific parts. In response to this trend, New
Tenneco plans to dedicate more resources towards strengthening technical
capability and design expertise and pursue appropriate strategic acquisitions,
joint ventures and strategic alliances in order to increase Tenneco
Automotive's ability to deliver such full-system capability. For example, the
recent acquisition of Clevite now gives Tenneco Automotive the ability to
deliver complete suspension systems to OEMs.
International Expansion. In response to the development of global markets
and in order to diversify its customer and product base, Tenneco Automotive
plans to continue its international expansion through joint ventures,
acquisitions and strategic alliances. For example, Tenneco Automotive recently
established joint ventures in China and India and acquired Europe's largest
supplier of automotive exhaust equipment for the OEM market. Rather than
segment the world, Tenneco Automotive plans to integrate its international
operations through the standardization of products and processes, improvements
in information technology and the global coordination of purchasing, costing
and quoting procedures.
Strategic Acquisitions. Strategic acquisitions have been, and management
believes will continue to be, an important element of Tenneco Automotive's
growth. Through such acquisitions, Tenneco Automotive can expand its product
portfolio, gain access to new customers and achieve leadership positions
within new geographic markets, while drawing on the strengths of existing
distribution channels with OEM relationships. Tenneco Automotive has developed
comprehensive integration plans to quickly integrate new companies into its
infrastructure. Tenneco Automotive intends to continue to pursue acquisition
opportunities in which management can substantially improve the profitability
of strategically related businesses by, among other things, rationalizing
similar product lines and eliminating certain lower margin product lines;
reconfiguring and upgrading manufacturing facilities; moving production to the
lowest cost facilities; and reducing selling, distribution, purchasing and
administrative costs.
Operating Cost Leadership. Tenneco Automotive will continue to seek cost
reductions as it standardizes it product and processes throughout its
international operations, improves its information technology, increases
employee training, invests in more efficient machinery and enhances the global
coordination of purchasing, costing and quoting procedures.
Other
As of July 1, 1996, Tenneco Automotive had approximately 21,000 employees.
Tenneco Automotive believes that its relations with its employees are good.
The principal raw material utilized by Tenneco Automotive is steel. Tenneco
Automotive believes that an adequate supply of steel can presently be obtained
from a number of different domestic and foreign suppliers.
77
<PAGE>
Tenneco Automotive holds a number of domestic and foreign patents and
trademarks relating to its products and businesses. It manufactures and
distributes its products primarily under the names Walker(R) and Monroe(R),
which are well recognized in the marketplace. The patents, trademarks and
other intellectual property owned by Tenneco Automotive are important in the
manufacturing and distribution of its products.
The operations of Tenneco Automotive face competition from other
manufacturers of automotive equipment, including affiliates of certain of its
customers, in both the OE market and the aftermarket.
Tenneco Automotive is headquartered in Deerfield, Illinois.
TENNECO PACKAGING
Tenneco Packaging is among the world's leading and most diversified
packaging companies, manufacturing packaging products for consumer,
institutional and industrial markets. The paperboard business group
manufactures corrugated containers, folding cartons and containerboard, has a
joint venture in recycled paperboard, and offers high value-added products
such as enhanced graphics packaging and displays and kraft honeycomb products.
Its specialty products group produces disposable aluminum, foam and clear
plastic food containers, molded fiber and pressed paperboard products, as well
as polyethylene bags and industrial stretch wrap. Tenneco Packaging's consumer
products include such recognized brand names as Hefty(R), Baggies(R) and E-Z
Foil(R).
Overview of Packaging Industry
The global packaging market is estimated at nearly $360 billion with about
one quarter in North America, slightly less in Europe and the balance spread
throughout the rest of the world. Tenneco Packaging now ranks as the fourth
largest packaging manufacturer in North America by sales and the tenth largest
in the world. Packaging remains one of the most fragmented major industries,
with the top five companies comprising only a 10% worldwide market share.
Within packaging material categories, Tenneco Packaging participates in the
three growing segments of paper, plastic and aluminum, with substantial or
leading market shares in virtually all of its product segments.
Business Strategy
Tenneco Packaging has embarked upon an aggressive growth plan to be the
leading specialty packaging company offering a broad line of packaging
products to provide customers with the best packaging solutions. In the past
two years, Tenneco Packaging has doubled its size to nearly $4 billion in
annualized revenues through internal growth in its base businesses,
productivity gains and 12 acquisitions that have been completed since early
1995.
As a result of these redeployment activities, Tenneco Packaging has
significantly reduced its sensitivity to changes in economic cyclicality:
. Tenneco Packaging's business is now over half specialty (including the
full year impact of the Mobil Plastic acquisition and the recently
announced Amoco Foam Products purchase), which reduces exposure to
business cycles.
. On the paperboard side, four acquisitions in specialty graphics and the
purchase of Hexacomb Corporation ("Hexacomb"), the world's largest
supplier of kraft paper honeycomb products used for protective packaging,
have reduced its sensitivity to raw material prices and offer greater
opportunities to add value. Currently, over 20% of Tenneco Packaging's
paperboard business is in higher margin, enhanced graphics including
folding cartons, point-of-purchase displays and point-of-sale packaging,
as well as protective packaging products.
78
<PAGE>
In the future, Tenneco Packaging will continue to pursue value-added, non-
cyclical growth opportunities, maintain market leadership positions in its
primary business groups and leverage its new product development expertise.
As with any manufacturing company whose product demand is sensitive to
general economic conditions, Tenneco Packaging's business results may be
adversely impacted by several uncertainties including raw material cost
fluctuations and pricing variability related to industry supply/demand
dynamics. In addition, potential packaging legislation or regulatory changes,
material substitution, new packaging technologies and changes in consumer
preferences or distribution channels could have an adverse impact on New
Tenneco. However, Tenneco Packaging has positioned itself to deal
strategically with these challenges through its:
. Multi-material focus, broad product line and concentration of growth in
packaging that offers customers greater functionality and value;
. Fiber flexibility, which enables Tenneco Packaging's paperboard business
to manage its mix of virgin and recycled fiber sources to take advantage
of changing market conditions;
. Raw material purchasing leverage in both fiber and plastic resin;
. Technology and new product development expertise, offering innovative
packaging design and materials applications; and
. Global expansion strategy of growing its international business through
value-added acquisitions, joint ventures, and multi-national customer
partnerships.
Tenneco Packaging believes that factors critical to its success include a
focused strategic direction, operating cost leadership, management expertise,
a committed and skilled workforce and a systems infrastructure to meet
stringent customer quality requirements and service needs. Tenneco Packaging
will spend approximately $110 million by the end of 1998 to provide state-of-
the-art customer linked manufacturing systems, shop floor scheduling and real-
time data for marketing and production management.
Overview of Tenneco Packaging
Tenneco Packaging is an industry leader in the manufacture and sale of
packaging products, offering a wide range of fiber-based materials and
packaging for consumer, institutional and industrial applications, as well as
aluminum and plastic-based specialty packaging for consumer, retail, food
service and food processing applications.
79
<PAGE>
The following tables set forth information relating to the net sales of both
of Tenneco Packaging's primary business groups, in dollars and by percentages:
<TABLE>
<CAPTION>
NET SALES (MILLIONS)
------------------------------------
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED ----------------------
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
PAPERBOARD PRODUCTS GROUP
Corrugated shipping containers and
containerboard products............... $ 751 $1,589 $1,214 $1,086
Folding cartons and recycled paperboard
mill products......................... 92 204 196 196
Paper Stock and other.................. 60 135 119 100
------ ------ ------ ------
903 1,928 1,529 1,382
------ ------ ------ ------
SPECIALTY PRODUCTS GROUP
Disposable plastic and aluminum packag-
ing products.......................... 756 593 434 442
Molded fiber products.................. 100 191 186 183
Other.................................. 16 40 35 35
------ ------ ------ ------
872 824 655 660
------ ------ ------ ------
Total Tenneco Packaging.............. $1,775 $2,752 $2,184 $2,042
====== ====== ====== ======
<CAPTION>
PERCENTAGE OF NET SALES
------------------------------------
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED ----------------------
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
PAPERBOARD PRODUCTS GROUP
Corrugated shipping containers and
containerboard products............... 42% 58% 56% 53%
Folding cartons and recycled paperboard
mill products......................... 5 7 9 10
Paper Stock and other.................. 4 5 5 5
------ ------ ------ ------
51 70 70 68
------ ------ ------ ------
SPECIALTY PRODUCTS GROUP
Disposable plastic and aluminum
packaging products.................... 43% 22% 20% 22%
Molded fiber products.................. 5 7 9 9
Other.................................. 1 1 1 1
------ ------ ------ ------
49 30 30 32
------ ------ ------ ------
Total Tenneco Packaging.............. 100% 100% 100% 100%
====== ====== ====== ======
SALES BY GEOGRAPHIC AREA(A)
United States.......................... 92% 91% 90% 88%
European Union......................... 5 5 6 8
Canada................................. 1 1 1 2
Other areas............................ 2 3 3 2
------ ------ ------ ------
100% 100% 100% 100%
====== ====== ====== ======
</TABLE>
- --------
(a) Restated 1995, 1994 and 1993 to reflect countries included in European
union as of December 31, 1995: Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain
and Sweden.
Paperboard Products
The paperboard business group manufactures and sells corrugated containers,
folding cartons, containerboard, lumber and building products, and has a joint
venture in recycled paperboard. The group's product line includes high value-
added products such as enhanced graphics packaging and displays and kraft
80
<PAGE>
honeycomb products. It produces over 2 million tons of containerboard that is
converted by its corrugated container plants and sold to both domestic and
export customers. Over 80% of the containerboard used by the corrugated
converting operations is either produced by Tenneco Packaging's own mills or
supplied through trade partnerships for other grades in exchange for product
produced at Tenneco Packaging's mills, which helps assure a secure supply of
product in a wide variety of grades to meet the requirements of its customers.
It also produces high quality, innovative folding carton products utilizing
the latest in printing and cutting technology for the sheet-fed offset,
narrow-web flexo and rotogravure processes. Finally, Tenneco Packaging
participates in the wood products business and has access to over 1.0 million
acres of timberland in the United States through both owned and leased
properties.
Sales and Marketing. Tenneco Packaging maintains a sales and marketing
organization of over 400 sales personnel. Tenneco Packaging also has four
graphics design centers with two more planned which help it meet its
customers' design and functional requirements.
New Product Development and Design. Tenneco Packaging's paperboard group is
establishing a nationwide network of new product development and creative
packaging design centers to develop and manufacture product packaging and
product display solutions to meet more sophisticated, complex customer needs.
This network includes four regional design centers, 21 primary and mid-range
graphics facilities and almost 100 sales personnel, new product development
engineers, and product graphics and design specialists. These centers offer
state-of-the-art computer and design equipment for 24-hour turnaround and
reduced product delivery times.
Manufacturing and Engineering. Tenneco Packaging has two kraft linerboard
mills and two medium mills, located in Tennessee, Georgia, Michigan and
Wisconsin, which together account for 7% of annual U.S. production, or 2.1
million tons. As of June 30, 1996, Tenneco Packaging had invested $75 million
at the Counce, Tennessee mill, which added 120,000 tons annually of capacity
and enabled the mill to meet a growing demand for lighter weight board. Each
of the mills has a strong focus on quality and is ISO 9002 certified. Two
paperstock recycling facilities provide some of the mills' recycled fiber
requirements.
Domestically, Tenneco Packaging's corrugated container network includes 64
geographically dispersed plants that manufacture approximately 7% of the total
annual U.S. corrugated shipments based on revenue, as well as seven kraft
paper honeycomb product plants, making it one of the top six integrated
producers. Tenneco Packaging also operates six folding carton plants located
primarily in the Midwest.
Tenneco Packaging has access to 1.0 million acres of timberland in the
United States through both owned and leased properties. To maximize the value
of the timber harvested, Tenneco Packaging operates four wood products
operations which produce hardwood dimensional lumber and utility poles.
Further, Tenneco Packaging is a party to a joint venture in a chip mill, as
well as a wood drying facility.
Tenneco Packaging's paperboard group operates a manufacturing and technical
support center located in Skokie, Illinois which provides engineering,
manufacturing and technical support to its corrugated operations. In addition,
it currently has a network of four design centers and a design organization
which includes more than 60 structural, graphic and package engineering
specialists for its corrugated and folding carton converting operations.
Strategic Acquisitions/Joint Ventures. As part of Tenneco Packaging's value-
added growth strategy, eight acquisitions were made during 1995 in the
Paperboard Products Group. Tenneco Packaging expanded its graphics and
printing capabilities to that of a full service supplier of point-of-purchase
displays and point-of-sale packaging by acquiring four facilities with
expertise in high impact graphics and design. The addition of Lux Packaging,
in Waco, Texas; the United Group in Los Angeles, California; Menasha
Corporation's South Brunswick, New Jersey plant; and DeLine Box in Windsor,
Colorado have broadened Tenneco Packaging's offering of products and services
to include permanent point-of-purchase displays, rotogravure preprint, litho-
lamination and advanced graphics design.
81
<PAGE>
Tenneco Packaging added to its network of specialty sheet plants through the
acquisition of Mid-Michigan Container in Michigan; Sun King Container in El
Paso, Texas; and Domtar Packaging's Watertown, New York facility. It also
increased its protective packaging capabilities through the purchase of
Hexacomb, the world's largest supplier of honeycomb corrugated products used
for protective packaging, materials handling and specialized structural
applications.
In June 1996, Tenneco Packaging and Caraustar Industries ("Caraustar")
entered a joint venture where Tenneco Packaging contributed its two recycled
paperboard mills (Rittman, Ohio and Tama, Iowa) and a recovered paper stock
and brokerage operation for cash and a 20% equity position in the business.
The mills will continue to supply recycled paperboard to Tenneco Packaging's
six folding carton plants.
Specialty Products
Tenneco Packaging's Specialty Products Group produces disposable aluminum,
foam and clear plastic products for the food processing, food preparation and
food service industries. It also manufactures molded fiber and pressed
paperboard products, as well as polyethylene bags and industrial stretch film.
Consumer products are sold under such recognized brand names of Hefty(R),
Baggies(R), Hefty OneZip(TM) and E-Z Foil(R).
Tenneco Packaging's lightweight, durable plastic packaging for in-store
deli, produce, bakery and catering applications maintain quality and enhance
presentation. Plastic food storage and trash bags, foam and molded fiber
dinnerware, disposable aluminum baking pans and related products are sold
through a variety of retail outlets. Tenneco Packaging also manufactures
molded fiber for produce and egg packaging, food service items and
institutional tableware.
Sales and Marketing. Specialty packaging products are marketed to five
primary market segments: food service, supermarkets, institutional, packer
processor and industrial users. The sales organization is specialized by user
segment and its teams work in alliance with strategic customers to build
sales. Approximately 85% of specialty packaging products are sold to its
distributors, while the remainder are sold directly to retailers.
Consumer products are marketed primarily through three classes of retailers
or channels of trade: grocery (supermarkets and convenience stores), non-food
(mass merchandisers, drug stores, hardware stores, home centers), and
warehouse clubs with sales distributed 66%, 30%, and 4%, respectively, based
on 1994 net revenues. Consumer products' internal sales management personnel
are augmented by a national network of grocery brokers and manufacturing
representatives to provide headquarter and in-store sales coverage for the
grocery channel. Consumer products covers warehouse clubs and selected non-
food retailers on a direct basis. The overall sales breakdown is approximately
19% direct and 81% broker/representative.
Manufacturing and Engineering. In North America, Tenneco Packaging operates
30 specialty products facilities. With the acquisitions of Mobil Plastics and
Amoco Foam Products, Tenneco Packaging now has polystyrene production in 19
locations in 13 states as well as one Canadian facility. It produces
polyethylene products in five locations including a Canadian facility.
Aluminum roll stock is converted at five locations, including three locations
shared with polystyrene production. Molded fiber packaging is produced in six
locations. Finally, pressed paperboard products are manufactured at one
facility in Columbus, Ohio. Research and development centers for packaging and
process development are located in Macedon, New York and Northbrook, Illinois.
Within the Specialty Products Group there are two major types of plastic
manufacturing plants, offering excellent process technology and high quality
equipment in polystyrene extrusion/thermoforming/automation, consumer waste
bags and stretch films. Tenneco Packaging's polyethylene plants produce
liners, food bags, grocery sacks and stretch film, as well as retail waste and
food bags for consumer applications. Most of the Specialty Products Group's
polyethylene processes are in-line. Polystyrene plants make foam products
including consumer tableware, foodservice disposables, meat trays and clear
containers. With multiple production lines, each plant is generally capable of
making several product types. Polystyrene pellets are marketed and extruded
and subsequently thermoformed and converted into finished products.
82
<PAGE>
Strategic Acquisitions. Tenneco Packaging acquired Mobil Plastics in late
1995 which more than doubled the size of its Specialty Products Group and
added new technologies and product development capabilities. It provides
strong consumer branded products such as Hefty(R) trash bags, Baggies(R) food
bags, and Hefty OneZip(TM) food storage bags. In addition, it manufactures
clear and foam polystyrene food service containers; plates and meat trays;
and, polyethylene film products including can liners, produce and retail bags,
and medical and industrial disposable packaging.
In June 1996, Tenneco Packaging agreed to purchase Amoco Foam Products.
Amoco Foam Products, with 1995 sales of $288 million, manufactures foam
polystyrene tableware including cups, plates, carrying trays; hinged-lid food
containers; packaging trays, primarily for meat and poultry; and industrial
products for residential and commercial construction applications. The closing
of this acquisition was completed in August 1996.
International
Tenneco Packaging has a growing international presence with a revenue base
of nearly $200 million and an additional $100 million in export sales to 38
countries, manufacturing products that serve a wide range of packaging needs.
It expects to significantly enlarge its international operations by growing
its base businesses, strengthening its export capabilities for both fiber-
based and plastic products, and by growing selectively in new markets,
geographies or channels that represent high-potential opportunities.
Manufacturing and Engineering. Tenneco Packaging currently operates or has
an ownership interest in 15 international manufacturing locations. Omni-Pac is
Europe's leading manufacturer of molded fiber packaging with facilities in
Elsfleth, Germany and Great Yarmouth, England. Tenneco Packaging's Alupak
operation in Belp, Switzerland is a major producer of smoothwall aluminum
portion packs. In plastic, Tenneco Packaging has the leading share of single-
use thermoformed plastic food containers in the United Kingdom, with four
manufacturing operations in England, Scotland and Wales. Tenneco Packaging
also operates or has an ownership interest in two protective packaging
products facilities in Asherat, Israel and Tokyo, Japan.
Tenneco Packaging also operates a folding carton plant in Budapest, Hungary
and is building a wood products operation in Romania. It participates in
several international joint ventures, including folding carton plants in
Donngguan, China and Bucharest, Romania and a corrugated converting facility
in Zhejiang, China.
Acquisitions/Business Development. In 1995, Tenneco Packaging purchased
Penlea and Delyn, two plastic thermoforming operations in the United Kingdom.
In 1996, it entered the European wood products business with the startup of a
venture in Buchin, Romania. In addition to harvesting rights in excess of 1.8
million cubic meters of timber, Tenneco Packaging is constructing a wood
processing plant for value-added furniture components, to be supported by a
full sawmill operation.
Other
As of June 30, 1996, Tenneco Packaging had approximately 19,000 employees.
Tenneco Packaging believes that its relations with its employees are good.
Tenneco Packaging holds a number of domestic and foreign patents and
trademarks relating to its products and businesses. The patents, trademarks
and other intellectual property owned by Tenneco Packaging are important in
the manufacturing, marketing and distribution of its products.
The principal raw materials used by Tenneco Packaging in its manufacturing
operations are virgin pulp, recycled fiber, plastic resin and aluminum roll
stock. Tenneco Packaging obtains its virgin pulp from timberland owned or
controlled by it as well as from outside purchases. Recycled fiber is supplied
from both outside contractual sources as well as internally from its two
recycling centers and its own containerboard clippings and trim. Tenneco
Packaging obtains plastic resin and aluminum roll stock from various
suppliers.
83
<PAGE>
As of June 30, 1996, Tenneco Packaging owned approximately 188,000 acres of
timberland in Alabama, Michigan, Mississippi and Tennessee and leased, managed
or had cutting rights on an additional 808,000 acres of timberland in Alabama,
Mississippi, Tennessee, Florida, Wisconsin and Georgia. In 1995, 1994, and
1993, approximately 31%, 20% and 22%, respectively, of the virgin fiber used
by Tenneco Packaging in its mill operations was obtained from Tenneco
Packaging-controlled timberlands.
The operations of Tenneco Packaging face competition from other
manufacturers of packaging products, including manufacturers of alternative
products, in each of its geographic and product markets.
Tenneco Packaging is headquartered in Evanston, Illinois.
TENNECO BUSINESS SERVICES
TBS designs, implements and administers shared administrative service
programs for the various Tenneco businesses as well as, on an "as requested"
basis, for former Tenneco business entities.
Primary service areas of TBS include (i) Financial Accounting Services,
including asset management, general accounting, purchasing and payables,
travel and entertainment, tax compliance and reporting and other applications;
(ii) Supplier Development and Administration, including vendor negotiations
and contract administration; (iii) Employee Benefits Administration for all
major salaried and hourly benefit plans; (iv) Technology Services, including
main frame computing services, telecommunication services and distributed
processing services; (v) Human Resources and Payroll Services, including
payroll processing, relocation services, government compliance services and
expatriate relocation and repatriation services; and (vi) Environmental Health
and Safety Services, including remediation consultation, operations risk
analysis and compliance audits.
TBS has to date only serviced other Tenneco businesses and, on an as
requested basis, former Tenneco businesses such as the Case Corporation.
However, TBS is in the process of investigating opportunities to provide
similar services to outside businesses. It is anticipated that after the
Distributions, TBS will continue to provide services to Newport News and
Tenneco pursuant to the terms of the TBS Services Agreement. See "The
Distributions-- Relationships Among Tenneco, New Tenneco and Newport News
After the Distributions--Terms of the Ancillary Agreements--TBS Services
Agreement."
In connection with its operations, TBS holds numerous software licenses,
owns and operates computer equipment and has agreements with numerous vendors
for supplies and services.
As of June 30, 1996, TBS had approximately 300 employees. TBS believes that
its relations with its employees are good.
Although to date TBS has provided its administrative programs exclusively to
current and former Tenneco businesses, once TBS attempts to begin providing
similar services to outside businesses it will face intense competition from
other providers of administrative services, many of whom are larger and have
more experience providing administrative services in a competitive
environment.
TBS is headquartered in The Woodlands, Texas.
PROPERTIES
Corporate Headquarters
New Tenneco's corporate offices are located in Greenwich, Connecticut.
Tenneco Automotive
In the United States, Walker operates 10 manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities,
and also has two research and development facilities. In addition, Walker
operates 25 manufacturing facilities located in Australia, Canada, China, the
Czech Republic, the United Kingdom, Mexico, Denmark, Germany, France, Spain,
Portugal, South Africa and Sweden, and also has one engineering and technical
center in Germany.
84
<PAGE>
Monroe has seven manufacturing facilities and one research and development
facility and three distribution centers. In addition, Monroe has 13 foreign
manufacturing operations in Australia, Belgium, Brazil, Canada, China, the
Czech Republic, India, Mexico, the United Kingdom, Spain and New Zealand.
Overall, Tenneco Automotive now operates 66 facilities in 18 countries in
North America, Europe, South America, Australia and the Asia-Pacific region.
Tenneco Packaging
In North America, Tenneco Packaging operates or has an ownership interest in
a total of 122 facilities. The paperboard business group has 71 corrugated
products plants, six folding carton plants and nine containerboard machines at
four mills. Two of the mills (located in Georgia and Wisconsin), including
substantially all of the equipment associated with both mills, are leased from
third parties. Additionally, the paperboard business group operates a wood
products group including two hardwood facilities, one dimensional lumber
plant, one utility pole facility, one air drying facility for wood, and a
joint venture in a chip mill. Two recycled paperstock facilities provide
furnish for the mills. Tenneco Packaging also has a minority equity position
in two recycled paperboard mills and one recycling center and brokerage
operation.
In July 1996, Tenneco Packaging exercised its early termination and purchase
options under the leases of the two mills located in Georgia and Wisconsin
discussed above, pursuant to which Tenneco Packaging has the right to purchase
the mills at an agreed cost of approximately $750 million in January 1997.
Tenneco Packaging has reached an agreement in principle pursuant to which
another lessor will acquire the mills directly from Tenneco's original lessor
and thereafter enter into a five year lease (with an option to extend for five
years under terms to be negotiated) with Tenneco Packaging. This agreement is
subject to the completion of definitive documentation and the consent of the
original lessor to allow the assignment of Tenneco Packaging's rights under
the purchase option. In the event this new lease transaction is not
consummated, Tenneco Packaging would be required to complete the purchase of
both mills.
Tenneco Packaging's Specialty Products Group operates six molded fiber
plants, one pressed paperboard plant and 23 disposable plastic and aluminum
packaging products plants in North America.
Internationally, Tenneco Packaging operates or has an ownership position in
15 locations. These include three folding carton operations, one corrugated
container plant and a wood products operation. Additionally, it also
manufactures plastics products at four locations, aluminum portion packs at
one facility, molded fiber products at two locations, and protective packaging
products at two locations.
TBS
TBS operates out of its headquarters in The Woodlands, Texas, as well as
offices in Evanston, Illinois, Newport News, Virginia and Houston, Texas.
New Tenneco believes that substantially all of its plants and equipment are,
in general, well maintained and in good operating condition. They are
considered adequate for present needs and as supplemented by planned
construction are expected to remain adequate for the near future.
New Tenneco is of the opinion that it and its subsidiaries have generally
satisfactory title to the properties owned and used in their respective
businesses, subject to liens for current taxes and easements, restrictions and
other liens which do not materially detract from the value of such property or
the interests therein or the use of such properties in their businesses.
ENVIRONMENTAL MATTERS
New Tenneco estimates that its subsidiaries will make capital expenditures
for environmental matters of approximately $15 million in 1996 and that
capital expenditures for environmental matters will be approximately $71.4
million in the aggregate for the years 1996 through 2006.
85
<PAGE>
For information regarding environmental matters, see "--Legal Proceedings,"
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Note 14, "Commitments and Contingencies," to the Combined
Financial Statements of New Tenneco.
LEGAL PROCEEDINGS
On August 2, 1993, the U.S. Department of Justice filed suit against Tenneco
Packaging in the Federal District Court for the Northern District of Indiana,
alleging that wastewater from Tenneco Packaging's molded fiber products plant
in Griffith, Indiana, interfered with or damaged the Town of Griffith's
municipal sewage pumping station on two occasions in 1991 and 1993, resulting
in discharges by the Town of Griffith of untreated wastewater into a river.
Tenneco Packaging and the Department of Justice have executed a consent decree
which has been lodged with the court and published for public notice and
comment. New Tenneco believes that the resolution of this matter will not have
a material adverse effect on the financial condition or results of operations
of New Tenneco and its subsidiaries.
In 1993 and 1995 the U.S. Environmental Protection Agency (the "U.S. EPA")
issued notices of violation for particulate and opacity violations at the
three coal-fired boilers of the Rittman, Ohio paperboard mill (owned by
Tenneco Packaging until June 1996). Tenneco Packaging filed responses
disputing the alleged violations. Stack testing has demonstrated Tenneco
Packaging's compliance. In July 1996, Tenneco Packaging received a U.S. EPA
administrative complaint seeking a $126,997 penalty for alleged emissions
violations. Tenneco Packaging has filed its answer to the complaint. New
Tenneco believes that the resolution of this matter will not have a material
adverse effect on the financial condition or results of operations of New
Tenneco and its subsidiaries.
At July 1, 1996, New Tenneco had been designated as a potentially
responsible party in 13 "Superfund" sites. With respect to its pro rata share
of the remediation costs of certain sites, New Tenneco is fully indemnified by
third parties. With respect to certain other of these sites, New Tenneco has
sought to resolve its liability through settlements which provide for payments
of New Tenneco's allocable share of remediation costs. For the remaining
sites, New Tenneco has estimated its share of the remediation costs to be
between $3 million and $23 million or .003% to .020% of the total remediation
costs for those sites and has provided reserves that it believers are adequate
for such costs. Because the clean-up costs are estimates and are subject to
revision as more information becomes available about the extent of remediation
required, New Tenneco's estimate of its share of remediation costs could
change. Moreover, liability under the Comprehensive Environmental Response,
Compensation and Liability Act is joint and several, meaning that New Tenneco
could be required to pay in excess of its pro rata share of remediation costs.
New Tenneco's understanding of the financial strength of other potentially
responsible parties has been considered, where appropriate, in New Tenneco's
determination of its estimated liability. New Tenneco believes that the costs
associated with its current status as a potentially responsible party in the
Superfund or other waste sites referenced above will not be material to its
consolidated financial position or results of operations.
For additional information concerning environmental matters, see "--
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the caption "Environmental Matters" under Note 14, in the
Combined Financial Statements of New Tenneco.
New Tenneco and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. New Tenneco believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on New Tenneco's combined financial condition or
results of operations.
NEW TENNECO CREDIT FACILITY
In connection with the Debt Realignment, New Tenneco will enter into the New
Tenneco Credit Facility, which is presently expected to provide up to $1.75
billion of financing to New Tenneco on an unsecured basis. As described above
under "Debt and Cash Realignment," initial borrowings under the New Tenneco
Credit Facility will be made to finance, in part, those aspects of the Debt
Realignment which contemplate cash payments pursuant to a cash dividend
payable by New Tenneco to Tenneco. If the Transaction had been consummated on
June 30, 1996, on a pro forma basis, approximately $6 million would have been
outstanding under the New Tenneco Credit Facility upon consummation of the
Transaction. Remaining availability under the New Tenneco Credit Facility will
be used by New Tenneco for working capital, acquisitions and other corporate
purposes.
86
<PAGE>
MANAGEMENT
Board of Directors
Upon consummation of the Industrial Distribution, the New Tenneco Board of
Directors will consist of 11 members. Each director will serve for a term
expiring at the annual meeting of stockholders in the year indicated below and
until his or her successor shall have been elected and qualified. Pursuant to
the Restated Certificate of Incorporation of New Tenneco (the "Certificate"),
the New Tenneco Board of Directors is divided into three classes. Information
concerning the individuals who will serve as directors of New Tenneco as of
the Distribution Date is set forth below.
Term Expiring at the 1997 Annual Meeting of Stockholders (Class I)
MARK ANDREWS has been Chairman of Andrews Associates, Inc., a government
consulting firm, since February 1987. From 1963 to 1980, he served in the U.S.
House of Representatives, and from 1980 to 1986 he served in the U.S. Senate.
He is also a director of Union Storage Co. and Case Corporation. Mr. Andrews
is 70 years old and has been a director of Tenneco since 1987. He has served
as a member of the Compensation and Benefits Committee and the Nominating and
Management Development Committee of Tenneco, and will serve as a member of the
Compensation and Benefits Committee and the Nominating and Management
Development Committee of New Tenneco.
W. MICHAEL BLUMENTHAL has been a consultant to Lazard Freres & Co. L.L.C.,
an investment banking firm, since January 1995 and was a limited partner of
that firm from April 1990 through December 1994. Prior to that time he was
Chairman of Unisys Corporation, a manufacturer of business information
systems, and had been an executive officer of that company for more than five
years. He is also a director of Daimler-Benz InterServices (Debis) AG. Mr.
Blumenthal is 70 years old and has been a director of Tenneco since 1985. He
has served as a member and the Chairman of the Nomination and Management
Development Committee of Tenneco, and will serve as a member and the Chairman
of the Nomination and Management Development Committee of New Tenneco.
BELTON K. JOHNSON is engaged in farming, ranching and investments and has
pursued such interest for more than five years. He is also a director of AT&T
Corp. Mr. Johnson is 66 years old and has been a director of Tenneco since
1979. He has served as a member of the Executive Committee and the
Compensation and Benefits Committee of Tenneco, and will serve as a member of
the Executive Committee and the Compensation and Benefits Committee of New
Tenneco.
WILLIAM L. WEISS has been Chairman Emeritus of Ameritech Corporation, a
telecommunications and information services company, since 1994, formerly
serving as Chairman and Chief Executive Officer of that company for more than
five years. Mr. Weiss is a director of Abbott Laboratories, Inc., Merrill
Lynch & Co., Inc. and the Quaker Oats Company. Mr. Weiss is 67 years old and
has been a director of Tenneco since January 1994. He has served as a member
of the Audit Committee of Tenneco and will serve as a member of the Audit
Committee of New Tenneco.
Term Expiring at the 1998 Annual Meeting of Stockholders (Class II)
M. KATHRYN EICKHOFF has been President of Eickhoff Economics, Inc., a
consulting firm, since 1987. From 1985 to 1987 she was Associate Director for
Economic Policy for the U.S. Office of Management and Budget, and prior to
1985 was Executive Vice President and Treasurer of Townsend-Greenspan & Co.,
Inc., an economic consulting firm. She is also a director of AT&T Corp.,
Pharmacia & Upjohn, Inc. and Fleet N.A. Ms. Eickhoff is 57 years old and has
been a director of Tenneco since 1987. She has served as a member of the
Executive Committee, Audit Committee and Nominating and Management Development
Committee of Tenneco, and will serve as a member of the Executive Committee,
Audit Committee and Nominating and Management Development Committee of New
Tenneco. She previously served as a member of the Tenneco Board from 1982
until her resignation to join the Office of Management and Budget in 1985.
PETER T. FLAWN is a former President of The University of Texas at Austin,
having served in such capacity for more than five years preceding his
retirement in 1985. He is also a director of National Instruments Corp.,
87
<PAGE>
Harte-Hanks Communications, Inc., Global Marine Inc. and Input/Output, Inc.
Dr. Flawn is 70 years old and has been a director of Tenneco since 1980. He
has served as a member of the Executive Committee and is a member and the
Chairman of the Audit Committee of Tenneco, and will serve as a member of the
Executive Committee and as a member and Chairman of the Audit Committee of New
Tenneco.
JOHN B. MCCOY is Chairman and Chief Executive Officer of Banc One
Corporation, a bank holding company, and has served in that position since
1987, prior to which he was President of that company from 1983. He is a
director of Cardinal Health, Inc., the Federal Home Loan Mortgage Corporation,
and Ameritech Corporation. He also serves on the advisory council of the
American Bankers Association. Mr. McCoy is 53 years old and has been a
director of Tenneco since 1992. He has served as a member of the Compensation
and Benefits Committee of Tenneco, and will serve as a member of the
Compensation and Benefits Committee of New Tenneco.
DANA G. MEAD is Chairman and Chief Executive Officer of New Tenneco and has
served as an executive officer of Tenneco since April 1992, when he joined
Tenneco as Chief Operating Officer. Prior to joining Tenneco, Mr. Mead served
as an Executive Vice President of International Paper Company, a manufacturer
of paper, pulp and wood products, from 1988, and served as Senior Vice
President of that company from 1981. He is also a director of Alco Standard
Corporation, Baker Hughes Incorporated, Case Corporation and Textron Inc. Mr.
Mead is 60 years old and has been a director of Tenneco since April 1992. He
has served as a member and Chairman of the Executive Committee and an ex
officio member of the Audit, and Nominating and Management Development
Committees of Tenneco, and will serve as a member and Chairman of the
Executive Committee and as an ex officio member of the Audit and Nominating
and Management Development Committees of New Tenneco.
Term Expiring at the 1999 Annual Meeting of Stockholders (Class III)
HENRY U. HARRIS, JR., since 1992, has been Vice Chairman Emeritus of Smith
Barney Inc., an investment banking firm, and for more than five years prior to
which he served as an executive officer of that firm. Mr. Harris is 69 years
old and has been a director of Tenneco since 1968. He has served as a member
of the Executive Committee, Audit Committee and the Nominating and Management
Development Committee of Tenneco, and will serve as a member of the Executive
Committee, Audit Committee and the Nominating and Management Development
Committee of New Tenneco.
CLIFTON R. WHARTON, JR., served as Chairman and Chief Executive Officer of
Teachers Insurance and Annuity Association and the College Retirement Equities
Fund from 1987 to 1993 and as Deputy Secretary of State, U.S. Department of
State, from January to November of 1993. From 1978 to 1987 he served as
Chancellor of the State University of New York System. From 1970 to 1978 Mr.
Wharton served as President of Michigan State University. Prior to 1970 he
spent 22 years working in foreign economic and agricultural development in
Latin America and Southeast Asia for the Rockefeller family philanthropic
interests. He is also a director of the TIAA Board of Overseers, Ford Motor
Company, the New York Stock Exchange, Inc. and Harcourt General, Inc. Mr.
Wharton is 69 years old and has been a director of Tenneco since June 1994. He
has served as a member and Chairman of the Compensation and Benefits Committee
of Tenneco, and will serve as a member and Chairman of the Compensation and
Benefits Committee of New Tenneco.
SIR DAVID PLASTOW is Chairman of the Medical Research Council, which
promotes and supports research and post-graduate training in the biomedical
and other sciences. He served as Chairman of Inchcape plc from June 1992 to
December 1995 and Chairman and Chief Executive Officer of Vickers plc, an
engineering and manufacturing company headquartered in London, from January
1987 to May 1992. He is also a director of Lloyds TSB Group plc. Sir David
Plastow is 64 years old and has been a director of Tenneco since May 14, 1996.
He previously served as a member of the Tenneco Board from 1985 until his
resignation in 1992. He has served as a member of the Compensation and
Benefits Committee and Nominating and Management Development Committee of
Tenneco, and will serve as a member of the Compensation and Benefits Committee
and Nominating and Management Development Committee of New Tenneco.
88
<PAGE>
Executive Officers
The following table sets forth certain information concerning the persons
who have served as executive officers of Tenneco and, upon consummation of the
Industrial Distribution, will serve as executive officers of New Tenneco. Each
such person will be elected to the indicated office with New Tenneco in
anticipation of the Industrial Distribution and will serve at the discretion
of the New Tenneco Board of Directors. Those persons who have been officers
and/or employees of Tenneco and/or Newport News will relinquish such positions
in connection with the Industrial Distribution.
<TABLE>
<CAPTION>
EFFECTIVE DATE OF TERM
NAME (AND AGE AT JULY AS EXECUTIVE OFFICER
31, 1996) OFFICES HELD* OF TENNECO
- --------------------- ------------- ----------------------
<S> <C> <C>
Dana G. Mead (60)....... Chairman May 1994
Chief Executive Officer February 1994
Director April 1992
Chairman of the Executive Committee February 1994
Member of the Executive Committee May 1992
Theodore R. Tetzlaff General Counsel July 1992
(51)...................
Robert T. Blakely (54).. Executive Vice President May 1996
Chief Financial Officer July 1981
Stacy S. Dick (39)...... Executive Vice President January 1996
John J. Castellani (45). Senior Vice President--Government March 1995
Relations
Arthur H. House (54).... Senior Vice President--Corporate Affairs March 1995
Barry R. Schuman (55)... Senior Vice President--Human Resources March 1993
Kenneth D. Allen (57)... Vice President March 1987
David T. Ellis (43)..... Vice President--Environment, Health and July 1995
Safety
Ilene S. Gordon (43).... Vice President--Operations May 1994
Jack Lascar (42)........ Vice President--Investor Relations July 1994
Mark A. McCollum (37)... Vice President and Controller May 1995
Robert S. McKinney (54). Vice President and Chief Information Officer May 1996
Thomas G. Oakley (43)... Vice President May 1996
Karen R. Osar (47)...... Vice President and Treasurer January 1994
Robert G. Simpson (44).. Vice President--Tax May 1990
Stephen J. Smith (51)... Vice President--Human Resources July 1994
Karl A. Stewart (53).... Vice President May 1991
Secretary May 1986
R. A. Snell (54)........ President and Chief Executive Officer-- September 1993
Tenneco Automotive
Paul T. Stecko (51)..... President and Chief Executive Officer-- December 1993
Tenneco Packaging
</TABLE>
- --------
*Unless otherwise indicated, all offices held are with Tenneco.
Each of the executive officers of Tenneco has been continuously engaged in
the business of Tenneco, its subsidiaries, affiliates or predecessor companies
during the past five years except that: (i) from 1986 to 1992, Dana G. Mead
was employed by International Paper Co., last serving in the capacity of
Executive Vice President; (ii) Theodore R. Tetzlaff has been a partner in the
law firm of Jenner & Block, Chicago, for more than five years; (iii) from 1985
to 1992, Stacy S. Dick was employed by The First Boston Corporation, last
serving in the capacity of Managing Director and from August 1992 to January
1996 he served as Senior Vice President--Strategy of Tenneco; (iv) from 1980
to 1992, John J. Castellani was employed by TRW Inc., last serving in the
capacity of Vice President of Government Relations and from August 1992 to
March 1995 he served as Vice President--Government Relations of Tenneco; (v)
from 1988 until his employment by Tenneco in 1992, Barry R. Schuman was
employed by Union Pacific Railroad Company, last serving in the capacity of
Vice President of Human Resources; (vi) from 1990 until 1992, Arthur H. House
served as Vice President, Corporate Communications of Aetna Life & Casualty
Company; from June 1992 until March 1995, he served as Vice President--
Corporate Affairs of Tenneco; (vii) from 1990 to May 1996, Robert S. McKinney
was chief information officer and a member of the board of directors of Paine
Webber; (viii) from 1975 to 1994, Karen R.
89
<PAGE>
Osar was employed by J.P. Morgan & Co., Inc., last serving in the capacity of
Managing Director--Corporate Finance Group; (ix) from 1980 to 1994, Mark A.
McCollum was employed by Arthur Andersen LLP, last serving as an Audit Partner
and from January 1995 to May 1995 he served as Vice President--Financial
Analysis and Planning of Tenneco; and (x) from 1977 to 1993, Paul T. Stecko
was employed by International Paper Co., last serving as Vice President and
General Manager of Publications Papers, Bristols and Converting Papers.
Stock Ownership of Management
Set forth below is the ownership as of July 31, 1996 (without giving effect
to the Transaction) of the number of shares and percentage of Tenneco Common
Stock beneficially owned by (i) each director of New Tenneco, (ii) each of the
executive officers of New Tenneco whose names are set forth on the Summary
Compensation Table and (iii) all executive officers and directors of New
Tenneco.
<TABLE>
<CAPTION>
SHARES OF TENNECO COMMON PERCENT OF TENNECO COMMON
DIRECTORS STOCK OWNED(A)(B) STOCK OUTSTANDING
--------- ------------------------ -------------------------
<S> <C> <C>
Mark Andrews............ 5,398 (c)
W. Michael Blumenthal... 3,536 (c)
M. Kathryn Eickhoff..... 3,680 (c)
Peter T. Flawn.......... 3,850 (c)
Henry U. Harris, Jr..... 15,255 (c)
Belton K. Johnson....... 6,111 (c)
John B. McCoy........... 2,850 (c)
Dana G. Mead............ 199,284 (c)
Sir David Plastow....... 2,100 (c)
William L. Weiss........ 4,850 (c)
Clifton R. Wharton, Jr.. 2,350 (c)
<CAPTION>
EXECUTIVE OFFICERS
------------------
<S> <C> <C>
Theodore R. Tetzlaff.... 33,637 (c)
Robert T. Blakely....... 55,185 (c)
Stacy S. Dick........... 19,292 (c)
Paul T. Stecko.......... 28,137 (c)
All executive officers
and directors as a
group.................. 684,162(d) (c)
</TABLE>
- --------
(a) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
set forth in note (b) below) as set forth in this column, except for (i)
shares that are held in trust for each director and executive officer
under Tenneco's restricted stock plans and (ii) shares that executive
officers of New Tenneco have the right to acquire pursuant to Tenneco's
stock option plans. It is anticipated that all restricted stock held by
employees (including executive officers) will be vested prior to the
consummation of the Distributions except that a small number of TBS
employees will be given cash in lieu of vesting of their restricted stock.
It is also anticipated that restricted stock held by directors will be
vested prior to the consummation of the Distributions, and the directors
will be paid an amount in cash to defray taxes incurred on such vesting.
As described in footnote (f) to the Option Grant Table, it is anticipated
that Tenneco options held by New Tenneco employees will be replaced by
options to acquire New Tenneco Common Stock upon consummation of the
Industrial Distribution.
(b) Includes shares that are: (i) held in trust under Tenneco's restricted
stock plans; at July 31, 1996, Messrs. Mead, Tetzlaff, Blakely, Dick, and
Stecko held 24,500; 15,000; 7,775; 7,000; and 5,000 restricted shares,
respectively; and (ii) subject to options, which were granted under
Tenneco's stock option plans, and are exercisable at July 31, 1996 or
within 60 days of said date, for Messrs. Mead, Tetzlaff, Blakely, Dick,
and Stecko to purchase 133,335; 16,667; 16,259; 12,667; and 18,667 shares,
respectively.
(c) Less than one percent.
90
<PAGE>
(d) Includes 278,015 shares of Tenneco Common Stock that are subject to
options that are exercisable by all executive officers of New Tenneco as a
group, and includes 217,020 shares that are held in trust under the
Tenneco restricted stock plans, for all executive officers and directors
of New Tenneco as a group.
Committees of the Board of Directors
The New Tenneco Board of Directors will establish four standing committees
as permitted by the By-laws of New Tenneco, which will have the following
described responsibilities and authority:
The Audit Committee will have the responsibility, among other things, to (i)
recommend the selection of New Tenneco's independent public accountants, (ii)
review and approve the scope of the independent public accountants' audit
activity and extent of non-audit services, (iii) review with management and
such independent public accountants the adequacy of New Tenneco's basic
accounting system and the effectiveness of New Tenneco's internal audit plan
and activities, (iv) review with management and the independent public
accountants New Tenneco's certified financial statements and exercise general
oversight of New Tenneco's financial reporting process and (v) review with New
Tenneco litigation and other legal matters that may affect New Tenneco's
financial condition and monitor compliance with New Tenneco's business ethics
and other policies.
The Compensation and Benefits Committee will have the responsibility, among
other things, to (i) establish the salary rate of officers and employees of
New Tenneco and its subsidiaries, (ii) examine periodically the compensation
structure of New Tenneco and (iii) supervise the welfare and pension plans and
compensation plans of New Tenneco.
The Nominating and Management Development Committee will have the
responsibility, among other things, to (i) review possible candidates for
election to the New Tenneco Board of Directors and recommend a slate of
nominees for election as directors at New Tenneco's annual stockholders'
meeting, (ii) review the function and composition of the other committees of
the New Tenneco Board of Directors and recommend membership on such committees
and (iii) review the qualifications and recommend candidates for election as
officers of New Tenneco.
Other than matters assigned to the Compensation and Benefits Committee, the
Executive Committee will have, during the interval between the meetings of New
Tenneco Board of Directors, the authority to exercise all the powers of the
New Tenneco Board of Directors that may be delegated legally to it by the New
Tenneco Board in the management and direction of the business and affairs of
New Tenneco.
Executive Compensation
Prior to the Industrial Distribution, the Industrial Business was owned and
operated by Tenneco through its direct and indirect subsidiaries and as such,
the management of New Tenneco has been employed by Tenneco and its direct and
indirect subsidiaries. The following table sets forth the remuneration paid by
Tenneco and/or its direct and indirect subsidiaries (i) to the Chairman of the
Board and Chief Executive Officer of New Tenneco and (ii) to each of the four
key executive officers expected to be the most highly compensated executive
officers of New Tenneco, other than the Chief Executive Officer, whose salary
and bonus exceeded $100,000, for the years indicated in connection with his
position with Tenneco:
91
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
RESTRICTED
NAME AND OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY(A) BONUS COMPENSATION(B) AWARDS(C) OPTIONS COMPENSATION(D)
------------------ ---- --------- -------- --------------- ---------- ------- --------------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dana G. Mead 1995 $957,375 $800,000 $143,970 -- 100,000(e) $149,972(f)
Chairman and Chief 1994 $878,177 $900,000 $149,110 $647,256 100,000 $142,966
Executive Officer 1993 $664,839 $700,000 $ 60,007 $582,813 50,000 $ 93,979
Theodore R. Tetzlaff 1995 $400,000 $350,000 $ 14,400 -- 18,000(e) -- (f)
General Counsel 1994 $400,000 $300,000 $ 307 $539,380 16,000 --
1993 $350,000 $250,000 -- $243,440 -- --
Robert T. Blakely 1995 $422,760 $230,000 $ 33,684 -- 16,000 $ 44,570
Executive Vice President 1994 $407,640 $230,000 $ 10,704 $230,585 15,675 $ 44,144
and Chief Financial 1993 $393,846 $200,000 $ 11,288 $163,188 -- $ 49,616
Officer
Stacy S. Dick 1995 $377,736 $280,000 $ 31,317 -- 14,000 $ 31,432
Executive Vice President 1994 $343,560 $235,000 $ 582 $215,752 12,000 $ 24,926
1993 $325,214 $200,000 $ 95,392 $139,875 -- $ 23,744
Paul T. Stecko 1995 $381,545 $300,000 $ 21,027 -- 24,000 $ 31,974
President and Chief 1994 $320,004 $200,000 $200,724 $269,690 16,000 $ 30,605
Executive Officer 1993 $ 23,188 $500,000 -- -- -- --
Tenneco Packaging
</TABLE>
- --------
(a) Includes base salary plus amounts paid in lieu of Tenneco matching
contributions to the Tenneco Thrift Plan.
(b) Includes amounts attributable to (i) the value of personal benefits
provided by Tenneco to its executive officers, which have an aggregate
value in excess of $50,000, such as the personal use of Tenneco owned
property, membership dues, and assistance provided to such person with
regard to financial, tax and estate planning, (ii) reimbursement for taxes
and (iii) amounts paid as dividend equivalents on performance share
equivalent units ("Dividend Equivalents"). The amount of each such
personal benefit that exceeds 25% of the estimated value of the total
personal benefits provided by Tenneco, reimbursement for taxes and amounts
paid as Dividend Equivalents to the individuals named in the table was as
follows: During 1995: $38,984 for use of Tenneco owned property, $29,750
for financial planning services, $28,706 for reimbursement for taxes, and
$40,000 in Dividend Equivalents paid to Mr. Mead; $4,437, $16,917 and
$1,827 for reimbursement for taxes and $14,400, $14,400 and $19,200 in
Dividend Equivalents for Messrs. Blakely, Dick, and Stecko, respectively;
and $14,400 in Dividend Equivalents paid to Mr. Tetzlaff; During 1994:
$57,540 for use of Tenneco owned property and $50,606 for reimbursement
for taxes for Mr. Mead; $100,794 in relocation expenses and $59,954 in
reimbursement for taxes for Mr. Stecko; and $307, $582, and $582 for
reimbursement for taxes for Messrs. Tetzlaff, Blakely, and Dick,
respectively; During 1993: $34,832 for use of Tenneco owned property,
$19,950 for financial planning services and $824 for reimbursement for
taxes for Mr. Mead; $823 for reimbursement for taxes for Mr. Blakely; and
$50,000 in relocation expenses and $35,266 for reimbursement for taxes for
Mr. Dick.
(c) Includes the dollar value of grants of restricted stock made pursuant to
Tenneco's restricted stock plans based on the price of Tenneco Common
Stock on the date of grant. At December 31, 1995, Messrs. Mead, Tetzlaff,
Blakely, Dick and Stecko held 49,500; 24,000; 20,280; 31,000; and 17,000
restricted shares and/or performance share equivalent units, respectively,
under such plans. The value at December 31, 1995 (based on a per share
price of $49.625 on that date) of all restricted shares and/or performance
share equivalent units held was $2,456,438 for Mr. Mead; $1,191,000 for
Mr. Tetzlaff; $1,006,395 for Mr. Blakely;
92
<PAGE>
$1,538,375 for Mr. Dick; and $843,625 for Mr. Stecko. Dividends/Dividend
Equivalents will be paid on the restricted shares and performance share
equivalent units held by each individual.
(d) Includes amounts attributable during 1995 to benefit plans of Tenneco as
follows:
(i) The amounts contributed pursuant to the Tenneco Thrift Plan for the
accounts of Messrs. Mead, Blakely, Dick, and Stecko were $4,625;
$9,240; $4,626; and $6,000, respectively.
(ii) The amounts accrued under the Tenneco Inc. Deferred Compensation Plan,
together with adjustments based upon changes in the Consumer Price
Index for All Urban Households, as computed by the Bureau of Labor
Statistics, for Messrs. Mead, Blakely, Dick, and Stecko were $108,405;
$32,167; $23,764; and $23,132, respectively.
(iii) Amounts imputed as income for federal income tax purposes under
Tenneco's group life insurance plan for Messrs. Mead, Blakely, Dick,
and Stecko were $36,942; $3,163; $3,041; and $2,842, respectively.
(e) In addition to the options granted by Tenneco in 1995, Messrs. Mead and
Tetzlaff, each in his capacity as a director of Case Corporation (an
affiliate of Tenneco during 1995) ("Case"), was granted an option by Case
to acquire 1,000 shares of Case common stock. Information on terms of
Tenneco options and the Case options is set forth in "Option Grants in
1995."
(f) As directors of Case, Messrs. Mead and Tetzlaff each received a director's
fee of $20,000 and meeting attendance fees of $4,000. In addition, Mr.
Tetzlaff received from Case an additional $3,000 for attendance at the
Case Compensation Committee meetings. Messrs. Mead and Tetzlaff elected to
receive their director fees in common stock of Case. The amounts in the
above table do not include the payments from Case.
OPTION GRANTS IN 1995
The following table sets forth the number of options to acquire Tenneco
Common Stock that were granted by Tenneco during 1995 to the persons named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(D)
--------------------------------------------------------- ---------------------
% OF TOTAL EXERCISE
OPTIONS OR BASE
OPTIONS GRANTED GRANTED TO PRICE
(NO. OF EMPLOYEES PER
NAME SHARES)(A)(B)(F) IN FISCAL YEAR SHARE(C) EXPIRATION DATE 5% 10%
---- ---------------- -------------- -------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dana G. Mead............ 100,000(e) 6.7% $42.875 January 10, 2005 $2,696,000 $6,833,000
Theodore R. Tetzlaff.... 18,500(e) 1.2% $42.875 January 10, 2005 $ 485,280 $1,229,940
Robert T. Blakely....... 16,000 1.1% $42.875 January 10, 2005 $ 431,360 $1,093,280
Stacy S. Dick........... 14,000 .9% $42.875 January 10, 2005 $ 377,440 $ 956,620
Paul T. Stecko.......... 24,000 1.6% $42.875 January 10, 2005 $ 647,040 $1,639,920
</TABLE>
- --------
(a) The options reported in this column and in the Summary Compensation Table
consist of non-qualified options. The options become exercisable at the
rate of one-third per year on January 10 of 1996, 1997 and 1998,
respectively. As described in footnote (f) below, it is anticipated that
Tenneco options held by New Tenneco employees will be replaced by options
to acquire New Tenneco Common Stock upon consummation of the Industrial
Distribution.
(b) These options provide that a grantee who delivers shares of Tenneco Common
Stock to pay the option exercise price will be granted, upon such delivery
and without further action by Tenneco, an additional option to purchase
the number of shares so delivered. These "reload" options are granted at
100% of the fair market value (as defined in the plan) on the date they
are granted, become exercisable six months from that date and expire
coincident with the options they replace. Grantees are limited to 10
reload options and the automatic grant of such reload options is limited
to twice during any one calendar year.
93
<PAGE>
(c) All options were granted at 100% of the fair market value on the date of
grant.
(d) The dollar amounts under these columns are the result of calculations for
the period from the date of grant to the expiration of the option at the
5% and 10% annual appreciation rates set by the Commission and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of Tenneco Common Stock. No gain to the optionee is possible without
an increase in price of the underlying stock. In order to realize the
potential values set forth in the 5% and 10% columns of this table, the
per share price of Tenneco Common Stock would be $69.84 and $111.21,
respectively, or 63% and 160%, respectively, above the exercise or base
price. As described in footnote (f) below, however, it is anticipated that
options to acquire Tenneco Common Stock held by New Tenneco employees will
be replaced by options to acquire New Tenneco Common Stock upon
consummation of the Industrial Distribution.
(e) In addition, Messrs. Mead and Tetzlaff, each in his capacity as a director
of Case, were granted an option to purchase 1,000 shares of Case common
stock at a purchase of $21.125 per share. These options, which are each
less than 1% of the total options granted by Case to employees in 1995,
become exercisable on January 1, 1998 and expire January 1, 2005. The
potential realizable value, calculated for the period from the date of
grant to the expiration of the respective option, at 5% and 10% assumed
annual rates of stock price appreciation for the term of the options would
be $13,285 and $33,665, respectively. In order to realize these potential
values, the per share price of the Case common stock would be $34.41 and
$54.79, respectively, or 63% and 160%, respectively, above the exercise or
base price. The 5% and 10% annual appreciation rates are not intended to
forecast possible future appreciation, if any, in the price of Case common
stock. No gain to the optionee is possible without an increase in the
price of the Case common stock.
(f) All Tenneco stock options held by employees of New Tenneco will be
cancelled as of the Industrial Distribution. New Tenneco has adopted a
plan (the "New Tenneco Stock Ownership Plan") which is substantially
similar to the 1994 Tenneco Inc. Stock Ownership Plan. Prior to the
Industrial Distribution, Tenneco will have approved New Tenneco Stock
Ownership Plan as the sole shareholder of New Tenneco. Options will be
granted under New Tenneco Stock Ownership Plan as of the Industrial
Distribution to all employees of New Tenneco who formerly held Tenneco
options. Each such employee will receive options of New Tenneco under
which the excess of the fair market value of the shares subject to the
options immediately after the grant over the aggregate option price is not
more than the excess of the aggregate fair market value of all Tenneco
shares subject to his or her Tenneco stock options immediately before such
cancellation over the aggregate option price under such Tenneco options.
The terms of New Tenneco options will be the same as if the Tenneco
options had remained outstanding except to the extent that New Tenneco
Stock Ownership Plan reflects legal changes adopted after the Tenneco
options were granted. These options provide that a grantee who delivers
shares of New Tenneco Common Stock to pay the option exercise price will
be granted, upon such delivery and without further action by New Tenneco,
an additional option to purchase the number of shares so delivered. These
"reload" options are granted at 100% of the fair market value (as defined
in New Tenneco Stock Ownership Plan) on the date they are granted, become
exercisable six months from that date and expire at the same time as the
options they replace. Grantees are limited to 10 reload options and
automatic grant of such reload options is limited to twice during any one
calendar year.
94
<PAGE>
OPTIONS EXERCISED IN 1995 AND 1995 YEAR-END VALUES
The following table sets forth the number of options to acquire Tenneco
Common Stock held, as of December 31, 1995, by the persons named in the
Summary Compensation Table. No options to acquire shares of Tenneco Common
Stock were exercised during 1995.
<TABLE>
<CAPTION>
TOTAL NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
AT DECEMBER 31, 1995(A) AT DECEMBER 31, 1995(A)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dana G. Mead................ 66,667 183,333 $31,233 $690,617
Theodore R. Tetzlaff........ 5,334 28,666 -- $121,500
Robert T. Blakely........... 5,700 26,450 $ 4,038 $108,000
Stacy S. Dick............... 4,000 22,000 -- $ 94,500
Paul T. Stecko.............. 5,344 34,666 -- $162,000
</TABLE>
- --------
(a) As described in footnote (f) to the Option Grant Table, the options to
acquire Tenneco Common Stock will be replaced by options to acquire New
Tenneco Common Stock.
LONG-TERM INCENTIVE PLANS
PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN LAST FISCAL YEAR
The following table sets forth information concerning performance based
awards made to the persons named in the Summary Compensation Table during 1995
by Tenneco.
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
NUMBER OF PERIOD
SHARES, UNTIL ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR MATURATION NON-STOCK PRICE BASED PLANS(A)
OTHER OR ---------------------------------
NAME RIGHTS(B) PAYOUT(C) THRESHOLD(D) TARGET(D) MAXIMUM(D)
---- --------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Dana G. Mead............ 25,000 4 years -- 12,500 25,000
Theodore R. Tetzlaff.... 9,000 4 years -- 4,500 9,000
Robert T. Blakely....... 9,000 4 years -- 4,500 9,000
Stacy S. Dick........... 9,000 4 years -- 4,500 9,000
Paul T. Stecko.......... 12,000 4 years -- 6,000 12,000
</TABLE>
- --------
(a) Estimated Future Payouts are based on earnings per share ("EPS") from
continuing operations as shown in the record of progress included in the
published financial statements of Tenneco. Earnings per share for 1995
were $4.16 and represent achievement of 25% of the performance goal
applicable to this award. Messrs. Mead, Tetzlaff, Blakely, Dick, and
Stecko each were provisionally credited with 100% of their performance
goal for 1995 and 6,250; 2,250; 2,250; 2,250; and 3,000 shares were
credited to their respective Plan accounts, subject to adjustment, for
payout at the end of the performance cycle.
(b) Each performance share equivalent unit represents one share of Tenneco's
Common Stock that may be earned under this award and the number of
performance share equivalent units listed in this column represents the
maximum number of performance share equivalent units that may be earned
under this award.
(c) Performance share equivalent units are earned at the rate of 25% per year
based on achievement of annual EPS goals. However, it is anticipated that
prior to the consummation of the Industrial Distribution the conditions to
issuance of all shares of Tenneco Common Stock underlying the performance
share unit equivalent awards will be waived and the maximum number of
shares of Tenneco Common Stock subject thereto will be issued.
(d) Represents maximum performance share equivalent units earned where the
goals were consistently within the indicated performance range on an
individual year and accumulated four year basis.
The following table sets forth the aggregate estimated annual benefits
payable upon normal retirement pursuant to New Tenneco's Retirement Plan (the
"Retirement Plan"), Benefit Equalization Plan (the "Benefit Equalization
Plan"), and Supplemental Executive Retirement Plan (the "Supplemental
Executive Retirement Plan") to persons in specified remuneration and years of
credited participation classifications. All of the plans listed in the
preceding sentence were adopted by New Tenneco. Under the Distribution
Agreement and the
95
<PAGE>
Benefits Agreement, New Tenneco will continue to sponsor those plans, but all
other entities will cease to sponsor them, and the benefits that the employees
of such entities have accrued under those plans will be frozen.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED PARTICIPATION
----------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 350,000 $ 82,500 $110,000 $137,500 $ 165,000 $ 192,500
400,000 94,300 125,700 157,100 188,600 220,000
450,000 106,100 141,400 176,800 212,100 247,500
500,000 117,900 157,100 196,400 235,700 275,000
550,000 129,600 172,900 216,100 259,300 302,500
600,000 141,400 188,600 235,700 282,900 330,000
650,000 153,200 204,300 255,400 306,400 357,000
700,000 165,000 220,000 275,000 330,000 365,000
750,000 176,800 235,700 294,600 353,600 412,500
800,000 188,600 251,400 314,300 377,100 440,000
850,000 200,400 267,100 333,900 400,700 467,500
900,000 212,100 282,900 353,600 424,300 495,000
950,000 223,900 298,600 373,200 447,900 522,500
1,000,000 235,700 314,300 392,900 471,400 550,000
1,100,000 259,300 345,700 432,100 518,600 605,000
1,200,000 282,900 377,100 471,400 565,700 660,000
1,300,000 306,400 408,600 510,700 612,900 715,000
1,400,000 330,000 440,000 550,000 660,000 770,000
1,500,000 353,600 471,400 589,300 707,100 825,000
1,600,000 377,100 502,900 628,600 754,300 880,000
1,700,000 400,700 534,300 667,900 801,400 935,000
1,800,000 424,300 565,700 707,100 848,600 990,000
1,900,000 447,900 597,100 746,400 895,700 1,045,000
2,000,000 471,400 628,600 785,700 942,900 1,100,000
2,100,000 495,000 660,000 825,000 990,000 1,155,000
2,200,000 518,600 691,400 864,300 1,037,100 1,210,000
</TABLE>
The benefits set forth above are computed as a straight life annuity and are
based on years of credited participation in the Retirement Plan and the
employee's average base salary during the final five years of credited
participation in the Plan; such benefits are not subject to any deduction for
Social Security or other offset amounts. The years of credited participation
under the Retirement Plan (or any supplemental plan) For Messrs. Mead,
Blakely, Dick and Stecko are 3, 14, 3 and 2, respectively. (See the paragraph
below for additional information relating to Messrs. Mead, Dick and Stecko;
and the "Summary Compensation Table" for salary and bonus information for
Messrs. Mead, Blakely, Dick and Stecko).
Pursuant to employment agreements with Messrs. Mead, Dick and Stecko
described under the heading "Employment Contracts and Termination of
Employment and Change-in-Control Arrangement" New Tenneco has agreed to pay
Messrs. Mead, Dick and Stecko such supplemental payments (in addition to any
benefits payable under New Tenneco's qualified and non-qualified pension
plans) as may be necessary to make each person's total payments equal to the
amount each would have received had he continued to be covered under pension
plans maintained by his former employer (based on his credited service with
New Tenneco plus 14.6, 15 and 17 years, respectively, of credited service with
each person's former employer, and on the compensation received from New
Tenneco as salary and bonuses).
96
<PAGE>
New Tenneco provides Mr. Tetzlaff with an individual pension benefit. The
benefit is based on Mr. Tetzlaff's salary and bonus and also provides for
guaranteed graduated minimum annual benefits of $100,000 beginning in 1998,
$200,000 per year beginning in 2003 and $300,000 per year beginning in 2008
(See "Summary Compensation Table" for salary and bonus information on Mr.
Tetzlaff).
Compensation of Directors
Following the Industrial Distribution, all directors who are not also
officers of New Tenneco or its subsidiaries will each be paid a director's fee
of $32,000 per annum and receive 300 restricted shares of New Tenneco Common
Stock (discussed below) and each will be paid an attendance fee of $1,500 plus
expenses for each meeting of the New Tenneco Board of Directors attended. Each
director who serves as a Chairman of the Audit, Compensation and Benefits, or
Nominating and Management Development Committees of New Tenneco Board will be
paid an additional fee of $7,000 per Chairmanship, and directors who serve as
members of such committees will be paid an additional fee of $4,000 per
committee membership. Members of the Executive Committee will receive an
additional $1,500 attendance fee plus expenses for each meeting of that
committee attended. Payment of all or a portion of such fees, together with
interest and an adjustment based upon changes in the Consumer Price Index For
All Urban Households as computed by the Bureau of Labor Statistics, may be
deferred at the election of the director until the earliest of (i) the year
next following the date upon which he or she ceases to be a director of New
Tenneco or (ii) the year selected by the director for commencement of payment
of the deferred amount. The foregoing compensation structures and amounts are
the same as currently apply to the Tenneco Board of Directors.
During 1995, Tenneco had a retirement plan for directors who are not also
officers of New Tenneco which provided retirement payments based on years of
service and the aggregate amount of director and committee fees being received
at the time of retirement. Prior to the Industrial Distribution, Tenneco
eliminated this retirement plan, and increased the amount of restricted stock
each director will receive each year in conjunction with their annual
directors' fees. Messrs. Flawn, Harris and Johnson are vested under this prior
retirement plan and, therefore, have the option to continue under such plan
and to receive monthly payments upon retirement. This plan will be assumed by
New Tenneco.
Directors who are not also officers of New Tenneco will receive annually 300
restricted shares of New Tenneco Common Stock. Such restricted shares may not
be sold, transferred, assigned, pledged or otherwise encumbered and are
subject to forfeiture should the director cease to serve on the New Tenneco
Board of Directors prior to the expiration of the restricted period that ends
upon such director's normal retirement from the New Tenneco Board of
Directors, unless such director is disabled, dies, or the Compensation and
Benefits Committee of the New Tenneco Board of Directors, at its discretion,
determines otherwise. During such restricted period, holders of restricted
shares are entitled to vote the shares and receive dividends.
It is anticipated that restricted shares of Tenneco Common Stock held by
directors will be vested prior to the consummation of the Distributions, and
the directors will be paid an amount in cash to defray taxes incurred on such
vesting.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Tenneco has an employment agreement and a supplemental pension agreement
with Mr. Mead which will be continued by New Tenneco providing for the payment
to Mr. Mead of a salary of not less than $575,000 per year (with such
increases as determined by the Compensation and Benefits Committee of the New
Tenneco Board of Directors) and the supplemental pension payments described
above. Also, New Tenneco has agreed that in the event Mr. Mead's employment is
terminated for any reason other than for cause, death or permanent disability,
New Tenneco will pay to Mr. Mead an amount equal to three times his annual
salary plus $300,000.
Tenneco also has an employment agreement with Mr. Dick which will also be
continued by New Tenneco providing for the payment to Mr. Dick of a salary of
not less than $325,000 per year (with such increases as
97
<PAGE>
determined by the Compensation and Benefits Committee of the New Tenneco Board
of Directors). Also, New Tenneco has agreed that in the event Mr. Dick's
employment is terminated for any reason other than for cause, death or
permanent disability, New Tenneco will pay to Mr. Dick an amount equal to his
annual salary.
New Tenneco has an employment agreement with Mr. Stecko which will also be
continued by New Tenneco providing for the payment to Mr. Stecko of a salary
of not less than $320,000 per year (with such increases as determined by the
Compensation and Benefits Committee of the New Tenneco Board of Directors).
Mr. Stecko is entitled to reimbursement for the cost of financial and estate
planning up to $20,000 per year and to be provided a country club membership
related to his performance as President and CEO of Tenneco Packaging. New
Tenneco has also agreed that, in the event Mr. Stecko's employment is
terminated for any reason other than for cause, death or permanent disability,
New Tenneco will pay to Mr. Stecko an amount equal to three times his base
salary and will purchase his home in accordance with New Tenneco's home
purchase program. Additionally, in the event Mr. Stecko's employment is
terminated within 3 years of the date of a change in control of Tenneco
Packaging, New Tenneco will pay Mr. Stecko an amount equal to three times his
base salary. The Transaction is not deemed to constitute a change in control
of Tenneco Packaging under Mr. Stecko's employment agreement.
New Tenneco will succeed to sponsorship of the Tenneco Benefits Protection
Program (the "Benefits Protection Program") established by Tenneco to enable
New Tenneco to continue to attract, retain and motivate highly qualified
employees by eliminating (to the maximum practicable extent) any concern on
the part of such employees that their job security or benefit entitlements
will be jeopardized by a "Change-in-Control" of New Tenneco (as such term is
defined in the Benefits Protection Program). The Benefits Protection Program
is designed to achieve this purpose through (i) the establishment of a
severance plan for the benefit of certain employees and officers whose
position is terminated under certain circumstances following such Change-in-
Control and (ii) the establishment of a trust fund designed to ensure the
payment of benefits accrued under certain plans. Under the Benefits Protection
Program, Messrs. Mead, Tetzlaff, Blakely, Dick and Stecko would have become
entitled to receive payments from New Tenneco in the amount of $5,175,000;
$2,151,000; $1,860,000; $1,839,000; and $1,980,000, respectively, had their
position been terminated on December 31, 1995, and, in addition, restricted
shares held in the name of such individuals under Tenneco's restricted stock
plans would have automatically reverted to Tenneco, and Tenneco would have
been obliged to pay such individuals the fair market value thereof all as
provided by such plans. The performance share equivalent units would also have
been fully vested and paid. The Transaction is not deemed to constitute a
"Change in Control" for purposes of the Benefits Protection Program.
Transactions with Management and Others
During 1995 Tenneco and its subsidiaries paid the law firm of Jenner &
Block, of which Theodore R. Tetzlaff, General Counsel of Tenneco, is a
partner, approximately $9.4 million for legal services (pursuant to an
agreement with Tenneco, Mr. Tetzlaff has agreed to devote whatever time is
necessary to attend to the responsibilities of General Counsel of Tenneco, and
will not receive from Jenner & Block any part of the fees paid by Tenneco to
that firm during such period he serves as General Counsel); and paid the firm
Eickhoff Economics, Inc., of which Ms. Eickhoff is the sole owner,
approximately $31,000 for financial consulting services. All such transactions
discussed above were in the ordinary course of business.
Tenneco and certain of its subsidiaries held, as of December 31, 1995,
approximately 21% of the outstanding common stock of Case, of which Mr. Mead
is a director. During 1995, Tenneco received payments from Case of
approximately $8.6 million in fixed charges for administrative and other
services provided to Case by Tenneco and its subsidiaries. Additionally, a
subsidiary of Tenneco paid Case approximately $11.8 million for retail
receivable services. The fee for such services is based on the amount of
outstanding receivables. Tenneco and Case have an agreement which provides for
the allocation of obligations for income and franchise taxes with respect to
Case and its subsidiaries for years preceding the 1994 reorganization and
public offering of Case common stock.
98
<PAGE>
During fiscal year 1995, Barry R. Schuman and Karl A. Stewart, executive
officers of Tenneco, each were indebted to Tenneco. The largest aggregate
amount outstanding during 1995 for each of Messrs. Schuman and Stewart was
approximately $401,000 and, as of February 29, 1996, approximately $403,000
was outstanding. Such indebtedness was incurred in connection with relocation
of such persons and all amounts outstanding are secured by a subordinated
mortgage note which accrues interest at the rate of 3% per year on the unpaid
balance and matures at the earlier of the individual's termination of
employment or the year 2026. Principal is payable in full at maturity and the
payment of interest has been deferred for 1995.
Transactions involving Mr. McCoy are set out below under the caption
"Compensation Committee Interlocks and Insider Participation."
Compensation Committee Interlocks and Insider Participation
Messrs. Andrews, Johnson, McCoy and Wharton are members of the Compensation
and Benefits Committee of the Tenneco Board of Directors and each will serve
as members of the Compensation and Benefits Committee of the New Tenneco Board
of Directors.
During 1995, an investment fund, of which a subsidiary of Tenneco owns 50%,
paid approximately $558,000 to a subsidiary of Banc One Corporation, of which
Mr. McCoy is a director and an executive officer, under a line of credit in an
amount of approximately $10 million under which approximately $9.4 million is
outstanding. Such line of credit is guaranteed 80% by a subsidiary of Tenneco
and is due to mature in 1997. All such transactions involving Banc One
Corporation were in the ordinary course of business.
Benefit Plans Following the Industrial Distribution
As described above, New Tenneco will succeed to sponsorship of two plans
qualified under Section 401(a) of the Code, the Tenneco Retirement Plan and
the Tenneco Thrift Plan. The Tenneco Retirement Plan is a defined benefit
pension plan. The Tenneco Thrift Plan is a 401(k) plan with an employer
matching contribution. New Tenneco will also succeed to sponsorship of the
Tenneco Supplemental Executive Retirement Plan and Tenneco Benefit
Equalization Plan, both of which are non-qualified plans designed to provide
covered individuals with benefits which they would receive under the Tenneco
Retirement Plan absent legal limitations. New Tenneco will also succeed to
sponsorship of the Tenneco Benefits Protection Program as well as the Tenneco
Inc. Deferred Compensation Plan and 1993 Deferred Compensation Plan, both of
which are non-qualified deferred compensation plans.
Prior to the consummation of the Industrial Distribution, New Tenneco will
adopt the New Tenneco Stock Ownership Plan, which will be approved by Tenneco
as the sole stockholder of New Tenneco. The New Tenneco Stock Ownership Plan
will be substantially similar to the Tenneco Inc. 1994 Stock Ownership Plan
and will provide for the grant of stock options, restricted stock, performance
shares and other forms of awards. New Tenneco will adopt, and Tenneco will
approve as its sole stockholder, an employee stock purchase plan which will be
substantially similar to the Tenneco employee stock purchase plan.
99
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of New
Tenneco as of June 30, 1996, and unaudited pro forma capitalization as of June
30, 1996, after giving effect to the transactions described in the "Unaudited
Pro Forma Combined Financial Statements" of New Tenneco. The capitalization of
New Tenneco should be read in conjunction with the Combined Financial
Statements of New Tenneco, and notes thereto, the "Combined Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of New Tenneco, each contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NEW TENNECO
---------------------
JUNE 30, 1996
---------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Allocated from Tenneco........................... $ 523(a) $ --
Other............................................ 7 13
------ ------
530 13
------ ------
Long-term debt:
Allocated from Tenneco........................... 1,510(a) --
New Securities................................... -- 2,069(b)
Other............................................ 63 63
------ ------
1,573 2,132
------ ------
Minority interest................................. 301 301
------ ------
Common stock...................................... -- 2
Paid-in capital................................... -- 2,986
Retained earnings................................. -- --
Combined equity................................... 2,168 --
------ ------
Total equity.................................... 2,168 2,988
------ ------
Total capitalization.............................. $4,572 $5,434
====== ======
</TABLE>
- --------
(a) Includes debt allocated to New Tenneco from Tenneco based on the portion of
Tenneco's investment in New Tenneco which is deemed to be debt, generally
based on the portion of New Tenneco's net assets to Tenneco's consolidated
net assets plus debt. Tenneco's historical practice has been generally to
incur indebtedness for its consolidated group at the parent company level
or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt is reasonable;
however, it is not necessarily indicative of New Tenneco's debt upon
completion of the Debt Realignment, nor debt that may be incurred by New
Tenneco as a separate public entity.
(b) Represents the $1,950 million aggregate principal amount of New Securities
assumed to be exchanged pursuant to the Exchange Offers, which will be
recorded based on the fair value of the New Securities (estimated to be
$2,069 million) upon consummation of the Exchange Offers. At this time, New
Tenneco and Tenneco cannot determine the ultimate amount of Old Securities
which will be exchanged by Tenneco Public Debt holders into New Securities
pursuant to the Exchange Offers and such amount could vary significantly.
For purposes of the pro forma capitalization, it is assumed that 100% of
the Old Securities are exchanged for New Securities pursuant to the
Exchange Offers.
100
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Balance Sheet of New Tenneco as
of June 30, 1996 and the Unaudited Pro Forma Combined Statements of Income for
the six months ended June 30, 1996 and the year ended December 31, 1995 have
been prepared to reflect: (i) the acquisition of Clevite in July 1996 and the
acquisition of Amoco Foam Products in August 1996; (ii) the effect on New
Tenneco of the Cash Realignment and Debt Realignment (including the Exchange
Offers); (iii) the effect on New Tenneco of the Corporate Restructuring
Transactions and other transactions pursuant to the provisions of the
Distribution Agreement and Merger Agreement; and (iv) the issuance of New
Tenneco Common Stock as part of the Industrial Distribution. The "Combined
Acquisitions" caption in the Unaudited Pro Forma Combined Statement of Income
for the year ended December 31, 1995 also reflects the pro forma results of
operations of Mobil Plastics prior to its acquisition in November 1995.
The acquisitions of Clevite and Amoco Foam Products have been included in
the accompanying Unaudited Pro Forma Combined Financial Statements for the
respective periods under the caption "Combined Acquisitions." The Combined
Acquisitions have been accounted for under the purchase method of accounting.
As such, pro forma adjustments are reflected in the accompanying Unaudited Pro
Forma Combined Financial Statements to reflect a preliminary allocation of New
Tenneco's purchase cost for the assets acquired and liabilities assumed as
well as additional depreciation and amortization resulting from New Tenneco's
purchase cost.
The historical Combined Financial Statements reflect the financial position
and results of operations for the Industrial Business whose net assets will be
transferred to New Tenneco pursuant to the Corporate Restructuring
Transactions and other transactions pursuant to the provisions of the
Distribution Agreement and Merger Agreement. The accounting for the transfer
of assets and liabilities pursuant to the Corporate Restructuring Transactions
represents a reorganization of companies under common control and,
accordingly, all assets and liabilities are reflected at their historical cost
in the Combined Financial Statements of New Tenneco.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if such
transactions occurred on June 30, 1996; the Unaudited Pro Forma Combined
Statements of Income have been prepared as if such transactions occurred as of
January 1, 1995. The Unaudited Pro Forma Combined Financial Statements set
forth on the following pages are unaudited and not necessarily indicative of
the results that would have actually occurred if the transactions had been
consummated as of June 30, 1996, or January 1, 1995, or results which may be
attained in the future.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. The
Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the Combined Financial Statements of New Tenneco, and notes
thereto, and the pre-acquisition Combined Financial Statements of Mobil
Plastics, and notes thereto, included elsewhere herein. The Clevite and Amoco
Foam Products acquisitions do not meet the Commission's criteria for inclusion
of separate historical financial statements.
101
<PAGE>
NEW TENNECO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
NEW ACQUISITIONS TRANSACTION
TENNECO PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- ---------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and temporary
cash investments..... $ 129 $ 2 $ $ 131 $ 36 (e) $ 205
38 (f)
Receivables........... 829 74 903 (113)(a) 1,044
182 (b)
(48)(c)
120 (d)
Inventories........... 820 46 6 (i) 872 872
Deferred income taxes. 28 28 28
Other current assets.. 196 8 204 (5)(c) 204
5 (e)
------ ---- ---------- ------ ------- ------
Total Current Assets. 2,002 130 6 2,138 215 2,353
------ ---- ---------- ------ ------- ------
Goodwill and
intangibles............ 965 384 (i) 1,349 1,349
Other Assets............ 808 9 817 9 (c) 836
10 (g)
Plant, property and
equipment, net......... 2,748 148 144 (i) 3,040 39 (c) 3,079
------ ---- ---------- ------ ------- ------
Total Assets......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ========== ====== ======= ======
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt....... $ 530 $ $ 638 (i) $1,168 $(1,155)(g) $ 13
Payables.............. 622 28 650 (23)(a) 629
2 (b)
Other current
liabilities.......... 558 76 634 17 (c) 651
------ ---- ---------- ------ ------- ------
Total Current
Liabilities......... 1,710 104 638 2,452 (1,159) 1,293
------ ---- ---------- ------ ------- ------
Long-term debt.......... 1,573 1 1,574 558 (g) 2,132
Deferred income taxes... 451 (5)(i) 446 13 (b) 459
Deferred credits and
other liabilities...... 320 53 30 (i) 403 41 (e) 444
Minority interest....... 301 301 301
------ ---- ---------- ------ ------- ------
Total Liabilities..... 4,355 158 663 5,176 (547) 4,629
------ ---- ---------- ------ ------- ------
Equity:
Combined equity....... 2,168 129 (129)(i) 2,168 (90)(a) --
167 (b)
(22)(c)
120 (d)
38 (f)
607 (g)
(2,988)(h)
Common Stock.......... -- -- -- 2 (h) 2
Paid-in Capital....... -- -- -- 2,986 (h) 2,986
Retained Earnings..... -- -- -- --
------ ---- ---------- ------ ------- ------
Total Liabilities
and Equity......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ========== ====== ======= ======
</TABLE>
- --------
* Certain amounts have been reclassified to conform to New Tenneco's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
102
<PAGE>
NEW TENNECO
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
NEW ACQUISITIONS TRANSACTION
TENNECO PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Operating
Revenues............... $ 3,233 $272 $ $3,505 $ $ 3,505
Other Income, Net....... 71 -- 71 71
Costs and Expenses...... 2,890 232 9 (j) 3,131 3,131
------- ---- ------- ------ ------- -----------
Income Before Interest
Expense,
Income Taxes and Minor-
ity Interest........... 414 40 (9) 445 445
Interest Expense........ 100 12 7 (j) 119 (36)(k) 83
Income Tax Expense...... 126 8 (1)(j) 133 14 (k) 147
Minority Interest....... 10 10 10
------- ---- ------- ------ ------- -----------
Income from continuing
operations ............ $ 178 $ 20 $ (15) $ 183 $ 22 $ 205
======= ==== ======= ====== ======= ===========
Average Number of Common
Shares outstanding..... 170,351,740
===========
Income from continuing
operations per share... $ 1.20
===========
EBITDA(l)............... $ 551 $ 603
======= ===========
Ratio of Earnings to
Fixed Charges(m)....... 2.9 3.5
======= ===========
</TABLE>
- --------
* Certain amounts have been reclassified to conform to New Tenneco's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
103
<PAGE>
NEW TENNECO
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(MILLIONS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
NEW ACQUISITIONS TRANSACTION
TENNECO PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Operating
Revenues............... $5,221 $2,035 $ $7,256 $ $ 7,256
Other Income, Net....... 39 6 45 45
Costs and Expenses...... 4,588 1,888 17 (j) 6,493 6,493
------ ------ ---- ------ -------- -----------
Income Before Interest
Expense,
Income Taxes and Minor-
ity Interest........... 672 153 (17) 808 808
Interest Expense........ 160 126 5 (j) 291 (125)(k) 166
Income Tax Expense...... 231 19 (9)(j) 241 50 (k) 291
Minority Interest....... 23 -- 23 23
------ ------ ---- ------ -------- -----------
Income from continuing
operations ............ $ 258 $ 8 $(13) $ 253 $ 75 $ 328
====== ====== ==== ====== ======== ===========
Average number of common
shares outstanding..... 173,995,941
===========
Income from continuing
operations per share... $ 1.89
===========
EBITDA(l)............... $ 845 $ 1,023
====== ===========
Ratio of Earnings to
Fixed Charges(m)....... 2.8 3.2
====== ===========
</TABLE>
- --------
* Certain amounts have been reclassified to conform to New Tenneco's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
104
<PAGE>
NEW TENNECO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect the settlement or capitalization of intercompany accounts
receivable and payable with Tenneco affiliates pursuant to the Corporate
Restructuring Transactions.
(b) To reflect the acquisition by New Tenneco of certain receivables from
Tenneco Credit Corporation, a Tenneco affiliate, in connection with the
Merger.
(c) To reflect the allocation between New Tenneco, Newport News and Tenneco of
certain corporate assets and liabilities in connection with the Corporate
Restructuring Transactions, the Distributions and the Merger.
(d) To reflect a $120 million receivable from El Paso pursuant to the Merger
Agreement for certain tax benefits to be realized as a result of the Debt
Realignment.
(e) To reflect the transfer to New Tenneco of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited, a Tenneco affiliate,
in connection with the Merger.
(f) To reflect the cash contribution from Tenneco to New Tenneco pursuant to
the Cash Realignment provisions of the Distribution Agreement and Merger
Agreement.
(g) To reflect adjustments to New Tenneco's indebtedness for the pre-
Distribution restructuring and refinancing of debt pursuant to the Debt
Realignment. If the Debt Realignment had been consummated on June 30,
1996, on a pro forma basis, New Tenneco would have had total long-term
debt of $2,132 million, and short-term debt of $13 million. The total pro
forma long-term debt includes $2,069 million of New Securities ($1,950
million aggregate principal amount) assumed to be exchanged in the
Exchange Offers, which will be recorded based on the fair value of the New
Securities, and $63 million of long-term debt of New Tenneco subsidiaries.
At this time, New Tenneco and Tenneco cannot determine the ultimate amount
of Old Securities which will be exchanged by Tenneco Public Debt holders
into New Securities pursuant to the Exchange Offers and such amount could
vary significantly. For purposes of these pro forma adjustments, it is
assumed that 100% of the Old Securities are exchanged for New Securities
pursuant to the Exchange Offers.
(h) To reflect the distribution of New Tenneco Common Stock to the holders of
Tenneco Common Stock at an exchange ratio of one share of New Tenneco
Common Stock for each share of Tenneco Common Stock.
(i) To reflect short-term debt issued to complete the Combined Acquisitions
and the preliminary allocation of purchase price to the assets acquired
and liabilities assumed related to the Combined Acquisitions. These
purchase accounting adjustments for Clevite and Amoco Foam Products are
based on preliminary estimates of fair values and will be adjusted when
more complete evaluations of fair values are received. The preliminary
allocations have been made solely for purposes of developing these
Unaudited Pro Forma Combined Financial Statements.
(j) To reflect additional depreciation and amortization related to the
Combined Acquisitions resulting from New Tenneco's purchase accounting
adjustments, interest expense at an assumed rate of 5.90% on the debt
issued to complete the acquisitions, and the related tax effects at an
assumed effective tax rate of 40%. The excess of New Tenneco's purchase
cost over the fair value of assets acquired and liabilities assumed is
amortized over 40 years for Clevite and 30 years for Amoco Foam Products.
(k) To reflect the adjustment to interest expense, and related tax effects at
an assumed effective tax rate of 40%, from the changes in the debt of New
Tenneco pursuant to the Debt Realignment as discussed in (g) above. For
purposes of this pro forma adjustment, the New Securities are assumed to
bear interest at a weighted average annual effective interest rate of
7.5%. In addition, the pro forma adjustment to interest expense includes
commitment fees on the unused borrowing capacity of the New Tenneco Credit
Facility and amortization of deferred debt financing costs incurred in
connection with the Exchange Offers and the New Tenneco Credit Facility. A
1/8% change in the assumed interest rates would change annual pro forma
interest expense by approximately $2.7 million, before the effect of
income taxes.
105
<PAGE>
(l) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical or pro forma Statements of Income. In addition, EBITDA should
not be considered as an alternative to net income or operating income, as
an indicator of the operating performance of New Tenneco or as an
alternative to operating cash flows as a measure of liquidity.
(m) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, preferred stock dividend requirements of subsidiaries, the
portion of rental expense considered representative of the interest factor
and capitalized interest. The historical ratio is based upon the amount of
interest expense on corporate debt allocated to New Tenneco by Tenneco.
See the Combined Financial Statements of New Tenneco, included elsewhere
herein, for further discussion on the allocation of corporate debt and
interest expense to New Tenneco. The pro forma ratio gives effect to the
pro forma adjustments discussed in (i) and (k).
106
<PAGE>
NEW TENNECO
COMBINED SELECTED FINANCIAL DATA
The following combined selected financial data as of December 31, 1995 and
1994 and for the years ended December 31, 1995, 1994 and 1993 were derived from
the audited Combined Financial Statements of New Tenneco. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of New Tenneco. In the opinion of New
Tenneco's management, the combined selected financial data of New Tenneco as of
December 31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and
1991 and as of and for the six months ended June 30, 1996 and 1995 include all
adjusting entries (consisting only of normal recurring adjustments) necessary
to present fairly the information set forth therein. The results of operations
for the six months ended June 30, 1996 should not be regarded as indicative of
the results that may be expected for the full year. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of New Tenneco and the Combined Financial
Statements of New Tenneco, and notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues from
continuing
operations--
Automotive............ $1,463 $1,263 $2,479 $1,989 $1,785 $1,763 $1,668
Packaging............. 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Intergroup sales and
other................ (5) (4) (10) (7) (7) (5) (5)
------ ------ ------ ------ ------ ------ ------
Total................ $3,233 $2,577 $5,221 $4,166 $3,820 $3,836 $3,597
====== ====== ====== ====== ====== ====== ======
Income from continuing
operations before in-
terest expense, income
taxes and minority in-
terest--
Automotive............ $ 163 $ 134 $ 240 $ 223 $ 222 $ 237 $ 188
Packaging............. 256 244 430 209 139 221 139
Other................. (5) -- 2 24 20 7 3
------ ------ ------ ------ ------ ------ ------
Total................ 414 378 672 456 381 465 330
Interest expense (net of
interest capitalized).. 100 74 160 104 101 102 111
Income tax expense...... 126 124 231 114 115 154 80
Minority interest....... 10 12 23 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Income from continuing
operations............ 178 168 258 238 165 209 139
Loss from discontinued
operations, net of
income tax............. -- -- -- (31) (7) (7) (12)
Cumulative effect of
changes in accounting
principles, net of in-
come tax............... -- -- -- (7)(c) -- (99)(c) --
------ ------ ------ ------ ------ ------ ------
Net income............. $ 178 $ 168 $ 258 $ 200 $ 158 $ 103 $ 127
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total Assets........... $6,523 $4,430 $6,117 $3,940 $3,029 $2,812 $2,792
Short-term debt(d) .... 530 205 384 108 94 182 758
Long-term debt(d) ..... 1,573 1,246 1,648 1,039 1,178 1,675 1,555
Minority Interest...... 301 297 301 301 1 1 2
Combined equity........ 2,168 1,163 1,852 987 533 (87) (553)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ 199 $ (9) $ 489 $ 571 $ 324 $ 121 $ 503
Net cash provided
(used) by investing
activities............ (340) (206) (2,041) (303) (152) (78) (237)
Net cash provided
(used) by financing
activities............ 169 (52) 1,297 50 (165) (41) (251)
Capital expenditures
for continuing
operations............ 263 179 562 280 217 159 202
OTHER DATA:
EBITDA(e).............. $ 551 $ 458 $ 845 $ 598 $ 518 $ 595 $ 463
Ratio of earnings to
fixed charges(f) ..... 2.9 3.4 2.8 3.2 2.9 3.4 2.4
</TABLE>
- -------
(a)For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see New Tenneco's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included
elsewhere herein.
(b) During 1995 and 1994, Tenneco Automotive and Tenneco Packaging each
completed several acquisitions, the most significant of which was Tenneco
Packaging's acquisition of Mobil Plastics for $1.3 billion in late 1995.
See Note 4 to the Combined Financial Statements of New Tenneco, included
elsewhere herein, for further information on New Tenneco's acquisitions.
(c) In 1994, New Tenneco adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits". In 1992, New Tenneco adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(d) Historical amounts include debt allocated to New Tenneco from Tenneco based
on the portion of Tenneco's investment in New Tenneco which is deemed to be
debt, generally based upon the ratio of New Tenneco's net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of New
Tenneco's debt upon completion of the Debt Realignment, nor debt and
interest that may be incurred by New Tenneco as a separate public entity.
See the Combined Financial Statements of New Tenneco, and notes thereto,
included elsewhere herein.
(e) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical or pro forma Statements of Income. In addition, EBITDA should
not be considered as an alternative to net income or operating income, as
an indicator of the operating performance of New Tenneco or as an
alternative to operating cash flows as a measure of liquidity.
(f) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense, preferred
stock dividend requirements of subsidiaries, the portion of rental expense
considered representative of the interest factor and capitalized interest.
The historical ratios are based upon the amount of interest expense on
corporate debt allocated to New Tenneco by Tenneco as discussed in (d)
above.
107
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following review of New Tenneco's financial condition and results of
operations should be read in conjunction with the Combined Financial
Statements of New Tenneco, and notes thereto, presented on pages
F-3 to F-27. Reference is made to the "Basis of Presentation" section of Note
1 to such Combined Financial Statements for the definition of "New Tenneco" as
utilized herein.
PROPOSED MERGER WITH EL PASO
In the first quarter of 1996, Tenneco announced its intention to focus
Tenneco on its automotive parts and packaging businesses. This strategic
action included the spin-off of the Shipbuilding Business to the holders of
Tenneco Common Stock and the development of options to separate the Energy
Business from the Industrial Business. On June 19, 1996, Tenneco announced
that it signed a definitive agreement to merge a subsidiary of El Paso into
Tenneco. Prior to the Merger, Tenneco will effect the Industrial Distribution
and the Shipbuilding Distribution.
The Merger represents a total value for Tenneco stockholders of
approximately $4 billion which includes:
. New shares of El Paso equity valued at $750 million (subject to the
effect of a collar on the market price of El Paso Common Stock issuable
in connection with the Merger).
. Assumption by El Paso of $2.65 billion (subject to certain adjustments)
of Tenneco Consolidated Debt and Tenneco Junior Preferred Stock.
. Other payments and certain liability retentions by El Paso which have
been estimated at an aggregate of approximately $600 million.
Consequently, after the Transaction is consummated, current holders of
Tenneco Common Stock will hold shares of Newport News, New Tenneco (to be
renamed Tenneco Inc.) and El Paso. New Tenneco would then consist of two
industrial manufacturing businesses, Tenneco Packaging and Tenneco Automotive,
both of which reported record earnings and revenues in 1995, and TBS, New
Tenneco's administrative services unit.
. Tenneco Automotive is one of the world's leading manufacturers of
automotive exhaust and ride control systems for both the original
equipment market and the replacement market, or aftermarket. Tenneco
Automotive is a global business that sells its products in over 100
countries. Tenneco Automotive manufactures and markets its automotive
exhaust systems primarily under the Walker(R) brand name and its ride
control systems primarily under the Monroe(R) brand name.
. Tenneco Packaging is among the world's leading and most diversified
packaging companies, manufacturing packaging products for consumer,
institutional and industrial markets. The paperboard business group
manufactures corrugated containers, folding cartons and containerboard,
has a joint venture in recycled paperboard, and offers high value-added
products such as enhanced graphics packaging and displays and kraft
honeycomb products. Its specialty products group produces disposable
aluminum, foam and clear plastic food containers, molded fiber and
pressed paperboard products, as well as polyethylene bags and industrial
stretch wrap. Tenneco Packaging's consumer products include such
recognized brand names as Hefty(R), Baggies(R) and E-Z Foil(R).
. TBS designs, implements and administers shared administrative service
programs for the Tenneco businesses as well as, on an "as requested"
basis, for former Tenneco business entities.
The consummation of the Transaction is conditioned upon approval thereof by
Tenneco stockholders. The consummation of the Transaction is also subject to
the satisfaction or waiver of a number of other conditions as described under
"The Distributions--Conditions to Consummation of the Distributions."
108
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1996 STRATEGIC ACTIONS
In the second quarter of 1996, New Tenneco continued its strategy to
redeploy capital to faster-growing, more profitable and less cyclical business
operations. In June, Tenneco Packaging and Caraustar entered into an agreement
to jointly operate clay-coated recycled paperboard mills in Rittman, Ohio and
Tama, Iowa and a recovered fiber recycling and brokerage business with
operations in Rittman and Cleveland, Ohio. Tenneco Packaging sold these assets
to the joint venture for cash and an equity ownership position in the new
venture. This strategic action resulted in a pre-tax gain of $50 million.
In addition, New Tenneco initiated several other strategic actions:
. In early 1996, Tenneco Automotive acquired two ride control companies,
National Springs, the largest manufacturer of automotive coil and leaf
springs in Australia and New Zealand, and ATESO s.a., one of the largest
automotive equipment manufacturing groups in the Czech Republic, for an
aggregate of $31 million.
. In July 1996, Tenneco Automotive acquired Clevite for approximately $330
million. Clevite is a leading North American original equipment
manufacturer of automotive vibration control components, including
bushings and engine mounts for the auto, light truck and heavy truck
markets. Clevite will be integrated into Monroe to form an operation with
the ability to design, manufacture, test and sell a complete automotive
suspension system.
. In June 1996, Tenneco Packaging announced that it had reached an
agreement to acquire the stock of Amoco Foam Products for $310 million.
Amoco Foam Products manufactures expanded polystyrene tableware,
including cups, plates and carrying trays; hinged-lid food containers;
packaging trays, primarily for meat and poultry and industrial products
for residential and commercial construction applications. The transaction
closed in August 1996.
. In August 1996, Tenneco Automotive acquired Luis Minuzzi e Hijos
("Minuzzi"), an Argentinian exhaust system manufacturer. The acquisition
will establish Walker's presence in the rapidly growing Argentinean and
South American automobile markets.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1996 AND 1995
New Tenneco's income from continuing operations for the 1996 first half of
$178 million improved by six percent compared with $168 million in the first
half of 1995 due to improved results from both Tenneco Packaging (which
included the $50 million pre-tax gain on the sale of two recycled paperboard
mills and a recovered fiber recycling and brokerage business to a joint
venture) and Tenneco Automotive, all of which are discussed below.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive........................................ $1,463 $1,263
Tenneco Packaging......................................... 1,775 1,318
Intergroup sales and other................................ (5) (4)
------ ------
$3,233 $2,577
====== ======
</TABLE>
109
<PAGE>
New Tenneco's revenues for the first six months of 1996 increased $656
million or 25 percent, and benefited from higher sales volumes in the
automotive business along with revenues from recent acquisitions. The results
of each business group are discussed in detail below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive......................................... $ 163 $ 134
Tenneco Packaging.......................................... 256 244
Other...................................................... (5) --
------ ------
$ 414 $ 378
====== ======
</TABLE>
New Tenneco's operating income for the first half of 1996 increased by $36
million compared with the 1995 period. Tenneco Automotive benefited from
improved results in both the exhaust and ride control operations. Also,
Tenneco Packaging recognized a gain from the sale of the recycled paperboard
mills to a joint venture of $50 million in New Tenneco's 1996 second quarter.
The results of each segment are discussed in detail below.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $1,463 $1,263
Operating income............................................ 163 134
</TABLE>
Tenneco Automotive's revenues increased in both the exhaust and ride control
operations. Revenues for exhaust increased 16 percent to $847 million. North
American and European original equipment revenues were up, driven by a record
number of new product launches, new vehicle production and recent
acquisitions. Exhaust aftermarket volumes also increased primarily due to the
third quarter 1995 acquisition of Fonos.
Ride control reported increased revenues of $83 million or 16 percent. Ride
control's North American aftermarket revenues increased 13 percent as a result
of new customers and consumer response to aggressive marketing programs. The
European original equipment revenues improved $25 million driven by new
vehicle production. Revenues in Australia increased as a result of the 1996
acquisition of National Springs.
Exhaust's operating income for the 1996 first half improved 30 percent to
$74 million primarily due to increased volumes and improved manufacturing
efficiencies. Ride control's operating income increase of $12 million was due
primarily to higher sales volumes, improved pricing and product mix.
OUTLOOK
Tenneco Automotive's aggressive acquisition and business initiative strategy
is helping it to maintain its market leadership positions around the world.
New Tenneco has committed substantial resources to improve and expand
production capacity, expand existing businesses and enter new markets in order
to serve its customers throughout the world. During the first half of 1996,
Tenneco Automotive announced an exhaust system joint venture in China and the
acquisition of Clevite. The Clevite acquisition is expected to produce
positive results immediately, impacting the second half of 1996. In addition,
Tenneco Automotive continues to develop business opportunities in emerging
markets such as China, India, Eastern Europe, and Latin America. Tenneco
Automotive expects the North American aftermarket to remain at 1995 activity
levels for the remainder of 1996. Original equipment volumes are expected to
increase as a result of the high level of new product launches undertaken in
1995 and early 1996 and continued interest by original equipment customers in
hydroforming technology. New Tenneco believes it is well positioned to respond
to the many changes currently underway in the original equipment market.
110
<PAGE>
TENNECO PACKAGING
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $1,775 $1,318
Operating income............................................ 256 244
</TABLE>
Tenneco Packaging's operating income was $256 million in the first half of
1996 compared with $244 million in the prior year period. The results for the
1996 first half included a $50 million pre-tax gain on the sale of two
recycled paperboard mills and a recovered fiber recycling and brokerage
business to a new joint venture between Tenneco Packaging and Caraustar. The
results were also driven by a strong performance from its plastics business.
The recently acquired plastics business contributed $73 million in operating
income on revenues of $516 million for the first half of 1996.
In Tenneco Packaging's paperboard business, revenues were down $75 million
to $903 million compared with the 1995 first half. Operating income in the
paperboard business declined $107 million to $98 million compared with the
1995 first half, excluding the 1996 second quarter $50 million pre-tax gain on
the sale of assets to the joint venture with Caraustar. Operating income and
revenues declined due to lower volumes and price realizations in both
linerboard and corrugated medium due to the weaker market conditions. The 1996
operating income was also reduced by a $14 million cost related to downtime at
mills taken to match inventories to market demand. In addition, the first half
of 1995 included a $14 million gain on the sale of a mill in North Carolina.
Revenues in Tenneco Packaging's specialty packaging business increased $532
million to $872 million compared with the 1995 first half, primarily as a
result of the recently acquired plastics business which provided $516 million
of this improvement.
The specialty packaging business earned $108 million in operating income for
the 1996 first half, an $83 million increase compared with the 1995 first half
results. The plastics, aluminum and molded fiber units also continued to
improve due to lower raw material cost of aluminum and lower operating cost as
a result of productivity improvements. Plastics volumes improved 5 percent for
the first half of 1996 and demand continued to be strong.
OUTLOOK
Tenneco Packaging anticipates strong revenue growth in the second half of
1996 in the specialty packaging unit. Tenneco Packaging will continue to make
strong progress in lessening the effects on it of cyclicality in the
paperboard industry as shown in the first half of 1996. The Amoco Foam
Products acquisition, which was finalized in the third quarter, will be
beneficial to building the specialty packaging product lines. In addition,
Tenneco Packaging continues to achieve productivity improvements, to
streamline manufacturing, and to obtain benefits from the recent restructuring
in the molded fiber and aluminum product operations.
OTHER
New Tenneco's other operations reported an operating loss of $5 million
during the first half of 1996 compared with breakeven in the 1995 first half.
This decrease in operating income resulted from decreased interest income
resulting from lower cash investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
111
<PAGE>
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense has been allocated to New Tenneco based on the
portion of Tenneco's investment in New Tenneco which is deemed to be debt,
generally based upon the ratio of New Tenneco's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7
percent, 8.3 percent and 7.4 percent for 1995, 1994 and 1993, respectively.
Although interest expense, and the related tax effects, have been allocated to
New Tenneco for financial reporting on a historical basis, New Tenneco has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of New
Tenneco's combined equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of New Tenneco's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by New Tenneco as a separate public
company. For additional information, see "Debt and Cash Realignment."
Interest expense increased from $74 million in the 1995 first half to $100
million in the 1996 first half. The increase was primarily attributable to
higher levels of allocated corporate debt. Interest capitalized was $5 million
for the 1996 first half compared with $1 million for the prior year period.
INCOME TAXES
Income tax expense for the first half of 1996 was $126 million compared with
$124 million for the 1995 first half. The effective tax rate for the first
half of 1996 was 40 percent compared with 41 percent in the prior year first
half.
In connection with the Industrial Distribution, the current tax sharing
agreement will be cancelled and New Tenneco will enter into a tax sharing
agreement with Tenneco, Newport News and El Paso. The tax sharing agreement
will provide, among other things, for the allocation of taxes among the
parties of tax liabilities arising prior to, as a result of, and subsequent to
the Distributions. Generally, New Tenneco will be liable for taxes imposed on
New Tenneco and its affiliates engaged in the automotive and packaging
businesses. Federal income taxes imposed on the combined activities of the
consolidated group will be allocated among New Tenneco, Tenneco and Newport
News according to their respective share of consolidated taxable income.
CHANGE IN ACCOUNTING PRINCIPLES
New Tenneco adopted FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first
quarter of 1996. FAS No. 121 establishes new accounting standards for
measuring the impairment of long-lived assets. The adoption of the new
standard did not have a material effect on New Tenneco's financial position or
results of operations.
In June 1996, the Financial Accounting Standards Board issued FAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The statement is effective for transactions
occurring after December 31, 1996. The impact of the new standard has not been
determined.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ -------- --------
(MILLIONS)
<S> <C> <C>
Operating activities................................ $ 199 $ (9)
Investing activities................................ (340) (206)
Financing activities................................ 169 (52)
</TABLE>
112
<PAGE>
New Tenneco's operating results, combined with proceeds from sales of assets
and businesses, contributions from Tenneco and short-term borrowings, have
provided funds for acquisitions and capital investments in existing
businesses. Operating cash flow for the first six months of 1996 increased due
to higher income from operations and improvements in working capital. Working
capital improved $147 million compared with the 1995 first half primarily due
to lower inventories and New Tenneco's working capital initiatives.
Inventories dropped as a result of downtime taken at the mills to keep
inventories in line and higher exhaust and ride control revenues driven by new
vehicle production.
New Tenneco invested $263 million in capital expenditures in its existing
businesses during the first half of 1996. Capital expenditures during the
first six months of 1996 included $84 million for Tenneco Automotive, $155
million for Tenneco Packaging and $24 million related to New Tenneco's other
operations. For Tenneco Packaging, these expenditures related to the paper
machine upgrade at the Counce, Tennessee mill and the expansion of specialty
packaging facilities. Capital expenditures were $179 million for continuing
operations during the first half of 1995.
CAPITALIZATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities.................... $ 530 $ 384
Long-term debt............................................ 1,573 1,648
Minority interest......................................... 301 301
Combined equity........................................... 2,168 1,852
------ ------
Total capitalization...................................... $4,572 $4,185
====== ======
</TABLE>
Debt increased $71 million at June 30, 1996 compared with December 31, 1995
primarily due to higher levels of allocated debt. For additional information
on corporate debt allocation, see "Interest Expense (net of interest
capitalized)" above.
LIQUIDITY
Historically, New Tenneco's excess net cash flows from operating and
investing activities have been used by its parent, Tenneco, to meet
consolidated debt and other obligations. Conversely, when New Tenneco's cash
requirements have been in excess of cash flows from operations, Tenneco has
utilized its consolidated credit facilities to fund New Tenneco's obligations.
Also, depending on market and other conditions, New Tenneco has utilized
external sources of capital to meet specific funding requirements. Management
of New Tenneco believes that cash flows from operations will generally be
sufficient to meet future capital requirements. However, during 1995, New
Tenneco received on a net basis $1.3 billion from Tenneco primarily to fund
its strategic acquisitions discussed below.
Prior to the Transaction as discussed under the caption "Proposed Merger
with El Paso," Tenneco intends to initiate a realignment of its existing
indebtedness. As part of the Debt Realignment, certain New Tenneco public debt
will be offered in exchange for certain issues of Public Debt. Tenneco will
initiate tender offers for other Public Debt, and certain debt issues may be
defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, New Tenneco (which will
dividend $350 million of such borrowings to Tenneco, as discussed below) and
Newport News (which will dividend $600 million of its borrowings to Tenneco).
Upon completion of the Debt Realignment, Tenneco will have responsibility for
$2.65 billion of debt, subject to certain adjustments, Newport News will have
responsibility for the borrowings under its credit lines and New Tenneco will
have responsibility for any remaining Tenneco Energy Consolidated Debt.
New Tenneco will enter into the New Tenneco Credit Facility, a portion of
which will be borrowed by New Tenneco and distributed to Tenneco as a dividend
for use by Tenneco in retiring certain of the Tenneco Energy
113
<PAGE>
Consolidated Debt. The remainder of the New Tenneco Credit Facility, along
with cash flows from operations, will be available by New Tenneco to fund its
future financing needs including working capital and possible acquisitions.
For additional information, see "Debt and Cash Realignment" and "--New
Tenneco Credit Facility."
ENVIRONMENTAL MATTERS
New Tenneco and certain of its subsidiaries and affiliates are parties to
environmental proceedings. Expenditures for ongoing compliance with
environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and
other societal and economic factors. All available evidence is considered,
including prior experience in remediation of contaminated sites, other
companies' cleanup experience and data released by the United States
Environmental Protection Agency ("EPA") or other organizations. These
estimated liabilities are subject to revision in future periods based on
actual costs or new circumstances. These liabilities are included in the
balance sheet at their undiscounted amounts. Recoveries are evaluated
separately from the liability and, when recovery is assured, are recorded and
reported separately from the associated liability in the financial statements.
At July 1, 1996, New Tenneco had been designated as a potentially
responsible party in 13 "Superfund" sites. With respect to its pro rata share
of the remediation costs of certain of these sites, New Tenneco is fully
indemnified by third parties. With respect to certain other of these sites,
New Tenneco has sought to resolve its liability through settlements which
provide for payments of New Tenneco's allocable share of the remediation
costs. For the remaining sites, New Tenneco has estimated its share of the
remediation costs to be between $3 million and $23 million or .003 percent to
.020 percent of the total remediation costs for those sites and has provided
reserves it believes are adequate for such costs. Because the clean-up costs
are estimates and are subject to revision as more information becomes
available about the extent of remediation required, New Tenneco's estimate of
its share of remediation costs could change. Moreover, liability under the
Comprehensive Environmental Response, Compensation and Liability Act is joint
and several, meaning that New Tenneco could be required to pay in excess of
its pro rata share of remediation costs. New Tenneco's understanding of the
financial strength of other potentially responsible parties has been
considered, where appropriate, in New Tenneco's determination of its estimated
liability. New Tenneco believes that the costs associated with its current
status as a potentially responsible party in the Superfund or other waste
disposal sites referenced above will not be material to its financial position
or results of operations.
RESULTS OF OPERATIONS FOR THE YEARS 1995, 1994 AND 1993
1995 STRATEGIC ACTIONS
New Tenneco acquired or announced intentions to acquire several new
businesses during 1995, as part of its strategy to redeploy capital to less
cyclical, higher-growth businesses, including:
. On November 17, 1995 Tenneco Packaging acquired Mobil Plastics, which is
one of the largest North American producers of polyethylene and
polystyrene packaging, for $1.3 billion. Its consumer products are
marketed under the Hefty(R), Kordite(R), Baggies(R) and Hefty OneZip(TM)
brand names. The acquired plastics business is also a leader in
polystyrene foam packaging, thermoformed polystyrene packaging and
polyethylene film products for food service and industrial consumers. In
addition to this acquisition, during 1995 Tenneco Packaging acquired two
plastics packaging operations in the United Kingdom for an aggregate of
$25 million, making Tenneco Packaging a leading supplier of single-use,
thermoformed plastic packaging in that market.
114
<PAGE>
. During 1995 Tenneco Packaging also completed eight acquisitions in the
paperboard packaging business for an aggregate of $171 million in cash,
notes and Tenneco Common Stock. Four of these acquisitions are in
enhanced graphics which helps reduce sensitivity to raw material prices
and offers greater opportunities to add value. Tenneco Packaging also
acquired Hexacomb, one of the world's largest suppliers of paper
honeycomb products, for $58 million. These acquisitions present many
opportunities for internal and external synergies.
. During 1995 Tenneco Automotive acquired an exhaust company in Spain and a
catalytic converter company in the United States for an aggregate of $40
million and entered into two ride control joint ventures in India and
China for an aggregate of $14 million.
RESULTS OF OPERATIONS--YEARS 1995 AND 1994
New Tenneco's income from continuing operations in 1995 of $258 million
increased by 8 percent compared with $238 million in 1994 due to improved
results from both Tenneco Packaging and Tenneco Automotive, as discussed
below.
In 1994, New Tenneco recorded a loss of $31 million from the discontinued
operations of Tenneco Automotive's brakes operations. Also, 1994 results
included a charge of $7 million for the adoption of a new accounting
principle, FAS No. 112, "Employers' Accounting for Postemployment Benefits."
No similar costs were incurred in 1995.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive........................................ $2,479 $1,989
Tenneco Packaging......................................... 2,752 2,184
Intergroup sales and other................................ (10) (7)
------ ------
$5,221 $4,166
====== ======
</TABLE>
New Tenneco's 1995 revenues increased $1,055 million, or 25 percent and
benefited from strong market conditions in its automotive and packaging
businesses along with revenues from acquisitions made in late 1994 and 1995.
The results of each segment are discussed in detail below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
1995 1994
----- -----
(MILLIONS)
<S> <C> <C>
Tenneco Automotive............................................ $ 240 $ 223
Tenneco Packaging............................................. 430 209
Other......................................................... 2 24
----- -----
$672 $ 456
===== =====
</TABLE>
New Tenneco's 1995 operating income increased by $216 million, or 47 percent
compared with 1994. Tenneco Packaging benefited from favorable market
conditions in the packaging industry and Tenneco Automotive improved as
European original equipment and aftermarkets both performed well. The results
of each segment are discussed in detail below.
Significant transactions affecting the comparability of operating income
between 1995 and 1994 are:
. Pre-tax gains on sales of assets and businesses of $15 million in 1995
(primarily a mill in North Carolina) compared with gains of $5 million in
1994.
115
<PAGE>
. Reserves established in 1995 of $30 million for restructuring at Tenneco
Packaging's molded fiber and aluminum foil packaging operations.
. Charges in 1994 of $22 million at Tenneco Automotive for a plant closing
in Ohio and consolidations in Europe associated with the acquisition of
Gillet, the German exhaust manufacturer.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $2,479 $1,989
Operating income............................................... $ 240 $ 223
</TABLE>
Revenues from Tenneco Automotive's exhaust operations increased during 1995
by $392 million to $1,466 million. Eighty-eight percent, or $346 million of
this increase resulted from revenues at Gillet. European original equipment
volumes were up significantly in 1995 where Gillet is the leading original
equipment manufacturer of exhaust components. European exhaust business
revenues were also stronger in the aftermarket. The 23% increase in European
aftermarket revenues resulted from volume increases and the acquisition of
Fonos. North American exhaust revenues declined slightly in 1995. The 7
percent decrease in the North American aftermarket was caused by an unusually
mild winter in the northeast and midwest which slowed automotive parts
replacement rates. In addition, the U.S. automakers' continued migration
toward stainless steel exhaust systems has negatively impacted North American
aftermarket revenues. The aftermarket decrease was partially offset by
increased original equipment unit volumes due to increased demand for light
truck and sport-utility vehicle exhaust systems.
Operating income for the exhaust operations increased during 1995 by $14
million to $114 million. The 1994 operating income included a $5 million
charge recorded for a plant closing and a $17 million charge related to plant
consolidations as part of the Gillet acquisition. The Gillet operations
contributed $16 million to operating income in 1995. The remainder of the
operating income change in 1995 is due primarily to a high level of costs
related to new product launches. Tenneco Automotive's exhaust business
launched 50 products for 1996 model year vehicles in 1995, more than twice the
normal levels which adversely affected 1995 earnings. In connection with the
new product launches, Tenneco Automotive incurred additional costs of $10
million in 1995 including those related to a new process, hydroforming.
Hydroforming is a liquid, high-pressure process for bending and shaping metal
parts in ways not feasible using traditional manufacturing technology.
Revenues from Tenneco Automotive's ride control operations increased during
1995 by $98 million to $1,013 million. Fifty-seven percent or $56 million of
this increase resulted from increased original equipment volumes in North
America and Europe. Original equipment volumes increased due to higher demand
for light truck and sport-utility vehicles in North America and improved
economic conditions in Europe. Increased aftermarket revenues in Europe and
the Far East more than offset the decrease in North American aftermarket
revenues which declined due to the overall decline in the North American
aftermarket.
Operating income for the ride control operations increased in 1995 by $3
million to $126 million. The increased revenues in 1995 did not result in
higher operating income primarily due to increased costs associated with the
large number of new product launches for 1996 model year vehicles. These 18
launches, a significant increase over 1994 launches, adversely affected 1995
earnings.
Tenneco Automotive's margins decreased to 9.7 percent from 11.2 percent in
1994. North American margins decreased to 10.2 percent in 1995 compared with
12.1 percent in 1994 due to higher costs related to new product launches and
lower North American aftermarket sales volumes. European operations margins
improved to 8.1 percent from 7.8 percent as a result of improved economic
conditions in Europe and higher earnings associated with the Gillet
acquisition.
116
<PAGE>
TENNECO PACKAGING
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $2,752 $2,184
Operating income............................................... $ 430 $ 209
</TABLE>
Tenneco Packaging's paperboard operations experienced excellent results
during 1995. Revenues were up $399 million to $1,928 million in 1995,
primarily as a result of strong pricing improvements in linerboard prices
during 1995 that began in late 1994 and continued to drive the paperboard
business until the end of 1995. As a result of the move into higher margin
graphics and specialty corrugated segments, Tenneco Packaging realized higher
revenues on comparable volumes. In addition, strong industry demand for
linerboard and corrugated products served to substantially increase prices for
those products in 1995 and contributed to record revenues.
Operating income in the paperboard operations improved by $260 million to
$399 million in 1995. This improvement includes the 1995 pre-tax gain of $14
million on the sale of a recycled medium mill in North Carolina. Effective mix
management allowed Tenneco Packaging to absorb rapidly rising raw material
prices for corrugated products while posting increased margins. Additionally,
Tenneco Packaging continued to post new productivity gains, especially in the
operation of its containerboard mills, resulting in record operating margins
in 1995.
Revenues in Tenneco Packaging's specialty packaging operations increased by
$169 million to $824 million during 1995. Revenues of $106 million from the
recently acquired plastics business (November 1995) are included in the
results of the specialty packaging business. The remainder of the revenue
increase over 1994 resulted from price realizations in the aluminum product
line.
The specialty packaging business earned $31 million in operating income in
1995, a $39 million decrease compared with 1994 results. Specialty packaging
recorded a restructuring charge of $30 million in 1995 for its molded fiber
and aluminum foil packaging operations and recognized income from the recently
acquired plastics business of $15 million. Excluding these two items, the
decline in operating income for specialty packaging resulted from 20 percent
raw material cost increases that more than offset the positive effects of the
pricing increases initiated during the year. The major contributors to the raw
material cost increases were higher prices for polystyrene, aluminum and old
newspaper. However, these prices declined during the second half of the year.
OTHER
New Tenneco's other operations reported operating income of $2 million
during 1995. During 1994, other operations reported operating income of $24
million. This decrease in operating income resulted from lower interest income
on temporary cash investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
New Tenneco's interest expense in 1995 was $160 million compared with $104
million in 1994. The higher interest expense in 1995 compared to 1994 is
principally due to higher levels of allocated corporate debt. Interest
capitalized was $5 million in 1995 compared with $2 million in 1994 due to
higher levels of capital spending in 1995. For a discussion of the historical
allocation of indebtedness of Tenneco and its subsidiaries, see "Results of
Operations--Six Months Ended June 30, 1996 and 1995--Interest Expense (Net of
Interest Capitalized)."
MINORITY INTEREST
Minority interest of $23 million in 1995 related to dividends on preferred
stock of a U.S. subsidiary which was issued in December 1994.
117
<PAGE>
INCOME TAXES
Income tax expense for 1995 was $231 million compared with $114 million in
1994. New Tenneco's effective tax rate was 45 percent in 1995, compared with
32 percent in 1994.
The increased tax expense in 1995 was primarily from higher pre-tax income
and higher foreign tax expense. In 1994, New Tenneco recorded tax benefits
from the realization of deferred tax assets resulting from consolidation of
New Tenneco's German operations.
DISCONTINUED OPERATIONS
Loss from discontinued operations in 1994 of $31 million, net of income tax
benefit of $20 million, resulted from the sale of Tenneco Automotive's brakes
business. The loss on the sale of the brakes business was $26 million, net of
income tax benefit of $15 million. Net loss in 1994 from the brakes operations
was $5 million, net of income tax benefit of $5 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, New Tenneco adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits," using the cumulative catch-up method.
It requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. As a result of adopting this statement,
an after-tax charge of $7 million was recorded in 1994.
In October 1995, the Financial Accounting Standards Board issued FAS No.
123, "Accounting for Stock-Based Compensation." This statement defines a fair
value based method of accounting for stock issued to employees and others but
also allows companies to choose to continue to measure compensation cost for
such plans as it is measured currently. New Tenneco has elected to continue to
use the current method of accounting for stock issued to employees.
Consequently, FAS No. 123 will have no impact on New Tenneco's consolidated
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
CASH PROVIDED (USED) BY: 1995 1994
------------------------ ------ ----
(MILLIONS)
<S> <C> <C>
Operating activities...................................... $ 489 $571
Investing activities...................................... (2,041) (303)
Financing activities...................................... 1,297 50
</TABLE>
New Tenneco's operating results, combined with proceeds from sales of assets
and businesses, and supplemented by contributions from Tenneco, have provided
funds for acquisitions and capital investments in existing businesses.
Operating cash flow for 1995 declined compared with 1994 primarily due to the
build up of paperboard inventories at Tenneco Packaging as a result of a
planned mill shut-down in Counce, Tennessee in early 1996.
Cash used for business acquisitions during 1995 totaled approximately $1.5
billion. The largest single transaction was the acquisition of Mobil Plastics
by Tenneco Packaging for $1.3 billion, which was financed by a cash
contribution from Tenneco. Also, Tenneco Packaging and Tenneco Automotive made
other key acquisitions during the year. Further, New Tenneco invested $562
million in capital expenditures in its existing businesses during the year.
Capital expenditures during the year included $208 million for Tenneco
Automotive, $316 million for Tenneco Packaging and $38 million related to New
Tenneco's other operations. For Tenneco Packaging, these expenditures included
$60 million for a paper machine addition at the Counce, Tennessee mill
118
<PAGE>
as well as $33 million for a new container plant in Salt Lake City, Utah.
Tenneco Automotive's capital spending included $22 million related to new
product launches in plants related to Gillet, which Tenneco Automotive
acquired in 1994, and $24 million for expanding a key exhaust plant and
distribution center. Capital expenditures increased in 1995 compared with the
prior year in all businesses. Net proceeds from sales of businesses and assets
during 1995 were $56 million, which included the $30 million proceeds from the
sale of a mill in North Carolina.
Cash flows from financing activities primarily included a $1.3 billion cash
contribution from Tenneco for the acquisition of Mobil Plastics in November
1995.
During 1994, New Tenneco's cash sources included operating cash flow of $571
million. During 1994, New Tenneco acquired Gillet for $44 million in cash and
other businesses for $7 million. Capital expenditures were $280 million for
continuing operations.
Cash provided from financing activities during 1994 was $50 million. In
December 1994 Tenneco sold a 25 percent preferred stock interest in a
subsidiary which resulted in net cash proceeds of $293 million. This was
included in the balance sheet as minority interest at December 31, 1994.
CAPITALIZATION
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities..................... $ 384 $ 108
Long-term debt............................................. 1,648 1,039
Minority interest.......................................... 301 301
Combined equity............................................ 1,852 987
------ ------
Total capitalization....................................... $4,185 $2,435
====== ======
</TABLE>
For additional information on corporate debt allocation, see "Interest
Expense (net of interest capitalized)" above.
RESULTS OF OPERATIONS--YEARS 1994 AND 1993
NET SALES AND OPERATING REVENUES
Revenues for 1994 were $4.17 billion, up from $3.82 billion in 1993. Tenneco
Automotive revenues were $1,989 million, a $204 million, or an 11 percent
increase, compared with 1993 primarily due to increased new vehicle production
in North America and an improving European economy. Aftermarket revenues also
benefited from the introduction of Monroe's new premium ride control product,
Sensa-Trac(R). A major trade and consumer promotion in North America of the
new Sensa-Trac(R) products helped lead to an 11 percent increase in revenues
for the ride control replacement business worldwide. Packaging revenues
increased $142 million, or seven percent, to $2.18 billion in 1994, as prices
in the paperboard business recovered from the seven-year low reached in the
third quarter of 1993.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
Operating income was $456 million for 1994. This was an improvement of $75
million compared with 1993's operating income of $381 million. Excluding gains
from asset sales and other special items including plant consolidations, 1994
operating income increased $126 million, or 36 percent, compared with 1993
primarily due to improved pricing in Tenneco Packaging's containerboard
business.
Tenneco Automotive operating income for 1994 was $223 million, compared with
$222 million in 1993. The 1994 operating income included a $17 million charge
for plant consolidations in Europe associated with acquiring Gillet and a $5
million charge taken in the second quarter for closing a plant in Ohio.
Excluding special
119
<PAGE>
items, operating income increased $23 million, or 10 percent, compared with
1993. This increase is a result of higher volumes in North America and Europe
and was partially offset by higher costs for new product development and new
facility start-up.
Tenneco Automotive's margins were 11.2 percent in 1994 compared with 12.4
percent in 1993. North American margins decreased to 12.1 percent in 1994
compared with 13.6 percent in 1993 due to higher costs related to new product
development and new facility start-up. European operations margins decreased
to 7.8 percent from 9.5 percent as a result of costs for plant consolidations
associated with the Gillet acquisition.
In November 1994, Tenneco Automotive acquired Gillet for $44 million in cash
and $69 million in assumed debt. Gillet is the leading manufacturer of
original equipment exhaust systems and components for European automakers.
Tenneco Packaging's operating income for 1994 was $209 million, compared
with $139 million in 1993. The 1993 operating income included $29 million from
gains related to asset realignment. Excluding these gains, operating income
increased $99 million, or 90 percent, compared with 1993 primarily because of
improved paperboard pricing.
The paperboard business earned $139 million, up $104 million compared with
1993, excluding the 1993 asset realignment gains. Prices rose from depressed
levels in 1993 and contributed $125 million, excluding the recycling business,
of increased operating income. This was partially offset by higher raw
material costs of $32 million, but improved productivity helped counter rising
raw material costs. Paperboard productivity rose 1.6 percent, with mill
operating rates exceeding rated capacity for the full year. The specialty
business operating income for 1994 declined $5 million to $70 million,
excluding the asset realignment gains in 1993. Both the aluminum and plastic
packaging businesses reported improved operating income. Plastic packaging
volumes grew seven percent in 1994 and demand continued to be strong.
Operating income for plastics rose 40 percent in 1994, reflecting increased
volumes and higher pricing. The increase in operating income provided by the
aluminum and plastic businesses was more than offset by weak performance in
the molded fiber business, where higher raw material costs had a negative
effect on operating income. Prices for recycled newspaper, a major raw
material for molded fiber, rose to over $100 per ton, compared with $26 per
ton in 1993.
New Tenneco's other operations reported operating income of $24 million in
1994, compared with operating income of $20 million for 1993.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
New Tenneco's interest expense in 1994 was $104 million compared with $101
million in 1993. Interest capitalized increased to $2 million in 1994 from $1
million in 1993 due to higher levels of major capital spending. For a
discussion of the historical allocation of indebtedness of Tenneco and its
subsidiaries, see "Results of Operations--Six Months Ended June 30, 1996 and
1995--Interest Expense (Net of Interest Capitalized)."
INCOME TAXES
Income tax expense was $114 million for 1994 compared with $115 million for
1993. New Tenneco's effective tax rate was 32 percent in 1994, compared with
41 percent in 1993. The lower effective tax rate in 1994 was the result of tax
benefits from the realization of deferred tax assets resulting from
consolidation of New Tenneco's German operations.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, New Tenneco adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." As a result, an after-tax charge of
$7 million was recorded in 1994.
120
<PAGE>
DISCONTINUED OPERATIONS
Loss from discontinued operations in 1994 of $31 million, net of income tax
benefit of $20 million resulted from New Tenneco's brakes business. Loss from
discontinued operations in 1993 of $7 million, net of income tax benefit of $4
million, was also attributable to New Tenneco's brakes business.
CASH FLOW
Net cash provided by operating activities was $571 million for the year
1994, compared with $324 million for 1993, an increase of $247 million. This
increase was due to higher income from operations and improved receivable
collections.
Net cash used by investing activities in 1994 was $303 million, compared
with $152 million in 1993. Net proceeds from the sale of businesses in 1993 of
$83 million resulted from the sales of various international aluminum
ventures.
Expenditures for plant, property and equipment from continuing operations
for 1994 were $280 million, compared with $217 million for 1993. Increased
expenditures were reported for Tenneco Automotive ($20 million), Tenneco
Packaging ($42 million) and New Tenneco's other operations ($1 million).
In December 1994, New Tenneco sold a 25 percent preferred stock interest in
a subsidiary which resulted in net cash proceeds of $293 million. This was
included in minority interest in the balance sheet at December 31, 1994.
121
<PAGE>
DESCRIPTION OF TENNECO
Tenneco is a diversified industrial company conducting all of its operations
through its subsidiaries. The major businesses of Tenneco are (a) the Energy
Business--consisting primarily of the interstate and intrastate transportation
and marketing of natural gas and all of the discontinued operations of Tenneco
not involving the Industrial Business and the Shipbuilding Business, (b) the
Industrial Business--consisting primarily of Tenneco's administrative services
business and the manufacture and sale of automotive exhaust system parts and
ride control products and packaging materials, cartons, containers and
specialty packaging products for consumer and commercial markets, and (c) the
Shipbuilding Business--consisting primarily of the design, construction,
repair and overhauling of ships (primarily nuclear powered aircraft carriers
and submarines for the United States Navy). See "Incorporation of Certain
Information by Reference."
Prior to the consummation of the Distributions, Tenneco and certain of its
consolidated subsidiaries will complete the Corporate Restructuring
Transactions, which are designed to facilitate the Distributions and the
Merger by separating and dividing the Industrial Business and Shipbuilding
Business from the Energy Business (including the assets and liabilities
included therein that relate to the discontinued operations of Tenneco not
involving the Industrial Business or the Shipbuilding Business). Accordingly,
upon consummation of the Corporate Restructuring Transactions, New Tenneco and
Newport News will each be a direct wholly owned subsidiary of Tenneco and will
own and operate, directly and through its direct and indirect subsidiaries,
the Industrial Business and the Shipbuilding Business, respectively.
Immediately following the consummation of the Distributions, Tenneco will
consist solely of the Energy Business. The Energy Business consists
principally of the interstate transportation of natural gas, as well as
certain other related business operations not generally subject to regulation
by the FERC, such as gas marketing, intrastate pipeline operations,
international pipelines and power generation, domestic power generation
operations and oil and gas ventures. After the Transaction, Tenneco will also
continue to hold limited assets and be responsible for the liabilities of
Tenneco and its subsidiaries that do not relate to the Industrial Business or
the Shipbuilding Business, including those business operations that have been
discontinued or sold. See "Description of Tenneco Energy."
122
<PAGE>
CAPITALIZATION
The following tables set forth the unaudited historical capitalization of
Tenneco as of June 30, 1996, and the unaudited pro forma capitalization as of
June 30, 1996, after giving effect to the Transaction and the Refinancing
Transactions. See "--Unaudited Pro Forma Consolidated Financial Statements" of
Tenneco. The capitalization of Tenneco should be read in conjunction with the
Tenneco and consolidated subsidiaries financial statements, and notes thereto,
and Tenneco's "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included in the Tenneco Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, which is incorporated by reference
herein, and the Tenneco and consolidated subsidiaries "Selected Consolidated
Financial Data."
<TABLE>
<CAPTION>
TENNECO
--------------------
JUNE 30, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt (a)..................................... $1,146 $ 330
------ ------
Long-term debt:
Notes (a)............................................. 2,790 --
Debentures (a)........................................ 584 --
Credit facilities..................................... -- 1,509
Other................................................. -- 5
------ ------
Total long-term debt.................................... 3,374 1,514
------ ------
Minority interest....................................... 320 18
------ ------
Preferred stock with mandatory redemption provisions.... 112 --
------ ------
Shareowners' equity:
Tenneco Junior Preferred Stock........................ -- 265
Subordinated Junior Preferred Stock................... -- 200
Common equity......................................... 3,569 777
------ ------
Total equity............................................ 3,569 1,242
------ ------
Total capitalization.................................... $8,521 $3,104
====== ======
</TABLE>
- --------
(a) For purposes of the pro forma capitalization, it is assumed that 100% of
the respective Tenneco Public Debt holders accept the Exchange Offers and
Tender Offers, as applicable. At this time, Tenneco cannot determine the
ultimate amount of Tenneco Public Debt securities which will be exchanged
or tendered pursuant to the Exchange Offers and Tender Offers,
respectively, and such amount could vary significantly.
123
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF TENNECO
The following Unaudited Pro Forma Consolidated Financial Statements of
Tenneco (the "Pro Forma Financial Statements") illustrate the effect of (i)
the Corporate Restructuring Transactions, the Cash Realignment and Debt
Realignment, the NPS Issuance and the Distributions (which are all part of the
Transaction discussed elsewhere herein) and (ii) the Merger and the
Refinancing Transactions. See "Risk Factors--Risk Factors Relating to Holders
Not Tendering in the Exchange Offers." The Unaudited Pro Forma Consolidated
Balance Sheet has been prepared as if such transactions occurred on June 30,
1996; the Unaudited Pro Forma Consolidated Statements of Income have been
prepared as if such transactions occurred as of January 1, 1995. The
accompanying Pro Forma Financial Statements are based, in part, upon
information and assumptions developed by El Paso management, principally
relating to the "Merger and Financing Adjustments."
The Corporate Restructuring Transactions represent a reorganization of
companies, assets and liabilities under common control and, accordingly, the
transfers of assets and liabilities pursuant to the Corporate Restructuring
Transactions will be accounted for at historical cost. In addition, the
Distributions represent the pro rata distribution of New Tenneco Common Stock
and Newport News Common Stock to the holders of Tenneco Common Stock in a spin
off transaction. Consequently, the Distributions will be recorded based on
historical cost.
As part of the Merger, El Paso will issue approximately $750 million
(subject to the effects of a collar on the average El Paso Common Stock market
price) of El Paso equity consideration to holders of Tenneco stock. The
composition of the El Paso equity consideration is dependent on whether
holders of El Paso Common Stock approve the proposed issuance of El Paso
Common Stock to consummate the Merger (the "Stock Issuance"). If the Stock
Issuance is not approved, the Merger will be consummated with a combination of
preferred stock of El Paso, with an assumed 8% dividend yield, and El Paso
Common Stock. A special meeting of El Paso's stockholders will be held on
1996 (which is expected to occur several days prior to the Tenneco
Special Meeting) to vote on the Stock Issuance. For purposes of these Pro
Forma Financial Statements, it has been assumed that El Paso will issue only
El Paso Common Stock to consummate the Merger. El Paso's acquisition of
Tenneco will be accounted for under the purchase method and the purchase price
adjustments will be reflected in the separate consolidated financial
statements of Tenneco. According to El Paso management, a final determination
of required purchase accounting adjustments, including the allocation of the
purchase price to the assets acquired and liabilities assumed based on their
respective fair values, has not yet been made. Accordingly, the purchase
accounting adjustments made in connection with the development of the Pro
Forma Financial Statements are preliminary and have been made solely for
purposes of developing the pro forma consolidated financial information.
However, El Paso's management has represented to Tenneco that it believes that
the pro forma adjustments and the underlying assumptions reasonably present
the significant effects of the Merger and the Refinancing Transactions. In
addition, El Paso will undertake a study to determine the fair value of
Tenneco's assets and liabilities and will revise purchase accounting
adjustments upon completion of that study. Upon consummation of the Merger,
the actual financial position and results of operations of Tenneco will
differ, perhaps significantly, from the pro forma amounts reflected herein
because of a variety of factors, including access to additional information,
changes in value and changes in operating results between the dates of the pro
forma financial information and the date on which the Merger takes place.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of Tenneco and its consolidated subsidiaries,
which are incorporated by reference herein, and the Notes to the Pro Forma
Financial Statements included elsewhere herein. The Pro Forma Financial
Statements are not necessarily indicative of actual operating results or
financial position had the transactions reflected therein occurred as of the
dates indicated above, nor do they purport to indicate operating results or
financial position which may be attained in the future.
124
<PAGE>
TENNECO
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
RESTRUCTURING,
REALIGNMENT,
CONSOLIDATED NPS ISSUANCE TENNECO MERGER AND CONSOLIDATED
TENNECO AND AS REFINANCING TENNECO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
------------ -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary
investments........... $ 229 $ (166)(c) $ 25 $ $ 25
(38)(d)
Receivables............ 1,898 (1,138)(c) 760 760
Inventories............ 1,175 (1,151)(c) 24 24
Other current assets... 349 (255)(c) 94 94
------- ------- ------- ------ ------
Total current assets... 3,651 (2,748) 903 903
------- ------- ------- ------ ------
Net property, plant and
equipment.............. 6,496 (3,611)(c) 2,885 1,856 (g) 4,161
(580)(j)
Goodwill and
intangibles............ 1,001 (964)(c) 37 37
Other assets and
deferred charges....... 2,114 (1,137)(c) 977 (530)(f) 527
80 (j)
------- ------- ------- ------ ------
Total assets........... $13,262 $(8,460) $ 4,802 $ 826 $5,628
======= ======= ======= ====== ======
LIABILITIES AND
SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt........ $ 1,146 $(1,146)(b) $ -- $ 330 (k) $ 330
Payables............... 1,170 (751)(c) 222 20 (e) 242
(197)(b)
Other current
liabilities........... 1,347 (660)(c) 605 120 (f) 725
(82)(b)
------- ------- ------- ------ ------
Total current
liabilities........... 3,663 (2,836) 827 470 1,297
------- ------- ------- ------ ------
Long-term debt.......... 3,374 (265)(a) 2,544 (500)(j) 1,514
(565)(b) (200)(i)
(330)(k)
Other liabilities and
deferred credits....... 1,220 (626)(c) 594 151 (f) 745
Deferred income taxes... 1,004 (603)(c) 401 411 (h) 812
------- ------- ------- ------ ------
9,261 (4,895) 4,366 2 4,368
------- ------- ------- ------ ------
Minority interest....... 320 (302)(c) 18 18
------- ------- ------- ------ ------
Preferred stock with
mandatory
redemption provisions.. 112 112 (112)(l) --
------- ------- ------- ------ ------
Shareowners' equity:
Tenneco Junior
Preferred Stock....... -- 265 (a) 265 265
Subordinated Junior
Preferred Stock....... -- -- 200 (i) 200
Common stock and paid-
in capital............ 4,504 4,504 (20)(e) 777
(801)(f)
1,856
(g)
(411)(h)
112 (l)
(4,463)(m)
Cumulative translation
adjustments........... 4 (4)(c) -- --
Retained earnings
(accumulated deficit). 26 1,990 (b) (3,498) 3,498 (m) --
(5,476)(c)
(38)(d)
------- ------- ------- ------ ------
4,534 (3,263) 1,271 (29) 1,242
Less-Shares held as
treasury stock, at
cost.................. 965 965 (965)(m) --
------- ------- ------- ------ ------
3,569 (3,263) 306 936 1,242
------- ------- ------- ------ ------
Total liabilities and
shareowners' equity... $13,262 $(8,460) $ 4,802 $ 826 $5,628
======= ======= ======= ====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
125
<PAGE>
TENNECO
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
RESTRUCTURING, REALIGNMENT, NPS ISSUANCE AND DISTRIBUTIONS:
(a) To reflect the NPS Issuance of $275 million of Tenneco Junior Preferred
Stock, with an assumed 8 1/2% dividend yield, for net NPS Issuance
Proceeds of $265 million, and the use of the net NPS Issuance Proceeds for
the repayment of Tenneco Energy Consolidated Debt.
(b) To reflect the restructuring and realignment of the Tenneco debt pursuant
to the Debt Realignment, the Distributions and the applicable provisions
of the Merger Agreement, and the assumed payment of accrued interest on
the Tenneco Public Debt defeased, redeemed, tendered or exchanged as part
of the Debt Realignment. The amount of "Tenneco as Adjusted" debt
immediately prior to the Merger will consist primarily of borrowings under
the Tenneco Credit Facility (assuming 100% acceptance of the Tender Offers
and Exchange Offers) and is calculated from the provisions of the Merger
Agreement as follows (in millions):
<TABLE>
<S> <C>
Base Debt Amount per the Merger Agreement......................... $2,650
Less: NPS Issuance Proceeds--see footnote (a)..................... (275)
------
2,375
Plus: Cash settlement payments.................................... 439
Less: Estimated collections subject to refund..................... (270)
------
Assumed "Tenneco as Adjusted" debt................................ $2,544
======
</TABLE>
At this time, Tenneco cannot determine the ultimate amount of securities
which will be purchased in the Tender Offers, or the ultimate amount of Old
Securities which will be exchanged into New Securities pursuant to the
Exchange Offers, and such amounts could vary significantly. However, for
purposes of these pro forma adjustments, it is assumed that 100% of the
securities subject to the Tender Offers are purchased pursuant to the
Tender Offers and 100% of the Old Securities are exchanged pursuant to the
Exchange Offers.
(c) To reflect the distribution of the New Tenneco Common Stock and Newport
News Common Stock pursuant to the Industrial Distribution and the Newport
News Distribution.
(d) To reflect distribution of Tenneco cash (subsequent to the Distributions)
in excess of $25 million pursuant to the Cash Realignment provisions of
the Merger Agreement.
MERGER AND REFINANCING TRANSACTIONS:
(e) To reflect the liability for the estimated legal, investment banking and
other costs of $20 million to be incurred by Tenneco in connection with
the Merger. These costs have been included in the purchase price reflected
in footnote (g).
(f) To reflect the preliminary estimated acquisition adjustments under the
purchase method of accounting, which will be reflected in the separate
financial statements of Tenneco, (i) to record assets acquired and
liabilities assumed at estimated fair value for reduction of certain other
assets, deferred charges and regulatory assets, and revision of benefit
plan assumptions relating to the retiree medical plan obligation, other
employee benefit costs and environmental costs, and (ii) the accrual of an
obligation to New Tenneco which is expected to be paid after the
completion of the transaction as a result of the utilization of certain
tax benefits generated by the Debt Realignment. The following adjustments
reflect El Paso management's intended business strategies which may differ
from the business strategies employed by Tenneco management prior to the
Merger (in millions):
<TABLE>
<S> <C>
Other assets and deferred charges...................................... $530
Other current liabilities.............................................. 120
Other liabilities and deferred credits................................. 151
----
$801
====
</TABLE>
126
<PAGE>
(Continued)
(g) To reflect the allocation to property, plant and equipment of the excess
purchase price of Tenneco, which will be reflected in the separate
financial statements of Tenneco, as follows (in millions):
<TABLE>
<S> <C>
Issuance of El Paso equity consideration in the Merger*............. $ 777
Less: Conversion of the $112 million Tenneco $4.50 and $7.40 Pre-
ferred Stock....................................................... (112)
Less: "Tenneco as Adjusted" net common book value subsequent to the
Debt Realignment and Distributions................................. (41)
Acquisition adjustments to assets acquired and liabilities assumed.. 801
Transaction fees payable--see footnote (e).......................... 20
Deferred income taxes on allocation of purchase price and acquisi-
tion adjustments................................................... 411
------
$1,856
======
</TABLE>
--------
* Reflects the contribution to Tenneco's capital of the El Paso equity
consideration issued as part of the Merger (assumed to only consist of El
Paso Common Stock for this pro forma financial information). The
composition of the El Paso equity consideration is dependent on whether
holders of El Paso Common Stock approve the Stock issuance to consummate
the Merger. If the Stock issuance of El Paso Common Stock is not
approved, the Merger will be consummated by issuing a combination of
preferred stock of El Paso, with an assumed 8% dividend yield, and El
Paso Common Stock. A portion of the total El Paso equity consideration
will be issued in exchange for the $112 million of Tenneco $7.40
Preferred Stock and Tenneco $4.50 Preferred Stock (see footnote (l)) with
the remainder exchanged for Tenneco Common Stock.
The allocation above reflects El Paso's internal evaluation of the excess
purchase price and is subject to the completion of an independent appraisal
of the fair value of the property. It is not expected that any excess
purchase price allocated to property, plant and equipment will be allowed
for regulatory recovery purposes. Should the independent appraisal not
support such allocation to property, plant and equipment, the excess of
total purchase price over the fair value of the net assets acquired will be
reflected as goodwill.
The following adjustments are made to adjust the historical values of
certain assets and liabilities to their estimated fair values as follows (in
millions):
<TABLE>
<S> <C>
Increase in property, plant and equipment............................ $1,856
Reduce other assets and deferred charges............................. (530)
Increase other current liabilities................................... (140)
Increase other liabilities and deferred credits...................... (151)
Increase deferred income tax liability............................... (411)
Eliminate Tenneco shareowners' equity:
Tenneco preferred stock............................................ 112
Tenneco common equity.............................................. 41
------
Issuance of El Paso equity consideration............................. $ 777
======
</TABLE>
(h) To reflect the increase in deferred income taxes of $411 million which have
been provided for temporary differences after the allocation of the pro
forma purchase price and acquisition adjustments. The following pro forma
adjustments were required for estimated book and tax basis differences
resulting from the allocation of the pro forma purchase price, at an
assumed effective tax rate of 39% (in millions):
<TABLE>
<S> <C>
Property, plant and equipment......................................... $ 724
Other assets.......................................................... (207)
Other liabilities..................................................... (106)
-----
$ 411
=====
</TABLE>
(i) To reflect the contribution by El Paso to Tenneco of proceeds from an
assumed issuance of $200 million of El Paso Common Stock in exchange for
Subordinated Junior Preferred Stock of Tenneco with an assumed dividend
yield of 9%. The proceeds from Tenneco's issuance of Subordinated Junior
Preferred Stock to El Paso will be utilized by Tenneco to pay down $200
million of the Tenneco Credit Facility.
(j) To reflect the assumed monetization of $500 million of assets through sales
or project financings, at book value, and to reflect Tenneco's remaining
$80 million investment in certain Australian projects using the equity
method. These proceeds are assumed to be utilized for the repayment of the
Tenneco Credit Facility.
(k) To reflect the replacement of the remaining balance under the Tenneco
Credit Facility with short-term and long-term financing at interest rates
of 6% and 8%, respectively.
(l) To reflect the conversion of the Tenneco $7.40 Preferred Stock and Tenneco
$4.50 Preferred Stock into El Paso Common Stock.
(m) To reflect the retirement and cancellation of Tenneco Common Stock held as
treasury stock and the capitalization of the pre-Merger "Tenneco as
Adjusted" accumulated deficit.
127
<PAGE>
TENNECO
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RESTRUCTURING,
REALIGNMENT,
CONSOLIDATED NPS ISSUANCE TENNECO MERGER AND CONSOLIDATED
TENNECO AND AS REFINANCING TENNECO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
------------ -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $5,517 $(4,147)(c) $1,370 $(46)(g) $1,324
Operating costs and expenses........... 5,004 (3,763)(c) 1,241 23 (d) 1,242
4 (e)
(26)(g)
------ ------- ------ ---- ------
Operating income...................... 513 (384) 129 (47) 82
Other (income) expense, net............ (168) 104 (c) (64) (64)
Interest expense....................... 179 (74)(b) 105 (28)(f) 72
(2)(g)
(3)(h)
------ ------- ------ ---- ------
Income before income taxes............ 502 (414) 88 (14) 74
Provision for income taxes *........... 175 29 (b) 8 (4)(g) 5
(196)(c) 1 (i)
Minority interest...................... 10 (10)(c) -- --
------ ------- ------ ---- ------
Net income from continuing operations. 317 (237) 80 (11) 69
Preferred stock dividends.............. 5 12 (a) 17 (5)(j) 21
9 (k)
------ ------- ------ ---- ------
Earnings from continuing operations
available to common stock............ $ 312 $ (249) $ 63 $(15) $ 48
====== ======= ====== ==== ======
EBITDA(m).............................. $ 956 $ 276
====== ======
Ratio of earnings to fixed charges(l).. 2.8 1.9
====== ======
Ratio of earnings to fixed charges and
preferred stock dividends(l).......... 2.7 1.5
====== ======
</TABLE>
- --------
* The provision for income taxes for Tenneco reflects the realization of
unrecognized deferred tax assets; therefore, the overall actual effective
tax rate is significantly lower than the assumed effective tax rate of 39%.
If the assumed effective tax rate had been used, the pro forma provision
for income taxes would have increased by $25 million and the pro forma
amount for earnings from continuing operations available to common stock
would have been $23 million.
See accompanying Notes to Unaudited Pro Forma Consolidated Income Statements.
128
<PAGE>
TENNECO
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
RESTRUCTURING,
REALIGNMENT,
CONSOLIDATED NPS ISSUANCE TENNECO MERGER AND CONSOLIDATED
TENNECO AND AS REFINANCING TENNECO PRO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS FORMA
------------ -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $8,899 $(6,978)(c) $1,921 $(52)(g) $1,869
Operating costs and
expenses............... 8,028 (6,278)(c) 1,750 46 (d) 1,761
8 (e)
(43)(g)
------ ------- ------ ---- ------
Operating income....... 871 (700) 171 (63) 108
Other (income) expense, (225) (106) (106)
net.................... 119 (c)
Interest expense........ 306 (89)(b) 217 (56)(f) 149
(6)(g)
(6)(h)
------ ------- ------ ---- ------
Income before income
taxes................. 790 (730) 60 5 65
Provision for income 279 35 (b) (45) 1 (g) (42)
taxes (benefit)*....... (359)(c) 2 (i)
Minority interest....... 22 (22)(c) -- --
------ ------- ------ ---- ------
Net income from
continuing operations. 489 (384) 105 2 107
Preferred stock 12 24 (a) 36 (12)(j) 42
dividends.............. 18 (k)
------ ------- ------ ---- ------
Earnings from
continuing operations
available to common
stock................. $ 477 $ (408) $ 69 $ (4) $ 65
====== ======= ====== ==== ======
EBITDA(m)............... $1,523 $ 456
====== ======
Ratio of earnings to
fixed charges(l)....... 2.4 1.3
====== ======
Ratio of earnings to
fixed charges and
preferred stock
dividends(l)........... 2.4 1.1
====== ======
</TABLE>
- --------
* The provision for income taxes for Tenneco reflects the realization of
unrecognized deferred tax assets; therefore, the overall actual effective
tax rate is significantly lower than the assumed effective tax rate of 39%.
If the assumed effective tax rate had been used, the pro forma provision
for income taxes (benefit) would have increased by $67 million and the pro
forma amount for earnings from continuing operations available to common
stock would have been $(2) million.
See accompanying Notes to Unaudited Pro Forma Consolidated Income Statements.
129
<PAGE>
TENNECO
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
RESTRUCTURING, REALIGNMENT, NPS ISSUANCE AND DISTRIBUTIONS:
(a) To reflect preferred stock dividends in the Consolidated Pro Forma Income
Statement on the Tenneco Junior Preferred Stock issued in the NPS Issuance
at an assumed yield of 8 1/2%.
(b) To reflect the effect on interest expense of the restructuring and
realignment of Tenneco debt pursuant to the Debt Realignment, the
Distributions and the applicable provisions of the Merger Agreement, and
related effect on the provision for income taxes (benefit) at an assumed
effective tax rate of 39%. The "Tenneco as Adjusted" debt consists
primarily of borrowings under the Tenneco Credit Facility (assuming 100%
acceptance of the Tender Offers and Exchange Offers) at an estimated
annual interest rate of 8%.
(c) To reflect the effects on Tenneco's results of operations from the
Industrial Distribution and the Newport News Distribution.
MERGER AND REFINANCING TRANSACTIONS:
(d) To reflect depreciation expense related to the increase in estimated fair
value of property, plant and equipment, depreciated over a 40-year period
which approximates the FERC approved depreciation rate for the regulated
property, plant and equipment of Tenneco prospectively.
(e) To reflect the assumed pro forma postretirement benefit cost for Tenneco
employees.
(f) To reflect an interest expense reduction relating to debt repaid with
proceeds from the $200 million Subordinated Junior Preferred Stock issued
to El Paso and proceeds from the monetization of $500 million of assets
and from project financings at book value.
(g) To reflect the impact on Tenneco's results of operations from the assumed
sale of certain 100% owned investments.
(h) To reflect the interest expense reduction relating to the replacement of
the Tenneco Credit Facility with short-term and long-term financing at
interest rates of 6% and 8%, respectively. A 1/8% change in interest rates
would have the impact of increasing pro forma interest expense by
approximately $1 million and $2 million for the six months ended June 30,
1996 and the year ended December 31, 1995, respectively.
(i) To reflect the income tax expense (benefit) effects of pro forma
adjustments at an assumed effective tax rate of 39%.
(j) To reflect the elimination of preferred stock dividends on the Tenneco
$7.40 Preferred Stock and Tenneco $4.50 Preferred Stock that will be
converted into El Paso Common Stock as part of the Merger.
(k) To reflect preferred stock dividends in the Consolidated Pro Forma Income
Statement on the Subordinated Junior Preferred Stock issued to El Paso
with an assumed dividend yield of 9%.
(l) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, preferred stock dividend requirements of subsidiaries, the
portion of rental expense considered representative of the interest factor
and capitalized interest. For purposes of computing these ratios,
preferred stock dividends have been included in the calculations on a pre-
tax basis.
(m) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical or pro forma Statements of Income. In addition, EBITDA should
not be considered as an alternative to net income, operating income, as an
indicator of the operating performance of Tenneco or as an alternative to
operating cash flows as a measure of liquidity.
130
<PAGE>
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated selected financial data as of and for each of the
fiscal years in the five-year period ended December 31, 1995 were derived from
audited financial statements of Tenneco and its consolidated subsidiaries. The
financial statements as of and for each of the fiscal years in the five-year
period ended December 31, 1995 have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated selected financial data as of
and for each of the six-month periods ended June 30, 1996 and 1995 were
derived from the unaudited condensed financial statements of Tenneco and its
consolidated subsidiaries. In the opinion of Tenneco's management, the
selected financial data of Tenneco as of and for the six months ended June 30,
1996 and 1995 include all adjusting entries (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results of operations for the six-months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year. This information should be read in conjunction with Tenneco's
financial statements, and the notes thereto, contained in the Tenneco Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995 and the
Tenneco Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1996, which are incorporated by reference herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------------
(DOLLARS IN MILLIONS
EXCEPT PER SHARE 1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
AMOUNTS) ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA(B):
Net sales and operating
revenues from
continuing
operations--
Automotive............ $ 1,463 $ 1,263 $ 2,479 $ 1,989 $ 1,785 $ 1,763 $ 1,668
Energy................ 1,366 937 1,916 2,378 2,862 2,183 2,183
Packaging............. 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Shipbuilding.......... 915 845 1,756 1,753 1,861 2,265 2,216
Other................. (2) (2) (4) (6) (5) 31 26
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ $ 5,517 $ 4,361 $ 8,899 $ 8,298 $ 8,545 $ 8,320 $ 8,027
=========== =========== =========== =========== =========== =========== ===========
Income from continuing
operations before
interest expense,
income taxes and
minority interest--
Automotive............ $ 163 $ 134 $ 240 $ 223 $ 222 $ 237 $ 188
Energy................ 185 148 333 415 411 360 561 (c)
Packaging............. 256 244 430 209 139 221 139 (c)
Shipbuilding.......... 81 90 160 200 225 249 225
Other................. (4) (11) (67) (25) 18 (32) (98)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ 681 605 1,096 1,022 1,015 1,035 1,015
Interest expense (net
of interest
capitalized).......... 179 152 306 263 254 221 237
Income tax expense..... 175 185 279 249 298 282 258
Minority interest...... 10 11 22 7 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations............ 317 257 489 503 463 532 520
Income (loss) from
discontinued
operations, net of
income tax(d)......... 339 81 246 (51)(e) (12)(e) (1,144)(e) (1,252)(e)
Extraordinary loss, net
of income tax......... -- -- -- (5) (25) (12) --
Cumulative effect of
changes in accounting
principles, net of -- -- -- (39)(f) -- (699)(f) --
income tax............ ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... 656 338 735 408 426 (1,323) (732)
Preferred stock 5 6 12 12 14 16 16
dividends............. ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) to $ 651 $ 332 $ 723 $ 396 $ 412 $ (1,339) $ (748)
common stock.......... =========== =========== =========== =========== =========== =========== ===========
Average number of
shares of common stock
outstanding........... 170,351,740 175,829,883 173,995,941 180,084,909 168,772,852 144,110,151 122,777,910
Earnings (loss) per
average share of
common stock--
Continuing
operations........... $ 1.83 $ 1.43 $ 2.75 $ 2.72 $ 2.66 $ 3.58 $ 4.10
Discontinued
operations........... 1.99 .46 1.41 (.27) (.07) (7.93) (10.19)
Extraordinary loss.... -- -- -- (.03) (.15) (.08) --
Cumulative effect of
changes in
accounting -- -- -- (.22) -- (4.86) --
principles........... ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)... $ 3.82 $ 1.89 $ 4.16 $ 2.20 (g) $ 2.44 (g) $ (9.29)(g) $ (6.09)
=========== =========== =========== =========== =========== =========== ===========
Cash dividends paid per
common share.......... $ .90 $ .80 $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 2.80
</TABLE>
(Table continued on next page)
131
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
---------- --------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA(B):
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets........... $ 13,262 $ 12,090 $ 13,451 $ 12,251 $ 11,105 $ 11,320 $ 12,985
Short-term debt........ 1,146 635 908 536 431 669 1,132
Long-term debt......... 3,374 3,309 3,751 3,568 3,620 4,718 4,593
Minority interest...... 320 315 320 320 150 160 171
Preferred stock with
mandatory redemption
provisions............ 112 129 130 147 163 191 194
Shareowners' equity.... 3,569 2,911 3,148 2,900 2,601 1,330 2,774
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (215) $ 255 $ 1,443 $ 450 $ 1,615 $ 929 $ 950
Net cash provided
(used) by investing
activities............ 505 183 (1,146) (117) (338) 105 (660)
Net cash provided
(used) by financing
activities............ (413) (741) (356) (151) (1,166) (1,136) (205)
Capital expenditures
for continuing
operations............ 464 322 976 653 424 447 564
OTHER DATA:
EBITDA(h).............. $ 956 $ 804 $ 1,523 $ 1,321 $ 1,385 $ 1,391 $ 1,350
Ratio of earnings to
fixed charges(i)...... 2.8 2.6 2.4 2.7 2.9 3.4 3.0
Ratio of earnings to
fixed charges and
preferred stock
dividends(i).......... 2.7 2.5 2.4 2.3 2.3 2.7 2.9
</TABLE>
- -------
(a)For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993, and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for Tenneco and Consolidated
Subsidiaries included in the Tenneco Annual Report on Form 10-K, as amended,
for the year ended December 31, 1995 and the Tenneco Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, which are incorporated by
reference herein.
(b) During 1995 and 1994, Tenneco completed several acquisitions at its
various operating segments, the most significant of which was Tenneco
Packaging's acquisition of Mobil Plastics for $1.3 billion by Tenneco
Packaging in late 1995. See Note 2 to the Financial Statements of Tenneco
Inc. and Consolidated Subsidiaries included in the Tenneco Annual Report
on Form 10-K, as amended, for the year ended December 31, 1995, which is
incorporated by reference herein, for further information on the Tenneco
acquisitions.
(c) For Tenneco Energy, includes a gain of $265 million related to the sale of
its natural gas liquids business, including its interest in an MTBE plant
then under construction. Also, Tenneco Packaging recorded a gain of $42
million related to the sale of three short-line railroads.
(d) Discontinued operations reflected in the above periods include Tenneco's
farm and construction equipment operations, which were discontinued in
March 1996, its chemicals and brakes operations, which were discontinued
during 1994, and its minerals and pulp chemicals operations, which were
discontinued in 1992. In addition, certain additional costs related to
Tenneco's discontinued oil and gas operations were reflected in 1991
results.
(e) Includes restructuring charge of $920 million recorded in 1992 relating to
the discontinued farm and construction equipment business. This
restructuring charge was reduced by $20 million in 1993 and $16 million in
1994. Additionally, a $473 million restructuring charge was recorded in
1991, of which $461 million related to the discontinued farm and
construction equipment business.
(f) In 1994, Tenneco adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, Tenneco adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Then Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(g) For purposes of computing earnings per share, Series A preferred stock was
included in average common shares outstanding until its conversion into
common stock in December 1994; therefore, the preferred dividends paid
were not deducted from net income (loss) to determine net income (loss) to
common stock. The inclusion of Series A preferred stock in the computation
of earnings per share was antidilutive for the years and certain quarters
in 1994, 1993 and 1992. Other convertible securities and common stock
equivalents outstanding during each of the five years ended December 31,
1995, 1994, 1993, 1992 and 1991 were not materially dilutive.
(h) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical or pro forma Statements of Income. In addition, EBITDA should
not be considered as an alternative to net income, operating income, as an
indicator of the operating performance of Tenneco or as an alternative to
operating cash flows as a measure of liquidity.
(i) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, preferred stock dividend requirements of subsidiaries, the
portion of rental expense considered representative of the interest factor
and capitalized interest. For purposes of computing these ratios,
preferred stock dividends have been included in the calculations on a pre-
tax basis.
132
<PAGE>
DESCRIPTION OF TENNECO ENERGY
GENERAL
As described elsewhere herein, immediately following the consummation of the
Distributions, Tenneco will consist solely of the Energy Business. The Energy
Business consists principally of the interstate transportation of natural gas,
as well as certain other related business operations not generally subject to
regulation by the FERC, such as gas marketing, intrastate pipeline operations,
international pipelines and power generation, domestic power generation
operations and oil and gas ventures. The Energy Business also includes the
assets and the liabilities of Tenneco and its subsidiaries that do not relate
to the Industrial Business or the Shipbuilding Business, including the assets
and liabilities of those business operations that have been discontinued or
sold. See "--Discontinued and Other Operations."
INTERSTATE PIPELINE OPERATIONS
The interstate pipeline operations of the Energy Business include the
pipeline systems of Tennessee, Midwestern and East Tennessee, as well as
certain joint ventures, which are primarily engaged in the transportation and
storage of natural gas for producers, marketers, end-users and other gas
transmission and distribution companies. Tennessee's multiple-line system
begins in gas-producing regions of Texas and Louisiana, including the
continental shelf of the Gulf of Mexico, and extends into the northeastern
section of the United States, including the New York City and Boston
metropolitan areas. Midwestern's pipeline system extends from Portland,
Tennessee, to Chicago, and principally serves the Chicago metropolitan area.
East Tennessee's pipeline system serves the states of Tennessee, Virginia and
Georgia. Revenues from the interstate gas sales and transportation operations
of the Energy Business accounted for approximately 45%, 39% and 40% of the
total revenues of the Energy Business for 1993, 1994 and 1995, respectively.
The interstate gas transmission systems of the Energy Business include
approximately 16,300 miles of pipeline, gathering lines and sales laterals
(with 14,800 miles operated by Tennessee, 400 miles operated by Midwestern and
1,100 miles operated by East Tennessee), together with related facilities that
include 90 compressor stations with an aggregate of approximately 1.5 million
horsepower. The Energy Business also has interests in or contractual rights to
six underground and above-ground gas storage facilities to permit increased
deliveries of gas during peak demand periods. The total design delivery
capacity of the Energy Business' interstate systems as of December 31, 1995
was approximately 4,800 million cubic feet ("MMCF") of gas per day, and
approximately 5,600 MMCF on peak demand days, which includes gas withdrawn
from storage.
Gas Sales and Transportation
The following table sets forth the volumes of gas, stated in billions of
British thermal units ("BBtu"), sold and transported by the interstate
pipeline of the Energy Business systems for the periods shown.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales*...................................... 95,397 131,097 213,210
Transportation*............................. 2,139,169 2,183,944 2,118,936
--------- --------- ---------
Total..................................... 2,234,566 2,315,041 2,332,146
========= ========= =========
</TABLE>
- --------
* Sales and transportation volumes include all natural gas sold or transported
by the Energy Business' interstate pipeline systems (including the
proportionate share of transportation volumes of the joint ventures in which
the Energy Business had interests) and have not been adjusted to reflect the
sale of a (i) 50% interest in Kern River Gas Transmission Company ("Kern
River") in December 1995, (ii) 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois") in June 1996, and (iii)
100% interest in Viking Gas Transmission Company ("Viking") in 1993. Kern
River owns a 904-mile pipeline system extending from Wyoming to California,
Iroquois owns a 370-mile pipeline extending from the Canadian border at
133
<PAGE>
Waddington, New York to Long Island, New York and Viking owns a 549-mile
pipeline extending from the Canadian border near Emerson, Manitoba to
Marshfield, Wisconsin. See "--Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Energy Business." Of the
total transportation volumes shown, Kern River transported approximately
135,827 BBtu, 129,964 BBtu and 127,624 BBtu during 1995, 1994 and 1993,
respectively, Iroquois transported approximately 45,272 BBtu, 32,489 BBtu and
32,721 BBtu during 1995, 1994 and 1993, respectively, and Viking transported
approximately 58,579 BBtu during 1993.
Customers of the interstate pipeline operations of the Energy Business
include natural gas producers, marketers and end-users, as well as other gas
transmission and distribution companies. Substantially all of the revenues of
these operations are generated under long-term gas transmission contracts
entered into between the Energy Business and its customers. Contracts
representing approximately 70% of the firm transportation capacity of the
interstate pipeline operations of the Energy Business will be expiring over
the next five years, principally in the year 2000. Although the Energy
Business presently intends to pursue the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether the
Energy Business will be able to obtain extended or replacement contracts.
Federal Regulation
The interstate natural gas pipeline companies included in the Energy
Business are "natural gas companies" as defined in the Natural Gas Act of
1938, as amended (the "Natural Gas Act"). As such, these companies are subject
to the jurisdiction of the FERC. The interstate pipeline operations of the
Energy Business are operated pursuant to certificates of public convenience
and necessity issued under the Natural Gas Act and pursuant to the Natural Gas
Policy Act of 1978. The FERC regulates the interstate transportation and
certain sales of natural gas, including, among other things, rates and charges
allowed natural gas companies, extensions and abandonments of facilities and
service, rates of depreciation and amortization and the accounting system
utilized by the companies.
Prior to the FERC's industry restructuring initiatives in the 1980's, the
Energy Business' interstate pipeline companies operated primarily as
merchants, purchasing natural gas under long-term contracts and reselling the
gas to customers, also under long-term contracts. On April 8, 1992, the FERC
issued Order 636 which restructured the natural gas industry by requiring
mandatory unbundling of pipeline sales and transportation services. Numerous
parties appealed to the U.S. Court of Appeals for the D.C. Circuit the
legality of Order 636 generally, as well as the legality of specific
provisions of Order 636. On July 16, 1996, the U.S. Court of Appeals for the
D.C. Circuit issued its decision upholding, in large part, Order 636. The
court remanded to the FERC several issues for further explanation, including
further explanation of the FERC's decision to allow pipelines to recover 100%
of their GSR costs.
Tennessee implemented revisions to its tariff, effective on September 1,
1993, which restructured its transportation, storage and sales services to
convert Tennessee from primarily a merchant to primarily a transporter of gas
as required by Order 636. As a result of this restructuring, Tennessee's gas
sales declined while certain obligations to producers under long-term gas
supply contracts continued, causing Tennessee to incur significant
restructuring transition costs. Pursuant to the provisions of Order 636
allowing for the recovery of transition costs related to the restructuring,
Tennessee has made filings to recover GSR costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" cost of Tennessee's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
Tennessee's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of
Tennessee to file for the recovery of losses upon disposition of these assets.
Tennessee has filed for appellate review of the FERC actions and believes that
certain Bastian Bay costs will ultimately be recovered as transition costs
under Order 636; the FERC has not contested the ultimate recoverability of
these costs.
134
<PAGE>
The filings implementing Tennessee's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery was made subject to refund pending FERC review and approval for
eligibility and prudence: (i) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; (ii) recovery of TBO costs,
which Tennessee is obligated to pay under existing contracts, through a
surcharge from firm transportation customers, adjusted annually; and (iii) GSR
cost recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers over a period of up to 60 months.
Following negotiations with its customers, Tennessee filed in July 1994 with
the FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides
for the recovery of approximately $100 million and the recovery of PGA costs
associated with the transfer of storage gas inventory to new storage customers
in Tennessee's restructuring proceeding. The PGA Stipulation eliminates all
challenges to the PGA costs, but establishes a cap on the charges that may be
imposed upon former sales customers. On November 15, 1994, the FERC issued an
order approving the PGA Stipulation and resolving all outstanding issues. On
April 5, 1995, the FERC issued its order on rehearing affirming its initial
approval of the PGA Stipulation. Tennessee implemented the terms of the PGA
Stipulation and made refunds in May 1995. The refunds had no material effect
on the net income reported by the Energy Business. The orders approving the
PGA Stipulation have been appealed to the D.C. Circuit Court of Appeals by
certain customers. Tennessee believes the FERC orders approving the PGA
Stipulation will be upheld on appeal.
Tennessee is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC subsequently issued
an order requiring Tennessee to refund certain costs from this surcharge and
refunds were made in May 1996. Tennessee is appealing this decision and
believes such appeal will likely be successful.
With regard to Tennessee's GSR costs, Tennessee, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
Tennessee of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an ALJ. The hearing, which concluded in July 1995, was limited to the
issue of whether the settlement agreements are prudent. The ALJ concluded, in
his initial decision issued in December 1995, that the settlement was
imprudent. Tennessee has filed exceptions to this initial decision. Tenneco
believes that this decision will not impair Tennessee's recovery of the costs
resulting from this contract. On July 17, 1996, the FERC ordered oral
arguments to be heard in September 1996. Oral arguments were held before the
full FERC on September 25, 1996. A decision by the FERC is expected by the end
of the year.
Also related to Tennessee's GSR costs, in June 1996, Tennessee settled
certain litigation with ICA Energy, Inc. ("ICA") and TransTexas Gas
Corporation ("TransTexas") by making a payment of $125 million. In connection
with that litigation, certain royalty interest owners filed a claim in July
1996 against Tennessee in Webb County, Texas, alleging that they are sellers
entitled to tender gas to Tennessee under the settled contract. This claim
falls under the indemnification provisions of Tennessee's settlement agreement
with TransTexas, which requires TransTexas to defend and indemnify Tennessee
on this claim.
Tennessee has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
Tennessee. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the
Court of Appeals favorable to Tennessee in one of these matters and indicated
that it would remand the case to the trial court. On April 18, 1996, however,
the Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
Tennessee. In June 1996, Tennessee filed a motion for rehearing with the Texas
Supreme Court which was
135
<PAGE>
denied in August 1996. The Texas Supreme Court's April 1996 ruling explicitly
preserves Tennessee's defenses based on bad faith conduct of the producers.
Nothing in the Texas Supreme Court's decision affects Tennessee's ability to
seek recovery of its above-market costs of purchasing gas under the contract
from its customers as GSR costs in proceedings currently pending before the
FERC. In addition, Tennessee has initiated two lawsuits against the holders of
this gas purchase contract, seeking damages related to their conduct in
connection with that contract. Tennessee has accrued amounts which it believes
are appropriate to cover the resolution of the litigation associated with its
contract reformation efforts.
As of June 30, 1996, Tennessee has deferred GSR costs yet to be recovered
from its customers of approximately $551 million, net of $380 million
previously recovered from its customers, subject to refund. The GSR Proceeding
is underway at the FERC with respect to the recovery of Tennessee's GSR costs.
Testimony has been completed in connection with Phase I of that proceeding
relating to the eligibility of GSR cost recovery; oral argument on eligibility
issues was originally set by a FERC ALJ for late October 1996. The Chief Judge
of the FERC has since issued orders (i) cancelling the October oral arguments,
(ii) convening settlement discussions which commenced on October 9, 1996, and
(iii) postponing scheduling an oral argument on eligibility.
Phase II of the proceeding on the prudency of the costs to be recovered and
on certain contract specific eligibility issues has not yet been scheduled,
but will likely occur sometimes after the ALJ's decision in Phase I is issued.
The FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although the Order 636 transition cost recovery
mechanism provides for complete recovery by pipelines of eligible and
prudently incurred transition costs, certain customers have challenged the
prudence and eligibility of Tennessee's GSR costs and Tennessee has engaged in
settlement discussions with its customers concerning the amount of such costs
in response to the FERC statements acknowledging the desirability of such
settlements.
Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tenneco is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on the combined financial position or results of operations of the
Energy Business.
On December 30, 1994, Tennessee filed for a general rate increase (the "1995
Rate Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, Tennessee
began collecting rates, subject to refund, reflecting an $87 million increase
in Tennessee's annual revenue requirement. A Stipulation and Agreement was
filed with an ALJ in this proceeding on April 5, 1996. This Stipulation, which
is currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and Tennessee is reserving revenues it believes adequate to
cover the income impact from any refunds that may be required upon final
settlement of this proceeding. While Tenneco believes that the Stipulation for
the settlement of the 1995 Rate Case is likely to be approved substantially in
its current form, there can be no assurance that there will not be changes
which are adverse to the Energy Business.
For a discussion of recent FERC proceedings relating to the recovery by the
Energy Business of certain environmental costs as a component of the rates
charged by its interstate pipeline operations see "--Environmental Matters."
Tennessee, as with all interstate pipelines, is subject to FERC audit review
of its books and records. Tennessee currently has an open audit covering the
years 1991-1994. The FERC audit staff is expected to issue an audit report by
year end.
Competition
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets,
136
<PAGE>
Tenneco Energy's interstate pipelines face competitive pressure from other
major pipeline systems, enabling local distribution companies and end-users to
choose a supplier or switch suppliers based on the short term price of gas and
the cost of transportation. Competition between pipelines is particularly
intense in Midwestern's Chicago and Northern Indiana markets, in East
Tennessee's Roanoke, Chattanooga and Atlanta markets, and in Tennessee's
supply area, Louisiana and Texas. In some instances, pipelines of the Energy
Business have been required to discount their transportation rates in order to
maintain their market share. As noted above, transportation contracts
representing approximately 70% of firm interstate transportation capacity will
be expiring over the next five years, principally in the year 2000. The
renegotiation of these contracts may be impacted by these competitive factors.
Gas Supply
With full implementation of Order 636, Tennessee's firm sales obligations
requiring maintenance of long-term gas purchase contracts have declined from
over a 1.4 billion dekatherm maximum daily delivery obligation to less than a
200 million dekatherm maximum daily delivery obligation. Tennessee has
substantially reduced its natural gas purchase portfolio in line with these
requirements through termination and assignment to third parties. Although
Tennessee's requirements for purchased gas are substantially less than prior
to its implementation of Order 636, the Energy Business is pursuing the
attachment of gas supplies to Tennessee's pipeline system for transportation
by others. Current gas supply activities include development of offshore and
onshore pipeline gathering projects and utilization of production financing
programs to spur exploration and development drilling in areas adjacent to
Tennessee's system. Major gathering systems in the Gulf of Mexico were
completed during the fourth quarter of 1994.
GAS MARKETING, INTRASTATE PIPELINES AND RELATED SERVICES
Tenneco Energy Resources Corporation ("Tenneco Resources"), a wholly owned
subsidiary of Tenneco, and its subsidiaries, are engaged primarily in the
businesses of marketing natural gas and owning and operating approximately
1,300 miles of pipelines that serve the Texas Gulf Coast and West Texas
markets.
Tenneco Resources' interstate marketing operations buy, sell and contract
for the transportation of up to 1.5 billion cubic feet of natural gas per day
from approximately 200 suppliers, through 40 pipelines to about 400 customers,
marketers and end-users. Tenneco Resources offers a portfolio of products and
services which are intended to help distributors, end-users and producers
manage their entire gas sales and purchasing processes, from budget control
and risk management to flexible takes and daily balances. Tenneco Resources
also owns and manages gas gathering systems and natural gas processing plants
in Pennsylvania, Texas and Louisiana. Additionally, Tenneco Resources owns and
operates, either directly or through joint ventures, approximately 1,300 miles
of intrastate pipelines in the Texas Gulf Coast and West Texas markets. In
addition to offering transportation capacity, these intrastate pipeline
operations manage buying, selling and transportation services for almost one
billion cubic feet of natural gas per day, serving approximately 150 suppliers
and 50 customers and shippers. The intrastate pipeline operations also provide
swing storage services and access to major intrastate and interstate pipelines
in Texas. Revenues from the operations of Tenneco Resources accounted for
approximately 55%, 61% and 57% of the total revenue of the Energy Business for
1993, 1994 and 1995, respectively.
The following table sets forth the volumes of gas, stated in BBtu, sold and
transported by Tenneco Resources for the periods indicated:
<TABLE>
<CAPTION>
1995 1994 1993
------- --------- -------
<S> <C> <C> <C>
Sales........................................... 642,096 739,432 741,800
Transportation.................................. 229,415 273,587 235,940
------- --------- -------
Total......................................... 871,511 1,013,019 977,740
======= ========= =======
</TABLE>
In February 1994, the Energy Business sold a 20% interest in Tenneco
Resources to Ruhrgas AG, Germany's largest natural gas company. As part of the
sale, Tenneco agreed that neither it nor any of its affiliates would engage in
gas marketing activities in North America and certain gas processing and
gathering activities except through Tenneco Resources. The Energy Business
repurchased this 20% interest in Tenneco Resources in September 1996 for $41
million.
137
<PAGE>
INTERNATIONAL, POWER GENERATION AND VENTURES
The Energy Business is presently engaged in various other energy-related
businesses that are consistent with Tenneco Energy's overall goal of
diversifying its operations into businesses that are not regulated by the
FERC.
International Operations. The Energy Business has recently undertaken
various activities to extend Tennessee's traditional activities in North
American pipelines to international pipeline, power, and energy-related
projects, with a current focus on activities in Latin America, Southeast Asia,
Australia and Europe.
In 1995, the Energy Business was selected to construct, own and operate a
470-mile natural gas pipeline in Queensland, Australia at a total cost of $170
million. Construction of the pipeline commenced in late 1995 and completion is
scheduled for December 1996. It is estimated that, as of June 30, 1996,
completion of the Queensland pipeline would require an additional $56 million
of capital expenditures. Additionally, in June 1995 Tenneco acquired the
natural gas pipeline assets of the Pipeline Authority of South Australia
("PASA"), which includes a 488-mile pipeline, for $225 million. It is
presently expected that El Paso will monetize certain of Tenneco's Australian
assets as part of the Refinancing Transactions. See "--Operation of the Energy
Business After the Merger" and "Description of Tenneco--Unaudited Pro Forma
Consolidated Statements." Tenneco Energy also has interests in a consortium
pursuing the development of a natural gas pipeline from Bolivia to Brazil and
related gas-fired electric generation plants. In December 1995, Tenneco Energy
was selected by the Beijing Natural Gas Transportation Company ("BGTC") to
serve as a paid technical advisor for the construction of China's first major
onshore natural gas pipeline. BGTC, a joint venture between the Chinese
National Petroleum Corporation and the city of Beijing, will build a 600-mile
line linking the Jingbian gas field in central China's Eerdous Basin with
Beijing. Construction commenced in March 1996, with an in-service date
scheduled for October 1997.
Power Generation Operations. Tenneco Energy's power unit is involved in
developing, building, owning, operating and acquiring energy-related
infrastructure domestically and internationally, by capitalizing on Tenneco
Energy's experience in major project development and gas technologies,
transportation and supply. Areas targeted for development include Australia,
Southeast Asia, central and eastern Europe and Latin America.
Tenneco Power Generation Company ("Tenneco Power") has a 17.5% interest in a
240 megawatt power plant in Springfield, Massachusetts, and 50% interests in
two additional cogeneration projects in Florida which have a combined capacity
of 220 megawatts. El Paso and Tenneco are currently working together to
monetize the Energy Business' interests in one of these Florida cogeneration
projects. See "--Operation of the Energy Business After the Merger" and
"Description of Tenneco--Unaudited Pro Forma Consolidated Financial
Statements." In May 1996, Tenneco Power acquired from Energy Equity Corp.,
Ltd., an Australian company, a 50% interest in two of its subsidiaries which
participate in a joint venture to construct a 135 megawatt gas-fired power
plant in Indonesia.
Tenneco Ventures. Tenneco Gas Production Corporation ("Tenneco Production")
and Tenneco Ventures Corporation ("Tenneco Ventures"), subsidiaries of
Tenneco, together with institutional investors and partners, invest in oil and
gas properties and finance independent producers engaged in exploration and
development projects. Tenneco Ventures and Tenneco Production hold various
ownership interests in oil and gas fields located primarily in the Gulf of
Mexico, Texas and Louisiana. Tenneco Ventures is also involved in Tenneco
Energy's international projects through exploration and development of gas
reserves in Indonesia, Poland and Bolivia. It is presently expected that,
after consummation of the Merger, El Paso will sell Tenneco Ventures and
Tenneco Production, the proceeds of which will be used to repay Tenneco debt.
See "--Operation of the Energy Business After the Merger" and "Description of
Tenneco--Unaudited Pro Forma Consolidated Financial Statements."
DISCONTINUED AND OTHER OPERATIONS
In addition to the operating assets and liabilities of the Energy Business,
upon consummation of the Merger and the other components of the Transaction,
including the Distributions, Tenneco (which will then be a subsidiary of El
Paso) will continue to hold certain limited assets and be responsible for the
liabilities of the existing and discontinued operations and businesses of
Tenneco and its subsidiaries other than those relating to the Industrial
Business or the Shipbuilding Business. These assets and liabilities consist
primarily of Tenneco's
138
<PAGE>
remaining interests in various discontinued operations which were engaged in
(i) natural gas pipeline transmission, gathering and processing, (ii) chemicals
production, (iii) the manufacture of farm and construction equipment through
Case and related companies, (iv) the extraction of minerals and other natural
resources, (v) oil and gas exploration, production and marketing through
Tenneco Oil Company and other companies, (vi) agricultural and urban
development, and (vii) insurance. Tenneco has established reserves which it
believes are adequate to cover these liabilities related to the various
discontinued operations of Tenneco for which it will remain liable following
consummation of the Transaction. See Note 13 to the Tenneco Energy Combined
Financial Statements included elsewhere herein and "--Environmental Matters."
EMPLOYEES
As of June 30, 1996, the Energy Business had approximately 3,200 full-time
employees.
PROPERTIES
Tenneco believes that substantially all of the facilities and equipment of
the Energy Business are, in general, well maintained and in good operating
condition. They are considered adequate for present needs and as supplemented
by planned construction are expected to remain adequate for the near future.
Tenneco also believes that it has generally satisfactory title to the
properties owned and used in the Energy Business, subject to liens for current
taxes and easements, restrictions and other liens which do not materially
detract from the value of such property or the interests therein or the use of
such properties in its businesses.
OPERATION OF THE ENERGY BUSINESS AFTER THE MERGER
General. El Paso has indicated that it is currently engaged in a
comprehensive review of the business and operations of Tenneco Energy.
Following the completion of such review and the Merger, El Paso has indicated
that it plans to integrate, for the most part, the operations of Tenneco Energy
with those of El Paso in order to increase operating and administrative
efficiency through consolidation and reengineering of facilities, workforce
reductions and coordination of purchasing, sales and marketing activities. El
Paso has indicated that it anticipates that the complementary interstate and
intrastate pipeline operations and gas marketing activities of El Paso and
Tenneco Energy should provide the combined company with increased operating
flexibility and access to additional customers and markets.
Refinancing Transactions. El Paso has indicated that it intends to undertake
the Refinancing Transactions in order to reduce the amount of Tenneco debt that
would otherwise be outstanding after consummation of the Transaction.
Accordingly, El Paso and Tenneco currently are working together to monetize
certain assets of the Energy Business through asset sales and non-recourse
project financings which currently are expected to provide net proceeds to
Tenneco of $500 million. El Paso has indicated that these proceeds will be used
to repay outstanding borrowings under the Tenneco Credit Facility. Assets to be
sold include Tenneco Ventures and Tenneco Production and an interest in
Tenneco's Australian pipeline operations. Project financings include one of
Tenneco's U.S. cogeneration facilities and the Australian pipeline operations.
Subject to market conditions, El Paso also currently intends to undertake a
public offering of common stock at some time after the Merger for anticipated
net proceeds of approximately $200 million. With the proceeds of this offering,
El Paso intends to purchase from Tenneco approximately $200 million of a series
of its Subordinated Junior Preferred Stock. El Paso intends to use the proceeds
from any offering of Subordinated Junior Preferred Stock to repay outstanding
borrowings under the Tenneco Credit Facility.
In addition, as market conditions may allow, El Paso may refinance Tenneco's
post-Transaction debt through a sale of senior debt securities of Tenneco
and/or Tennessee to the public. See "Description of Tenneco--Unaudited Pro
Forma Consolidated Financial Statements of Tenneco."
ENVIRONMENTAL MATTERS
Since 1988, Tennessee has been engaged in an internal project to identify and
deal with the presence of polychlorinated biphenyls ("PCBs") and other
substances of concern, including substances on the U.S. EPA List of Hazardous
Substances ("HS List") at compressor stations and other facilities operated by
both its interstate and intrastate natural gas pipeline systems. While
conducting this project, Tennessee has been in frequent contact with federal
and state regulatory agencies, both through informal negotiation and formal
entry of consent orders, in order to assure that its efforts meet regulatory
requirements.
139
<PAGE>
Tenneco has established a reserve for Tennessee's environmental expenses,
which includes: (i) expected remediation expense and associated onsite,
offsite and groundwater technical studies; (ii) legal fees; and (iii)
settlement of third party and governmental litigation, including civil
penalties. Through June 30, 1996, Tenneco has charged approximately $156
million against the environmental reserve, excluding recoveries related to
Tennessee's environmental settlement as discussed below. Of the remaining
reserve, $24 million has been recorded on the combined balance sheet under
"Payables-trade" and $132 million under "Deferred credits and other
liabilities."
Due to the current uncertainty regarding the further activity necessary for
Tennessee to address the presence of the PCBs, the substances on the HS List
and other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, Tenneco cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
Tennessee's evaluation and experience to date, Tenneco continues to believe
that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, Tennessee in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that establishes a mechanism for recovering a substantial
portion of the environmental costs. In November 1995, the FERC issued an order
approving the Environmental Stipulation. Although one shipper filed for
rehearing, the FERC denied rehearing of its order on February 20, 1996. This
shipper filed a Petition for Review on April 22, 1996 in the D.C. Circuit
Court of Appeals; Tennessee believes the FERC order approving the
Environmental Stipulation will be upheld on appeal. The effects of the
Environmental Stipulation, which was effective as of July 1, 1995, have been
recorded with no material effect on the combined financial position or results
of operations of the Energy Business. As of June 30, 1996, the balance of the
regulatory asset is $61 million.
Tenneco has completed settlements with and has received payments from the
majority of its liability insurance policy carriers for remediation costs and
related claims. Tenneco believes that the likelihood of recovery of a portion
of these remediation costs and claims against the remaining carriers in its
pending litigation is reasonably possible. In addition, Tennessee has settled
its pending litigation against and received payment from the manufacturer of
the PCB-containing lubricant. These recoveries have been considered in
Tennessee's recording of its environmental settlement with its customers.
Tennessee is a party in proceedings involving federal and state authorities
regarding the past use by Tennessee of a lubricant containing PCBs in its
starting air systems. Tennessee has executed a consent order with the EPA
governing the remediation of certain of its compressor stations and is working
with the Pennsylvania and New York environmental agencies to specify the
remediation requirements at the Pennsylvania and New York stations.
Remediation activities in Pennsylvania are essentially complete; in addition,
pursuant to the Consent Order dated August 1, 1995, between Tenneco and the
Pennsylvania Department of Environmental Protection, Tenneco funded an
environmentally beneficial project for $450,000 in April 1996. Remediation and
characterization work at the compressor stations under its consent order with
the U.S. EPA and the jurisdiction of the New York Department of Environmental
Conservation is ongoing. Tenneco believes that the ultimate resolution of
these matters will not have a material adverse effect on the combined
financial position or results of operations of the Energy Business.
Tennessee sold its subsidiary which owns a 13.2% general partnership
interest in Iroquois to ANR Iroquois Inc., a subsidiary of The Coastal
Corporation. Iroquois owns an interstate gas pipeline from the Canadian border
through the states of New York and Connecticut to Long Island. Tennessee is
still under contract to provide gas dispatching as well as post-construction
field operation and maintenance services for the operator of Iroquois, but
Tennessee is not the operator and is not an affiliate of the operator of
Iroquois' pipeline system. A global settlement was entered into during the
second quarter of 1996 by Iroquois and the operator of Iroquois' pipeline
system with the Federal and New York State authorities resolving all criminal,
civil and administrative
140
<PAGE>
enforcement actions contemplated by such authorities as a result of their
investigation of alleged environmental violations which occurred during the
construction of the pipeline. Due to the sale of Tenneco's interest in
Iroquois, Tenneco believes that any environmental matters relating to the
construction and operation of the pipeline system by Iroquois will not have a
material adverse effect on the combined financial position or results of
operations of the Energy Business.
Tenneco has identified other sites in its various operating divisions
included within the Energy Business where environmental remediation expense
may be required should there be a change in ownership, operations or
applicable regulations. These possibilities cannot be predicted or quantified
at this time and accordingly, no provision has been recorded. However,
provisions have been made for all instances where it has been determined that
the incurrence of any material remedial expense is reasonably possible.
Tenneco believes that the provisions recorded for environmental exposures are
adequate based on current estimates.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court,
Docket No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency
alleged that Tennessee discharged pollutants into the waters of the state
without a permit and disposed of PCBs without a permit. The agency sought an
injunction against future discharges, sought an order to remediate or remove
PCBs, and sought a civil penalty. Tennessee has entered into agreed orders
with the agency to resolve many of the issues raised in the original
allegations, has received water discharge permits for its Kentucky stations
from the agency, and continues to work to resolve the remaining issues.
Counsel for Tenneco are unable to express an opinion as to the ultimate
outcome. Tenneco believes that the resolution of this issue will not have a
material adverse effect on the combined financial position or results of
operations of the Energy Business.
Certain of the entities included in the Energy Business have been
designated, have received notice that they could be designated or have been
asked for information to determine whether they could be designated as
potentially responsible parties with respect to 26 "Superfund" sites (of which
24 are related to discontinued operations included within the Energy
Business). The Energy Business' has sought to resolve its liability with
respect to these sites through indemnification by third parties and/or
settlements which provide for payment of the Energy Business' allocable share
of remediation costs. Tenneco has estimated the Energy Business' share of the
remediation costs at these sites to be between $7 million and $41 million and
has provided reserves that it believes are adequate for such costs. Because
the clean up costs are estimates and are subject to revision as more
information becomes available about the extent of remediation required,
Tenneco's estimate of the Energy Business' share of remediation costs could
change. Moreover, liability under the federal Superfund statute (the
Comprehensive Environmental Response, Compensation and Liability Act) is joint
and several, meaning that the Energy Business could be required to pay in
excess of its pro rata share of remediation costs. Tenneco's understanding of
the financial strength of other potentially responsible parties has been
considered, where appropriate, in its determination of the Energy Business'
estimated liability as described herein. Tenneco presently believes that the
costs associated with the current status of members of such Energy Business
entities as potentially responsible parties at the Superfund sites referenced
above will not have a material adverse effect on the combined financial
position or results of operations of the Energy Business.
In addition, the Energy Business includes liabilities to remediate a number
of formerly owned or leased sites, and certain other sites associated with the
discontinued operations included in the Energy Business, pursuant to state and
federal laws enacted for the protection of the environment. Tenneco estimates
the Energy Business' share of the remediation costs at these sites to be
between $23 million and $43 million and has provided reserves that it believes
are adequate for such costs. Because the cleanup costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, Tenneco's estimate of the Energy Business' share of
remediation costs could change. Tenneco presently believes that the costs to
remediate these sites will not have a material adverse effect on the combined
financial position or results of operations of the Energy Business.
For additional information concerning environmental matters, see the caption
"Environmental Matters" under Note 15 in the notes to the Tenneco Energy
Combined Financial Statements included elsewhere herein.
For a discussion of various regulatory proceedings involving cost recovery
and contract reformation in connection with Tenneco Energy's interstate
pipeline operations, see "--Interstate Pipeline Operations--Federal
Regulation."
141
<PAGE>
LEGAL PROCEEDINGS
In addition to the proceedings described herein under "--Environmental
Matters" and "--Interstate Pipeline Operations--Federal Regulation," Tenneco
and its subsidiaries are parties to numerous other legal proceedings relating
to the Energy Business and arising from their present and former operations.
Tenneco Energy believes that the outcome of these other proceedings,
individually and in the aggregate, will have no material adverse effect on the
combined financial condition or results of operations of the Energy Business.
TENNECO CREDIT FACILITY
Tenneco intends to enter into the Tenneco Credit Facility under which a
syndicate of banks (the "Lenders") will commit to provide up to $3.0 billion
of financing to Tenneco on an unsecured basis. It is expected Chase Securities
Inc. will arrange the Tenneco Credit Facility and The Chase Manhattan Bank
will act as agent for the Lenders. The Tenneco Credit Facility is expected to
be a 364-day revolving credit facility with a two year term thereafter, the
proceeds of which will be used to effect the Debt Realignment and for other
general corporate purposes, and, upon consummation of the Merger will be
guaranteed by El Paso.
Initial borrowings under the Tenneco Credit Facility are expected to occur
shortly before the Merger Effective Time. See "Description of Tenneco--
Unaudited Pro Forma Consolidated Financial Statements" for a description of
the application of the proceeds of such borrowings. The borrowings under the
Tenneco Credit Facility are expected to mature on , 1999.
Borrowings under the Tenneco Credit Facility are expected to bear interest
at a rate per annum equal to, at Tenneco's option, either
(a) the highest of (i) the rate from time to time publicly announced by
The Chase Manhattan Bank in New York City as its prime rate, (ii) the
federal funds effective rate from time to time plus 1/2 of 1%, and (iii)
the secondary market rate for certificates of deposit plus 1/2 of 1% (such
higher rate, the "Alternate Base Rate"), plus in each case, the Applicable
Margin (as defined herein), or
(b) the average of the rates at which eurodollar deposits for one, two,
three or six months or, subject to availability to each lender, nine or 12
months (as selected by Tenneco) are offered in the interbank eurodollar
market in the approximate amount of the relevant loan (the "Eurodollar
Rate"), plus the Applicable Margin.
It is expected that the "Applicable Margin" will mean initially for loans made
at the Alternate Base Rate, %, and for loans made at the Eurodollar Rate,
%; provided, that such margins will be adjustable up or down based on El
Paso's senior long-term debt rating or, if El Paso's debt is not rated, each
rating agency will be assumed to have assigned its lowest rating.
It is expected that the Tenneco Credit Facility will require that El Paso's
ratio of total indebtedness to total indebtedness plus net worth not exceed
70%. Failure to satisfy the foregoing minimum requirement will be a default
under the Tenneco Credit Facility that will enable the Lenders to refuse to
loan funds to Tenneco and to accelerate the indebtedness thereunder.
It's also expected that the Tenneco Credit Facility will impose prohibitions
or limitations on liens (other than agreed permitted liens), subsidiary
indebtedness and guarantee obligations, asset dispositions (with certain
permitted exceptions) and dividends, among others.
It is expected that the Tenneco Credit Facility will contain certain default
provisions, including, among other things, (i) nonpayment of any amount due to
the lenders under the Tenneco Credit Facility, (ii) material breach of
representations and warranties, (iii) default in the performance of covenants,
(iv) bankruptcy or insolvency, (v) cross-default with respect to indebtedness
for borrowed money and related guaranty obligations in excess of $100 million,
and (vi) a judgment suffered by El Paso in excess of $50 million not covered
by insurance and which judgment shall not have been vacated, discharged,
stayed or bonded pending appeal within 60 days.
142
<PAGE>
MANAGEMENT AFTER THE TRANSACTION
Pursuant to the Merger Agreement, the directors of El Paso Subsidiary as of
the Merger Effective Time will become the initial directors of Tenneco after
consummation of the Merger. In addition, the executive officers of El Paso
Subsidiary as of the Merger Effective Time will become the initial executive
officers of Tenneco upon consummation of the Merger. El Paso has advised
Tenneco that the following individuals will be the directors and executive
officers of El Paso Subsidiary as of the Merger Effective Time and will become
the directors and executive officers of Tenneco upon consummation of the
Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Wise......... 51 Chairman of the Board, President and Chief Executive Officer
H. Brent Austin......... 42 Senior Vice President, Chief Financial Officer and Director
Joel Richards III....... 49 Senior Vice President and Director
Britton White, Jr....... 53 Senior Vice President, General Counsel and Director
Thomas C. Livengood..... 41 Vice President, Treasurer and Director
Jeffrey I. Beason....... 47 Vice President and Controller
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
WILLIAM A. WISE--Upon consummation of the Merger, Mr. Wise will become the
Chairman of the Board, President and Chief Executive Officer of Tenneco. Mr.
Wise has been Chairman of the Board of El Paso since January 1994 and the
President and Chief Executive Officer of El Paso since January 1990. He was
President and Chief Operating Officer of El Paso from April 1989 to December
1989. From March 1987 until April 1989, Mr. Wise was an Executive Vice
President of El Paso. From January 1984 to February 1987, he was a Senior Vice
President of El Paso. He is a member of the Board of Directors of Battle
Mountain Gold Company.
H. BRENT AUSTIN--Upon consummation of the Merger, Mr. Austin will become the
Senior Vice President, Chief Financial Officer and a Director of Tenneco. Mr.
Austin has been Executive Vice President of El Paso since May 1995 and he has
been Chief Financial Officer of El Paso since April 1992. He was Senior Vice
President of El Paso from April 1992 to April 1995. He was Vice President,
Planning and Treasurer of Burlington Resources, Inc. ("BR") from November 1990
to March 1992 and Assistant Vice President, Planning of BR from January 1989
to October 1990.
JOEL RICHARDS III--Upon consummation of the Merger, Mr. Richards will become
the Senior Vice President and a Director of Tenneco. Mr. Richards has been
Senior Vice President of El Paso since January 1991 and he was Vice President
from June 1990 to December 1990. He was Senior Vice President, Finance and
Human Resources of Meridian Minerals Company, a wholly owned subsidiary of BR,
from October 1988 to June 1990.
BRITTON WHITE, JR.--Upon consummation of the Merger, Mr. White will become
the Senior Vice President, General Counsel and a Director of Tenneco. Mr.
White has been Senior Vice President and General Counsel of El Paso since
March 1991 and from March 1991 to April 1992, he was also Corporate Secretary
of El Paso. For more than five years prior to that time, Mr. White was a
partner in the law firm of Holland & Hart.
THOMAS C. LIVENGOOD--Upon consummation of the Merger, Mr. Livengood will
become the Vice President, Treasurer and a Director of Tenneco. Mr. Livengood
joined Tennessee in April 1989 and has served in several executive capacities.
He is currently Vice President and Chief Financial Officer of Tennessee.
JEFFREY I. BEASON--Upon consummation of the Merger, Mr. Beason will become
the Vice President and Controller of Tenneco. Mr. Beason has been Vice
President, Controller and Treasurer of El Paso since April 1996 and from
September 1993 to April 1996 he was Senior Vice President of Administration
for Mojave Pipeline Operating Company, a subsidiary of El Paso. For more than
five years prior to September 1993, Mr. Beason was Director of Financial
Reporting for El Paso.
143
<PAGE>
TENNECO ENERGY
COMBINED SELECTED FINANCIAL DATA
The combined selected financial data as of December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993 were derived from the
audited Combined Financial Statements of Tenneco Energy. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of Tenneco Energy. In the opinion of
Tenneco Energy's management, the combined selected financial data of Tenneco
Energy as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 and for the six months ended June 30, 1996 and 1995 include
all adjusting entries (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results of
operations for the six months ended June 30, 1996 should not be regarded as
indicative of the results that may be expected for the full year. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Energy
Business and Tenneco Energy's Combined Financial Statements, and notes
thereto, included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(DOLLARS IN MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues.............. $1,370 $ 939 $1,921 $2,381 $2,866 $2,221 $2,216
====== ====== ====== ====== ====== ====== ======
Income before interest
expense and income
taxes ................ 188 140 268 367 419 337 475(c)
Interest expense (net
of interest capital-
ized)................. 63 61 122 142 127 94 121
Income tax expense
(benefit)............. 22 32 (11) 72 104 63 103
------ ------ ------ ------ ------ ------ ------
Income before
extraordinary loss and
cumulative effect of
changes in accounting
principles, net of
income tax............ 103 47 157 153 188 180 251
Extraordinary loss, net
of income tax......... -- -- -- -- (25)(d) (9)(e) --
Cumulative effect of
changes in accounting
principles, net of in-
come tax.............. -- -- -- -- -- (332)(f) --
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 103 $ 47 $ 157 $ 153 $ 163 $ (161) $ 251
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $5,539 $5,799 $5,792 $5,730 $4,290 $4,054 $4,464
Short-term debt(g)..... 521 376 456 399 304 392 338
Long-term debt(g)...... 1,519 1,737 1,811 2,242 2,019 2,282 2,674
Combined equity........ 1,054 899 687 382 (652) (1,503) (1,120)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (185) $ 174 $ 765 $ (278) $ 209 $ 729 $ 84
Net cash provided
(used) by investing
activities............ 117 (266) (537) (229) (35) (383) 61
Net cash provided
(used) by financing
activities............ (81) 63 (27) 426 (49) (393) (190)
Capital expenditures... 164 113 337 345 171 253 298
</TABLE>
- --------
(a)For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Energy Business
included elsewhere herein.
(b) During 1995, 1994 and 1993, Tenneco Energy completed several acquisitions
and dispositions, the most significant of which was the acquisition of the
natural gas pipeline assets of the Pipeline Authority of South Australia
in 1995 and the disposition of its 50% interest in Kern River Gas
Transmission Company in 1995. See Notes 4 and 5 to the Combined Financial
Statements of Tenneco Energy, included elsewhere herein, for further
information on the Tenneco Energy acquisitions and dispositions.
(c) Includes a gain of $265 million related to the sale of Tenneco Energy's
natural gas liquids business, including its interest in an MTBE plant then
under construction.
(d) During 1993, Tenneco Energy recorded an extraordinary loss as a result of
the prepayment of long-term debt. See Note 5 to the Combined Financial
Statements of Tenneco Energy, included elsewhere herein, for further
information on the Tenneco Energy extraordinary loss.
(e) During 1992, Tenneco Energy recorded an extraordinary loss as a result of
the defeasance of $310 million of its high interest bearing long-term
debt.
(f) In 1992, Tenneco Energy adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(g) Amounts are net of allocations from Tenneco to New Tenneco and Newport
News. The allocation is based on the portion of Tenneco's investment in
New Tenneco and Newport News which is deemed to be debt, generally based
on the ratio of New Tenneco's and Newport News' net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of
Tenneco Energy's debt and interest expense upon completion of the Debt
Realignment. See Note 6 to the Combined Financial Statements of Tenneco
Energy, included elsewhere herein.
144
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE ENERGY BUSINESS
The following review of the financial condition and results of operations of
the Energy Business should be read in conjunction with the Combined Financial
Statements of Tenneco Energy and the notes thereto included elsewhere in this
Prospectus. Such review includes certain forward-looking statements, which
should be read in conjunction with the factors identified in "Risk Factors"
herein.
PROPOSED MERGER WITH EL PASO
In the first quarter of 1996, Tenneco announced its intention to focus on
its automotive parts and packaging businesses. This strategic action included
the spin-off of Newport News to the holders of Tenneco Common Stock and the
development of options to separate Tenneco Energy from the packaging and
automotive parts divisions. On June 19, 1996, Tenneco announced that it has
signed the Merger Agreement, pursuant to which El Paso Subsidiary will be
merged with and into Tenneco, with Tenneco surviving the Merger as a
subsidiary of El Paso. Prior to the Merger, Tenneco will spin off New Tenneco
and Newport News to the holders of Tenneco Common Stock as separate public
companies.
The Merger represents a total value for Tenneco stockholders of
approximately $4 billion which includes:
. New shares of El Paso equity to be issued to Tenneco stockholders valued
at approximately $750 million (subject to the effect of a collar on the
market price of El Paso Common Stock issuable in connection with the
Merger).
. Retention by Tenneco after the Distributions and the Merger of
approximately $2.65 billion (subject to adjustment as more fully
described herein under "Debt and Cash Realignment") of Tenneco Energy
Consolidated Debt and the Tenneco Junior Preferred Stock to be issued in
the NPS Issuance.
. Other payments and certain liability retentions by El Paso which El Paso
has estimated at an aggregate of approximately $600 million. See "The
Merger."
Upon consummation of the Transaction, holders of Tenneco Common Stock will
own equity securities of three separate, publicly held companies--New Tenneco,
Newport News and El Paso (which will include Tenneco Energy as a subsidiary)--
and holders of $7.40 Preferred Stock and $4.50 Preferred Stock will hold El
Paso Common Stock.
The consummation of the Transaction is subject to certain conditions,
including receipt of a favorable ruling from the IRS that the Distributions
will be tax-free for federal income tax purposes to Tenneco and its
stockholders and approval of the Transaction by Tenneco stockholders at the
Tenneco Special Meeting and of the Distributions and the Charter Amendment by
the holders of the Tenneco Junior Preferred Stock issued in the NPS Issuance
(if issued prior to the Charter Amendment becoming effective). See "The
Distributions--Conditions to Consummation of the Distributions" and "The
Merger--Conditions Precedent."
REFINANCING TRANSACTIONS
El Paso has indicated that it currently intends to monetize certain assets
of Tenneco Energy in order to pay down certain post-Transaction debt of
Tenneco for anticipated net proceeds of approximately $500 million. See
"Description of Tenneco Energy--Operation of Energy Business After the Merger"
and "Description of Tenneco--Unaudited Pro Forma Consolidated Financial
Statements."
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net income for the 1996 first half of $103 million increased significantly
compared with $47 million in the first half of 1995.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-----------
1996 1995
------ ----
(MILLIONS)
<S> <C> <C>
Revenues...................................................... $1,370 $939
Operating income.............................................. 188 140
</TABLE>
NET SALES AND OPERATING REVENUES
Revenues for the 1996 first half were $1.37 billion, an increase of 46
percent compared with $939 million for the year ago period.
145
<PAGE>
Revenues from Tenneco Energy's operations which are subject to regulation by
the FERC (generally referred to herein as its "regulated" operations)
increased to $423 million, or 21 percent, primarily due to a new rate
structure implemented in July 1995, which increased revenues by approximately
$30 million, higher transportation volumes resulting in a $35 million
increase, and non-recurring regulatory settlements of $8 million that had no
operating income impact. Revenues from Tenneco Energy's energy-related
operations which are not generally subject to regulation by the FERC
(generally referred to herein as its "non-regulated" operations) increased 61
percent to $943 million, primarily the result of higher gas prices resulting
in a $300 million revenue increase, an increase in gas volumes, increasing
revenues by $28 million, the acquisition of the assets of the Pipeline
Authority of South Australia ("PASA") in June 1995 which contributed $18
million in revenues and new processing and gathering projects which increased
revenues by $10 million. Revenues from other operations were $4 million
compared with $2 million in the prior-year period.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Operating income from regulated operations in the U.S. rose $32 million to
$166 million. The increase included $15 million for a favorable legal
settlement in addition to a $4 million gain on the sale of Tennessee's
interest in Iroquois. Higher transportation rates, which contributed a $30
million increase, more than compensated for the absence of earnings
contributed by Kern River, which contributed $16 million in the year-ago
period. Tenneco Energy's 50 percent interest in Kern River was sold in late
1995.
Nonregulated operating income increased to $19 million in the first half of
1996 from $14 million in the 1995 first half due to higher operating income
from Tenneco Ventures' oil and gas production of $10 million and acquisition
of PASA in June 1995 which contributed $10 million. Partially offsetting the
nonregulated earnings increase was lower operating income of $3 million due to
depressed margins on marketing activities resulting from increased
competition, $5 million in unfavorable legal settlements and other
nonregulated activities resulting in decreases of $7 million.
Tenneco Energy's other operations reported operating income of $3 million
during the first half of 1996 compared with an operating loss of $8 million in
the 1995 first half. The increase is due to the recognition of a $32 million
deferred gain on the sale of Tenneco Energy's investment in Cummins Engine
Company stock offset by lower interest income from the rolloff of Case retail
receivables.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at an operating company level and to centrally
manage various cash functions. Consequently, the corporate debt of Tenneco and
its related interest expense has been allocated to New Tenneco and Newport
News based upon the portion of Tenneco's investment in New Tenneco and Newport
News which is deemed to be debt, generally based upon the ratio of New
Tenneco's and Newport News' net assets to Tenneco consolidated net assets plus
debt. Interest expense was allocated at a rate equivalent to the weighted
average cost of all corporate debt, which was 7.7 percent, 8.3 percent and 7.4
percent for 1995, 1994 and 1993, respectively. Total pre-tax interest expense
allocated to New Tenneco and Newport News in 1995, 1994 and 1993 was $180
million, $120 million and $124 million, respectively. New Tenneco and Newport
News have also been allocated tax benefits approximating 35 percent of the
allocated pre-tax interest expense. Although interest expense and the related
tax effects have been allocated to New Tenneco and Newport News for financial
reporting on a historical basis, New Tenneco and Newport News have not been
billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest expense have been included as a component of
Tenneco Energy's combined equity. Although management believes that the
historical allocation of corporate debt and interest is reasonable, it is not
necessarily indicative of what Tenneco Energy's debt and interest expense will
be upon completion of the Debt Realignment and the other components of the
Transaction. For additional information, see "Debt and Cash Realignment."
Interest expense increased from $61 million in the 1995 first half to $63
million in the 1996 first half. The increase was primarily attributable to
higher levels of debt.
146
<PAGE>
INCOME TAXES
Income tax expense for the first half of 1996 was $22 million compared with
$32 million for the 1995 first half. The effective tax rate for the first half
of 1996 was 18 percent compared with 41 percent in the prior year first half.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes new accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The statement is
effective for transactions occurring after December 31, 1996. The impact of
the new standard has not been determined.
Tenneco Energy adopted FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first
quarter of 1996. FAS No. 121 establishes new accounting standards for
measuring the impairment of long-lived assets. The adoption of the new
standard did not have a material effect on Tenneco Energy's combined financial
position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ -------- --------
(MILLIONS)
<S> <C> <C>
Operating activities................................ $ (185) $ 174
Investing activities................................ 117 (266)
Financing activities................................ (81) 63
</TABLE>
Tenneco Energy's operating results, combined with proceeds from sales of
assets and businesses, supplemented by net contributions from affiliates and
borrowings, have provided funds for acquisitions and capital investments in
existing businesses, to repurchase Tenneco Common Stock and to retire long-
term debt.
OPERATING ACTIVITIES
Operating cash flow for the first six months of 1996 declined due to lower
sales of customer receivables compared with the first half of 1995. This
decrease was due primarily to trade receivables sold to Asset Securitization
Cooperative Corporation, which were $140 million lower in the first half of
1996 compared with the first half of 1995. Operating cash flow in the first
half of 1996 also declined as a result of higher tax payments compared with
the first half of 1995 due to the settlement of 1987 through 1989 federal tax
liabilities and Tennessee's gas contract settlement with ICA and TransTexas
for $125 million.
INVESTING ACTIVITIES
The sale of other businesses and assets, primarily Tenneco Energy's 50
percent interest in Kern River, generated an additional $278 million of cash
during the first half of 1996. The acquisition of assets, primarily the
acquisition of PASA, required $225 million of cash during the first half of
1995.
Tenneco Energy invested $164 million in capital expenditures in its existing
businesses during the first half of 1996. Capital expenditures were $113
million during the first half of 1995.
147
<PAGE>
FINANCING ACTIVITIES
Cash used by financing activities was $81 million during the first six
months of 1996, a $144 million decrease from the same period in 1995. Tenneco
repurchased $122 million in common stock in the first half of 1996, down $328
million from the previous year. Tenneco had short term debt outstanding at the
end of June 1996 of $130 million more than 1995. Tenneco also retired $292
million of long-term debt in the first six months of 1996 compared to $180
million retired in 1995. Finally, Tenneco received $301 million in cash
contributions from affiliates, down from $786 million received in the first
six months of 1995. Cash contributions from affiliates vary based on cash
generated by affiliates from operations net of cash required for operating and
investing activities.
CAPITALIZATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities.............. $ 521 $ 456
Long-term debt...................................... 1,519 1,811
Minority interest................................... 18 19
Preferred stock..................................... 112 130
Combined equity..................................... 1,054 687
------ ------
Total capitalization................................ $3,224 $3,103
====== ======
</TABLE>
Debt decreased $227 million at June 30, 1996 compared with December 31,
1995. For additional information on corporate debt allocation, see "--Interest
Expense (net of interest allocated to affiliates)" above.
LIQUIDITY
Historically, Tenneco Energy's excess net cash flows from operating and
investing activities have been used to meet consolidated debt and other
obligations. Conversely, when Tenneco Energy's cash requirements have been in
excess of cash flows from operations, Tenneco has utilized its consolidated
credit facilities to fund Tenneco Energy's obligations. Also, depending on
market and other conditions, Tenneco Energy has utilized external sources of
capital to meet specific funding requirements. However, during 1995, Tenneco
made cash distributions of approximately $1.3 billion, in the aggregate, to
its Tenneco Automotive, Tenneco Packaging and Newport News subsidiaries to
fund strategic acquisitions and capital spending. The disposition of the
Albright and Wilson chemicals operations and the sales of Case common stock
and other assets provided approximately $1.6 billion for these cash
distributions.
Prior to the Transaction, Tenneco will restructure its consolidated
indebtedness for money borrowed pursuant to the Debt Realignment through a
series of tender offers, exchange offers, payments, defeasances, and
prepayments. In connection with the Debt Realignment, Tenneco will enter into
the Tenneco Credit Facility, which will consist of a one-year committed
revolving credit facility. Initial borrowings under the Tenneco Credit
Facility will be used to finance certain aspects of the Debt Realignment. For
additional information, see "Description of Tenneco Energy--Tenneco Credit
Facility" and "Debt and Cash Realignment."
After giving effect to the Refinancing Transactions and based on El Paso's
representations regarding the operations of the Energy Business after the
Merger, Tenneco believes that internally generated funds of the Energy
Business and the availability under the Tenneco Credit Facility will provide
adequate sources of funds to finance the future capital requirements of the
Energy Business including any payments associated with the settlement of the
GSR issues discussed herein. See "Risk Factors--Risk Factors Relating to
Holders Not Tendering in the Exchange Offers."
148
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS 1995 AND 1994
1995 STRATEGIC ACTIONS
In December 1995, Tenneco Energy sold its 50 percent interest in Kern River,
a joint venture that owns a 904-mile pipeline extending from Wyoming to
California. The sales price was $206 million, resulting in a pre-tax gain of
$30 million.
Tenneco Energy acquired the natural gas pipeline assets of PASA, which
includes a 488-mile pipeline, in June 1995 for approximately $225 million and
a 50 percent interest in two gas-fired cogeneration plants from ARK Energy in
November 1995 for approximately $65 million in cash and Tenneco Common Stock.
During 1995, Tenneco completed the $500 million common stock repurchase
program announced in December 1994. Also, in 1995, Tenneco announced two
additional share buyback programs, one for up to 3 million shares and another
for 2.5 million shares. These programs were designed to offset the growth in
common shares resulting from shares issued pursuant to employee benefit plans.
The 3 million share repurchase program was completed in 1995. Since December
1994, Tenneco has repurchased a total of 14.3 million common shares at a cost
of $646 million.
RESULTS OF OPERATIONS--YEARS 1995 AND 1994
Tenneco Energy's net income for 1995 of $157 million increased by three
percent compared with $153 million in 1994. The increased results occurred in
both the regulated and nonregulated businesses, all of which are discussed
below.
Significant transactions affecting the comparability of operating income
between 1995 and 1994 are:
. Pre-tax gains on sales of assets and businesses of $11 million in 1995
(primarily Tenneco Energy's interest in Kern River) compared with gains
of $24 million in 1994 (primarily from the sale of a 20 percent interest
in Tenneco Resources).
. Reserves established in 1995 of $25 million for the liquidation of
surplus real estate holdings and notes and $30 million for estimated
regulatory and legal settlement costs at Tenneco Energy.
. A gain from a 1994 contract settlement between Tenneco Energy and
Columbia Gas Transmission Corporation ("Columbia Gas") of $11 million.
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $1,921 $2,381
Operating income............................................... 268 367
</TABLE>
NET SALES AND OPERATING REVENUES
The regulated portion of Tenneco Energy's business experienced a decline in
revenues from $918 million in 1994 to $761 million in 1995. Lower regulated
merchant gas sales caused a decline of approximately $135 million. Under FERC
Order 636, customers assume the responsibility for acquiring their gas
supplies, reducing sales by the pipeline. Other non-recurring regulatory
settlements that had no operating income impact decreased revenue by $24
million. The $11 million contract settlement reached with Columbia Gas in 1994
as part of its bankruptcy proceedings, along with other contract expirations,
reduced contract volumes, contributing $17 million to the transportation
revenue decline in 1995. Partially offsetting these declines was an increase
in revenues of $30 million due to the implementation by Tenneco Energy of a
new rate structure.
Revenues in Tenneco Energy's nonregulated operations were $1,155 million,
down $305 million compared with 1994. Average natural gas prices were lower in
1995 compared with 1994, contributing approximately $175 million to the
revenue decrease. Furthermore, natural gas volumes declined contributing $148
million to the revenue decrease. Warmer weather in early 1995 resulted in
lower levels of storage activity during the year, decreasing demand for
natural gas and forcing prices lower. These effects were offset somewhat by
$18 million in revenues earned by the PASA assets which were acquired by
Tenneco Energy in June 1995.
149
<PAGE>
Revenues from Tenneco Energy's other operations were $5 million compared
with $3 million in 1994.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Operating income in the regulated portion of Tenneco Energy's business was
down by $27 million in 1995 as compared with 1994. The 1995 results included
the $30 million pre-tax gain on the sale of Tenneco Energy's interest in Kern
River, a $7 million loss on the sale of Tenneco Energy's interest in Ozark Gas
Transmission, and a $21 million reserve for estimated regulatory and legal
settlement costs while 1994 included the $11 million benefit from the Columbia
Gas contract settlement. Excluding these transactions, Tenneco Energy's
regulated business operating income decrease was primarily due to the
reduction of revenues of approximately $17 million related to the termination
or expiration of transportation contracts. This decrease was partially offset
by the benefit Tennessee realized of approximately $30 million through a new
rate structure implemented in July 1995.
The 1995 operating income for the nonregulated business decreased $55
million compared with 1994. Operating income in 1994 included a $23 million
gain from the sale of a 20 percent interest in Tenneco Resources to Ruhrgas
AG. The remainder of the operating income decline was due to increased startup
and development costs on international programs of approximately $7 million, a
$9 million reserve for estimated legal settlement costs and lower margins and
volumes due to lower demand in gas marketing which resulted in a $9 million
decrease, an increase in administrative costs of approximately $5 million.
Tenneco Energy operating results included $9 million in income from operating
the PASA assets during the last half of 1995.
Tenneco Energy's other operations reported an operating loss of $65 million
during 1995. This included a $25 million charge to establish a reserve for
liquidation of surplus real estate holdings and notes. During 1994, other
operations reported $48 million in operating losses.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Tenneco Energy's interest expense in 1995 was $122 million compared with
$142 million in 1994. For a discussion of the historical allocation of
indebtedness of Tenneco and its subsidiaries, see "--Six Months Ended June 30,
1996 and 1995--Interest Expense (net of interest allocated to affiliates)."
INCOME TAXES
Income tax benefit for 1995 was $11 million compared with income tax expense
of $72 million in 1994.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, Tenneco Energy adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits," using the cumulative catch-up method.
It requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. The adoption of this new standard had
no material impact on Tenneco Energy's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
CASH PROVIDED (USED) BY: 1995 1994
------------------------ ----- -----
(MILLIONS)
<S> <C> <C>
Operating activities...................................... $ 765 $(278)
Investing activities...................................... (537) (229)
Financing activities...................................... (27) 426
</TABLE>
Tenneco Energy's operating results, combined with proceeds from sales of
assets and businesses, and supplemented by contributions from affiliates and
short-term and long-term borrowings, have provided funds for acquisitions and
capital investments in existing businesses and to repurchase Tenneco Common
Stock.
150
<PAGE>
OPERATING ACTIVITIES
Operating cash flow for 1995 improved as Tenneco Energy generated $783
million from the collection and sale of customer receivables compared with
$245 million in 1994. This increase was due primarily to trade receivables
sold to Asset Securitization Cooperative Corporation, which were $783 million
higher in 1995 compared with 1994. The increase in collections of receivables
was also due in part to the collection of approximately $300 million of Case
retail receivables in 1995. In addition, rate refund payments of approximately
$250 million were made to pipeline customers in 1994. The working capital
increase of $652 million in 1994 resulted primarily from the reduction of the
pipeline rate refund liability of approximately $250 million and lower tax
accruals of $252 million. The lower tax accruals resulted from the utilization
of capital losses related to the sale of assets.
INVESTING ACTIVITIES
Cash used for business acquisitions during 1995 totaled $241 million. This
included the acquisition of PASA for approximately $225 million. Further,
Tenneco Energy invested $337 million in capital expenditures in its existing
businesses during the year. During 1994, Tenneco Energy's other cash sources
included $68 million in proceeds from the sale of assets. Capital expenditures
were $345 million for continuing operations.
FINANCING ACTIVITIES
In addition to business expansion, Tenneco Energy used its cash flow during
the year for the scheduled retirement of $497 million in long-term debt, to
reacquire Tenneco Common Stock for $655 million and to pay $286 million in
dividends on Tenneco Stock. During 1994, Tenneco Energy had a net reduction of
$605 million in debt and paid dividends on Tenneco Stock of $318 million.
Other cash sources included net contributions from affiliates of $1,367
million.
CAPITALIZATION
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities..................... $ 456 $ 399
Long-term debt............................................. 1,811 2,242
Minority interest.......................................... 19 19
Preferred stock............................................ 130 147
Combined equity............................................ 687 382
------ ------
Total capitalization....................................... $3,103 $3,189
====== ======
</TABLE>
Debt decreased $374 million at December 31, 1995 compared with December 31,
1994. For additional information on corporate debt allocation, see "--Results
of Operations for the Six Months Ended June 30, 1996 and 1995--Interest
Expense (net of interest allocated to affiliates)".
RESULTS OF OPERATIONS FOR THE YEARS 1994 AND 1993
NET SALES AND OPERATING REVENUES
Revenues for 1994 were $2.38 billion, down from $2.87 billion in 1993.
Tenneco Energy revenues were down $485 million or 17 percent as customers
shifted from sales to transportation service in the regulated business, which
resulted in a decrease of approximately $325 million, and lower gas prices in
the nonregulated gas marketing business which decreased revenues by $122
million. The regulated and nonregulated businesses reported a net volume
decrease which resulted in decreased revenues of $13 million and other
miscellaneous activities resulting in a $6 million decrease, partially offset
by the contract settlement with Columbia Gas of $11 million. 1993 included
increased revenues for non-recurring regulatory settlements of approximately
$30 million.
151
<PAGE>
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Tenneco Energy reported operating income of $367 million in 1994 compared
with $419 million in 1993.
The energy operations reported operating income for 1994 of $415 million,
compared with $411 million in 1993. Special items in 1994 included a $23
million gain on the sale of a 20 percent interest in Tenneco Resources to
Ruhrgas AG and an $11 million contract settlement with Columbia Gas. Special
items in 1993 included a $31 million gain on the sale of Viking and Dean
Pipeline Company partially offset by a $3 million loss related to regulatory
and legal settlements. When non-recurring items in both years are excluded,
operating income in 1994 declined slightly, compared with 1993. Significant
growth in the nonregulated businesses which contributed $24 million, including
an increase in Tenneco Ventures' operating income, was offset by declines in
the regulated business caused by implementing FERC Order 636 resulting in a
$16 million decrease and declines in nonregulated gas marketing prices
resulting in an $11 million decrease and $2 million in other miscellaneous
activities.
Tenneco Energy's other operations reported an operating loss of $48 million
in 1994, compared with operating income of $8 million for 1993. The 1993
operating income included a gain of $39 million from contributing Tenneco
Energy's investment in Cummins Engine Company to the Case Corporation Pension
Plan for Hourly Paid Employees.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Net interest expense increased $15 million from $127 million in 1993 to $142
million in 1994. For additional information on corporate debt allocation, see
"--Results of Operations for the Six Months Ended June 30, 1996 and 1995--
Interest Expense (net of interest allocated to affiliates)."
INCOME TAXES
Income tax expense for 1994 was $72 million compared with $104 million
reported for 1993. The lower tax expense in 1994 was primarily the result of
lower pre-tax earnings.
EXTRAORDINARY LOSS
Extraordinary loss for 1993 was $25 million, net of income tax benefit of
$13 million. This was the result of redemption premiums from prepaying high
interest-bearing long-term debt.
LIQUIDITY & CAPITAL RESOURCES
OPERATING ACTIVITIES
Net cash used by operating activities was $278 million for the year 1994,
compared with net cash provided of $209 million for 1993, a decrease of $487
million. This decrease was due in part to lower sales of receivables in 1994.
Trade receivables sold to Asset Securitization Cooperative Corporation were
$313 million less in 1994 compared with 1993. In addition, rate refund
payments of approximately $250 million were made to pipeline customers in
1994. The working capital increase of $652 million for 1994 resulted primarily
from the reduction of the pipeline rate refund liability of approximately $250
million and lower tax accruals of $252 million. The lower tax accruals
resulted from the utilization of capital losses related to the sale of assets.
INVESTING ACTIVITIES
Net cash used by investing activities in 1994 was $229 million, compared
with net cash used of $35 million in 1993. Net proceeds from the sale of
businesses and assets were $68 million in 1994. Net proceeds from the sale of
businesses in 1993 of $114 million resulted from the sales of Dean Pipeline
Company and Viking Gas Transmission Company.
Expenditures for plant, property and equipment from continuing operations
for 1994 were $345 million, compared with $171 million for 1993.
152
<PAGE>
FINANCING ACTIVITIES
Cash provided by financing activities was $426 million in 1994 compared to
cash used of $49 million in 1993. During 1993, Tenneco issued $1.2 billion of
common stock which was used to retire long term debt. In 1994, Tenneco issued
common stock for $188 million, received cash from affiliates of $1.4 billion,
including approximately $700 million in proceeds from sales of assets by
affiliates, and retired debt of $508 million.
FERC MATTERS
Tennessee has deferred certain costs it has incurred associated with
renegotiating GSR costs as a result of FERC Order 636. For a discussion of
Tennessee's ongoing settlement and contract reformation discussions with
holders of long-term gas purchase contracts, ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and various
FERC proceedings relating to Tennessee cost recovery of transition costs
incurred pursuant to implementation of FERC Order 636, see "Description of
Tenneco Energy--Interstate Pipeline Operations--Federal Regulation."
ENVIRONMENTAL MATTERS
Tenneco Energy and certain of its subsidiaries are subject to various
environmental claims and proceedings relating to its current businesses and
discontinued operations. See "Description of Tenneco Energy--Environmental
Matters."
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion is a summary of certain U.S. federal income tax
consequences of the Exchange Offers to holders of Old Securities ("Holders").
This discussion is general in nature and does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular Holder in light
of the Holder's particular circumstances, or to certain types of Holders
subject to special treatment under U.S. federal income tax laws (such as
insurance companies, tax-exempt organizations, financial institutions,
employee stock ownership plans, banks, brokers, dealers, Holders that hold Old
Securities as part of a position in a "straddle" or as part of a "hedging" or
"conversion" transaction for U.S. federal income tax purposes or that have a
"functional currency" other than the United States dollar, and taxpayers that
are neither citizens nor residents of the United States, or that are foreign
corporations, foreign partnerships or foreign estates or trusts as to the
United States). In addition, the discussion does not consider the effect of
any foreign, state, local, or other tax laws, or any United States tax
consequences (e.g., estate or gift tax) other than income tax consequences,
that may be applicable to particular Holders. Further, this summary assumes
that Holders hold their Old Securities as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the Code.
This summary is based on the Code and applicable Treasury Regulations,
rulings, administrative pronouncements and decisions as of the date hereof,
all of which are subject to change or differing interpretations at any time
with possible retroactive effect.
EACH HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR TO DETERMINE THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES TO IT OF THE
EXCHANGE OFFERS.
TAX CONSIDERATIONS FOR HOLDERS WHO TENDER IN THE EXCHANGE OFFERS
A Holder who participates in the Exchange Offers will recognize capital gain
or loss at the time the Holder's Old Securities are exchanged by New Tenneco
in an amount equal to the difference between the issue price of the New
Securities (other than the amount, if any, in respect of accrued interest) and
the Holder's adjusted tax basis of the Old Securities surrendered. Such
capital gain or loss will be long-term or short-term depending on whether the
Holder's holding period for the Old Securities on the Exchange Date by New
Tenneco exceeds one year. The "issue price" of the New Securities will be
equal to (i) the fair market value of the Old Securities or the New Securities
if either the Old Securities or the New Securities are traded on an
established market or (ii) the stated principal amount of the New Securities
if neither the Old Securities nor the New Securities are traded on an
established market.
153
<PAGE>
An exception to the capital gain or loss treatment described above applies
to a Holder who holds Old Securities with "market discount". Market discount
is the amount by which the Holder's basis in its Old Securities immediately
after their acquisition is exceeded by the stated redemption price at maturity
of the Old Securities. If, however, such excess is less than 1/4 of 1% of the
stated redemption price at maturity of the Old Securities multiplied by the
number of complete years from the Holder's acquisition date of the Old
Securities to its maturity date, the Old Securities will be considered to have
no market discount. The gain, if any, realized by a Holder of market discount
Old Securities on the exchange of such Old Securities will be treated as
ordinary income to the extent that market discount has accrued from the
Holder's acquisition date to the Exchange Date, unless the Holder has elected
to include market discount in income currently as it accrues. Any gain in
excess of such accrued market discount will be subject to the capital gains
rules described above. Generally, market discount obligations do not include
any Old Securities acquired by the Holder at their original issue. If a Holder
had interest expense attributable to market discount Old Securities which
interest expense was not allowed as a deduction under Section 1277(a) of the
Code, such interest expense may be allowable in whole or in part upon such
Holder's disposition of the Old Securities. Holders of Old Securities having
market discount should consult their own tax advisors as to the effect to them
of the market discount rules on the exchange of Old Securities pursuant to the
Exchange Offers.
If either the Old Securities or the New Securities are traded on an
established market, the New Securities may have original issue discount
("OID") or amortizable bond premium in an amount equal to the difference
between their issue price and their stated principal amount. Holders would
include any OID in income as it accrues on the basis of a constant yield to
the maturity date, and would be required to include amounts in income prior to
the date such income is actually paid in cash. Holders may elect to deduct
amortization of any bond premium, using a constant yield method, over the
remaining term of the New Securities. Such an election requires basis
reductions in the amounts of the deductions, and applies to all taxable debt
obligations then owned or thereafter acquired by the taxpayer.
Any portion of the payment received by a Holder on the Exchange Date which
is attributable to accrued interest on the Old Securities up to the Exchange
Date will be taxable as ordinary income in accordance with the Holder's method
of accounting for U.S. federal income tax purposes.
TAX CONSIDERATIONS FOR HOLDERS WHO DO NOT TENDER IN THE EXCHANGE OFFERS
A Holder whose Old Securities are not exchanged in the Exchange Offers will
not recognize gain or loss for U.S. federal income tax purposes unless such
Old Securities were issued under the Old Indentures and the Supplemental
Indenture with respect to such Indenture becomes effective and is deemed to
constitute a significant modification of the Old Securities under applicable
Treasury Regulations. The changes in the terms of the Old Securities should
not constitute a significant modification under the applicable Treasury
Regulations, and will not result in a deemed exchange of securities for U.S.
federal income tax purposes. Accordingly, holders of Old Securities who elect
to retain their Old Securities should not recognize gain or loss as a result
of the changes to the terms of the Old Securities effected by the Proposed
Amendments.
BACKUP WITHHOLDING
Under the U.S. federal Income tax backup withholding provisions of the Code
and applicable Treasury Regulations, a Holder may be subject to backup
withholding at the rate of 31% with respect to interest and redemption
proceeds unless such Holder: (i) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (ii)
provides a correct taxpayer identification number to the Depositary, certifies
as to no loss of exemption from backup withholding, and otherwise complies
with the applicable requirements of the backup withholding rules. Any amount
withheld under these rules will be credited against the Holder's U.S. federal
income tax liability. To prevent backup withholding with respect to the
payment of interest, each Holder must complete and sign a substitute Form W-9,
which is included as part of the Letter of Transmittal, and return it to the
Exchange Agent. If the Depositary is not provided with the correct taxpayer
identification number, the Holder may also be subject to a penalty imposed by
the IRS. If withholding results in an overpayment of taxes, a refund may be
obtained by such Holder from the IRS.
154
<PAGE>
LEGAL MATTERS
Certain legal matters regarding the New Securities will be passed upon for
New Tenneco by Theodore R. Tetzlaff, General Counsel of New Tenneco. Certain
federal income tax matters are also being passed upon for New Tenneco by
Jenner & Block, Chicago, Illinois. Mr. Tetzlaff beneficially owns 33,637
shares of Tenneco Common Stock (including options to purchase 16,667 shares of
Tenneco Common Stock, which options are either presently exercisable or
exercisable within 60 days of such date). Certain legal matters relating to
Exchange Offers will be passed upon for the Dealer Manager by Cahill Gordon &
Reindel (a partnership including a professional corporation), New York, New
York. Cahill Gordon & Reindel has in the past represented and continues to
represent Tenneco in certain matters.
EXPERTS
The following financial statements and schedules included or incorporated by
reference in this Prospectus or elsewhere in this Registration Statement, to
the extent and for the periods indicated in their reports, have been audited
by Arthur Andersen LLP, independent public accountants, and are included
herein in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports: (i) Tenneco and consolidated subsidiaries
included in Tenneco's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1995, incorporated by reference herein; (ii) the businesses
of Tenneco Energy, included herein; and (iii) the businesses of New Tenneco,
included herein.
The combined financial statements of Mobil Plastics for the year ended
December 28, 1994 appearing in the Current Report of Tenneco on Form 8-K dated
November 17, 1995, which is incorporated by reference herein, and the combined
financial statements of Mobil Plastics for the period December 29, 1994 to
November 17, 1995 and the year ended December 28, 1994 included herein, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and herein. Such financial statements have
been incorporated herein by reference and included herein in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
155
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BUSINESSES OF NEW TENNECO
Report of Independent Public Accountants................................ F-2
Combined Statements of Income for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 and
1995................................................................... F-3
Combined Balance Sheets--December 31, 1995 and 1994 and June 30, 1996... F-4
Combined Statements of Cash Flows for each of three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 and
1995................................................................... F-5
Statements of Changes in Combined Equity for each of the three years in
the period ended
December 31, 1995 and for the six months ended June 30, 1996........... F-6
Notes to Combined Financial Statements.................................. F-7
THE MOBIL PLASTICS DIVISION OF MOBIL CORPORATION
Report of Independent Auditors.......................................... F-28
Combined Statements of Net Assets--December 28, 1994 and November 17,
1995................................................................... F-29
Combined Statements of Operations Before Income Taxes--Year ended Decem-
ber 28, 1994 and period ended November 17, 1995........................ F-30
Combined Statements of Changes in Net Assets--Year Ended December 28,
1994 and period ended November 17, 1995................................ F-31
Combined Statements of Cash Flows--Year ended December 28, 1994 and pe-
riod ended
November 17, 1995...................................................... F-32
Notes to Combined Financial Statements.................................. F-33
THE BUSINESSES OF TENNECO ENERGY
Report of Independent Auditors.......................................... F-41
Combined Statements of Income for each of the three years in the period
ended
December 31, 1995 and for the six months ended June 30, 1996 and 1995.. F-42
Combined Balance Sheets December 31, 1995 and 1994 and June 30, 1996.... F-43
Combined Statements of Cash Flows for each of the three years in the pe-
riod ended December 31, 1995 and for the six months ended June 30, 1996
and 1995............................................................... F-44
Statements of Changes in Combined Equity for each of the three years in
the period ended December 31, 1995 and for the six months ended June
30, 1996 and 1995...................................................... F-45
Notes to Combined Financial Statements.................................. F-46
FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts--The Businesses of New Tenneco ....... S-1
Valuation and Qualifying Accounts--The Businesses of Tenneco Energy..... S-2
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses of
New Tenneco (see Note 1) as of December 31, 1995 and 1994, and the related
combined statements of income, cash flows and changes in combined equity for
each of the three years in the period ended December 31, 1995. These combined
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements and schedule 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of New Tenneco as of December 31, 1995 and 1994, and the results of
its combined operations and 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 Note 3 to the combined financial statements, effective January
1, 1994, the businesses of New Tenneco changed its method of accounting for
postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of New Tenneco taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1996
F-2
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ------------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues--
Automotive....................... $2,479 $1,989 $1,785 $ 1,463 $ 1,263
Packaging........................ 2,752 2,184 2,042 1,775 1,318
Intergroup sales and other....... (10) (7) (7) (5) (4)
------ ------ ------ -------- --------
5,221 4,166 3,820 3,233 2,577
Other income, net.................. 39 (2) 42 71 30
------ ------ ------ -------- --------
5,260 4,164 3,862 3,304 2,607
------ ------ ------ -------- --------
COSTS AND EXPENSES
Cost of sales (exclusive of depre-
ciation shown below).............. 3,737 3,050 2,854 2,303 1,828
Engineering, research and develop-
ment expenses..................... 67 43 39 44 33
Selling, general and administra-
tive.............................. 588 473 451 396 276
Depreciation, depletion and amorti-
zation............................ 196 142 137 147 92
------ ------ ------ -------- --------
4,588 3,708 3,481 2,890 2,229
------ ------ ------ -------- --------
Income before interest expense, in-
come taxes and minority
interest.......................... 672 456 381 414 378
Interest expense (net of interest
capitalized)...................... 160 104 101 100 74
------ ------ ------ -------- --------
Income before income taxes and mi-
nority interest................... 512 352 280 314 304
Income tax expense................. 231 114 115 126 124
------ ------ ------ -------- --------
Income before minority interest.... 281 238 165 188 180
Minority interest.................. 23 -- -- 10 12
------ ------ ------ -------- --------
Income from continuing operations.. 258 238 165 178 168
Loss from discontinued operations,
net of income tax................. -- (31) (7) -- --
------ ------ ------ -------- --------
Income before cumulative effect of
change in accounting
principle......................... 258 207 158 178 168
Cumulative effect of change in ac-
counting principle, net of
income tax........................ -- (7) -- -- --
------ ------ ------ -------- --------
Net income......................... $ 258 $ 200 $ 158 $ 178 $ 168
====== ====== ====== ======== ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements of income.
F-3
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ ----------- ---
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments............ $ 103 $ 350 $ 129
Receivables--
Customer notes and accounts (net)............ 351 284 477
Affiliated companies......................... 117 53 114
Income taxes................................. 41 2 52
Other........................................ 54 45 186
Inventories.................................... 838 557 820
Deferred income taxes.......................... 23 24 28
Prepayments and other.......................... 168 152 196
------ ------ ------
1,695 1,467 2,002
------ ------ ------
Investments and other assets:
Long-term notes receivables.................... 16 11 16
Goodwill and intangibles, net.................. 1,024 320 965
Deferred income taxes.......................... 52 49 61
Pension assets................................. 433 389 444
Other.......................................... 239 113 287
------ ------ ------
1,764 882 1,773
------ ------ ------
Plant, property and equipment, at cost........... 4,138 3,065 4,332
Less--Reserves for depreciation, depletion and
amortization.................................. 1,480 1,474 1,584
------ ------ ------
2,658 1,591 2,748
------ ------ ------
$6,117 $3,940 $6,523
====== ====== ======
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Short-term debt (including current maturities
on long-term debt)............................ $ 384 $ 108 $ 530
Payables
Trade........................................ 589 465 599
Affiliated companies......................... 47 68 23
Taxes accrued.................................. 45 -- 74
Accrued liabilities............................ 237 129 242
Other.......................................... 257 282 242
------ ------ ------
1,559 1,052 1,710
------ ------ ------
Long-term debt................................... 1,648 1,039 1,573
Deferred income taxes............................ 435 342 451
Postretirement benefits.......................... 156 122 161
Deferred credits and other liabilities........... 166 97 159
Commitments and contingencies
Minority interest................................ 301 301 301
Combined equity.................................. 1,852 987 2,168
------ ------ ------
$6,117 $3,940 $6,523
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-4
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........... $ 258 $238 $165 $ 178 $ 168
Adjustments to reconcile income from contin-
uing operations to cash provided (used) by
continuing operations--
Depreciation, depletion and amortization.. 196 142 137 147 92
Deferred income taxes..................... 75 19 1 37 15
Gain on sale of businesses and assets,
net...................................... (15) (5) (29) (49) (14)
Allocated interest, net of tax............ 99 61 59 63 44
Changes in components of working capital
(Increase) decrease in receivables....... 30 87 55 (110) (79)
(Increase) decrease in inventories....... (102) (57) (1) 18 (99)
(Increase) decrease in prepayments and
other current assets.................... (39) 8 (38) (19) (10)
Increase (decrease) in payables.......... 7 69 34 (13) (59)
Increase (decrease) in taxes accrued..... 23 (17) (47) 23 (18)
Increase (decrease) in other current lia-
bilities................................ (15) (3) 79 (43) (26)
Other..................................... (28) 20 (85) (33) (23)
------ ---- ---- ----- -----
Cash provided (used) by continuing opera-
tions................................... 489 562 330 199 (9)
Cash provided (used) by discontinued op-
erations................................ -- 9 (6) -- --
------ ---- ---- ----- -----
Net cash provided (used) by operating activ-
ities...................................... 489 571 324 199 (9)
------ ---- ---- ----- -----
INVESTING ACTIVITIES
Net proceeds (expenditures) related to the
sale of discontinued operations............ -- 5 (4) -- --
Net proceeds from sale of businesses and as-
sets....................................... 56 16 83 10 34
Expenditures for plant, property and equip-
ment....................................... (562) (280) (217) (263) (179)
Acquisitions of businesses.................. (1,461) (51) (14) (23) (55)
Investments and other....................... (74) 7 -- (64) (6)
------ ---- ---- ----- -----
Net cash used by investing activities....... (2,041) (303) (152) (340) (206)
------ ---- ---- ----- -----
FINANCING ACTIVITIES
Issuance of equity securities by a combined
subsidiary................................. -- 293 -- -- --
Retirement of long-term debt................ (15) (152) (21) (8) (11)
Net increase (decrease) in short-term debt
excluding current maturities on long-term
debt....................................... 8 (94) (29) (23) (2)
Cash contributions from (distributions to)
Tenneco.................................... 1,304 3 (115) 200 (39)
------ ---- ---- ----- -----
Net cash provided (used) by financing activ-
ities...................................... 1,297 50 (165) 169 (52)
------ ---- ---- ----- -----
Effect of foreign exchange rate changes on
cash and temporary cash investments........ 8 4 (2) (2) 4
------ ---- ---- ----- -----
Increase (decrease) in cash and temporary
cash investments........................... (247) 322 5 26 (263)
Cash and temporary cash investments, January
1.......................................... 350 28 23 103 350
------ ---- ---- ----- -----
Cash and temporary cash investments, Decem-
ber 31 (Note).............................. $ 103 $350 $ 28 $ 129 $ 87
====== ==== ==== ===== =====
Cash paid during the year for interest...... $ 6 $ 14 $ 15 $ 2 $ 6
Cash paid during the year for income taxes
(net of refunds)........................... $ 180 $137 $178 $ 97 $ 137
</TABLE>
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at the date of purchase.
The accompanying notes to combined financial statements are an integral
part of these combined statements of cash flows.
F-5
<PAGE>
THE BUSINESSES OF NEW TENNECO
STATEMENTS OF CHANGES IN COMBINED EQUITY
(MILLIONS)
<TABLE>
<S> <C>
Balance, December 31, 1992............................................. $ (87)
Net income........................................................... 158
Translation adjustment............................................... (75)
Allocated interest, net of tax....................................... 59
Change in allocated corporate debt................................... 519
Cash distributions to Tenneco........................................ (115)
Noncash contributions from Tenneco................................... 74
------
Balance, December 31, 1993............................................. $ 533
Net income........................................................... 200
Translation adjustment............................................... 56
Allocated interest, net of tax....................................... 61
Change in allocated corporate debt................................... (5)
Cash contributions from Tenneco...................................... 3
Noncash contributions from Tenneco................................... 139
------
Balance, December 31, 1994............................................. $ 987
Net income........................................................... 258
Translation adjustment............................................... 49
Allocated interest, net of tax....................................... 99
Change in allocated corporate debt................................... (887)
Cash contributions from Tenneco...................................... 1,304
Noncash contributions from Tenneco................................... 42
------
Balance, December 31, 1995............................................. $1,852
Net income........................................................... 178
Translation adjustment............................................... (25)
Allocated interest, net of tax....................................... 63
Change in allocated corporate debt................................... (94)
Cash contributions from Tenneco...................................... 200
Noncash distributions to Tenneco..................................... (6)
------
Balance, June 30, 1996 (unaudited)..................................... $2,168
======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these
statements of changes in combined equity.
F-6
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined financial statements represent the financial
position, results of operations and cash flows for all automotive
(collectively referred to as "Tenneco Automotive") and packaging (collectively
referred to as "Tenneco Packaging") operations owned directly or indirectly by
Tenneco Inc. ("Tenneco") and its subsidiaries (see "Control" below).
Unless the context otherwise requires, as used herein the term "Company"
refers: (i) for periods prior to the Industrial Distribution, as defined
below, to Tenneco Automotive, Tenneco Packaging and certain administrative
service operations of Tenneco (collectively, "New Tenneco") which New Tenneco
Inc. will own and operate after the Industrial Distribution, and (ii) for
periods after the Industrial Distribution, to New Tenneco Inc. and its
consolidated subsidiaries.
Reference is made to Note 13, "Segment and Geographic Area Information" for
a description of the businesses of the Company.
2. THE INDUSTRIAL DISTRIBUTION
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged into Tenneco (the "Merger"). The Merger is part of a larger Tenneco
reorganization (the "Transaction") which includes the distribution of the
common stock of the Company (the "Industrial Distribution") and Newport News
Shipbuilding Inc. ("Newport News"), a subsidiary of Tenneco which will hold
all of the assets, liabilities and operations of Tenneco's current
shipbuilding business (the "Shipbuilding Distribution") (collectively, the
"Distributions") to the holders of Tenneco common stock. Upon completion of
the Transaction, holders of Tenneco common stock will receive equity
securities of the Company, Newport News and El Paso.
Prior to the Transaction, Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain Company debt
will be offered in exchange for certain issues of Tenneco debt. Tenneco will
initiate tender offers for other Tenneco debt, and certain debt issues may be
defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, the Company (which may declare
and pay a dividend to Tenneco) and Newport News (which will declare and pay a
dividend of $600 million to Tenneco). Upon completion of the debt realignment,
Tenneco will have responsibility for $2.65 billion of debt, subject to certain
adjustments, Newport News will have responsibility for the borrowings under
its credit lines and the Company will have responsibility for the remaining
debt.
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco stockholders.
In order to assist in the orderly transition of the Company into a separate,
publicly held company, Tenneco intends to modify, amend or enter into certain
contractual agreements with the Company. Such agreements include a tax sharing
agreement between Tenneco and its subsidiaries (see "Income taxes" in Note 3),
an employee benefits agreement, an insurance agreement, an administrative
services agreement and other ancillary agreements. These agreements will
provide, among other things, that (i) the Company will become the sole sponsor
of the Tenneco Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various
Tenneco Inc. welfare plans; (ii) the Company will retain specific insurance
policies which relate to its businesses and will retain continuing rights and
obligations for certain parent-company insurance policies of Tenneco; and
(iii) the Company will provide certain corporate services, such as mainframe
data processing and product purchasing services, to Tenneco and Newport News
for a specified period of time.
F-7
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF ACCOUNTING POLICIES
Control
All of the outstanding common stock of the Company is owned directly or
indirectly by Tenneco. Thus, the companies which comprise Tenneco Automotive,
Tenneco Packaging and certain administrative service operations are under the
control of Tenneco.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim combined financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The interim financial results are not indicative of
operating results for an entire year.
Research and Development
Research and development costs are expensed as incurred. The amounts charged
to "Engineering, research and development expenses" were $42 million, $27
million, and $38 million for 1995, 1994 and 1993, respectively.
Risk Management Activities
The Company is currently a party to financial instruments to hedge its
exposure to changes in foreign currency exchange rates. These financial
instruments are accounted for on the accrual basis with gains and losses being
recognized based on the type of contract and exposure being hedged. After-tax
net gains or losses on foreign currency contracts designated as hedges of the
Company's net investments in foreign subsidiaries are recognized in the
balance sheet caption "Combined equity." Net gains and losses of foreign
currency contracts designated as hedges of firm commitments or other specific
transactions are deferred and recognized when the offsetting gains or losses
are recognized on the hedged items.
In the Combined Statements of Cash Flows, cash receipts or payments related
to the financial instruments are classified consistent with the cash flows
from the transactions being hedged.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
The Company and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have entered into an agreement to
file a consolidated U.S. Federal income tax return. Such agreement provides,
among other things, that (1) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis and (2) each company in a tax loss position will be
reimbursed currently to the extent its deductions, including general business
credits, are utilized in the consolidated return. The income tax amounts
reflected in the combined financial statements of the
F-8
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Company under the provisions of the tax sharing arrangement are not materially
different from the income taxes which would have been provided had the Company
filed a separate tax return. Under the tax sharing agreement, Tenneco pays all
federal taxes directly and bills or refunds, as applicable, its subsidiaries
for the applicable portion of the total tax payments. Cash taxes paid in the
Combined Statement of Cash Flows include payments to Tenneco for U.S. federal
income taxes.
The Company does not provide for U.S. income taxes on unremitted earnings of
foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries are approximately $505 million at December 31, 1995. It
is not practicable to determine the amount of U.S. income taxes that would be
payable upon remittance of the assets that represent those earnings.
In connection with the Distributions the current tax sharing agreement will
be cancelled and the Company will enter into a tax sharing agreement with
Tenneco, Newport News and El Paso. The tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, the Company will be liable for taxes imposed on the
Company and its affiliates engaged in the automotive and packaging businesses.
Federal income taxes imposed on the combined activities of the consolidated
group will be allocated among the Company, Tenneco and Newport News according
to their respective share of consolidated taxable income.
Changes in Accounting Principles
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which
establishes new accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The statement is
effective for transactions occurring after December 31, 1996. The impact of
the adoption of the new standard has not been determined.
The Company adopted FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first
quarter of 1996. FAS No. 121 establishes new accounting standards for
measuring the impairment of long-lived assets. The adoption of this new
standard did not have a significant effect on the Company's combined financial
position or results of operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. The Company recorded an after-tax charge of $7
million which was reported as a cumulative effect of change in accounting
principle.
Inventories
At December 31, 1995 and 1994, inventory by major classification was as
follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ----
<S> <C> <C>
Finished goods.................................................. $396 $267
Work in process................................................. 102 81
Raw materials................................................... 253 137
Materials and supplies.......................................... 87 72
---- ----
$838 $557
==== ====
</TABLE>
F-9
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Inventories are stated at the lower of cost or market. A portion of
inventories are valued using the "last-in, first-out" method (47% and 27% at
December 31, 1995 and 1994, respectively). All other inventories are valued on
the "first-in, first-out" ("FIFO") or "average" methods. If the FIFO or
average method of inventory accounting had been used by the Company for all
inventories, inventories would have been $48 million, $46 million and $40
million higher at December 31, 1995, 1994 and 1993, respectively.
Goodwill and Intangibles
At December 31, 1995 and 1994, goodwill and intangibles by major category
was as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ------ ----
<S> <C> <C>
Goodwill...................................................... $ 632 $299
Trademarks.................................................... 194 1
Patents....................................................... 160 --
Other......................................................... 38 20
------ ----
$1,024 $320
====== ====
</TABLE>
Goodwill is being amortized on a straight-line basis over periods ranging
from 15 years to 40 years. Such amortization amounted to $10 million, $8
million and $8 million for 1995, 1994 and 1993, respectively, and is included
in the Combined Statements of Income caption, "Depreciation, depletion and
amortization."
The Company has capitalized certain intangible assets, primarily trademarks
and patents, based on their estimated fair value at date of acquisition.
Amortization is provided on these intangible assets on a straight-line basis
over periods ranging from 5 to 40 years and was not significant during any of
the periods presented in the accompanying combined financial statements.
The majority of goodwill and intangibles at December 31, 1995, resulted from
the acquisition of the plastics division of Mobil Corporation in November
1995. See Note 4, "Acquisitions," for further information on the acquisitions.
Plant, Property and Equipment, at Cost
At December 31, 1995 and 1994, plant, property and equipment, at cost, by
major category was as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ------ ------
<S> <C> <C>
Land, buildings and improvements........................... $1,125 $ 978
Machinery and equipment.................................... 2,446 1,722
Other, including construction in progress.................. 567 365
------ ------
$4,138 $3,065
====== ======
</TABLE>
Depreciation of the Company's properties is provided on a straight-line
basis over the estimated useful lives of the related assets. Useful lives
range from 10 to 40 years for buildings and improvements and from 3 to 25
years for machinery and equipment. Depletion of timber and timberlands is
provided on a unit-of-production basis.
Notes Receivable and Allowance for Doubtful Accounts
Short-term notes receivable of $53 million and $31 million were outstanding
at December 31, 1995 and 1994, respectively.
F-10
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the allowance for doubtful accounts and notes
receivable was $24 million and $15 million, respectively.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations,
and which do not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies' clean-up experience and
data released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the combined balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are recorded and reported separately from the associated liability in
the combined financial statements.
For further information on this subject, reference is made to Note 14,
"Commitments and Contingencies--Environmental Matters."
Foreign Currency Translation
Financial statements of international operations are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses and gains and losses. Translation adjustments are
reflected in the balance sheet caption "Combined equity."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of the Company's assets,
liabilities, revenues and expenses. Reference is made to the "Income Taxes"
section of this footnote and Notes 11, 12 and 14 for additional information on
significant estimates included in the Company's combined financial statements.
4. ACQUISITIONS
In June 1996, the Company entered into agreements to acquire The Pullman
Company and its Clevite products division ("Clevite") for $328 million and
Amoco Foam Products Company, a unit of Amoco Chemical Company ("Amoco Foam
Products"), for $310 million. Clevite makes suspension bushings and other
elastomeric parts for cars and trucks. Upon completion of the Clevite
acquisition in July 1996, Clevite's operations became part of Tenneco
Automotive. Amoco Foam Products manufactures expanded polystyrene tableware,
hinged-lid food containers, packaging trays and industrial products for
residential and commercial construction applications. The Company anticipates
closing the acquisition of Amoco Foam Products by the end of August 1996 and
Amoco Foam Products will become part of Tenneco Packaging.
In November 1995, Tenneco Packaging acquired the plastics division of Mobil
Corporation for $1.3 billion. The plastics business is one of the largest
North American producers of polyethylene and polystyrene consumer and food
service packaging.
F-11
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tenneco Packaging's acquisition of the plastics business was accounted for
as a purchase; accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on preliminary estimates of
their fair values. Final purchase price allocations will be based on more
complete evaluations and may differ from the original allocation. The excess
of the purchase price over the fair value of the net assets acquired is
included in the balance sheet caption, "Goodwill and intangibles" and is being
amortized on a straight-line basis over 40 years. The purchase was financed
with a cash contribution from Tenneco.
The following unaudited pro forma information of the Company illustrates the
effect of the plastics business acquisition as if it had occurred at the
beginning of 1994, after giving effect to certain pro forma adjustments
including amortization of the excess purchase price, depreciation and other
adjustments based on the preliminary purchase price allocation related to the
acquisition, together with estimates of the related income tax effects.
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED
DECEMBER 31,
-------------
(MILLIONS) 1995 1994
---------- ------ ------
<S> <C> <C>
Net sales and operating revenues........................... $6,217 $5,203
Income from continuing operations.......................... $ 268 $ 181
</TABLE>
The summarized pro forma information has been prepared for comparative
purposes only. It is not intended to be indicative of the actual operating
results that would have occurred had the acquisition been consummated at the
beginning of 1994, or the results which may be attained in the future.
Also during 1995, Tenneco Packaging completed the acquisitions of eight
paperboard packaging businesses and two specialty packaging businesses for a
total consideration of approximately $196 million. In addition, Tenneco
Automotive completed four acquisitions for approximately $54 million.
Each of the acquisitions was accounted for as a purchase. If these assets
and investments had been acquired January 1, 1995, net income would not have
been significantly different from the reported amount.
In 1994, Tenneco Automotive acquired Heinrich Gillet GmbH & Co. KG for $44
million in cash and $69 million in assumed debt.
5. TRANSACTIONS WITH TENNECO
Combined Equity
The "Combined equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative investment in the combined
businesses of the Company. Changes in the "Combined equity" caption represent
the net income of the Company, net cash and non-cash contributions from
(distributions to) Tenneco, cumulative translation adjustments, changes in
allocated corporate debt, and allocated interest, net of tax. Reference is
made to the Statements of Changes in Combined Equity for an analysis of the
activity in the "Combined equity" caption for the three years ended December
31, 1995 and six months ended June 30, 1996.
General and Administrative Expenses
General and administrative expenses of $229 million, $154 million and $149
million in 1995, 1994 and 1993, respectively, are included in the "Selling,
general and administrative" caption in the Combined Statements of Income. Of
the total general and administrative expenses for 1995, 1994 and 1993, $61
million, $27 million and $21 million, respectively, represent the Company's
share of Tenneco's corporate general and administrative costs for legal,
financial, communication and other administrative services. Tenneco's
corporate general and
F-12
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
administrative expenses are allocated based on the estimated level of effort
devoted to Tenneco's various operations and their relative size based on
revenues, gross property and payroll. Tenneco's corporate general and
administrative expenses not budgeted for allocation are absorbed by the
Company. The Company's management believes the method for allocating corporate
general and administrative expenses is reasonable. Total general and
administrative expenses reflected in the accompanying combined financial
statements are representative of the total general and administrative costs
the Company would have incurred as a separate entity.
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7%,
8.3% and 7.4% for 1995, 1994, and 1993, respectively. Total pre-tax interest
expense allocated to the Company in 1995, 1994 and 1993 was $152 million, $94
million and $90 million, respectively. The Company has also been allocated tax
benefits approximating 35% of the allocated pre-tax interest expense. Although
interest expense, and the related tax effects, have been allocated to the
Company for financial reporting on a historical basis, the Company has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of the
Company's Combined equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of the Company's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by the Company as a separate public
entity.
Notes and Advances Receivable with Tenneco
"Cash contributions from (distributions to) Tenneco" in the Statements of
Changes in Combined Equity consist of net cash changes in notes and advances
receivable with Tenneco which have been included in combined equity.
Historically, Tenneco has utilized notes and advances to centrally manage cash
funding requirements for its consolidated group.
At December 31, 1995 and 1994, the Company had an interest bearing note
receivable from Tenneco totaling $494 million and $310 million, respectively,
which is payable on demand and is included as a component of the Company's
combined equity.
Accounts Receivable and Accounts Payable--Affiliated Companies
The "Receivables--Affiliated companies" balance primarily includes billings
for general and administrative costs incurred by the Company and charged to
Newport News and Tenneco Energy. The "Payables--Affiliated companies" balance
primarily relates to billings for U.S. income taxes incurred by Tenneco and
charged to the Company. Affiliated accounts receivable and accounts payable
between Tenneco, the Company and Newport News will be settled, capitalized or
converted into ordinary trade accounts, as applicable, as part of the
Distributions.
Employee Benefits
Certain employees of the Company participate in the Tenneco employee stock
option and employee stock purchase plans. The Tenneco employee stock option
plan provides for the grant of Tenneco common stock options and other stock
awards at a price not greater than market value at the date of grant. The
Tenneco employee stock purchase plan allows employees to purchase Tenneco
common stock at a 15% discount subject
F-13
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
to certain thresholds. The Company expects to establish similar plans for its
employees after the Industrial Distribution. In connection with the Industrial
Distribution, outstanding options on Tenneco common stock held by Company
employees will be converted into options of the Company so as to preserve the
aggregate value of the options held prior to the Industrial Distribution.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made to Notes 11 and 12 for a further
discussion of these plans.
Sales of Receivables
At December 31, 1995 and 1994, the Company sold $513 million and $384
million, respectively, of trade receivables to Tenneco Credit Corporation
("TCC"), a wholly-owned subsidiary of Tenneco Inc. TCC sells these trade
receivables to a third party in the ordinary course of its business.
6. DISCONTINUED OPERATIONS AND DISPOSITION OF ASSETS
Discontinued Operations
In 1994, the Company sold its brakes operation. Net proceeds from the sale
of the brakes operation was approximately $18 million. Net assets and results
from discontinued operations as of and for the years ended December 31, 1994
and 1993, are as follows:
<TABLE>
<CAPTION>
1994 1993
(MILLIONS) ---- ----
<S> <C> <C>
Net assets at December 31..................................... $ -- $61
==== ===
Net sales and operating revenues.............................. $ 62 $54
==== ===
Loss before income taxes and interest allocation.............. $ (8) $(8)
Income tax benefit............................................ 5 4
---- ---
Loss before interest allocation............................... (3) (4)
Allocation of interest expense, net of income tax (a)......... (2) (3)
---- ---
Net loss...................................................... (5) (7)
---- ---
Loss on disposition........................................... (41) --
Income tax benefit from loss on disposition................... 15 --
---- ---
Net loss on disposition....................................... (26) --
---- ---
Net loss from discontinued operations......................... $(31) $(7)
==== ===
</TABLE>
- --------
(a) The allocation of interest expense to discontinued operations is based on
the ratio of net assets of discontinued operations to Tenneco consolidated
net assets plus debt.
Disposition of Assets
In the second quarter of 1996, Tenneco Packaging entered into an agreement
to form a joint venture with Caraustar Industries whereby Tenneco Packaging
sold its two recycled paperboard mills and recycling operation to the joint
venture in return for cash and an equity interest in the joint venture. The
Company recognized a $50 million pre-tax gain from the sale in the second
quarter of 1996.
In 1995, the Company sold certain facilities and assets, principally at its
Tenneco Packaging segment. Proceeds from these dispositions were $56 million
resulting in a pre-tax net gain of $15 million.
F-14
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During 1994, the Company disposed of several assets and investments
including a facility, machinery and equipment at Tenneco Packaging. Proceeds
from these dispositions were $16 million resulting in a pre-tax gain of $5
million.
During 1993, the Company disposed several Tenneco Packaging operations. The
proceeds from dispositions were $83 million and the pre-tax gain was $29
million.
7. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of long-term debt outstanding and allocated corporate debt
obligations at December 31, 1995 and 1994, is set forth in the following table
(Note):
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ------ ------
<S> <C> <C>
Notes due 1996 through 2014, average effective interest rate
10.9% in 1995 and 7.9% in 1994 (net of $32 million in 1995
and $33 million in 1994 of unamortized discount)............. $ 41 $ 52
Other obligations due 1996 through 2007, average effective in-
terest rate 8.8% in 1995 and
8.4 % in 1994................................................ 26 20
Current maturities............................................ (6) (5)
------ ------
61 67
------ ------
Allocated corporate debt obligations, average effective inter-
est rate 7.7% in 1995 and 8.3% in 1994....................... 1,587 972
------ ------
$1,648 $1,039
====== ======
</TABLE>
Note: Reference is made to Note 5 for a discussion of allocated corporate debt
obligations.
At December 31, 1995 and 1994, approximately $72 million and $154 million,
respectively, of gross plant, property and equipment was pledged as collateral
to secure $30 million and $31 million, respectively, principal amounts of
long-term debt.
The aggregate maturities applicable to non-allocated issues outstanding at
December 31, 1995, are $6 million, $7 million, $6 million, $5 million and $6
million for 1996, 1997, 1998, 1999 and 2000, respectively.
Short-Term Debt
The Company uses lines of credit and overnight borrowings to finance its
short-term capital requirements. Information regarding short-term credit
agreements for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1995 1994
- --------------------- ---- ----
<S> <C> <C>
Outstanding borrowings at end of year............................... $16 $ 22
Weighted average interest rate on outstanding borrowings at end of
year............................................................... 6.8% 8.1%
Approximate maximum month-end outstanding borrowings during year.... $18 $163
Approximate average month-end outstanding borrowings during year.... $11 $ 53
</TABLE>
Note: Includes borrowings under both committed credit facilities and
uncommitted lines of credit and similar arrangements.
The Company had other short-term borrowings outstanding of $17 million at
December 31, 1995, and $8 million at December 31, 1994 and was allocated
short-term corporate debt obligations of $345 million at December 31, 1995 and
$73 million at December 31, 1994.
F-15
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Financing Arrangements
As of December 31, 1995, the Company had arranged committed credit
facilities of $43 million of which approximately $12 million had been
utilized. The credit facilities have various terms and the Company is
generally required to pay commitment fees on the unused portion of the total
commitment and facility fees on the total commitment.
8. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments by class at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- -------------- --------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
- -------------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Asset and Liability Instruments
Cash and temporary cash investments.......... $ 103 $ 103 $ 350 $ 350
Receivables (customer, affiliated and long-
term)....................................... 484 484 348 348
Accounts payable (trade and affiliated)...... (636) (636) (533) (533)
Short-term debt (excluding current maturi-
ties) (Note)................................ (33) (33) (30) (30)
Long-term debt (including current maturities)
(Note)...................................... (67) (52) (72) (74)
Instruments With Off-Balance-Sheet Risk
Derivative
Foreign currency contracts................. 5 4 17 18
Non-derivative
Financial guarantees....................... -- (15) -- (20)
</TABLE>
Note: The carrying amounts and estimated fair values of short-term and long-
term debt are before allocation of corporate debt to the Company from Tenneco.
See Note 5.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was not determined to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, the Company's aggregate customer
and long-term receivable balance was concentrated by industry segment as
follows: Tenneco Automotive, 77% and 76%, respectively, and Tenneco Packaging,
23% and 24%, respectively.
Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates.
Instruments With Off-Balance-Sheet Risk
Derivative
The Company utilizes foreign exchange forward contracts to hedge certain
translation effects of the Company's investment in net assets in certain
foreign affiliated companies. Pursuant to these arrangements, the Company
recognized aggregate after-tax translation gains (losses) of $3 million, $(2)
million and $5 million for 1995, 1994 and 1993, respectively, which have been
included in the balance sheet caption "Combined equity."
The Company routinely enters into various foreign currency forward purchase
and sale contracts to hedge the transaction effect of exchange rate movements
on receivables and payables denominated in foreign currencies. These foreign
currency contracts generally mature in one year or less.
F-16
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In managing its foreign currency exposures, the Company identifies naturally
occurring offsetting positions and then hedges residual exposures. The
following table summarizes by major currency the contractual amounts of
foreign currency contracts utilized by the Company:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------- ---------------
(MILLIONS) PURCHASE SELL PURCHASE SELL
---------- -------- ---- -------- ------
<S> <C> <C> <C> <C>
Foreign currency contracts (in US$):
Australian Dollars....................... $ 1 $202 $ 94 $ 26
British Pounds........................... 81 125 277 964
Canadian Dollars......................... 23 50 81 74
French Francs............................ 44 16 94 15
U.S. Dollars............................. 240 81 244 377
Other.................................... 127 83 274 123
---- ---- ------ ------
$516 $557 $1,064 $1,579
==== ==== ====== ======
</TABLE>
Based on exchange rates at December 31, 1995 and 1994, the cost of replacing
these contracts in the event of non-performance by the counterparties would
not have been material.
Non-derivative
Guarantees--At December 31, 1995 and 1994, the Company had guaranteed
payment and performance of approximately $15 million and $20 million,
respectively, primarily with respect to letters of credit and other guarantees
supporting various financing and operating activities.
9. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
U.S. income before income taxes........................... $361 $242 $169
Foreign income before income taxes........................ 151 110 111
---- ---- ----
Income before income taxes................................ $512 $352 $280
==== ==== ====
</TABLE>
Following is a comparative analysis of the components of combined income tax
expense applicable to continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current--
U.S.................................................... $ 54 $ 42 $ 58
State and local........................................ 38 23 21
Foreign................................................ 64 30 35
---- ---- ----
156 95 114
---- ---- ----
Deferred--
U.S.................................................... 61 31 (9)
Foreign................................................ 14 (12) 10
---- ---- ----
75 19 1
---- ---- ----
Income tax expense....................................... $231 $114 $115
==== ==== ====
</TABLE>
Current U.S. income tax expense for the years ended December 31, 1995, 1994
and 1993, include tax benefits of $53 million, $33 million and $32 million,
respectively, related to the allocation of corporate interest expense to the
Company from Tenneco. See Note 5.
F-17
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is a reconciliation of income taxes computed at the statutory U.S.
federal income tax rate (35% for all years presented) to the income tax
expense reflected in the Combined Statements of Income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
- ---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income tax
rate......................................................... $179 $123 $ 98
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit........................................ 17 (12) 7
State and local taxes on income, net of U.S. federal income
tax benefit................................................ 25 16 13
U.S. federal income tax rate change......................... -- -- 2
Realization of unrecognized deferred tax assets............. -- (12) --
Other....................................................... 10 (1) (5)
---- ---- ----
Income tax expense............................................ $231 $114 $115
==== ==== ====
</TABLE>
The components of the Company's net deferred tax liability at December 31,
1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ----
<S> <C> <C>
Deferred tax assets--
Tax loss carryforwards...................................... $ 83 $ 76
Postretirement benefits other than pensions................. 41 39
Other....................................................... 31 54
Valuation allowance......................................... (83) (72)
---- ----
Net deferred tax asset...................................... 72 97
---- ----
Deferred tax liabilities--
Tax over book depreciation.................................. 204 163
Pension..................................................... 158 146
Book versus tax gains and losses on asset disposals......... 63 49
Other....................................................... 7 8
---- ----
Total deferred tax liability................................ 432 366
---- ----
Net deferred tax liability.................................... $360 $269
==== ====
</TABLE>
As reflected by the valuation allowance in the table above, the Company had
potential tax benefits of $83 million and $72 million at December 31, 1995 and
1994, respectively, which were not recognized in the Combined Statements of
Income when generated. These benefits resulted primarily from foreign tax loss
carryforwards which are available to reduce future foreign tax liabilities. At
December 31, 1995, the Company had tax benefits of $83 million from foreign
net operating loss carryforwards which will carry forward indefinitely.
10. MINORITY INTEREST
At both December 31, 1995 and 1994, the Company reported minority interest
in the balance sheet of $301 million. At December 31, 1995, $293 million of
minority interest resulted from the December 1994 sale of a 25% preferred
stock interest in Tenneco International Holding Corp. ("TIHC") to a financial
investor. TIHC holds certain assets including the capital stock of Tenneco
Canada Inc., Monroe Europe N.V., Monroe Australia Proprietary Limited, Walker
France S.A. and other subsidiaries included in the Tenneco Automotive segment.
For financial reporting purposes, the assets, liabilities and earnings of TIHC
and its subsidiaries are combined in the Company's financial statements, and
the investor's preferred stock interest has been recorded as "Minority
interest" in the Combined Balance Sheets.
F-18
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Dividends on the TIHC preferred stock are based on the issue price ($300
million) times a rate per annum equal to 1.12% over LIBOR and are payable
quarterly in arrears on the last business day of each quarter commencing on
March 31, 1995. For 1995, the weighted average rate paid on TIHC preferred
stock was 7.30%. Additionally, beginning in 1996, the holder of the 12,000,000
shares of preferred stock will be entitled to receive, when and if declared by
the Board of Directors of TIHC, participating dividends based on the operating
income growth rate of TIHC. For financial reporting purposes, dividends paid
by TIHC to its financial investors have been recorded in the Company's
Combined Statements of Income as "Minority interest."
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
The Company's employees participate in Tenneco's postretirement health care
and life insurance plans which cover the Company's employees who meet certain
eligibility requirements. For salaried employees, the plans cover employees
retiring from the Company on or after attaining age 55 who have had at least
10 years service with the Company after attaining age 45. For hourly
employees, the postretirement benefit plans generally cover employees who
retire pursuant to one of the Company's hourly employee retirement plans. All
of these benefits may be subject to deductibles, co-payment provisions and
other limitations, and Tenneco or the Company, as applicable, has reserved the
right to change these benefits. Tenneco's postretirement benefit plans are not
funded.
Generally, the Company will retain liabilities with respect to welfare
benefits of its current and former employees and their dependents in
connection with the Distributions.
The funded status of the postretirement benefit plans reconciles with
amounts recognized in the balance sheet at December 31, 1995 and 1994, as
follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit ob-
ligation at September 30:
Retirees....................................................... $ 82 $ 76
Fully eligible active plan participants........................ 19 20
Other active plan participants................................. 33 27
----- -----
Total accumulated postretirement benefit obligation.............. 134 123
Plan assets at fair value at September 30........................ -- --
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (134) (123)
Claims paid during the fourth quarter............................ 2 2
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (12) (13)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 30 22
----- -----
Accrued postretirement benefit cost at December 31............... $(114) $(112)
===== =====
</TABLE>
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
F-19
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic postretirement benefit cost from continuing operations for
the years 1995, 1994 and 1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year................. $ 3 $ 4 $ 3
Interest cost on accumulated postretirement benefit obligation... 10 10 9
Net amortization of unrecognized amounts......................... (1) (1) --
--- --- ---
Net periodic postretirement benefit cost......................... $12 $13 $12
=== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $12 million, $10 million and $12 million,
respectively, and would increase the aggregate of the service cost and
interest cost components of the net postretirement benefit cost for 1995, 1994
and 1993 by approximately $1 million, $1 million and $2 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. Implementation of this new rule reduced 1994
net income by $7 million, net of income tax benefits of $5 million, which was
reported as the cumulative effect of a change in accounting principle.
12. PENSION PLANS
The Company has various defined benefit plans which cover substantially all
of its employees. Benefits are based on years of service and, for most
salaried employees, on final average compensation. The Company's funding
policies are to contribute to the plans amounts necessary to satisfy the
funding requirements of federal laws and regulations. Plan assets consist of
listed equity and fixed income securities. Certain employees of the Company
participate in the Tenneco Inc. Retirement Plan (the "TRP"). Also, included in
the table below are pension obligations and assets related to certain former
employees of Tenneco which the Company will retain after the distributions.
The Company will become the sole sponsor of the TRP after the Distributions.
The benefits accrued by Tenneco and Newport News employees in the TRP will be
frozen as of the last day of the calendar month including the Distributions
and the Company will amend the TRP to provide that all benefits accrued
through that day are fully vested and non-forfeitable.
F-20
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconcile with amounts on the Combined
Balance Sheets at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
PLANS IN
WHICH ASSETS PLANS IN WHICH
EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ALL PLANS
BENEFITS ASSETS (NOTE)
-------------- ---------------- -------------- -------
(MILLIONS) 1995 1994 1995 1994 1995 1994
- ---------- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actuarial present value
of benefits based on
service to date and
present pay levels at
September 30:
Vested benefit obliga-
tion................. $1,793 $1,672 $ 35 $ 24 $1,828 $1,696
Non-vested benefit ob-
ligation............. 38 31 4 2 42 33
------ ------ ------- ------- ------ ------
Accumulated benefit
obligation........... $1,831 $1,703 $ 39 $ 26 $1,870 $1,729
Additional amounts re-
lated to projected sal-
ary increases.......... 72 63 3 4 75 67
------ ------ ------- ------- ------ ------
Total projected benefit
obligation at September
30..................... $1,903 $1,766 $ 42 $ 30 $1,945 $1,796
Plan assets at fair
value at September 30.. 2,233 1,968 8 9 2,241 1,977
------ ------ ------- ------- ------ ------
Plan assets in excess of
(less than) total pro-
jected benefit obliga-
tion at September 30... $ 330 $ 202 $ (34) $ (21) $ 296 $ 181
Contributions during the
fourth quarter......... 4 14 -- -- 4 14
Unrecognized net loss
resulting from plan ex-
perience and changes in
actuarial assumptions.. 142 234 2 3 144 237
Unrecognized prior serv-
ice obligations result-
ing from plan amend-
ments.................. 75 81 1 1 76 82
Remaining unrecognized
net obligation (asset)
at initial application. (80) (96) 1 1 (79) (95)
Adjustment recorded to
recognize minimum lia-
bility................. -- -- (2) (2) (2) (2)
------ ------ ------- ------- ------ ------
Prepaid (accrued) pen-
sion cost at December
31..................... $ 471 $ 435 $ (32) $ (18) $ 439 $ 417
====== ====== ======= ======= ====== ======
</TABLE>
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
Net periodic pension costs (income) from continuing operations for the years
1995, 1994 and 1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the
year................................... $ 23 $ 29 $ 20
Interest accrued on prior years pro-
jected benefit obligation.............. 144 110 60
Expected return on plan assets--
Actual (return) loss.................. (387) 16 (151)
Unrecognized excess (deficiency) of
actual return over expected return... 188 (175) 53
---- ---- ----
(199) (159) (98)
Net amortization of unrecognized
amounts................................ (3) 1 (7)
----- ----- -----
Net pension income...................... $ (35) $ (19) $ (25)
===== ===== =====
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.3% and 7.5%, respectively.
F-21
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The rate of increase in future compensation was 5.1%, 5.1% and 4.9% for 1995,
1994 and 1993, respectively. The weighted average expected long-term rate of
return on plan assets was 10% for 1995, 1994 and 1993.
13. SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company is a global manufacturer with the following business segments:
Tenneco Automotive
Manufacture and sale of exhaust and ride control systems, for both the
original equipment and replacement markets.
Tenneco Packaging
Manufacture and sale of packaging materials, cartons, containers and
specialty packaging products for consumer and commercial markets.
F-22
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize certain segment and geographic information of
the Company's businesses (Note):
<TABLE>
<CAPTION>
SEGMENT
--------------------------
RECLASS.
AND
(MILLIONS) AUTOMOTIVE PACKAGING OTHER ELIMINATION COMBINED
- ---------- ---------- --------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995, AND FOR
THE YEAR THEN ENDED
Net sales and operating
revenues..................... $2,479 $2,752 $ -- $(10) $5,221
====== ====== ===== ==== ======
Operating profit.............. 248 440 44 -- 732
Equity in net income of
affiliated companies......... 1 -- -- -- 1
General corporate expenses.... (9) (10) (42) -- (61)
------ ------ ----- ---- ------
Income before interest
expense, income taxes and
minority interest............ 240 430 2 -- 672
====== ====== ===== ==== ======
Identifiable assets........... 1,874 3,405 925 (94) 6,110
Investment in affiliated
companies.................... 3 4 -- -- 7
------ ------ ----- ---- ------
Total assets................ 1,877 3,409 925 (94) 6,117
====== ====== ===== ==== ======
Depreciation, depletion and
amortization................. 84 110 2 -- 196
====== ====== ===== ==== ======
Capital expenditures for
continuing operations......... 208 316 38 -- 562
====== ====== ===== ==== ======
AT DECEMBER 31, 1994, AND FOR
THE YEAR THEN ENDED
Net sales and operating
revenues..................... $1,989 $2,184 $ -- $ (7) $4,166
====== ====== ===== ==== ======
Operating profit.............. 231 217 35 -- 483
Equity in net income of
affiliated companies......... -- -- -- -- --
General corporate expenses.... (8) (8) (11) -- (27)
------ ------ ----- ---- ------
Income before interest
expense, income taxes and
minority interest............ 223 209 24 -- 456
====== ====== ===== ==== ======
Identifiable assets........... 1,472 1,537 1,082 (156) 3,935
Investment in affiliated
companies.................... 2 3 -- -- 5
------ ------ ----- ---- ------
Total assets................ 1,474 1,540 1,082 (156) 3,940
====== ====== ===== ==== ======
Depreciation, depletion and
amortization................. 51 89 2 -- 142
====== ====== ===== ==== ======
Capital expenditures for
continuing operations......... 113 166 1 -- 280
====== ====== ===== ==== ======
AT DECEMBER 31, 1993, AND FOR
THE YEAR THEN ENDED
Net sales and operating
revenues..................... $1,785 $2,042 $ -- $ (7) $3,820
====== ====== ===== ==== ======
Operating profit.............. 230 146 24 -- 400
Equity in net income of
affiliated companies......... -- 2 -- -- 2
General corporate expenses.... (8) (9) (4) -- (21)
------ ------ ----- ---- ------
Income before interest
expense, income taxes and
minority interest............ 222 139 20 -- 381
====== ====== ===== ==== ======
Identifiable assets........... 987 1,433 576 (46) 2,950
Investment in affiliated
companies.................... 4 6 -- -- 10
Identifiable assets related to
discontinued operations...... 70 -- -- (1) 69
------ ------ ----- ---- ------
Total assets................ 1,061 1,439 576 (47) 3,029
====== ====== ===== ==== ======
Depreciation, depletion and
amortization................. 52 83 2 -- 137
====== ====== ===== ==== ======
Capital expenditures for
continuing operations......... 93 124 -- -- 217
====== ====== ===== ==== ======
</TABLE>
Note: Included in "other" above is the operations of Tenneco Business Services
("TBS"). TBS designs, implements and administers shared administrative service
programs for the Company as well as other Tenneco business entities.
F-23
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA(B)
-------------------------------
RECLASS.
UNITED EUROPEAN OTHER AND
(MILLIONS) STATES CANADA UNION FOREIGN ELIMINATION COMBINED
- ---------- ------ ------ -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers.............. $3,683 $149 $1,140 $249 $ -- $5,221
Transfers among geo-
graphic areas(a)....... 75 43 27 21 (166) --
------ ---- ------ ---- ---- ------
Total................. 3,758 192 1,167 270 (166) 5,221
====== ==== ====== ==== ==== ======
Operating profit.......... 585 20 102 25 -- 732
Equity in net income
(loss) of affiliated
companies................ 1 -- 1 (1) -- 1
General corporate ex-
penses................... (61) -- -- -- -- (61)
------ ---- ------ ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 525 20 103 24 -- 672
====== ==== ====== ==== ==== ======
Identifiable assets....... 4,664 207 1,077 241 (79) 6,110
Investment in affiliated
companies................ 3 -- 2 2 -- 7
------ ---- ------ ---- ---- ------
Total assets.......... 4,667 207 1,079 243 (79) 6,117
====== ==== ====== ==== ==== ======
AT DECEMBER 31, 1994, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers.............. $3,143 $165 $ 624 $234 $ -- $4,166
Transfers among geo-
graphic areas(a)....... 72 36 39 30 (177) --
------ ---- ------ ---- ---- ------
Total................. 3,215 201 663 264 (177) 4,166
====== ==== ====== ==== ==== ======
Operating profit.......... 376 31 47 29 -- 483
Equity in net income
(loss) of affiliated
companies................ 1 -- -- (1) -- --
General corporate ex-
penses................... (27) -- -- -- -- (27)
------ ---- ------ ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 350 31 47 28 -- 456
====== ==== ====== ==== ==== ======
Identifiable assets....... 2,729 141 1,149 17 (101) 3,935
Investment in affiliated
companies................ 4 -- -- 1 -- 5
------ ---- ------ ---- ---- ------
Total assets............ 2,733 141 1,149 18 (101) 3,940
====== ==== ====== ==== ==== ======
</TABLE>
See Notes on following page.
F-24
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA(B)
-------------------------------
RECLASS.
UNITED EUROPEAN OTHER AND
(MILLIONS) STATES CANADA UNION FOREIGN ELIMINATION COMBINED
- ---------- ------ ------ -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1993, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers.............. $2,875 $176 $569 $200 $ -- $3,820
Transfers among geo-
graphic areas(a)....... 67 32 35 19 (153) --
------ ---- ---- ---- ---- ------
Total................. 2,942 208 604 219 (153) 3,820
====== ==== ==== ==== ==== ======
Operating profit.......... 293 28 56 23 -- 400
Equity in net income of
affiliated companies..... 1 -- 1 -- -- 2
General corporate ex-
penses................... (21) -- -- -- -- (21)
------ ---- ---- ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 273 28 57 23 -- 381
====== ==== ==== ==== ==== ======
Identifiable assets....... 2,154 111 583 139 (37) 2,950
Investment in affiliated
companies................ 5 -- 2 3 -- 10
Identifiable assets re-
lated to discontinued op-
erations................. 54 15 1 -- (1) 69
------ ---- ---- ---- ---- ------
Total assets.......... 2,213 126 586 142 (38) 3,029
====== ==== ==== ==== ==== ======
</TABLE>
Notes: (a) Products are transferred between geographic areas on a basis
intended to reflect as nearly as possible the "market value" of the products.
(b) As reflected above, the Company's segments principally market their
products and services in the United States, with significant sales in the
European Union and other foreign countries.
The Company is engaged in the sale of products for export from the United
States. Such sales are reflected in the table below:
<TABLE>
<CAPTION>
(MILLIONS)
GEOGRAPHIC AREA PRINCIPAL PRODUCTS 1995 1994 1993
--------------- ------------------------------------------ ---- ---- ----
<C> <S> <C> <C> <C>
Canada Paperboard products, molded and pressed $ 87 $ 75 $ 80
pulp goods, corrugated boxes, aluminum and
plastics
European Union Molded and pressed pulp goods, paperboard 145 21 22
products, corrugated boxes, aluminum and
plastics
Other Foreign Ride control systems, molded and pressed 110 49 45
pulp goods, paperboard products,
corrugated boxes, aluminum and plastics
---- ---- ----
Total Export Sales $342 $145 $147
==== ==== ====
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company estimates that expenditures aggregating approximately $567
million will be required after December 31, 1995, to complete facilities and
projects authorized at such date, and substantial commitments have been made
in connection therewith.
F-25
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Lease Commitments
The Company holds certain of its facilities and equipment under long-term
leases. The minimum rental commitments under non-cancelable operating leases
with lease terms in excess of one year are $134 million, $126 million, $124
million, $113 million and $117 million for the years 1996, 1997, 1998, 1999
and 2000, respectively, and $866 million for subsequent years. Of these
amounts, $81 million for 1996, $84 million for 1997, $93 million for 1998, $86
million for 1999, $92 million for 2000 and $689 million for subsequent years
are lease payment commitments to GECC, John Hancock, Metropolitan Life and
others (collectively, the "Lessors") for assets purchased by these companies
from Georgia-Pacific in January 1991 and leased to Tenneco Packaging.
The Company has the right to purchase from the Lessors the various leased
assets under certain conditions as specified in the agreements. In the event
the purchase options are not exercised, and that no event of default, as
defined, exists at the renewal dates, the Company also has the right to extend
the various lease terms on a basis set forth in the agreements. Throughout the
lease terms, the Company is required to maintain the leased properties which
includes reforestation of the timberlands harvested.
Commitments under capital leases were not significant to the accompanying
combined financial statements. Total rental expense for continuing operations
for the years 1995, 1994 and 1993, was $171 million, $161 million and $131
million, respectively, including minimum rentals under non-cancelable
operating leases of $148 million, $143 million and $138 million for the
corresponding periods.
Tenneco Packaging's various lease agreements require that it comply with
certain covenants and restrictions, including financial ratios that, among
other things, place limitations on incurring additional "funded debt" as
defined by the agreements. Under the provisions of the lease agreements, in
order to incur funded debt, Tenneco Packaging must maintain a pretax cash flow
coverage ratio, as defined, on a cumulative four quarter basis of a minimum of
2.0, subsequently modified to 1.25 through December 31, 1995. Tenneco
Packaging was in compliance with all of its covenants at December 31, 1995.
Litigation
The legal entities which comprise the Company are parties to various legal
proceedings arising from their operations. Management believes that the
outcome of these proceedings, individually and in the aggregate, will have no
material effect on the financial position or results of operations of the
Company.
Environmental Matters
The Company is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. The potential
costs related to the Company for various environmental matters are uncertain
due to such factors as the unknown magnitude of possible cleanup costs, the
complexity and evolving nature of governmental laws and regulations and their
interpretations, and the timing, varying costs and effectiveness of
alternative cleanup technologies. Liabilities recorded by the Company for
environmental contingencies are estimates of probable costs based upon
available information and assumptions. Because of these uncertainties,
however, the Company's estimates may change. The Company believes that any
additional costs identified as further information becomes available would not
have a material effect on the financial position or results of operations of
the Company.
F-26
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
INCOME BEFORE EFFECT OF
INTEREST LOSS FROM CHANGE IN
NET SALES EXPENSE, INCOME DISCONTINUED ACCOUNTING
AND INCOME TAXES FROM OPERATIONS, PRINCIPLE,
QUARTER OPERATING AND MINORITY CONTINUING NET OF NET OF NET
(MILLIONS) REVENUES INTEREST OPERATIONS INCOME TAX INCOMETAX INCOME
---------- --------- ------------- ---------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
1996 1st..... $1,539 $161 $ 60 $ -- $-- $ 60
2nd........ 1,694 253 118 -- -- 118
------ ---- ---- ---- --- ----
$3,233 $414 $178 $ -- $-- $178
====== ==== ==== ==== === ====
1995 1st..... $1,237 $177 $ 76 $ -- $-- $ 76
2nd........ 1,340 201 92 -- -- 92
3rd........ 1,263 173 73 -- -- 73
4th........ 1,381 121 17 -- -- 17
------ ---- ---- ---- --- ----
$5,221 $672 $258 $ -- $-- $258
====== ==== ==== ==== === ====
1994 1st..... $ 954 $ 78 $ 51 $ (2) $(7) $ 42
2nd........ 1,071 125 45 (23) -- 22
3rd........ 1,071 149 117 -- -- 117
4th........ 1,070 104 25 (6) -- 19
------ ---- ---- ---- --- ----
$4,166 $456 $238 $(31) $(7) $200
====== ==== ==== ==== === ====
</TABLE>
Notes: Reference is made to Notes 3, 4 and 6 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for items affecting
quarterly results.
The preceding notes are an integral part of the foregoing financial
statements.
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Mobil Oil Corporation
We have audited the accompanying combined statement of net assets of the
Mobil Plastics Division of Mobil Oil Corporation (the "Division") as of
November 17, 1995 and December 28, 1994 and the related combined statements of
operations before income taxes, changes in net assets and cash flows for the
period December 29, 1994 to November 17, 1995 and the year ended December 28,
1994. These financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these 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.
As described in Note 1, the accompanying financial statements were prepared
to present the net assets and operations before income taxes of the Division,
which does not have a separate legal status or existence, and are not intended
to be a complete presentation of the assets and liabilities or the results of
operations of Mobil Oil Corporation.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined net assets of the Division at November
17, 1995 and December 28, 1994 and the combined results of its operations
before income taxes and its cash flows before income taxes for the period
December 29, 1994 to November 17, 1995 and the year ended December 28, 1994 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Buffalo, New York
August 9, 1996
F-28
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Accounts receivable--net............................ $114,219 $102,930
Inventories......................................... 92,492 73,785
Prepaid expenses and other current assets........... 1,232 552
-------- --------
Total current assets.................................. 207,943 177,267
Properties, plants and equipment--net................. 330,269 306,078
Assets held for sale.................................. 4,263 9,160
-------- --------
Total assets.......................................... 542,475 492,505
Current liabilities:
Accounts payable.................................... 53,788 53,503
Accrued restructuring charges....................... 5,575 28,837
Accrued expenses--other............................. 57,860 81,571
-------- --------
Total current liabilities............................. 117,223 163,911
-------- --------
Net assets............................................ $425,252 $328,594
======== ========
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF OPERATIONS BEFORE INCOME TAXES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
DECEMBER 29, 1994 YEAR ENDED
TO DECEMBER 28,
NOVEMBER 17, 1995 1994
----------------- ------------
<S> <C> <C>
Net sales....................................... $994,686 $1,035,884
Other operating revenue......................... 1,028 1,050
-------- ----------
995,714 1,036,934
Operating expenses:
Cost of goods sold............................ 625,330 665,150
Selling, distribution, general and administra-
tive......................................... 259,323 281,544
Research and development...................... 7,879 8,612
Restructuring and other charges............... 9,267 77,716
-------- ----------
901,799 1,033,022
-------- ----------
Operating income................................ 93,915 3,912
Other income.................................... 6,000 695
-------- ----------
Income before income taxes...................... $ 99,915 $ 4,607
======== ==========
</TABLE>
See notes to combined financial statements.
F-30
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Excess of combined assets over liabilities at December 29, 1993...... $ 432,150
Income before income taxes........................................... 4,607
Net change in foreign currency translation adjustment................ (239)
Net change in parent company advances................................ (107,924)
---------
Excess of combined assets over liabilities at December 28, 1994...... 328,594
Income before income taxes........................................... 99,915
Net change in foreign currency transaction adjustment................ (179)
Net change in parent company advances................................ (3,078)
---------
Excess of combined assets over liabilities at November 17, 1995...... $ 425,252
=========
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Income before income taxes.......................... $99,915 $ 4,607
Adjustments to reconcile income before income taxes
to net cash flows provided by operating activities:
Depreciation...................................... 34,538 42,184
Write down of properties, plants, equipment and
inventory as a result of restructuring program... 4,842 34,386
Gain (loss) on disposal of machinery and equip-
ment............................................. (20) 3,005
Changes in operating assets and liabilities:
Accounts receivable--net........................ (11,289) (11,605)
Inventories..................................... (18,707) 52,431
Prepaid expenses and other current assets....... (680) 5,056
Accounts payable and accrued expenses........... (23,426) 9,749
Accrued restructuring charges................... (23,262) 28,837
Other........................................... 197 462
------- --------
Cash provided by operating activities............... 62,108 169,112
INVESTING ACTIVITIES
Capital expenditures................................ (63,858) (63,031)
Proceeds from sale of machinery and equipment....... 4,828 1,843
------- --------
Cash used in investing activities................... (59,030) (61,188)
FINANCING ACTIVITIES
Change in parent company investment................. (3,078) (107,924)
------- --------
Cash used in financing activities................... (3,078) (107,924)
------- --------
Net change in cash and cash equivalents............. -- --
Cash and cash equivalents:
Beginning of period............................... -- --
------- --------
End of period..................................... $ -- $ --
======= ========
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined financial statements present, on a historical cost
basis, the combined assets, liabilities, revenue and expense related to the
Mobil Plastics Division of Mobil Oil Corporation ("The Division" or the
"Plastics Division") as of November 17, 1995 and December 28, 1994. These
statements are presented as if the Division had existed as a separate entity
during the periods presented. Transactions between the businesses included in
these statements have been eliminated.
On November 17, 1995, substantially all of the assets and liabilities of the
Division were purchased by Tenneco Inc. pursuant to the Asset Purchase
Agreement dated October 1, 1995 among Mobil Oil Corporation, Mobil Chemical
Canada, Ltd. and Tenneco Inc. (the "agreement"). In accordance with the
agreement, certain assets and liabilities of the Division were retained by
Mobil Oil Corporation; however, with the exception of income taxes, these
assets and liabilites are included in the accompanying combined financial
statements.
The combined financial statements include the financial position and results
of operations of the Plastics Packaging and Consumer Products business groups,
which, prior to the sale to Tenneco Inc., were 100% owned by Mobil Corporation
("Mobil") through the legal entity, Mobil Oil Corporation ("Mobil Oil"). These
business groups have been organized as part of a division of Mobil Chemical
Company ("Mobil Chemical"), which is an operating entity of Mobil Oil.
The Division incurs certain common costs which relate to both the Division
and other Mobil Chemical operations, and management has made allocations of
these costs to the Division. Also, in order to prepare these combined
financial statements, management has made certain allocations of liabilities
to the Division. Management of Mobil Chemical believes such allocations are
reasonable; however, the amounts could differ from amounts that would be
determined if the Division were operated on a stand-alone basis.
Net assets reflect Mobil's historical cost basis investment in the Division,
accumulated earnings and losses of the Division, cumulative exchange
translation adjustments and intercompany activity with Mobil and other
affiliates which are not settled on a current basis.
Income taxes have been excluded from the accompanying combined financial
statements as the responsibility for such taxes is being retained by Mobil
Oil.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All cash and cash equivalents are transferred to Mobil Oil Corporation
through the intercompany account on a current basis and, with the exception of
petty cash, are excluded from assets on the accompanying combined statements
of net assets. The Division is part of a centralized cash management system of
Mobil Oil, whereby all cash disbursements of the Division are funded by, and
all cash receipts are transferred to, Mobil Oil.
Inventories
Inventories are stated at cost, but not in excess of market. The cost of
substantially all product inventories is determined by the last-in, first-out
(LIFO) method. The cost of maintenance and supplies inventories is determined
by the first-in, first-out method.
Properties, Plants and Equipment
Properties, plants and equipment are stated at cost. Depreciation is
computed principally using the straight-line and various accelerated methods
over the estimated useful lives of the assets which range from 3 years to 11
F-33
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
years for machinery and equipment, and 25 years to 32 years for land
improvements and buildings. Expenditures for renewals and improvements that
extend the useful life of an asset are capitalized. Expenditures for routine
repairs and maintenance are charged to operations when incurred. Property
items retired or otherwise disposed of are removed from the property and
related accumulated depreciation accounts. Any profit or loss is included in
operations.
Foreign Currency Translation
Financial statements for the Canadian operations are translated into U.S.
dollars at period-end exchange rates as to assets and liabilities and weighted
average exchange rates as to revenues and expenses. The resulting translation
adjustments are recorded as part of net assets.
Use of Estimates
The financial statements, which are prepared in conformity with generally
accepted accounting principles, include amounts that are based, in part, on
management's best estimates and judgments.
Revenue Recognition
The Division recognizes revenue at the point of passage of title, which is
at the time of shipment to the customer.
Promotional Programs
The Division accrues for the costs of promotional programs, including cents-
off coupons and other trade related programs, at the time the program is made
available to customers. Any adjustments between the original estimate and
ultimate costs are recorded as a change in estimate in the period known. This
change in estimate in 1995 resulted in a reduction of expense of approximately
$9 million.
Environmental Liabilities
The estimated future costs for known environmental remediation requirements
are accrued when it is probable that a liability has been incurred and the
amount of remediation costs can be reasonably estimated. These amounts are the
undiscounted future estimated costs under existing regulatory requirements and
using existing technology.
Allocation of Expenses
The Division shares certain services with other related business groups at
the Divisional level. Services are also performed by Mobil Chemical, Mobil Oil
and Mobil Corporation. These services are allocated to the Plastics Division
primarily on the basis of estimated usage of services. A summary of the
services and the amounts allocated to the Division are described in Note 10.
3. OPERATING ACTIVITIES
The Division is comprised of two primary business groups, Plastics Packaging
and Consumer Products. Plastics Packaging serves food service, supermarkets
and industrial segments while Consumer Products serves the packaged goods
segment of the retail industry. The Division's products include waste bags,
tableware, food bags, food service disposables, meat trays, clear containers,
grocery sacks and stretch film. The Division operates ten manufacturing
facilities in the United States and one in Canada. These facilities consist of
six polyethylene and five polystyrene fabricating plants. The Division
primarily markets its products to customers in North America. There are no
further geographic concentrations of customers, and, generally, collateral is
not required.
F-34
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Accounts receivable--trade............................ $112,239 $101,911
Other receivables..................................... 3,067 2,108
Less: Allowance for doubtful accounts................. (1,087) (1,089)
-------- --------
$114,219 $102,930
======== ========
</TABLE>
5. INVENTORIES
Major classes of inventories are as follows:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Raw material.......................................... $ 25,068 $24,443
In-process............................................ 12,740 10,637
Finished product...................................... 84,752 63,866
-------- -------
Product inventory at current cost..................... 122,560 98,946
Less: LIFO and other product inventory reserves....... (43,895) (44,893)
-------- -------
78,665 54,053
Other material and supplies........................... 6,427 6,274
Maintenance........................................... 7,400 13,458
-------- -------
$ 92,492 $73,785
======== =======
</TABLE>
As a result of the decrease in the level of inventories in 1994, a LIFO
layer liquidation occurred. The impact of the liquidation was approximately a
$7,340 thousand decrease to cost of goods sold for the year ended December 28,
1994. The reduction to cost of goods sold consists of a decrease of $8,640
thousand for the Consumer Products business group which is offset by an
increase of $1,300 thousand for the Plastics Packaging business group.
6. PROPERTIES, PLANTS AND EQUIPMENT
Major classes of properties, plants and equipment are as follows:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Land and land improvements............................ $ 17,185 $ 17,092
Buildings............................................. 112,218 111,262
Machinery, equipment, furniture and fixtures.......... 591,343 561,596
Construction in progress.............................. 50,642 31,580
--------- ---------
Properties, plants and equipment--gross............... 771,388 721,530
Less accumulated depreciation......................... (441,119) (415,452)
--------- ---------
Properties, plants and equipment--net................. $ 330,269 $ 306,078
========= =========
</TABLE>
F-35
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. ASSETS HELD FOR SALE
As part of the Division's reengineering program, as described in Note 15,
the Division closed two manufacturing plants and eliminated unprofitable
product lines which resulted in either the sale or disposal of the related
machinery and equipment. The restructuring charge recorded in 1995 and 1994
includes $4,713 thousand and $28,581 thousand to write-down the two plants,
machinery and equipment to their estimated realizable value. These items had
an original cost of approximately $108,700 thousand and accumulated
depreciation of approximately $66,000 thousand prior to the restructuring
charge. The Washington, New Jersey plant was closed in September 1994, and the
Woodland, California plant was closed in March 1995. The items that have not
been sold or disposed of are included as assets held for sale in the
accompanying combined statement of net assets at management's estimate of the
realizable value.
8. ACCRUED EXPENSES--OTHER
Accrued expenses--other consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Promotional programs.................................. $28,861 $42,139
Vacation.............................................. 6,752 7,993
Quantity discounts.................................... 5,791 7,150
Freight............................................... 4,847 6,965
Sales force and other bonuses......................... 2,624 2,331
Benefits.............................................. 2,310 3,442
Commissions........................................... 1,421 1,671
Relocation costs...................................... 1,152 873
Sales and use tax..................................... 1,042 674
Workers compensation insurance........................ 965 2,230
Insurance programs.................................... 769 773
Advertising........................................... 446 1,219
Property taxes........................................ 221 904
Salaries.............................................. -- 2,067
Other accrued expenses................................ 659 1,140
------- -------
$57,860 $81,571
======= =======
</TABLE>
9 FOREIGN CURRENCY TRANSLATION
The cumulative currency translation adjustment included in net assets
consists of the following unrealized gain (loss):
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Balance at December 29, 1993........................................ $ (770)
Exchange adjustments.............................................. (239)
-------
Balance at December 28, 1994........................................ (1,009)
Exchange adjustments.............................................. (179)
-------
Balance at November 17, 1995........................................ $(1,188)
=======
</TABLE>
F-36
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
Mobil Chemical Company, Mobil Oil Corporation, and Mobil Corporation have
provided the Plastics Division with various administrative and financial
services. Mobil Chemical Company services include computer systems,
accounting, legal and purchasing functions. Mobil Oil Corporation and Mobil
Corporation services include computer mainframe and networking charges,
payroll and employee benefits administration, health, safety and environmental
compliance programs, and plastics industry trade dues. It is Mobil's policy to
allocate centrally incurred costs primarily on the basis of usage or on
estimated time spent. Management believes these allocations and charges have
been made on a reasonable basis; however, they are not necessarily indicative
of the level of expenses which might have been incurred had the Division been
operating as a stand-alone entity.
Charges allocated to the Division from the above-mentioned sources amounted
to approximately $21,110 thousand and $24,980 thousand for the period December
29, 1994 to November 17, 1995 and the year ended December 28, 1994,
respectively. In addition to the above charges, the Division is allocated a
surcharge based on payroll for various employee benefits, including those
mandated by statute. For U.S. operations these charges amounted to $36,606
thousand and $46,591 thousand, and for Canadian operations these charges
amounted to $502 thousand and $610 thousand for the periods ended November 17,
1995 and December 28, 1994, respectively. In addition, workers' compensation
costs were allocated to the Division from Mobil Oil based on payroll, state
mandated rates, and experience ratings. Workers' compensation costs allocated
to the Division for the periods ended November 17, 1995 and December 28, 1994,
amounted to approximately $4,811 thousand and $7,300 thousand, respectively.
The Division obtains general liability and fire and extended property
insurance coverage from a wholly-owned subsidiary of Mobil Corporation. The
Division is self-insured up to deductible limits; these limits for fire and
extended property insurance were increased effective January 1, 1995.
Insurance premiums charged to the Division were approximately $382 thousand
and $801 thousand for the periods ended November 17, 1995 and December 28,
1994, respectively.
The Division purchased approximately 7% and 10% of its polyethylene resin
raw material from Mobil affiliates during the period ended November 17, 1995
and the year ended December 28, 1994, respectively. These purchases, which
were made at market rates, amounted to approximately $12,240 thousand and
$16,600 thousand for the periods ended November 17, 1995 and December 28,
1994, respectively.
11. DEFINED BENEFIT RETIREMENT PLANS
The majority of the Division's U.S. employees are covered by funded
noncontributory pension plans sponsored by Mobil Oil. These plans are
primarily final average pay plans. Funding for these plans, at the Corporate
level, is based on the projected unit credit actuarial cost method. The assets
of these plans consist primarily of equity and fixed income securities.
The Division receives an intercompany allocation of pension costs from Mobil
or its subsidiaries. The net pension obligation is maintained on Mobil's books
and no amount has been included in the accompanying combined statement of net
assets for the Division's share of the obligation.
Net pension costs allocated by Mobil Oil to the Plastics Division
approximated a credit of $983 thousand for the period December 29, 1994 to
November 17, 1995 and a charge of $4,619 thousand for the year ended December
28, 1994. Amounts allocated are principally determined based on payroll. These
credits and charges are included in the payroll surcharge amount disclosed in
Note 10.
F-37
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. DEFINED BENEFIT RETIREMENT PLANS--(CONTINUED)
The Division also provides retirement benefits for its Canadian employees
under pension plans sponsored by a Canadian subsidiary of Mobil Corporation.
Net pension costs allocated to the Plastics Division amounted to approximately
$99 thousand and $170 thousand for the periods ended November 17, 1995 and
December 28, 1994, respectively. These charges are included in the payroll
surcharge amount disclosed in Note 10.
In accordance with certain reporting requirements, actuarial valuations for
the defined benefit retirement plans are performed on an annual basis. Mobil
Oil performed actuarial valuations as of December 31, 1995 and 1994. The
primary assumptions used for the U.S. and Canadian plans actuarial valuations
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 28,
1995 1994
------------ ------------
Percent
<S> <C> <C>
Discount rate......................................... 7.0--7.3 7.5--8.5
Rate of salary increase............................... 4.0--5.3 4.0--5.6
Expected return on plan assets........................ 8.7--9.0 8.2--8.5
</TABLE>
12. OTHER POSTRETIREMENT BENEFITS
The Division, through Mobil Oil, provides certain health care and life
insurance benefits for U.S. retired employees who meet eligibility
requirements. The cost of these benefits is allocated to the Division by Mobil
Oil. The net obligation for these benefits is maintained by Mobil Oil and no
amount has been recorded in the accompanying combined statement of net assets
for the Division's share of the obligation. Premium costs are shared on a
plan-by-plan basis between Mobil Oil and the participants. Postretirement
health care benefits are provided both before and after eligibility for
Medicare. The life insurance plans provide for a single lump-sum payment to a
designated beneficiary.
Charges for postretirement health care and life insurance plans allocated to
the Division by Mobil Oil were $951 thousand and $3,460 thousand for the
period December 28, 1994 to November 17, 1995 and the year ended December 28,
1994, respectively. Amounts allocated are principally determined based on the
Division's payroll and the number of employees. These charges are included in
the payroll surcharge amount disclosed in Note 10.
In accordance with certain reporting requirements, actuarial valuations for
postretirement health care and life insurance plans are performed on an annual
basis. Mobil Oil performed actuarial valuations as of December 31, 1995 and
1994.
The accumulated postretirement benefit obligation is based on a weighted-
average assumed discount rate of 7% and 8.5% as of December 31, 1995 and 1994,
respectively. At December 31, 1995, the health care cost trend used to
calculate the accumulated postretirement benefit obligation is 9.7% for 1996,
and is assumed to decrease generally over 9 years to 5.5%. At December 31,
1994, the health care cost trend rate was assumed to be 10.3% for 1995,
declining to 5.5% after 10 years. The effect of a one percentage point
increase in the assumed health care cost trend rate for each year would
increase the Division's postretirement benefit charge by approximately 15%.
Mobil Corporation's policy is to make contributions to funded plans and
provide book reserves for unfunded plans.
The Division does not provide postretirement benefits for its Canadian
employees because they are covered primarily by local government programs.
F-38
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE SAVINGS PLAN
The Division, through Mobil Oil, sponsors an Employee Savings Plan, which
covers most U.S. employees. The Plan includes a savings plan, which consists
primarily of an employee stock ownership plan (ESOP) and a 401(k) plan. The
ESOP consists of contributions made by Mobil Oil of 4% of eligible employees'
annual base salary. The 401(k) plan consists of Mobil Oil's contribution of 2%
of eligible employees' annual base salary and employee contributions of 1% to
10% of their base salary subject to IRS limitations. Mobil Oil contributions
to the ESOP are invested in Mobil ESOP Convertible Preferred Stock. Employee
contributions to the savings plan are invested at the employees' discretion in
Mobil Corporation common stock or a variety of mutual funds. The Division was
charged approximately $4,348 thousand and $6,506 thousand for the period
December 29, 1994 to November 17, 1995 and the year ended December 28, 1994,
respectively, for their allocated costs of these plans. These charges are
included in the payroll surcharge amount disclosed in Note 10.
The Division also sponsors, through a Canadian subsidiary of Mobil
Corporation, an Employee Savings Plan for its Canadian employees. For salaried
employees the plan consists of a 3-5% contribution by Mobil (depending on
years of service). This contribution is made only if an employee also
contributes a minimum of 5%. An employee may contribute up to 25% of their
salary. For non-salaried workers the employee has a choice of 2% of additional
wages, or a 2% contribution to the Savings Plan. All contributions are
invested at the employees' discretion in Mobil Corporation common stock or a
variety of mutual funds. Employee Savings Plan contributions allocated to the
Division amounted to approximately $65 thousand and $73 thousand for the
periods ended November 17, 1995 and December 28, 1994, respectively. These
charges are included in the payroll surcharge amount disclosed in Note 10.
14. LEASE COMMITMENTS AND RENTALS
The Division rents certain property and equipment under various operating
leases. Total rental expense for the period December 29, 1994 to November 17,
1995 and the year ended December 28, 1994, amounted to approximately $3,518
thousand and $8,169 thousand, respectively.
Future minimum lease payments under all non-cancelable operating leases
having a remaining term in excess of one year are as follows for the next five
calendar years:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
1996................................................................ $2,098
1997................................................................ 1,415
1998................................................................ 930
1999................................................................ --
2000................................................................ --
</TABLE>
15. RESTRUCTURING CHARGE
During 1994, the Division implemented a major reengineering program intent
on reducing the Division's cost structure through a comprehensive redesign of
operating practices and major business processes. The program included the
closing of two manufacturing plants, equipment consolidation, elimination of
unprofitable product lines, closure of outside warehouses, and manpower
reductions made possible by improved processes and consolidating accounting
and other administrative functions. As a result of the reengineering program,
the Division's headcount was reduced by approximately 25% or 1,200 positions.
Included in operating results is a charge of $7,267 and $74,809 thousand
relating to the cost of this program for the period December 29, 1994 to
November 17, 1995 and for the year ended December 28, 1994, respectively.
F-39
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
15. RESTRUCTURING CHARGE--(CONTINUED)
The restructuring charge consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Employee severance packages......................... $1,102 $37,375
Write-down of equipment and inventory and related
costs of discontinued product lines................ 3,896 27,190
Charges to record closed manufacturing facilities at
estimated realizable value and related closure and
selling costs...................................... 946 9,113
Other............................................... 1,323 1,131
------ -------
$7,267 $74,809
====== =======
</TABLE>
The Division's combined statements of net assets includes accruals for
restructuring of $5,575 thousand and $28,837 thousand at November 17, 1995 and
December 28, 1994, respectively. These accruals consist primarily of employee
severance packages which are paid on an ongoing basis; it is anticipated that
payments relating to this program will be completed in 1996.
The Division also incurred consulting charges relating to the restructuring
program of $2,000 thousand and $2,907 thousand for the period December 29,
1994 to November 17, 1995 and the year ended December 28, 1994, respectively.
16. CONTINGENCIES
Environmental Matters
The Division is subject to loss contingencies pursuant to various federal,
state and local environmental laws and regulations. These include possible
obligations to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain chemical or other
substances by the Division or by other parties.
The Division is not aware of any significant environmental obligations and
accordingly has not made any provisions for such obligations related to its
current operating facilities. The Division may, in the future, be involved in
environmental assessments or clean-ups. While the ultimate requirement for any
such remediation, and its cost, is presently not known, the management of the
Division does not expect these costs, based upon currently known information
and existing requirements, to have a material adverse effect on its net assets
and future operating results.
17. PATENT INFRINGEMENT SETTLEMENT
In March 1995 the Division received a $6,000 thousand settlement relating to
a patent infringement suit. This amount is recorded as other income during the
period ended November 17, 1995.
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses
of Tenneco Energy (see Note 1) as of December 31, 1995 and 1994, and the
related combined statements of income, cash flows and changes in combined
equity for each of the three years in the period ended December 31, 1995.
These combined financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and schedule 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of Tenneco Energy as of December 31, 1995 and 1994, and the results
of its combined operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of Tenneco Energy taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1996
F-41
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
--------------------- ------------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues..... $1,921 $2,381 $2,866 $1,370 $ 939
Other income--
Interest income.................... 85 65 25 31 44
Equity in net income of affiliated
companies......................... 65 51 47 18 37
Gain (loss) on sale of assets, net. 11 1 62 42 (7)
Gain on the sale by a subsidiary of
its stock......................... -- 23 -- -- --
Other income, net.................. 29 17 37 6 19
------ ------ ------ ------ ------
2,111 2,538 3,037 1,467 1,032
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of gas sold..................... 954 1,472 1,786 795 493
Operating expenses................... 414 379 442 230 170
General and administrative........... 200 143 169 113 96
Finance charges...................... 79 75 51 34 43
Depreciation, depletion and amortiza-
tion................................ 196 102 170 107 90
------ ------ ------ ------ ------
1,843 2,171 2,618 1,279 892
------ ------ ------ ------ ------
Income before interest expense and
income taxes........................ 268 367 419 188 140
Interest expense, net of interest al-
located to affiliates............... 122 142 127 63 61
------ ------ ------ ------ ------
Income before income taxes........... 146 225 292 125 79
Income tax expense (benefit)......... (11) 72 104 22 32
------ ------ ------ ------ ------
Income before extraordinary loss..... 157 153 188 103 47
Extraordinary loss, net of income
tax................................. -- -- (25) -- --
------ ------ ------ ------ ------
Net income .......................... $ 157 $ 153 $ 163 $ 103 $ 47
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements of income.
F-42
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................ $ 249 $ 48 $ 100
Receivables--
Customer notes and accounts (net)................. 508 961 503
Affiliated companies.............................. 199 215 170
Gas transportation and exchange................... 64 214 151
Income taxes...................................... 133 234 105
Other............................................. 436 130 261
Inventories........................................ 24 22 24
Deferred income taxes.............................. -- -- 21
Prepayments and other.............................. 83 92 93
------ ------ ------
1,696 1,916 1,428
------ ------ ------
Investments and other assets:
Investment in affiliated companies................. 280 358 230
Long-term notes and other receivables (net) ....... 352 683 235
Goodwill........................................... 22 25 37
Other.............................................. 601 307 685
------ ------ ------
1,255 1,373 1,187
------ ------ ------
Plant, property and equipment, at cost............... 6,272 5,768 6,436
Less--Reserves for depreciation, depletion and
amortization...................................... 3,431 3,327 3,512
------ ------ ------
2,841 2,441 2,924
------ ------ ------
$5,792 $5,730 $5,539
====== ====== ======
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)................................... $ 456 $ 399 $ 521
Payables--
Trade............................................. 365 324 312
Affiliated companies.............................. 88 47 113
Gas transportation and exchange................... 28 159 107
Taxes accrued...................................... 525 56 25
Deferred income taxes.............................. 65 29 --
Interest accrued................................... 102 124 97
Natural gas pipeline revenue reservation........... 27 190 59
Other.............................................. 428 238 537
------ ------ ------
2,084 1,566 1,771
------ ------ ------
Long-term debt....................................... 1,811 2,242 1,519
------ ------ ------
Deferred income taxes................................ 323 735 413
------ ------ ------
Postretirement benefits.............................. 260 288 246
------ ------ ------
Deferred credits and other liabilities............... 478 351 406
------ ------ ------
Commitments and contingencies
Minority interest.................................... 19 19 18
------ ------ ------
Preferred stock with mandatory redemption provisions. 130 147 112
------ ------ ------
Combined equity...................................... 687 382 1,054
------ ------ ------
$5,792 $5,730 $5,539
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-43
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ----- ----- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 157 $ 153 $ 163 $ 103 $ 47
Adjustments to reconcile net income to net
cash provided (used) by operating
activities --
Extraordinary loss, net of tax.......... -- -- 25 -- --
Depreciation, depletion and
amortization........................... 196 102 170 107 90
Equity in net income of affiliated
companies, net of dividends............ (12) (3) (5) (1) (12)
Deferred income taxes................... 88 51 93 5 (7)
(Gain) loss on sale of assets, net...... (11) (24) (62) (42) 7
Cash paid for interest allocated to
affiliates, net of tax................. (117) (78) (81) (75) (56)
Changes in components of working
capital--
(Increase) decrease in receivables..... 451 17 78 19 163
(Increase) decrease in prepayments and
other current assets.................. 8 35 51 4 8
Increase (decrease) in payables........ (25) (262) (241) (2) (70)
Increase (decrease) in taxes accrued... 40 (252) 90 (235) 9
Increase (decrease) in interest
accrued............................... (52) (39) (32) (15) (27)
Increase (decrease) in natural gas
pipeline revenue reservation.......... (156) (91) 136 11 (179)
Increase (decrease) in other current
liabilities........................... (102) (60) (122) (161) (7)
(Increase) decrease in long-term notes
and other receivables (net)............ 332 228 -- 138 199
Take-or-pay (refunds to customers)
recoupments, net....................... 36 26 (34) 2 25
Other................................... (68) (81) (20) (43) (16)
----- ----- ------- ----- -----
Net cash provided (used) by operating
activities............................... 765 (278) 209 (185) 174
----- ----- ------- ----- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets.......... 17 68 114 278 13
Expenditures for plant, property and
equipment................................ (337) (345) (171) (164) (113)
Acquisitions of businesses................ (241) -- -- -- (225)
Investments and other..................... 24 48 22 3 59
----- ----- ------- ----- -----
Net cash provided (used) by investing
activities............................... (537) (229) (35) 117 (266)
----- ----- ------- ----- -----
FINANCING ACTIVITIES
Issuance of Tenneco Inc. common, treasury
and SECT shares.......................... 102 188 1,215 46 39
Purchase of Tenneco Inc. common stock..... (655) (26) (7) (122) (450)
Redemption of Tenneco Inc. preferred
stock.................................... (20) (20) (30) (20) (20)
Dividends (Tenneco Inc. common and
preferred stock)......................... (286) (318) (307) (158) (146)
Redemption of equity securities by a
subsidiary............................... -- (160) -- -- --
Net increase (decrease) in short-term debt
excluding current maturities on long-term
debt..................................... 415 (97) 19 164 34
Issuance of long-term debt................ 594 -- -- -- --
Retirement of long-term debt.............. (497) (508) (1,335) (292) (180)
Net cash contributions from affiliates.... 320 1,367 396 301 786
----- ----- ------- ----- -----
Net cash provided (used) by financing
activities............................... (27) 426 (49) (81) 63
----- ----- ------- ----- -----
Increase (decrease) in cash and temporary
cash investments......................... 201 (81) 125 (149) (29)
Cash and temporary cash investments, at
beginning of period...................... 48 129 4 249 48
----- ----- ------- ----- -----
Cash and temporary cash investments, at
end of period............................ $ 249 $ 48 $ 129 $ 100 $ 19
===== ===== ======= ===== =====
Cash paid during the year for interest.... $ 420 $ 349 $ 498 $ 220 $ 210
Cash paid during the year for income taxes
(net of refunds and tax payments from
affiliates).............................. $(123) $(129) $ 14 $ 516 $ 56
</TABLE>
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at the date of purchase.
The accompanying notes to combined financial statements are an integral part of
these combined statements of cash flows.
F-44
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
STATEMENTS OF CHANGES IN COMBINED EQUITY
<TABLE>
<CAPTION>
(MILLIONS)
- ----------
<S> <C>
Balance, December 31, 1992............................................ $(1,503)
Net income.......................................................... 163
Cash paid for interest allocated to affiliates, net of tax.......... (81)
Change in corporate debt allocated to affiliates.................... (905)
Cash contributions from (distributions to) affiliates, net.......... 396
Noncash contributions from (distributions to) affiliates, net....... 360
Contributions from (distributions to) shareowners, net.............. 918
-------
Balance, December 31, 1993............................................ (652)
Net income.......................................................... 153
Cash paid for interest allocated to affiliates, net of tax.......... (78)
Change in corporate debt allocated to affiliates.................... (135)
Cash contributions from (distributions to) affiliates, net.......... 1,367
Noncash contributions from (distributions to) affiliates, net....... (98)
Contributions from (distributions to) shareowners, net.............. (175)
-------
Balance, December 31, 1994............................................ 382
Net income.......................................................... 157
Cash paid for interest allocated to affiliates, net of tax.......... (117)
Change in corporate debt allocated to affiliates.................... 930
Cash contributions from (distributions to) affiliates, net.......... 320
Noncash contributions from (distributions to) affiliates, net....... (235)
Contributions from (distributions to) shareowners, net.............. (750)
-------
Balance, December 31, 1995............................................ 687
Net income.......................................................... 103
Cash paid for interest allocated to affiliates, net of tax.......... (75)
Change in corporate debt allocated to affiliates.................... 111
Cash contributions from (distributions to) affiliates, net.......... 301
Noncash contributions from (distributions to) affiliates, net....... 140
Contributions from (distributions to) shareowners, net.............. (213)
-------
Balance, June 30, 1996 (unaudited).................................... $ 1,054
=======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements of changes in combined equity.
F-45
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The accompanying combined financial statements represent the financial
position, results of operations and cash flows of all energy businesses and
operations owned directly or indirectly by Tenneco Inc. ("Tenneco") and its
subsidiaries, and other existing and discontinued operations of Tenneco and
its subsidiaries other than those relating to Tenneco's automotive, packaging,
administrative services and shipbuilding businesses. The combination of these
energy businesses and operations and such other existing and discontinued
operations of Tenneco, together with Tenneco (which will remain the parent
company of such businesses and operations after the Distributions and Merger
described in Note 2 below) are collectively referred to herein as "Tenneco
Energy" or the "Company".
Investments in 20% to 50% owned companies where Tenneco Energy has the
ability to exert significant influence over operating and financial policies
are carried at cost plus equity in undistributed earnings since date of
acquisition. Reference is made to Note 11, "Investment in Affiliated
Companies," for information concerning significant equity method investees.
All significant transactions and balances among combined businesses have been
eliminated.
Description of Business
Tenneco Energy is engaged primarily in the interstate transportation of
natural gas. The Company is also engaged in related businesses that are not
generally subject to regulation by the Federal Energy Regulatory Commission
("FERC"). The principal activities of these businesses include the intrastate
transportation and marketing of natural gas, the development of and
participation in international natural gas pipelines, primarily in Australia,
the participation in international and domestic gas-fired power generation
projects and the development of natural gas production and production
financing programs, primarily in the United States. Tenneco Energy, through
its combined subsidiary Tenneco Credit Corporation ("TCC"), is also engaged in
financing, on a nonrecourse basis, receivables of certain current and former
operating divisions of Tenneco.
2. MERGER AND DISTRIBUTIONS
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged with and into Tenneco (the "Merger") which, immediately following
the distributions discussed below, will consist only of the energy businesses
and operations and the other existing and discontinued operations of Tenneco.
The Merger is part of a larger Tenneco reorganization (the "Transaction"),
which includes the distribution of all of the outstanding shares of common
stock of New Tenneco Inc., a newly formed subsidiary of Tenneco which, after
giving effect to certain corporate restructuring transactions, will hold the
assets, liabilities and operations of Tenneco's current automotive and
packaging businesses and its administrative services business ("New Tenneco"),
and Newport News Shipbuilding Inc., a subsidiary of Tenneco that was formerly
named Tenneco InterAmerica Inc. and that will hold all of the assets,
liabilities and operations of Tenneco's current shipbuilding business
("Newport News"), to the holders of Tenneco common stock (collectively, the
"Distributions"). Upon completion of the Transaction, holders of Tenneco
common stock will receive equity securities in New Tenneco, Newport News and
El Paso.
Prior to the Transaction Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain New Tenneco
debt will be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for other Tenneco debt, and certain debt issues
may be defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of the Company, New Tenneco
F-46
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(which may declare and pay a dividend to Tenneco) and Newport News (which will
declare and pay a dividend of $600 million to Tenneco). Upon completion of the
debt realignment, Tenneco will have responsibility for $2.65 billion of debt
and preferred stock, subject to certain adjustments, Newport News will have
responsibility for the borrowings under its credit lines and New Tenneco will
have responsibility for the remaining debt.
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco's shareowners.
In order to assist in the orderly transition of New Tenneco and Newport News
into separate, publicly held companies, Tenneco intends to modify, amend or
enter into certain contractual agreements with New Tenneco and Newport News,
including a tax sharing agreement (see "Income taxes" in Note 3), an employee
benefits agreement, an insurance agreement, an administrative services
agreement and other ancillary agreements. These agreements will provide, among
other things, that: (i) New Tenneco will become the sole sponsor of the
Tenneco Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various
Tenneco Inc. welfare plans; (ii) New Tenneco and Newport News will retain
specific insurance policies relating to their businesses and will continue to
have rights and obligations under certain parent-company level insurance
policies of Tenneco; and (iii) at the election of Tenneco pursuant to El
Paso's request, New Tenneco will provide certain services, such as mainframe
data processing and product purchasing services, to the Company for a limited
period of time following the Distributions.
3. SUMMARY OF ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of the Company's assets,
liabilities, revenues and expenses. Reference is made to the "Revenue
Recognition" and "Income Taxes" sections of this footnote and Notes 9, 13, 14
and 15 for additional information on significant estimates included in the
Company's combined financial statements.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim combined financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The interim financial results may not be indicative
of operating results for an entire year.
Notes Receivable and Allowance for Doubtful Accounts and Notes
Short-term notes receivable of $302 million and $305 million were
outstanding at December 31, 1995 and 1994, respectively, of which $216 million
and $284 million, respectively, related to TCC. These notes receivable are
presented net of unearned finance charges of $26 million and $43 million at
December 31, 1995 and 1994, respectively, which related to TCC. At December
31, 1995 and 1994, unearned finance charges related to long-term notes and
other receivables were $23 million and $66 million, respectively, which
related to TCC.
F-47
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the allowance for doubtful accounts and
notes receivable was $49 million and $21 million, respectively.
Inventory
Inventories, consisting of materials and supplies are valued at the lower of
average cost or market.
Property, Plant and Equipment, at Cost
The majority of the Company's property, plant and equipment consists of its
investment in interstate and intrastate pipeline systems. At December 31, 1995
and 1994, $223 million and $160 million, respectively, of the Company's
property, plant and equipment balance is construction work in progress.
Additionally, the Company has recorded capitalized interest and an allowance
for equity funds used during construction in the cost of property, plant and
equipment. Pursuant to a FERC order, Tennessee Gas Pipeline Company, a
combined subsidiary of the Company ("Tennessee") recorded all natural gas in
storage as a fixed asset. As of December 31, 1995 and 1994, the balance of
Tennessee's natural gas in storage included in property, plant and equipment
was $96 million.
Depreciation, Depletion and Amortization
Depreciation of the Company's regulated transmission plants are provided
using the composite method over the estimated useful lives of the depreciable
facilities. The rates for depreciation range from 2% to 5%. Costs of
properties that are not operating units, as defined by the FERC, which are
retired, sold or abandoned by the regulated subsidiaries are credited or
charged, net of salvage, to accumulated depreciation. Gains or losses on sales
of operating units are credited or charged to income.
Depreciation of the Company's nonregulated properties is provided using the
straight line or composite method which, in the opinion of management, is
adequate to allocate the cost of properties over their estimated useful lives.
Goodwill
Goodwill is being amortized over a 15-year period using the straight-line
method. Such amortization amounted to $1.8 million for 1995, 1994 and 1993 and
is included in "Other income, net" in the accompanying combined statements of
income. Accumulated amortization of goodwill was $5.4 million and $3.6 million
at December 31, 1995 and 1994, respectively.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations,
and which do not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies clean-up experience and
data released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the combined balance sheets at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are
F-48
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
recorded and reported separately from the associated liability in the combined
financial statements. Reference is made to Note 15, "Commitments and
Contingencies--Environmental Matters" for further information on this subject.
Revenue Recognition
The regulated subsidiaries of the Company are subject to FERC regulations
and, accordingly, revenues are collected subject to possible refunds pending
final FERC orders. The regulated subsidiaries record rate refund accruals
based on management's estimate of the expected income impact of the rate
proceedings. The Company has recorded revenue reservations of $27 million and
$190 million as of December 31, 1995 and 1994, respectively. The Company
believes the estimate for revenues subject to refund is adequate.
Other Income
Gains or losses on the sale by a subsidiary of its stock are included in
"Other Income, net" in the accompanying combined statements of income.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
Tenneco, together with certain of its subsidiaries which are owned 80% or
more (including Tenneco Energy), have entered into an agreement to file a
consolidated U.S. federal income tax return. Such agreement provides, among
other things, that (i) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis, and (ii) each company in a tax loss position will
be reimbursed currently to the extent its deductions, including general
business credits, are utilized in the consolidated return. The income tax
amounts reflected in the combined financial statements of Tenneco Energy under
the provisions of the tax sharing arrangement are not materially different
from the income taxes which would have been provided had Tenneco Energy filed
a separate tax return. Under the tax sharing agreement, Tenneco pays all
federal taxes directly and bills or refunds, as applicable, its subsidiaries,
including those comprising Tenneco Energy, for the applicable portion of the
total tax payments.
In connection with the Distributions, the current tax sharing agreement will
be cancelled and the Company will enter into a tax sharing agreement with
Newport News, New Tenneco and El Paso. The tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, Tenneco will be liable for taxes imposed on Tenneco
Energy. Federal income taxes imposed with respect to periods prior to the
consummation of the Distributions on the combined activities of Tenneco and
other members of its consolidated group prior to giving effect to the
Distributions will be allocated among the Company, New Tenneco and Newport
News according to their respective share of consolidated taxable income.
Changes in Accounting Principles
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments
F-49
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of Liabilities," which establishes new accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The statement is effective for transactions occurring after
December 31, 1996. The impact of the new standard has not been determined.
Effective January 1, 1996, the Company adopted FAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". FAS No. 121 establishes new accounting standards for measuring the
impairment of long-lived assets. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees, after employment but before retirement, on the accrual basis rather
than the "pay-as-you-go" basis. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
Risk Management Activities
The Company is currently a party to financial instruments and commodity
contracts to hedge its exposure to changes in interest rates and natural gas
prices. These financial instruments and commodity contracts are accounted for
on the accrual basis with gains and losses being recognized based on the type
of contract and exposure being hedged. The amounts paid or received under
interest rate swap agreements are recognized, on the accrual basis, as an
adjustment to interest expense. Net gains and losses on energy commodity
contracts and financial instruments are deferred and recognized when the
hedged transaction is consummated. In the combined statements of cash flows,
cash receipts or payments related to these financial instruments and commodity
contracts are classified consistent with the cash flows from the transactions
being hedged.
4. ACQUISITIONS
During 1995, the Company acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488-mile pipeline, for
approximately $225 million. Also during 1995, the Company acquired a 50%
interest in two gas-fired cogeneration plants from ARK Energy, a privately-
owned power generation company, for approximately $65 million in cash and
Tenneco common stock. Each of the acquisitions was accounted for as a
purchase. If these assets and investments had been acquired January 1, 1995,
net income would not have been significantly different from the reported
amount.
5. DISPOSITION OF ASSETS AND EXTRAORDINARY LOSS
Disposition of Assets
During the first six months of 1996, the Company sold its 13.2% interest in
Iroquois Gas Transmission System, L.P., its 50% interest in Dauphin Island
Gathering System, an investment in stock and certain other assets, resulting
in a pre-tax gain of $42 million.
In December 1995, the Company sold its 50% interest in Kern River Gas
Transmission Company ("Kern River") for a pre-tax gain of $30 million. Kern
River owns a 904-mile pipeline extending from Wyoming to California. Also in
1995, the Company sold certain other facilities and assets for a combined pre-
tax loss of $19 million.
In 1994, Tenneco Energy Resources Corporation, a combined subsidiary which
operates the Company's nonregulated gas marketing and intrastate pipeline
businesses, issued 50 shares of its common stock, diluting Tenneco's ownership
in this subsidiary to 80% and resulting in a gain of $23 million. No taxes
were provided on the gain because management expects that the recorded
investment will be recovered in a tax-free manner.
F-50
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, the Company disposed of two wholly-owned companies, Viking Gas
Transmission Company and Dean Pipeline Company, and investments in stock and
certain other assets for a total pre-tax gain of $62 million.
Extraordinary Loss
In April 1993, Tenneco issued 23.5 million shares of its common stock for
approximately $1.1 billion. The proceeds were used to retire $327 million of
short-term debt, $688 million of long-term debt and $14 million of variable-
rate preferred stock. In November 1993, Tenneco retired DM250 million bonds.
The redemption premium related to the retirement of long-term debt resulting
from these two transactions ($25 million, net of income tax benefits of $13
million) was recorded as an extraordinary loss.
6. TRANSACTIONS WITH AFFILIATES
Combined Equity
The "Combined equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative investment in the combined
businesses of Tenneco Energy. Changes in the "Combined equity" caption
represent the net income of the Company, cash paid for interest allocated to
affiliates, net of tax, changes in corporate debt allocated to affiliates, net
cash and noncash contributions from (distributions to) affiliates and net
contributions from (distributions to) shareowners. Reference is made to the
Statements of Changes in Combined Equity for an analysis of activity in the
"Combined equity" caption for each of the three years ended December 31, 1995
and for the six months ended June 30, 1996.
General and Administrative Expenses
Included in the total general and administrative expenses for 1995, 1994 and
1993, is $16 million, $13 million, and $17 million, respectively, which
represents Tenneco Energy's share of Tenneco's corporate general and
administrative costs for legal, financial, communication and other
administrative services. Tenneco's corporate general and administrative
expenses are allocated based on the estimated level of effort devoted to
Tenneco's various operations and relative size based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable. Total
general and administrative expenses reflected in the accompanying combined
statements of income are reasonable when compared with the total general and
administrative costs Tenneco Energy would have incurred on a stand-alone
basis.
Corporate Debt and Interest Allocations
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to New Tenneco and Newport News
based upon the portion of Tenneco's investment in New Tenneco and Newport News
which is deemed to be debt, generally based upon the ratio of New Tenneco's
and Newport News' net assets to Tenneco consolidated net assets plus debt.
Interest expense was allocated at a rate equivalent to the weighted-average
cost of all corporate debt, which was 7.7%, 8.3% and 7.4% for 1995, 1994 and
1993, respectively. Total pre-tax interest expense allocated to New Tenneco
and Newport News in 1995, 1994 and 1993 was $180 million, $120 million and
$124 million, respectively. New Tenneco and Newport News have also been
allocated tax benefits totaling approximately 35% of the allocated pre-tax
interest expense. Although interest expense, and the related tax effects, have
been allocated to New Tenneco and Newport News for financial
F-51
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
reporting on a historical basis, New Tenneco and Newport News have not been
billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest expense have been included as a component of the
Company's combined equity. Although, management believes that the historical
allocation of corporate debt and interest expense is reasonable, it is not
necessarily indicative of the Company's debt upon completion of the Debt
Realignment.
Notes and Advances Payable with Affiliates
"Cash contributions from (distributions to) affiliates" in the Statements of
Changes in Combined Equity consist of net cash changes in notes and advances
payable between the Company and New Tenneco and Newport News which have been
included in combined equity. Historically, Tenneco has utilized notes and
advances to centrally manage cash funding requirements for its consolidated
group.
At December 31, 1995 and 1994, the Company had an interest bearing note
payable to New Tenneco totaling $494 million and $310 million, respectively,
which is due on demand and is included as a component of the Company's
combined equity. At December 31, 1995 and 1994, the Company had a non-interest
bearing note payable to Newport News totalling $965 million and $991 million,
respectively, which is due on demand and is included as a component of the
Company's combined equity.
Accounts Receivable and Accounts Payable--Affiliated Companies
The "Payables--Affiliated companies" balance primarily includes billings for
general and administrative costs incurred by New Tenneco and charged to
Tenneco Energy. The "Receivables--Affiliated companies" balance primarily
relates to billings for U.S. income taxes incurred by Tenneco and charged to
New Tenneco and Newport News. Affiliated accounts receivable and accounts
payable between the Company and New Tenneco and Newport News will be settled,
capitalized or converted into ordinary trade accounts, as applicable, as part
of the Distributions.
Employee Benefits
Certain employees of the Company participate in Tenneco's employee stock
ownership and employee stock purchase plans. The Tenneco employee stock
ownership plan provides for the grant of Tenneco common stock options and
other stock awards at a price not greater than market value at the date of
grant. The Tenneco employee stock purchase plan allows employees to purchase
Tenneco common stock at a 15% discount subject to certain thresholds. Certain
employees of New Tenneco and Newport News also participate in Tenneco's
employee stock ownership and employee stock purchase plans. The cost of stock
issued to these employees is billed to New Tenneco and Newport News. In
connection with the Distributions, outstanding options on Tenneco common stock
held by the Company's employees will be vested so that they become fully
exercisable prior to the Merger. If not exercised prior to the Merger, such
options will be cancelled upon consummation of the Merger. Outstanding options
on Tenneco common stock held by New Tenneco and Newport News employees will be
converted into new options of New Tenneco and Newport News, as applicable, so
as to preserve the aggregate value of the options held prior to the
Distributions.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made to Notes 13 and 14 for a further
discussion of the plans.
Sales of Receivables
TCC purchased $513 million and $384 million of trade receivables from New
Tenneco at December 31, 1995 and 1994, respectively. TCC sells these trade
receivables to a third party in the ordinary course of business.
F-52
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Corporate Debt
A summary of long-term corporate debt obligations of the Company at December
31, 1995 and 1994, is set forth in the following table:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ------ ------
<S> <C> <C>
Tenneco Inc.--
Debentures due 1998 through 2025, average effective interest
rate 8.7% in 1995 and 9.7% in 1994 (net of $2 million in 1995
and 1994 of unamortized discount)............................. $ 698 $ 398
Notes due 1996 through 2005, average effective interest rate
8.8% in 1995 and 9.2% in 1994 (net of $5 million in 1995 and
$4 million in 1994 of unamortized discount)................... 1,962 1,681
Tennessee Gas Pipeline Company--
Debentures due 2011, effective interest rate 15.1% in 1995 and
1994 (net of $216 million in 1995 and $219 million in 1994 of
unamortized discount)......................................... 184 181
Notes due 1996 through 1997, average effective interest rate
9.7% in 1995 and 10.1% in 1994 (net of $5 million in 1995 and
$8 million in 1994 of unamortized discount)................... 573 808
Tenneco Credit Corporation--
Senior notes due 1996 through 2001, average effective interest
rate 9.7% in 1995 and 9.6% in 1994 (net of $1 million in 1995
and $2 million in 1994 of unamortized discount)............... 549 749
Medium-term notes due 1996 through 2002, average interest rate
9.0% in 1995 and 9.4% in 1994................................. 38 73
Subordinated notes due 1998 through 2001, average interest rate
9.9% in 1995 and 1994......................................... 92 92
Other subsidiaries--
Notes due 1996 through 2014, average effective interest rate
8.6% in 1995 and 8.0% in 1994 (net of $14 million in 1995 and
$15 million in 1994 of unamortized discount).................. 8 4
------ ------
4,104 3,986
Less--Current maturities......................................... 414 485
------ ------
Total long-term corporate debt............................... $3,690 $3,501
====== ======
</TABLE>
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1995, are $414 million, $513 million, $838
million, $250 million and $175 million for 1996, 1997, 1998, 1999 and 2000,
respectively.
Long-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- -------- --------
<S> <C> <C>
Total long-term corporate debt................................ $ 3,690 $ 3,501
Less: Long-term corporate debt allocated to New Tenneco and
Newport News................................................. (1,879) (1,259)
-------- --------
Total long-term corporate debt, net of allocation to New
Tenneco and Newport News................................... $ 1,811 $ 2,242
======== ========
</TABLE>
- --------
Note: Reference is made to Note 6 for information concerning debt allocated to
New Tenneco and Newport News.
F-53
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Corporate Debt
The Company uses commercial paper, lines of credit and overnight borrowings
to finance its short-term capital requirements. Information regarding short-
term debt for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
TENNECO TENNECO
COMMERCIAL CREDIT COMMERCIAL CREDIT
(MILLIONS) PAPER AGREEMENTS PAPER AGREEMENTS
- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding borrowings at end of
year.............................. $346 $ 85 $ -- $ 17
Weighted average interest rate on
outstanding borrowings at end of
year.............................. 6.2% 7.2% -- 10.7%
Approximate maximum month-end
outstanding borrowings during
year.............................. $615 $467 $362 $133
Approximate average month-end
outstanding borrowings during
year.............................. $109 $104 $164 $ 51
</TABLE>
- --------
Note:Includes borrowings under both committed credit facilities and
uncommitted lines of credit and similar arrangements.
Tenneco had other short-term borrowings outstanding of $24 million at
December 31, 1995, and none at December 31, 1994.
Short-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Current maturities on long-term corporate debt.................... $ 414 $ 485
Commercial paper.................................................. 346 --
Credit agreements................................................. 85 17
Other............................................................. 24 --
----- -----
Total short-term corporate debt (including current maturities on
long-term corporate debt)...................................... 869 502
Less: Short-term corporate debt allocated to New Tenneco and
Newport News................................................... (413) (103)
----- -----
Total short-term corporate debt, net of allocation to New
Tenneco and Newport News..................................... $ 456 $399
===== =====
</TABLE>
- --------
Note:Reference is made to Note 6 for information concerning corporate debt
allocated to New Tenneco and Newport News.
Financing Arrangements
As of December 31, 1995, Tenneco had arranged committed credit facilities of
approximately $2.5 billion:
<TABLE>
<CAPTION>
COMMITTED CREDIT FACILITIES(A)
------------------------------------------
(MILLIONS) TERM COMMITMENTS UTILIZED AVAILABLE
- ---------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Tenneco credit agreements............ 1996-1999 $2,400(b) $346(c) $2,054
Other credit agreements.............. various 79 35 44
------ ---- ------
$2,479 $381 $2,098
====== ==== ======
</TABLE>
- --------
Notes:(a) These facilities generally require the payment of commitment fees on
the unused portion of the total commitment and facility fees on the
total commitment.
(b) In 1996, $400 million of these agreements expire; the remainder are
committed through 1999. Of the total committed long-term credit
facilities, $400 million are available to both Tenneco and TCC.
(c) Tenneco's committed long-term credit facilities support its commercial
paper borrowings; consequently, the amount available under the committed
long-term credit facilities is reduced by outstanding commercial paper
borrowings.
F-54
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments by class at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
(MILLIONS) CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
- -------------------- -------- ------ -------- ------
<S> <C> <C> <C> <C>
Asset and Liability Instruments
Cash and temporary cash investments........ $ 249 $ 249 $ 48 $ 48
Receivables (customer and long-term)....... 860 860 1,644 1,644
Accounts payable (trade)................... (365) (365) (324) (324)
Short-term debt (excluding current maturi-
ties) (Note).............................. (455) (455) (17) (17)
Long-term debt (including current maturi-
ties) (Note).............................. (4,104) (4,692) (3,986) (4,206)
Instruments With Off-Balance-Sheet Risk
Derivative
Interest rate swaps:
In a net receivable position........... -- 10 -- --
In a net payable position.............. -- (22) -- (30)
Natural gas swaps, futures and options... -- 3 -- (5)
Non-derivative
Financial guarantees..................... -- (14) -- (14)
</TABLE>
- --------
Note: The carrying amounts and estimated fair values of short-term debt and
long-term debt are before allocation of corporate debt to New Tenneco
and Newport News. Reference is made to Note 6 for information concerning
corporate debt allocated to New Tenneco and Newport News.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was determined not to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, Tenneco Energy's aggregate
customer and long-term receivable balance was concentrated by industry as
follows: energy industry 22% and 21%; automotive parts industry 9% and 11%;
packaging industry 8% and 13%; and farm and construction equipment industry
52% and 47%; all other amounts were not significant. Receivables in the
automotive parts, packaging and farm and construction equipment industries
result from TCC's financing receivables of current and former operating
divisions of Tenneco. TCC sells these trade receivables to a third party in
the ordinary course of business.
Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates; the carrying
amount of floating-rate debt was assumed to approximate its fair value.
Instruments With Off-Balance-Sheet Risk
Derivative
Interest Rate Swaps--The fair value of interest rate swaps was based on the
cost that would have been incurred to buy out those swaps in a loss position
and the consideration that would have been received to terminate those swaps
in a gain position. At December 31, 1995 and 1994, the Company was a party to
swaps with a notional value of $1.5 billion and $1.6 billion, respectively. At
December 31, 1995, $750 million were in a net receivable position and $795
million were in a net payable position. At December 31, 1994, the entire $1.6
billion was in a net payable position. Notional amounts associated with these
swaps do not represent future cash payment requirements. These contractual
amounts are only used as a base to measure amounts to be exchanged at
specified settlement dates.
F-55
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Consistent with its overall policy, the Company uses these instruments from
time to time only to hedge known, quantifiable risks arising from fluctuations
in interest rates. The counterparties to these interest rate swaps are major
international financial institutions. The risk associated with counterparty
default on interest rate swaps is measured as the cost of replacing, at the
prevailing market rates, those contracts in a gain position. In the event of
non-performance by the counterparties, the cost to replace outstanding
interest rate swaps at December 31, 1995 and 1994, would not have been
material.
Price Risk Management--The Company uses exchange-traded futures and option
contracts and over-the-counter option and swap contracts to reduce its
exposure to fluctuations in the prices of natural gas. The fair value of these
contracts is based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. As of December
31, 1995 and 1994, these contracts, maturing through 1997 and 1996,
respectively, had an absolute notional contract quantity of 321 Bcf and 187
Bcf, respectively. Since the contracts described above are designated as
hedges whose fair values correlate to price movements of natural gas, any
gains or losses on the contracts resulting from market changes will be offset
by losses or gains on the hedged transactions. The Company has off-balance
sheet risk of credit loss in the event of non-performance by counterparties to
all over-the-counter contracts. However, the Company does not anticipate non-
performance by the counterparties.
Non-derivative
Guarantees--At December 31, 1995 and 1994, the Company had guaranteed
payment and performance of approximately $14 million, primarily with respect
to letters of credit and other guarantees supporting various financing and
operating activities.
9. FEDERAL ENERGY REGULATORY COMMISSION REGULATORY MATTERS
Restructuring Proceedings
On April 8, 1992, the FERC issued Order 636 which restructured the natural
gas industry by requiring mandatory unbundling of pipeline sales and
transportation services. Numerous parties appealed, to the U.S. Court of
Appeals for the D.C. Circuit Court, the legality of Order 636 generally, as
well as the legality of specific provisions of Order 636. On July 16, 1996,
the U.S. Court of Appeals for the D.C. Circuit issued its decision upholding,
in large part, Order 636. The Court remanded to the FERC several issues for
further explanation, including further explanation of the FERC's decision to
allow pipelines to recover 100% of their gas supply realignment ("GSR") costs.
Tennessee implemented revisions to its tariff, effective on September 1,
1993, which restructured its transportation, storage and sales services to
convert Tennessee from primarily a merchant to primarily a transporter of gas
as required by Order 636. As a result of this restructuring, Tennessee's gas
sales declined while certain obligations to producers under long-term gas
supply contracts continued, causing Tennessee to incur significant
restructuring transition costs. Pursuant to the provisions of Order 636
allowing for the recovery of transition costs related to the restructuring,
Tennessee has made filings to recover GSR costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" cost of Tennessee's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
Tennessee's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of
Tennessee to file for the recovery of losses upon disposition of these assets.
Tennessee has filed for appellate
F-56
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
review of the FERC actions and is confident that the Bastian Bay costs will
ultimately be recovered as transition costs under Order 636; the FERC has not
contested the ultimate recoverability of these costs.
The filings implementing Tennessee's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery was made subject to refund pending FERC review and approval for
eligibility and prudence: 1) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; 2) recovery of TBO costs,
which Tennessee is obligated to pay under existing contracts, through a
surcharge from firm transportation customers, adjusted annually; and 3) GSR
cost recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers over a period of up to 60 months.
Following negotiations with its customers, Tennessee filed in July 1994 with
the FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides
for the recovery of PGA costs of approximately $100 million and the recovery
of costs associated with the transfer of storage gas inventory to new storage
customers in Tennessee's restructuring proceeding. The PGA Stipulation
eliminates all challenges to the PGA costs, but establishes a cap on the
charges that may be imposed upon former sales customers. On November 15, 1994,
the FERC issued an order approving the PGA Stipulation and resolving all
outstanding issues. On April 5, 1995, the FERC issued its order on rehearing
affirming its initial approval of the PGA Stipulation. Tennessee implemented
the terms of the PGA Stipulation and made refunds in May 1995. The refunds had
no material effect on Tenneco Energy's reported net income. The orders
approving the PGA Stipulation have been appealed to the D.C. Circuit Court of
Appeals by certain customers. Tennessee believes the FERC orders approving the
PGA Stipulation will be upheld on appeal.
Tennessee is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC subsequently issued
an order requiring Tennessee to refund certain costs from this surcharge and
refunds were made in May 1996. Tennessee is appealing this decision and
believes such appeal will likely be successful.
With regard to Tennessee's GSR costs, Tennessee, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
Tennessee of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge ("ALJ"). The hearing, which concluded in
July 1995, was limited to the issue of whether the settlement agreements are
prudent. The ALJ concluded, in his initial decision issued in December 1995,
that the settlement was imprudent. Tennessee has filed exceptions to this
initial decision and believes that this decision will not impair Tennessee's
recovery of the costs resulting from this contract. On July 17, 1996, the FERC
ordered oral arguments to be heard September 1996.
Also related to Tennessee's GSR costs, on October 14, 1993, Tennessee was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that Tennessee had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading sought $1.5 billion from Tennessee for alleged damages caused by
Tennessee's refusal to purchase gas produced from the TransTexas leases
covering the new production and lands. In June 1996, Tennessee reached a
settlement with ICA and TransTexas for $125 million wherein ICA and TransTexas
agreed to terminate the contract, released Tennessee from liability under the
contract, and indemnified Tennessee against future claims, including royalty
owner claims.
F-57
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tennessee has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
Tennessee. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the
Court of Appeals favorable to Tennessee in one of these matters and indicated
that it would remand the case to the trial court. On April 18, 1996, however,
the Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
Tennessee. In June 1996, Tennessee filed a motion for rehearing with the Texas
Supreme Court which was denied in August 1996. The Supreme Court's April 1996
ruling explicitly preserves Tennessee's defenses based on bad faith conduct of
the producers. Nothing in the Supreme Court's decision affects Tennessee's
ability to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, Tennessee has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. Tennessee has accrued amounts which
it believes are appropriate to cover the resolution of the litigation
associated with its contract reformation efforts.
As of June 30, 1996, and December 31, 1995, Tennessee has deferred GSR costs
yet to be recovered from its customers of approximately $551 million and $462
million, respectively, net of $380 million and $316 million, respectively,
previously recovered from its customers, subject to refund. A phased
proceeding is underway at the FERC with respect to the recovery of Tennessee's
GSR costs. Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery; oral argument on
eligibility issues has been set by a FERC ALJ for late October 1996. Phase II
of the proceeding on the prudency of the costs to be recovered and on certain
contract specific eligibility issues has not yet been scheduled, but will
likely occur sometime after the ALJ's decision in Phase I is issued. The FERC
has generally encouraged pipelines to settle such issues through negotiations
with customers. Although the Order 636 transition cost recovery mechanism
provides for complete recovery by pipelines of eligible and prudently incurred
transition costs, certain customers have challenged the prudence and
eligibility of Tennessee's GSR costs and Tennessee has engaged in settlement
discussions with its customers concerning the amount of such costs in response
to the FERC statements acknowledging the desirability of such settlements.
Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, the Company is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its combined financial position or results of operations.
Rate Proceedings
On December 30, 1994, Tennessee filed for a general rate increase (the "1995
Rate Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, Tennessee
began collecting rates, subject to refund, reflecting an $87 million increase
in Tennessee's annual revenue requirement. A Stipulation and Agreement was
filed with an ALJ in this proceeding on April 5, 1996. This Stipulation, which
is currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and Tennessee is reserving revenues it believes are adequate to
cover any refunds that may be required upon final settlement of this
proceeding.
F-58
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Following is a comparative analysis of the components of combined income tax
expense (benefit) for the years 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Current--
U.S. ................................................ $(96) $25 $(11)
State and local...................................... (3) (4) 22
---- --- ----
(99) 21 11
---- --- ----
Deferred--
U.S.................................................. 76 39 82
State and local...................................... 12 12 11
---- --- ----
88 51 93
---- --- ----
Income tax expense (benefit)........................... $(11) $72 $104
==== === ====
</TABLE>
Following is a reconciliation of income taxes computed at the statutory U.S.
federal income tax rate (35% for all years presented) to the income tax
expense (benefit) reflected in the combined statements of income for the years
1995, 1994 and 1993:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal in-
come tax rate.......................................... $ 51 $79 $102
Increases (reductions) in income tax expense resulting
from:
State and local taxes on income, net of U.S. federal
income tax benefit................................... 6 5 21
U.S. federal income tax rate change................... -- -- 4
Permanent differences on sales of assets.............. 12 -- (15)
Realization of unrecognized deferred tax assets....... (72) -- --
Other................................................. (8) (12) (8)
---- --- ----
Income tax expense (benefit)............................ $(11) $72 $104
==== === ====
</TABLE>
Current U.S. income tax expense (benefit) for the years ended December 31,
1995, 1994 and 1993, includes a reduction in tax benefits of $63 million, $42
million and $44 million, respectively, related to the allocation of corporate
interest expense to New Tenneco and Newport News. Reference is made to Note 6
for information concerning corporate debt allocated to New Tenneco and Newport
News from the Company.
F-59
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of the Company's net deferred tax liability at December 31,
1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ------
<S> <C> <C>
Deferred tax assets--
U.S. capital loss carryforwards.......................... $163 $ 267
Postretirement benefits other than pensions.............. 104 107
GSR reserve.............................................. 141 --
Environmental reserve.................................... 75 81
Other.................................................... 76 119
Valuation allowance...................................... (117) (293)
---- ------
Net deferred tax asset................................... 442 281
---- ------
Deferred tax liabilities--
Tax over book depreciation............................... 440 437
Asset related to GSR costs of operations regulated by the
FERC.................................................... 141 --
Other regulatory assets.................................. 67 56
Debt related items....................................... 43 44
Book versus tax gains and losses on asset disposals...... 23 321
Other.................................................... 116 187
---- ------
Total deferred tax liability............................. 830 1,045
---- ------
Net deferred tax liability................................. $388 $ 764
==== ======
</TABLE>
As reflected by the valuation allowance in the table above, the Company had
potential tax benefits of $117 million and $293 million at December 31, 1995
and 1994, respectively, which were not recognized in the combined statements
of income when generated. These benefits resulted primarily from U.S. capital
loss carryforwards which are available to reduce future capital gains. During
1995, the Company reduced its deferred tax asset valuation allowance due to
the recognition of U.S. capital loss carryforwards utilized to offset income
taxes payable on asset dispositions. During 1996, these capital loss
carryfowards were utilized to offset taxes on capital gain transactions.
11. INVESTMENT IN AFFILIATED COMPANIES
The Company holds investments in various affiliates which are accounted for
on the equity method of accounting. The principal equity method investments
were the Company's 50% investment in Kern River, and joint venture interests
in power generation plants, interstate pipelines, gathering systems and
natural gas storage facilities.
At December 31, 1995 and 1994, the Company's combined equity included equity
in undistributed earnings from equity method investments of $25 million and
$69 million, respectively. Dividends and distributions received from
affiliates accounted for on the equity method were $53 million, $48 million
and $42 million during 1995, 1994 and 1993, respectively.
F-60
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information of the Company's proportionate share of 50%
or less owned companies accounted for by the equity method of accounting as of
December 31, 1995, 1994 and 1993, and for the years then ended is as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Current assets............................................ $ 60 $ 47 $ 41
Non-current assets........................................ 543 901 829
Short-term debt........................................... 122 19 17
Other current liabilities................................. 24 61 37
Long-term debt............................................ 152 494 496
Other non-current liabilities............................. 25 16 13
Equity in net assets...................................... 280 358 307
Revenues and other income................................. 184 183 164
Costs and expenses........................................ 119 132 117
Net income................................................ 65 51 47
</TABLE>
- --------
Note: Balance sheet amounts related to Kern River are not included in the
table above as of December 31, 1995, due to the Company's sale of its
investment in Kern River in December 1995. Reference is made to Note 5 for
information concerning the sale of Kern River.
12. PREFERRED STOCK
At December 31, 1995, Tenneco had authorized 15,000,000 shares of preferred
stock. In addition, Tenneco has an authorized class of stock consisting of
50,000,000 shares of junior preferred stock, without par value, none of which
has been issued.
The preferred stock issues outstanding at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
SHARES REDEMPTION PERIODS OPTIONAL
ISSUED AND ------------------- REDEMPTION
ISSUE OUTSTANDING OPTIONAL MANDATORY PRICE
----- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
$7.40 preferred (no par val-
ue).......................... 587,270 1996-1998 1996-1998 $100
$4.50 preferred (no par val-
ue).......................... 803,723 1996-1999 1999 $100
---------
1,390,993
=========
</TABLE>
The $7.40 and $4.50 preferred stock issues have a mandatory redemption value
of $100 per share (an aggregate of $139 million and $159 million at December
31, 1995 and 1994, respectively). Tenneco recorded these preferred stocks at
their fair value at the date of original issue (an aggregate of $250 million)
and is making periodic accretions of the excess of the redemption value over
the fair value at the date of issue.
During 1993, Tenneco retired the remainder of a variable rate preferred
stock issue at the redemption price of $100 per share, or $17 million.
The aggregate maturities applicable to preferred stock issues outstanding at
December 31, 1995, are $20 million for each of the years 1996 and 1997, $19
million for 1998 and $80 million for 1999.
F-61
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Changes in Preferred Stock with Mandatory Redemption Provisions
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- -----------------
(MILLIONS EXCEPT SHARE
AMOUNTS) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ---------------------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1........ 1,586,764 $147 1,782,508 $163 2,084,796 $191
Shares redeemed........ (195,771) (20) (195,744) (20) (302,288) (31)
Accretion of excess of
redemption value over
fair value at date of
issue................. -- 3 -- 4 -- 3
--------- ---- --------- ---- --------- ----
Balance December 31...... 1,390,993 $130 1,586,764 $147 1,782,508 $163
========= ==== ========= ==== ========= ====
</TABLE>
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
Tenneco has postretirement health care and life insurance plans which cover
substantially all of Tenneco Energy's employees. For salaried employees, the
plans cover employees retiring from the Company on or after attaining age 55
who have had at least 10 years service with the Company after attaining age
45. For hourly employees, the postretirement benefit plans generally cover
employees who retire pursuant to one of Tenneco's hourly employee retirement
plans. Tenneco Energy is also obligated to provide certain benefits to former
employees of operations previously disposed of by Tenneco. Tenneco Energy will
retain this liability after the Distributions. In addition, Tenneco Energy
will retain liabilities with respect to welfare benefits of its current and
former employees of Tenneco Energy and their dependents in connection with the
Distributions. All of these benefits may be subject to deductibles, copayment
provisions and other limitations, and Tenneco has reserved the right to change
these benefits.
The majority of Tenneco's postretirement benefit plans are not funded. In
June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of the Company. The contributions are collected from
customers in FERC approved rates. As of December 31, 1995, cumulative
contributions were $10 million. Plan assets consist principally of fixed
income securities.
The funded status of the postretirement benefit plans reconciles with
amounts recognized on the combined balance sheets at December 31, 1995 and
1994, as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit
obligation at September 30:
Retirees....................................................... $ 320 $ 321
Fully eligible active plan participants........................ 5 5
Other active plan participants................................. 2 2
----- -----
Total accumulated postretirement benefit obligation.............. 327 328
Plan assets at fair value at September 30........................ 3 2
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (324) (326)
Claims paid during the fourth quarter............................ 14 10
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (68) (83)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 74 65
----- -----
Accrued postretirement benefit cost at December 31............... $(304) $(334)
===== =====
</TABLE>
- --------
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
F-62
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic postretirement benefit cost for the years 1995, 1994 and
1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year......... $ 1 $ 1 $ 1
Interest cost on accumulated postretirement benefit obli-
gation.................................................. 26 17 8
Net amortization of unrecognized amounts................. (13) (6) (1)
---- --- ---
Net periodic postretirement benefit cost................. $ 14 $12 $ 8
==== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $14 million, $14 million and $7 million,
respectively, and would increase the aggregate of the service cost and
interest cost components of the net postretirement benefit cost for 1995, 1994
and 1993 by approximately $1 million, $3 million and $1 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
14. PENSION PLANS
Tenneco has retirement plans which cover substantially all of the Company's
employees. Benefits are based on years of service and, for most salaried
employees, on final average compensation. Tenneco's funding policies are to
contribute to the plans amounts necessary to satisfy the funding requirements
of federal laws and regulations. Plan assets consist principally of listed
equity and fixed income securities. Certain employees of the Company
participate in the Tenneco Inc. Retirement Plan (the "TRP").
New Tenneco will become the sole sponsor of the TRP upon consummation of the
Distributions. The benefits accrued by the employees of Tenneco Energy who
participate in the TRP will be frozen as of the last day of the calendar
months including the Distributions and New Tenneco will amend the TRP to
provide that all benefits accrued through that day are fully vested and non-
forfeitable.
F-63
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconciles with amounts recognized on the
combined balance sheets at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
ALL PLANS
----------
(MILLIONS) 1995 1994
- ---------- ---- ----
<S> <C> <C>
Actuarial present value of benefits based on service to date and
present pay levels at September 30:
Vested benefit obligation....................................... $187 $169
Non-vested benefit obligation................................... 12 11
---- ----
Accumulated benefit obligation.................................. 199 180
Additional amounts related to projected salary increases.......... 41 37
---- ----
Total projected benefit obligation at September 30................ 240 217
Plan assets at fair value at September 30......................... 259 224
---- ----
Plan assets in excess of total projected benefit obligation at
September 30..................................................... 19 7
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions......................................... 14 26
Unrecognized prior service obligations resulting from plan
amendments....................................................... 2 3
Remaining unrecognized net asset at initial application........... (14) (16)
---- ----
Prepaid pension cost at December 31............................... $ 21 $ 20
==== ====
</TABLE>
- --------
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid pension cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
Net periodic pension income for the years 1995, 1994 and 1993 consist of the
following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year. $ 6 $ 6 $ 7
Interest accrued on prior year's projected
benefit obligation........................... 18 16 15
Expected return on plan assets--
Actual (return) loss........................ (45) 4 (31)
Unrecognized excess (deficiency) of actual
return over expected return................ 22 (26) 10
--- --- ---
(23) (22) (21)
Net amortization of unrecognized amounts...... (2) (2) (2)
---- ---- ----
Net periodic pension income................... $ (1) $ (2) $ (1)
==== ==== ====
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.3% and 7.5%, respectively. The rate of
increase in future compensation was 4.9%, in 1995, 1994, and 1993. The
weighted average expected long-term rate of return on plan assets was 10% in
1995, 1994 and 1993.
15. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company estimates that expenditures aggregating approximately $636
million will be required after December 31, 1995, to complete facilities and
projects authorized at such date, and substantial commitments have been made
in connection therewith.
F-64
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Purchase Obligations
In connection with the financing commitments of certain joint ventures, the
Company has entered into unconditional purchase obligations for products and
services of $145 million ($106 million on a present value basis) at December
31, 1995. The Company's annual obligations under these agreements are $22
million for the years 1996 through 2000. Payments under such obligations,
including additional purchases in excess of contractual obligations, were $26
million, $34 million and $31 million for the years 1995, 1994 and 1993,
respectively. In addition, in connection with the Great Plains coal
gasification project (Dakota Gasification Company), Tennessee has contracted
to purchase 30% of the output of the plant's original design capacity for a
remaining period of 14 years. Tennessee has executed a settlement of this
contract as a part of its gas supply realignment negotiations discussed in
Note 9.
Litigation
Reference is made to Note 9, "Federal Energy Regulatory Commission
Regulatory Matters," for information concerning gas supply litigation. The
Company is party to numerous other legal proceedings arising from their
operations. The Company believes that the outcome of these proceedings,
individually and in the aggregate, will have no material effect on the
combined financial position or results of operations of the Company.
Environmental Matters
Since 1988, Tennessee has been engaged in an internal project to identify
and deal with the presence of polychlorinated biphenyls ("PCBs") and other
substances of concern, including substances on the U.S. Environmental
Protection Agency ("EPA") List of Hazardous Substances ("HS List") at
compressor stations and other facilities operated by both its interstate and
intrastate natural gas pipeline systems. While conducting this project,
Tennessee has been in frequent contact with federal and state regulatory
agencies, both through informal negotiation and formal entry of consent
orders, in order to assure that its efforts meet regulatory requirements.
The Company has established a reserve for Tennessee's environmental
expenses, which includes: 1) expected remediation expense and associated
onsite, offsite and groundwater technical studies, 2) legal fees and 3)
settlement of third party and governmental litigation, including civil
penalties. Through June 30, 1996, and December 31, 1995, the Company has
charged approximately $156 million and $147 million, respectively, against the
environmental reserve, excluding recoveries related to Tennessee's
environmental settlement as discussed below. Of the remaining reserve at June
30, 1996 and December 31, 1995, $24 million and $38 million, respectively, has
been recorded on the combined balance sheets under "Payables-trade" and $132
million and $126 million, respectively, under "Deferred credits and other
liabilities."
Due to the current uncertainty regarding the further activity necessary for
Tennessee to address the presence of the PCBs, the substances on the HS List
and other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, Tennessee cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
Tennessee's evaluation and experience to date, the Company continues to
believe that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, Tennessee in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that establishes a mechanism for recovering a substantial
portion of the environmental costs. In November 1995, the FERC issued an order
approving the Environmental Stipulation. Although one shipper filed for
rehearing, the FERC denied rehearing of its order on
F-65
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
February 20, 1996. This shipper filed a Petition for Review on April 22, 1996
in the D.C. Circuit Court of Appeals; Tennessee believes the FERC Order
approving the Environmental Stipulation will be upheld on appeal. The effects
of the Environmental Stipulation, which was effective as of July 1, 1995, have
been recorded with no material effect on the Company's combined financial
position or results of operations. As of June 30, 1996, and December 31, 1995,
the balance of the regulatory asset is $61 million and $74 million,
respectively.
The Company has completed settlements with and has received payments from
the majority of its liability insurance policy carriers for remediation costs
and related claims. The Company believes that the likelihood of recovery of a
portion of its remediation costs and claims against the remaining carriers in
its pending litigation is reasonably possible. In addition, Tennessee has
settled its pending litigation against and received payment from the
manufacturer of the PCB-containing lubricant. These recoveries have been
considered in Tennessee's recording of its environmental settlement with its
customers.
The Company has identified other sites where environmental remediation
expense may be required should there be a change in ownership, operations or
applicable regulations. These possibilities cannot be predicted or quantified
at this time and accordingly, no provision has been recorded. However,
provisions have been made for all instances where it has been determined that
the incurrence of any material remedial expense is reasonably possible. The
Company believes that the provisions recorded for environmental exposures are
adequate based on current estimates.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET SALES INCOME
AND BEFORE INTEREST
QUARTER OPERATING EXPENSE AND NET
(MILLIONS) REVENUES INCOME TAXES INCOME
- ---------- --------- --------------- ------
<S> <C> <C> <C>
1996 1st....................................... $ 748 $119 $ 78
2nd....................................... 622 69 25
------ ---- ----
$1,370 $188 $103
====== ==== ====
1995 1st....................................... $ 505 $ 71 $ 32
2nd....................................... 434 69 15
3rd....................................... 429 43 5
4th....................................... 553 85 105
------ ---- ----
$1,921 $268 $157
====== ==== ====
1994 1st....................................... $ 693 $ 89 $ 18
2nd....................................... 607 80 60
3rd....................................... 549 71 (38)
4th....................................... 532 127 113
------ ---- ----
$2,381 $367 $153
====== ==== ====
</TABLE>
- --------
Note: Reference is made to Notes 4 and 5 and "Managements' Discussion and
Analysis of Financial Condition and Results of Operations" for
discussion of items affecting quarterly results.
The preceding notes to combined financial statements are an integral part of
the foregoing combined financial statements.
F-66
<PAGE>
The Dealer Manager for the Exchange Offers is
MORGAN STANLEY & CO.
INCORPORATED
Liability Management Group
1585 Broadway, Second Floor New York, New York 10036 Call Toll-free: (800) 624-
1808
Any questions concerning the terms of the Exchange Offers may be directed to
the Dealer Manager.
The Information Agent for the Exchange Offers is:
GEORGESON & COMPANY, INC.
Wall Street Plaza
New York, New York 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll Free: (800) 223-2064
Any questions concerning tender procedures or requests for additional copies
of this Prospectus may be directed to the Information Agent.
The Exchange Agent for the Exchange Offers is:
THE CHASE MANHATTAN BANK
By Mail: By Overnight Delivery: By Hand:
Box 2020 c/o Bond Dept. (9:00 a.m. - 5:00 p.m.
4 Chase MetroTech Ctr. 450 W. 33rd St. New York City Time)
Brooklyn, NY 11245 10th Floor 1 Chase Manhattan Plaza
New York, NY 10001 Floor 1-B
Nassau and Liberty
Streets
New York, NY 10081
By Facsimile Transmission:
(212) 946-8016/8017
Information and Confirm by Telephone
(212) 946-3471
Any questions concerning tender procedures, please contact
Ron Halleran 450 West 33rd Street John Strain
(212) 946-3068 15th Floor (212) 946-3035
FAX (212) 946-8158 New York, N.Y. 10001 FAX (212) 946-8151
8159 8152
8160 8153
TRUSTEE:
The Chase Manhattan Bank
450 W. 33rd St.
15th Floor
New York, New York 10001
Telephone: (212) 946-3068
Attention: Ron Halleran
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The by-laws of New Tenneco Inc. include the following provisions:
Section 6.1. Right to Indemnification. The corporation shall indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (an "Indemnitee") who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
corporation or, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the
preceding sentence, except as otherwise provided in Section 6.3, the
corporation shall be required to indemnify an Indemnitee in connection with a
proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors of the corporation.
Section 6.2. Prepayment of Expenses. The corporation shall pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided, however, that, to
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an
undertaking by the Indemnitee to repay all amounts advanced if it should be
ultimately determined that the Indemnitee is not entitled to be indemnified
under this Article VI or otherwise.
Section 6.3. Claims. If a claim for indemnification or payment of expenses
under this Article VI is not paid in full within sixth days after a written
claim therefor by the Indemnitee has been received by the corporation, the
Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the corporation shall have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or payment of expenses under applicable law.
Section 6.4. Nonexclusivity of Rights. The rights conferred on any
Indemnitee by this Article VI shall not be exclusive of any other rights which
such Indemnitee may have or hereafter acquire under any statute, provision of
the certificate of incorporation, these by-laws, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 6.5. Other Sources. The corporation's obligation, if any, to
indemnify or to advance expenses to any Indemnitee who was or is serving at
its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Indemnitee may collect as indemnification of
advancement of expenses from such other corporation, partnership, joint
venture, trust, enterprise or non-profit enterprise.
Section 6.6. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right
or protection hereunder of any Indemnitee in respect of any act or omission
occurring prior to the time of such repeal or modification.
Section 6.7. Other Indemnification and Prepayment of Expenses. This Article
VI shall not limit the right of the corporation, to the extent and in the
manner permitted by law, to indemnify and to advance expenses to persons other
than Indemnitees when and as authorized by appropriate corporate action.
II-1
<PAGE>
Prior to the effective time of the Merger, New Tenneco intends to amend and
restate its by-laws. After such amendment and restatement, New Tenneco's by-
laws will include the following provisions:
Section 14. (1) The corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including appeals (a "proceeding"), by reason of the fact that he, or a
person for whom he is the legal representative, is or was a director or
officer of the corporation or, while a director or officer of the
corporation, is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees)
reasonably incurred by such Indemnitee. Notwithstanding the preceding
sentence, except as otherwise provided in paragraph (3) of this Section 14,
the corporation shall be required to indemnify an Indemnitee in connection
with a proceeding (or part thereof) commenced by such Indemnitee only if
the commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board.
(2) The corporation shall pay the expenses (including attorneys' fees)
incurred by an Indemnitee in defending any proceeding in advance of its
final disposition, provided, however, that, to the extent required by law,
such payment of expenses in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the
Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Section 14 or otherwise.
(3) If a claim for indemnification or payment of expenses under this
Section 14 is not paid in full within thirty days after a written claim
therefor by the Indemnitee has been received by the corporation, the
Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the corporation shall have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or payment of expenses under applicable law.
(4) The rights conferred on any Indemnitee by this Section 14 shall not
be exclusive of any other rights which such Indemnitee may have or
hereafter acquire under any statute, provision of the Restated Certificate
of Incorporation, these By-Laws, agreement, vote of stockholders or
disinterested directors or otherwise.
(5) The corporation's obligation, if any, to indemnify or to advance
expenses to any Indemnitee who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, enterprise or nonprofit entity shall be reduced by
any amount such Indemnitee may collect as indemnification or advancement of
expenses from such other corporation, partnership, joint venture, trust,
enterprise or nonprofit enterprise.
(6) Any repeal or modification of the foregoing provisions of this
Section 14 shall not adversely affect any right or protection hereunder of
any Indemnitee in respect of any act or omission occurring prior to the
time of such repeal or modification.
(7) This Section 14 shall not limit the right of the corporation, to the
extent and in the manner permitted by law, to indemnify and to advance
expenses to persons other than Indemnitees when and as authorized by
appropriate corporate action.
The Company has purchased insurance which purports to insure the Company
against certain costs of indemnification which may be incurred by it pursuant
to the foregoing by-law provision, and to insure the officers and directors of
the Company, and of its subsidiary companies, against certain liabilities
incurred by them in the discharge of their functions as such officers and
directors except for liabilities resulting from their own malfeasance.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration statement:
<TABLE>
<C> <S>
**1 --Dealer Manager Agreement, dated as of , 1996, between New
Tenneco Inc. and Morgan Stanley & Co. Incorporated
**2 --Form of Distribution Agreement, dated as of , 1996, by and
among Tenneco Inc., New Tenneco Inc., and Newport News Shipbuilding
Inc.
**3.1 --Certificate of Incorporation of the Company as currently in effect
**3.2 --Restated Certificate of Incorporation to be adopted prior to the
Distribution Date
**3.3 --By-laws of the Company as currently in effect
**3.4 --Amended and Restated By-laws to be adopted prior to the Distribution
Date
**4.1 --Indenture dated as of , 1996, between New Tenneco Inc. and The
Chase Manhattan Bank, as Trustee
**5 --Opinion of Theodore R. Tetzlaff
**8 --Opinion of Jenner & Block re: certain tax matters
**10.1 --Form of Debt and Cash Allocation Agreement, dated as of ,
1996, by and among Tenneco Inc., New Tenneco Inc., and Newport News
Shipbuilding Inc.
**10.2 --Form of Benefits Agreement, dated as of , 1996, by and among
Tenneco Inc., New Tenneco Inc., and Newport News Shipbuilding Inc.
**10.3 --Form of Insurance Agreement, dated as of , 1996, by and among
Tenneco Inc., New Tenneco Inc., and Newport News Shipbuilding Inc.
**10.4 --Form of Tax Sharing Agreement, dated as of , 1996, by and
among Tenneco Inc., New Tenneco Inc., and El Paso Natural Gas Company
**10.5 --Form of TBS Services Agreement, dated as of , 1996, by
and among New Tenneco Inc., Tenneco Business Services Inc. and
Newport News Shipbuilding Inc.
**10.6 --Form of Transition Services Agreement, dated as of June 19, 1996, by
and among Tenneco Business Services, Inc., Tenneco Inc., and El Paso
Natural Gas Company
**10.7 --Form of Shipbuilding Trademark Transition Services Agreement, dated
as of , by and between Newport News Shipbuilding Inc. and
Tenneco Inc.
**10.8 --Form of Tenneco Trademark Transition Services Agreement, dated as of
, by and between New Tenneco Inc. and Tenneco Inc.
**10.9 --Form of Amended and Restated Tenneco Inc. Board of Directors
Deferred Compensation Plan, to be assumed by New Tenneco Inc. as of
the Distribution Date.
**10.10 --Form of Amended and Restated Tenneco Inc. Executive Incentive
Compensation Plan, to be assumed by New Tenneco Inc. as of the
Distribution Date.
**10.11 --Form of Tenneco Inc. Deferred Compensation Plan, to be adopted by
New Tenneco Inc. as of the Distribution Date.
**10.12 --Form of Tenneco Inc. 1997 Deferred Compensation Plan, to be adopted
by New Tenneco Inc. as of the Distribution Date.
**10.13 --Form of Amended and Restated Tenneco Inc. Supplemental Executive
Retirement Plan, to be assumed by New Tenneco Inc. as of the
Distribution Date.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
**10.14 --Form of Amended and Restated Tenneco Inc. Benefit Equalization
Plan, to be assumed by New Tenneco Inc. as of the Distribution Date.
**10.15 --Form of Amended and Restated Tenneco Inc. Outside Directors
Retirement Plan, to be assumed by New Tenneco Inc. as of the
Distribution Date.
**10.16 --Form of Amended and Restated Supplemental Pension Agreement, dated
September 12, 1995, between Dana G. Mead and Tenneco Inc. to be
assumed by New Tenneco Inc. as of the Distribution Date.
**10.17 --Form of Amended and Restated Tenneco Inc. Change in Control
Severance Benefit Plan for Key Executives, to be assumed by New
Tenneco Inc. as of the Distribution Date.
**10.18 --Form of Amended and Restated Tenneco Benefits Protection Trust, to
be assumed by New Tenneco Inc. as of the Distribution Date.
**10.19 --Employment Agreement dated June 29, 1992, between Stacy S. Dick and
Tenneco Inc.
**10.20 --Employment Agreement dated March 12, 1992, between Dana G. Mead and
Tenneco Inc.
**10.21 --Employment Agreement dated December 3, 1993, between Paul T. Stecko
and Tenneco Packaging, Inc.
**10.22 --Form of Agreement dated September 9, 1992, between Theodore R.
Tetzlaff and Tenneco Inc.
**10.23 --Form of Tenneco Inc. Directors Restricted Stock Program, effective
as of the Distribution Date, to be adopted by New Tenneco Inc. as of
the Distribution Date.
**10.24 --Form of Tenneco Inc. Directors Restricted Stock and Restricted Unit
Program, effective as of the Distribution Date, to be adopted by New
Tenneco Inc. as of the Distribution Date.
**10.25 --Form of 1997 Tenneco Inc. Stock Ownership Plan, to be adopted by
New Tenneco Inc. as of the Distribution Date.
**10.26 --Lease Agreement, Tomahawk, dated as of January 30, 1991, between
The Connecticut National Bank, as Owner Trustee, and Packaging
Corporation of America (Exhibit 10(b)(1) to Tenneco Inc.'s Form 10-K
for the fiscal year ended December 31, 1990, File No. 1-9864).
**10.27 --Lease Agreement, Valdosta, dated as of January 30, 1991 between The
Connecticut National Bank, Philip G. Kane, Jr., Frank McDonald, Jr.,
and William R. Monroe, as Owner Trustee, and Packaging Corporation
of America (Exhibit 10(b)(2) to Tenneco Inc.'s Form 10-K for the
fiscal year ended December 31, 1990, File No. 1-9864).
**10.28 --Timberland Lease, dated January 31, 1991, by and between Four
States Timber Venture and Packaging Corporation of America (Exhibit
10(b)(3) to Tenneco Inc.'s Form 10-K for the fiscal year ended
December 31, 1990, File No. 1-9864).
**10.29 --Participation Agreement, dated as of , 1996, by and between
.
**10.30 --Form of Amended and Restated Mill Lease, dated as of , 199 ,
by and between .
12 --Statement re computation of ratios
**21 --List of Subsidiaries and Affiliates of New Tenneco Inc.
**23.1 --Consent of Theodore R. Tetzlaff
**23.2 --Consent of Jenner & Block
23.3 --Consent of Arthur Andersen LLP
23.4 --Consent of Ernst & Young LLP
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
24 --Powers of Attorney of the following directors of New Tenneco Inc.:
Mark Andrews
W. Michael Blumenthal
M. Kathryn Eickhoff
Peter T. Flawn
Henry U. Harris, Jr.
Belton K. Johnson
Sir David Plastow
William L. Weiss
Clifton R. Wharton, Jr.
**25 --Statement of Eligibility of Trustee
27(a) --Financial Data Schedule (as of December 31, 1995)
27(b) --Financial Data Schedule (as of June 30, 1996)
**99.1 --Form of Letter of Transmittal
**99.2 --Form of Notice of Guaranteed Delivery
**99.3 --Form of Letter to DTC Participants
**99.4 --Form of Letter to Holders of Physical Securities
**99.5 --Form of Letter to Beneficial Holders
</TABLE>
Each exhibit identified on this Exhibit List is filed as part of this
Registration Statement. Exhibits incorporated by reference to a prior filing
are designated by an asterisk (*); exhibits to be filed by amendment to this
Registration Statement are designated by a double asterisk (**); all exhibits
not so designated are being filed herewith.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts--The Businesses of New
Tenneco
Schedule II--Valuation and Qualifying Accounts--The Businesses of Tenneco
Energy
[(c) Appraisal reports]
ITEM 22. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
B. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
C. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF GREENWICH, STATE OF
CONNECTICUT, ON THE 11 DAY OF OCTOBER, 1996.
NEW TENNECO INC.
/s/ Dana G. Mead
BY:__________________________________
Dana G. Mead
Chairman
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Dana G. Mead Principal Executive Officer October 11, 1996
____________________________________ and Director
Dana G. Mead
/s/ Robert T. Blakely Principal Financial and October 11, 1996
____________________________________ Accounting Officer
Robert T. Blakely
</TABLE>
Mark Andrews, W. Michael Directors October 11,
Blumenthal, M. Kathryn 1996
Eickoff, Peter T. Flawn, Henry
U. Harris, Jr., Belton K.
Johnson, Sir David Plastow,
William L. Weiss, Clifton R.
Wharton, Jr.
/s/ Karl A. Stewart
BY:____________________________
Attorney-in-fact
II-6
<PAGE>
SCHEDULE II
THE BUSINESSES OF NEW TENNECO
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $15 $20 $-- $11 $24
=== === === === ===
Year Ended December 31,
1994.................. $15 $ 5 $-- $ 5 $15
=== === === === ===
Year Ended December 31,
1993.................. $17 $10 $-- $12 $15
=== === === === ===
</TABLE>
S-1
<PAGE>
SCHEDULE II
THE BUSINESSES OF TENNECO ENERGY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $21 $26 $ 9 $ 7 $49
=== === === === ===
Year Ended December 31,
1994.................. $37 $ 2 $22 $20 $21
=== === === === ===
Year Ended December 31,
1993.................. $15 $23 $ 3 $ 4 $37
=== === === === ===
</TABLE>
S-2
<PAGE>
EXHIBIT 12
THE BUSINESSES OF NEW TENNECO
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- -----------------------------
PRO FORMA PRO FORMA
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- ----- ----- --------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations............. $ 205 $ 178 $ 168 $ 328 $ 258 $ 238 $ 165 $ 209 $ 139
Add:
Interest.............. 83 100 74 166 160 104 101 103 112
Portion of rentals
representative of in-
terest factor........ 31 31 26 57 57 52 47 47 44
Preferred stock divi-
dend requirements of
majority-owned
subsidiaries......... 10 10 12 23 23 -- -- -- --
Income tax expense and
other taxes on
income............... 147 126 124 291 231 114 115 156 92
Amortization of inter-
est capitalized...... 1 1 1 2 2 1 -- 1 1
Undistributed (earn-
ings) losses of af-
filiated companies in
which less than a 50%
voting interest is
owned................ -- -- -- -- -- -- -- 2 2
----- ----- ----- ----- ----- ----- ----- ----- -----
Earnings as defined. $ 477 $ 446 $ 405 $ 867 $ 731 $ 509 $ 428 $ 518 $ 390
===== ===== ===== ===== ===== ===== ===== ===== =====
Interest................ $ 83 $ 100 $ 74 $ 166 $ 160 $ 104 $ 101 $ 103 $ 112
Interest capitalized.... 5 5 1 5 5 2 1 1 4
Portion of rentals rep-
resentative of interest
factor................. 31 31 26 57 57 52 47 47 44
Preferred stock dividend
requirements of
majority-owned subsidi-
aries on a pretax ba-
sis.................... 17 16 20 42 42 -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Fixed charges as de-
fined.............. $ 136 $ 152 $ 121 $ 270 $ 264 $ 158 $ 149 $ 151 $ 160
===== ===== ===== ===== ===== ===== ===== ===== =====
Ratio of earnings to
fixed charges.......... 3.51 2.93 3.35 3.21 2.77 3.22 2.87 3.43 2.44
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our reports dated February 8, 1996
(except with respect to the matter discussed in Note 3, as to which the date
is March 7, 1996), included in Tenneco Inc.'s Annual Report on Form 10-K, as
amended, for the year ended December 31, 1995, and August 19, 1996 for (i) the
Businesses of Tenneco Energy and (ii) the Businesses of New Tenneco, included
in or made a part of this Registration Statement, and to all references to our
Firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
October 11, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in this
Registration Statement (Form S-4) and to the incorporation by reference
therein of our report dated August 18, 1995 with respect to the December 28,
1994 combined financial statements of Mobil Plastics Division of Mobil
Corporation included in the Current Report of Tenneco Inc. on Form 8-K dated
November 17, 1995 filed with the Securities and Exchange Commission and to the
use of our report dated August 9, 1996 with respect to the combined financial
statements of Mobil Plastics Division of Mobil Oil Corporation for the period
December 29, 1994 to November 17, 1995 and the year ended December 28, 1994 in
this Registration Statement.
Ernst & Young LLP
Buffalo, New York
October 11, 1996
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ Mark Andrews
-------------------------------------
Mark Andrews
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ W. Michael Blumenthal
-------------------------------------
W. Michael Blumenthal
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ M. Kathryn Eickhoff
-------------------------------------
M. Kathryn Eickhoff
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ Peter T. Flawn
-------------------------------------
Peter T. Flawn
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ Henry U. Harris, Jr.
-------------------------------------
Henry U. Harris, Jr.
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ Belton K. Johnson
-------------------------------------
Belton K. Johnson
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ Sir David Plastow
-------------------------------------
Sir David Plastow
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ William L. Weiss
-------------------------------------
William L. Weiss
<PAGE>
NEW TENNECO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a
Director of New Tenneco Inc., whose signature appears immediately below
constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of
them, severally, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 for the registration of debentures, notes and/or other debt obligations of
New Tenneco Inc. which are to be exchanged for an equal amount of debt
obligations of Tenneco Inc., and any and all amendments (including post-
effective amendments) thereto and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with
or without the other of said attorneys and shall have full power and authority
to do and perform, in the name and on behalf of the undersigned, each and
every act and thing requisite and necessary to be done, as fully and to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this instrument this 8th
day of October, 1996.
/s/ Clifton R. Wharton, Jr.
-------------------------------------
Clifton R. Wharton, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
The Business of New Tenneco Combined Financial Statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 351
<ALLOWANCES> 0
<INVENTORY> 838
<CURRENT-ASSETS> 1,695
<PP&E> 4,138
<DEPRECIATION> 1,480
<TOTAL-ASSETS> 6,117
<CURRENT-LIABILITIES> 1,559
<BONDS> 1,648
<COMMON> 0
0
0
<OTHER-SE> 1,852
<TOTAL-LIABILITY-AND-EQUITY> 6,117
<SALES> 5,221
<TOTAL-REVENUES> 5,221
<CGS> 3,737
<TOTAL-COSTS> 3,737
<OTHER-EXPENSES> 851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160
<INCOME-PRETAX> 512
<INCOME-TAX> 231
<INCOME-CONTINUING> 258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
The Business of New Tenneco Combined Financial Statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 129
<SECURITIES> 0
<RECEIVABLES> 477
<ALLOWANCES> 0
<INVENTORY> 820
<CURRENT-ASSETS> 2,002
<PP&E> 4,332
<DEPRECIATION> 1,584
<TOTAL-ASSETS> 6,523
<CURRENT-LIABILITIES> 1,710
<BONDS> 1,573
<COMMON> 0
0
0
<OTHER-SE> 2,168
<TOTAL-LIABILITY-AND-EQUITY> 6,523
<SALES> 3,233
<TOTAL-REVENUES> 3,233
<CGS> 2,303
<TOTAL-COSTS> 2,303
<OTHER-EXPENSES> 587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> 314
<INCOME-TAX> 126
<INCOME-CONTINUING> 178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
