<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12387
----------------
NEW TENNECO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0515284
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1275 KING STREET, GREENWICH, CONNECTICUT 06831
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 863-1000
N/A
----------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No X*
- --------
* The registrant's Registration Statement on Form 10 became effective on
November 7, 1996.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
600 shares of common stock, $.01 par value per share, as of December 6,
1996. (See Note 4 to Notes to Combined Financial Statements).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I--Financial Information
Item 1. Financial Statements (Unaudited)
The Businesses of New Tenneco--
Combined Statements of Income......................................... 2
Combined Statements of Cash Flows..................................... 3
Combined Balance Sheets............................................... 4
Statements of Changes in Combined Equity.............................. 5
Notes to Combined Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 10
Part II--Other Information
Item 1. Legal Proceedings............................................... 18
Item 2. Changes in Securities........................................... *
Item 3. Defaults Upon Senior Securities................................. *
Item 4. Submission of Matters to a Vote of Security Holders............. *
Item 5. Other Information............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 20
</TABLE>
- --------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
1
<PAGE>
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
THE BUSINESSES OF NEW TENNECO
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED
30, SEPTEMBER 30,
- --------------------------------------------------------------------------------
(MILLIONS) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales and operating revenues--
Automotive................................... $ 760 $ 600 $2,223 $1,863
Packaging.................................... 896 665 2,671 1,983
Other........................................ (3) (2) (8) (7)
----- ----- ------ ------
1,653 1,263 4,886 3,839
Other income--
Interest income.............................. 1 2 5 11
Gain (loss) on sale of businesses and assets,
net......................................... 9 (1) 58 13
Other income, net............................ 30 12 48 20
----- ----- ------ ------
1,693 1,276 4,997 3,883
----- ----- ------ ------
Costs and Expenses:
Cost of sales (exclusive of depreciation shown
below)........................................ 1,211 912 3,514 2,740
Engineering, research and development expenses. 22 12 66 45
Selling, general and administrative............ 207 132 603 408
Depreciation, depletion and amortization....... 82 47 229 139
----- ----- ------ ------
1,522 1,103 4,412 3,332
----- ----- ------ ------
Income Before Interest Expense, Income Taxes and
Minority Interest............................... 171 173 585 551
Interest Expense (net of interest capitalized)... 45 39 145 113
----- ----- ------ ------
Income Before Income Taxes and Minority Interest. 126 134 440 438
Income Tax Expense............................... 45 56 171 180
----- ----- ------ ------
Income Before Minority Interest.................. 81 78 269 258
Minority Interest................................ 5 5 15 17
----- ----- ------ ------
Net Income....................................... $ 76 $ 73 $ 254 $ 241
===== ===== ====== ======
</TABLE>
(The accompanying notes to combined financial statements are an integral part
of these combined statements of income.)
2
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
30,
- -------------------------------------------------------------------------------
(MILLIONS) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income..................................................... $ 254 $ 241
Adjustments to reconcile net income to net cash provided (used)
by operating activities--
Depreciation, depletion and amortization...................... 229 139
Deferred income taxes......................................... 32 15
Gain on sale of businesses and assets, net.................... (58) (13)
Allocated interest, net of tax................................ 90 73
Changes in components of working capital--
(Increase) decrease in receivables........................... (112) (64)
(Increase) decrease in inventories........................... 12 (108)
(Increase) decrease in prepayments and other current assets.. (4) (28)
Increase (decrease) in payables.............................. (10) (119)
Increase (decrease) in taxes accrued......................... 59 27
Increase (decrease) in other current liabilities............. (63) (57)
Other......................................................... (43) (54)
------ -----
Net Cash Provided (Used) by Operating Activities................ 386 52
------ -----
Cash Flows from Investing Activities:
Net proceeds from sale of businesses and assets................ 136 35
Expenditures for plant, property and equipment................. (389) (300)
Acquisitions of businesses..................................... (677) (107)
Investments and other.......................................... (91) 2
------ -----
Net Cash Provided (Used) by Investing Activities................ (1,021) (370)
------ -----
Cash Flows from Financing Activities:
Issuance of long-term debt..................................... 5 --
Retirement of long-term debt................................... (13) (12)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt................................... (23) (11)
Cash contributions from (distributions to) Tenneco............. 695 107
------ -----
Net Cash Provided (Used) by Financing Activities................ 664 84
------ -----
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments................................................ (2) 6
------ -----
Increase (Decrease) in Cash and Temporary Cash Investments...... 27 (228)
Cash and Temporary Cash Investments, January 1.................. 103 350
------ -----
Cash and Temporary Cash Investments, September 30 (Note)........ $ 130 $ 122
====== =====
Cash Paid During the Period for:
Interest....................................................... $ 5 $ 5
Income taxes (net of refunds).................................. $ 126 $ 169
</TABLE>
- --------
NOTE: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at date of purchase.
(The accompanying notes to combined financial statements are an integral part
of these combined statements of cash flows.)
3
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(MILLIONS) 1996 1995 1995
- -------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and temporary cash investments.. $ 130 $ 103 $ 122
Receivables--
Customer notes and accounts (net).. 529 351 398
Affiliated companies............... 130 117 43
Income taxes....................... 65 41 10
Other.............................. 73 54 62
Inventories--
Finished goods..................... 403 396 312
Work in process.................... 118 102 96
Raw materials...................... 269 253 215
Materials and supplies............. 92 87 74
Deferred income taxes................ 23 23 27
Prepayments and other................ 181 168 171
------ ------ ------
2,013 1,695 1,530
------ ------ ------
Investments and Other Assets:
Long-term notes and other
receivables (net)................... 15 16 16
Goodwill and intangibles, net........ 1,334 1,024 338
Deferred income taxes................ 61 52 53
Pension assets....................... 476 433 418
Other................................ 341 239 213
------ ------ ------
2,227 1,764 1,038
------ ------ ------
Plant, Property and Equipment, at
cost................................. 4,685 4,138 3,260
Less--Reserves for depreciation,
depletion and amortization.......... 1,586 1,480 1,454
------ ------ ------
3,099 2,658 1,806
------ ------ ------
$7,339 $6,117 $4,374
====== ====== ======
<CAPTION>
LIABILITIES AND COMBINED EQUITY
<S> <C> <C> <C>
Current Liabilities:
Short-term debt (including current
maturities on long-term debt)....... $ 916 $ 384 $ 173
Payables--
Trade.............................. 611 589 441
Affiliated companies............... 50 47 4
Taxes accrued........................ 120 45 56
Accrued liabilities.................. 208 237 168
Other................................ 285 257 158
------ ------ ------
2,190 1,559 1,000
------ ------ ------
Long-term Debt........................ 1,531 1,648 1,119
------ ------ ------
Deferred Income Taxes................. 450 435 374
------ ------ ------
Postretirement Benefits............... 198 156 126
------ ------ ------
Deferred Credits and Other
Liabilities.......................... 204 166 182
------ ------ ------
Commitments and Contingencies
Minority Interest..................... 300 301 296
------ ------ ------
Combined Equity....................... 2,466 1,852 1,277
------ ------ ------
$7,339 $6,117 $4,374
====== ====== ======
</TABLE>
(The accompanying notes to combined financial statements are an integral part
of these combined balance sheets.)
4
<PAGE>
THE BUSINESSES OF NEW TENNECO
STATEMENTS OF CHANGES IN COMBINED EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
- --------------------------------------------------------------------------------
(MILLIONS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1.............................................. $1,852 $ 987
Net income.................................................... 254 241
Translation adjustment........................................ (24) 66
Allocated interest, net of tax................................ 90 73
Change in allocated corporate debt............................ (423) (172)
Cash distributions from Tenneco............................... 695 107
Noncash contributions from (distributions to) Tenneco......... 22 (25)
------ ------
Balance, September 30........................................... $2,466 $1,277
====== ======
</TABLE>
(The accompanying notes to combined financial statements are an integral part
of these
statements of changes in combined equity.)
5
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(1) New Tenneco Inc. (hereinafter referred to as "New Tenneco") is a newly
formed, wholly-owned subsidiary of Tenneco Inc. ("Tenneco"). Upon consummation
of the Transaction, which is defined and more fully described in Note 4 below,
(a) New Tenneco will own directly and indirectly (through its combined
companies) all of the assets, liabilities and operations of the (i) automotive
parts business ("Tenneco Automotive"), (ii) packaging business ("Tenneco
Packaging"), and (iii) administrative services business ("Tenneco Business
Services") currently owned directly or indirectly by Tenneco, and (b) the
common stock of New Tenneco will be distributed pro rata to holders of Tenneco
common stock and New Tenneco will thereafter be a publicly traded company.
The accompanying unaudited combined financial statements of New Tenneco and
its combined companies (collectively, the "New Company") contain all
adjustments necessary to present fairly the financial position as of September
30, 1996, and the results of operations, changes in equity, and cash flows for
the periods indicated of Tenneco Automotive, Tenneco Packaging and Tenneco
Business Services. The unaudited interim combined financial statements 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. In the
opinion of New Tenneco's management, the unaudited interim combined financial
statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The combined
financial statements of the New Company include all of Tenneco's majority-
owned companies that are part of Tenneco Automotive, Tenneco Packaging and
Tenneco Business Services. Investments in 20% to 50% owned companies where the
New Company 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 and cumulative translation adjustments.
(2) New Tenneco and its combined companies are parties to numerous legal
proceedings arising from their operations. New Tenneco believes that the
outcome of these proceedings, individually and in the aggregate, will have no
material adverse effect on the New Company's financial position or results of
operations.
(3) The New Company has identified sites in its various operating divisions
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
probable. The New Company believes that the provisions recorded for
environmental exposures are adequate based on current estimates.
(4) As part of the ongoing strategic realignment of its businesses, on June
19, 1996, Tenneco's Board of Directors approved a plan to reorganize Tenneco
(the "Transaction") pursuant to which (i) Tenneco will restructure (the "Debt
Realignment") its and certain of its consolidated subsidiaries' debt through a
series of tender offers, exchange offers, payments, redemptions, prepayments
and defeasances involving Tenneco, New Tenneco and Newport News Shipbuilding
Inc., a wholly owned subsidiary of Tenneco ("Newport News"); (ii) Tenneco and
its subsidiaries will, pursuant to a distribution agreement (the "Distribution
Agreement") among Tenneco, New Tenneco and Newport News, undertake various
intercompany transfers and distributions (collectively, the "Corporate
Restructuring Transactions") designed to restructure, divide and separate
their various businesses and assets so that substantially all of the assets,
liabilities and operations of (A) Tenneco Automotive, Tenneco Packaging and
Tenneco Business Services (collectively, "Industrial Business") are owned and
operated by New Tenneco and/or the other companies comprising the New Company,
and (B) their shipbuilding business ("Shipbuilding Business") is owned and
operated by Newport News; (iii) Tenneco will then distribute (the
"Distributions") pro rata to holders of Tenneco common stock, all of the
outstanding common stock of New Tenneco (the "New Tenneco Common Stock") and
Newport News (the "Newport News Common Stock"); and (iv) thereafter an
indirect wholly owned subsidiary of El Paso Natural Gas Company
6
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
("El Paso") will merge with and into Tenneco (the "Merger"), which will then
consist of the remaining assets, liabilities and operations of Tenneco and its
subsidiaries other than those relating to the Industrial Business or the
Shipbuilding Business, including the transmission and marketing of natural gas
(collectively, the "Energy Business" or "Tenneco Energy") pursuant to an
Amended and Restated Agreement and Plan of Merger dated as of June 19, 1996
between El Paso, its merger subsidiary and Tenneco.
For the past several years, Tenneco Inc. and its consolidated subsidiaries
(collectively, the "Old Company" or the "Tenneco Group") have 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 is designed to complete this process. Consummation
of the Transaction is conditioned upon, among other things, the approval by
Tenneco shareowners of the Transaction and a favorable ruling from the
Internal Revenue Service ("IRS") regarding the tax-free nature of certain
components of the Transaction. Tenneco received a favorable ruling from the
IRS regarding the applicable components of the Transaction on October 30,
1996. The Transaction will be submitted as a single, unified proposal at a
special meeting of Tenneco shareowners, presently scheduled to be held on
December 10, 1996.
As a part of the Transaction, Tenneco has undertaken or will specifically
undertake the following actions:
. New Preferred Stock Issuance. On November 18, 1996, Tenneco issued in a
registered public offering (the "NPS Issuance") 6,000,000 shares of its
newly designated 8 1/4% Cumulative Junior Preferred Stock, Series A (the
"Tenneco Junior Preferred Stock"). The number of shares of Tenneco Junior
Preferred Stock issued in the NPS Issuance was to the extent possible,
designed 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 proceeds (the "NPS Issuance Proceeds") to Tenneco from
the sale of the Tenneco Junior Preferred Stock in the NPS Issuance (which
totalled $300 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, indebtedness for
borrowed money of Tenneco and certain of its consolidated subsidiaries
("Tenneco Consolidated Debt") will be restructured and refinanced through a
series of cash tender offers, exchange offers, payments, redemptions,
prepayments and defeasances. The Debt Realignment is intended to reduce the
total amount of Tenneco Consolidated Debt to an amount that, when added to
the total amount of certain other liabilities and obligations of Tenneco
Energy outstanding as of the effective time of the Merger ("Actual Energy
Debt Amount") equals $2.65 billion, less the NPS Issuance Proceeds and
subject to certain other adjustments (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 adjustment.
If the Transaction had been consummated on September 30, 1996, on a pro
forma basis (assuming 100% acceptance of the Cash Tender Offers and
Exchange Offers, as defined below), Tenneco and New Tenneco would have had
indebtedness for money borrowed of approximately $2,519 million, ($1,819
million after giving effect to certain other refinancing transactions to be
undertaken by or on behalf of El Paso) and $2,200 million, respectively.
. Cash Realignment. The total amount of cash and cash equivalents of Tenneco
and its consolidated subsidiaries at the time of the Merger will be
allocated $25 million to Tenneco (subject to certain adjustments), $5
million to Newport News and the balance to New Tenneco.
. Charter Amendment. Prior to the Merger, Tenneco will file an amendment to
eliminate specified rights, powers and preferences of its junior preferred
stock (certain of, however, are preserved or modified in the certificate of
designation for the Tenneco Junior Preferred Stock issued in the NPS
Issuance) contained in the Tenneco Certificate of Incorporation, as
amended.
7
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
. The Distributions. On the effective date of the Distributions, Tenneco will
distribute to all holders of Tenneco common stock, par value $5.00 per
share, of record as of the close of business on December 11, 1996, (i) one
share of New Tenneco Common Stock, $.01 par value per share, for every
share of Tenneco common stock held, and (ii) one share of Newport News
Common Stock, $.01 par value per share, for every five shares of Tenneco
common stock held. Cash will be paid in lieu of fractional shares. The
Distribution Agreement and various agreements to be entered into in
connection therewith will govern the post-Transaction allocation of various
other rights and obligations among Tenneco, New Tenneco and Newport News.
. The Merger. El Paso Merger Company, an indirect wholly owned subsidiary of
El Paso, will be merged with and into Tenneco, which will then consist
solely of the Energy Business. 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).
The Old Company expects to incur an extraordinary charge as a result of the
Debt Realignment and estimates that this charge will be approximately $300
million after-tax, based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions, which The Old Company estimates will be
approximately $100 million after tax.
New Tenneco after the Transaction
Upon completion of the Distributions and the other components of the
Transaction, New Tenneco will be an independent, publicly-held holding company
which will be renamed "Tenneco Inc." and which will conduct substantially all
of its operations through its direct and indirect subsidiaries. Immediately
following the Distributions, Tenneco will not have an ownership interest in
New Tenneco.
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
business, organization and affairs of Tenneco, 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, which combined represent over half of the assets, revenues and
operating income of the businesses, operations and companies presently
constituting the Tenneco Group. Consequently, pending approval of the
Transaction by Tenneco stockholders, New Tenneco will reflect Newport News and
the Energy Business as discontinued operations in its historical financial
statements.
As part of the Debt Realignment, New Tenneco will offer to exchange (the
"Debt Exchange Offers") $1,950 million aggregate principal amount of new,
publicly traded debt securities of New Tenneco for an equal amount of Tenneco
Consolidated Debt. New Tenneco debt will have similar maturities, but higher
interest rates than the Tenneco Consolidated Debt for which it is being
exchanged. Upon consummation of the Debt Exchange Offers, Tenneco will
purchase (and thereafter extinguish) the Tenneco Consolidated Debt held by New
Tenneco, and New Tenneco will then distribute such proceeds as a dividend to
Tenneco.
Additionally, the Debt Realignment will include tender offers by Tenneco
(the "Cash Tender Offers") to purchase for cash approximately $1,580 million
aggregate principal amount of current Tenneco Consolidated Debt. The Tenneco
Consolidated Debt acquired in the Cash Tender Offers will be extinguished. The
Cash Tender
8
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Offers and the other cash components of the Debt Realignment will principally
be financed by internally generated cash, the NPS Issuance Proceeds (net of
underwriting commissions and expenses relating to the NPS Issuance) and
borrowings under several new credit facilities and other financing
arrangements as discussed below.
In addition, New Tenneco will enter into a $1,750 million revolving credit
facility (the "New Tenneco Credit Facility"). New Tenneco will use the New
Tenneco Credit Facility for working capital, acquisitions and other general
corporate purposes; in addition, New Tenneco is likely to borrow funds under
the New Tenneco Credit Facility and declare and pay a dividend to Tenneco in
connection with the Debt Realignment.
Newport News after the Transaction
Upon completion of the Distributions and the other components of the
Transaction, Newport News will be an independent, publicly-held holding
company which will conduct substantially all of its operations through its
direct and indirect consolidated subsidiaries. Immediately following the
Distributions, neither Tenneco nor New Tenneco will have an ownership interest
in Newport News. In connection with the Transaction and to provide for working
capital needs, Newport News recently issued $200 million of Senior Notes due
2006 (the "Senior Notes") and $200 million of Senior Subordinated Notes due
2006 (the "Senior Subordinated Notes" and together with the Senior Notes, the
"Notes"). The net proceeds from such issuance are currently being held in
escrow and will be released therefrom for use in connection with Debt
Realignment upon satisfaction of all material conditions to consummation of
(i) Debt Realignment, (ii) the Distributions (other than consummation of the
Debt Realignment) and (iii) the Merger (other than consummation of the Debt
Realignment and Distributions). In addition, Newport News recently entered
into a $415 million secured senior credit facility (the "Senior Credit
Facility") comprised of a $200 million six-year amortizing term loan (the
"Term Loan") and a $215 million six-year revolving credit facility (the
"Revolving Credit Facility"), of which $125 million may be used for advances
and letters of credit and $90 million may be used for standby letters of
credit. In addition, Newport News will utilize the proceeds of the Notes and
Term Loan and borrowings of $14 million under the Revolving Credit Facility to
distribute (i) $600 million as a dividend to Tenneco or one or more of its
subsidiaries for use in retiring Tenneco Consolidated Debts and (ii) $14
million in payment of certain fees and expenses incurred in connection with
Senior Credit Facility and the Notes.
Energy Business after the Transaction
Upon completion of the Merger and the other components of the Transaction,
Tenneco will be a majority owned subsidiary of El Paso and will change its
name to "El Paso Tennessee Gas Pipeline Co." In connection with the cash
funding requirements of the Debt Realignment, Tenneco recently entered into a
$3 billion credit facility (the "Tenneco Credit Facility") which consists of a
364-day revolving credit facility with a two-year term thereafter. The Tenneco
Credit Facility and the borrowings thereunder, will continue to be part of the
Energy Business subsequent to the Transaction.
(5) In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes new accounting 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 adoption of
the new standard has not been quantified.
(The above notes are an integral part of the foregoing combined financial
statements.)
9
<PAGE>
THE BUSINESSES OF NEW TENNECO
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PROPOSED SPIN-OFFS AND MERGER WITH EL PASO NATURAL GAS COMPANY
As part of the ongoing strategic realignment of its businesses, on June 19,
1996, the Board of Directors of Tenneco Inc. ("Tenneco"), which is currently
the parent company of New Tenneco, approved a plan to reorganize Tenneco and
its consolidated subsidiaries (the "Transaction") pursuant to which (i)
Tenneco will restructure (the "Debt Realignment") its and certain of its
consolidated subsidiaries' debt through a series of tender offers, exchange
offers, payments, redemptions, prepayments and defeasances involving Tenneco,
New Tenneco, and Newport News Shipbuilding Inc., a wholly owned subsidiary of
Tenneco ("Newport News"); (ii) Tenneco and its subsidiaries will, pursuant to
a distribution agreement (the "Distribution Agreement") among Tenneco, New
Tenneco and Newport News, undertake various intercompany transfers and
distributions (collectively, the "Corporate Restructuring Transactions")
designed to restructure, divide and separate their various businesses and
assets so that substantially all of the assets, liabilities and operations of
(A) their automotive parts, packaging and administrative services businesses
("Industrial Business") are owned and operated by New Tenneco and (B) their
shipbuilding business ("Shipbuilding Business") is owned and operated by
Newport News; (iii) Tenneco will then distribute (the "Distributions") pro
rata to holders of Tenneco common stock, all of the outstanding common stock
of New Tenneco (the "New Tenneco Common Stock") and Newport News (the "Newport
News Common Stock"); and (iv) thereafter an indirect wholly owned subsidiary
of El Paso will merge with and into Tenneco (the "Merger"), which will then
consist of the remaining assets, liabilities and operations of Tenneco and its
subsidiaries other than those relating to the Industrial Business or the
Shipbuilding Business, including the transmission and marketing of natural gas
(collectively, the "Energy Business" or "Tenneco Energy") pursuant to an
Amended and Restated Agreement and Plan of Merger dated as of June 19, 1996
between El Paso and El Paso Merger Company, a wholly owned subsidiary of El
Paso, and Tenneco.
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 is designed to complete this process. Consummation of the
Transaction is conditioned upon, among other things, the approval by Tenneco
shareowners of the Transaction and a favorable ruling from the Internal
Revenue Service ("IRS") regarding the tax-free nature of certain components of
the Transaction. Tenneco received a favorable ruling from the IRS regarding
the applicable components of the Transaction on October 30, 1996. The
Transaction will be submitted as a single, unified proposal at a special
meeting of Tenneco shareowners, presently scheduled to be held on December 10,
1996. (For additional information concerning the Transaction, see Note 4 in
the "Notes to Financial Statements.")
The Old Company expects to incur an extraordinary charge as a result of the
Debt Realignment and estimates that this charge will be approximately $300
million after-tax based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions which the Old Company estimates will be
approximately $100 million after-tax.
OTHER STRATEGIC ACTIONS
In the 1996 third quarter, Tenneco completed the acquisition of the
following new businesses that will be included in the Industrial Business, and
thus the New Company, upon consummation of the Distributions:
.Tenneco Automotive acquired The Pullman Company and its Clevite products
division ("Clevite") for approximately $330 million. Clevite is a leading
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 the Monroe business group of
Tenneco Automotive to form an operation with all of the components
necessary to design, manufacture, test and sell a complete automotive
suspension system.
.Tenneco Automotive also acquired Luis Minuzzi e Hijos, an Argentinean
exhaust system manufacturer ("Minuzzi"). The acquisition will expand the
presence of Tenneco Automotive's Walker business group in the rapidly
growing Argentinean and South American automobile markets.
10
<PAGE>
. Tenneco Packaging acquired the stock of Amoco Foam Products Company
("Amoco Foam"), a unit of Amoco Chemical Company, for $310 million. Amoco
Foam manufactures expanded polystyrene carrying trays and disposable
tableware, including plates and cups; hinged-lid food containers; packaging
trays, primarily for meat and poultry; and industrial foam products for
residential and commercial construction applications.
THREE MONTHS RESULTS
The New Company's net income for the 1996 third quarter was $76 million, an
improvement of four percent compared with $73 million in the year ago quarter.
Both Tenneco Automotive and Tenneco Packaging's specialty acquisitions made in
1995 and 1996 contributed to this improvement.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
THIRD QUARTER
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Automotive................................................ $ 760 $ 600
Packaging................................................. 896 665
Other..................................................... (3) (2)
------ ------
$1,653 $1,263
====== ======
</TABLE>
Third quarter 1996 revenues increased $390 million, or 31 percent, as both
operating divisions achieved double digit revenue growth. Tenneco Automotive's
revenues increased in both the exhaust and ride control operations. Tenneco
Packaging's improvement resulted primarily from the less cyclical specialty
acquisitions made in 1995 and 1996 offset in part by lower pricing from
paperboard packaging. The results of each business are discussed in detail
below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
THIRD QUARTER
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Automotive.................................................. $ 82 $ 61
Packaging................................................... 85 111
Other....................................................... 4 1
------ ------
$ 171 $ 173
====== ======
</TABLE>
The New Company's operating income for the 1996 third quarter decreased by
$2 million, or one percent, compared with the 1995 period. Tenneco Automotive
benefited from improved results in both the exhaust and ride control sectors
and operating earnings from recent acquisitions. These increases were offset
by lower operating income at Tenneco Packaging due to lower paperboard prices.
The results of each business are discussed in detail below.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
THIRD QUARTER
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $ 760 $ 600
Operating income............................................ 82 61
</TABLE>
Operating income from the exhaust operations improved 20 percent to $48
million, excluding last year's $10 million charge for start-up costs related
to hydroforming, primarily due to increased volumes, recent acquisitions, and
improved manufacturing efficiencies, along with lower distribution costs. Ride
control's operating income increase of $3 million was generated primarily by
recent acquisitions.
11
<PAGE>
Tenneco Automotive's revenues in the third quarter rose 27 percent to set a
record for twelve consecutive quarters of quarter over quarter improvement.
Revenues from recent acquisitions contributed slightly over 70 percent of the
revenue improvement, including Clevite which contributed $57 million.
Exhaust revenues increased 20 percent to $423 million primarily due to
increased North American and European original equipment volumes driven by new
vehicle production and recent acquisitions. Aftermarket volumes also increased
in Europe primarily due to the recent Fonos acquisition.
Ride control reported increased revenues of $90 million, up 36 percent. Ride
Control's North American original equipment revenues more than doubled to $83
million due to the third quarter acquisition of Clevite. European original
equipment revenues improved 53 percent driven by widespread dealer incentives,
new vehicle production, and the recent Ateso acquisition. In addition,
revenues in Australia increased as a result of the acquisition of National
Springs.
TENNECO PACKAGING
<TABLE>
<CAPTION>
THIRD
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
<S> <C> <C>
Revenues...................................................... $ 896 $ 665
Operating income.............................................. 85 111
</TABLE>
Operating income for Tenneco Packaging for the 1996 third quarter was $85
million compared with $111 million in the year ago quarter. The specialty
packaging unit's operating income increased to $64 million from $9 million in
the year ago quarter. Volume growth, primarily from the November 1995 plastics
acquisition and lower raw materials costs were key factors in the specialty
packaging unit's operating income improvement. This recently acquired plastics
business contributed $38 million in operating income on revenues of $274
million in the 1996 third quarter.
The paperboard packaging operations' operating income was $21 million
compared with $102 million in the prior year quarter. Linerboard and
corrugating medium prices averaged $340 per ton and $280 per ton compared with
$530 per ton and $520 per ton, respectively in the year ago period.
In the paperboard business, revenues were down $76 million to $408 million
compared with the 1995 third quarter. Operating income in the paperboard
business declined $81 million to $21 million compared with the 1995 third
quarter. Operating income and revenues were reduced by lower price
realizations due to the weaker market conditions compared with record levels a
year ago.
Revenues in Tenneco Packaging's specialty packaging business increased $307
million to $488 million compared with the 1995 third quarter, primarily as a
result of the recently acquired plastics and foam products businesses. The
specialty packaging business, which included the strong results of the
November 1995 plastics acquisition, earned $64 million in operating income for
the 1996 third quarter, a $55 million increase compared with the year ago
results. Operating margins in the specialty packaging business increased to 13
percent from 5 percent in the year-ago quarter.
OTHER
New Tenneco's other operations reported operating income of $4 million for
the 1996 third quarter compared with operating income of $1 million in the
year ago quarter. The operating income improvement resulted primarily from
lower administrative expenses.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense increased from $39 million in the 1995 third quarter to $45
million in the 1996 third quarter. The increase was primarily attributable to
higher levels of allocated corporate debt.
12
<PAGE>
INCOME TAXES
Income tax expense for the third quarter of 1996 was $45 million compared
with $56 million for the 1995 third quarter. The effective tax rate for the
third quarter of 1996 was 36 percent compared with 42 percent in the prior
year quarter.
NINE MONTHS RESULTS
The New Company's net income for the first nine months of 1996 was $254
million, an improvement of five percent compared with $241 million in the year
ago period. Both Tenneco Automotive and Tenneco Packaging's specialty
acquisitions made in 1995 and 1996 contributed to this improvement.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Automotive............................................ $ 2,223 $ 1,863
Packaging............................................. 2,671 1,983
Other................................................. (8) (7)
-------- --------
$4,886 $ 3,839
======== ========
Net sales and operating revenues for the first nine months of 1996 were $4.89
billion, up 27 percent from $3.84 billion reported in the 1995 period due to
revenues from recent acquisitions. Higher revenues were reported by all
divisions: Tenneco Packaging (up $688 million or 35 percent) and Tenneco
Automotive (up $360 million or 19 percent).
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Automotive............................................ $ 245 $ 195
Packaging............................................. 341 355
Other................................................. (1) 1
-------- --------
$ 585 $551
======== ========
Operating income for the first nine months of 1996 improved $34 million, or
six percent, to $585 million.
Tenneco Automotive benefited from improved results in both the exhaust and
ride control sectors and from recent acquisitions. This increase was partially
offset by lower operating income at Tenneco Packaging due to lower paperboard
prices. The results of each business are discussed in detail below.
TENNECO AUTOMOTIVE
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Revenues.............................................. $ 2,223 $ 1,863
Operating income...................................... 245 195
</TABLE>
Tenneco Automotive's revenues increased in both the exhaust and ride control
operations. Revenues for exhaust increased 17 percent to $1,270 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 in North America and
Europe.
13
<PAGE>
Ride control reported increased revenues of $173 million, or 22 percent.
North American and European original equipment revenues increased as the
result of the Clevite and Ateso acquisitions and new vehicle production. Ride
control's aftermarket revenues also increased in North America due to improved
product mix.
Exhaust's operating income for the first nine months of 1996 improved 40
percent to $122 million primarily due to increased volumes, improved
manufacturing efficiencies and recent acquisitions. Ride control's operating
income increase of $15 million was due primarily to higher sales volumes,
improved product mix and recent acquisitions including Clevite.
TENNECO PACKAGING
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $2,671 $1,983
Operating income............................................ 341 355
</TABLE>
Tenneco Packaging's operating income decreased $14 million, or four percent,
in the nine month period compared with the 1995 period. Revenues increased
$688 million, or 35 percent, compared with the nine months of 1995. Higher
revenues from the specialty operations were primarily the result of the
November 1995 plastics acquisition and the Amoco Foam acquisition. This
increase was partially offset by lower revenues in the paperboard business.
Specialty packaging earned $172 million in operating income for the nine-month
period in 1996 compared with $34 million in the year ago period. Of this
increase of $138 million, $111 million was the result of the November 1995
plastics acquisition. In Tenneco Packaging's paperboard business, revenues and
operating income declined due to lower volumes and price realizations
resulting from weak market conditions in both linerboard and corrugating
medium. Operating income included a $50 million pre-tax gain in the 1996
second quarter from the sale of two recycled paperboard mills and a recovered
fiber recycling and brokerage business to form a joint venture with Caraustar.
The 1995 period included a $14 million gain on the sale of a North Carolina
mill.
OTHER
The New Company's other operations reported an operating loss of $1 million
during the first nine months of 1996 compared with operating income of $1
million in the year-ago period. 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
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense has been allocated to the New Company based on the
portion of Tenneco's investment in the New Company which is deemed to be debt,
generally based upon the ratio of the New 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. Although
interest expense, and the related tax effects, have been allocated to the New
Company for financial reporting on a historical basis, the New 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 New
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 New Company's debt upon completion of the Debt Realignment
nor debt and interest that may be incurred by the New Company as a separate
public company.
14
<PAGE>
Interest expense increased from $113 million in the 1995 first nine months
to $145 million in the first nine months of 1996, while interest capitalized
was $5 million in the first nine months of 1996 compared with $3 million in
the 1995 period. The year-to-year change in interest expense was due to the
same reason discussed under "Three Months Results" above.
INCOME TAXES
Income tax expense for the 1996 first nine months was $171 million compared
with $180 million in the 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ --------- --------
(MILLIONS)
<S> <C> <C>
Operating activities................................ $ 386 $ 52
Investing activities................................ (1,021) (370)
Financing activities................................ 664 84
</TABLE>
The New Company'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 ACTIVITIES
Operating cash flow for the first nine months of 1996 increased due to
higher income from operations and improvements in working capital. Working
capital improved $349 million compared with the 1995 period primarily due to
the New Company'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.
INVESTING ACTIVITIES
Cash used in acquisitions of businesses was $677 million for the 1996 nine
month period. Several key acquisitions were completed in the third quarter
including Automotive's acquisition of The Pullman Company and its Clevite
product division for approximately $330 million and Packaging's acquisition of
Amoco Foam in late August for $310 million.
The New Company invested $389 million in capital expenditures in its
existing businesses during the first nine months of 1996. Capital expenditures
during the first nine months of 1996 included $123 million for Tenneco
Automotive, $223 million for Tenneco Packaging and $43 million related to the
New Company'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 $300
million for continuing operations during the first nine months of 1995.
FINANCING ACTIVITIES
Cash provided by financing activities was $664 million during the first nine
months of 1996, compared with $84 million for the same period in the previous
year. The New Company had a net decrease in short-term debt of $23 million in
the first nine months of 1996 compared with $11 million for the same period in
1995. The New Company also received $695 million in cash contributions from
Tenneco in the first nine months of 1996 compared with a $107 million cash
contribution to Tenneco in the first nine months of 1995. See "Liquidity"
below for further discussion of cash contributions to and from Tenneco.
15
<PAGE>
CAPITALIZATION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
------------- ------------ -------------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current
maturities........................... $ 916 $ 384 $ 173
Long-term debt........................ 1,531 1,648 1,119
Minority interest..................... 300 301 296
Combined equity....................... 2,466 1,852 1,277
------ ------ ------
Total capitalization................ $5,213 $4,185 $2,865
====== ====== ======
</TABLE>
Debt increased $415 million at September 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.
OTHER
The increase in the New Company's plant, property and equipment and
receivable balances at September 30, 1996 when compared with December 31, 1995
is the result of the acquisitions of Amoco Foam by Tenneco Packaging and
Clevite, Ateso and National Springs by Tenneco Automotive and capital
expenditures in the first nine months of 1996, as well as an increase in
receivables due to higher sales revenues from those acquisitions in the 1996
period.
LIQUIDITY
Historically, The New Company'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 the New Company's
cash requirements have been in excess of cash flows from operations, Tenneco
has utilized its consolidated credit facilities to fund the New Company's
obligations. Also, depending on market and other conditions, the New Company
has utilized external sources of capital to meet specific funding
requirements. Management of the New Company believes that cash flows from
operations will generally be sufficient to meet future capital requirements.
However, during 1995, the New Company received on a net basis $1.3 billion
from Tenneco primarily to fund its strategic acquisitions.
Prior to consummation of the Distributions and the Merger, as discussed
under the caption "Proposed Spin-Offs and Merger with El Paso Natural Gas
Company," Tenneco intends to initiate a realignment (the "Debt Realignment")
of its existing indebtedness. As part of the Debt Realignment, New Tenneco
will offer to exchange (the "Exchange Offers") $1,950 million aggregate
principal amount of new, publicly traded debt securities of New Tenneco for an
equal amount of Tenneco public debt. New Tenneco debt will have similar
maturities, but higher interest rates than the Tenneco public debt for which
it is being exchanged. Upon consummation of the Exchange Offers, Tenneco will
purchase (and thereafter extinguish) the Tenneco public debt held by New
Tenneco, and New Tenneco will then distribute such proceeds as a dividend to
Tenneco.
As described above, as part of the Transaction Tenneco will, pursuant to the
Debt Realignment, restructure and refinance the indebtedness for borrowed
money of Tenneco and certain of its consolidated subsidiaries ("Tenneco
Consolidated Debt") through a series of cash tender offers, exchange offers,
payments, redemptions, prepayments and defeasances involving Tenneco, New
Tenneco and Newport News. The Debt Realignment is intended to reduce the total
amount of Tenneco Consolidated Debt to an amount that, when added to the total
amount of certain other liabilities and obligations of Tenneco outstanding as
of the effective time of the Merger (the "Actual Energy Debt Amount") equals
$2.65 billion, less the NPS Issuance Proceeds and subject to certain other
adjustments (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 adjustment. If the
16
<PAGE>
Transaction had been consummated on September 30, 1996, on a pro forma basis
(assuming 100% acceptance of the cash tender offers and the Exchange Offers),
New Tenneco would have had indebtedness for money borrowed of approximately
$2,200 million. The difference between the market value of the consideration
issued in the cash tender offers, Exchange Offer and defeasances and the net
carrying amount of the Tenneco Consolidated Debt will be recognized as an
extraordinary charge.
In addition, New Tenneco will enter into a $1,750 million revolving credit
facility (the "New Tenneco Credit Facility"). New Tenneco will use the New
Tenneco Credit Facility for working capital, acquisitions and other general
corporate purposes; in addition, New Tenneco is likely to borrow funds under
the New Tenneco Credit Facility and declare and pay a dividend to Tenneco in
connection with the Debt Realignment.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(1) Environmental Proceedings.
On August 2, 1993, the Department of Justice filed suit against Tenneco
Packaging Inc. ("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 position or
results of operations of New Tenneco Inc. and its consolidated subsidiaries.
In 1993 and 1995, the 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 an 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 Inc. and its consolidated subsidiaries.
(2) Potential Superfund Liability.
At September 30, 1996, New Tenneco has been designated as a potentially
responsible party in 12 "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 sites, New Tenneco has sought to
resolve its liability through payments to the other potentially responsible
parties. 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 .02% of
the total remediation costs for those sites 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, 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 sites described above will not
be material to its consolidated financial position or results of operations.
(3) Other Proceedings.
New Tenneco Inc. and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. New Tenneco Inc. believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on New Tenneco's consolidated financial position or
results of operations.
ITEM 5. OTHER INFORMATION.
Recent Developments.
(1) Tenneco Inc.'s Board of Directors has called a Special Meeting of
Shareholders on December 10, 1996 for the following purposes:
I. To consider and vote upon a single, unified proposal relating to the
proposed reorganization of Tenneco (the "Transaction"):
18
<PAGE>
A. to approve and adopt the Distribution Agreement, dated as of November
1, 1996, as such may be amended, supplemented or modified from time to time
(the "Distribution Agreement"), among Tenneco, New Tenneco and Newport
News, pursuant to which (i) Tenneco and its subsidiaries will undertake
various intercompany transfers and distributions designed to restructure,
divide and separate their existing businesses and assets so that the
assets, liabilities and operations of (A) their automotive parts, packaging
and administrative services businesses are owned and operated by New
Tenneco, and (B) their shipbuilding business is owned and operated by
Newport News, and (ii) Tenneco will subsequently distribute (the
"Distributions") pro rata to holders of Tenneco common stock, par value
$5.00 per share (the "Tenneco Common Stock"), all of the outstanding common
stock, $.01 par value per share, of New Tenneco and all of the outstanding
common stock, $.01 par value per share, of Newport News;
B. to approve and adopt the Amended and Restated Agreement and Plan of
Merger, dated as of June 19, 1996, as such may be amended, supplemented or
modified from time to time (the "Merger Agreement"), among El Paso Natural
Gas Company, a Delaware corporation ("El Paso"), El Paso Merger Company, a
Delaware corporation and an indirect wholly owned subsidiary of El Paso
("El Paso Subsidiary"), and Tenneco pursuant to which (i) El Paso
Subsidiary will be merged with and into Tenneco (the "Merger"), which will
then (as a result of the Distributions) consist only of Tenneco Energy, and
(ii) shares of Tenneco stock (other than certain preferred shares held by
holders entitled to demand and who properly demand appraisal of such shares
and shares of one or more new series of Tenneco junior preferred stock to
be issued prior to the Merger) will be converted into the right to receive
shares of El Paso common stock, par value $3.00 per share, and possibly, in
the case of holders of Tenneco Common Stock, depositary shares representing
interests in shares of a new series of El Paso preferred stock, pursuant to
formulas set forth in the Merger Agreement and described more fully in the
Joint Proxy Statement-Prospectus dated November 4, 1996;
C. to approve the transactions contemplated by the Merger Agreement and
the Distribution Agreement; and
D. to approve an amendment (the "Charter Amendment") to the Certificate
of Incorporation of Tenneco, as amended, which will eliminate the rights,
powers and preferences of the junior preferred stock of Tenneco specified
therein.
II. To transact such other business, including, without limitation, the
adjournment of the Special Meeting (including an adjournment of the Special
Meeting to obtain a quorum, solicit additional votes in favor of proposal I
and/or allow for the fulfillment of certain conditions precedent to the
Transaction), as may properly come before the Special Meeting or any
adjournments or postponements thereof.
The Board action follows receipt by Tenneco Inc. of a favorable Internal
Revenue Service ruling on the tax-free nature of these previously announced
strategic actions.
Pursuant to separate consents dated October 31, 1996, October 31, 1996,
October 31, 1996 and December 1, 1996, the following Corporate Restructuring
Transactions were submitted to a vote of, and were approved by, the Company's
sole stockholder, Tenneco Corporation (a direct, wholly owned subsidiary of
Tenneco): (1) the transfer of Tenneco trade names, trademarks, and service
marks to Tenneco Management Company (New Tenneco's wholly owned subsidiary);
(ii) the transfer and assignment to New Tenneco from Tenneco Corporation of all
of the assets, and the assumption by New Tenneco of all of the liabilities,
relating to the Walker Muffler Shop Distribution Center operations located in
Carson, California; (iii) the issuance of 500 shares of Common Stock, par value
$.01 per share, of New Tenneco, to Tenneco Corporation in consideration of
Tenneco Corporation's transfer to New Tenneco of all of Tenneco Corporation's
right, title and interest in and to certain specified assets, including its
equity holdings in various entities included in the New Company; and (iv) the
transfer by New Tenneco to Tenneco Management Company of certain aviation
assets, certain furniture and fixtures and a note payable due from a former
affiliated company of Tenneco.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(1) Exhibits. The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in Exhibit Index which follows the signature page and
immediately precedes the exhibits filed.
12--Computation of Ratio of Earnings to Fixed Charges.
27--Financial Data Schedule.
(2) Reports on Form 8-K. New Tenneco Inc. did not file any Current Reports on
Form 8-K during the quarter ended September 30, 1996.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW TENNECO INC.
/s/ Robert T. Blakely
By __________________________________
Robert T. Blakely
Executive Vice President and
Chief Financial Officer
Date: December 9, 1996
21
<PAGE>
EXHIBIT 12
THE BUSINESSES OF NEW TENNECO
COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
30,
---------
1996 1995
---- ----
<S> <C> <C>
Net income........................................................... $254 $241
Add:
Interest........................................................... 148 116
Portion of rentals representative of interest factor............... 43 45
Preferred stock dividend requirements of majority-owned
subsidiaries...................................................... 15 17
Income tax expense and other taxes on income....................... 171 180
Amortization of interest capitalized applicable to nonutility
companies......................................................... 1 1
---- ----
Earnings as defined.............................................. $632 $600
==== ====
Interest............................................................. $148 $116
Interest capitalized................................................. 5 3
Portion of rentals representative of interest factor................. 43 45
Preferred stock dividend requirements of majority-owned subsidiaries
on a pretax basis................................................... 24 30
---- ----
Fixed charges as defined......................................... $220 $194
==== ====
Ratio of earnings to fixed charges................................... 2.87 3.09
==== ====
</TABLE>
<PAGE>
[LOGO OF TENNECO APPEARS HERE]
<PAGE>
NEW TENNECO INC.
EXHIBIT INDEX
(PURSUANT TO ITEM 601 OF REGULATION S-K)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2* Distribution Agreement, November 1, 1996, by and among Tenneco Inc.,
New Tenneco Inc., and Newport News Shipbuilding Inc.
3.1* Certificate of Incorporation of New Tenneco Inc. as currently in
effect.
3.2* Form of Restated Certificate of Incorporation to be adopted prior to
the Distribution Date.
3.3* By-laws of New Tenneco Inc. as currently in effect.
3.4* Form of Amended and Restated By-laws to be adopted prior to the
Distribution Date.
4.1* Form of Specimen Stock Certificate of Company Common Stock.
4.2* Form of Rights Agreement by and between New Tenneco Inc. and First
Chicago Trust Company of New York, as Rights Agent.
4.3* Form of Indenture between New Tenneco Inc. and The Chase Manhattan
Bank, as trustee.
10.1* Form of Debt and Cash Allocation Agreement by and among Tenneco Inc.,
New Tenneco Inc., and Newport News Shipbuilding Inc.
10.2* Form of Benefits Agreement by and among Tenneco Inc., New Tenneco
Inc., and Newport News Shipbuilding Inc.
10.3* Form of Insurance Agreement by and among Tenneco Inc., New Tenneco
Inc., and Newport News Shipbuilding Inc.
10.4* Form of Tax Sharing Agreement by and among Tenneco Inc., Newport News
Shipbuilding Inc., New Tenneco Inc., and El Paso Natural Gas Company.
10.5* Form of Transition Services Agreement by and among, Tenneco Business
Services, Inc., Tenneco Inc. and El Paso Natural Gas Company.
10.6* Form of Shipbuilding Trademark Transition License Agreement by and
between Newport News Shipbuilding Inc. and New Tenneco Inc.
10.7* Form of Tenneco Trademark Transition License Agreement by and between
New Tenneco Inc. and Tenneco Inc.
10.8* 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.
10.9* Form of Amended and Restated Tenneco Inc. Executive Incentive
Compensation Plan, to be assumed by New Tenneco Inc. as of the
Distribution Date.
10.10* Form of Tenneco Inc. Deferred Compensation Plan, to be assumed by New
Tenneco Inc. as of the Distribution Date.
10.11* Form of Tenneco Inc. 1996 Deferred Compensation Plan, to be assumed by
New Tenneco Inc. as of the Distribution Date.
10.12* Form of Amended and Restated Tenneco Inc. Supplemental Executive
Retirement Plan, to be assumed by New Tenneco Inc. as of the
Distribution Date.
10.13* Form of Amended and Restated Tenneco Inc. Benefit Equalization Plan,
to be assumed by New Tenneco Inc. as of the Distribution Date.
10.14* Form of Amended and Restated Tenneco Inc. Outside Directors Retirement
Plan, to be assumed by New Tenneco Inc. as of the Distribution Date.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15* Form of Amended and Restated Supplemental Pension Agreement, between
Dana G. Mead and Tenneco Inc., to be assumed by New Tenneco Inc. as of
the Distribution Date.
10.16* 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.
10.17* Form of Amended and Restated Tenneco Benefits Protection Trust, to be
assumed by New Tenneco as of the Distribution Date.
10.18* Form of Employment Agreement between Stacy S. Dick and New Tenneco
Inc.
10.19* Form of Employment Agreement between Dana G. Mead and New Tenneco Inc.
10.20* Form of Employment Agreement between Paul T. Stecko and Tenneco
Packaging Inc.
10.21* Form of Agreement between Theodore R. Tetzlaff and New Tenneco Inc.
10.22* Form of Tenneco Inc. Directors Restricted Stock Program, effective as
of the Distribution Date, to be assumed by New Tenneco Inc. as of the
Distribution Date.
10.23* Form of Tenneco Inc. Directors Restricted Stock and Restricted Unit
Program, effective as of the Distribution Date, to be assumed by New
Tenneco Inc. as of the Distribution Date.
10.24* Form of 1996 Tenneco Inc. Stock Ownership Plan, to be assumed by New
Tenneco Inc. as of the Distribution Date.
10.25* Lease Agreement, Tomahawk, dated as of January 30, 1991, between The
Connecticut National Bank, as Owner Trustee, and Packaging Corporation
of America.
10.26* 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.
10.27* Timberland Lease, dated January 31, 1991, by and between Four States
Timber Venture and Packaging Corporation of America.
10.28* Professional Services Agreement, dated August 22, 1996, by and between
Tenneco Business Services Inc. and Newport News Shipbuilding Inc.
11 None.
12 Computation of Ratio of Earnings to Fixed Charges.
15 None.
18 None.
19 None.
22-24 None.
27 Financial data schedule
</TABLE>
- --------
* Incorporated by reference to the Registrant's Registration Statement on Form
10, Commission File No. 1-12387, initially filed on October 30, 1996 and
amended on November 4, 1996 and November 6, 1996.
<PAGE>
EXHIBIT 12
THE BUSINESSES OF NEW TENNECO
COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
30,
---------
1996 1995
---- ----
<S> <C> <C>
Net income........................................................... $254 $241
Add:
Interest........................................................... 148 116
Portion of rentals representative of interest factor............... 43 45
Preferred stock dividend requirements of majority-owned
subsidiaries...................................................... 15 17
Income tax expense and other taxes on income....................... 171 180
Amortization of interest capitalized applicable to nonutility
companies......................................................... 1 1
---- ----
Earnings as defined.............................................. $632 $600
==== ====
Interest............................................................. $148 $116
Interest capitalized................................................. 5 3
Portion of rentals representative of interest factor................. 43 45
Preferred stock dividend requirements of majority-owned subsidiaries
on a pretax basis................................................... 24 30
---- ----
Fixed charges as defined......................................... $220 $194
==== ====
Ratio of earnings to fixed charges................................... 2.87 3.09
==== ====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the New
Tenneco Inc. and combined companies financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 130
<SECURITIES> 0
<RECEIVABLES> 529
<ALLOWANCES> 0
<INVENTORY> 882
<CURRENT-ASSETS> 2,013
<PP&E> 4,685
<DEPRECIATION> 1,586
<TOTAL-ASSETS> 7,339
<CURRENT-LIABILITIES> 2,190
<BONDS> 1,531
0
0
<COMMON> 2,466
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,339
<SALES> 4,886
<TOTAL-REVENUES> 4,886
<CGS> 3,580
<TOTAL-COSTS> 3,580
<OTHER-EXPENSES> 832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> 440
<INCOME-TAX> 171
<INCOME-CONTINUING> 254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
