<PAGE>
FILED PURSUANT TO
RULE 424(b)(2) IN
CONNECTION WITH
REGISTRATION STATEMENT
NO. 333-14009
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 12, 1996)
6,000,000 Shares
Tenneco Inc.
8 1/4% CUMULATIVE
JUNIOR PREFERRED STOCK, SERIES A
($50 PER SHARE STATED VALUE)
---------------
Tenneco Inc. ("Tenneco" or the "Company") is hereby offering (the
"Offering") 6,000,000 shares of its 8 1/4% Cumulative Junior Preferred Stock,
Series A (the "Series A Preferred Stock"). Upon consummation of the Merger (as
defined), the Company will be renamed "El Paso Tennessee Pipeline Co." and the
8 1/4% Cumulative Junior Preferred Stock, Series A, will be renamed "8 1/4%
Cumulative Preferred Stock, Series A." Dividends on the Series A Preferred
Stock will be cumulative from the date of issue at a rate of 8 1/4% per annum
and are payable quarterly on each March 31, June 30, September 30 and December
31, commencing December 31, 1996. The annual dividend rate for the Series A
Preferred Stock will be automatically adjusted upward as described herein (on
one occasion), retroactive to the date of original issuance, if (i) the
issuance of additional shares of common stock of El Paso Natural Gas Company
("El Paso") in connection with the Merger is not approved by the holders of El
Paso common stock at the El Paso Special Meeting (as defined), (ii) the Merger
is consummated, and (iii) the rating of the Series A Preferred Stock is
downgraded by either Standard & Poor's Corp. ("S&P") or Moody's Investors
Service, Inc. ("Moody's") on or before the 90th day after the date of the El
Paso Special Meeting currently scheduled for December 9, 1996. See
"Description of Series A Preferred Stock--Dividends."
The Series A Preferred Stock will not be redeemable prior to December 31,
2001, except as stated below. On or after such date, the Series A Preferred
Stock will be redeemable at the option of the Company, in whole or from time
to time in part, upon not less than 30 days' notice, at a redemption price
equal to $50 per share of Series A Preferred Stock, plus dividends accrued and
unpaid up to but excluding the redemption date. The Series A Preferred Stock
may also be redeemed, at the redemption prices specified herein, prior to
December 31, 2001, in whole, but not in part, at the option of the Company if
certain amendments are made to the Internal Revenue Code of 1986, as amended
(the "Code"), in respect of the dividends received deduction. See "Description
of Series A Preferred Stock--Optional Redemption."
Should a Mandatory Redemption Event occur, the Company will be required to
redeem all of the outstanding shares of Series A Preferred Stock at a
redemption price equal to $50.50 per share plus accrued and unpaid dividends
thereon to but excluding the redemption date. A "Mandatory Redemption Event"
is defined as the earliest of the following to occur: (i) the proposal to
approve the Transaction (as defined) is voted upon and not approved at the
Tenneco Special Meeting (as defined); (ii) the Transaction fails to be
approved by the requisite vote of the holders of Tenneco
(continued on following page)
---------------
SEE "RISK FACTORS" IN THE PROSPECTUS, BEGINNING ON PAGE 9.
---------------
THE NEW YORK STOCK EXCHANGE ("NYSE") HAS APPROVED FOR LISTING THE SERIES A
PREFERRED STOCK UPON NOTICE OF ISSUANCE. TRADING OF THE SERIES A PREFERRED
STOCK ON THE NYSE IS EXPECTED TO COMMENCE WITHIN 30 DAYS OF THE DATE OF THIS
PROSPECTUS SUPPLEMENT.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
PRICE $50 PER SHARE
---------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
--------- -------------- -------------
<S> <C> <C> <C>
Per Share............................. $50.000 $.750 $49.250
Total................................. $300,000,000 $4,500,000 $295,500,000
</TABLE>
- -------
(1) Plus accrued dividends, if any, from November 18, 1996.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriters."
(3) Before deducting expenses payable by the Company estimated to be
$5,500,000.
---------------
The Series A Preferred Stock is offered, subject to prior sale, when, as and
if issued and accepted by the Underwriters named herein, and subject to
approval of certain legal matters by Cahill Gordon & Reindel, counsel for the
Underwriters. It is expected that delivery of the Series A Preferred Stock
will be made on or about November 18, 1996 at the office of Morgan Stanley &
Co. Incorporated, New York, N.Y., against payment therefor in immediately
available funds.
---------------
MORGAN STANLEY & CO.
Incorporated
MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
November 12, 1996 SMITH BARNEY INC.
<PAGE>
(continued from previous page)
stock entitled to vote thereon on or prior to March 31, 1997; or (iii) the
Company shall not have accepted on or prior to March 31, 1997 any indebtedness
of the Company and its subsidiaries tendered to it pursuant to the tender
offers to be made by it in connection with the Transaction. The Series A
Preferred Stock is also subject to redemption if less than 600,000 shares are
outstanding at any time, as described herein. The Series A Preferred Stock is
not subject to any sinking fund provision.
Tenneco has proposed to amend its Certificate of Incorporation, as amended
(the "Tenneco Charter"), to eliminate the rights, powers and preferences of
the authorized class of junior preferred stock of Tenneco (the "Junior
Preferred Stock") thereunder, certain of which will be preserved for the
holders of the Series A Preferred Stock in the Certificate of Designation of
the Series A Preferred Stock. See "Description of Series A Preferred Stock."
The underwriters in the Offering (the "Underwriters"), as the initial record
holders of the Series A Preferred Stock, will approve the Distributions (as
defined) and the Charter Amendment (as defined) by a written consent in lieu
of a meeting (which consent will not be revocable by purchasers of the Series
A Preferred Stock from the Underwriters or by such purchasers' successors).
See "Consent to Distributions and Charter Amendment."
The Series A Preferred Stock will not be converted or otherwise exchanged in
the Merger. Upon consummation of the Merger, the Series A Preferred Stock will
remain outstanding and the holders thereof will receive no consideration in
respect of such shares in connection with the Merger.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company Prior to the Transaction...................................... S-4
Summary of the Transaction................................................ S-4
The Tenneco Special Meeting............................................... S-7
The Company After the Transaction......................................... S-7
Description of the Transaction............................................ S-9
Consent to Distributions and Charter Amendment............................ S-10
Use of Proceeds........................................................... S-11
Capitalization............................................................ S-11
Unaudited Pro Forma Consolidated Financial Statements of the Company...... S-12
Tenneco Energy Combined Selected Financial Data........................... S-20
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Energy Business........................................ S-21
Description of Series A Preferred Stock................................... S-29
Appraisal Rights.......................................................... S-35
Recent Tax Proposals...................................................... S-38
Certain United States Federal Tax Considerations For Non-U.S. Holders of
Series A Preferred Stock................................................. S-39
Underwriters.............................................................. S-42
Legal Matters............................................................. S-43
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A PREFERRED STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
S-3
<PAGE>
THE COMPANY PRIOR TO THE TRANSACTION
The Company is a diversified industrial company conducting all of its
operations through its subsidiaries. The major businesses of the Company
presently consist of (i) interstate and intrastate transportation and
marketing of natural gas, (ii) the manufacturing 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 industrial markets, and (iv) the design, construction,
repair and overhauling of ships (primarily nuclear-powered aircraft carriers
and submarines for the United States Navy). For additional information
regarding the Company, see "Incorporation of Certain Documents By Reference"
in the Prospectus.
In 1987, the Company was incorporated in Delaware and acquired all of the
outstanding shares of Tennessee Gas Pipeline Company (which at the time was
named Tenneco Inc.). The Company's principal executive offices are located at
1275 King Street, Greenwich, Connecticut 06831, and its telephone number at
that address is (203) 863-1000. Upon consummation of the Merger and the other
components of the Transaction, if they occur, the Company's name will be
changed to El Paso Tennessee Pipeline Co., its principal executive offices
will be located at 1010 Milam Street, Houston, Texas 77002, and its telephone
number at such address will be (713) 757-2131.
SUMMARY OF THE TRANSACTION
The Offering is one component of a plan (the "Debt Realignment") designed to
restructure the indebtedness for money borrowed of Tenneco and certain of its
consolidated subsidiaries as part of the reorganization of the Company (the
"Transaction") pursuant to which (i) the Company and its subsidiaries will,
pursuant to a Distribution Agreement dated as of November 1, 1996 (as such may
be amended, supplemented or modified from time to time, the "Distribution
Agreement") among the Company, New Tenneco Inc., a newly formed, wholly owned
subsidiary of Tenneco ("New Tenneco"), and Newport News Shipbuilding Inc., a
wholly owned subsidiary of Tenneco ("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 all of the assets, liabilities and
operations of (A) their automotive parts, packaging and administrative
services businesses (the "Industrial Business") are owned and operated by New
Tenneco, and (B) their shipbuilding business (the "Shipbuilding Business") are
owned and operated by Newport News; (ii) the Company will then 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 of
New Tenneco and Newport News; and (iii) thereafter, an indirect wholly owned
subsidiary of El Paso will merge with and into the Company (the "Merger"),
which will then consist of the remaining existing and discontinued operations
of the Company 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 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, El Paso Merger
Company ("El Paso Subsidiary") and the Company. Upon consummation of the
Merger, 100% of the common equity of the Company and approximately 75% of its
combined equity value will be held by El Paso, with the balance held by the
holders of Series A Preferred Stock. The Series A Preferred Stock will be an
obligation solely of Tenneco and will not be an obligation of or be guaranteed
by any other person (including, without limitation, El Paso). See "The
Transaction" in the Prospectus.
Also as part of the Transaction, the Company has proposed to amend (the
"Charter Amendment") the Tenneco Charter to eliminate the rights, powers and
preferences of its authorized class of Junior Preferred Stock thereunder
(including the Series A Preferred Stock offered hereby), certain of which will
be preserved in the Certificate of Designation establishing the Series A
Preferred Stock. After giving effect to the Charter Amendment, shares of the
Series A Preferred Stock offered hereby will have only such rights, powers and
preferences as are set forth in the Certificate of Designation for the Series
A Preferred Stock. See "Description of Series A Preferred Stock." Upon
consummation of the Merger, if it occurs, Tenneco's currently authorized class
of preferred stock (which by its terms is senior to the Junior Preferred Stock
in certain respects) will be eliminated and the Junior Preferred Stock
(including the Series A Preferred Stock) will be redenominated as "Preferred
Stock." See "The Charter Amendment" in the Prospectus. No assurance can be
given that the Merger or the other components of the Transaction will be
consummated.
S-4
<PAGE>
The following chart shows the abbreviated corporate structure of the Company
and its subsidiaries immediately prior to the Transaction:
LOGO
S-5
<PAGE>
The following chart shows the abbreviated corporate structure of the
Company and its subsidiaries immediately after giving effect to the
Transaction:
[PRE-TRANSACTION CHART APPEARS HERE]
- -------
*Does not reflect the proposed purchase by El Paso of approximately $200
million of Subordinated Tenneco Preferred Stock (as defined) from Tenneco,
which El Paso presently intends to undertake following consummation of the
Transaction as part of the Refinancing Transactions (as defined). See "The
Company After the Transaction--Operation of the Energy Business After the
Merger" and "Risk Factors--Risks Related to the Transaction--Uncertainty
Regarding Consummation of the Refinancing Transactions" in the Prospectus.
5
S-6
<PAGE>
THE TENNECO SPECIAL MEETING
A special meeting of stockholders of the Company (the "Tenneco Special
Meeting") is presently scheduled to be held on December 10, 1996. At the
Tenneco Special Meeting, the Company's current stockholders will be asked to
consider and vote upon a single unified proposal relating to the Transaction,
including approval and adoption of the Distribution Agreement and the Merger
Agreement; approval of the transactions contemplated by the Merger Agreement
and the Distribution Agreement; and approval of the Charter Amendment.
Purchasers of the Series A Preferred Stock will not be entitled to any vote at
the Tenneco Special Meeting with respect to their shares of Series A Preferred
Stock, since such shares were not issued and outstanding on November 6, 1996,
the record date for the Tenneco Special Meeting (the "Tenneco Record Date").
However, the Distributions and Charter Amendment will be submitted to the
Underwriters, as the initial record holders of the Series A Preferred Stock,
for approval by a written consent in lieu of a meeting (which consent will not
be revocable by the purchasers of Series A Preferred Stock from such
Underwriters or by the successors of such purchasers).
THE COMPANY AFTER THE TRANSACTION
GENERAL
Immediately following the Transaction, the businesses and operations of the
Company will consist solely of the Energy Business. In addition, 100% of the
common equity of the Company and approximately 75% of its combined equity
value at that time will be held by El Paso, with the balance held by the
holders of the Series A Preferred Stock.
El Paso is a Delaware corporation which was incorporated in 1928. In
recognition of changes in the natural gas industry and the manner in which El
Paso manages its businesses, and in order to facilitate a more detailed
understanding of the various activities in which it engages, El Paso began
doing business under the name El Paso Energy Corporation (effective April 22,
1996) and has segregated its business activities into three business segments:
(i) natural gas transmission, (ii) field and merchant services, and (iii)
corporate and other.
El Paso is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, El Paso
files reports, proxy and information statements and other information with the
Securities Exchange Commission (the "Commission"). Copies of such material can
be inspected and copied at the public reference facilities maintained by the
Commission at the addresses specified under "Available Information" in the
Prospectus. Reports, proxy and information statements and other information
concerning El Paso may also be inspected at the offices of the NYSE at the
address specified under "Available Information" in the Prospectus.
THE ENERGY BUSINESS
The Energy Business as presently 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 the Company 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
"Risk Factors--Risks Related to the Energy Business--Liabilities of Tenneco
for Discontinued Businesses" and "The Energy Business--Discontinued and Other
Operations" in the Prospectus.
The interstate pipeline operations of the Energy Business include the
pipeline systems of Tennessee Gas Pipeline Company ("TGP"), and its wholly
owned subsidiaries Midwestern Gas Transmission Company
S-7
<PAGE>
("Midwestern") and East Tennessee Natural Gas Company ("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. TGP'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. 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 TGP, 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 includes buying, selling,
storing, processing and transporting natural gas and the provision of price
risk management services. The Energy Business also is engaged in various
international energy-related projects, invests in oil and gas properties and
finances independent producers engaged in exploration and development
projects.
For more detailed information concerning the Energy Business, see "The
Energy Business" in the Prospectus.
OPERATION OF THE ENERGY BUSINESS AFTER THE MERGER
General. 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 consummation of the Merger, El Paso has indicated that it
plans to integrate, for the most part, the operations of the Energy Business
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 the
Energy Business should provide the combined company with increased operating
flexibility and access to additional customers and markets. See "Risk
Factors--Risks Related to the Transaction--Uncertainty Surrounding Integration
of Operations" in the Prospectus.
Refinancing Transactions. El Paso has indicated that it intends to undertake
various transactions with respect to the Energy Business (the "Refinancing
Transactions") in order to reduce the amount of outstanding Company debt that
would otherwise 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 Tenneco Preferred Stock") from the Company. The cash
proceeds received by the Company from El Paso's purchase of the Subordinated
Tenneco Preferred Stock will be used by the Company to repay a portion of its
post-Transaction debt. In addition, as market conditions allow, El Paso may
refinance the Company's remaining post-Transaction debt through the sale of
senior debt of the Company and/or TGP. See "Unaudited Pro Forma Consolidated
Financial Statements of the Company" herein and "Risk Factors--Risks Related
to the Transaction--Uncertainty Regarding Consummation of Refinancing
Transactions" and "The Energy Business--Operation of the Energy Business after
the Merger" in the Prospectus.
Proposed Post-Merger Resolution of GSR Transition Cost Disputes. El Paso has
reached, contingent upon consummation of the Merger and various other
conditions (including approval by the FERC), a preliminary understanding with
certain of TGP's customers regarding the customers' challenges to TGP's
ability to recover various gas supply realignment ("GSR") and other costs from
its customers (the "El Paso Preliminary GSR Understanding"). See "The Energy
Business--Operation of the Energy Business After the Merger--Proposed Post-
Merger Resolution of GSR Transition Cost Disputes" in the Prospectus.
S-8
<PAGE>
DESCRIPTION OF THE TRANSACTION
The following sets forth the principal transactions which will be undertaken
to consummate the Transaction. For more information regarding the Transaction,
see "The Transaction" in the Prospectus.
. The Offering. The shares of Series A Preferred Stock being offered
hereby are designed, to the extent possible, to have an aggregate value
equal to approximately 25% of the total value of all shares of the
Company's capital stock outstanding as of the effective time of the
Merger (the "Merger Effective Time") (although there can be no assurance
that such shares will have such an aggregate value at that time). The
proceeds to the Company of the Offering (the "Offering Proceeds"), which
are presently estimated to be $300 million, will, net of underwriting
commissions and other expenses (presently estimated to be $10 million),
be used to repay certain existing indebtedness of the Company and
certain of its subsidiaries in connection with the Debt Realignment. See
"Use of Proceeds." Holders of the Series A Preferred Stock will not
receive any consideration in respect of such stock in the Merger. The
Series A Preferred Stock will not be converted or otherwise exchanged in
the Merger and will remain outstanding immediately following
consummation thereof (held by the holders thereof immediately prior to
the Merger). After giving effect to the Transaction, the Series A
Preferred Stock will remain an obligation solely of the Company, the
assets, liabilities and operations of which will consist solely of the
Energy Business, and will not be an obligation of, or be guaranteed by,
any other person (including, without limitation, El Paso).
. Debt Realignment. Pursuant to the Debt Realignment, the indebtedness for
money borrowed of the Company and certain of its consolidated
subsidiaries (the "Energy Consolidated Debt"), which had a total book
value of approximately $5,210 million at September 30, 1996), will be
restructured through (i) tender offers by the Company for approximately
$1,577 million in aggregate principal amount of Energy Consolidated Debt
(collectively, the "Tender Offers"), (ii) offers by New Tenneco to
exchange its notes and debentures for $1,950 million in aggregate
principal amount of Energy Consolidated Debt (collectively, the
"Exchange Offers"), and (iii) a series of payments, redemptions,
prepayments and defeasances involving the Company, New Tenneco and
Newport News. The Debt Realignment is intended to reduce the total
amount of the Energy Consolidated Debt to an amount that, when added to
the total amount of certain other liabilities and obligations of the
Energy Business outstanding as of the Merger Effective Time (as so
added, the "Actual Energy Debt Amount"), equals $2.65 billion, less the
Offering Proceeds and subject to certain other adjustments described in
the Prospectus (the "Base Debt Amount"). If the Actual Energy Debt
Amount varies from the Base Debt Amount, the amount of the variance will
be accounted for in a post-Transaction cash payment (the "Debt Cash
Adjustment") (i) from New Tenneco to the Company, if the Actual Energy
Debt Amount exceeds the Base Debt Amount, or (ii) from the Company to
New Tenneco, if the Actual Energy Debt Amount is less than the Base Debt
Amount. If the Debt Realignment and other components of the Transaction
had been consummated on September 30, 1996, on a pro forma basis
(assuming 100% acceptance of the Tender Offers and Exchange Offers),
Tenneco and New Tenneco would have had indebtedness for money borrowed
of approximately $2,519 million ($1,819 million after giving effect to
the Refinancing Transactions) and $2,200 million, respectively. See
"Unaudited Pro Forma Consolidated Financial Statements of the Company"
herein and "Debt and Cash Realignment" in the Prospectus.
. Corporate Restructuring Transactions. The Company will restructure,
divide and separate its existing businesses so that, upon consummation
of the Distributions, the assets, liabilities and operations of the
Industrial Business will be directly and indirectly owned and operated
by New Tenneco and substantially all the assets, liabilities and
operations of the Shipbuilding Business will be directly and indirectly
owned and operated by Newport News. See "Corporate Restructurings
Transactions" in the Prospectus.
. Cash Realignment. The total amount of cash and cash equivalents of the
Company and its consolidated subsidiaries (which, as of September 30,
1996, totalled approximately $165 million) as of the Merger Effective
Time will be allocated $25 million (subject to certain adjustments) to
the Company, $5
S-9
<PAGE>
million to Newport News and the balance to New Tenneco (collectively,
the "Cash Realignment"). See "Debt and Cash Realignment" in the
Prospectus.
. The Charter Amendment. The Company will file the Charter Amendment to
eliminate the rights, powers and preferences of its junior preferred
stock thereunder, certain of which will be preserved for the holders of
the Series A Preferred Stock in the Certificate of Designation
establishing that series. See "The Charter Amendment" in the Prospectus.
. The Distributions. The Company will distribute pro rata to the holders
of Tenneco Common Stock on a record date to be determined all
outstanding shares of common stock of 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 the
Company, New Tenneco and Newport News. See "The Distributions" in the
Prospectus.
. The Merger. El Paso Subsidiary will be merged with and into the Company,
which will then consist solely of the assets, liabilities and operations
of the Company and its subsidiaries remaining after the Distributions,
including certain discontinued operations thereof, not related to the
Industrial Business or the Shipbuilding Business. The Company will
survive the Merger, with 100% of its common equity held indirectly by El
Paso. The Merger is conditioned upon, among other things, the receipt of
certain tax rulings and opinions (which condition has been satisfied),
completion of the Debt Realignment by the Company, certain governmental
approvals and approval of the Transaction by the stockholders of the
Company entitled to vote thereon at the Tenneco Special Meeting. No
assurance can be given that the Merger will be consummated. See "The
Merger" in the Prospectus.
CONSENT TO DISTRIBUTIONS AND CHARTER AMENDMENT
Because the Offering will be consummated before the Charter Amendment becomes
effective, the Distributions and Charter Amendment will be submitted to the
Underwriters, as the initial record holders of the Series A Preferred Stock,
for approval by a written consent in lieu of a meeting (which consent will not
be revocable by the purchasers of the Series A Preferred Stock from the
Underwriters or by the successors of such purchasers). Notwithstanding such
consent, however, any purchaser who becomes a record holder of the Series A
Preferred Stock on or prior to the date of the Tenneco Special Meeting
(presently scheduled to be held on December 10, 1996, unless adjourned) will be
entitled, at or prior to the Tenneco Special Meeting, to demand appraisal of
such shares in connection with the Merger under Section 262 of the Delaware
General Corporation Law ("DGCL"). See "Appraisal Rights."
S-10
<PAGE>
USE OF PROCEEDS
The Company will receive approximately $290 million from the Offering, after
deduction of underwriting discounts and estimated expenses payable by the
Company in connection with the Offering. The Company intends to use the net
proceeds of the Offering to repay a portion of the Energy Consolidated Debt
(which, as of September 30, 1996, had interest rates ranging from 6% to 10
1/2% per annum and maturities ranging from 2 months to 15 years) in connection
with the Debt Realignment. See "Unaudited Pro Forma Consolidated Financial
Statements of the Company" herein and "Debt and Cash Realignment" in the
Prospectus.
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of
the Company as of September 30, 1996, and the unaudited pro forma
capitalization of the Company as of September 30, 1996, after giving effect to
the Transaction and the Refinancing Transactions. See "Unaudited Pro Forma
Consolidated Financial Statements of the Company." The capitalization of the
Company should be read in conjunction with the Company's consolidated
financial statements, and notes thereto, and the Company'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
September 30, 1996, which is incorporated by reference herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt(a).................................. $1,913 $ 330
------ ------
Long-term debt:
Notes(a).......................................... 2,473 --
Debentures(a)..................................... 885 --
Credit facilities................................. -- 1,484
Other............................................. 41 5
------ ------
Total long-term debt............................ 3,399 1,489
------ ------
Minority interest................................... 301 --
------ ------
Preferred stock with mandatory redemption
provisions......................................... 113 --
------ ------
Shareowners' Equity:
Series A Preferred Stock.......................... -- 290
Subordinated Tenneco Preferred Stock ............. -- 200
Common equity..................................... 3,662 882
------ ------
Total equity.................................... 3,662 1,372
------ ------
Total capitalization................................ $9,388 $3,191
====== ======
</TABLE>
--------
(a) For purposes of the pro forma capitalization, it is assumed that
100% of the Energy Consolidated Debt holders accept the Exchange
Offers and Tender Offers, as applicable. At this time, the Company
cannot determine the ultimate amount of Energy Consolidated Debt
securities which will be exchanged or tendered pursuant to the
Exchange Offers and Tender Offers, respectively, and such amount
could vary significantly.
S-11
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
The following Unaudited Pro Forma Consolidated Financial Statements of the
Company (the "Pro Forma Financial Statements") illustrate the effect of: (i)
the Corporate Restructuring Transactions, the Cash Realignment and Debt
Realignment, the Offering and the Distributions (which are part of the
Transaction discussed elsewhere herein), and (ii) the Merger and the
Refinancing Transactions. See "Risk Factors--Risks Related to the
Transaction--Uncertainty Regarding Consummation of the Refinancing
Transactions" included in the Prospectus. The Unaudited Pro Forma Consolidated
Balance Sheet has been prepared as if such transactions occurred on September
30, 1996; the Unaudited Pro Forma Consolidated Statements of Income have been
prepared as if such transactions occurred as of January 1, 1995. The
accompanying Pro Forma Financial Statements are based, in part, upon
information and assumptions developed by El Paso management, principally
relating to the "Merger and Refinancing Transactions" 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 the common stock of New
Tenneco and Newport News 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, par value $3.00 per share (the "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 El Paso
preferred depositary shares, with an assumed 10% dividend yield, and El Paso
Common Stock. A special meeting of El Paso's stockholders will be held on
Monday, December 9, 1996 (which is expected to be held one day prior to the
Tenneco Special Meeting) to vote on the Stock Issuance. These Pro Forma
Financial Statements assume that the Stock Issuance is approved (El Paso will
issue only El Paso Common Stock to consummate the Merger) and that the value
of the El Paso Common Stock to be issued is calculated based on the average El
Paso Common Stock price for the 20-day trading period ended October 28, 1996.
El Paso's acquisition of the Company will be accounted for under the purchase
method and the purchase price adjustments will be reflected in the separate
consolidated financial statements of the Company. 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 by El Paso solely for purposes of developing the pro forma
consolidated financial information. However, El Paso's management has
represented to the Company 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 the Company'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 the Company 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. See "Risk Factors--Risks Related to the
Transaction--Purchase Accounting Adjustments" included in the Prospectus.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of the Company 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.
S-12
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- --------------------------
RESTRUCTURING,
CONSOLIDATED REALIGNMENT, TENNECO MERGER AND CONSOLIDATED
TENNECO OFFERING AND AS REFINANCING TENNECO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
------------ -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash
investments........... $ 165 $ (130)(c) $ 25 $ $ 25
(10)(d)
Receivables............ 1,797 (958)(c) 839 839
Inventories............ 1,254 (1,229)(c) 25 25
Other current assets... 369 (251)(c) 118 118
------- ------- ------- ------ ------
Total current assets... 3,585 (2,578) 1,007 1,007
------- ------- ------- ------ ------
Net property, plant and
equipment.............. 6,904 (3,971)(c) 2,933 1,810 (g) 4,163
(580)(j)
Goodwill and
intangibles............ 1,381 (1,333)(c) 48 48
Other assets and
deferred charges....... 2,107 (1,195)(c) 912 (590)(f) 402
80 (j)
------- ------- ------- ------ ------
Total assets........... $13,977 $(9,077) $ 4,900 $ 720 $5,620
======= ======= ======= ====== ======
LIABILITIES AND
SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt........ $ 1,913 $(1,913)(b) $ -- $ 330 (k) $ 330
Payables............... 1,113 (760)(c) 353 20 (e) 373
Other current
liabilities........... 1,219 (670)(c) 424 120 (f) 544
(125)(b)
------- ------- ------- ------ ------
Total current
liabilities........... 4,245 (3,468) 777 470 1,247
------- ------- ------- ------ ------
Long-term debt.......... 3,399 (290)(a) 2,519 (500)(j) 1,489
(590)(b) (200)(i)
(330)(k)
Other liabilities and
deferred credits....... 1,233 (665)(c) 568 151 (f) 719
Deferred income taxes... 1,024 (601)(c) 423 370 (h) 793
------- ------- ------- ------ ------
9,901 (5,614) 4,287 (39) 4,248
------- ------- ------- ------ ------
Minority interest....... 301 (301)(c) -- --
------- ------- ------- ------ ------
Preferred stock with
mandatory
redemption provisions.. 113 113 (113)(l) --
------- ------- ------- ------ ------
Shareowners' equity:
Series A Preferred
Stock................. -- 290 (a) 290 290
Subordinated Tenneco
Preferred Stock....... -- -- 200 (i) 200
Common stock and paid-
in capital............ 4,562 4,562 (20)(e) 882
(861)(f)
1,810
(g)
(370)(h)
113 (l)
(4,352)(m)
Cumulative translation
adjustments........... 9 (9)(c) -- --
Retained earnings
(accumulated deficit). 62 2,628 (b) (3,381) 3,381 (m) --
(6,061)(c)
(10)(d)
------- ------- ------- ------ ------
4,633 (3,162) 1,471 (99) 1,372
Less-Shares held as
treasury stock, at
cost.................. 971 971 (971)(m) --
------- ------- ------- ------ ------
3,662 (3,162) 500 872 1,372
------- ------- ------- ------ ------
Total liabilities and
shareowners' equity... $13,977 $(9,077) $ 4,900 $ 720 $5,620
======= ======= ======= ====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
S-13
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
RESTRUCTURING, REALIGNMENT, OFFERING AND DISTRIBUTIONS:
(a) To reflect the final terms of the Offering of $300 million of Series A
Preferred Stock, with an 8 1/4% dividend yield, for net Offering Proceeds
of $290 million, and the use of the net Offering Proceeds for the
repayment of Energy Consolidated Debt. See "Use of Proceeds."
(b) To reflect the restructuring and realignment of the Company 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 Energy Consolidated 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
a new credit facility (the "Tenneco Credit Facility") entered into in
connection with the Transaction (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: Offering Proceeds--see footnote (a)......................... (300)
------
2,350
Plus: Cash settlement payments.................................... 439
Less: Estimated collections subject to refund..................... (270)
------
Assumed "Tenneco as Adjusted" debt................................ $2,519
======
</TABLE>
At this time, the Company cannot determine the ultimate amount of
securities which will be purchased in the Tender Offers, or the ultimate
amount of securities which will be exchanged 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 securities subject to the Exchange Offers are exchanged
pursuant to the Exchange Offers. See "Debt and Cash Realignment."
(c) To reflect the distribution of the common stock of New Tenneco and Newport
News pursuant to the Distributions. See "The Distributions."
(d) To reflect the distribution of the Company cash (subsequent to the
Distributions) in excess of $25 million pursuant to the Cash Realignment
provisions of the Merger Agreement. The distribution of cash as part of
the Cash Realignment may be adjusted by the sale of Energy Business
receivables by the Company prior to the Merger Effective Time. See "Debt
and Cash Realignment."
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 the Company 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 the Company to record assets acquired and
liabilities assumed at estimated fair value for: (i) reduction of certain
other assets, deferred charges and regulatory assets; (ii) the revision of
benefit plan assumptions relating to the retiree medical plan obligation;
(iii) adjustments related to other employee benefit costs and
environmental costs; and (iv) 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 the Company's management prior to the Merger (in millions):
<TABLE>
<S> <C>
Other assets and deferred charges...................................... $590
Other current liabilities.............................................. 120
Other liabilities and deferred credits................................. 151
----
$861
====
</TABLE>
S-14
<PAGE>
(Continued)
(g) To reflect the allocation to property, plant and equipment of the excess
purchase price of the Company, which will be reflected in the separate
financial statements of the Company, as follows (in millions):
<TABLE>
<S> <C>
Issuance of El Paso equity consideration in the Merger*............. $ 882
Less: Conversion of the $113 million book value of Tenneco $4.50 and
$7.40 Cumulative Preferred Stock................................... (113)
Less: "Tenneco as Adjusted" net common book value subsequent to the
Debt Realignment and Distributions................................. (210)
Acquisition adjustments to assets acquired and liabilities assumed.. 861
Transaction fees payable--see footnote (e).......................... 20
Deferred income taxes on allocation of purchase price and acquisi-
tion adjustments................................................... 370
------
$1,810
======
</TABLE>
--------
* Reflects the contribution to the Company'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 is not approved, the Merger will be
consummated by El Paso issuing a combination of El Paso preferred
depositary shares, with an assumed 10% dividend yield, and El Paso Common
Stock. A portion of total El Paso equity consideration will be issued in
exchange for the $113 million book value of the Tenneco $7.40 Cumulative
Preferred Stock, without par value (the "$7.40 Preferred Stock"), and the
Tenneco $4.50 Cumulative Preferred Stock, without par value (the "$4.50
Preferred Stock") (see footnote (l) below) 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 acquired. It is not expected that any
excess purchase price allocated to property, plant and equipment will be
allowed for regulatory purposes or recovery through rates. Should the
independent appraisal not support such allocation to property, plant and
equipment, the excess of total purchase price over the fair value of the
net assets acquired will be reflected as goodwill.
The following adjustments are made to adjust the historical values of
certain assets and liabilities to their estimated fair values (in
millions):
<TABLE>
<S> <C>
Increase in property, plant and equipment............................ $1,810
Reduce other assets and deferred charges............................. (590)
Increase other current liabilities................................... (140)
Increase other liabilities and deferred credits...................... (151)
Increase deferred income tax liability............................... (370)
Eliminate Tenneco shareowners' equity:
Tenneco preferred stock............................................ 113
"Tenneco as Adjusted" common equity................................ 210
------
Total El Paso equity consideration................................... $ 882
======
</TABLE>
(h) To reflect the increase in deferred income taxes of $370 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......................................... $ 706
Other assets.......................................................... (230)
Other liabilities..................................................... (106)
-----
$ 370
=====
</TABLE>
S-15
<PAGE>
(Continued)
(i) To reflect the contribution by El Paso to the Company of proceeds from an
assumed issuance of $200 million of El Paso Common Stock in exchange for
Subordinated Tenneco Preferred Stock of the Company with an assumed
dividend yield of 9%. The proceeds from the Company's issuance of
Subordinated Tenneco Preferred Stock to El Paso will be utilized by the
Company 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 the Company's
remaining $80 million investment in certain Australian projects using the
equity method. These proceeds are assumed to be utilized for the repayment
of a portion of the indebtedness outstanding under 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 $7.40 Preferred Stock and $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.
S-16
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- -------------------------
RESTRUCTURING,
CONSOLIDATED REALIGNMENT, TENNECO MERGER AND CONSOLIDATED
TENNECO OFFERING AND AS REFINANCING TENNECO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
------------ -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $8,320 $(6,323)(c) $1,997 $(69)(g) $1,928
Operating costs and expenses........... 7,599 (5,785)(c) 1,814 34 (d) 1,809
6 (e)
(45)(g)
------ ------- ------ ---- ------
Operating income...................... 721 (538) 183 (64) 119
Other (income) expense, net............ (242) 118 (c) (124) 4 (g) (120)
Interest expense....................... 268 (110)(b) 158 (42)(f) 113
2 (g)
(5)(h)
------ ------- ------ ---- ------
Income before income taxes and
minority interest.................... 695 (546) 149 (23) 126
Provision for income taxes *........... 247 43 (b) 34 (12)(g) 19
(256)(c) (3)(i)
Minority interest...................... 15 (15)(c) -- --
------ ------- ------ ---- ------
Net income from continuing operations. 433 (318) 115 (8) 107
Preferred stock dividends.............. 7 19 (a) 26 (7)(j) 33
14 (k)
------ ------- ------ ---- ------
Earnings from continuing operations
available to common stock............ $ 426 $ (337) $ 89 $(15) $ 74
====== ======= ====== ==== ======
</TABLE>
- --------
* The provision for income taxes for the Company 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 $30 million and the pro forma amount
for earnings from continuing operations available to common stock would have
been $44 million.
See accompanying Notes to Unaudited Pro Forma Consolidated Income Statements.
S-17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(MILLIONS)
<TABLE>
<CAPTION>
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- -------------------------
RESTRUCTURING,
CONSOLIDATED REALIGNMENT, TENNECO MERGER AND CONSOLIDATED
TENNECO OFFERING AND AS REFINANCING TENNECO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
------------ -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $8,899 $(6,978)(c) $1,921 $(47)(g) $1,874
Operating costs and
expenses............... 8,028 (6,278)(c) 1,750 45 (d) 1,762
8 (e)
(41)(g)
------ ------- ------ ---- ------
Operating income....... 871 (700) 171 (59) 112
Other (income) expense, (225) (106) (106)
net.................... 119 (c)
Interest expense........ 306 (89)(b) 217 (56)(f) 152
(3)(g)
(6)(h)
------ ------- ------ ---- ------
Income before income
taxes and minority
interest.............. 790 (730) 60 6 66
Provision for income 279 35 (b) (44) (1)(g) (42)
taxes (benefit)*....... (358)(c) 3 (i)
Minority interest....... 22 (22)(c) -- --
------ ------- ------ ---- ------
Net income from
continuing operations. 489 (385) 104 4 108
Preferred stock 12 25 (a) 37 (12)(j) 43
dividends.............. 18 (k)
------ ------- ------ ---- ------
Earnings from
continuing operations
available to common
stock................. $ 477 $ (410) $ 67 $ (2) $ 65
====== ======= ====== ==== ======
</TABLE>
- --------
* The provision for income taxes for the Company 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 $68 million and the pro forma
amount for earnings from continuing operations available to common stock
would have been $(3) million.
See accompanying Notes to Unaudited Pro Forma Consolidated Income Statements.
S-18
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
RESTRUCTURING, REALIGNMENT, OFFERING AND DISTRIBUTIONS:
(a) To reflect dividends in the Consolidated Pro Forma Income Statement on the
Series A Preferred Stock issued in the Offering at a dividend yield of 8
1/4%.
(b) To reflect the effect on interest expense of the restructuring and
realignment of the Company debt pursuant to the Debt Realignment, the
Distributions and the applicable provisions of the Merger Agreement, and
the 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 the Company's results of operations from the
Distributions.
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 the Company prospectively.
(e) To reflect the assumed pro forma postretirement benefit cost for the
Company employees.
(f) To reflect an interest expense reduction relating to debt repaid with
proceeds from the $200 million Subordinated Tenneco Preferred Stock issued
to El Paso by the Company and proceeds from the monetization of $500
million of assets, and certain project financings, at book value.
(g) To remove the historical operating results of Tenneco Energy's exploration
and production business which is assumed to be disposed of at book value.
(h) To reflect the interest expense reduction relating to 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. A
1/8% change in interest rates would have the impact of increasing pro
forma interest expense by approximately $1.7 million and $2.3 million for
the nine months ended September 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 dividends on the $7.40 Preferred Stock and
$4.50 Preferred Stock which will be converted into El Paso Common Stock as
part of the Merger.
(k) To reflect dividends in the Consolidated Pro Forma Income Statement on the
Subordinated Tenneco Preferred Stock issued to El Paso by the Company with
an assumed dividend yield of 9%.
S-19
<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 nine-month periods ended September 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 as of and for the nine months ended September 30, 1996
and 1995 include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results of operations for the nine months ended September 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 included herein, and Tenneco Energy's Combined Financial
Statements, and notes thereto.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(MILLIONS) -------- -------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA(B):
Net sales and operating
revenues.............. $ 1,997 $ 1,368 $1,921 $2,381 $2,866 $2,221 $2,216
======== ======== ====== ====== ====== ====== ======
Income before interest
expense and income
taxes ................ $ 264 $ 182 $ 268 $ 367 $ 419 $ 337 $ 475(c)
Interest expense (net
of interest
capitalized).......... 101 86 122 142 127 94 121
Income tax expense
(benefit)............. 36 44 (11) 72 104 63 103
-------- -------- ------ ------ ------ ------ ------
Income before
extraordinary loss and
cumulative effect of
changes in accounting
principles, net of
income tax............ 127 52 157 153 188 180 251
Extraordinary loss, net
of income tax......... (1) -- -- -- (25)(d) (9)(e) --
Cumulative effect of
changes in accounting
principles, net of in-
come tax.............. -- -- -- -- -- (332)(f) --
-------- -------- ------ ------ ------ ------ ------
Net income (loss)...... $ 126 $ 52 $ 157 $ 153 $ 163 $ (161) $ 251
======== ======== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $ 5,448 $ 6,275 $5,792 $5,730 $4,290 $4,054 $4,464
Short-term debt(g)..... 836 403 456 399 304 392 338
Long-term debt(g)...... 1,603 1,611 1,811 2,242 2,019 2,282 2,674
Combined equity........ 846 1,570 687 382 (652) (1,503) (1,120)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (275) $ 626 $ 765 $ (278) $ 209 $ 729 $ 84
Net cash provided
(used) by investing
activities............ (15) (407) (537) (229) (35) (383) 61
Net cash provided
(used) by financing
activities............ 76 323 (27) 426 (49) (393) (190)
Capital expenditures... 267 224 337 345 171 253 298
</TABLE>
- --------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the nine months
ended September 30, 1996 and 1995, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Energy
Business" included in the Prospectus.
(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 in the Prospectus, 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 in the Prospectus, 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 Statement of Financial Accounting
Standards ("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 upon completion of the Debt Realignment. See Note 6
to the Combined Financial Statements of Tenneco Energy, included in the
Prospectus.
S-20
<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. Such review includes
certain forward-looking statements, which should be read in conjunction with
the factors identified in "Risk Factors" in the Prospectus.
PROPOSED MERGER WITH EL PASO
In the first quarter of 1996, the Company 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 the Energy Business from the
packaging and automotive parts divisions. On June 19, 1996, the Company
announced that it had signed the Merger Agreement, pursuant to which El Paso
Subsidiary will be merged with and into the Company, with the Company
surviving the Merger as a subsidiary of El Paso. Prior to the Merger, the
Company 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 Company stockholders of
approximately $4 billion which includes:
. New shares of El Paso equity to be issued to the Company stockholders
valued at approximately $750 million (subject to the effect of a collar
on the average market price of the El Paso Common Stock issuable in
connection with the Merger).
. Retention by the Company after the Distributions and the Merger of
approximately $2.65 billion (subject to adjustment as more fully
described under "Debt and Cash Realignment" in the Prospectus) of Energy
Consolidated Debt and the Series A Preferred Stock.
. Other payments and certain liability retentions by El Paso which El Paso
has estimated at an aggregate of approximately $600 million. See "The
Merger" in the Prospectus.
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 the Energy Business 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 approval of the Transaction by Tenneco stockholders at the Tenneco
Special Meeting and approval of the Distributions and the Charter Amendment by
the holders of the Series A Preferred Stock (if issued prior to the Charter
Amendment becoming effective). See "The Distributions--Conditions to
Consummation of the Distributions" and "The Merger--Conditions Precedent" in
the Prospectus.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net income for the 1996 first nine months of $126 million increased
significantly compared with $52 million in the first nine months of 1995.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $1,997 $1,368
Operating income............................................ 264 182
</TABLE>
S-21
<PAGE>
NET SALES AND OPERATING REVENUES
Revenues for the 1996 first nine months were $2 billion, an increase of 46
percent compared with $1.37 billion for the year ago period.
Revenues from the operations of the Energy Business which are subject to
regulation by the FERC (generally referred to herein as its "regulated"
operations) increased to $641 million, or 16 percent, primarily due to
increased transportation volumes, benefits derived from a new rate structure
implemented on July 1, 1995 which resulted in a $12 million increase and
regulatory adjustments of $70 million of which $55 million had no operating
income impact. Revenues from the energy-related operations of the Energy
Business which are not generally subject to regulation by the FERC (generally
referred to herein as its "nonregulated" operations) increased 67 percent to
$1,352 million, primarily due to higher gas prices resulting in a $430 million
increase and an increase in gas volumes resulting in a $58 million increase.
Additionally, the acquisition of the assets of the Pipeline Authority of South
Australia ("PASA") in June 1995 and new processing and gathering projects
increased revenues by $38 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. increased 21% to $251
million. The increase included $22 million for legal settlements and a $4
million gain on the sale of TGP's interest in Iroquois Gas Transmission
System, L.P. Higher transportation revenues contributed $12 million to the
increase and improved operating efficiencies contributed $21 million.
Additionally, 1995 included a loss of $7 million from the sale of TGP's
interest in Ozark Gas Transmission System ("Ozark") which added to the 1996
increase. Partially offsetting these increases was the absence of earnings
contributed by the Kern River Gas Transmission Company ("Kern River"), which
added $24 million in the year-ago period. The Energy Business' 50 percent
interest in Kern River was sold in late 1995.
Nonregulated operating income increased to $31 million or 48% in the first
nine months of 1996 due to higher operating income from the oil and gas
production of Tenneco Ventures Corporation ("Tenneco Ventures") of $14 million
and acquisition of PASA in June 1995 which contributed $10 million. Partially
offsetting the nonregulated earnings increase was lower operating income of
$10 million due to lower margin from marketing activities and $5 million in
legal settlements.
The other operations of the Energy Business reported an operating loss of
$18 million during the first nine months of 1996 compared with an operating
loss of $47 million in the 1995 first nine months. The decrease is primarily
due to the recognition of a $32 million deferred gain on the sale of the
Energy Business investment in Cummins Engine Company stock offset by lower
interest income from the rolloff of Case retail receivables. Operating income
for the 1995 period included a $25 million reserve for the liquidation of
surplus real estate holdings.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
The Company'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 the Company
and its related interest expense have been allocated to New Tenneco and
Newport News based upon the portion of the Company'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 the Company 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
S-22
<PAGE>
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
the combined equity of the Energy Business. Although management believes that
the historical allocation of corporate debt and interest is reasonable, it is
not necessarily indicative of what the debt and interest expense of the Energy
Business will be upon completion of the Debt Realignment and the other
components of the Transaction. For additional information, see "Debt and Cash
Realignment" in the Prospectus.
Interest expense increased from $86 million in the first nine months of 1995
to $101 million in the first nine months of 1996. The increase was primarily
attributable to higher levels of debt.
INCOME TAXES
Income tax expense for the first nine months of 1996 was $36 million
compared with $44 million for the 1995 first nine months. The effective tax
rate for the first nine months of 1996 was 22 percent compared with 46 percent
in the prior year first nine months.
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.
The Energy Business 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 the combined financial position or
results of operations of the Energy Business.
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................................ $ (275) $ 626
Investing activities................................ (15) (407)
Financing activities................................ 76 323
</TABLE>
The Energy Business' 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 nine months of 1996 declined due to lower
sales of customer receivables compared with the first nine months of 1995.
This decrease was due primarily to trade receivables sold to Asset
Securitization Cooperative Corporation ("ASCC"), which were $328 million lower
in the first nine months of 1996 compared with the first nine months of 1995.
Operating cash flow in the first nine months of 1996 also declined as a result
of higher tax payments compared with the first nine months of 1995 due to the
settlement of 1987 through
S-23
<PAGE>
1989 federal tax liabilities and TGP's gas contract settlements for $125
million with ICA Energy, Inc. and Trans Texas Gas Corporation and $193 million
with Coastal and Tesoro.
Investing Activities
The sale of other businesses and assets, primarily the Energy Business' 50
percent interest in Kern River, generated an additional $283 million of cash
during the first nine months of 1996. The acquisition of assets, primarily the
acquisition of PASA, required $225 million of cash during the first nine
months of 1995.
The Energy Business invested $267 million in capital expenditures in its
existing businesses during the first nine months of 1996. Capital expenditures
were $224 million during the first nine months of 1995.
Financing Activities
Cash provided by financing activities was $76 million during the first nine
months of 1996, a $247 million decrease from the same period in 1995. The
Company repurchased $149 million in common stock in the first half of 1996,
down $347 million from the previous year. The Company borrowed approximately
$1.0 billion under various short-term credit facilities during the first nine
months of 1996, an increase from $271 million in the prior year period. The
proceeds from the 1996 short-term borrowings were generally utilized to pay
distributions to affiliates, dividends, capital expenditures and to fund other
operating cash flow uses discussed above. Tenneco also retired $367 million of
long-term debt in the first nine months of 1996 compared to $380 million
retired in 1995. Finally, the Company distributed $261 million in cash to
affiliates, as compared to contributions from affiliates of $1.1 billion
received in the first nine months of 1995. Cash contributions from and
distributions to affiliates vary based on cash generated by affiliates from
operations net of cash required for operating and investing activities.
CAPITALIZATION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities......... $ 836 $ 456
Long-term debt................................. 1,603 1,811
Minority interest.............................. -- 19
Preferred stock................................ 113 130
Combined equity................................ 846 687
------ ------
Total capitalization........................... $3,398 $3,103
====== ======
</TABLE>
Debt increased $172 million at September 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, excess net cash flows from operating and investing activities
have been used to meet consolidated debt and other obligations. Conversely,
when cash requirements of the Energy Business have been in excess of cash
flows from operations, the Company has utilized its consolidated credit
facilities to fund the Energy Business' obligations. Also, depending on market
and other conditions, the Energy Business 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 automotive, packaging and shipbuilding businesses to fund strategic
acquisitions and capital spending. The disposition of the chemical operations
of Albright & Wilson, plc and the sales of Case common stock and other assets
provided approximately $1.6 billion for these cash distributions.
Prior to the Transaction, the Company 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, the Company entered into
the Tenneco Credit Facility, which consists of a 364-day revolving credit
facility with a two-year term thereafter. Initial borrowings under the Tenneco
Credit Facility will be used to finance certain aspects of the Debt
Realignment. For additional
S-24
<PAGE>
information, see "The Energy Business--Tenneco Credit Facility" and "Debt and
Cash Realignment" in the Prospectus.
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 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 gas
supply realignment ("GSR") issues discussed in the Prospectus.
RESULTS OF OPERATIONS FOR THE YEARS 1995 AND 1994
1995 STRATEGIC ACTIONS
In December 1995, the Energy Business 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.
The Energy Business 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, the Company completed the $500 million common stock repurchase
program announced in December 1994. Also, in 1995, the Company 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, the Company has repurchased a total of 14.3 million common shares at a
cost of $646 million.
RESULTS OF OPERATIONS--YEARS 1995 AND 1994
The Energy Business' 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 the Energy Business' interest in Kern River) compared with
gains of $24 million in 1994 (primarily from the sale of a 20 percent
interest in Tenneco Energy Resources Corporation).
. 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 the Energy 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 $222 million. Under FERC
Order 636, customers assume the responsibility for acquiring their gas
supplies, reducing sales by
S-25
<PAGE>
the pipeline. Other non-recurring regulatory adjustments that had no operating
income impact also increased revenues by $63 million.
Revenues in the nonregulated operations of the Energy Business 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 the
Energy Business in June 1995.
Revenues from the other operations of the Energy Business 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 the Energy 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 the Energy Business' interest in Kern
River, a $7 million loss on the sale of Tenneco Energy's interest in Ozark 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, the Energy Business' regulated
business operating income decrease of approximately $18 million was primarily
due to the termination or expiration of transportation contracts.
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 $12 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 and an increase in administrative costs of approximately $5
million. Operating results of the Energy Business included $9 million in
income from operating the PASA assets during the last half of 1995.
The Energy Business' 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)
Interest expense in 1995 was $122 million compared with $142 million in
1994. For a discussion of the historical allocation of indebtedness of the
Company and its subsidiaries, 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 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 financial position or results of operations of the
Energy Business.
S-26
<PAGE>
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>
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.
Operating Activities
Operating cash flow for 1995 improved as the Energy Business 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 ASCC, 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, the
Energy Business invested $337 million in capital expenditures in its existing
businesses during the year. During 1994, the Energy Business' 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, the Energy Business 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, the Energy Business 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)."
S-27
<PAGE>
FERC MATTERS
TGP has deferred certain costs it has incurred associated with renegotiating
GSR costs as a result of FERC Order 636. For a discussion of TGP's ongoing
settlement and contract reformation discussions with holders of long-term gas
purchase contracts, ongoing discussions between TGP and its customers related
to the recovery of GSR costs and various FERC proceedings relating to TGP cost
recovery of transition costs incurred pursuant to implementation of FERC Order
636, see "The Energy Business--Interstate Pipeline Operations--Federal
Regulation" contained in the Prospectus.
ENVIRONMENTAL MATTERS
The Energy Business and certain of its subsidiaries are subject to various
environmental claims and proceedings relating to its current businesses and
discontinued operations. See "The Energy Business--Environmental Matters"
contained in the Prospectus.
S-28
<PAGE>
DESCRIPTION OF SERIES A PREFERRED STOCK
The following description of the Series A Preferred Stock offered hereby
supplements the description of the general terms and provisions of the
authorized class of Junior Preferred Stock of the Company set forth in the
Prospectus, to which reference is hereby made. To the extent the description
of the Series A Preferred Stock contained in this section differs from the
description thereof set forth in the Prospectus, the following description
shall control. The following summary of the particular terms and provisions of
the Series A Preferred Stock does not purport to be complete and is qualified
in its entirety by reference to the Tenneco Charter and the Certificate of
Designation, Preferences and Rights of the Series A Preferred Stock (the
"Certificate of Designation").
GENERAL. Pursuant to action of the Board of Directors of the Company (the
"Board") or a committee thereof (the "Committee"), the shares of Series A
Preferred Stock constitute a single series of Junior Preferred Stock of the
Company. Upon consummation of the Merger, if it occurs, Tenneco's currently
authorized class of preferred stock (which by its terms is senior to the
Junior Preferred Stock in certain respects) will be eliminated and the Junior
Preferred Stock (including the Series A Preferred Stock) will be redenominated
as "Preferred Stock." See "The Charter Amendment" in the Prospectus. At such
time, the Series A Preferred Stock will be renamed the "8 1/4% Cumulative
Preferred Stock, Series A." The Series A Preferred Stock is not convertible
into shares of any other class or series of stock of the Company. Shares of
Series A Preferred Stock have no preemptive rights.
The First National Bank of Boston is the registrar, transfer agent and
dividend disbursing agent for the shares of Series A Preferred Stock.
RANK. As of the date hereof, the Series A Preferred Stock will rank as to
payment of dividends and amounts payable on liquidation prior to the Tenneco
Common Stock and the Series A Participating Junior Preferred Stock, without
par value, issuable in certain circumstances in connection with the Company's
stockholder rights plan and junior to the $4.50 Preferred Stock and $7.40
Preferred Stock. Upon consummation of the Merger, each outstanding share of
$7.40 Preferred Stock, $4.50 Preferred Stock and Tenneco Common Stock (other
than shares owned directly or indirectly by El Paso, the Company or any of
their respective wholly owned subsidiaries, which will be cancelled, and
shares of $4.50 Preferred Stock held by holders who are entitled to demand and
properly demand appraisal of their shares) will be converted into the right to
receive shares of El Paso Common Stock (or, in the case of Tenneco Common
Stock, under certain circumstances, El Paso Common Stock and depositary shares
representing interests in preferred stock of El Paso) and will no longer be
outstanding. Upon consummation of the Merger, the Series A Preferred Stock
will rank as to payment of dividends and amounts payable on liquidation prior
to the common stock of the Company (and there will be no other class or series
of preferred stock of the Company outstanding at that time).
The shares of Series A Preferred Stock 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
immediately prior to the Merger), and the holders thereof will receive no
consideration in respect of such shares in the Merger.
Immediately following the Merger, if it occurs, El Paso will own 100% of the
common equity of the Company and the holders of the Series A Preferred Stock
will hold an amount of Series A Preferred Stock designed, to the extent
possible, to have an aggregate value as of such time that is equal to
approximately 25% of the value of all Company capital stock outstanding upon
consummation of the Merger.
DIVIDENDS. Holders of shares of Series A Preferred Stock are entitled to
receive, when, as and if declared by the Board out of assets legally available
therefor, cash dividends payable quarterly at the rate of 8 1/4% of the stated
value of $50 per share of Series A Preferred Stock per annum (the "Annual
Dividend Rate"). If (x) the Stock Issuance is not approved by the holders of
El Paso Common Stock at a special meeting (including any adjournments or
postponements thereof) called to approve such issuance (the "El Paso Special
Meeting"), (y) the Merger is effected, and (z) on or before the 90th day after
the date of the El Paso Special Meeting, either S&P or Moody's downgrades the
rating previously given by it to the Series A Preferred Stock, the Annual
S-29
<PAGE>
Dividend Rate will be automatically subjected to a one-time upward adjustment
to the rate set forth in the table below opposite the applicable ratings which
are given to the Series A Preferred Stock by each of Moody's and S&P as of the
90th day after the El Paso Special Meeting, effective as of the date of
original issuance of the Series A Preferred Stock.
<TABLE>
<CAPTION>
ANNUAL
DIVIDEND
REVISED RATINGS (MOODY'S/S&P) RATE
----------------------------- --------
<S> <C>
Ba1/BB+.......................................................... 9.000%
Ba2/BB+ or Ba1/BB................................................ 9.125%
Ba2/BB........................................................... 9.250%
Ba3/BB or Ba2/BB-................................................ 9.500%
Ba3/BB-.......................................................... 10.000%
</TABLE>
If any such adjustment to the Annual Dividend Rate occurs after a dividend
payment date as to which the Company previously paid dividends on the Series A
Preferred Stock, additional dividends will be payable, out of funds legally
available therefor, on each share of Series A Preferred Stock on the next
succeeding dividend payment date (or if such adjustment occurs after the
dividend payable on the next succeeding dividend payment date has been
declared, on the second succeeding dividend payment date following the date of
such adjustment) to the holder of record of such share of Series A Preferred
Stock as of the record date established for such succeeding dividend payment
date (or second succeeding payment date, as the case may be) in an amount equal
to the excess of (x) the aggregate amount of dividends that would have been
payable on such share on all dividend payment dates as to which the Company
previously paid dividends on the Series A Preferred Stock if dividends had
accrued from the date of issuance of the Series A Preferred Stock at the
adjusted Annual Dividend Rate, over (y) the aggregate amount of dividends
actually paid with respect to such share of Series A Preferred Stock. If the
Annual Dividend Rate is adjusted as provided above, the Company will cause
notice of such adjustment to be sent to the registered holders of Series A
Preferred Stock.
Dividends on the Series A Preferred Stock, calculated as a percentage of the
stated value (which is $50 per share), will be payable (out of funds legally
available therefor) quarterly on each March 31, June 30, September 30 and
December 31 (each a "dividend payment date"), commencing December 31, 1996.
Dividends (including Additional DRD Dividends (as defined)) on the Series A
Preferred Stock will be cumulative from the date of initial issuance of such
Series A Preferred Stock. Dividends will be payable to holders of record as
they appear on the stock books of the Company on the applicable record dates,
not more than 60 days preceding the dividend payment dates, as shall be fixed
by the Board. Accrued but unpaid dividends will not bear interest.
Unless full cumulative dividends on the outstanding shares of Series A
Preferred Stock for all past dividend periods have been paid, or declared and
set apart for payment, and the Company shall not be in default with respect to
a mandatory redemption of the Series A Preferred Stock, dividends may not be
paid or declared and other distributions may not be made upon the Tenneco
Common Stock or on any other series of preferred stock of the Company ranking
junior to or on a parity with the Series A Preferred Stock as to dividends or
rights upon dissolution, liquidation or winding up of the Company nor may any
Tenneco Common Stock or such other preferred stock of the Company ranking
junior to or on a parity with the Series A Preferred Stock as to dividends or
rights upon dissolution, liquidation or winding up of the Company be purchased,
retired or otherwise acquired by the Company, in either case without the
consent of the holders of a majority of the shares of Series A Preferred Stock,
provided, however, that notwithstanding the foregoing, the Company may at any
time redeem, purchase or otherwise acquire shares of capital stock ranking
junior to or on a parity with the Series A Preferred Stock as to dividends and
rights upon liquidation, dissolution and winding up in exchange for, or out of
net cash proceeds from a substantially concurrent sale of, other shares of any
capital stock ranking junior to the Series A Preferred Stock as to dividends
and rights upon liquidation, dissolution and winding up.
CHANGES IN THE DIVIDENDS RECEIVED PERCENTAGE. If one or more amendments to
the Code are enacted that reduce the percentage of the dividends received
deduction as specified in Section 243(a)(1) of the Code or any successor
provision (the "Dividends Received Percentage") to below the existing Dividends
Received
S-30
<PAGE>
Percentage (currently 70%), the amount of each dividend payable per share of
the Series A Preferred Stock for dividend payments made on or after the
effective date of such change (or the second succeeding dividend payment after
such effective date, as described in the following paragraph) will be adjusted
by multiplying the amount of the dividend payable determined as described
above (before adjustment as described below) by a factor, which will be the
number determined in accordance with the following formula (the "DRD
Formula"), and rounding the result to the nearest cent:
1 - (.35 (1 - .70))
1 - (.35 (1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, if, with
respect to any such amendment, the Company receives either an unqualified
opinion of nationally recognized independent tax counsel selected by the
Company or a private letter ruling or similar form of authorization from the
IRS to the effect that such an amendment would not apply to dividends payable
on the Series A Preferred Stock, then any such amendment will not result in
the adjustment provided for pursuant to the DRD Formula. The opinion
referenced in the previous sentence must be based upon a specific exception in
the legislation amending the DRP or upon a published pronouncement of the IRS
addressing such legislation. Unless the context otherwise requires, references
to dividends in this Prospectus Supplement will mean dividends as adjusted by
the DRD Formula. The Company's calculation of the dividends payable, as so
adjusted and as certified accurate as to calculation and reasonable as to
method by the independent public accountants then regularly engaged by the
Company, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received Percentage
to below 70% is enacted after a dividend payable on a dividend payment date
has been declared but prior to the applicable dividend payment date, the
amount of dividend payable on such dividend payment date will not be
increased. Instead, an amount, equal to the excess of (x) the product of the
dividends paid by the Company on such dividend payment date and the factor
derived from the DRD Formula (where the DRP used in the DRD Formula would be
equal to such reduced Dividends Received Percentage for such dividends), over
(y) the dividends paid by the Company on such dividend payment date, will be
payable to holders of record as of the record date established for the next
succeeding dividend payment date in addition to any other amounts payable on
such date. Notwithstanding the foregoing, no such additional dividend will be
payable if such amendment to the Code would not result in an adjustment to the
DRD Formula due to the Company having received either an opinion of counsel or
tax ruling referred to in the immediately preceding paragraph.
In addition, if, prior to March 31, 1997, an amendment to the Code is
enacted that reduces the Dividends Received Percentage to below 70% and such
reduction retroactively applies to a dividend payment date as to which the
Company previously paid dividends on the Series A Preferred Stock (each an
"Affected Dividend Payment Date"), additional dividends (the "Additional DRD
Dividends") will be payable out of funds legally available therefor on the
next succeeding dividend payment date (or if such amendment is enacted after
the dividend payable on such dividend payment date has been declared, on the
second succeeding dividend payment date following the date of enactment) to
holders of record as of the record date established for such succeeding
dividend payment date (or second succeeding dividend payment date, as the case
may be) in an amount equal to the excess of (x) the product of the dividends
paid by the Company on each Affected Dividend Payment Date and the factor
derived from the DRD Formula (where the DRP used in the DRD Formula would be
equal to the reduced Dividends Received Percentage applied to each Affected
Dividend Payment Date), over (y) the dividends paid by the Company on all
Affected Dividend Payment Dates.
Additional DRD Dividends will not be paid in respect of the enactment of any
amendment to the Code on or after March 31, 1997 which retroactively reduces
the Dividends Received Percentage to below 70%, or if enacted prior to March
31, 1997, which would not result in an adjustment due to the Company having
received
S-31
<PAGE>
either an opinion of counsel or tax ruling referred to in the third preceding
paragraph. The Company will only make one payment of Additional DRD Dividends.
If the amount of dividends payable per share of the Series A Preferred Stock
will be adjusted pursuant to the DRD Formula and/or Additional DRD Dividends
are to be paid, the Company will cause notice of each such adjustment and, if
applicable, any Additional DRD Dividends, to be sent to the holders of the
Series A Preferred Stock.
If the Dividends Received Percentage is reduced to 40% or less, the Company
may, at its option, redeem the Series A Preferred Stock, in whole but not in
part, as described below. See "--Optional Redemption." See also "Recent Tax
Proposals" for a discussion of certain Proposals (as defined) to reduce the
Dividends Received Percentage.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding
up of the Company, the holders of shares of Series A Preferred Stock will be
entitled to receive, on a pari passu basis with the holders of other pari
passu stock, if any, out of the assets of the Company available for
distribution to stockholders, before any distribution is made to holders of
(i) Tenneco Common Stock or (ii) shares of any other class or series of stock
ranking junior to the Series A Preferred Stock as to rights upon liquidation,
dissolution or winding up which may be issued in the future, liquidating
distributions in the amount of $50 per share, plus an amount equal to accrued
and accumulated but unpaid dividends to the date of final distribution,
including any changes in dividends payable due to changes in the Annual
Dividend Rate or Dividends Received Percentage, and Additional DRD Dividends,
if any, but the holders of the shares of Series A Preferred Stock will not be
entitled to receive the liquidation price of such shares until the liquidation
preference of any other shares of the Company's capital stock ranking senior
to the Series A Preferred Stock as to rights upon liquidation, dissolution or
winding up shall have been paid (or a sum set aside therefor sufficient to
provide for payment) in full. Upon consummation of the Merger, there will be
no outstanding shares of the Company's capital stock ranking senior to the
Series A Preferred Stock as to rights upon liquidation, dissolution or winding
up. See "--Rank."
OPTIONAL REDEMPTION. The Series A Preferred Stock does not have any maturity
date. The Series A Preferred Stock is not redeemable at the option of the
Company prior to December 31, 2001, except as stated below. On or after such
date, the Series A Preferred Stock will be redeemable out of funds legally
available therefor at the option of the Company, in whole or in part, upon not
less than 30 days' notice at a redemption price equal to $50.00 per share,
plus an amount equal to accrued and accumulated but unpaid dividends to but
excluding the date fixed for redemption, including any changes in dividends
payable due to changes in the Annual Dividend Rate or Dividends Received
Percentage, and Additional DRD Dividends, if any. If full cumulative dividends
on the Series A Preferred Stock for all past dividend periods have not been
paid or declared and set apart for payment, the Series A Preferred Stock may
not be redeemed in part as described above and the Company may not purchase or
acquire any share of Series A Preferred Stock other than pursuant to a
purchase or exchange offer made on the same terms to all holders of the Series
A Preferred Stock or by mandatory redemption. If fewer than all the
outstanding shares of Series A Preferred Stock are to be redeemed, the Company
will select those to be redeemed pro rata, by lot or by a substantially
equivalent method.
Notwithstanding the preceding paragraph, if the Dividends Received
Percentage is equal to or less than 40% and, as a result, the amount of
dividends on the Series A Preferred Stock payable on any dividend payment date
will be or is adjusted upwards as described under "--Changes in the Dividends
Received Percentage," the Company, at its option, may redeem all, but not less
than all, of the outstanding shares of the Series A Preferred Stock out of
funds legally available therefor, provided that within 60 days of the date on
which an amendment to the Code is enacted which reduces the Dividends Received
Percentage to 40% or less, the Company sends notice to holders of the Series A
Preferred Stock of such redemption. A redemption of the Series A Preferred
Stock pursuant to the terms described in this paragraph will take place on the
date specified in the notice, which shall be not less than 30 nor more than 60
days from the date such notice is sent to holders of the Series A Preferred
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<PAGE>
Stock. A redemption of the Series A Preferred Stock in accordance with the
terms described in this paragraph shall be at the applicable redemption price
set forth in the following table, in each case plus an amount equal to accrued
and unpaid dividends (whether or not declared) thereon to but excluding the
date fixed for redemption, including any changes in dividends payable due to
changes in the Annual Dividend Rate or the Dividends Received Percentage, and
Additional DRD Dividends, if any.
<TABLE>
<CAPTION>
REDEMPTION PERIOD REDEMPTION PRICE PER SHARE
- ----------------- --------------------------
<S> <C>
November 18, 1996 to December 30, 1997............... $52.50
December 31, 1997 to December 30, 1998............... $52.00
December 31, 1998 to December 30, 1999............... $51.50
December 31, 1999 to December 30, 2000............... $51.00
December 31, 2000 to December 30, 2001 .............. $50.50
December 31, 2001 and thereafter..................... $50.00
</TABLE>
Notwithstanding the second preceding paragraph, if at any time fewer than
10% of the shares of Series A Preferred Stock originally issued (600,000
shares) remain outstanding, the Company, at its option, may redeem all, but
not less than all, of the outstanding shares of the Series A Preferred Stock.
A redemption pursuant to the terms described in this paragraph may take place
not less than 30 nor more than 60 days from the date notice of such redemption
is sent to the holders of the Series A Preferred Stock. A redemption of the
Series A Preferred Stock in accordance with the terms described in this
paragraph shall be at the applicable redemption price set forth in the
following table, in each case plus accrued and unpaid dividends (whether or
not declared) thereon to but excluding the date fixed for redemption,
including any changes in dividends payable due to changes in the Annual
Dividend Rate or the Dividends Received Percentage, and Additional DRD
Dividends, if any.
<TABLE>
<CAPTION>
REDEMPTION PERIOD REDEMPTION PRICE PER SHARE
- ----------------- --------------------------
<S> <C>
November 18, 1996 to December 30, 1997............... $52.50
December 31, 1997 to December 30, 1998............... $52.00
December 31, 1998 to December 30, 1999............... $51.50
December 31, 1999 to December 30, 2000............... $51.00
December 31, 2000 to December 30, 2001 .............. $50.50
December 31, 2001 and thereafter..................... $50.00
</TABLE>
MANDATORY REDEMPTION. Upon the occurrence of a Mandatory Redemption Event
(as defined), the Company will be required, subject to the rights of the
holders of any class or series of stock ranking prior to the Series A
Preferred Stock (i.e., the holders of the $4.50 Preferred Stock and $7.40
Preferred Stock), to redeem, to the extent of funds legally available
therefor, all, but not less than all, of the outstanding shares of Series A
Preferred Stock at a redemption price of $50.50 per share plus an amount equal
to accrued and unpaid dividends (whether or not declared) thereon to but
excluding the date fixed for redemption, including any changes in dividends
payable due to changes in the Annual Dividend Rate or the Dividends Received
Percentage and Additional DRD Dividends, if any. A "Mandatory Redemption
Event" shall occur upon the earliest to occur of the following events: (i) the
proposal to approve the Transaction is voted upon and is not approved at the
Tenneco Special Meeting (such meeting having been finally adjourned); (ii) the
Transaction is not approved by the requisite vote of the holders of Tenneco
stock entitled to vote thereon on or prior to March 31, 1997; or (iii) the
Company shall not have accepted on or prior to March 31, 1997 any indebtedness
of the Company and its subsidiaries tendered to it pursuant to the tender
offers to be made by it in connection with the Transaction. A redemption of
the Series A Preferred Stock pursuant to this paragraph will take place on the
date specified in the notice thereof, which shall be not less than 30 nor more
than 60 days from the date a Mandatory Redemption Event occurs.
VOTING RIGHTS. Holders of Series A Preferred Stock will not have any voting
rights except as set forth below or as otherwise from time to time required by
law. Holders of the Series A Preferred Stock will possess the right to elect a
number of directors of the Company, at each annual meeting of stockholders,
representing one-sixth of the entire Board (which shall be set at an integral
multiple of six so long as any Series A Preferred
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<PAGE>
Stock is outstanding, subject to increase for additional directors that holders
of Series A Preferred Stock would be entitled to elect in the event of dividend
arrearages), excluding directors elected as a result of dividend arrearages
discussed below. If at any time the service on the Board of one or more of the
directors elected by the holders of the Series A Preferred Stock pursuant to
the foregoing voting rights (the "Preferred Stock Directors") is terminated for
any reason then the resulting vacancy or vacancies may only be filled by the
vote of the continuing Preferred Stock Directors or, if there are no such
continuing directors, by the remaining directors then constituting the Board of
Directors.
In addition, whenever dividends on the Series A Preferred Stock shall be in
arrears for dividend periods, whether or not consecutive, containing in the
aggregate a number of days equivalent to six calendar quarters, the holders of
shares of Series A Preferred Stock will be entitled to elect two additional
directors of the Company at a special meeting of holders of the Series A
Preferred Stock called for such purpose and at each subsequent meeting at which
directors are to be elected until all dividends accumulated on the Series A
Preferred Stock and in arrears have been fully paid or declared and set apart
for payment. The term of office of the additional directors so elected by the
holders of the Series A Preferred Stock shall terminate automatically at such
time as all dividends accumulated on Series A Preferred Stock and in arrears
have been fully paid or set apart for payment.
The Company may not, without the consent of the holders of a majority of the
outstanding shares of Series A Preferred Stock (a) issue any additional shares
of Series A Preferred Stock (other than the 6,000,000 shares of Series A
Preferred Stock offered hereby), or issue any shares of any class or series of
stock ranking prior to or on a parity with the Series A Preferred Stock as to
dividends or rights upon dissolution, liquidation or winding up of the Company,
or issue any obligation or security convertible into or exercisable for shares
of stock of any class or series ranking prior to or on a parity with the Series
A Preferred Stock as to dividends or rights upon dissolution, liquidation or
winding up of the Company, or (b) subject to certain exceptions, purchase,
redeem or otherwise acquire for value any shares of stock of any class or
series ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or rights upon dissolution, liquidation or winding up of the Company
during the continuance of any default in the payment of dividends on the Series
A Preferred Stock or with respect to a mandatory redemption of the Series A
Preferred Stock or (c) amend the Tenneco Charter or the Certificate of
Designation in a manner which adversely affects the holders of the Series A
Preferred Stock.
Holders of shares of Series A Preferred Stock will have one vote for each
share held on those matters upon which such holders are entitled to vote.
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<PAGE>
APPRAISAL RIGHTS
Holders of shares of $4.50 Preferred Stock and the shares of Series A
Preferred Stock offered hereby (hereinafter together referred to as "Eligible
Stock") who do not vote in favor of the Merger or waive appraisal rights and
who properly demand appraisal of their Eligible Stock will be entitled to
appraisal rights in connection with the Merger under Section 262 of the DGCL.
No other stockholders of Tenneco are entitled to such appraisal rights.
The holders as of the Tenneco Record Date of more than 75% of the $4.50
Preferred Stock have agreed to vote such shares in favor of the Transaction
(which includes the Merger) at the Tenneco Special Meeting and have agreed to
grant an irrevocable proxy to Tenneco to so vote such shares and not demand or
to assert any rights of appraisal under the DGCL in connection with the
Merger.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE
FULL TEXT OF SECTION 262 WHICH IS ATTACHED TO THE PROSPECTUS AS APPENDIX A.
ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER" ARE TO
THE RECORD HOLDER OF THE SHARES OF ELIGIBLE STOCK AS TO WHICH APPRAISAL RIGHTS
ARE ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES OF ELIGIBLE
STOCK HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR
NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS
SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
Under the DGCL, holders of shares of Eligible Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
Eligible Stock appraised by the Delaware Court of Chancery and to receive
payment of the "fair value" of such shares, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, as determined by such court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Tenneco Special Meeting, the
corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders entitled to appraisal rights that such appraisal rights are
available and include in such notice a copy of Section 262. The applicable
statutory provisions are attached to the Prospectus as Appendix A. Any holder
of Eligible Stock who wishes to exercise such appraisal rights or who wishes
to preserve his, her or its right to do so, should review the following
discussion and Appendix A carefully because failure to timely and properly
comply with the procedures specified will result in the loss of appraisal
rights under the DGCL.
A holder of shares of Eligible Stock wishing to exercise his, her or its
appraisal rights must deliver to the Company, before the vote on the
Transaction (which includes the Merger) at the Tenneco Special Meeting, a
written demand for appraisal of his, her or its shares of Eligible Stock and
must not vote in favor of the Merger (which is being submitted as a part of
the Transaction). Because a duly executed proxy which does not contain voting
instructions will, unless revoked, be voted for the Transaction, a holder of
shares of $4.50 Preferred Stock who votes by proxy and who wishes to exercise
his, her or its appraisal rights must (i) vote against the Transaction, or
(ii) abstain from voting on the Transaction. A vote against the Transaction,
in person or by proxy, will not in and of itself constitute a written demand
for appraisal satisfying the requirements of Section 262. In addition, a
holder of shares of Eligible Stock wishing to exercise his, her or its
appraisal rights must hold of record such shares on the date the written
demand for appraisal is made and must continue to hold such shares of record
until the Merger Effective Time. If any holder of shares of Eligible Stock
fails to comply with any of these conditions and the Merger becomes effective,
the holder of shares of Eligible Stock will be entitled to receive the
consideration (if any) receivable with respect to such shares in the absence
of a valid assertion of appraisal rights in accordance with the Merger
Agreement.
Only a holder of record of shares of Eligible Stock is entitled to assert
appraisal rights for the shares of Eligible Stock registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the holder
of record, fully and correctly, as his, her or its name appears on his, her or
its stock certificates, and must state that the stockholder intends thereby to
demand appraisal of his, her or its shares in connection with
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<PAGE>
the Merger. If the shares of Eligible Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the shares of Eligible Stock are owned
of record by more than one person, as in a joint tenancy and tenancy in
common, the demand should be executed by or on behalf of all joint owners. An
authorized agent, including two or more joint owners, may execute a demand for
appraisal on behalf of a holder of record; however, the agent must identify
the record owner or owners and expressly disclose the fact that, in executing
the demand, the agent is agent for such owner or owners. A record holder such
as a broker who holds shares of Eligible Stock as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares of
Eligible Stock held for one or more beneficial owners while not exercising
such rights with respect to the shares of Eligible Stock held for other
beneficial owners; in such case, however, the written demand should set forth
the number of shares of Eligible Stock as to which appraisal is sought and
where no number of shares of Eligible Stock is expressly mentioned the demand
will be presumed to cover all shares of Eligible Stock held in the name of the
record owner. Stockholders who hold their shares of Eligible Stock in
brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such a nominee.
All written demands for appraisal pursuant to Section 262 should be sent or
delivered to the Company at 1275 King Street, Greenwich, Connecticut 06831,
Attention: Corporate Secretary.
Within ten days after the Merger Effective Time, the Company, as the
surviving corporation of the Merger, must notify each holder of Eligible Stock
who has complied with Section 262 and has not voted in favor of or consented
to the Merger as of the date that the Merger has become effective. Within 120
days after the Merger Effective Time, but not thereafter, the Company or any
holder of Eligible Stock who has so complied with Section 262 and is entitled
to appraisal rights under Section 262 may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of his, her or
its shares of $4.50 Preferred Stock or Series A Preferred Stock, as the case
may be. The Company is under no obligation to and has no present intention to
file such a petition. Accordingly, it is the obligation of the holders of
$4.50 Preferred Stock and Series A Preferred Stock, respectively, to initiate
all necessary action to perfect their appraisal rights within the time
prescribed in Section 262.
Within 120 days after the Merger Effective Time, any holder of Eligible
Stock who has complied with the requirements for exercise of appraisal rights
will be entitled, upon written request, to receive from the Company a
statement setting forth the aggregate number of shares of $4.50 Preferred
Stock entitled to demand appraisal rights or Series A Preferred Stock, as the
case may be, not voted in favor of the Merger and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such statement must be mailed within ten days after a written
request therefor has been received by the Company or within ten days after the
expiration of the period for delivery of demands for appraisal, whichever is
later.
If a petition for an appraisal is timely filed by a holder of shares of
$4.50 Preferred Stock entitled to demand appraisal rights or Series A
Preferred Stock, as the case may be, and a copy thereof is served upon the
Company, the Company will then be obligated within 20 days to file with the
Delaware Register in Chancery a duly verified list containing the names and
addresses of all holders of $4.50 Preferred Stock or Series A Preferred Stock,
as the case may be, who have demanded an appraisal of their shares and with
whom agreements as to the value of their shares have not been reached. After
notice to such stockholders as required by the Court, the Delaware Court of
Chancery is empowered to conduct a hearing on such petition to determine those
holders of $4.50 Preferred Stock or Series A Preferred Stock, as the case may
be, who have complied with Section 262 and who have become entitled to
appraisal rights thereunder. The Delaware Court of Chancery may require the
holders of shares of Eligible Stock who demanded payment for their shares to
submit their stock certificates to the Register in Chancery for notation
thereon of the pendency of the appraisal proceeding; and if any stockholder
fails to comply with such direction, the Court of Chancery may dismiss the
proceedings as to such stockholder.
After determining the holders of Eligible Stock entitled to appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their shares of
$4.50 Preferred Stock or Series A Preferred Stock, as the case may
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<PAGE>
be, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. Holders of Eligible
Stock considering seeking appraisal should be aware that the fair value of
their shares of Eligible Stock as determined in an appraisal proceeding under
Section 262 could be more than, the same as or less than the value of the
shares they would receive or continue to hold, as the case may be, pursuant to
the Merger if they did not seek appraisal of their shares of Eligible Stock
and that investment banking opinions as to fairness from a financial point of
view are not necessarily opinions as to fair value under Section 262. The
Delaware Supreme Court has stated that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered in the appraisal
proceeding. In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on factual circumstances, may or may not be a
dissenter's exclusive remedy. The Court of Chancery will also determine the
amount of interest, if any, to be paid upon the amounts to be received by
persons whose shares of Eligible Stock have been appraised. The costs of the
action may be determined by the Court and taxed upon the parties as the Court
deems equitable. The Court may also order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged against
the value of all the shares of Eligible Stock entitled to be appraised.
Any holder of shares of Eligible Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Merger Effective Time, be
entitled to vote the shares of Eligible Stock subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares of Eligible Stock (except dividends or other distributions
payable to holders of record of Eligible Stock as of a record date prior to
the Merger Effective Time).
If any stockholder who demands appraisal of his, her or its shares of
Eligible Stock under Section 262 fails to perfect, or effectively withdraws or
loses, his, her or its right to appraisal, as provided in the DGCL, the shares
of $4.50 Preferred Stock or Series A Preferred Stock, as the case may be, of
such stockholder will be converted into the right to receive shares of El Paso
Common Stock or remain outstanding as shares of Series A Preferred Stock,
respectively, pursuant to the Merger Agreement as described in the Prospectus
(without interest). A stockholder will fail to perfect, or effectively lose or
withdraw, his, her or its right to appraisal if no petition for appraisal is
filed within 120 days after the Merger Effective Time, or if the stockholder
delivers to the Company a written withdrawal of his, her, or its demand for
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Merger Effective Time will require
the written approval of the Company and, once a petition for appraisal is
filed, the appraisal proceeding may not be dismissed as to any holder absent
court approval.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
Pursuant to the Merger Agreement, from and after the Merger Effective Time,
the Company will be solely responsible for (and shall indemnify New Tenneco
and Newport News against) the payment of any and all consideration that may be
determined pursuant to Section 262 to be due to the holders of Eligible Stock
who have perfected their rights to appraisal as described herein.
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<PAGE>
RECENT TAX PROPOSALS
On December 7, 1995, the Clinton Administration released a budget plan that
included certain tax proposals (the "Proposals") that may affect holders of
the Series A Preferred Stock. It is uncertain whether the Proposals will be
enacted into law.
Under the Proposals, the Dividends Received Percentage that is currently
available to corporate shareholders for certain dividends received from
another corporation in which the shareholder owns less than 20% (by vote and
value) would be reduced from 70% to 50%. As originally proposed, this
provision would be effective for dividends paid after January 31, 1996. Under
the Clinton Administration's budget plan submitted to Congress on March 19,
1996, the provision would be effective for dividends received or accrued more
than 30 days after the date of enactment. On August 27, 1996, the Clinton
Administration released an outline of new revenue initiatives that included
elimination of the dividends-received deduction in the case of "certain debt-
like preferred stock" that was not further identified, proposed to apply to
preferred stock issued after the date of enactment. To the extent the
Dividends Received Percentage is reduced from 70%, the amount of dividends
payable per share will be adjusted in certain circumstances. See "Description
of Series A Preferred Stock--Changes in the Dividends Received Percentage."
Additionally, under current law, the dividends received deduction is allowed
to a corporate shareholder only if the shareholder satisfies a 46-day holding
period for the dividend-paying stock (or a 91-day period for certain dividends
on preferred stock). The Proposals provide that a taxpayer would not be
entitled to a dividends received deduction if the taxpayer's holding period
for the dividend-paying stock were not satisfied over a period immediately
before or immediately after the taxpayer would become entitled to receive the
dividend. As proposed, this provison would be effective for any dividends paid
after January 31, 1996. Under the Clinton Administration's budget plan
submitted to Congress on March 19, 1996, the provision would be effective for
dividends received or accrued more than 30 days after the date of enactment.
Due to the inherently uncertain nature of proposed changes to the tax law
such as the Proposals, there can be no assurance as to whether, or in what
form, the Proposals may be enacted into law, or as to the effective dates of
any such changes to the law.
For a discussion of certain additional proposed legislation, see "Certain
Federal Income Tax Consequences of the Transaction--Possible Future
Legislation" in the Prospectus.
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF
SERIES A PREFERRED STOCK
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of Series
A Preferred Stock applicable to a beneficial owner thereof that is a "Non-U.S.
Holder." As used herein, a "Non-U.S. Holder" is any person holding Series A
Preferred Stock other than (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized under the laws of the
United States or of any State or (iii) an estate or trust whose income is
included in gross income for United States federal income tax purposes
regardless of its source. The following summary addressees only the U.S.
federal income tax consequences to holders that will hold the Series A
Preferred Stock as a capital asset and does not address all aspects of United
States federal and estate taxation that may be relevant to Non-U.S. Holders in
light of their particular circumstances such as insurance companies, tax-
exempt organizations, banks or dealers in securities or currencies, holders
that will hold Series A Preferred Stock as part of a "hedging," "conversion"
or "straddle" transaction for United States federal income tax purposes, or
holders with a "functional currency" other than the United States dollar. This
summary is based on provisions of the Code and administrative and judicial
interpretations as of the date hereof, all of which are subject to change,
possibly on a retroactive basis. This summary does not deal with U.S. state
and local or non-U.S. tax consequences and, except as specifically noted, does
not address the effects of any tax treaties the United States has concluded
with other countries.
Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-U.S. Holder of Series A Preferred Stock.
The Proposed Regulations are generally proposed to be effective with respect
to dividends paid after December 31, 1997, subject to certain transition
rules. The discussion below is not intended to be a complete discussion of the
provisions of the Proposed Regulations, and prospective investors are urged to
consult their tax advisors with respect to the effect the Proposed Regulations
would have if adopted.
ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF SERIES A PREFERRED STOCK.
DIVIDENDS. In general, dividends (to the extent of earnings and profits for
federal income tax purposes) paid on Series A Preferred Stock to a Non-U.S.
Holder will be subject to withholding of United States federal income tax at a
rate of 30% of the amount of the dividend (or a lower rate prescribed by an
applicable income tax treaty). However, if the dividend is effectively
connected with the conduct of a United States trade or business by the Non-
U.S. Holder or, if a tax treaty applies, is attributable to a permanent
establishment in the United States maintained by the Non-U.S. Holder, and the
Non-U.S. Holder properly files an IRS Form 4224 (or such other applicable form
required by the IRS) with the Company or its dividend disbursing agent, then
the dividend (i) will not be subject to income tax withholding and (ii) will
be subject to United States federal income tax in the same manner as if the
Non-U.S. Holder were a U.S. resident. In the case of a Non-U.S. Holder that is
a corporation, such effectively connected dividend income (or dividends
attributable to a permanent establishment in the United States) may also be
subject to the branch profits tax (which is generally imposed on a foreign
corporation on the repatriation from the United States of effectively
connected earnings and profits) at a 30% rate (or a lower rate prescribed by
an applicable income tax treaty). The branch profits tax may not apply if the
recipient is a qualified resident of certain countries with which the United
States has an income tax treaty.
For purposes of determining whether tax is to be withheld at a 30% rate or
at a reduced rate as specified by an applicable tax treaty, under current
United States Treasury Regulations, the Company ordinarily will presume that
dividends paid to a holder with an address in a foreign country are paid to a
resident of such country absent knowledge that such presumption is not
warranted. Under the Proposed Regulations, to obtain a reduced rate of
withholding under a treaty a Non-U.S. Holder would generally be required to
provide an IRS Form W-8 certifying such Non-U.S. Holder's entitlement to
benefits under a treaty together with, in certain circumstances,
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<PAGE>
additional information. The Proposed Regulations also would provide special
rules to determine whether, for purposes of determining the applicability of a
tax treaty and for purposes of the 30% withholding tax described above,
dividends paid to a Non-U.S. Holder that is an entity should be treated as
paid to the entity or to those holding an interest in that entity.
The Company is required to report annually to the IRS and each Non-U.S.
Holder the amount of dividends paid to, and the income tax withheld with
respect to, such holder. Such information may also be made available by the
IRS to the tax authorities of the country in which the Non-U.S. Holder
resides.
Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the Non-U.S.
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information to the
Company or its dividend disbursing agent.
A Non-U.S. Holder of Series A Preferred Stock who is eligible for a reduced
rate of U.S. withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts currently withheld by filing an appropriate claim
for refund with the IRS. Each Non-U.S. Holder should consult its own tax
advisor on the possibility of the Non-U.S. Holders' entitlement to a foreign
tax credit or other tax relief in the Non-U.S. Holder's own country in respect
of any U.S. tax paid by such Non-U.S. Holder on dividends paid with respect to
Series A Preferred Stock.
DISPOSITION OF SERIES A PREFERRED STOCK. In general, a Non-U.S. Holder will
not be subject to United States federal income tax on any gain realized upon
the disposition of such holder's Series A Preferred Stock unless: (i) the gain
is effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States or, alternatively, if an applicable income tax
treaty so provides, attributable to a permanent establishment maintained by
the Non-U.S. Holder in the United States; (ii) the Series A Preferred Stock is
disposed of by a Non-U.S. Holder who is an individual and either (a) has a
"tax home" (as defined for United States federal income tax purposes) in the
United States (unless such gain is attributable to a fixed place of business
in a foreign country maintained by such individual and has been subject to a
foreign tax of at least 10%) or (b) the gain is attributable to an office or
other fixed place of business maintained in the United States by the
individual, and such Non-U.S. Holder holds the Series A Preferred Stock as a
capital asset and is present in the United States for 183 days or more in the
taxable year of the disposition; (iii) the Non-U.S. Holder is subject to tax
pursuant to provisions of the Code regarding the taxation of U.S. expatriates;
or (iv) the Company is or has been a United States real property holding
corporation for United States federal income tax purposes at any time within
the shorter of the five-year period preceding such disposition or such Non-
U.S. Holder's holding period.
It is possible that the Company is or could become a United States real
property holding corporation for United States federal income tax purposes.
Under the Code, a corporation is a United States real property holding
corporation if the fair market value of its United States real property
interests equals or exceeds 50% of the fair market value of (i) all its
interests in real property, plus (ii) any other of its assets which are used
or held for use in a trade or business. Natural gas pipelines constitute real
property for purposes of this determination. If the Company is considered to
be a United States real property holding corporation at any time within the
shorter of the five-year period preceding such disposition or a Non-U.S.
Holder's holding period, such Non-U.S. Holder would generally be subject to
United States federal income tax on any gain realized upon the disposition of
such holder's Series A Preferred Stock, unless such Series A Preferred Stock
is "regularly traded on an established securities market" for tax purposes and
the Non-U.S. Holder held, directly or indirectly, at all times within the
shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period, 5% or less of the Series A Preferred Stock of the
Company.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
SERIES A PREFERRED STOCK. Under current United States federal income tax law,
information reporting and backup withholding imposed at a rate of 31% will
apply to the proceeds of a disposition of Series A Preferred Stock paid to or
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through a U.S. office of a broker unless the disposing holder certifies as to
its non-U.S. status or otherwise establishes an exemption. Generally,
dividends paid to Non-U.S. holders outside the United States that are subject
to the 30% or treaty reduced rate of withholding tax will be exempt from
backup withholding tax. In addition, as a general matter, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the United States through a non-U.S.
office of a non-U.S. broker. However, U.S. information reporting requirements
(but not backup withholding) will apply to a payment of disposition proceeds
outside the United States if (A) the payment is made through an office outside
the United States of a broker that is either (i) a United States person, (ii)
a foreign person which derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (iii)
a "controlled foreign corporation" for United States federal income tax
purposes and (B) the broker fails to maintain documentary evidence that the
holder is a Non-U.S. Holder and that certain conditions are met, or that the
holder otherwise is entitled to an exemption.
The Proposed Regulations would, if adopted, alter the foregoing rules in
certain significant respects. Among other things, the Proposed Regulations
would provide certain presumptions under which a Non-U.S. Holder would be
subject to backup withholding and information reporting unless the Company
receives certification from the holder of non-U.S. status.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund or
credit may be obtained, provided that the required information is furnished to
the IRS.
ESTATE TAX. Series A Preferred Stock owned or treated as owned by an
individual who is not a citizen or resident (as specifically defined for
United States federal estate tax purposes) of the United States at the time of
his or her death will be includable in the individual's gross estate for
United States federal estate tax purposes and may be subject to United States
federal estate tax, unless an applicable estate tax treaty provides otherwise.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, the underwriters named below (the
"Underwriters") have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of shares of Series A
Preferred Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.............................. 900,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated ............ 850,000
Dean Witter Reynolds Inc. ..................................... 850,000
Donaldson, Lufkin & Jenrette
Securities Corporation....................................... 850,000
Goldman, Sachs & Co............................................ 850,000
PaineWebber Incorporated....................................... 850,000
Smith Barney Inc. ............................................. 850,000
---------
Total........................................................ 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Series A
Preferred Stock are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are committed to
take and pay for all of the shares of Series A Preferred Stock if any are
taken.
The Underwriters initially propose to offer part of the shares of Series A
Preferred Stock directly to the public at the public offering price set forth
on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $.45 per share. Any Underwriter may
allow, and such dealers may reallow, a concession, not in excess of $.25 per
share, to certain other dealers. After the initial offering of the shares of
Series A Preferred Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters named on the cover page of this
Prospectus Supplement.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
The Underwriters and any dealers utilized in the sale of Series A Preferred
Stock will not confirm sales to accounts over which they exercise
discretionary authority.
The NYSE has approved for listing the Series A Preferred Stock upon notice
of issuance. Trading of the Series A Preferred Stock on the NYSE is expected
to commence within 30 days of the date of this Prospectus Supplement.
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<PAGE>
LEGAL MATTERS
Certain legal matters regarding the Series A Preferred Stock will be passed
upon for the Company by Theodore R. Tetzlaff, General Counsel of the Company
and a partner of Jenner & Block. Certain federal income tax matters are also
being passed upon for the Company 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 within 60 days of such date) and other Jenner &
Block attorneys participating in this matter beneficially own 458 shares of
Tenneco Common Stock. Certain legal matters relating to the Series A Preferred
Stock will be passed upon for the Underwriters 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 the
Company in certain matters.
S-43
