<PAGE>
FILED PURSUANT TO
RULE 424(b)(3) IN
CONNECTION WITH
REGISTRATION STATEMENT
NO. 333-14009
PROSPECTUS
Issued November 12, 1996
$330,000,000
Tenneco Inc.
JUNIOR PREFERRED STOCK
---------------
Tenneco Inc. ("Tenneco" or the "Company") may offer and issue from time to
time in one or more series its Junior Preferred Stock (the "Junior Preferred
Stock"), without par value, on terms to be determined at the time of sale. The
accompanying Prospectus Supplement will set forth the specific terms of the
Junior Preferred Stock, including, in the case of a particular series of
Junior Preferred Stock, the specific designation, the aggregate number of
shares offered, the dividend rate (or manner of calculation thereof), the
dividend periods (or manner of calculation thereof), the stated value of the
shares of such series, the voting rights of the shares of such series, whether
and on what terms the shares of such series may be redeemed at the option of
the Company, listing (if any) on a securities exchange and any other specific
terms of such series of Junior Preferred Stock being offered. The accompanying
Prospectus Supplement also will set forth the name of and compensation to each
dealer, underwriter or agent (if any) involved in the sale of the Junior
Preferred Stock being offered and the managing underwriters with respect to
any Junior Preferred Stock sold to or through underwriters. Any such
underwriters (and any representative thereof), dealers or agents will include
Morgan Stanley & Co. Incorporated.
This Prospectus may not be used to consummate sales of the Junior Preferred
Stock unless accompanied by a Prospectus Supplement.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
Junior Preferred Stock may be offered through dealers, underwriters or
agents designated from time to time, as set forth in the accompanying
Prospectus Supplement. Net proceeds to the Company will be the purchase price
in the case of sales to a dealer, the public offering price less discount in
the case of sales to an underwriter or the purchase price less commission in
the case of sales through an agent--in each case, less other expenses
attributable to issuance and distribution. See "Plan of Distribution" for
possible indemnification arrangements for dealers, underwriters and agents.
---------------
MORGAN STANLEY & CO.
Incorporated
November 12, 1996
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
JUNIOR PREFERRED STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street N.W., Washington, D.C. 20549 or at its Regional Offices located
at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661, and at Seven World Trade Center, 13th Floor, New York, New York 10048,
and copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such reports and other information can be reviewed through
the Commission's Electronic Data Gathering Analysis and Retrieval System,
which is publicly available through the Commission's web site
(http://www.sec.gov). The Company's Common Stock, par value $5.00 per share
(the "Tenneco Common Stock"), is presently listed on the New York Stock
Exchange, Inc. (the "NYSE"), the Chicago Stock Exchange and the Pacific Stock
Exchange, Inc. Reports, proxy statements and other information concerning the
Company can be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005; the Chicago Stock Exchange, 440 South LaSalle Street,
Chicago, Illinois 60605; and the Pacific Stock Exchange, Inc., 301 Pine
Street, San Francisco, California 94104 or 618 South Spring Street, Los
Angeles, California 90014. The Company's Common Stock is also presently listed
on the Toronto, London, Paris, Frankfurt, Dusseldorf, Basel, Geneva and Zurich
Stock Exchanges.
This Prospectus constitutes a part of a Registration Statement filed by the
Company with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus omits certain of the information contained
in the Registration Statement in accordance with the rules and regulations of
the Commission. Reference is hereby made to the Registration Statement,
including the related exhibits and schedules thereto for further information
with respect to the Company and the Junior Preferred Stock. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such
reference.
Additional information concerning the Transaction (as defined herein) is
contained in the Joint Proxy Statement/Prospectus of Tenneco and El Paso
Natural Gas Company ("El Paso"), dated November 4, 1996, included as part of
El Paso's Registration Statement on Form S-4, as amended (File No. 333-10911),
filed with the Commission in connection with the Transaction (the "Joint Proxy
Statement"). The Joint Proxy Statement is being distributed to Tenneco's
stockholders entitled to vote on the Transaction (which does not include
holders of Junior Preferred Stock) at a special meeting of Tenneco
stockholders (the "Tenneco Special Meeting"), presently scheduled to be held
on December 10, 1996.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-9864) are incorporated by reference into this Prospectus:
1. Tenneco's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended by Tenneco's Form 10-K/A dated August 27,
1996 (the "Tenneco Form 10-K");
2. Tenneco's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1996 and June 30, 1996;
3. The portions of Tenneco's definitive Proxy Statement for the Annual
Meeting of Stockholders held on May 14, 1996 that have been incorporated by
reference into the Tenneco Form 10-K; and
4. Tenneco's Current Reports on Form 8-K dated November 17, 1995,
February 2, 1996, March 21, 1996, June 6, 1996, June 19, 1996 and November
6, 1996.
2
<PAGE>
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to termination of the offering of the Junior Preferred Stock shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof
from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Copies of the above documents (excluding exhibits, unless such exhibits are
specifically incorporated by reference into such documents) may be obtained
upon request without charge upon written or oral request to Karl A. Stewart,
Vice President and Secretary, Tenneco Inc., 1275 King Street, Greenwich,
Connecticut 06831, telephone 203-863-1000.
----------------
IN CONNECTION WITH THE OFFERING OF CERTAIN SERIES OF THE JUNIOR PREFERRED
STOCK, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE
OR MAINTAIN THE MARKET PRICES OF SUCH JUNIOR PREFERRED STOCK, OTHER SECURITIES
OF THE COMPANY OR ANY SECURITIES THE PRICES OF WHICH MAY BE USED TO DETERMINE
PAYMENTS ON SUCH SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.............. 2
Incorporation of Certain Documents
By Reference...................... 2
Summary............................ 4
Use of Proceeds.................... 9
Risk Factors....................... 9
Unaudited Pro Forma Consolidated
Financial Statements.............. 19
Tenneco Inc. and Consolidated
Subsidiaries Selected Consolidated
Financial Information............. 27
Tenneco Energy Combined Selected
Financial Data.................... 29
The Energy Business................ 30
Management After the Transaction... 42
Management's Discussion and
Analysis of Financial Condition
and Results of Operations of the
Energy Business................... 43
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Transaction..................... 52
The NPS Issuance.................... 53
Debt and Cash Realignment........... 54
Corporate Restructuring
Transactions....................... 57
The Distributions................... 58
The Merger.......................... 64
Certain Federal Income Tax
Consequences of the Transaction.... 72
Description of Capital Stock........ 77
The Charter Amendment .............. 87
Plan of Distribution................ 89
Legal Matters....................... 90
Experts............................. 90
Index to Combined Financial
Statements and Schedules of the
Energy Business.................... F-1
Report of Independent Public
Accountants........................ F-2
</TABLE>
3
<PAGE>
SUMMARY
Tenneco may offer and issue from time to time, in one or more series, its
Junior Preferred Stock on the terms and subject to the conditions set forth
herein and in the applicable Prospectus Supplement. The following summary is
not intended to be complete and is qualified in its entirety by reference to
the more detailed information included or incorporated by reference in this
Prospectus. Prospective purchasers are urged to read carefully this Prospectus
(including the documents incorporated herein by reference).
TENNECO PRIOR TO THE TRANSACTION
Tenneco is a diversified industrial company conducting all of its operations
through its subsidiaries. The major businesses of Tenneco presently consist of
(i) 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 Tenneco, see "Incorporation
of Certain Documents By Reference."
In 1987, Tenneco was incorporated in Delaware and acquired all of the
outstanding shares of Tennessee Gas Pipeline Company (which at the time was
named Tenneco Inc.). Tenneco's principal executive offices are located at 1275
King Street, Greenwich, Connecticut 06831, and its telephone number at that
address is (203) 863-1000. Upon consummation of the Merger (as defined) and the
other components of the Transaction, if they occur, Tenneco's name will be
changed to El Paso Tennessee Pipeline Co. and its principal executive offices
and telephone number at such offices will be 1010 Milam Street, Houston, Texas
77002, and (713) 757-2131, respectively.
THE TRANSACTION
For the past several years, Tenneco has been undergoing a corporate
transformation from a highly diversified industrial corporation to a global
manufacturing company focused on its automotive and packaging businesses. On
June 19, 1996, Tenneco's Board of Directors approved a plan to reorganize
Tenneco (the "Transaction") pursuant to which (i) Tenneco will restructure (the
"Debt Realignment") the indebtedness for money borrowed of Tenneco and certain
of its consolidated subsidiaries (the "Tenneco Energy Consolidated Debt")
through a series of tender offers, exchange offers, payments, redemptions,
prepayments and defeasances involving Tenneco, 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"); (ii)
Tenneco and its subsidiaries will, pursuant to a Distribution Agreement (as
such may be amended, supplemented or modified from time to time, the
"Distribution Agreement") among Tenneco, New Tenneco and Newport News,
undertake various intercompany transfers and distributions (collectively, the
"Corporate Restructuring Transactions") designed to restructure, divide and
separate their various businesses and assets so that substantially all of the
assets, liabilities and operations of (A) their automotive parts, packaging and
administrative services businesses ("Industrial Business") are owned and
operated by New Tenneco, and (B) their shipbuilding business ("Shipbuilding
Business") are owned and operated by Newport News; (iii) Tenneco will then
distribute (the "Distributions") pro rata to holders of Tenneco Common Stock,
all of the outstanding common stock of New Tenneco (the "New Tenneco Common
Stock") and Newport News (the "Newport News Common Stock"); and (iv) thereafter
an indirect wholly owned subsidiary of El Paso will merge with and into Tenneco
(the "Merger"), which will then consist of the remaining assets, liabilities
and operations of Tenneco and its subsidiaries other than those relating to the
Industrial Business or the Shipbuilding Business, including the transmission
and marketing of natural gas (collectively, the "Energy Business" or "Tenneco
Energy") pursuant to 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 Tenneco. See "The Transaction."
4
<PAGE>
As part of the Debt Realignment, the Company intends to issue one or more
series of Junior Preferred Stock in an amount calculated to have, to the extent
possible, an aggregate value as of the effective time of the Merger (the
"Merger Effective Time") that is equal to approximately 25% (but in any event
more than 20%) of the total value of all shares of Tenneco capital stock then
outstanding (the "NPS Issuance"). The total proceeds to Tenneco from the NPS
Issuance (the "NPS Issuance Proceeds") are estimated to be approximately $275
million. The shares of Junior Preferred Stock issued pursuant to the NPS
Issuance will not be converted or otherwise exchanged in the Merger and will
remain outstanding immediately following consummation thereof (held by the
persons who were the holders of such shares immediately prior to the Merger),
and the holders thereof will receive no consideration in respect thereof in
connection with the Merger.
Also as part of the Transaction, Tenneco has proposed to amend its
Certificate of Incorporation, as amended (the "Tenneco Charter"), to eliminate
the specified rights, powers and preferences of its authorized class of Junior
Preferred Stock thereunder (including the Junior Preferred Stock offered
hereby). After giving effect to the Charter Amendment (as defined), shares of
any series of Junior Preferred Stock offered hereby will have only such rights,
powers and preferences as set forth in the applicable Certificate of
Designation for the series. See "Description of Capital Stock."
THE TENNECO SPECIAL MEETING
At the Tenneco Special Meeting, presently scheduled to be held on December
10, 1996, Tenneco'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 Junior
Preferred Stock offered hereby will not be entitled to any vote at the Tenneco
Special Meeting with respect to their shares of Junior Preferred Stock, since
no such shares will be issued and outstanding on November 6, 1996, the record
date for the Tenneco Special Meeting (the "Tenneco Record Date"). If, however,
any such shares of Junior Preferred Stock are issued prior to the Charter
Amendment becoming effective, the approval of (i) a majority of the voting
power of such shares, voting together as a class, will be required to effect
the Distributions, and (ii) 66 2/3% of the voting power of such shares, voting
together as a class, will be required to effect the Charter Amendment. In such
event, the Distributions and Charter Amendment would be submitted, as
applicable, to the underwriters, dealers or agents involved in the sale of such
shares of Junior Preferred Stock, as the initial record holders thereof, for
approval by written consent in lieu of a meeting (which consent would not be
revocable by either the purchasers of Junior Preferred Stock from such
underwriters, dealers or agents or by the successors of such purchasers).
TENNECO AFTER THE TRANSACTION
General
Immediately following the Transaction, the businesses and operations of
Tenneco will consist solely of the Energy Business. In addition, 100% of the
common equity of Tenneco and approximately 75% of the combined equity value of
Tenneco at that time will be held by El Paso, with the balance held by the
holders of one or more series of Junior Preferred Stock to be issued in the NPS
Issuance.
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 Exchange Act.
Accordingly, El Paso files reports, proxy and information statements and other
information with 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." 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."
5
<PAGE>
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 ("FERC"), such as gas marketing, intrastate pipeline
operations, international pipelines and power generation, domestic power
generation operations and oil and gas ventures. The Energy Business also
includes certain assets and liabilities of Tenneco and its subsidiaries that do
not relate to the Industrial Business or 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 Business" and "The Energy Business--Discontinued and Other
Operations."
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 ("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 the 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. See "The Energy Business."
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."
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 Tenneco 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 Tenneco. The cash proceeds
received by Tenneco from El Paso's purchase of the Subordinated Tenneco
Preferred Stock will be used by Tenneco to repay a portion of its post-
Transaction debt. In addition, as market conditions allow, El Paso may
refinance Tenneco's remaining post-Transaction debt through the sale of senior
debt of Tenneco and/or TGP. See "Risk Factors--Risks Related to the
Transaction--Consummation of Refinancing Transactions," "The Energy Business--
Operation of the Energy Business After the Merger" and "Unaudited Pro Forma
Consolidated Financial Statements."
6
<PAGE>
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."
RECENT DEVELOPMENTS
Tenneco
On October 22, 1996, Tenneco announced consolidated earnings for the nine
months ended September 30, 1996. The prior year's results have been restated to
reflect Tenneco's farm and construction equipment business as a discontinued
operation.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
(IN MILLIONS EXCEPT PER SHARE DATA)
Revenues.............................................. $8,320 $6,497
======== ========
Income before interest expense, income taxes and
minority interest.................................... $ 963 $ 855
Interest expense...................................... 268 222
Income tax expense.................................... 247 265
Minority interest..................................... 15 17
-------- --------
Income from continuing operations..................... 433 351
Income from discontinued operations, net of income
tax.................................................. 339 201
Extraordinary loss, net of income tax................. (1) --
-------- --------
Net income............................................ 771 552
Preferred stock dividends............................. 7 8
-------- --------
Net income to common stock............................ $ 764 $ 544
======== ========
Earnings (loss) per average common share:
Continuing operations............................... $ 2.50 $ 1.96
Discontinued operations............................. 1.99 1.15
Extraordinary loss.................................. (.01) --
-------- --------
$ 4.48 $ 3.11
======== ========
</TABLE>
Revenues for the nine months increased by 28 percent from $6.5 billion to
$8.3 billion. All divisions posted volume gains. Revenues at the automotive
business of Tenneco ("Tenneco Automotive") and the packaging business of
Tenneco (" Tenneco Packaging") increased by approximately $1.1 billion due to
recent acquisitions, while in Tenneco's energy segment, revenues increased 46
percent due primarily to higher gas prices in both regulated and non-regulated
operations. The revenue increase of $147 million in Tenneco's shipbuilding
segment was primarily attributable to increased carrier construction activity
and activity on the overhaul of the carrier Eisenhower, offset by decreased
submarine construction and conversion work.
Income before interest expense, income taxes and minority interest
("operating income") increased by 13 percent to $963 million for the nine month
period. Tenneco Automotive's operating income increased approximately $21
million as a result of recent acquisitions with the balance of the increase due
primarily to higher volumes in most of Tenneco Automotive's businesses. The
operating income increase of $53 million in Tenneco's energy segment resulted
from income from Australian assets which was up $10 million from 1995, an
increase of $14 million from oil and gas production operations, and a $29
million increase primarily due to benefits derived from the new rate case
implemented in July 1995 and increased volume activity. Tenneco Packaging's
operating income declined by $14 million. While recent acquisitions contributed
approximately $127 million in operating income and Tenneco Packaging realized a
$50
7
<PAGE>
million gain on the sale of two recycled paperboard mills to a joint venture,
lower price realizations in the paperboard business more than offset that
increase. Earnings in Tenneco's shipbuilding segment declined $8 million
primarily due to $57 million of estimated contract losses on commercial product
tankers as well as lower margins on conversion work, offset by productivity
improvements and increased activity on the overhaul of the carrier Eisenhower.
Also, results in 1995 included a $25 million reserve related to the liquidation
of surplus real estate holdings.
Interest expense increased due to higher borrowings resulting from
acquisitions completed late in 1995 and during 1996.
Income from discontinued operations primarily reflects Tenneco's sale of its
remaining shares of Case Corporation ("Case") and Tenneco's share of Case's
income in 1995. The current period's net income included an extraordinary loss
of $1 million due to the early retirement of debt.
Average common shares outstanding decreased by 4.4 million shares versus the
prior year due to shares repurchased. During the third quarter the stock
buyback program was completed.
The Energy Business
Earnings for the Energy Business, which includes certain of Tenneco's
corporate operations, for the nine months ended September 30, 1996 and 1995 are
summarized below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $1,997 $1,368
======== ========
Income before interest expense and income taxes....... $ 264 $ 182
Interest expense...................................... 101 86
Income tax expense.................................... 36 44
-------- --------
Income before extraordinary loss...................... 127 52
Extraordinary loss, net of income tax................. (1) --
-------- --------
Net income............................................ $ 126 $ 52
======== ========
</TABLE>
The revenue increase for the Energy Business in 1996 compared to 1995
resulted primarily from higher gas prices as well as benefits from a new rate
case implemented on July 1, 1995. Volumes also increased in both of the Energy
Business' regulated and non-regulated operations.
Operating income from regulated operations increased $43 million to $251
million due to benefits derived from the new rate case, increased volume
activity and a reduction in controllable costs. Year ago results also included
$24 million in operating income from Kern River Pipeline which was sold in late
1995. Non-regulated operations contributed $31 million in 1996, up $10 million
from 1995. The increase is primarily due to higher income of $10 million from
the acquisition of Australian assets and higher earnings of $14 million from
oil and gas production. Also, results in 1995 included a $25 million reserve
related to the liquidation of surplus real estate holdings.
8
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Junior Preferred Stock pursuant to the
NPS Issuance will, as more fully described elsewhere herein and in the
applicable Prospectus Supplement therefor, be used to repay a portion of the
Tenneco Energy Consolidated Debt pursuant to the Debt Realignment. See "The
NPS Issuance." The net proceeds from the sale of Junior Preferred Stock
offered hereby other than pursuant to the NPS Issuance will be used as set
forth in the Prospectus Supplement applicable to such sale.
RISK FACTORS
The following factors, in conjunction with the other information included in
this Prospectus and any Prospectus Supplement, should be considered by
prospective purchasers of the Junior Preferred Stock.
RISKS RELATED TO THE TRANSACTION
Risk of Non-Consummation of the Transaction
The Distributions, the Merger and the Charter Amendment will not be
consummated unless the Transaction as a whole is approved by the stockholders
of Tenneco at the Tenneco Special Meeting. If the Transaction is not approved
by Tenneco's stockholders, Tenneco may elect subsequently to proceed with one
or more of the transactions included in the Transaction which do not require
the same level of stockholder approval. In addition, the Distributions and the
Merger are subject to certain other conditions. See "The Distributions--
Conditions to Consummation of the Distributions" and "The Merger--Conditions
Precedent." There can be no assurance that the Transaction will be approved by
Tenneco's stockholders or that the Distributions and the Merger will occur.
There can be no assurance that the failure to consummate the Transaction as
currently contemplated will not have an adverse effect on the market prices of
any outstanding Junior Preferred Stock.
Possible Reduction in Rating if Stock Issuance Not Approved
The issuance of El Paso common stock, par value $3.00 per share (the "El
Paso Common Stock"), to Tenneco stockholders (other than holders of Junior
Preferred Stock in respect of shares of Junior Preferred Stock) in connection
with the Merger (the "Stock Issuance") is being submitted to El Paso's
stockholders at a special meeting presently scheduled to be held on December
9, 1996. If the Stock Issuance is not approved, the Merger is still expected
to be consummated except that Tenneco stockholders (other than holders of
Junior Preferred Stock in respect of shares of Junior Preferred Stock) will be
issued depositary receipts (the "El Paso Preferred Depositary Shares")
representing interests in a new series of adjustable rate El Paso preferred
stock in lieu of certain shares of El Paso Common Stock that would have been
issued had the Stock Issuance been approved. The issuance of such El Paso
Preferred Depositary Shares could result in a downgrading of the ratings of
the securities of El Paso and its subsidiaries, including any Junior Preferred
Stock then outstanding.
No Prior Market for Junior Preferred Stock
There has been no prior public market for the Junior Preferred Stock. No
assurance can be given that an active trading market will develop for the
Junior Preferred Stock or that, if such market develops, it will continue or
that the market price will equal or exceed the public offering price.
Uncertainty Regarding Consummation of Refinancing Transactions
El Paso has indicated that it currently intends to enter into various
transactions with respect to the Energy Business in order to reduce the amount
of Tenneco debt that would otherwise be outstanding after consummation of the
Transaction (the "Refinancing Transactions"). However, there can be no
assurance that any of the Refinancing Transactions will occur or as to the
price, terms or provisions of any of the Refinancing Transactions. The
Unaudited Pro Forma Consolidated Financial Statements included elsewhere
herein are based, in part, on the assumption that each of the Refinancing
Transactions will be consummated either prior to or shortly following the
consummation of the Transaction and will result in Tenneco's receipt of an
estimated
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amount of cash proceeds to be used by Tenneco to repay a portion of its post-
Transaction debt. If any one or more of the Refinancing Transactions is either
not consummated or, if consummated, does not generate at least the total amount
of cash proceeds currently estimated to be generated therefrom, the total
amount of Tenneco's post-Transaction debt will be higher than is currently
anticipated and the actual effect of the Refinancing Transactions on the
financial condition or results of operations of the Company might differ
materially from that reflected in the Unaudited Pro Forma Consolidated
Financial Statements. See "The Energy Business--Operation of the Energy
Business After the Merger" and "Unaudited Pro Forma Consolidated Financial
Statements."
Lack of Operating History as Separate Entity and Potential Disruptions in
Operations
Upon consummation of the Distributions, Tenneco (as an indirect subsidiary of
El Paso) will own and operate the Energy Business, New Tenneco will own and
operate the Industrial Business and Newport News will own and operate the
Shipbuilding Business. The Energy Business does not have any recent operating
history as a separate entity and has historically been able to rely on the
earnings, assets and cash flow of the Industrial Business and Shipbuilding
Business for capital requirements and certain administrative services.
Following the Distributions, the ability of Tenneco to satisfy its
obligations and maintain profitability will be dependent upon its future
performance, which will be subject to prevailing economic conditions and to
financial, business and other factors affecting the business operations of
Tenneco, including factors beyond the control of Tenneco.
Subsequent to the Distributions, Tenneco will be a smaller and less
diversified company than Tenneco was prior to the Distributions. In addition,
the division of Tenneco may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of Tenneco, and will also result in the duplication of
certain personnel, administrative and other expenses required for the operation
of independent companies. Pursuant to the Merger Agreement, the directors of El
Paso Subsidiary as of the Merger Effective Time will become the directors of
Tenneco upon consummation of the Merger. In addition, as of the Merger
Effective Time, it is expected that substantially all the executive officers of
Tenneco will resign and become the initial executive officers of New Tenneco
and the executive officers of El Paso Subsidiary as of the Merger Effective
Time will become the executive officers of Tenneco. There can be no assurance
that such transition in the management of Tenneco will not disrupt at least
temporarily the operations of the Energy Business.
Potential Adverse Impact of Leverage on Ability to Meet Interest and Dividend
Obligations
On June 30, 1996, on a pro forma basis after giving effect to the
Transaction, Tenneco would have had indebtedness for money borrowed of
approximately $2,544 million ($1,844 million after giving effect to the
Refinancing Transactions), and stockholders' equity of $1,147 million ($1,347
million after giving effect to the Refinancing Transactions). The degree to
which Tenneco is leveraged could have important consequences to holders of
Junior Preferred Stock, including the following: (i) Tenneco's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; (ii) a substantial
portion of Tenneco's cash flow from operations must be dedicated to the payment
of interest on its indebtedness, thereby reducing the funds available to
Tenneco for other purposes, including the payment of dividends on the Junior
Preferred Stock; (iii) the agreements governing Tenneco's indebtedness contain
certain restrictive financial and operating covenants; (iv) certain
indebtedness of Tenneco will be at variable rates of interest, which will cause
Tenneco to be vulnerable to increases in interest rates; (v) Tenneco may be
hindered in its ability to adjust rapidly to changing market conditions; and
(vi) Tenneco's substantial degree of leverage could make it more vulnerable in
the event of a downturn in general economic conditions or in its business. In
addition, although the Tenneco Credit Facility (as defined herein) is not
expected to contain any restrictions on the payment of dividends, subsequent
financing arrangements entered into by Tenneco could contain such restrictions.
See "The Energy Business--Tenneco Credit Facility."
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement and the various other agreements to be entered
into in connection with the Distributions (the "Ancillary Agreements") allocate
among Tenneco, New Tenneco and Newport News and
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their respective subsidiaries responsibility for various debts, liabilities
and obligations. See "The Distributions--Relationship Among Tenneco, New
Tenneco and Newport News After the Distributions." It is possible that a court
would disregard this contractual allocation of debts, liabilities and
obligations among the parties and require either Tenneco, New Tenneco, Newport
News or their respective subsidiaries to assume responsibility for obligations
allocated to another party, particularly if such other party were to refuse or
was unable to pay or perform any of its allocated obligations.
Potential Conflicts of Interest Due to Control by El Paso
After consummation of the Merger, Tenneco will be an indirect subsidiary of
El Paso, which will own 100% of the common equity of Tenneco and will thus
control the management of Tenneco's business and operations, subject to the
right of the holders of the Junior Preferred Stock issued pursuant to the NPS
Issuance to elect one-sixth of the members of Tenneco's Board of Directors. El
Paso's interests as a common equity holder of Tenneco may conflict with the
interests of holders of Junior Preferred Stock. See "The Energy Business--
Operation of the Energy Business after the Merger" and "Unaudited Pro Forma
Consolidated Financial Statements."
Pursuant to the Merger Agreement, the current directors of El Paso
Subsidiary as of the Merger Effective Time will become the directors of
Tenneco upon consummation of the Merger. In addition, as of the Merger
Effective Time it is expected that substantially all of the executive officers
of Tenneco will resign and become the initial executive officers of New
Tenneco and the executive officers of El Paso Subsidiary as of the Merger
Effective Time will become the executive officers of Tenneco. There can be no
assurance that such transition in the management of Tenneco will not disrupt,
at least temporarily, the operations of the Energy Business.
In addition, so long as dividends are not in arrears on the Junior Preferred
Stock and subject to applicable law, Tenneco will be able to pay dividends on,
repurchase or redeem the Tenneco Common Stock and Subordinated Junior
Preferred Stock held by El Paso at such times and in such amounts as Tenneco
may determine in its discretion.
Uncertainty Surrounding Integration of Operations
El Paso is currently engaged in a comprehensive review of the business and
operations of the Energy Business. Following the completion of such review and
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
to increase operating and administrative efficiency through consolidation and
reengineering of facilities, workforce reductions and coordination of
purchasing, sales and marketing activities. The future operations of the
Energy Business as a subsidiary of El Paso may vary significantly from its
historical operations as a division of Tenneco. While El Paso has indicated
that it believes that operational, financial and administrative synergies can
be achieved through the combination of El Paso and the Energy Business, the
amount and timing of realization of such synergies will depend upon the
ability of El Paso to integrate successfully the businesses and operations of
the companies, and the time period over which such integration is effected.
Potential Federal Income Tax Liabilities
On October 30, 1996, the Internal Revenue Service (the "IRS") issued a
ruling letter (the "IRS Ruling Letter") to the effect, among other things,
that for federal income tax purposes the Distributions will be tax-free to
Tenneco and the Tenneco stockholders (except to the extent cash is received in
lieu of fractional shares) under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code"), and that certain other transactions to be
effected as part of the Corporate Restructuring Transactions will be tax-free.
See "Certain Federal Income Tax Consequences of the Transaction." Such an IRS
ruling letter, while generally binding upon the IRS, is based upon certain
factual representations and assumptions. If such factual representations and
assumptions were incomplete or untrue in a material respect, or the facts upon
which the IRS Ruling Letter was based are materially different from the facts
at the time of the Distributions, the IRS could modify or revoke the IRS
Ruling Letter
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retroactively. Each of El Paso, Tenneco, New Tenneco and Newport News has
agreed to certain restrictions on its future actions to provide further
assurances that the Distributions will be tax-free for federal income tax
purposes.
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then, in general, a corporate level federal income
tax would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Section 355
of the Code) would be based upon the gain (computed as the difference between
the fair market value of the stock distributed and the distributing
corporation's adjusted basis in such stock) realized by each of the
distributing corporations upon its distribution of the stock of one or more
controlled corporations to its stockholders in the Transaction. The corporate
level federal income tax would be payable by Tenneco. Under certain limited
circumstances, however, New Tenneco and Newport News have agreed to indemnify
Tenneco for a defined portion of such tax liabilities. See "The
Distributions--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions--Terms of the Ancillary Agreements--Tax Sharing Agreement."
However, under IRS regulations, each member of the consolidated group is
severally liable for such tax liability.
The Administration's Budget Proposal issued March 19, 1996 (the "Budget
Proposal") contains a provision that would require a distributing corporation
in a transaction otherwise qualifying as a tax-free distribution under Section
355 of the Code to recognize gain on the distribution of the stock of one or
more controlled corporations under certain circumstances. If such legislation
were enacted, the Distributions, if ultimately subject to such legislation,
may result in significant taxable gain to Tenneco under Section 355(c) of the
Code. The Budget Proposal also contains a provision under which the receipt by
a stockholder of certain preferred stock in an otherwise tax-free
reorganization would result in gain recognition to the stockholder. If such
legislation were enacted, it is possible that the receipt of the El Paso
Preferred Depositary Shares would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code
resulting in the recognition of gain by Tenneco stockholders as described
below. Even if the issuance of El Paso Preferred Stock and El Paso Preferred
Depositary Shares did not prevent qualification of the Merger as a tax-free
reorganization, holders of Tenneco Stock receiving El Paso Preferred
Depositary Shares would recognize gain on the exchange. The failure of the
Merger to qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code or the recognition of gain by stockholders as a
result of the receipt of El Paso Preferred Depositary Shares, may also cause
the Distributions to not qualify as tax-free distributions under Section 355
of the Code. See "Certain Federal Income Tax Consequences--Possible Future
Legislation."
It is a condition to consummation of the Transaction that Tenneco receive a
Tax Opinion (as defined), to the effect, among other things (but only to the
extent not covered by the IRS Ruling Letter), that the Merger will constitute
a reorganization under Section 368(a)(1)(B) of the Code. Because the IRS
Ruling Letter issued on October 30, 1996 covered the matters to be addressed
in the Tax Opinion, delivery of the Tax Opinion is a condition to consummation
of the Merger which has been satisfied. The failure of the Merger to qualify
as a reorganization within the meaning of Section 368(a)(1)(B) of the Code may
cause the Distributions to not qualify as tax-free distributions under Section
355 of the Code, in which case Tenneco would be treated in the manner
described above. See "Certain Federal Income Tax Cosequences of the
Transaction--Tax Rulings and Opinions."
Potential Indemnification Liabilities
Pursuant to the Distribution Agreement and certain of the Ancillary
Agreements, each of Tenneco, New Tenneco and Newport News has agreed to
indemnify the other parties and certain related persons from and after
consummation of the Distributions with respect to certain debts, liabilities
and obligations, including liabilities relating to its violations or alleged
violations of securities or other laws arising out of certain documents
relating to, or filed by or on behalf of it in connection with the
Transaction. See "Corporate Restructuring Transactions" and "The
Distributions--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions."
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Potential Liabilities due to Fraudulent Transfer Provisions and Legal
Dividend Requirements
The Corporate Restructuring Transactions, the Debt Realignment and Tenneco's
distribution of the New Tenneco Common Stock and Newport News Common Stock to
holders of Tenneco Common Stock are subject to review under federal and state
fraudulent conveyance laws. Under these laws, if a court in a lawsuit by an
unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy of Tenneco, New Tenneco or Newport News as a debtor-in-possession)
were to determine that Tenneco, New Tenneco, Newport News or any of their
subsidiaries did not receive fair consideration or reasonably equivalent value
for incurring indebtedness or transferring assets in connection with the Debt
Realignment and Corporate Restructuring Transactions and, at the time of the
Distributions, or such incurrence of indebtedness or transfer of assets,
Tenneco, New Tenneco, Newport News or any of their subsidiaries (i) was
insolvent or would be rendered insolvent, (ii) had unreasonably small capital
with which to carry on its business and all businesses in which it intended to
engage, or (iii) intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature, then such court could
order the holders of the New Tenneco Common Stock and the Newport News Common
Stock to return the value of the stock and any dividends paid thereon, bar
future dividend and redemption payments on the stock, and invalidate, in whole
or in part, the Corporate Restructuring Transactions, the Debt Realignment or
the Distributions as fraudulent conveyances.
The measure of insolvency for purposes of the fraudulent conveyance laws
will vary depending on which jurisdiction's law is applied. Generally,
however, an entity would be considered insolvent if the present fair saleable
value of its assets is less than (i) the amount of its liabilities (including
contingent liabilities), or (ii) the amount that will be required to pay its
probable liabilities on its existing debts as they become absolute and mature.
No assurance can be given as to what standard a court would apply in
determining insolvency or that a court would not determine that Tenneco, New
Tenneco, Newport News or any of their subsidiaries was "insolvent" at the time
of or after giving effect to the Corporate Restructuring Transactions, the
Debt Realignment and the Distributions.
In addition, Tenneco's distribution of the New Tenneco Common Stock and
Newport News Common Stock, and the distributions pursuant to the Corporate
Restructuring Transactions and Debt Realignment, are subject to review under
state corporate distribution statutes. Under the Delaware General Corporation
Law ("DGCL"), a corporation may only pay dividends to its stockholders either
(i) out of its surplus (net assets minus capital), or (ii) if there is no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Although all distributions are
intended to be made entirely from surplus, no assurance can be given that a
court will not later determine that some or all of the distributions were
unlawful.
Prior to the Distributions, the Tenneco Board of Directors expects to obtain
an opinion from a third-party financial advisor regarding the solvency of
Tenneco, New Tenneco and Newport News and the permissibility of the
Distributions under Section 170 of the DGCL. Tenneco's Board of Directors and
management believe that, in accordance with this opinion, (i) Tenneco, New
Tenneco and Newport News each will be solvent (and thus not insolvent) at or
following the time of the Distributions (in accordance with the foregoing
definitions), will be able to repay its debts as they mature following the
Distributions and will have sufficient capital to carry on its businesses, and
(ii) the Distributions will be made entirely out of surplus, in accordance
with Section 170 of DGCL. There is no certainty, however, that a court would
find the opinion rendered by Tenneco's financial advisor to be binding on
creditors of Tenneco, New Tenneco or Newport News or that a court would reach
the same conclusions set forth in such opinion in determining whether Tenneco,
New Tenneco or Newport News was insolvent at the time of, or after giving
effect to, the Distributions, or whether lawful funds were available for the
distributions made in connection with the Transaction.
Purchasing Accounting Adjustments
Certain of the pro forma adjustments under the "Unaudited Pro Forma
Consolidated Financial Statements" section below reflect preliminary estimated
acquisition adjustments under the purchase method of accounting. A number of
these adjustments reflect El Paso's management's intended business strategies,
and others El Paso's
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allocations to property, plant and equipment of the excess of the total
purchase price of the Energy Business over the fair value of the net assets
acquired. This allocation 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. Should the independent valuation not
support such allocation, the excess of total purchase price over the fair
value of the net assets acquired will be reflected as goodwill. There can be
no assurance as to the effect on Tenneco or the Junior Preferred Stock or the
proposed Refinancing Transactions if the final purchase accounting adjustments
are materially different from those reflected in the "Unaudited Pro Forma
Combined Financial Statements" included elsewhere herein.
RISKS RELATED TO THE ENERGY BUSINESS
Risk Associated with Fluctuating Market Conditions
The revenues generated by Tenneco Energy are dependent upon the price of
natural gas, as well as the prices of alternative sources of energy.
Fluctuations in energy prices are caused by a number of factors, including
regional, domestic and international demand, availability and adequacy of
transportation facilities, energy legislation, federal or state taxes, if any,
on the sale or transportation of natural gas and natural gas liquids and the
abundance of supplies of alternative energy sources.
Regulated Industry; Potential Adverse Impact of Cost Recovery and Rate
Proceedings
Certain pipeline facilities, services and rates of each of Tenneco Energy,
TGP, Midwestern and East Tennessee are regulated by the FERC in accordance
with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. The
FERC regulates the interstate transportation and certain sales of natural gas,
including, among other things, rates and charges allowed natural gas
companies, construction, extensions and abandonments of facilities and
service, rates of depreciation and amortization and accounting systems. The
businesses of Tenneco Energy could be adversely affected by the outcome of
regulatory or rate proceedings relating to their pipeline operations.
TGP is currently a party to various regulatory and rate proceedings relating
to its pipeline operations. In particular, TGP is a party to regulatory
proceedings before the FERC relating to the recovery of GSR costs associated
with the restructuring by TGP of its transportation, storage and sales
services to convert TGP from primarily a merchant to primarily a transporter
of gas.
As of June 30, 1996, TGP has deferred GSR costs yet to be recovered from its
customers of approximately $551 million, net of $380 million previously
recovered from its customers, subject to refund. A phased proceeding is
underway at the FERC with respect to the recovery of TGP's GSR costs (the "GSR
Proceeding"). Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery; oral argument on
eligibility issues was originally set by a FERC Administrative Law Judge
("ALJ") for late October 1996. The Chief Judge of the FERC has since issued
orders: (i) cancelling the October oral argument; (ii) convening settlement
discussions which commenced on October 9, 1996; and (iii) postponing
scheduling an oral argument on eligibility issues. Phase II of the proceeding
on the prudency of the costs to be recovered and on certain contract specific
eligibility issues has not yet been scheduled, but will likely occur sometime
after the ALJ's decision in Phase I is issued. As described under "The Energy
Business--Operation of the Energy Business After the Merger--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), the El Paso Preliminary GSR Understanding
with certain of TGP's customers regarding the customers' challenges to TGP's
GSR and other transition costs.
With regard to TGP's GSR costs, TGP, along with three other pipelines,
executed four separate settlement agreements with Dakota Gasification Company
and the U.S. Department of Energy and initiated four separate proceedings at
the FERC seeking approval to implement the settlement agreements. The
settlement resolved litigation concerning purchases made by TGP of synthetic
gas produced from the Great Plains Coal
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Gasification plant ("Great Plains"). The FERC previously ruled that the costs
related to the Great Plains project are eligible for recovery through GSR and
other special recovery mechanisms and that the costs are eligible for recovery
for the duration of the term of the original gas purchase agreements. On
October 18, 1994, the FERC consolidated the four proceedings and set them for
hearing before an ALJ. The hearing, which concluded in July 1995, was limited
to the issue of whether the settlement agreements are prudent. The ALJ
concluded, in his initial decision issued in December 1995, that the
settlement was imprudent. TGP has filed exceptions to this initial decision.
Tenneco believes that this decision will not impair TGP's recovery of the
costs resulting from this contract. On July 17, 1996, the FERC ordered oral
arguments to be heard in September 1996. Oral arguments were held before the
full FERC on September 25, 1996. A decision by the FERC is expected by the end
of 1996.
Also related to TGP's GSR costs, in June 1996, TGP settled certain
litigation with ICA Energy, Inc. ("ICA") and TransTexas Gas Corporation
("TransTexas") by making a payment of $125 million. This payment is included
in the deferred GSR costs described above. In connection with that litigation,
certain royalty interest owners filed a claim in July 1996 against TGP in Webb
County, Texas, alleging that they are sellers entitled to tender gas to TGP
under the settled contract. This claim falls under the indemnification
provisions of TGP's settlement agreement with TransTexas and ICA, which
requires TransTexas and ICA to defend and indemnify TGP on this claim.
In a separate declaratory judgment action relating to another gas purchase
contract, the Texas Supreme Court affirmed a ruling of the Texas Court of
Appeals favorable to TGP on August 1, 1995. On April 18, 1996, the Texas
Supreme Court withdrew its initial opinion and issued an opinion reversing the
Court of Appeals opinion on the matter which was favorable to TGP. That Texas
Supreme Court ruling, however, explicitly preserves TGP's defenses based on
bad faith conduct of the producers. In June 1996, TGP filed a motion for
rehearing with the Texas Supreme Court. On August 16, 1996, the Texas Supreme
Court denied TGP's motion. Nothing in the Texas Supreme Court's decision
affects TGP's ability to seek recovery of its above-market costs of purchasing
gas under the contract from its customers as GSR costs in the phased
proceedings currently pending before the FERC. In addition, TGP has initiated
two lawsuits against the holders of this gas purchase contract seeking damages
related to their conduct in connection with that contract.
During the pendency of the declaratory judgment lawsuit, TGP has either
paid, or provided for the payment of, amounts it believes are appropriate to
cover the resolution of its contract reformation litigation, including
providing a bond in the approximate amount of $200 million. On September 30,
1996, TGP paid approximately $195 million to the producers and the producers
agreed to release all but approximately $2 million of the bonded amount (to
cover remaining disputed interest charges and attorneys' fees). On October 1,
1996, TGP filed to recover the pricing differential portion of this payment
from its customers. It is anticipated that TGP will also continue to pay the
above-market contract price for the gas tendered by the producers through the
expiration of the contract in 1999, and will seek recovery of those amounts
from its customers in the FERC proceedings as well. TGP plans to amend its
complaint in one of the separate lawsuits pending against the producers to
seek recovery of amounts TGP believes it is entitled to recover as a result of
the producers' bad faith conduct.
The FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although the FERC's Order 636 issued April 8,
1992 ("Order 636") transition cost recovery mechanism provides for complete
recovery by pipelines of eligible and prudently incurred transition costs,
certain customers have challenged the prudence and eligibility of TGP's GSR
costs and TGP has engaged in settlement discussions with its customers
concerning the amount of such costs in response to the FERC statements
acknowledging the desirability of such settlements.
As described under "The Energy Business--Operation of the Energy Business
After the Merger--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) the El Paso
Preliminary GSR Understanding.
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Given the uncertainty over the results of ongoing discussions between TGP
and its customers related to the recovery of GSR costs and the uncertainty
related to predicting the outcome of its gas purchase contract reformation
efforts and the associated litigation, Tenneco is unable to predict the timing
or the ultimate impact that the resolution of these issues will have on the
combined financial position or results of operations of the Energy Business.
On December 30, 1994, TGP filed for a general rate increase (the "1995 Rate
Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, TGP began
collecting rates, subject to refund, reflecting an $87 million increase in
TGP's annual revenue requirement. A Stipulation and Agreement was filed with
an ALJ in this proceeding on April 5, 1996. This Stipulation, which is
currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and TGP is reserving revenues it believes adequate to cover the
income impact of any refunds that may be required upon final settlement of
this proceeding. On October 30, 1996, the FERC approved the Stipulation for
the settlement of the 1995 Rate Case, with certain modifications and
clarifications which are not material and which should not cause changes which
are adverse to the Energy Business.
For a detailed description of rate and regulatory proceedings relating to
TGP, see "The Energy Business--Interstate Pipeline Operations--Federal
Regulation."
Highly Competitive Industry
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, interstate
pipelines face competitive pressure from other major pipeline systems,
enabling local distribution companies and end-users to choose a supplier or
switch suppliers based on the short term price of gas and the cost of
transportation. The Energy Business also faces varying degrees of competition
from alternative energy sources, such as electricity, hydroelectric power,
coal and oil.
Competition between pipelines is particularly intense in the Chicago,
Northern Indiana, Roanoke, Chattanooga and Atlanta markets served by the
Energy Business, and in TGP's supply area, Louisiana and Texas. In some
instances, the pipelines of the Energy Business have been required to discount
their transportation rates to maintain their market share. Additionally,
transportation contracts representing approximately 70% of firm interstate
transportation capacity of the Energy Business will be expiring over the next
five years, principally in the year 2000.
Future renegotiations of the existing transportation contracts of the Energy
Business and negotiations with potential new customers could be adversely
impacted by the foregoing or other competitive factors.
Potential Environmental Liabilities
The current and discontinued operations and activities of the Energy
Business are subject to various federal, state, local and foreign laws and
regulations covering the discharge of material into the environment or
otherwise relating to protection of the environment. In particular, the
pipeline facilities of the Energy Business and its use of such facilities for
treating, processing, recovering, or otherwise handling natural gas are
subject to stringent environmental regulation by governmental authorities in
the United States and in foreign jurisdictions. Such regulations have
increased the costs of planning, designing, operating and abandoning
facilities.
The Energy Business has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements and each anticipates that it will continue to do so in the
future. Although Tenneco believes that the operations and facilities of the
Energy Business are in general compliance with applicable environmental laws
and regulations, risks of substantial costs and liabilities are inherent in
natural gas operations, and there can be no assurance that significant costs
and liabilities will not be
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incurred in the future. Moreover, it is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement
policies thereunder, and claims for damages to property, employees, other
persons and the environment resulting from the current or discontinued
operations of the Energy Business, could result in substantial costs and
liabilities in the future. See "The Energy Business--Environmental Matters"
and Note 15 to the Combined Financial Statements of the Energy Business
included elsewhere in this Prospectus.
Adverse Effect of Changes in Economic, Industry and Weather Conditions
The business and operating results of the Energy Business can be adversely
affected by changes in the economic environment, including changes in interest
rates, market perceptions of the natural gas industry or Tenneco Energy,
security ratings or the weather.
Risks Related to Use of Derivative Financial Instruments
The Energy Business has utilized financial instruments for many years to
mitigate its exposure to various risks. The Energy Business is currently party
to financial instruments to hedge its exposure to changes in interest rates
and natural gas prices. Although losses could occur, the derivatives contracts
used by the Energy Business are generally designated as hedges whose fair
value correlates to price movements of natural gas. As a result, gains or
losses resulting from market changes should generally be offset by losses or
gains on the hedged transaction.
Operating Hazards and Uninsured Risks
The operations of the Energy Business are subject to the inherent risks
normally associated with the transportation, gathering and processing of
natural gas, including explosions, pollution and fires, each of which could
result in damage to or destruction of gas transportation, gathering and
processing facilities or damage to persons and property. While the Energy
Business maintains insurance against certain of such risks and in amounts that
it believes to be reasonable, the occurrence of a significant event that is
not fully insured against could have a material adverse effect on the combined
financial condition or operations of the Energy Business.
Acquisitions and Investments
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of acquisitions and
joint ventures within and outside the United States may be subject to the
effects of, and changes in, United States and foreign trade and monetary
policies, laws and regulations, political and economic developments, inflation
rates, and the effects of taxes and operating conditions. Activities in areas
outside the United States are also subject to the risks inherent in foreign
operations, including loss of revenue, property and equipment as a result of
hazards such as expropriation, nationalization, war, insurrection and other
political risks, and the effects of currency fluctuations and exchange
controls.
Liabilities of Tenneco Energy for Discontinued Businesses
Tenneco has certain actual and contingent liabilities which, under the terms
of the Distribution Agreement, will be liabilities of the Energy Business
after the Distributions. These liabilities relate to, among other things,
retiree medical and other retiree costs of former employees of Tenneco and its
subsidiaries, litigation, environmental matters, and liabilities (including
environmental liabilities) relating to discontinued businesses and operations
of Tenneco and its subsidiaries (other than the discontinued businesses of the
Industrial Business and the Shipbuilding Business). El Paso has estimated that
the aggregate amount of these liabilities is approximately $600 million.
However, the actual amount of such liabilities could vary materially from such
estimate. See "The Energy Business--Discontinued and Other Operations" and
"The Energy Business--Environmental Matters."
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains or incorporates by reference forward-looking
statements. The factors identified under "Risk Factors" are important factors
(but not necessarily all important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made
by, or on behalf of, Tenneco (or its subsidiaries).
17
<PAGE>
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, Tenneco
cautions that, while such assumptions or bases are believed to be reasonable
and are made in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or basis and actual
results can be material, depending upon the circumstances. Where, in any
forward-looking statement, Tenneco (or its subsidiaries), or its managements,
express an expectation or belief as to future results, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished. The words "believe," "expect" and
"anticipate" and similar expressions identify forward-looking statements. The
portions of this Prospectus which contain forward-looking statements generally
include cross-references to "Risk Factors." See also the information contained
under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Energy Business" and "The Energy
Business--Interstate Pipeline Operations," "--Gas Marketing, Intrastate
Pipelines and Related Matters," "--International, Power Generation and
Ventures," and "--Operation of the Energy Business After the Merger," and the
information incorporated by reference from Tenneco's Annual Report on Form 10-
K, as amended for the fiscal year ended December 31, 1995 and Tenneco's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, as
amended, and June 30, 1996 under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business and
Properties."
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
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 (as defined),
the Debt Realignment, the NPS Issuance 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--Consummation of Refinancing Transactions." The Unaudited Pro
Forma Consolidated Balance Sheet has been prepared as if such transactions
occurred on June 30, 1996; the Unaudited Pro Forma Consolidated Statements of
Income have been prepared as if such transactions occurred as of January 1,
1995. The accompanying Pro Forma Financial Statements are based, in part, upon
information and assumptions developed by El Paso management, principally
relating to the "Merger and 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 New Tenneco Common Stock
and Newport News Common Stock to the holders of Tenneco Common Stock in a spin
off transaction. Consequently, the Distributions will be recorded based on
historical cost.
As part of the Merger, El Paso will issue approximately $750 million
(subject to the effects of a collar on the average market price of El Paso
Common Stock Price) of El Paso equity consideration to holders of Tenneco
Stock (as defined elsewhere herein). The composition of the El Paso equity
consideration is dependent on whether holders of El Paso Common Stock approve
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 December 9, 1996 (which is expected to
occur 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 values and changes in operating
results between the dates of the pro forma financial information and the date
on which the Merger takes place.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of 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 herein 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.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
PRE-MERGER PRO FORMA PRO FORMA MERGER
----------------------------------- -----------------------
RESTRUCTURING,
REALIGNMENT, THE
THE NPS ISSUANCE COMPANY MERGER AND THE
COMPANY AND AS REFINANCING COMPANY
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
---------- -------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash
investments........... $ 229 $ (166)(c) $ 25 $ $ 25
(38)(d)
Receivables............ 1,898 (1,138)(c) 760 760
Inventories............ 1,175 (1,151)(c) 24 24
Other current assets... 349 (255)(c) 94 94
------- ------- ------- ------ ------
Total current assets... 3,651 (2,748) 903 903
------- ------- ------- ------ ------
Net property, plant and
equipment.............. 6,496 (3,611)(c) 2,885 2,089 (g) 4,394
(580)(j)
Goodwill and
intangibles............ 1,001 (964)(c) 37 37
Other assets and
deferred charges....... 2,114 (1,137)(c) 977 (590)(f) 467
80 (j)
------- ------- ------- ------ ------
Total assets........... $13,262 $(8,460) $ 4,802 $ 999 $5,801
======= ======= ======= ====== ======
LIABILITIES AND
SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt........ $ 1,146 $(1,146)(b) $ -- $ 330 (k) $ 330
Payables............... 1,170 (751)(c) 222 20 (e) 242
(197)(b)
Other current
liabilities........... 1,347 (660)(c) 605 120 (f) 725
(82)(b)
------- ------- ------- ------ ------
Total current
liabilities........... 3,663 (2,836) 827 470 1,297
------- ------- ------- ------ ------
Long-term debt.......... 3,374 (265)(a) 2,544 (500)(j) 1,514
(565)(b) (200)(i)
(330)(k)
Other liabilities and
deferred credits....... 1,220 (626)(c) 594 151 (f) 745
Deferred income taxes... 1,004 (603)(c) 401 479 (h) 880
------- ------- ------- ------ ------
9,261 (4,895) 4,366 70 4,436
------- ------- ------- ------ ------
Minority interest....... 320 (302)(c) 18 18
------- ------- ------- ------ ------
Preferred stock with
mandatory
redemption provisions.. 112 112 (112)(l) --
------- ------- ------- ------ ------
Shareowners' equity:
Junior Preferred Stock. -- 265 (a) 265 265
Subordinated Tenneco
Preferred Stock....... -- -- 200 (i) 200
Common stock and paid-
in capital............ 4,504 4,504 (20)(e) 882
(861)(f)
2,089
(g)
(479)(h)
112 (l)
(4,463)(m)
Cumulative translation
adjustments........... 4 (4)(c) -- --
Retained earnings
(accumulated deficit). 26 1,990 (b) (3,498) 3,498 (m) --
(5,476)(c)
(38)(d)
------- ------- ------- ------ ------
4,534 (3,263) 1,271 76 1,347
Less-Shares held as
treasury stock, at
cost.................. 965 965 (965)(m) --
------- ------- ------- ------ ------
3,569 (3,263) 306 1,041 1,347
------- ------- ------- ------ ------
Total liabilities and
shareowners' equity... $13,262 $(8,460) $ 4,802 $ 999 $5,801
======= ======= ======= ====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
RESTRUCTURING, REALIGNMENT, NPS ISSUANCE AND DISTRIBUTIONS:
(a) To reflect the NPS Issuance of $275 million of Junior Preferred Stock,
with an assumed 8 1/2% dividend yield, for net NPS Issuance Proceeds of
$265 million, and the use of the net NPS Issuance Proceeds for the
repayment of Tenneco Energy Consolidated Debt. See "The NPS Issuance."
(b) To reflect the restructuring and realignment of the Tenneco Energy
Consolidated Debt pursuant to the Debt Realignment, the Distributions and
the applicable provisions of the Merger Agreement, and the assumed payment
of accrued interest on the Tenneco Energy Consolidated Debt defeased,
redeemed, tendered or exchanged as part of the Debt Realignment. The
amount of "The Company as Adjusted" debt immediately prior to the Merger
will (assuming 100% acceptance of the Debt Tender Offers, as defined, and
Debt Exchange Offers, as defined) consist primarily of borrowings under
the Tenneco Credit Facility (as defined) and is calculated from the
provisions of the Merger Agreement as follows (in millions):
<TABLE>
<S> <C>
Base Debt Amount per the Merger Agreement......................... $2,650
Less: NPS Issuance Proceeds--see footnote (a)..................... (275)
------
2,375
Plus: Cash settlement payments.................................... 439
Less: Estimated collections subject to refund..................... (270)
------
Assumed "The Company as Adjusted" debt............................ $2,544
======
</TABLE>
At this time, the Company cannot determine the ultimate amount of
securities which will be purchased in the Debt Tender Offers or the
ultimate amount of the public debt of the Company that will be exchanged
for New Tenneco Public Debt pursuant to the Debt Exchange Offers, and such
amounts could vary significantly. However, for purposes of these pro forma
adjustments, it is assumed that 100% of the public debt of Tenneco and its
subsidiaries subject to the Debt Tender Offers is purchased pursuant to the
Debt Tender Offers and 100% of the public debt of Tenneco subject to the
Debt Exchange Offers is exchanged for New Tenneco Public Debt pursuant to
the Debt Exchange Offers. See "Debt and Cash Realignment."
(c) To reflect the distribution of the New Tenneco Common Stock and Newport
News Common Stock pursuant to the Distributions. See "The Distributions."
(d) To reflect the distribution of cash of the Company (subsequent to the
Distributions) in excess of $25 million pursuant to the Cash Realignment
provisions of the Merger Agreement. The distribution of cash from the
Company 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 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>
21
<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 $112 million book value of the Company $4.50
and $7.40 Preferred Stock.......................................... (112)
Less: "The Company as Adjusted" net common book value subsequent to
the Debt Realignment and Distributions............................. (41)
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................................................... 479
------
$2,089
======
</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 issuance of 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 $112 million book value of $7.40 Cumulative Preferred Stock (as
defined) and $4.50 Cumulative Preferred Stock (as defined) of the Company
(see footnote (l) below) with the remainder exchanged for the 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............................ $2,089
Reduce other assets and deferred charges............................. (590)
Increase other current liabilities................................... (140)
Increase other liabilities and deferred credits...................... (151)
Increase deferred income tax liability............................... (479)
Eliminate Tenneco shareowners' equity:
Tenneco preferred stock............................................ 112
"The Company as Adjusted" common equity............................ 41
------
Total El Paso equity consideration................................... $ 882
======
</TABLE>
(h) To reflect the increase in deferred income taxes of $479 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......................................... $ 815
Other assets.......................................................... (230)
Other liabilities..................................................... (106)
-----
$ 479
=====
</TABLE>
(i) To reflect the contribution by El Paso to Tenneco of proceeds from an
assumed issuance of $200 million of El Paso Common Stock in exchange for
Subordinated 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.
22
<PAGE>
(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 Company's $7.40 Cumulative Preferred
Stock and the Company's $4.50 Cumulative Preferred Stock into El Paso
Common Stock.
(m) To reflect the retirement and cancellation of the Tenneco Common Stock
held as treasury stock and the capitalization of the pre-Merger "The
Company as Adjusted" accumulated deficit.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRE-MERGER PRO FORMA PRO FORMA MERGER
----------------------------------- ----------------------
RESTRUCTURING,
REALIGNMENT, THE
THE NPS ISSUANCE COMPANY MERGER AND THE
COMPANY AND AS REFINANCING COMPANY
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS PRO FORMA
---------- -------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues............................... $5,517 $(4,147)(c) $1,370 $(46)(g) $1,324
Operating costs and expenses........... 5,004 (3,763)(c) 1,241 26 (d) 1,247
4 (e)
(24)(g)
------ ------- ------ ---- ------
Operating income...................... 513 (384) 129 (52) 77
Other (income) expense, net............ (168) 104 (c) (64) (64)
Interest expense....................... 179 (74)(b) 105 (28)(f) 73
(1)(g)
(3)(h)
------ ------- ------ ---- ------
Income before income taxes and
minority interest.................... 502 (414) 88 (20) 68
Provision for income taxes *........... 175 29 (b) 8 (5)(g) 2
(196)(c) (1)(i)
Minority interest...................... 10 (10)(c) -- --
------ ------- ------ ---- ------
Net income from continuing operations. 317 (237) 80 (14) 66
Preferred stock dividends.............. 5 12 (a) 17 (5)(j) 21
9 (k)
------ ------- ------ ---- ------
Earnings from continuing operations
available to common stock............ $ 312 $ (249) $ 63 $(18) $ 45
====== ======= ====== ==== ======
</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 $25 million and the pro forma amount
for earnings from continuing operations available to common stock would have
been $20 million.
See accompanying Notes to Unaudited Pro Forma Consolidated Income Statements.
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PRE-MERGER PRO FORMA PRO FORMA MERGER
----------------------------------- --------------------
RESTRUCTURING,
REALIGNMENT, THE THE
THE NPS ISSUANCE COMPANY MERGER AND COMPANY
COMPANY AND AS REFINANCING PRO
HISTORICAL DISTRIBUTIONS ADJUSTED TRANSACTIONS 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 52 (d) 1,769
8 (e)
(41)(g)
------ ------- ------ ---- ------
Operating income....... 871 (700) 171 (66) 105
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 (1) 59
Provision for income 279 35 (b) (44) (1)(g) (46)
taxes (benefit)*....... (358)(c) (1)(i)
Minority interest....... 22 (22)(c) -- --
------ ------- ------ ---- ------
Net income from
continuing operations. 489 (385) 104 1 105
Preferred stock 12 24 (a) 36 (12)(j) 42
dividends.............. 18 (k)
------ ------- ------ ---- ------
Earnings from
continuing operations
available to common
stock................. $ 477 $ (409) $ 68 $ (5) $ 63
====== ======= ====== ==== ======
</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 $69 million and the pro forma
amount for earnings from continuing operations available to common stock
would have been $(6) million.
See accompanying Notes to Unaudited Pro Forma Consolidated Income Statements.
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
RESTRUCTURING, REALIGNMENT, NPS ISSUANCE AND DISTRIBUTIONS:
(a) To reflect dividends in the Consolidated Pro Forma Income Statement on the
Junior Preferred Stock to be issued in the NPS Issuance at an assumed
dividend yield of 8 1/2%. See "The NPS Issuance."
(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 Company as Adjusted" debt consists
primarily of borrowings under the Tenneco Credit Facility (assuming 100%
acceptance of the Debt Tender Offers and Debt Exchange Offers) at an
estimated annual interest rate of 8%. See "The Debt and Cash Realignment,"
"The Distributions" and "The Merger."
(c) To reflect the effects on the Company's results of operations from the
Distributions. See "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's employees.
(f) To reflect an interest expense reduction relating to debt repaid with
proceeds from the $200 million of 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 million and $2 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively.
(i) To reflect the income tax expense (benefit) effects of pro forma
adjustments at an assumed effective tax rate of 39%.
(j) To reflect the elimination of dividends on the Company's $7.40 Cumulative
Preferred Stock and $4.50 Cumulative Preferred Stock which will be
converted into El Paso Common Stock as part of the Merger. See "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%.
26
<PAGE>
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated selected financial data as of and for each of the
fiscal years in the five-year period ended December 31, 1995 were derived from
audited financial statements of Tenneco and its consolidated subsidiaries. The
financial statements as of and for each of the fiscal years in the five-year
period ended December 31, 1995 have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated selected financial data as of
and for each of the six-month periods ended June 30, 1996 and 1995 were
derived from the unaudited condensed financial statements of Tenneco and its
consolidated subsidiaries. In the opinion of Tenneco's management, the
selected financial data of Tenneco as of and for the six months ended June 30,
1996 and 1995 include all adjusting entries (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
herein. The results of operations for the six-months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year. This information should be read in conjunction with Tenneco's
financial statements, and the notes thereto, contained in the Tenneco Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995 and the
Tenneco Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1996, which are incorporated by reference herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------------
(MILLIONS EXCEPT PER 1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
SHARE AMOUNTS) ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA(B):
Net sales and operating
revenues from
continuing
operations--
Automotive............ $ 1,463 $ 1,263 $ 2,479 $ 1,989 $ 1,785 $ 1,763 $ 1,668
Energy................ 1,366 937 1,916 2,378 2,862 2,183 2,183
Packaging............. 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Shipbuilding.......... 915 845 1,756 1,753 1,861 2,265 2,216
Other................. (2) (2) (4) (6) (5) 31 26
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ $ 5,517 $ 4,361 $ 8,899 $ 8,298 $ 8,545 $ 8,320 $ 8,027
=========== =========== =========== =========== =========== =========== ===========
Income from continuing
operations before
interest expense,
income taxes and
minority interest--
Automotive............ $ 163 $ 134 $ 240 $ 223 $ 222 $ 237 $ 188
Energy................ 185 148 333 415 411 360 561 (c)
Packaging............. 256 244 430 209 139 221 139 (c)
Shipbuilding.......... 81 90 160 200 225 249 225
Other................. (4) (11) (67) (25) 18 (32) (98)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ 681 605 1,096 1,022 1,015 1,035 1,015
Interest expense (net
of interest
capitalized).......... 179 152 306 263 254 221 237
Income tax expense..... 175 185 279 249 298 282 258
Minority interest...... 10 11 22 7 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations............ 317 257 489 503 463 532 520
Income (loss) from
discontinued
operations, net of
income tax(d)......... 339 81 246 (51)(e) (12)(e) (1,144)(e) (1,252)(e)
Extraordinary loss, net
of income tax......... -- -- -- (5) (25) (12) --
Cumulative effect of
changes in accounting
principles, net of -- -- -- (39)(f) -- (699)(f) --
income tax............ ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... 656 338 735 408 426 (1,323) (732)
Preferred stock 5 6 12 12 14 16 16
dividends............. ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) to $ 651 $ 332 $ 723 $ 396 $ 412 $ (1,339) $ (748)
common stock.......... =========== =========== =========== =========== =========== =========== ===========
Average number of
shares of common stock
outstanding........... 170,351,740 175,829,883 173,995,941 180,084,909 168,772,852 144,110,151 122,777,910
Earnings (loss) per
average share of
common stock--
Continuing
operations........... $ 1.83 $ 1.43 $ 2.75 $ 2.72 $ 2.66 $ 3.58 $ 4.10
Discontinued
operations........... 1.99 .46 1.41 (.27) (.07) (7.93) (10.19)
Extraordinary loss.... -- -- -- (.03) (.15) (.08) --
Cumulative effect of
changes in
accounting -- -- -- (.22) -- (4.86) --
principles........... ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)... $ 3.82 $ 1.89 $ 4.16 $ 2.20 (g) $ 2.44 (g) $ (9.29)(g) $ (6.09)
=========== =========== =========== =========== =========== =========== ===========
Cash dividends paid per
common share.......... $ .90 $ .80 $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 2.80
</TABLE>
(Table continued on next page)
27
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA(B):
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets........... $ 13,262 $ 12,090 $ 13,451 $ 12,251 $ 11,105 $ 11,320 $ 12,985
Short-term debt........ 1,146 635 908 536 431 669 1,132
Long-term debt......... 3,374 3,309 3,751 3,568 3,620 4,718 4,593
Minority interest...... 320 315 320 320 150 160 171
Preferred stock with
mandatory redemption
provisions............ 112 129 130 147 163 191 194
Shareowners' equity.... 3,569 2,911 3,148 2,900 2,601 1,330 2,774
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (215) $ 255 $ 1,443 $ 450 $ 1,615 $ 929 $ 950
Net cash provided
(used) by investing
activities............ 505 183 (1,146) (117) (338) 105 (660)
Net cash provided
(used) by financing
activities............ (413) (741) (356) (151) (1,166) (1,136) (205)
Capital expenditures
for continuing
operations............ 464 322 976 653 424 447 564
OTHER DATA:
EBITDA(h).............. $ 956 $ 804 $ 1,523 $ 1,321 $ 1,385 $ 1,391 $ 1,350
Ratio of earnings to
fixed charges(i)...... 2.8 2.6 2.4 2.7 2.9 3.4 3.0
Ratio of earnings to
fixed charges and
preferred stock
dividends(i).......... 2.7 2.5 2.4 2.3 2.3 2.7 2.9
</TABLE>
- -------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993, and for the six months
ended June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for Tenneco Inc. and
Consolidated Subsidiaries included in the Tenneco Annual Report on Form
10-K, as amended, for the year ended December 31, 1995 and the Tenneco
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which
are incorporated by reference herein.
(b) During 1995 and 1994, Tenneco completed several acquisitions at its
various operating segments, the most significant of which was Tenneco
Packaging's acquisition of the Mobil Plastics Division of Mobil Oil
Corporation for $1.3 billion in late 1995. See Note 2 to the Financial
Statements of Tenneco Inc. and Consolidated Subsidiaries included in the
Tenneco Annual Report on Form 10-K, as amended, for the year ended
December 31, 1995, which is incorporated by reference herein, for further
information on the Tenneco acquisitions.
(c) For Tenneco Energy, includes a gain of $265 million related to the sale of
its natural gas liquids business, including its interest in an MTBE plant
then under construction. Also, Tenneco Packaging recorded a gain of $42
million related to the sale of three short-line railroads.
(d) Discontinued operations reflected in the above periods include Tenneco's
farm and construction equipment operations, which were discontinued in
March 1996, its chemicals and brakes operations, which were discontinued
during 1994, and its minerals and pulp chemicals operations, which were
discontinued in 1992. In addition, certain additional costs related to
Tenneco's discontinued oil and gas operations were reflected in 1991
results.
(e) Includes a pre-tax restructuring charge of $920 million recorded in 1992
relating to the discontinued farm and construction equipment business.
This pre-tax restructuring charge was reduced by $20 million in 1993 and
$16 million in 1994. Additionally, a $473 million pre-tax restructuring
charge was recorded in 1991, of which $461 million related to the
discontinued farm and construction equipment business.
(f) In 1994, Tenneco adopted Statement of Financial Accounting Standards
("FAS") No. 112, "Employers' Accounting for Postemployment Benefits". In
1992, Tenneco adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(g) For purposes of computing earnings per share, Series A preferred stock was
included in average common shares outstanding until its conversion into
common stock in December 1994; therefore, the preferred dividends paid
were not deducted from net income (loss) to determine net income (loss) to
common stock. The inclusion of Series A preferred stock in the computation
of earnings per share was antidilutive for the years and certain quarters
in 1994, 1993 and 1992. Other convertible securities and common stock
equivalents outstanding during each of the five years ended December 31,
1995, 1994, 1993, 1992 and 1991 were not materially dilutive.
(h) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon generally accepted accounting principles;
however, the amounts included in the EBITDA calculation are derived from
amounts included in the combined historical Statements of Income. In
addition, EBITDA should not be considered as an alternative to net income
or operating income, as an indicator of the operating performance of
Tenneco or as an alternative to operating cash flows as a measure of
liquidity.
(i) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges
(excluding capitalized interest). Fixed charges consist of interest
expense, preferred stock dividend requirements of subsidiaries, the
portion of rental expense considered representative of the interest factor
and capitalized interest. For purposes of computing these ratios,
preferred stock dividends have been included in the calculations on a pre-
tax basis.
28
<PAGE>
TENNECO ENERGY COMBINED SELECTED FINANCIAL DATA
The combined selected financial data as of December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993 were derived from the
audited Combined Financial Statements of Tenneco Energy. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of Tenneco Energy. In the opinion of
Tenneco Energy's management, the combined selected financial data of Tenneco
Energy as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991, and as of and for the six months ended June 30, 1996 and
1995 include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results of operations for the six months ended June 30, 1996 should not be
regarded as indicative of the results that may be expected for the full year.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Energy
Business and Tenneco Energy's Combined Financial Statements, and notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 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.............. $1,370 $ 939 $1,921 $2,381 $2,866 $2,221 $2,216
====== ====== ====== ====== ====== ====== ======
Income before interest
expense and income
taxes ................ $ 188 $ 140 $ 268 $ 367 $ 419 $ 337 $ 475(c)
Interest expense (net
of interest
capitalized).......... 63 61 122 142 127 94 121
Income tax expense
(benefit)............. 22 32 (11) 72 104 63 103
------ ------ ------ ------ ------ ------ ------
Income before
extraordinary loss and
cumulative effect of
changes in accounting
principles, net of
income tax............ 103 47 157 153 188 180 251
Extraordinary loss, net
of income tax......... -- -- -- -- (25)(d) (9)(e) --
Cumulative effect of
changes in accounting
principles, net of in-
come tax.............. -- -- -- -- -- (332)(f) --
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 103 $ 47 $ 157 $ 153 $ 163 $ (161) $ 251
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $5,539 $5,799 $5,792 $5,730 $4,290 $4,054 $4,464
Short-term debt(g)..... 521 376 456 399 304 392 338
Long-term debt(g)...... 1,519 1,737 1,811 2,242 2,019 2,282 2,674
Combined equity........ 1,054 899 687 382 (652) (1,503) (1,120)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (185) $ 174 $ 765 $ (278) $ 209 $ 729 $ 84
Net cash provided
(used) by investing
activities............ 117 (266) (537) (229) (35) (383) 61
Net cash provided
(used) by financing
activities............ (81) 63 (27) 426 (49) (393) (190)
Capital expenditures... 164 113 337 345 171 253 298
</TABLE>
- -------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Energy Business
included elsewhere in this 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 elsewhere in this 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 elsewhere in this 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 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 elsewhere
in this Prospectus.
29
<PAGE>
THE ENERGY BUSINESS
GENERAL
The Energy Business consists principally of the interstate transportation of
natural gas, as well as certain other related business operations not
generally subject to regulation by FERC, such as gas marketing, intrastate
pipeline operations, international pipelines and power generation, domestic
power generation operations and oil and gas ventures. The Energy Business also
includes the assets and the liabilities of Tenneco and its subsidiaries that
do not relate to the Industrial Business or the Shipbuilding Business,
including those business operations that have been discontinued or sold. The
information under the heading "The Energy Business" includes certain forward-
looking statements, which should be read in conjunction with the factors
identified under "Risk Factors--Risks Related to the Energy Business--
Liabilities of Tenneco Energy for Discontinued Businesses" and "--Discontinued
and Other Operations."
INTERSTATE PIPELINE OPERATIONS
The interstate pipeline operations of the Energy Business include the
pipeline systems of TGP, and its wholly owned subsidiaries Midwestern and East
Tennessee, as well as certain joint ventures, which are primarily engaged in
the transportation and storage of natural gas for producers, marketers, end-
users and other gas transmission and distribution companies. TGP's multiple-
line system begins in the gas-producing regions of Texas and Louisiana,
including the continental shelf of the Gulf of Mexico, and extends into the
northeastern section of the United States, including the New York City and
Boston metropolitan areas. Midwestern's pipeline system extends from Portland,
Tennessee, to Chicago, and principally serves the Chicago metropolitan area.
East Tennessee's pipeline system serves the states of Tennessee, Virginia and
Georgia. Revenues from the interstate gas sales and transportation operations
of the Energy Business accounted for approximately 45%, 39% and 40% of total
revenues of the Energy Business for 1993, 1994 and 1995, respectively.
The interstate gas transmission systems of the Energy Business include
approximately 16,300 miles of pipeline, gathering lines and sales laterals
(with 14,800 miles operated by 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 has interests in or contractual rights to
six underground and above-ground gas storage facilities to permit increased
deliveries of gas during peak demand periods. The total design delivery
capacity of the Energy Business' interstate systems as of December 31, 1995
was approximately 4,800 million cubic feet ("MMCF") of gas per day, and
approximately 5,600 MMCF on peak demand days, which includes gas withdrawn
from storage.
Gas Sales and Transportation
The following table sets forth the volumes of gas, stated in billions of
British thermal units ("BBtu"), sold and transported by the interstate
pipeline systems of the Energy Business for the periods shown.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales*...................................... 95,397 131,097 213,210
Transportation*............................. 2,139,169 2,183,944 2,118,936
--------- --------- ---------
Total..................................... 2,234,566 2,315,041 2,332,146
========= ========= =========
</TABLE>
- --------
* Sales and transportation volumes include all natural gas sold or transported
by the Energy Business' interstate pipeline systems (including the
proportionate share of transportation volumes of the joint ventures in which
the Energy Business had interests) and have not been adjusted to reflect the
sale of (i) a 50% interest in Kern River in December 1995, (ii) a 13.2%
general partnership interest in Iroquois Gas Transmission System, L.P.
("Iroquois") in June 1996, and (iii) a 100% interest in Viking Gas
Transmission Company ("Viking") in 1993. Kern River owns a 904-mile pipeline
system extending from Wyoming to California, Iroquois owns a 370-mile
pipeline extending from the Canadian border at Waddington, New York to Long
Island, New York and Viking owns a 549-mile pipeline extending from the
Canadian border near Emerson, Manitoba to Marshfield, Wisconsin. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Energy Business." Of the total transportation volumes
shown, Kern River transported
30
<PAGE>
approximately 135,827 BBtu, 129,964 BBtu and 127,624 BBtu during 1995, 1994
and 1993, respectively, Iroquois transported approximately 45,272 BBtu,
32,489 BBtu and 32,721 BBtu during 1995, 1994 and 1993, respectively, and
Viking transported approximately 58,579 BBtu during 1993.
Customers of the interstate pipeline operations of the Energy Business
include natural gas producers, marketers and end-users, as well as other gas
transmission and distribution companies. Substantially all of the revenues of
these operations are generated under long-term gas transmission contracts
entered into between the Energy Business and its customers. Contracts
representing approximately 70% of the firm transportation capacity of the
interstate pipeline operations of the Energy Business will be expiring over
the next five years, principally in the year 2000. Although the Energy
Business presently intends to pursue the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether the
Energy Business will be able to obtain extended or replacement contracts.
Federal Regulation
The interstate natural gas pipeline companies included in the Energy
Business are "natural gas companies" as defined in the Natural Gas Act of
1938, as amended (the "Natural Gas Act"). As such, these companies are subject
to the jurisdiction of the FERC. The interstate pipeline operations of the
Energy Business are operated pursuant to certificates of public convenience
and necessity issued under the Natural Gas Act and pursuant to the Natural Gas
Policy Act of 1978. The FERC regulates the interstate transportation and
certain sales of natural gas, including, among other things, rates and charges
allowed natural gas companies, extensions and abandonments of facilities and
service, rates of depreciation and amortization and the accounting system
utilized by the companies.
Prior to the FERC's industry restructuring initiatives in the 1980's, the
interstate pipeline companies included in the Energy Business operated
primarily as merchants, purchasing natural gas under long-term contracts and
reselling the gas to customers, also under long-term contracts. On April 8,
1992, the FERC issued Order 636 which restructured the natural gas industry by
requiring mandatory unbundling of pipeline sales and transportation services.
Numerous parties appealed to the U.S. Court of Appeals for the D.C. Circuit
the legality of Order 636 generally, as well as the legality of specific
provisions of Order 636. On July 16, 1996, the U.S. Court of Appeals for the
D.C. Circuit issued its decision upholding, in large part, Order 636. The
court remanded to the FERC several issues for further explanation, including
further explanation of the FERC's decision to allow pipelines to recover 100%
of their GSR costs.
TGP implemented revisions to its tariff, effective on September 1, 1993,
which restructured its transportation, storage and sales services to convert
TGP from primarily a merchant to primarily a transporter of gas as required by
Order 636. As a result of this restructuring, TGP's gas sales declined while
certain obligations to producers under long-term gas supply contracts
continued, causing TGP to incur significant restructuring transition costs.
Pursuant to the provisions of Order 636 allowing for the recovery of
transition costs related to the restructuring, TGP has made filings to recover
GSR costs resulting from remaining gas purchase obligations, costs related to
its Bastian Bay facilities, the remaining unrecovered balance of purchased gas
("PGA") costs and the "stranded" cost of TGP's continuing contractual
obligation to pay for capacity on other pipeline systems ("TBO costs").
TGP's filings to recover costs related to its Bastian Bay facilities have
been rejected by the FERC based on the continued use of the gas production
from the field; however, the FERC recognized the ability of TGP to file for
the recovery of losses upon disposition of these assets. TGP has filed for
appellate review of the FERC actions and believes that certain Bastian Bay
costs will ultimately be recovered as transition costs under Order 636; the
FERC has not contested the ultimate recoverability of these costs.
31
<PAGE>
The filings implementing TGP's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery was made subject to refund pending FERC review and approval for
eligibility and prudence: (i) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; (ii) recovery of TBO costs,
which TGP is obligated to pay under existing contracts, through a surcharge
from firm transportation customers, adjusted annually; and (iii) GSR cost
recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers over a period of up to 60 months.
Following negotiations with its customers, TGP filed in July 1994 with the
FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides for
the recovery of approximately $100 million and the recovery of PGA costs
associated with the transfer of storage gas inventory to new storage customers
in TGP's restructuring proceeding. The PGA Stipulation eliminates all
challenges to the PGA costs, but establishes a cap on the charges that may be
imposed upon former sales customers. On November 15, 1994, the FERC issued an
order approving the PGA Stipulation and resolving all outstanding issues. On
April 5, 1995, the FERC issued its order on rehearing affirming its initial
approval of the PGA Stipulation. TGP implemented the terms of the PGA
Stipulation and made refunds in May 1995. The refunds had no material effect
on the net income reported by the Energy Business. The orders approving the
PGA Stipulation have been appealed to the D.C. Circuit Court of Appeals by
certain customers. TGP believes the FERC orders approving the PGA Stipulation
will be upheld on appeal.
TGP is recovering through a surcharge, subject to refund, TBO costs formerly
incurred to perform its sales function. The FERC subsequently issued an order
requiring TGP to refund certain costs from this surcharge and refunds were
made in May 1996. TGP is appealing this decision and believes such appeal will
likely be successful.
With regard to TGP's GSR costs, TGP, along with three other pipelines,
executed four separate settlement agreements with Dakota Gasification Company
and the U.S. Department of Energy and initiated four separate proceedings at
the FERC seeking approval to implement the settlement agreements. The
settlement resolved litigation concerning purchases made by TGP of synthetic
gas produced from Great Plains. The FERC previously ruled that the costs
related to the Great Plains project are eligible for recovery through GSR and
other special recovery mechanisms and that the costs are eligible for recovery
for the duration of the term of the original gas purchase agreements. On
October 18, 1994, the FERC consolidated the four proceedings and set them for
hearing before an ALJ. The hearing, which concluded in July 1995, was limited
to the issue of whether the settlement agreements are prudent. The ALJ
concluded, in his initial decision issued in December 1995, that the
settlement was imprudent. TGP has filed exceptions to this initial decision.
Tenneco believes this decision will not impair TGP's recovery of the costs
resulting from this contract. On July 17, 1996, the FERC ordered oral
arguments to be heard in September 1996. Oral arguments were held before the
full FERC on September 25, 1996. A decision by the FERC is expected by the end
of 1996.
Also related to TGP's GSR costs, on October 14, 1993, TGP was sued in the
State District Court of Ector County, Texas, by ICA and TransTexas. In that
suit, ICA and TransTexas contended that TGP had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading sought $1.5 billion from TGP for alleged damages caused by TGP's
refusal to purchase gas produced from the TransTexas leases covering the new
production and lands. In June 1996, TGP reached a settlement with ICA and
TransTexas for $125 million wherein ICA and TransTexas agreed to terminate
their contract rights, released TGP from liability under the contract, and
indemnified TGP against future claims, including royalty owner claims. In
connection with that litigation, certain royalty interest owners filed a claim
in July 1996 against TGP in Webb County, Texas, alleging that they are sellers
entitled to tender gas to TGP under the settled contract. This claim falls
under the indemnification provisions of TGP's settlement with ICA and
TransTexas, which requires ICA and TransTexas to defend and indemnify TGP on
this claim.
32
<PAGE>
TGP has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
TGP. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the Texas
Court of Appeals favorable to TGP in one of these matters and indicated that
it would remand the case to the trial court. On April 18, 1996, however, the
Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
TGP. In June 1996, TGP filed a motion for rehearing with the Texas Supreme
Court which was denied in August 1996. The Texas Supreme Court's April 1996
ruling explicitly preserves TGP's defenses based on bad faith conduct of the
producers. Nothing in the Texas Supreme Court's decision affects TGP's ability
to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, TGP has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. TGP has accrued amounts which it
believes are appropriate to cover the resolution of the litigation associated
with its contract reformation efforts.
As of June 30, 1996, TGP has deferred GSR costs yet to be recovered from its
customers of approximately $551 million, net of $380 million previously
recovered from its customers, subject to refund. The GSR Proceeding is
underway at the FERC with respect to the recovery of TGP's GSR costs.
Testimony has been completed in connection with Phase I of that proceeding
relating to the eligibility of GSR cost recovery; oral argument on eligibility
issues was originally set by a FERC ALJ for late October 1996. The Chief Judge
of the FERC has since issued orders (i) cancelling the October oral arguments,
(ii) convening settlement discussions which commenced on October 9, 1996, and
(iii) postponing scheduling an oral argument on eligibility issues.
Phase II of the proceeding on the prudency of the costs to be recovered and
on certain contract specific eligibility issues has not yet been scheduled,
but will likely occur sometime after the ALJ's decision in Phase I is issued.
The FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although the Order 636 transition cost recovery
mechanism provides for complete recovery by pipelines of eligible and
prudently incurred transition costs, certain customers have challenged the
prudence and eligibility of TGP's GSR costs and TGP has engaged in settlement
discussions with its customers concerning the amount of such costs in response
to the FERC statements acknowledging the desirability of such settlements. As
described under "--Operation of the Energy Business After the Merger--Proposed
Post-Merger Resolution of GSR Transition Cost Disputes," El Paso has reached,
contingent upon consummation of the Merger and various conditions (including
approval by the FERC), the El Paso Preliminary GSR Understanding. See also
"Risk Factors--Risks Related to the Energy Business--Regulated Industry;
Potential Adverse Impact of Cost Recovery and Rate Proceedings."
Given the uncertainty over the results of ongoing discussions between TGP
and its customers related to the recovery of GSR costs and the uncertainty
related to predicting the outcome of its gas purchase contract reformation
efforts and the associated litigation, Tenneco is unable to predict the timing
or the ultimate impact that the resolution of these issues will have on the
combined financial position or results of operations of the Energy Business.
On December 30, 1994, TGP filed for a general rate increase (the "1995 Rate
Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, TGP began
collecting rates, subject to refund, reflecting an $87 million increase in
TGP's annual revenue requirement. A Stipulation and Agreement was filed with
an ALJ in this proceeding on April 5, 1996. This Stipulation, which is
currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and TGP is reserving revenues it believes adequate to cover the
income impact from any refunds that may be required upon final settlement of
this proceeding. On October 30, 1996, the FERC approved the Stipulation for
the Settlement of the 1995 Rate Case, with certain modifications and
clarifications which are not material and which should not cause changes which
are adverse to the Energy Business.
For a discussion of recent FERC proceedings relating to the recovery by
Tenneco Energy of certain environmental costs as a component of the rates
charged by its interstate pipeline operations see "--Environmental Matters."
33
<PAGE>
TGP, as with all interstate pipelines, is subject to FERC audit review of
its books and records. TGP currently has an open audit covering the years
1991-1994. The FERC audit staff is expected to issue an audit report by year
end.
Competition
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, the interstate
pipelines of the Energy Business face competitive pressure from other major
pipeline systems, enabling local distribution companies and end-users to
choose a supplier or switch suppliers based on the short term price of gas and
the cost of transportation. Competition between pipelines is particularly
intense in Midwestern's Chicago and Northern Indiana markets, in East
Tennessee's Roanoke, Chattanooga and Atlanta markets, and in TGP's supply
area, Louisiana and Texas. In some instances, the pipelines of the Energy
Business have been required to discount their transportation rates in order to
maintain their market share. As noted above, transportation contracts
representing approximately 70% of firm interstate transportation capacity will
be expiring over the next five years, principally in the year 2000. The
renegotiation of these contracts may be impacted by these competitive factors.
Gas Supply
With full implementation of Order 636, TGP's firm sales obligations
requiring maintenance of long-term gas purchase contracts have declined from
over a 1.4 billion dekatherm maximum daily delivery obligation to less than a
200 million dekatherm maximum daily delivery obligation. TGP has substantially
reduced its natural gas purchase portfolio in line with these requirements
through termination and assignment to third parties. Although TGP's
requirements for purchased gas are substantially less than prior to its
implementation of Order 636, the Energy Business is pursuing the attachment of
gas supplies to TGP's pipeline system for transportation by others. Current
gas supply activities include development of offshore and onshore pipeline
gathering projects and utilization of production financing programs to spur
exploration and development drilling in areas adjacent to TGP's system. Major
gathering systems in the Gulf of Mexico were completed during the fourth
quarter of 1994.
GAS MARKETING, INTRASTATE PIPELINES AND RELATED SERVICES
Tenneco Energy Resources Corporation ("Tenneco Resources"), a wholly owned
subsidiary of Tenneco, and its subsidiaries are engaged primarily in the
businesses of marketing natural gas and owning and operating approximately
1,300 miles of pipelines that serve the Texas Gulf Coast and West Texas
markets.
Tenneco Resources' interstate marketing operations buy, sell and contract
for the transportation of up to 1.5 billion cubic feet of natural gas per day
from approximately 200 suppliers, through 40 pipelines to about 400 customers,
marketers and end-users. Tenneco Resources offers a portfolio of products and
services which are intended to help distributors, end-users and producers
manage their entire gas sales and purchasing processes, from budget control
and risk management to flexible takes and daily balances. Tenneco Resources
also owns and manages gas gathering systems and natural gas processing plants
in Pennsylvania, Texas and Louisiana. Additionally, Tenneco Resources owns and
operates, either directly or through joint ventures, approximately 1,300 miles
of intrastate pipelines in the Texas Gulf Coast and West Texas markets. In
addition to offering transportation capacity, these intrastate pipeline
operations manage buying, selling and transportation services for almost one
billion cubic feet of natural gas per day, serving approximately 150 suppliers
and 50 customers and shippers. The intrastate pipeline operations also provide
swing storage services and access to major intrastate and interstate pipelines
in Texas. Revenues from the operations of Tenneco Resources accounted for
approximately 55%, 61% and 57% of the total revenues of the Energy Business
for 1993, 1994 and 1995, respectively.
34
<PAGE>
The following table sets forth the volumes of gas, stated in BBtu, sold and
transported by Tenneco Resources for the periods indicated:
<TABLE>
<CAPTION>
1995 1994 1993
------- --------- -------
<S> <C> <C> <C>
Sales........................................... 642,096 739,432 741,800
Transportation.................................. 229,415 273,587 235,940
------- --------- -------
Total......................................... 871,511 1,013,019 977,740
======= ========= =======
</TABLE>
In February 1994, the Energy Business sold a 20% interest in Tenneco
Resources to Ruhrgas AG, Germany's largest natural gas company. As part of the
sale, Tenneco agreed that neither it nor any of its affiliates would engage in
gas marketing activities in North America and certain gas processing and
gathering activities except through Tenneco Resources. The Energy Business
repurchased this 20% interest in Tenneco Resources in September 1996 for $41
million.
INTERNATIONAL, POWER GENERATION AND VENTURES
The Energy Business is presently engaged in various other energy-related
businesses that are consistent with Tenneco Energy's overall goal of
diversifying its operations into businesses that are not regulated by the
FERC.
International Operations. The Energy Business has recently undertaken
various activities to extend TGP's traditional activities in North American
pipelines to international pipeline, power and energy-related projects, with a
current focus on activities in Latin America, Southeast Asia, Australia and
Europe.
In 1995, the Energy Business was selected to construct, own and operate a
470-mile natural gas pipeline in Queensland, Australia at a total cost of $170
million. Construction of the pipeline commenced in late 1995 and completion is
scheduled for December 1996. It is estimated that, as of June 30, 1996,
completion of the Queensland pipeline would require an additional $56 million
of capital expenditures. Additionally, in June 1995 Tenneco acquired the
natural gas pipeline assets of the Pipeline Authority of South Australia
("PASA"), which includes a 488-mile pipeline, for $225 million. El Paso and
Tenneco are currently working together to monetize certain of Tenneco's
Australian assets as part of the Refinancing Transactions. See "--Operation of
the Energy Business After the Merger" and "Unaudited Pro Forma Consolidated
Financial Statements." The Energy Business also has interests in a consortium
pursuing the development of a natural gas pipeline from Bolivia to Brazil and
related gas-fired electric generation plants. In December 1995, the Energy
Business was selected by the Beijing Natural Gas Transportation Company
("BGTC") to serve as a paid technical advisor for the construction of China's
first major onshore natural gas pipeline. BGTC, a joint venture between the
Chinese National Petroleum Corporation and the city of Beijing, will build a
600-mile line linking the Jingbian gas field in central China's Eerdous Basin
with Beijing. Construction commenced in March 1996, with an in-service date
scheduled for October 1997.
Power Generation Operations. The Energy Business' power unit is involved in
developing, building, owning, operating and acquiring energy-related
infrastructure domestically and internationally, by capitalizing on the
experience of the Energy Business in major project development and gas
technologies, transportation and supply. Areas targeted for development
include Australia, Southeast Asia, central and eastern Europe and Latin
America.
Tenneco Power Generation Company ("Tenneco Power") has a 17.5% interest in a
240 megawatt power plant in Springfield, Massachusetts, and 50% interests in
two additional cogeneration projects in Florida which have a combined capacity
of 220 megawatts. El Paso and Tenneco are currently working together to
monetize the Energy Business interest in one of these Florida cogeneration
projects as part of the Refinancing Transactions. See "--Operation of the
Energy Business After the Merger" and "Unaudited Pro Forma Consolidated
Financial Statements." In May 1996, Tenneco Power acquired from Energy Equity
Corp., Ltd., an Australian company, a 50% interest in two of its subsidiaries
which participate in a joint venture to construct a 135 megawatt gas-fired
power plant in Indonesia.
35
<PAGE>
Tenneco Ventures. Tenneco Gas Production Corporation ("Tenneco Production")
and Tenneco Ventures Corporation ("Tenneco Ventures"), subsidiaries of Tenneco,
together with institutional investors and partners, invest in oil and gas
properties and finance independent producers engaged in exploration and
development projects. Tenneco Ventures and Tenneco Production hold various
ownership interests in oil and gas fields located primarily in the Gulf of
Mexico, Texas and Louisiana. Tenneco Ventures is also involved in Tenneco
Energy's international projects through exploration and development of gas
reserves in Indonesia, Poland and Bolivia. It is presently expected that, after
consummation of the Merger, El Paso will sell Tenneco Ventures and Tenneco
Production as part of the Refinancing Transactions, the proceeds of which sale
will be used to repay a portion of the indebtedness expected to then be
outstanding under the Tenneco Credit Facility. See "Risk Factors--Risks Related
to the Transaction--Uncertainty Regarding Consummation of Refinancing
Transactions," "--Operation of the Energy Business After the Merger" and
"Unaudited Pro Forma Consolidated Financial Statements."
DISCONTINUED AND OTHER OPERATIONS
In addition to the operating assets and liabilities of the Energy Business,
upon consummation of the Merger and the other components of the Transaction,
including the Distributions, Tenneco (which will then be a subsidiary of El
Paso) will continue to hold certain limited assets and be responsible for the
liabilities of the existing and discontinued operations and businesses of
Tenneco and its subsidiaries other than those relating to the Industrial
Business or the Shipbuilding Business. These assets and liabilities consist
primarily of Tenneco's remaining interests in various discontinued operations
which were engaged in (i) natural gas pipeline transmission, gathering and
processing, (ii) chemicals production, (iii) the manufacture of farm and
construction equipment through Case Corporation ("Case") and related companies,
(iv) the extraction of minerals and other natural resources, (v) oil and gas
exploration, production and marketing through Tenneco Oil Company and other
companies, (vi) agricultural and urban development, and (vii) insurance.
Tenneco has established reserves which it believes are adequate to cover these
liabilities related to the various discontinued operations of Tenneco for which
it will remain liable following consummation of the Transaction. See Note 13 to
the Combined Financial Statements of the Energy Business included elsewhere in
this Prospectus and "--Environmental Matters."
EMPLOYEES
As of June 30, 1996, the Energy Business had approximately 3,200 full-time
employees.
PROPERTIES
Tenneco believes that substantially all of the facilities and equipment of
the Energy Business are, in general, well maintained and in good operating
condition. They are considered adequate for present needs and, as supplemented
by planned construction, are expected to remain adequate for the near future.
Tenneco also believes that it has generally satisfactory title to the
properties owned and used in the Energy Business, subject to liens for current
taxes and easements, restrictions and other liens which do not materially
detract from the value of such property or the interests therein or the use of
such properties in its businesses.
OPERATION OF THE ENERGY BUSINESS AFTER THE MERGER
General. El Paso 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
intends to integrate, for the most part, the operations of the Energy Business
with those of El Paso 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.
Refinancing Transactions. El Paso has indicated that it intends to undertake
the Refinancing Transactions in order to reduce the amount of outstanding
Tenneco debt that would otherwise be outstanding after consummation
36
<PAGE>
of the Transaction. Accordingly, El Paso and Tenneco currently are working
together to monetize certain assets of the Energy Business through asset sales
and non-recourse project financings which currently are expected to provide net
proceeds to Tenneco of approximately $500 million. El Paso has indicated that
these proceeds will be used to repay outstanding borrowings under the Tenneco
Credit Facility. Assets to be sold include Tenneco Ventures and Tenneco
Production and a 50% interest in Tenneco's Australian pipeline operations.
Project financings include one of Tenneco's U.S. cogeneration facilities and
the Australian pipeline operations. See "--International Power Generation and
Ventures."
Subject to market conditions, El Paso also currently intends to undertake a
public offering of El Paso equity securities after the Merger for anticipated
net proceeds of approximately $200 million. Using the proceeds of this
offering, El Paso will purchase from Tenneco approximately $200 million of
Subordinated Tenneco Preferred Stock (that will be subordinate to the Junior
Preferred Stock issued in the NPS Issuance). El Paso intends to use the
proceeds to Tenneco from any sale of such Subordinated Tenneco Preferred Stock
to repay outstanding borrowings under the Tenneco Credit Facility.
In addition, as market conditions may allow, El Paso may refinance Tenneco's
post-Transaction debt through the sale of senior debt securities of Tenneco
and/or TGP to the public. See "Risk Factors--Risk Factors Relating to the
Transaction--Consummation of Refinancing Transactions."
Proposed Post-Merger Resolution of GSR Transition Cost Disputes. On October
23, 1996, in anticipation of consummation of the Merger which will result in
TGP becoming a subsidiary of El Paso, El Paso reached a preliminary
understanding with certain of TGP's customers (i.e., the El Paso Preliminary
GSR Understanding). Under the El Paso Preliminary GSR Understanding, if the
Merger is consummated prior to April 1, 1997, then El Paso will settle the
customers' challenges to TGP's GSR and other transition costs, effective
January 1, 1997. It is unlikely that the El Paso Preliminary GSR Understanding
will be finalized and filed with the FERC prior to December 31, 1996. The
purchase accounting adjustments in the "Unaudited Pro Forma Consolidated
Financial Statements" included elsewhere herein assume the settlement with
respect to TGP's GSR costs on the terms of the El Paso Preliminary GSR
Understanding. Finalization of the El Paso Preliminary GSR Understanding is
subject to consummation of the Merger before April 1, 1997, and certain other
conditions. If the Merger is not consummated prior to April 1, 1997, then TGP
has the option to terminate the El Paso Preliminary GSR Understanding.
Assuming the El Paso Preliminary GSR Understanding is finalized and filed
with the FERC, non-consenting customers will have the opportunity to object to
the proposed settlement. It is impossible to predict with certainty whether the
FERC would approve the proposed settlement in the form ultimately presented to
it.
ENVIRONMENTAL MATTERS
Since 1988, TGP has been engaged in an internal project to identify and deal
with the presence of polychlorinated biphenyls ("PCBs") and other substances of
concern, including substances on the U.S. Environmental Protection Agency
("EPA") List of Hazardous Substances ("HS List") at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting this project, TGP has been in frequent
contact with federal and state regulatory agencies, both through informal
negotiation and formal entry of consent orders, in order to ensure that its
efforts meet regulatory requirements.
Tenneco has established a reserve for TGP's environmental expenses, which
includes: (i) expected remediation expense and associated onsite, offsite and
groundwater technical studies; (ii) legal fees; and (iii) settlement of third-
party and governmental litigation, including civil penalties. Through June 30,
1996, Tenneco has charged approximately $156 million against the environmental
reserve, excluding recoveries related to TGP's environmental settlement as
discussed below. Of the remaining reserve, $24 million has been recorded on the
combined balance sheet under "Payables-trade" and $132 million under "Deferred
credits and other liabilities."
37
<PAGE>
Due to the current uncertainty regarding the further activity necessary for
TGP to address the presence of the PCBs, the substances on the HS List and
other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, Tenneco cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
TGP's evaluation and experience to date, Tenneco continues to believe that the
recorded estimate for the reserve is adequate.
Following negotiations with its customers, TGP in May 1995 filed with the
FERC a separate Stipulation and Agreement (the "Environmental Stipulation")
that establishes a mechanism for recovering a substantial portion of the
environmental costs. In November 1995, the FERC issued an order approving the
Environmental Stipulation. Although one shipper filed for rehearing, the FERC
denied rehearing of its order on February 20, 1996. This shipper filed a
Petition for Review on April 22, 1996 in the D.C. Circuit Court of Appeals;
TGP believes the FERC order approving the Environmental Stipulation will be
upheld on appeal. The effects of the Environmental Stipulation, which was
effective as of July 1, 1995, have been recorded with no material effect on
the combined financial position or results of operations of the Energy
Business. As of June 30, 1996, the balance of the regulatory asset is $61
million.
The Energy Business has completed settlements with and has received payments
from the majority of its liability insurance policy carriers for remediation
costs and related claims. Tenneco believes that the likelihood of recovery of
a portion of these remediation costs and claims against the remaining carriers
in its pending litigation is reasonably possible. In addition, TGP has settled
its pending litigation against and received payment from the manufacturer of
the PCB-containing lubricant. These recoveries have been considered in TGP's
recording of its environmental settlement with its customers.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting
air systems. TGP has executed a consent order with the EPA governing the
remediation of certain of its compressor stations and is working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are essentially complete; in addition, pursuant to the Consent
Order dated August 1, 1995, between Tenneco and the Pennsylvania Department of
Environmental Protection, Tenneco funded an environmentally beneficial project
for $450,000 in April 1996. Remediation and characterization work at the
compressor stations under its consent order with the EPA and the jurisdiction
of the New York Department of Environmental Conservation is ongoing. Tenneco
believes that the ultimate resolution of these matters will not have a
material adverse effect on the combined financial position or results of
operations of the Energy Business.
TGP sold its subsidiary which owns a 13.2% general partnership interest in
Iroquois to ANR Iroquois Inc., a subsidiary of The Coastal Corporation.
Iroquois owns an interstate gas pipeline from the Canadian border through the
states of New York and Connecticut to Long Island. TGP is still under contract
to provide gas dispatching as well as post-construction field operation and
maintenance services for the operator of Iroquois, but TGP is not the operator
and is not an affiliate of the operator of Iroquois' pipeline system. A global
settlement was entered into during the second quarter of 1996 by Iroquois and
the operator of Iroquois' pipeline system with the Federal and New York State
authorities resolving all criminal, civil and administrative enforcement
actions contemplated by such authorities as a result of their investigation of
alleged environmental violations which occurred during the construction of the
pipeline. Due to the sale of Tenneco's interest in Iroquois, Tenneco believes
that any environmental matters relating to the construction and operation of
the pipeline system by Iroquois will not have a material adverse effect on the
combined financial position or results of operations of the Energy Business.
Tenneco has identified other sites in its various operating divisions
included within the Energy Business where environmental remediation expense
may be required should there be a change in ownership, operations or
38
<PAGE>
applicable regulations. These possibilities cannot be predicted or quantified
at this time and accordingly, no provision has been recorded. However,
provisions have been made for all instances where it has been determined that
the incurrence of any material remedial expense is reasonably possible. Tenneco
believes that the provisions recorded for environmental exposures of the Energy
Business are adequate based on current estimates.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court,
Docket No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency
alleged that TGP discharged pollutants into the waters of the state without a
permit and disposed of PCBs without a permit. The agency sought an injunction
against future discharges, sought an order to remediate or remove PCBs, and
sought a civil penalty. TGP has entered into agreed orders with the agency to
resolve many of the issues raised in the original allegations, has received
water discharge permits for its Kentucky stations from the agency, and
continues to work to resolve the remaining issues. Counsel for Tenneco are
unable to express an opinion as to the ultimate outcome. Tenneco believes that
the resolution of this issue will not have a material adverse effect on the
combined financial position or results of operations of the Energy Business.
Certain of the entities included in the Energy Business have been designated,
have received notice that they could be designated or have been asked for
information to determine whether they could be designated as potentially
responsible parties with respect to 26 "Superfund" sites (of which 24 are
related to discontinued operations included within the Energy Business). The
Energy Business has sought to resolve its liability with respect to these sites
through indemnification by third parties and/or settlements which provide for
payment of the Energy Business' allocable share of remediation costs. Tenneco
has estimated the Energy Business' share of the remediation costs at these
sites to be between $7 million and $41 million and has provided reserves that
it believes are adequate for such costs. Because the clean-up costs are
estimates and are subject to revision as more information becomes available
about the extent of remediation required, Tenneco's estimate of the Energy
Business' share of remediation costs could change. Moreover, liability under
the federal Superfund statute (the Comprehensive Environmental Response,
Compensation and Liability Act) is joint and several, meaning that the Energy
Business could be required to pay in excess of its pro rata share of
remediation costs. Tenneco's understanding of the financial strength of other
potentially responsible parties has been considered, where appropriate, in its
determination of the estimated liability of the Energy Business as described
herein. Tenneco presently believes that the costs associated with the current
status of such Energy Business entities as potentially responsible parties at
the Superfund sites referenced above will not have a material adverse effect on
the combined financial position or results of operations of the Energy
Business.
In addition, the Energy Business includes liabilities to remediate a number
of formerly owned or leased sites, and certain other sites associated with the
discontinued operations included in the Energy Business, pursuant to state and
federal laws enacted for the protection of the environment. Tenneco estimates
that the Energy Business' share of the remediation costs at these sites to be
between $23 million and $43 million and has provided reserves that it believes
are adequate for such costs. Because the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, Tenneco's estimate of the Energy Business' share of
remediation costs could change. Tenneco presently believes that the costs to
remediate these sites will not have a material adverse effect on the combined
financial position or results of operations of the Energy Business.
For additional information concerning environmental matters, see the caption
"Environmental Matters" under Note 15 in the notes to the Combined Financial
Statements of the Energy Business included elsewhere in this Prospectus.
For a discussion of various regulatory proceedings involving cost recovery
and contract reformation in connection with the interstate pipeline operations
of the Energy Business, see "--Interstate Pipeline Operations--Federal
Regulation."
39
<PAGE>
LEGAL PROCEEDINGS
In July 1996, TGP was served with a complaint in the matter of Jack J.
Grynberg v. Alaska Pipeline Co., et al., filed in the U.S. District Court for
the District of Columbia. Plaintiff brings this action under the False Claims
Act against several interstate pipelines and others alleging Defendants
mismeasured natural gas produced from federal and Indian lands, which deprived
the U.S. of royalties otherwise due it. Plaintiff seeks, among other things,
to recover, on behalf of the U.S. unspecified treble damages, his finder's fee
and attorneys' fees. All Defendants have been granted an extension until
November 13, 1996 to respond to the complaint. It is believed that there are
valid jurisdictional and procedural defenses to Plaintiff's complaint;
however, even if Plaintiff is ultimately entitled to pursue his claims,
Tenneco believes that it has substantive defenses, including that TGP's
measurement practices are consistent with industry practice and all applicable
standards, regulations, contracts, and tariffs and that TGP should not be
liable in any event. Based on information available at this time, Tenneco does
not believe that the ultimate resolution of this matter will have a materially
adverse effect on the Energy Business' financial condition.
In addition to the foregoing proceeding and the proceedings described under
"--Interstate Pipeline Operations--Federal Regulation" and "--Environmental
Matters", Tenneco and its subsidiaries are parties to numerous other legal
proceedings relating to the Energy Business and arising from their present and
former operations. Tenneco believes that the outcome of these other
proceedings, individually and in the aggregate, will have no material adverse
effect on the combined financial condition or results of operations of the
Energy Business.
TENNECO CREDIT FACILITY
Tenneco has entered into the Tenneco Credit Facility under which a syndicate
of banks (the "Lenders") has committed to provide up to $3 billion of
financing to Tenneco on an unsecured basis. Chase Securities Inc. has arranged
the Tenneco Credit Facility and The Chase Manhattan Bank is acting as agent
for the Lenders. The Tenneco Credit Facility consists of a 364-day revolving
credit facility, with a two-year term thereafter, the proceeds of which will
be used to effect the Debt Realignment and for other general corporate
purposes, and, upon consummation of the Merger, will be guaranteed by El Paso.
Initial borrowings under the Tenneco Credit Facility are expected to occur
on or shortly before the Merger Effective Time. See "--Unaudited Pro Forma
Consolidated Financial Statements" for a description of the application of the
proceeds of such borrowings. The borrowings under the Tenneco Credit Facility
will mature in November 1999.
Borrowings under the Tenneco Credit Facility will bear interest at a rate
per annum equal to, at Tenneco's option, either
(a) the highest of (i) the rate from time to time publicly announced by
The Chase Manhattan Bank in New York City as its prime rate, and (ii) the
federal funds effective rate from time to time plus 1/2 of 1%, (such higher
rate, the "Alternate Base Rate"), plus in each case, the Applicable Margin
(as defined), or
(b) the average of the rates at which eurodollar deposits for one, two,
three or six months or, subject to availability to each lender, nine or 12
months (as selected by Tenneco) are offered in the interbank eurodollar
market in the approximate amount of the relevant loan (the "Eurodollar
Rate"), plus the Applicable Margin.
The "Applicable Margin" will be based on El Paso's senior long-term debt
rating, as determined from time to time, or, if El Paso's debt is not rated,
each rating agency will be assumed to have assigned its lowest rating.
The Tenneco Credit Facility requires that El Paso's ratio of total
indebtedness to total indebtedness plus net worth not exceed 70%. Failure to
satisfy the foregoing minimum requirement will be a default under the Tenneco
Credit Facility that will enable the Lenders to refuse to loan funds to
Tenneco and to accelerate the indebtedness thereunder.
40
<PAGE>
The Tenneco Credit Facility also imposes prohibitions or limitations on
liens (other than agreed permitted liens), subsidiary indebtedness and
guarantee obligations, and asset dispositions (with certain permitted
exceptions), among others.
The Tenneco Credit Facility contains certain default provisions, including,
among other things, (i) nonpayment of any amount due to the lenders under the
Tenneco Credit Facility, (ii) material breach of representations and
warranties, (iii) default in the performance of covenants, (iv) bankruptcy or
insolvency, (v) cross-default with respect to indebtedness for borrowed money
and related guaranty obligations in excess of $100 million, and (vi) a
judgment suffered by El Paso in excess of $50 million not covered by insurance
and which judgment shall not have been vacated, discharged, stayed or bonded
pending appeal within 60 days.
41
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MANAGEMENT AFTER THE TRANSACTION
Pursuant to the Merger Agreement, the directors of El Paso Subsidiary as of
the Merger Effective Time will become the initial directors of Tenneco upon
consummation of the Merger. In addition, the executive officers of El Paso
Subsidiary as of the Merger Effective Time will become the executive officers
of Tenneco upon consummation of the Merger. El Paso has advised Tenneco that
the following individuals will be the executive officers and directors of the
El Paso Subsidiary as of the Merger Effective Time and will become the
executive officers (holding the offices indicated below) and directors of
Tenneco upon consummation of the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Wise.................. 51 Chairman of the Board, President and Chief
Executive Officer
H. Brent Austin.................. 42 Senior Vice President, Chief Financial
Officer and Director
Joel Richards III................ 49 Senior Vice President and Director
Britton White, Jr................ 53 Senior Vice President, General Counsel and
Director
Jeffrey I. Beason................ 47 Vice President, Treasurer, Controller and
Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
WILLIAM A. WISE--Upon consummation of the Merger, Mr. Wise will become the
Chairman of the Board, President and Chief Executive Officer of Tenneco. Mr.
Wise has been Chairman of the Board of El Paso since January 1994 and the
President and Chief Executive Officer of El Paso since January 1990. He was
President and Chief Operating Officer of El Paso from April 1989 to December
1989. From March 1987 until April 1989, Mr. Wise was an Executive Vice
President of El Paso. From January 1984 to February 1987, he was a Senior Vice
President of El Paso. He is a member of the Board of Directors of Battle
Mountain Gold Company.
H. BRENT AUSTIN--Upon consummation of the Merger, Mr. Austin will become the
Senior Vice President, Chief Financial Officer and a Director of Tenneco. Mr.
Austin has been Executive Vice President of El Paso since May 1995 and he has
been Chief Financial Officer of El Paso since April 1992. He was Senior Vice
President of El Paso from April 1992 to April 1995. He was Vice President,
Planning and Treasurer of Burlington Resources Inc. ("BR") from November 1990
to March 1992 and Assistant Vice President, Planning of BR from January 1989 to
October 1990.
JOEL RICHARDS III--Upon consummation of the Merger, Mr. Richards will become
the Senior Vice President and a Director of Tenneco. Mr. Richards has been
Senior Vice President of El Paso since January 1991 and he was Vice President
from June 1990 to December 1990. He was Senior Vice President, Finance and
Human Resources of Meridian Minerals Company, a wholly owned subsidiary of BR,
from October 1988 to June 1990.
BRITTON WHITE, JR.--Upon consummation of the Merger, Mr. White will become
the Senior Vice President, General Counsel and a Director of Tenneco. Mr. White
has been Senior Vice President and General Counsel of El Paso since March 1991
and from March 1991 to April 1992, he was also Corporate Secretary of El Paso.
For more than five years prior to that time, Mr. White was a partner in the law
firm of Holland & Hart.
JEFFREY I. BEASON--Upon consummation of the Merger, Mr. Beason will become
the Vice President, Treasurer, Controller and a Director of Tenneco. Mr. Beason
has been Vice President, Controller and Treasurer of El Paso since April 1996
and from September 1993 to April 1996 he was Senior Vice President of
Administration for Mojave Pipeline Operating Company, a subsidiary of El Paso.
For more than five years prior to September 1993, Mr. Beason was Director of
Financial Reporting for El Paso.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE ENERGY BUSINESS
The following review of the financial condition and results of operations of
the Energy Business should be read in conjunction with the Combined Financial
Statements of Tenneco Energy and the notes thereto included elsewhere in this
Prospectus. Such review includes certain forward-looking statements, which
should be read in conjunction with the factors identified in "Risk Factors"
herein.
PROPOSED MERGER WITH EL PASO
In the first quarter of 1996, Tenneco announced its intention to focus on its
automotive parts and packaging businesses. This strategic action included the
spin-off of Newport News to the holders of Tenneco Common Stock and the
development of options to separate the Energy Business from the packaging and
automotive parts divisions. On June 19, 1996, Tenneco announced that it had
signed the Merger Agreement, pursuant to which El Paso Subsidiary will be
merged with and into Tenneco, with Tenneco surviving the Merger as a subsidiary
of El Paso. Prior to the Merger, Tenneco will spin off New Tenneco and Newport
News to the holders of Tenneco Common Stock as separate public companies.
The Merger represents a total value for Tenneco stockholders of approximately
$4 billion which includes:
. New shares of El Paso equity to be issued to Tenneco stockholders valued
at approximately $750 million (subject to the effect of a collar on the
average market price of the El Paso Common Stock issuable in connection
with the Merger).
. Retention by Tenneco after the Distributions and the Merger of
approximately $2.65 billion (subject to adjustment as more fully
described herein under "Debt and Cash Realignment") of Tenneco Energy
Consolidated Debt and the Junior Preferred Stock to be issued in the NPS
Issuance.
. Other payments and certain liability retentions by El Paso which El Paso
has estimated at an aggregate of approximately $600 million. See "The
Merger."
Upon consummation of the Transaction, holders of Tenneco Common Stock will
own equity securities of three separate, publicly held companies--New Tenneco,
Newport News and El Paso (which will include Tenneco Energy as a subsidiary)--
and holders of $4.50 Cumulative Preferred Stock, without par value, of Tenneco
(the "$4.50 Preferred Stock") and $7.40 Cumulative Preferred Stock, without par
value, of Tenneco (the "$7.40 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 Junior Preferred Stock issued in the NPS Issuance (if issued
prior to the Charter Amendment becoming effective). See "The Distributions--
Conditions to Consummation of the Distributions" and "The Merger--Conditions
Precedent."
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net income for the 1996 first half of $103 million increased significantly
compared with $47 million in the first half of 1995.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-----------
1996 1995
------ ----
(MILLIONS)
<S> <C> <C>
Revenues...................................................... $1,370 $939
Operating income.............................................. 188 140
</TABLE>
43
<PAGE>
NET SALES AND OPERATING REVENUES
Revenues for the 1996 first half were $1.37 billion, an increase of 46
percent compared with $939 million for the year ago period.
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 $423 million, or 21 percent. Non-recurring regulatory
adjustments that had no operating income impact contributed $55 million to the
increase. In addition, transportation revenues increased by $18 million
primarily due to a new rate structure implemented in July 1995 and increased
transportation volumes. 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 61
percent to $943 million, primarily the result of higher gas prices resulting in
a $226 million revenue increase, an increase in gas volumes which increased
revenues by $101 million, the acquisition of the assets of the Pipeline
Authority of South Australia ("PASA") in June 1995 which contributed $18
million in revenues and new processing and gathering projects which increased
revenues by $11 million. Revenues from other operations were $4 million
compared with $2 million in the prior-year period.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Operating income from regulated operations in the U.S. rose $32 million to
$166 million. The increase included $15 million for a favorable legal
settlement in addition to a $4 million gain on the sale of TGP's interest in
Iroquois. Higher transportation revenues contributed $18 million to the
increase while related operating costs primarily remained constant.
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 Kern River, which added $16 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 $19 million in the first half of
1996 from $14 million in the 1995 first half due to higher operating income
from Tenneco Ventures' oil and gas production of $10 million and the
acquisition of PASA in June 1995 which contributed $10 million. Partially
offsetting the nonregulated earnings increase was lower operating income of $5
million due to increased development costs on international programs and $5
million in unfavorable legal settlements.
The other operations of the Energy Business reported operating income of $3
million during the first half of 1996 compared with an operating loss of $8
million in the 1995 first half. The increase is due to the recognition of a $32
million deferred gain on the sale of the Energy Business' investment in Cummins
Engine Company stock offset by lower interest income from the rolloff of Case
retail receivables.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at an operating company level and to centrally manage
various cash functions. Consequently, the corporate debt of Tenneco and its
related interest expense have been allocated to New Tenneco and Newport News
based upon the portion of Tenneco's investment in New Tenneco and Newport News
which is deemed to be debt, generally based upon the ratio of New Tenneco's and
Newport News' net assets to Tenneco consolidated net assets plus debt. Interest
expense was allocated at a rate equivalent to the weighted average cost of all
corporate debt, which was 7.7 percent, 8.3 percent and 7.4 percent for 1995,
1994 and 1993, respectively. Total pre-tax interest expense allocated to New
Tenneco and Newport News in 1995, 1994 and 1993 was $180 million, $120 million
and $124 million, respectively. New Tenneco and Newport News have also been
allocated tax benefits approximating 35 percent of the allocated pre-tax
interest expense. Although interest expense and the related tax effects have
been allocated to New Tenneco and Newport News for financial reporting on a
historical basis, New Tenneco and Newport News have not been billed for these
amounts. The changes in allocated corporate debt and the after-tax allocated
interest expense have been included as a component of 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
44
<PAGE>
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."
Interest expense increased from $61 million in the 1995 first half to $63
million in the 1996 first half. The increase was primarily attributable to
higher levels of debt.
INCOME TAXES
Income tax expense for the first half of 1996 was $22 million compared with
$32 million for the 1995 first half. The effective tax rate for the first half
of 1996 was 18 percent compared with 41 percent in the prior year first half.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes new accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The statement is
effective for transactions occurring after December 31, 1996. The impact of the
new standard has not been determined.
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>
SIX MONTHS ENDED
JUNE 30,
------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ -------- --------
(MILLIONS)
<S> <C> <C>
Operating activities................................ $ (185) $ 174
Investing activities................................ 117 (266)
Financing activities................................ (81) 63
</TABLE>
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 six months of 1996 declined due to lower
sales of customer receivables compared with the first half of 1995. This
decrease was due primarily to trade receivables sold to Asset Securitization
Cooperative Corporation ("ASCC"), which were $140 million lower in the first
half of 1996 compared with the first half of 1995. Operating cash flow in the
first half of 1996 also declined as a result of higher tax payments compared
with the first half of 1995 due to the settlement of 1987 through 1989 federal
tax liabilities and TGP's gas contract settlement with ICA and TransTexas for
$125 million.
Investing Activities
The sale of other businesses and assets, primarily the Energy Business' 50
percent interest in Kern River, generated an additional $278 million of cash
during the first half of 1996. The acquisition of assets, primarily the
acquisition of PASA, required $225 million of cash during the first half of
1995.
45
<PAGE>
The Energy Business invested $164 million in capital expenditures in its
existing businesses during the first half of 1996. Capital expenditures were
$113 million during the first half of 1995.
Financing Activities
Cash used by financing activities was $81 million during the first six months
of 1996, a $144 million decrease from the same period in 1995. Tenneco
repurchased $122 million in common stock in the first half of 1996, down $328
million from the previous year. Tenneco had short-term debt outstanding at the
end of June 1996 of $130 million more than 1995. Tenneco also retired $292
million of long-term debt in the first six months of 1996 compared to $180
million retired in 1995. Finally, Tenneco received $301 million in cash
contributions from affiliates, down from $786 million received in the first six
months of 1995. Cash contributions from affiliates vary based on cash generated
by affiliates from operations net of cash required for operating and investing
activities.
CAPITALIZATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities.............. $ 521 $ 456
Long-term debt...................................... 1,519 1,811
Minority interest................................... 18 19
Preferred stock..................................... 112 130
Combined equity..................................... 1,054 687
------ ------
Total capitalization................................ $3,224 $3,103
====== ======
</TABLE>
Debt decreased $227 million at June 30, 1996 compared with December 31, 1995.
For additional information on corporate debt allocation, see "--Interest
Expense (net of interest allocated to affiliates)" above.
LIQUIDITY
Historically, 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, Tenneco 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 Tenneco
Automotive, Tenneco Packaging and Newport News subsidiaries 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, Tenneco will restructure its consolidated
indebtedness for money borrowed pursuant to the Debt Realignment through a
series of tender offers, exchange offers, payments, defeasances and
prepayments. In connection with the Debt Realignment, Tenneco will enter into
the Tenneco Credit Facility, which will consist of a 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 information, see "The Energy Business--Tenneco
Credit Facility" and "Debt and Cash Realignment."
After giving effect to the Refinancing Transactions and based on El Paso's
representations regarding the operations of the Energy Business after the
Merger, Tenneco believes internally generated funds of the Energy Business and
the availability under the Tenneco Credit Facility will provide adequate
sources of funds to finance the future capital requirements of the Energy
Business including any payments associated with the settlement of the GSR
issues discussed herein.
46
<PAGE>
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
include a 488-mile pipeline, in June 1995 for approximately $225 million and a
50 percent interest in two gas-fired cogeneration plants from ARK Energy in
November 1995 for approximately $65 million in cash and Tenneco Common Stock.
During 1995, Tenneco completed the $500 million common stock repurchase
program announced in December 1994. Also, in 1995, Tenneco announced two
additional share buyback programs, one for up to 3 million shares and another
for 2.5 million shares. These programs were designed to offset the growth in
common shares resulting from shares issued pursuant to employee benefit plans.
The 3 million share repurchase program was completed in 1995. Since December
1994, Tenneco has repurchased a total of 14.3 million common shares at a cost
of $646 million.
RESULTS OF OPERATIONS--YEARS 1995 AND 1994
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 Resources).
. Reserves established in 1995 of $25 million for the liquidation of
surplus real estate holdings and notes and $30 million for estimated
regulatory and legal settlement costs at Tenneco Energy.
. A gain from a 1994 contract settlement between Tenneco Energy and
Columbia Gas Transmission Corporation ("Columbia Gas") of $11 million.
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $1,921 $2,381
Operating income............................................... 268 367
</TABLE>
NET SALES AND OPERATING REVENUES
The regulated portion of 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 the pipeline. Other non-recurring regulatory
adjustments that had no operating income impact also increased revenue 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
47
<PAGE>
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 Tenneco 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 Tenneco Energy's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
CASH PROVIDED (USED) BY: 1995 1994
------------------------ ----- -----
(MILLIONS)
<S> <C> <C>
Operating activities...................................... $ 765 $(278)
Investing activities...................................... (537) (229)
Financing activities...................................... (27) 426
</TABLE>
48
<PAGE>
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, Tenneco Energy had a net reduction of
$605 million in debt and paid dividends on Tenneco Stock of $318 million. Other
cash sources included net contributions from affiliates of $1,367 million.
CAPITALIZATION
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities..................... $ 456 $ 399
Long-term debt............................................. 1,811 2,242
Minority interest.......................................... 19 19
Preferred stock............................................ 130 147
Combined equity............................................ 687 382
------ ------
Total capitalization....................................... $3,103 $3,189
====== ======
</TABLE>
Debt decreased $374 million at December 31, 1995 compared with December 31,
1994. For additional information on corporate debt allocation, see "--Results
of Operations for the Six Months Ended June 30, 1996 and 1995--Interest Expense
(net of interest allocated to affiliates)."
RESULTS OF OPERATIONS FOR THE YEARS 1994 AND 1993
NET SALES AND OPERATING REVENUES
Revenues for 1994 were $2.38 billion, down from $2.87 billion in 1993. The
Energy Business revenues were down $485 million or 17 percent as customers
shifted from sales to transportation service in the regulated business which
resulted in a decrease of approximately $390 million, and lower gas prices in
the nonregulated gas marketing business which decreased revenues by $167
million. Offsetting these decreases, the nonregulated businesses reported a
volume increase which resulted in increased revenues of $56 million and the
contract settlement with Columbia Gas which increased 1994 revenues by $11
million.
49
<PAGE>
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
The Energy Business reported operating income of $367 million in 1994
compared with $419 million in 1993.
The energy operations reported operating income for 1994 of $415 million,
compared with $411 million in 1993. Special items in 1994 included a $23
million gain on the sale of a 20 percent interest in Tenneco Resources to
Ruhrgas AG and an $11 million contract settlement with Columbia Gas. Special
items in 1993 included $31 million gain on the sale of Viking and Dean Pipeline
Company. When non-recurring items in both years are excluded, operating income
in 1994 declined slightly, compared with 1993. Declines during 1994 in the
regulated business were primarily due to transportation contract expirations
amounting to $12 million. Declines in nonregulated gas marketing prices
resulted in a $10 million decrease. Offsetting these declines was significant
growth in the nonregulated businesses which contributed $24 million.
The other operations of the Energy Business reported an operating loss of $48
million in 1994, compared with operating income of $8 million for 1993. The
1993 operating income included a gain of $39 million from contributing the
investment of the Energy Business in Cummins Engine Company to the Case
Corporation Pension Plan for Hourly Paid Employees.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Net interest expense increased $15 million from $127 million in 1993 to $142
million in 1994. For additional information on corporate debt allocation, see
"--Results of Operations for the Six Months Ended June 30, 1996 and 1995--
Interest Expense (net of interest allocated to affiliates)."
INCOME TAXES
Income tax expense for 1994 was $72 million compared with $104 million
reported for 1993. The lower tax expense in 1994 was primarily the result of
lower pre-tax earnings.
EXTRAORDINARY LOSS
Extraordinary loss for 1993 was $25 million, net of income tax benefit of $13
million. This was the result of redemption premiums from prepaying high
interest-bearing long-term debt.
LIQUIDITY & CAPITAL RESOURCES
Operating Activities
Net cash used by operating activities was $278 million for the year 1994,
compared with net cash provided of $209 million for 1993, a decrease of $487
million. This decrease was due in part to lower sales of receivables in 1994.
Trade receivables sold to the ASCC were $313 million less in 1994 compared with
1993. In addition, rate refund payments of approximately $250 million were made
to pipeline customers in 1994. The working capital increase of $652 million for
1994 resulted primarily from the reduction of the pipeline rate refund
liability of approximately $250 million and lower tax accruals of $252 million.
The lower tax accruals resulted from the utilization of capital losses related
to the sale of assets.
Investing Activities
Net cash used by investing activities in 1994 was $229 million, compared with
net cash used of $35 million in 1993. Net proceeds from the sale of businesses
and assets were $68 million in 1994. Net proceeds from the sale of businesses
in 1993 of $114 million resulted from the sales of Dean Pipeline Company and
Viking.
Expenditures for plant, property and equipment from continuing operations for
1994 were $345 million, compared with $171 million for 1993.
50
<PAGE>
Financing Activities
Cash provided by financing activities was $426 million in 1994 compared to
cash used of $49 million in 1993. During 1993, Tenneco issued $1.2 billion of
common stock which was used to retire long-term debt. In 1994, Tenneco issued
stock for $188 million, received cash from affiliates of $1.4 billion,
including approximately $700 million in proceeds from sales of assets by
affiliates, and retired debt of $508 million.
FERC MATTERS
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 herein.
ENVIRONMENTAL MATTERS
Tenneco Energy and certain of its subsidiaries are subject to various
environmental claims and proceedings relating to its current businesses and
discontinued operations. See "The Energy Business--Environmental Matters."
51
<PAGE>
THE TRANSACTION
The Distributions, Merger and Charter Amendment are separate parts of the
Transaction, none of which will be consummated unless the Transaction as a
whole is approved at the Tenneco Special Meeting (although Tenneco may elect
subsequently to proceed with one or more of the transactions included in the
Transaction which do not require the same level of stockholder approval if the
Transaction is not approved). The Distributions will not be consummated until
all other conditions to the Merger have been satisfied (or can be
contemporaneously satisfied), other than the filing of a Certificate of Merger
with the Secretary of State of Delaware.
The principal transactions which will be undertaken to consummate the
Transaction include the (i) NPS Issuance, (ii) Debt Realignment, (iii)
Corporate Restructuring Transactions, (iv) Cash Realignment (as defined), (v)
Charter Amendment, (vi) Distributions, and (vii) Merger. See "The NPS
Issuance," "Debt and Cash Realignment," "Corporate Restructuring Transactions,"
"The Distributions," and "The Merger."
The Transaction is being submitted as a single, unified proposal to Tenneco's
existing stockholders for consideration at the Tenneco Special Meeting.
Approval of the Transaction requires the affirmative vote of (i) holders of a
majority of the outstanding shares of the Tenneco Common Stock and Tenneco
$7.40 Preferred Stock, voting together as a class, and (ii) holders of a
majority of the outstanding shares of $7.40 Preferred Stock and $4.50 Preferred
Stock, voting together as a class. The holders of more than 75% of the $4.50
Preferred Stock (which are presently expected to be the holders as of the
Tenneco Record Date) have agreed to grant an irrevocable proxy to Tenneco to so
vote such shares. If the Junior Preferred Stock to be issued in the NPS
Issuance is issued prior to effectiveness of the Charter Amendment, the holders
thereof will be entitled to vote (but not at the Tenneco Special Meeting) to
approve the Distributions and the Charter Amendment. In such event, Tenneco
will obtain the consent of the initial record holders of such Junior Preferred
Stock to the Distributions and the Charter Amendment in connection with the NPS
Issuance.
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The following sections entitled "The NPS Issuance," "Debt and Cash
Realignment," "Corporate Restructuring Transactions," "The Distributions" and
"The Merger" contain descriptions of certain provisions of the Distribution
Agreement and Merger Agreement. These descriptions are only summaries and do
not purport to be complete. These descriptions are qualified in their entirety
by reference to the complete text of the Distribution Agreement and Merger
Agreement. Copies of the Distribution Agreement and Merger Agreement as
currently in effect are filed as Exhibits to the Registration Statement of
which this Prospectus forms a part.
THE NPS ISSUANCE
Prior to the Merger, Tenneco will issue in a public offering new shares of
Junior Preferred Stock in one or more series pursuant to the NPS Issuance in an
amount calculated to have, to the extent possible, an aggregate value as of the
Merger Effective Time that is equal to approximately 25% (but in any event more
than 20%) of the total value of all shares of Tenneco capital stock then
outstanding. Holders of the Junior Preferred Stock issued pursuant to the NPS
Issuance will possess the right to elect, voting as a class, a number of
directors of Tenneco representing one-sixth of the members of the Board of
Directors of Tenneco and the Tenneco Board of Directors will be set at six or
an integral multiple of six. The NPS Issuance Proceeds are estimated to be $275
million. Tenneco expects to use the net NPS Issuance Proceeds (estimated to be
$265 million) to repay a portion of the outstanding Tenneco Energy Consolidated
Debt pursuant to the Debt Realignment.
Under the existing terms of the Tenneco Charter, the approval of a majority
of the outstanding Junior Preferred Stock will be required to effect the
Distributions and the approval of two-thirds of the outstanding Junior
Preferred Stock will be required to effect the Charter Amendment if the Junior
Preferred Stock is issued prior to the Charter Amendment becoming effective
(which is expected to occur on the day following the Tenneco Special Meeting,
if the Transaction is approved thereat). Accordingly, if the NPS Issuance
occurs prior to the effectiveness of the Charter Amendment, as part of the NPS
Issuance, the Charter Amendment and Distributions will be submitted for
approval by the initial record holders of the Junior Preferred Stock issued
pursuant to the NPS Issuance (which will be the underwriters for the public
offering) by written consent in lieu of a meeting. Notwithstanding such
approval, persons who become record holders of the Junior Preferred Stock on or
prior to the date of the Tenneco Special Meeting will have the right to demand
appraisal of their shares of Junior Preferred Stock in connection with the
Merger at or prior to the Tenneco Special Meeting. See "The Merger--Appraisal
Rights."
The shares of Junior Preferred Stock issued pursuant to the NPS Issuance will
not be converted or otherwise exchanged in the Merger and will remain
outstanding immediately following consummation thereof (held by the persons who
were the holders of such shares immediately prior to the Merger), and the
holders thereof will receive no consideration in respect thereof in connection
with the Merger. See "The Charter Amendment."
Although the NPS Issuance is one of the transactions contemplated by the
Merger Agreement, the NPS Issuance is expected to be consummated prior to the
Tenneco Special Meeting and thus regardless of the outcome of the vote on the
Transaction at the Tenneco Special Meeting.
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DEBT AND CASH REALIGNMENT
In general, from and after the Distributions each of Tenneco, New Tenneco and
Newport News will be responsible for the debts, liabilities and obligations
related to the business or businesses that it owns and operates following
consummation of the Corporate Restructuring Transactions. See "Corporate
Restructuring Transactions" and "The Distributions." Tenneco's historical
practice, however, has been to 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.
Accordingly, the Merger Agreement, Distribution Agreement and Ancillary
Agreements provide for (i) the pre-Distribution restructuring of the Tenneco
Energy Consolidated Debt pursuant to the Debt Realignment, (ii) the allocation
among each of Tenneco, New Tenneco and Newport News of the total amount of cash
and cash equivalents on hand as of the Merger Effective Time pursuant to the
Cash Realignment, and (iii) the allocation of responsibility for certain
capital expenditures related to the Energy Business.
DEBT REALIGNMENT
The Merger Agreement requires Tenneco to, or to cause its relevant
subsidiaries to, obtain the requisite consents of the various lenders to permit
consummation of the Transaction and tender for, exchange, redeem, prepay,
defease or let mature the Tenneco Energy Consolidated Debt prior to the
Distributions.
The Debt Realignment is intended to reduce the total amount of the Tenneco
Energy Consolidated Debt to an amount that, when added to the total amount of
certain other obligations of the Energy Business outstanding, as of the Merger
Effective Time (the "Actual Energy Debt Amount"), is equal to $2.65 billion,
less the NPS Issuance Proceeds and subject to certain other specified
adjustments (the "Base Debt Amount"). As of June 30, 1996, the total book value
of Tenneco Energy Consolidated Debt was $4,443 million, including $634 million
of short-term debt (excluding the current portion of long-term debt), $75
million of non-public debt and $3,734 million book value ($3,955 million
principal amount) of publicly held debt (the "Public Debt"). The short-term
debt consists primarily of commercial paper and bank borrowings under Tenneco's
current credit facilities. The Public Debt includes an aggregate of $2,619
million, $436 million and $679 million book value ($2,625 million, $650 million
and $680 million principal amount) of Public Debt issued in various series
under several different indentures by Tenneco, and by its subsidiaries TGP and
Tenneco Credit Corporation ("TCC"), respectively.
The short-term debt and the $75 million of non-public debt will be retired
with cash and some of the non-public debt is expected to remain in place
subject to the consent of the lenders. In addition, Tenneco and its
subsidiaries will defease or let mature approximately $428 million of Public
Debt, New Tenneco will offer to exchange debt obligations of New Tenneco (the
"New Tenneco Public Debt") for $1,950 million of aggregate principal amount of
Public Debt (the "Debt Exchange Offers") and Tenneco will offer to purchase for
cash approximately $1,580 million of aggregate principal amount of Public Debt
pursuant to a series of tender offers (the "Debt Tender Offers"). The
defeasances, Debt Tender Offers and related extinguishments described above, as
well as the retirement of existing short-term and non-public debt, will be
financed by internally generated cash, borrowings by Tenneco under the Tenneco
Credit Facility (the "Tenneco Revolving Debt"), the net NPS Issuance Proceeds,
and a cash distribution of $600 million to be paid by Newport News to Tenneco
or one of its subsidiaries principally using borrowings under one or more
credit facilities and/or financings to be entered into by Newport News in
connection with the Transaction (the "Newport News Financings"). The balance of
the funding will be financed by a cash dividend to be paid by New Tenneco to
Tenneco principally using borrowings under a new $1.75 billion credit facility
to be entered into by New Tenneco in connection with the Transaction (the "New
Tenneco Credit Facility"). Upon consummation of the Debt Exchange Offers,
Tenneco will then purchase for cash (and subsequently extinguish) the Public
Debt held by New Tenneco (which cash will then be distributed back to Tenneco).
Upon consummation of the Debt Tender Offers, the Public Debt acquired thereby
will be extinguished.
Accordingly, after giving effect to the Debt Realignment, Tenneco and its
appropriate subsidiaries, as applicable, after giving effect to the Transaction
(the "Energy Group") will remain responsible for all of the
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Tenneco Energy Consolidated Debt which remains outstanding and any borrowings
under the Tenneco Credit Facility, Newport News and its appropriate
subsidiaries, as applicable, will be responsible for all borrowings under the
Newport News Financings and New Tenneco will be responsible for the New Tenneco
Public Debt and all borrowings under the New Tenneco Credit Facility.
The Debt and Cash Allocation Agreement to be entered into among Tenneco, New
Tenneco and Newport News in connection with the Distributions (the "Debt and
Cash Allocation Agreement") contemplates that, as of the Merger Effective Time,
the Actual Energy Debt Amount be limited to the Base Debt Amount. The Base Debt
Amount will equal $2.65 billion less the NPS Issuance Proceeds, (i) plus the
sum of: (a) the amount of all cash payments made by Tenneco and its
subsidiaries during the period from June 19, 1996 to the Merger Effective Time
(the "Merger Interim Period") in respect of gas purchase contracts as a result
or in respect of any settlement, judgment or satisfaction of a bond in excess
of the market price for gas received under such contracts by Tenneco and its
subsidiaries reduced by the amount of any cash payments received by Tenneco and
its subsidiaries from customers, insurers or other third parties in respect of
any such settlement, judgment or satisfaction of a bond (other than ones
refunded prior to the Merger Effective Time) or with respect to any GSR costs
recovered (and not refunded) on or prior to the Merger Effective Time, (b) the
amount of any purchase price paid by Tenneco or its subsidiaries during the
Merger Interim Period to acquire an additional interest in certain existing
pipeline operations, (c) the amount of all cash payments made by Tenneco and
any of the Energy Subsidiaries during the Merger Interim Period in settlement
of any significant claim, action, suit or proceeding to the extent such matter
would be an Energy Liability (as defined) and with the consent of El Paso,
which shall not be arbitrarily withheld, reduced by the amount of any payments
by or recoveries from third parties received by Tenneco or its subsidiaries
during the Merger Interim Period relating to any such settlement, and (d) the
amount of certain other capital expenditures and settlements of certain claims
by the Energy Business during the Merger Interim Period, and (ii) less (a) the
amount, calculated as of the Merger Effective Time, of any rate refunds,
including interest, which would be payable to customers pursuant to the rate
settlement at FERC Docket RP95-112 and which have not been paid as of the
Merger Effective Time, whether such amounts are to be paid to customers or
credited against GSR costs pursuant to a settlement with customers, and (b) the
proceeds of the monetization of certain assets of the Energy Business during
the Merger Interim Period. The Actual Energy Debt Amount will include the
following amounts, as of the Merger Effective Time: (i) outstanding amounts
under the Tenneco Revolving Debt (plus accrued and accreted interest and fees),
(ii) the value of any remaining Public Debt, (iii) the outstanding amount of
other Tenneco Energy Consolidated Debt (plus accrued and accreted interest and
fees), (iv) the unpaid amount of Transaction expenses incurred by Tenneco and
its subsidiaries, (v) certain sales and use, gross receipt or other transfer
taxes applicable to the Transaction, (vi) certain income taxes resulting from
the Transaction, (vii) the outstanding amount of any off balance sheet
indebtedness incurred after the date of the Merger Agreement to finance the
acquisition by Tenneco of an additional interest in the pipeline operations
referred to above, (viii) unpaid dividends declared on Tenneco stock which have
a record date before the Merger Effective Time, and (ix) dividends accrued on
the Junior Preferred Stock which are unpaid as of the Merger Effective Time.
Pursuant to the Debt Cash Adjustment, if the post-Transaction audit conducted
by the parties determines that the Actual Energy Debt Amount as of the Merger
Effective Time exceeds the Base Debt Amount, New Tenneco will be required to
pay the excess to Tenneco in cash. Likewise, Tenneco will be required to pay to
New Tenneco in cash the amount, if any, by which such Actual Energy Debt Amount
is less than the Base Debt Amount.
The Debt Realignment is expected to create tax benefits to Tenneco of
approximately $120 million. Pursuant to the tax sharing agreement to be entered
into by Tenneco, New Tenneco, Newport News and El Paso in connection with the
Distributions, any such tax benefits will be allocated to New Tenneco. For a
description of this tax sharing agreement, see "The Distributions--Relationship
Among Tenneco, New Tenneco and Newport News After the Distributions."
Also in connection with the Debt Realignment, Tenneco has agreed that, (i)
the indebtedness for borrowed money of Tenneco and its direct and indirect
subsidiaries after giving effect to the Distributions as of the Merger
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Effective Time (other than the Tenneco Revolving Debt) will contain only
specified financial and operational covenants, and (ii) with respect to the
Public Debt for which Tenneco and the Energy Subsidiaries will remain liable
after the Merger, there shall be no extension of maturity or average life,
increase in interest rates or adverse change in defeasance or redemption
provisions.
As part of the Debt Tender Offers and the Debt Exchange Offers, Tenneco or
New Tenneco, as the case may be, will solicit the consent of the holders of
certain of the Public Debt to make various amendments to the indentures of
Tenneco, TGP and TCC governing such Public Debt, including amendments to
certain of the indentures to permit various aspects of the Transaction. The
approval of a majority in aggregate principal amount of all series of Public
Debt of Tenneco taken together as a single class is necessary to amend the
indenture under which Public Debt was issued by Tenneco. The approval of 66
2/3% in aggregate principal amount of the series of Public Debt of TGP is
subject to a Debt Tender Offer is necessary to amend the indenture under which
such Public Debt was issued. The approval of 66 2/3% in aggregate principal
amount of all series of the senior TCC Public Debt that are subject to the Debt
Tender Offers, taken together, and all series of the TCC subordinated Public
Debt that are subject to the Debt Tender Offers, taken together, are necessary
to amend the indentures under which such Public Debt was issued.
The obligation of Tenneco to consummate the Debt Tender Offers and the
obligation of New Tenneco to consummate the Debt Exchange Offers, are
conditioned upon sufficient Public Debt being tendered and/or exchanged such
that the necessary amendments to the relevant indentures have been approved and
such tenders have not been withdrawn (which condition may be waived).
Completion of the Debt Realignment is a condition to the obligation of Tenneco
and El Paso to consummate the Merger and failure to consummate the Debt
Realignment could result in Tenneco's abandonment of the Transaction or El
Paso's abandonment of the Merger.
Certain components of the Debt Realignment have already been consummated, or
are expected to be consummated prior to the Tenneco Special Meeting. Tenneco
does not presently intend to unwind any such transactions if the Transaction is
not approved at the Tenneco Special Meeting.
The offering of the New Tenneco Debt in the Debt Exchange Offers will be made
by means of a separate prospectus that constitutes a part of New Tenneco's
Registration Statement on Form S-4 (File No. 333-14003), which has been filed
with the Commission. The Debt Tender Offers will be made only by means of an
offer to purchase made by Tenneco.
CAPITAL EXPENDITURE ADJUSTMENT
Also as part of the Debt Realignment, Tenneco has agreed to make certain
minimum capital expenditures with respect to the Energy Business pending
consummation of the Transaction. If the actual amount of such capital
expenditures exceeds the required amount, after consummation of the Transaction
Tenneco will be required to pay the excess to New Tenneco in cash. Likewise,
New Tenneco will be required to pay to Tenneco in cash the amount, if any, by
which such actual capital expenditures are less than the required amount. The
required amount of Energy Business capital expenditures is equal to
$333,200,000 for 1996, plus $27,750,000 per month for each month (or pro rata
portion) from January 1, 1997 to the Merger Effective Time.
CASH REALIGNMENT
The total amount of cash and cash equivalents of Tenneco and its consolidated
subsidiaries (which, as of June 30, 1996, totalled approximately $229 million),
as of the Merger Effective Time will be allocated $25 million plus a percentage
of the proceeds from the sale of certain Energy Business receivables to
Tenneco, $5 million to Newport News and the balance to New Tenneco (the "Cash
Realignment"). Following the post-Transaction audit described above, New
Tenneco will be required to pay to Tenneco or Newport News, as the case may be,
the amount of any shortfall as of the Merger Effective Time from the above-
reflected allocation. Likewise, Tenneco and Newport News will each be required
to pay to New Tenneco any excess cash and cash equivalents as of the Merger
Effective Time determined pursuant to such audit.
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CORPORATE RESTRUCTURING TRANSACTIONS
Pursuant to the Distribution Agreement, prior to consummation of the
Distributions, Tenneco will effect the Corporate Restructuring Transactions
through a series of intercompany transfers and distributions. Upon completion
of the Corporate Restructuring Transactions, Tenneco's existing businesses and
assets will be restructured, divided and separated so that, upon consummation
of the Distributions, substantially all of the assets, liabilities and
operations of (i) the Industrial Business will be owned and operated, directly
and indirectly, by New Tenneco, and (ii) the Shipbuilding Business will be
owned and operated, directly and indirectly, by Newport News. As a result of
the Corporate Restructuring Transactions, upon consummation of the
Distributions the remaining assets, liabilities and operations of Tenneco and
its remaining subsidiaries will consist solely of those related to the Energy
Business, which includes liabilities and limited assets relating to
discontinued Tenneco operations not related to the Industrial Business or the
Shipbuilding Businesses. See "The Energy Business--Discontinued and Other
Operations."
The assets which will be owned by New Tenneco upon consummation of the
Corporate Restructuring Transactions (the "Industrial Assets") are generally
those related to the past and current conduct of the Industrial Business, as
reflected on the New Tenneco June 30, 1996 pro forma balance sheet attached as
an exhibit to the Distribution Agreement to the extent still held on the
effective date of the Distributions (the "Distribution Date") (plus any
subsequently acquired asset which is of a nature or type that would have
resulted in such asset being included thereon had it been acquired prior to the
date thereof), plus all rights expressly allocated to New Tenneco and its
subsidiaries under the Distribution Agreement or any Ancillary Agreement. As
part of the Corporate Restructuring Transactions, New Tenneco will acquire
various corporate assets of Tenneco such as the "Tenneco" trademark and
associated rights, other intellectual property and certain office space and
related equipment. The assets which will be owned by Newport News (the
"Shipbuilding Assets") upon consummation of the Corporate Restructuring
Transactions are generally those related to the past and current conduct of the
Shipbuilding Business, as reflected on the Newport News June 30, 1996 pro forma
balance sheet attached as an exhibit to the Distribution Agreement to the
extent still held on the Distribution Date (plus any subsequently acquired
asset which is of a nature or type that would have resulted in such asset being
included thereon had it been acquired prior to the date thereof), plus all
rights expressly allocated to Newport News and its subsidiaries under the
Distribution Agreement or any Ancillary Agreement. The remaining assets of
Tenneco (the "Energy Assets") will continue to be owned and operated by Tenneco
following the Corporate Restructuring Transactions and Distributions. See "The
Energy Business."
The liabilities to be retained or assumed by New Tenneco pursuant to the
Distribution Agreement (the "Industrial Liabilities") generally include (i)
those liabilities related to the Industrial Assets and the current and past
conduct of the Industrial Business, including liabilities reflected on the New
Tenneco June 30, 1996 pro forma balance sheet which remain outstanding as of
the Distribution Date (plus outstanding liabilities that were subsequently
incurred or accrued liabilities determined on a basis consistent with the
determination of liabilities thereon), (ii) certain liabilities for any
violations or alleged violations of securities or other laws arising out of
documents relating to, filed by or on behalf of, New Tenneco in connection with
the Transaction, and (iii) those liabilities expressly allocated to New Tenneco
or its subsidiaries under the Distribution Agreement or any Ancillary
Agreement.
The liabilities to be retained or assumed by Newport News pursuant to the
Distribution Agreement (the "Shipbuilding Liabilities") generally include (i)
those liabilities related to the Shipbuilding Assets and the current and past
conduct of the Shipbuilding Business, including liabilities reflected on the
aforementioned Newport News June 30, 1996 pro forma balance sheet which remain
outstanding as of the Distribution Date (plus outstanding liabilities that were
subsequently incurred or accrued liabilities determined on a basis consistent
with the determination of liabilities thereon), (ii) certain liabilities for
any violations or alleged violations of securities or other laws arising out of
documents relating to, filed by or on behalf of, Newport News in connection
with the Transaction or certain financing arrangements, and (iii) those
liabilities expressly allocated to Newport News or its subsidiaries under the
Distribution Agreement or any Ancillary Agreement.
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The liabilities to be retained or assumed by Tenneco and/or its appropriate
subsidiaries pursuant to the Distribution Agreement (the "Energy Liabilities")
generally include (i) those liabilities related to the Energy Assets and the
current and past conduct of the Energy Business, including liabilities
reflected on the Energy Business June 30, 1996 pro forma balance sheet attached
as an exhibit to the Distribution Agreement and included elsewhere herein which
remain outstanding as of the Distribution Date (plus outstanding liabilities
that were subsequently incurred or accrued liabilities determined on a basis
consistent with the determination of liabilities thereon), (ii) those
liabilities expressly allocated to Tenneco or its subsidiaries under the
Distribution Agreement or any Ancillary Agreement, and (iii) all other
liabilities of Tenneco or any other member of the Energy Group which do not
constitute Industrial Liabilities or Shipbuilding Liabilities, including
certain liabilities for violations of securities or other laws.
It is expected that a substantial number of the Corporate Restructuring
Transactions will be consummated prior to the date of the Tenneco Special
Meeting. Tenneco does not presently intend to unwind any such transactions if
the Transaction is not approved at the Tenneco Special Meeting.
For a description of certain liabilities that will be expressly allocated
among Tenneco, New Tenneco and Newport News and their respective subsidiaries
by the Distribution Agreement and Ancillary Agreements, including liabilities
for the Tenneco Energy Consolidated Debt, taxes and certain employee benefits,
see "Debt and Cash Realignment," "The Distributions--Certain Other Pre-
Distribution Transactions" and "The Distributions--Relationship Among Tenneco,
New Tenneco and Newport News After the Distributions."
THE DISTRIBUTIONS
MANNER OF DISTRIBUTION
Pursuant to the Distribution Agreement, the Tenneco Board of Directors will
declare the special distribution to effect the Distributions and will set the
Distribution Date (which will be prior to the Merger Effective Time). Subject
to the conditions summarized below, on the Distribution Date Tenneco will
distribute pro rata to all holders of record of Tenneco Common Stock as of such
date (i) one share of New Tenneco Common Stock for every share of Tenneco
Common Stock so held, and (ii) one share of Newport News Common Stock for every
five shares of Tenneco Common Stock so held. Pursuant to the Distribution
Agreement, as soon as practicable on or after the Distribution Date, Tenneco
will deliver to First Chicago Trust Company of New York or such other trust
company or bank designated by Tenneco, as distribution agent for holders of
Tenneco Common Stock as of the Distribution Date, certificates representing
such shares of New Tenneco Common Stock and Newport News Common Stock as are
required for the Distributions.
CERTAIN OTHER PRE-DISTRIBUTION TRANSACTIONS
Settlement of Intercompany Accounts. Pursuant to the Distribution Agreement,
all intercompany receivables, payables and loans (unless specifically provided
for in any Ancillary Agreement) between entities which will be the members of
separate business groups following consummation of the Distributions must be
settled, capitalized or converted into ordinary trade accounts as of the close
of business on the Distribution Date. Further, all intercompany agreements
between members of different business groups (other than those contemplated by
the Transaction) will be terminated.
Certain Consent Requirements. Pursuant to the Distribution Agreement, each
party has agreed to use its best efforts to obtain any third-party consents or
approvals that are required to consummate the transactions contemplated
thereby. Consent of the holders of certain of the Tenneco Energy Consolidated
Debt will be required and sought in connection with the Distributions. See
"Debt and Cash Realignment." Tenneco presently believes that it will be able to
obtain in a timely manner all required third-party consents with respect to its
material contractual obligations in connection with the Distributions.
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Other. The Distribution Agreement also requires that a variety of other
actions be taken by Tenneco and/or its subsidiaries prior to consummation of
the Distributions including, without limitation, (i) certain corporate
organizational actions with respect to New Tenneco and Newport News, (ii) the
transfer and assignment of certain licenses and permits among the Energy Group,
New Tenneco and its subsidiaries after giving effect to the Transaction (the
"Industrial Group") and Newport News and its subsidiaries after giving effect
to the Transaction (the "Shipbuilding Group"), (iii) assignment and assumption
of agreements that relate exclusively to the Energy Business, Industrial
Business or Shipbuilding Business to the Energy Group, Industrial Group or
Shipbuilding Group, as appropriate (with joint agreements to be assigned and
assumed in part), and (iv) the preparation and filing of NYSE listing
applications and necessary federal and state securities laws filings.
RELATIONSHIP AMONG TENNECO, NEW TENNECO AND NEWPORT NEWS AFTER THE
DISTRIBUTIONS
Tenneco, New Tenneco and Newport News have entered into the Distribution
Agreement, which governs certain aspects of their relationships both prior to
and following the Distributions. See "--Certain Other Pre-Distribution
Transactions." In addition, prior to the Distributions, Tenneco, New Tenneco
and/or Newport News (and their appropriate subsidiaries) have entered into, or
will prior to the Distributions enter into, the Ancillary Agreements which are
intended to further effect the disaffiliation of the Energy Business,
Industrial Business and the Shipbuilding Business and to govern certain
additional aspects of their ongoing relationships.
Terms of the Distribution Agreement. In addition to providing for the terms
of the Distributions and the various actions to be taken prior to the
Distributions, the Distribution Agreement contains other agreements governing
the relationship among Tenneco, New Tenneco and Newport News prior to and
following the Distributions.
The Distribution Agreement provides that, from and after the Distribution
Date, (i) Tenneco shall (and shall cause the other members of the Energy Group
to) assume, pay, perform and discharge all Energy Liabilities in accordance
with their terms, (ii) New Tenneco shall (and shall cause the other members of
the Industrial Group to) assume, pay, perform and discharge all Industrial
Liabilities in accordance with their terms, and (iii) Newport News shall (and
shall cause the other members of the Shipbuilding Group to) assume, pay,
perform and discharge all Shipbuilding Liabilities in accordance with their
terms. See "Corporate Restructuring Transactions."
In addition, the Distribution Agreement provides for cross-indemnities that
require (i) Tenneco to indemnify New Tenneco and Newport News (and their
respective subsidiaries, directors, officers, employees and agents, and certain
other related parties) against all losses arising out of or in connection with
the Energy Liabilities or the breach of the Distribution Agreement or any
Ancillary Agreement by Tenneco, (ii) New Tenneco to indemnify Tenneco and
Newport News (and their respective subsidiaries, directors, officers, employees
and agents, and certain other related parties) against all losses arising out
of or in connection with the Industrial Liabilities or the breach of the
Distribution Agreement or any Ancillary Agreement by New Tenneco, and (iii)
Newport News to indemnify Tenneco and New Tenneco (and their respective
subsidiaries, directors, officers, employees and agents, and certain other
related parties) against all losses arising out of or in connection with the
Shipbuilding Liabilities or the breach of the Distribution Agreement or any
Ancillary Agreement by Newport News and for contribution in certain
circumstances.
Pursuant to the Distribution Agreement, each of the parties has agreed to use
all reasonable efforts to take or cause to be taken all action, and do or cause
to be done all things, reasonably necessary, proper or advisable to consummate
the transactions contemplated by and carry out the purposes of the Distribution
Agreement. As such, the Distribution Agreement provides that if any
contemplated pre-Transaction transfers and assignments have not been effected
on or prior to the Distribution Date, the parties will cooperate to effect such
transfers as quickly thereafter as practicable. The entity retaining any asset
or liability which should have been transferred prior to the Distribution Date
will continue to hold that asset for the benefit of the party entitled thereto
or that liability for the account of the party required to assume it, and must
take such other action as may be reasonably requested by the party to whom such
asset was to be transferred or by whom such liability was to be assumed in
order to place such party, insofar as reasonably possible, in the same position
as would have existed had such asset or liability been transferred or assumed
as contemplated by the Distribution Agreement.
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The Distribution Agreement provides for the transfer of books and records
among Tenneco, New Tenneco and Newport News and their respective subsidiaries
and grants to each party access to certain information in the possession of
the others (subject to certain confidentiality requirements). In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each party to obtain the consent
of the others prior to waiving any shared privilege.
Terms of the Ancillary Agreements. Below are descriptions of the principal
Ancillary Agreements which have been, or prior to consummation of the
Distributions will be, entered into by Tenneco, New Tenneco and/or Newport
News (and, in certain circumstances, their appropriate subsidiaries).
Benefits Agreement
The Benefits Agreement to be entered into by and among Tenneco, New Tenneco
and Newport News (the "Benefits Agreement") will define certain labor,
employment, compensation and benefit matters in connection with the
Distributions and the transactions contemplated thereby. Pursuant to the
Benefits Agreement, from and after the Distribution Date each of Tenneco, New
Tenneco and Newport News will continue employment of each of their respective
retained employees (subject to their rights to terminate said employees) with
the same compensation as prior to the Distribution Date, continue to honor
all related existing collective bargaining agreements, recognize related
incumbent labor organizations and continue sponsorship of hourly employee
benefit plans. New Tenneco will become the sole sponsor of the Tenneco Inc.
Retirement Plan (the "TRP") and of the Tenneco Inc. Thrift Plan (the "Tenneco
Thrift Plan") from and after the Distribution Date, and Tenneco and Newport
News will establish defined contribution plans for the benefit of each of
their respective employees to which the account balances of retained and
former employees of Tenneco and Newport News in the Tenneco Thrift Plan will
be transferred. The benefits accrued by Tenneco and Newport News employees in
the TRP will be frozen as of the last day of the calendar month including the
Distribution Date, and New Tenneco will amend the TRP to provide that all
benefits accrued through that day by Tenneco and Newport News employees are
fully vested and non-forfeitable. Tenneco will retain and assume employment
contracts with certain individuals. All liabilities under the Tenneco Inc.
Benefit Equalization Plan and the Supplemental Executive Retirement Plan will
be assumed by New Tenneco pursuant to the Benefits Agreement; however, New
Tenneco is entitled to reimbursement for certain payments thereunder from
Tenneco and Newport News. Generally, each of Tenneco, New Tenneco and Newport
News will retain liabilities with respect to the welfare benefits of its
current and former employees and their dependents, but Tenneco will assume
all liabilities for retiree medical benefits of the employees of discontinued
operations and their dependents. In addition, as of the Distribution Date,
participation by retained and former employees of Tenneco and Newport News in
the Tenneco Inc. Deferred Compensation Plan and the 1993 Deferred
Compensation Plan will be discontinued.
Debt and Cash Allocation Agreement
The Debt and Cash Allocation Agreement will govern the allocation among the
parties of the cash and cash equivalents of Tenneco and its consolidated
subsidiaries on hand as of the Merger Effective Time and responsibility for
certain capital expenditures related to the Energy Business, as described
above under "Debt and Cash Realignment." The Debt and Cash Allocation
Agreement will also (i) require Newport News to make a $600 million
distribution to Tenneco or one of its subsidiaries to be used in connection
with the Debt Realignment, (ii) govern certain terms of the Tenneco Credit
Facility, (iii) govern the conduct of the post-Transaction audit to be
undertaken to ascertain the Actual Energy Debt Amount and the amount of cash
and cash equivalents held by each of Tenneco, New Tenneco and Newport News
upon consummation of the Transaction, and (iv) require New Tenneco to pay in
cash to Tenneco the amount, if any, by which the Actual Energy Debt Amount
exceeds the Base Debt Amount (and require Tenneco to pay in cash to New
Tenneco the amount, if any, by which the Actual Energy Debt Amount is less
than the Base Debt Amount). See "Debt and Cash Realignment."
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Insurance Agreement
Tenneco has historically maintained at the parent-company level various
insurance policies for the benefit or protection of itself and its
subsidiaries. The Insurance Agreement to be entered into among Tenneco,
Newport News and New Tenneco (the "Insurance Agreement") in connection with
the Distributions will provide for the respective continuing rights and
obligations from and after the Distribution Date of the parties with respect
to these insurance policies (other than directors' and officers' liability
insurance policies, which are addressed by the Merger Agreement).
In general, following consummation of the Transaction, policies which
relate exclusively to the Energy Business or a member of the Energy Group
will be retained by Tenneco, policies which relate exclusively to the
Industrial Business or a member of the Industrial Group will be retained by
New Tenneco and policies which relate exclusively to the Shipbuilding
Business or a member of the Shipbuilding Group will be retained by Newport
News.
Pursuant to the Insurance Agreement, any non-exclusive Tenneco policies
which are in effect as of the Distribution Date (other than those which are
cost plus, fronting, high deductible or retrospective premium programs, as
described below) will either be transferred into the name of New Tenneco or
cancelled, at New Tenneco's option. In general, "go-forward" coverage under
these policies for the Energy Group and Shipbuilding Group (and certain
related persons) will be terminated as follows: (i) coverage under "claims-
made" policies (i.e., those policies which provide coverage for claims made
during a specified period) will be terminated on the Distribution Date for
any claims not made prior thereto, and (ii) coverage under "occurrence-based"
policies (i.e., those policies which provide coverage for acts or omissions
occurring during a specified period) will be terminated on the Distribution
Date for acts or omissions occurring thereafter. However, the Energy Group,
Industrial Group and Shipbuilding Group (and certain related persons) will
all continue to have access to these policies ("go-backward" coverage) for
claims made prior to the Distribution Date, in the case of claims-made
policies, and for acts or omissions which occurred prior to the Distribution
Date, in the case of occurrence-based policies (subject to certain
obligations to replace exhausted policy limits). Each respective group will
be liable for and get the benefit of premiums, costs and charges under these
policies that relate to its coverage thereunder.
Pursuant to the Insurance Agreement, policies which are cost plus,
fronting, high deductible or retrospective premium programs will be retained
by the Energy Group following the Distributions and shall provide no go-
forward coverage to the Industrial Group or Shipbuilding Group. However, go-
backward coverage will continue to be available to these groups, subject to
an obligation to reimburse Tenneco for premiums, costs and charges under
these policies related to their respective coverages following the
Distributions. Following the Distributions, Tenneco will be required to
maintain in place certain letters of credit and surety bonds securing
obligations under these policies.
Tax Sharing Agreement
The Tax Sharing Agreement to be entered into among Tenneco, Newport News,
New Tenneco and El Paso (the "Tax Sharing Agreement") will provide for the
allocation among the parties of tax liabilities arising prior to, as a result
of, and subsequent to the Distributions. As a general rule, Tenneco will be
liable for all taxes not specifically allocated to New Tenneco or Newport
News under the specific terms of the Tax Sharing Agreement. Generally, New
Tenneco will be liable for taxes imposed exclusively on the Industrial Group,
and Newport News will be liable for taxes imposed exclusively on the
Shipbuilding Group (including for pre-Distribution periods, taxes imposed on
Newport News). In the case of federal income taxes imposed on the combined
activities of Tenneco, the Industrial Group and the Shipbuilding Group, each
of New Tenneco and Newport News will be liable to Tenneco for federal income
taxes attributable to their activities, and each will be allocated an agreed-
upon share of estimated tax payments made by the Tenneco consolidated group,
except that (i) tax benefits attributable to the Debt Realignment ("Debt
Discharge Items"), presently anticipated to total approximately $120 million,
will be specifically allocated to the Industrial Group, and (ii) tax benefits
attributable to certain items included in the Base Debt Amount ("Base Debt
Amount Adjustment Items") will be specifically allocated to Tenneco. New
Tenneco will also be responsible for tax items attributable to certain
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discontinued operations of Tenneco to the extent that such items exceed
forecasted amounts by more than a specified amount. In the case of state
income taxes imposed on the combined activities of the business groups,
Tenneco will be responsible for payment of the combined tax to the state tax
authority, and New Tenneco and Newport News will pay Tenneco a deemed tax
equal to the tax that would be imposed if the Industrial Group and the
Shipbuilding Group had filed combined returns for their respective groups,
except that Debt Discharge Items and Base Debt Amount Adjustment Items will
be specifically allocated to New Tenneco and Tenneco, respectively.
In general and, except as provided below, Tenneco will be responsible for
any taxes imposed on or resulting from the Transaction ("Transaction Taxes").
New Tenneco will be responsible for any Transaction Taxes resulting from any
inaccuracy in factual statements or representations in connection with the
IRS Ruling Letter or the tax opinion to be received by Tenneco in connection
with the Transaction (the "Tax Opinion") to the extent attributable to facts
in existence prior to the Merger, but excluding facts relating to the
Shipbuilding Group or El Paso. Newport News and El Paso will each be
responsible for the accuracy of any factual statements or representations
relating to them or their respective affiliates. Each of New Tenneco, Newport
News and El Paso will be responsible for any Transaction Tax to the extent
such tax is attributable to action taken by that entity which is inconsistent
with the tax treatment contemplated in the IRS Ruling Letter or Tax Opinion.
Certain Transaction Taxes (i.e., transfer taxes, and federal and state income
taxes imposed on those Corporate Restructuring Transactions which are known
to be taxable) are included in the determination of the Actual Energy Debt
Amount and consequently may be economically borne by New Tenneco (because New
Tenneco must pay to Tenneco in cash the amount, if any, by which the Actual
Energy Debt Amount exceeds the Base Debt Amount). If between the date of the
Merger Agreement and the Merger Effective Time, there is a change in law (as
defined in the Tax Sharing Agreement) and as a result of such change in law
Tenneco is required to restore certain deferred gains to income, then any
resulting tax shall be shared equally between New Tenneco and Tenneco.
Transition Services Agreement
Tenneco Business Services Inc. ("TBS") currently provides certain
administrative services to Tenneco, including mainframe computing services,
backup, recovery and related operations, consulting services and payroll
services. Under the Transition Services Agreement entered into among Tenneco,
TBS and El Paso (the "Transition Services Agreement"), at the request of El
Paso at least 45 days prior to the Merger Effective Time TBS (which will,
following the Distributions, be a subsidiary of New Tenneco) will continue to
provide the services specified in El Paso's request for a period of 12 months
from the Merger Effective Time at a price to be negotiated among the parties
and based on the market rate for comparable services. If elected, any or all
of the services may be terminated by Tenneco on 45 days notice to TBS.
Additionally, as described above, a separate Service Agreement may also be
entered into with Tenneco for transition services to be supplied by TBS to
Tenneco and its subsidiaries. The services covered and compensation for such
services would depend on the services elected by Tenneco, and the negotiation
among the parties, pursuant to the Transition Services Agreement.
Trademark Transition License Agreements
Upon consummation of the Corporate Restructuring Transactions, New Tenneco
will hold the rights to various trademarks, servicemarks, tradenames and
similar intellectual property, including rights in the marks "Tenneco" "Ten"
and "Tenn" (but not "Tennessee"), alone and in combination with other terms
and/or symbols and variations thereof (collectively, the "Trademarks"), in
the United States and elsewhere throughout the world. In connection with the
Distributions, Trademark Transition License Agreements will be entered into
as of the Distribution Date between both (i) New Tenneco and Tenneco, and
(ii) New Tenneco and Newport News. Pursuant to these agreements, New Tenneco
will grant to each of Tenneco and Newport News a limited, non-exclusive,
royalty-free license to use the Trademarks, with respect to specified goods
and services as follows: (a) Tenneco and Newport News will be permitted to
use the Trademarks in their corporate names for 30 days after the date of the
agreements (and, pursuant to the Distribution Agreement, each have agreed to
remove the Trademarks from such corporate names within 30 days after the
Distribution Date),
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(b) Tenneco and Newport News will be permitted to use their existing supplies
and documents which have the Trademarks imprinted on them for 6 months after
the date of the agreements, and (c) Tenneco and Newport News will be
permitted to use the Trademarks on existing signs, displays or other
identifications for a period (after the date of agreement of two years (in
the case of Tenneco) and one year (in the case of Newport News) after the
date of the agreements). However, so long as Tenneco or Newport News
continues to use the Trademarks, it must maintain certain quality standards
prescribed by New Tenneco in the conduct of business operations in which the
Trademarks are used. In addition, under these agreements each of Tenneco and
Newport News will agree to indemnify New Tenneco from any claims that arise
as a result of its use of the Trademarks or any breach of its agreement and
neither Tenneco nor Newport News may adopt or use at any time a word or mark
likely to be similar to or confused with the Trademarks. Each Transition
Trademark License Agreement shall be immediately terminable by New Tenneco
upon a material breach of the agreement by Tenneco or Newport News, as the
case may be.
CONDITIONS TO CONSUMMATION OF THE DISTRIBUTIONS
The Distributions are conditioned on, among other things, approval of the
Distributions by the holders of Tenneco stock at the Tenneco Special Meeting
and by the holders of Junior Preferred Stock, if issued prior to the
effectiveness of the Charter Amendment, and formal declaration of the
Distributions by the Tenneco Board of Directors. Other conditions to the
Distributions include (i) execution and delivery of certain of the Ancillary
Agreements and consummation of the various pre-Distribution transactions (such
as the Corporate Restructuring Transactions and the Debt Realignment), (ii)
receipt of the IRS Ruling Letter to the effect that for federal income tax
purposes the Distributions will be tax-free to Tenneco and its stockholders
under Section 355 of the Code and that certain internal spin-off transactions
involving Tenneco or its subsidiaries to be effected pursuant to the Corporate
Restructuring Transactions will also be tax-free, (iii) approval for listing on
the NYSE of the New Tenneco Common Stock and Newport News Common Stock to be
distributed, (iv) registration of the New Tenneco Common Stock and Newport News
Common Stock under the Exchange Act, (v) receipt of all material consents to
the Corporate Restructuring Transactions, the Distributions and transactions
contemplated in the Distribution Agreement, (vi) performance of the various
covenants required to be performed prior to the Distribution Date (see "--
Certain Other Pre-Distribution Transactions" and "--Relationship Among Tenneco,
New Tenneco and Newport News After the Distributions"), and (vii) lack of
prohibition of the Distributions by any law or governmental authority. On
October 30, 1996, the IRS issued the IRS Ruling Letter, which satisfied the
condition referred to in clause (ii) above. Even if all the conditions to the
Distributions are satisfied, Tenneco has reserved the right to, under certain
circumstances, amend or terminate the Distribution Agreement and the
transactions contemplated thereby. The Tenneco Board of Directors has not
attempted to identify or establish objective criteria for evaluating the
particular types of events or conditions that would cause the Tenneco Board of
Directors to consider amending or terminating the Distribution Agreement. See
"--Amendment or Termination of the Distributions." Although the foregoing
conditions may be waived by Tenneco to the extent permitted by law, the Tenneco
Board of Directors presently has no intention to proceed with the Distributions
unless each of these conditions is satisfied.
AMENDMENT OR TERMINATION OF THE DISTRIBUTION AGREEMENT
Prior to the Distributions, the Distribution Agreement may be amended or
terminated and the Distributions may be modified or abandoned by Tenneco
without the approval of its stockholders or New Tenneco or Newport News,
subject to the consent of El Paso as described below. If any amendment or
modification prior to the termination of the Merger Agreement or consummation
of the Merger adversely affects the Energy Business (other than to a de minimis
extent) or materially delays or prevents the consummation of the Merger, such
amendment can be effectuated only with prior consent of El Paso. Termination of
the Distribution Agreement prior to the termination of the Merger Agreement or
consummation of the Merger can be effectuated only with the prior written
consent of El Paso.
After consummation of the Distributions, the Distribution Agreement may be
amended or terminated only by a written agreement signed by Tenneco, New
Tenneco and Newport News. Certain amendments or terminations after the
Distributions also require the consent of third-party beneficiaries to the
extent that the Distribution Agreement has expressly guaranteed them rights.
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THE MERGER
CLOSING OF THE MERGER
On June 19, 1996 the respective Boards of Directors of El Paso, El Paso
Subsidiary and Tenneco each approved, and El Paso, El Paso Subsidiary and
Tenneco each executed and delivered, the original Merger Agreement. On November
1, 1996, the parties approved and executed an Amended and Restated Merger
Agreement, effective as of June 19, 1996, to make certain technical changes and
to fix the allocation of equity consideration among the holders of Tenneco
Stock (as defined). The Merger Agreement provides that, at the Merger Effective
Time, El Paso Subsidiary will be merged with and into Tenneco, with Tenneco
continuing as the surviving corporation of the Merger and as a subsidiary of El
Paso, and the separate existence of El Paso Subsidiary will cease.
The consideration to be paid by El Paso in the Merger consists of (i) the
retention by Tenneco of any outstanding Tenneco Energy Consolidated Debt as of
the Merger Effective Time (subject to the Debt Cash Adjustment) and Tenneco's
obligations to the holders of the Junior Preferred Stock issued in the NPS
Issuance, (ii) the retention by Tenneco after the Merger of liabilities related
to certain discontinued businesses of Tenneco estimated by El Paso at
approximately $600 million, and (iii) the issuance of El Paso equity securities
with an aggregate value equal to approximately $750 million (subject to the
effect of a collar on the average market price of El Paso Common Stock), to the
holders of Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred
Stock (collectively, the "Tenneco Stock").
Pursuant to the provisions of the Merger Agreement (unless the parties
otherwise agree), as soon as practicable (and in any event within two business
days) after the satisfaction or waiver of certain conditions summarized herein,
the closing of the transactions contemplated by the Merger Agreement will take
place (the "Closing") and a Certificate of Merger will be prepared, executed
and acknowledged and thereafter delivered to the Secretary of State of Delaware
for filing pursuant to the DGCL. The Merger shall become effective at the
Merger Effective Time, which shall be the time of the filing of the Certificate
of Merger with the Secretary of State of Delaware (or such later date or time
set forth therein). As used herein, the term "Closing Date" refers to the date
on which the Closing occurs.
EFFECTS OF THE MERGER
The Merger will have the effects specified in the DGCL. In addition, the
Merger Agreement provides that the Tenneco Charter will be further amended as
of the Merger Effective Time, to, among other things (i) alter the authorized
capital stock of Tenneco, (ii) eliminate the authorized class of Preferred
Stock, (iii) rename the Junior Preferred Stock as Preferred Stock, (iv)
eliminate the restrictions on business combinations with interested
stockholders contained in the Tenneco Charter, (v) modify the number of members
of and the structure of the Tenneco Board of Directors, and (vi) eliminate the
provisions regarding transactions between Tenneco and members of its Board of
Directors with certain interests in the transactions. See "The Charter
Amendment." The Merger Agreement also provides that the by-laws of El Paso
Subsidiary, as in effect immediately prior to the Merger Effective Time and
amended to include specified provisions regarding the indemnification of and
advancement of expenses to directors and officers, shall become the by-laws of
Tenneco. In addition, the Merger Agreement provides that the directors of El
Paso Subsidiary at the Merger Effective Time will be the initial directors of
Tenneco after the Merger.
CERTAIN OTHER PRE-MERGER TRANSACTIONS
The Merger Agreement requires that the Distributions be consummated before
the Merger Effective Time with only such changes or modifications as do not
adversely affect, other than to a de minimis extent, the Energy Business.
Accordingly, the pre-Distribution transactions and conditions must generally be
consummated or satisfied, as the case may be, substantially as described herein
prior to the Merger. See "The Distributions."
Notwithstanding the foregoing, the Merger Agreement contemplates that under
certain circumstances Tenneco may enter into negotiations and/or an agreement
regarding a sale, merger or other disposition
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transaction involving either or both of the Shipbuilding Business and
Industrial Business, or any portion thereof (an "S/I Transaction"), and thereby
abandon one or both of the Distributions. With prior notice to El Paso, Tenneco
may enter into an S/I Transaction so long as such transaction is not adverse,
other than to a de minimis extent, to El Paso or the Energy Business and would
not render the Merger impossible or impracticable or materially delay the
consummation thereof. If the S/I Transaction would have any of the foregoing
effects, the transaction may nonetheless be pursued prior to approval of the
Merger Agreement, the Merger and the Distributions by Tenneco stockholders if
the Tenneco Board of Directors determines in good faith after consultation with
counsel that there is a substantial risk that failure to do so would constitute
a breach of its fiduciary duties under applicable law.
EL PASO GUARANTY OF TENNECO PERFORMANCE
Pursuant to the Merger Agreement and certain instruments to be executed in
connection therewith, from and after the Merger Effective Time, El Paso will
guarantee the full and timely payment and performance by Tenneco and the other
members of the Energy Group of their obligations under the Merger Agreement,
Distribution Agreement and each and every other agreement to be entered into
pursuant thereto. Such agreements will not require that El Paso guarantee any
of Tenneco's obligations under any of the Securities.
EMPLOYEE BENEFITS
The Merger Agreement requires Tenneco to enter into the Benefits Agreement
and to perform its obligations thereunder. See "The Distributions--Relationship
Among Tenneco, New Tenneco and Newport News After the Distributions." In
addition, pursuant to the Merger Agreement, El Paso has agreed to provide (or
cause Tenneco to provide) certain benefits to certain employees and former
employees of Tenneco and their dependents from and after the Merger Effective
Time.
El Paso has agreed to provide severance benefits, vacation pay, outplacement
services and other benefits to certain employees of the Energy Business who are
terminated within one year of the Merger Effective Time (other than for death,
disability or cause). Pursuant to this agreement, approximately 50 high-level
employees of the Energy Business would be eligible to receive severance
benefits ranging from 12 to 24 months' base pay and approximately 3,200 other
employees of the Energy Business would be eligible to receive severance
benefits ranging from six to 52 weeks' base pay. Additionally, El Paso has
agreed to provide health care coverage to these employees on an optional basis
(with the costs being shared by the employee as are shared by similarly
situated active El Paso employees) for a period equal to the months of pay
received as severance, up to 12 months.
El Paso has also agreed to provide retiree medical and life benefits for at
least ten years from the Merger Effective Time to former employees of Tenneco
and their dependents and to current employees who are eligible to retire as of
the Merger Effective Time and retire within a window period after the Merger
Effective Time to be selected by El Paso, which will be not less than six
months. However, El Paso may institute changes to the retiree medical plan to
implement appropriate cost containment features and other methods of providing
comparable benefits.
El Paso has further agreed to provide retention payments to key and other
Energy Business employees. Under the executive retention program, certain key
employees will be paid an aggregate of $9 million if they cooperate with the
effort to sell the Energy Business and remain full-time active employees until
the Merger Effective Time. Additionally, a separate retention program has been
implemented for approximately 200 lower management and staff level employees
with similar conditions and an aggregate of $4 million in payments.
Employees of the Energy Business will also receive credit for past service
with Tenneco in determining entitlements under certain El Paso benefit
programs. El Paso has also agreed to satisfy certain obligations owed by
Tenneco to specific individuals.
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CONDITIONS PRECEDENT
Conditions to Obligations of the Parties
The respective obligations of each of Tenneco, El Paso and El Paso Subsidiary
to consummate the transactions contemplated by the Merger Agreement are subject
to the satisfaction, at or prior to the Closing, of the following conditions,
any or all of which may be waived, in whole or in part, to the extent permitted
by applicable law:
(i) the Merger Agreement, the Merger and the Distributions shall have
been approved and adopted by the requisite vote of the stockholders of
Tenneco, in accordance with the DGCL and the Tenneco Charter;
(ii) any waiting period applicable to the consummation of the
transactions contemplated by the Merger Agreement under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, shall have expired
or been terminated (which condition has been satisfied);
(iii) all authorizations, consents, orders and approvals of, and
declarations or filings with, and expiration of waiting periods imposed by,
any governmental authority or other person shall have been obtained or
filed and shall be in full force and effect, other than those which if not
obtained or filed would not have a material adverse effect on El Paso
Business or the ability of any party to consummate the transactions
contemplated by the Merger Agreement prior to June 30, 1997 (the
"Termination Date");
(iv) no governmental authority shall have enacted, issued, promulgated,
enforced or entered any statute or rule, regulation, injunction or other
order (whether temporary, preliminary or permanent) which materially
restricts, prevents or prohibits consummation of the Merger or the other
transactions contemplated by the Merger Agreement;
(v) the El Paso Common Stock and El Paso Preferred Depositary Shares (if
any) shall have been approved for listing on the NYSE, subject to official
notice of issuance;
(vi) Tenneco shall have received (a) the IRS Ruling Letter as described
under "The Distributions--Conditions to Consummation of the Distributions,"
and (b) to the extent not covered by the IRS Ruling Letter, the Tax Opinion
from the law firm of Jenner & Block (counsel to Tenneco) that, among other
things, the Merger will qualify as a tax-free reorganization under Section
368(a)(1)(B) of the Code (because the IRS Ruling Letter was received on
October 30, 1996 and covered the matters to be addressed in the Tax
Opinion, delivery of the Tax Opinion is a condition to the consummation of
the Merger which has been satisfied);
(vii) the Distributions, the Debt Realignment, the Charter Amendment and
the other transactions contemplated by the Distribution Agreement
(including any S/I Transaction) shall have been effected; and
(viii) the NPS Issuance shall have been consummated.
Conditions to Obligations of Tenneco
The obligations of Tenneco to consummate the transactions contemplated by the
Merger Agreement are also subject to the satisfaction, at the Closing, of the
following conditions, any or all of which may be waived, in whole or in part,
by Tenneco:
(i) the representations and warranties of El Paso and El Paso Subsidiary
in the Merger Agreement shall be true and correct as of the Closing Date
with the same effect as if made on and as of the Closing Date (except for
changes permitted by the Merger Agreement and failures to remain true and
correct which do not have a material adverse effect on El Paso and its
consolidated subsidiaries and will not prevent consummation of the
transactions contemplated by the Merger Agreement by El Paso or El Paso
Subsidiary prior to the Termination Date);
(ii) each of El Paso and El Paso Subsidiary shall have performed in all
material respects their respective obligations under the Merger Agreement
to be performed at or prior to the Closing; and
(iii) delivery to Tenneco by El Paso and El Paso Subsidiary of officers'
certificates with respect to the matters identified in clauses (i) and (ii)
and certain other corporate proceedings.
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Conditions to Obligations of El Paso and El Paso Subsidiary
The obligations of El Paso and El Paso Subsidiary to effect the transactions
contemplated by the Merger Agreement are also subject to the satisfaction, at
the Closing, of the following conditions any or all of which may be waived, in
whole or in part, by El Paso and El Paso Subsidiary:
(i) the representations and warranties of Tenneco contained in the Merger
Agreement shall be true and correct as of the Closing Date with the same
effect as if made on and as of the Closing Date (except for changes
permitted by the Merger Agreement and failures to remain true and correct
which do not have a material adverse effect on the Energy Business and will
not prevent consummation of the transactions contemplated by the Merger
Agreement by Tenneco prior to the Termination Date);
(ii) Tenneco shall have performed in all material respects its
obligations under the terms of the Merger Agreement to be performed at or
prior to the Closing;
(iii) El Paso shall not have reasonably determined, in good faith after
consultation with Tenneco and its advisors, that as a result of an
announcement or introduction of legislation by certain U.S. government
officials identified in the Merger Agreement there exists a reasonable
likelihood that the Distributions or the Merger would not be tax-free for
federal income tax purposes to Tenneco and El Paso; and
(iv) delivery to El Paso by Tenneco of officers' certificates with
respect to the matters identified in clauses (i) and (ii) and certain other
corporate proceedings.
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Merger
Effective Time, whether before or after the approval of the Merger Agreement,
the Merger or the Distributions by the stockholders of Tenneco and the approval
of the Stock Issuance by the stockholders of El Paso (which is being submitted
to such stockholders at a special meeting to be held on or about December 9,
1996), by (i) the mutual written consent of El Paso and Tenneco authorized by
their respective boards of directors; (ii) El Paso or Tenneco, if the Merger is
not consummated by the Termination Date (other than for the terminating party's
failure to observe any of the covenants, agreements and conditions of the
Merger Agreement to be performed or observed by such party prior to the Closing
Date), (iii) El Paso or Tenneco, if there has been a material breach on the
part of the other party of any covenant, representation or warranty set forth
in the Merger Agreement, or any failure on the part of the other party to
comply with its obligations under the Merger Agreement, or any other
circumstances have occurred such that the conditions to El Paso's or Tenneco's
consummation of the Merger, respectively, could not be satisfied on or prior to
the Termination Date; (iv) El Paso or Tenneco, if the stockholders of Tenneco
at the Tenneco Special Meeting do not approve the Transaction; (v) El Paso, if
the Board of Directors of Tenneco withdraws, amends or modifies in a manner
adverse to El Paso its favorable recommendation to its stockholders of the
Transaction or promulgates any favorable recommendation with respect to certain
business combination transactions not involving El Paso (other than in response
to a situation described in clause (iii) above); (vi) Tenneco, if the Board of
Directors of El Paso withdraws, amends or modifies in a manner adverse to
Tenneco its favorable recommendation to its stockholders or approves an
agreement for or recommends to its stockholders a business combination
transaction not involving Tenneco (other than in response to a situation
described in clause (iii) above); (vii) El Paso or Tenneco, under certain
circumstances where, prior to approval of the Transaction by Tenneco
stockholders, Tenneco enters into an S/I Transaction which would adversely
impact El Paso or the Energy Business, or render the Merger impossible or
impracticable or prevent or materially delay consummation of the Merger; (viii)
El Paso, if there has occurred since June 19, 1996 any event, change or effect
which, in the aggregate with all other events, changes or effects, reduces the
value of the Energy Business as of June 19, 1996 by more than $75 million
(excluding negative events, changes or effects which result from (A) any action
by El Paso or certain affiliated parties, (B) changes in general economic,
financial markets or industrial conditions, or (C) matters related to the GSR
Ruling); (ix) Tenneco if there has occurred since June 19, 1996 any event,
change or effect which, in the aggregate with all other events, changes or
effects, reduces the value of El Paso as of June 19, 1996 by more than $75
million (excluding negative events, changes or effects which result
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from (A) any action by Tenneco or certain affiliated parties, or (B) changes in
general economic, financial markets or industrial conditions); or (x) Tenneco
or El Paso (but only prior to approval of the Transaction by Tenneco's
stockholders) if Tenneco receives a Higher Proposal (which is a proposal for an
acquisition or similar transaction involving Tenneco and/or the Energy Business
if (A) it is reasonably likely to result in the consummation of such a
transaction which is more favorable, from a financial point of view, to Tenneco
stockholders and (B) Tenneco's Board of Directors determines, in good faith
after consultation with independent legal counsel, that there is a substantial
risk that failure to pursue such transaction would be found to constitute a
breach of its fiduciary duties under applicable law) that it advises El Paso in
writing that it wishes to accept and El Paso does not make, within five
business days of receipt of such written notice, an offer that the Board of
Directors of Tenneco believes, in good faith after consultation with its
financial advisors, is at least as favorable, from a financial point of view,
to the stockholders of Tenneco as the Higher Proposal.
If the Merger Agreement is terminated as permitted above, the Merger
Agreement will become void and there will be no liability or obligation on the
part of the terminating party, or the directors, officers, stockholders,
employees, agents, consultants or representatives of such party, except that
such termination shall not relieve any other party of any damages or other
amounts for which it would otherwise be liable, including Tenneco's obligation
to pay to El Paso the Termination Fee (as defined) under certain circumstances.
See "--Termination Fee" and "--Consulting Arrangement."
Prior to the Merger Effective Time, whether before or after approval and
adoption of the Transaction by the stockholders of Tenneco, the provisions of
the Merger Agreement may be amended by a written agreement executed and
delivered by the parties thereto, subject to applicable law. After the Merger
Effective Time, the provisions of the Merger Agreement may be amended only by a
written agreement executed and delivered by El Paso, Tenneco (as the surviving
corporation of the Merger) and New Tenneco.
WAIVER
Any time prior to the Merger Effective Time any party to the Merger Agreement
may, by action of its Board of Directors set forth in writing, to the extent
legally permissible, extend the time for performance of any of the obligations
or other acts of the other parties thereto, waive any inaccuracies in the
representations and warranties of the other parties contained therein or in any
document delivered pursuant thereto, and waive compliance by any of the other
parties thereto with any of the agreements or conditions contained therein.
TERMINATION FEE
The Merger Agreement requires Tenneco to pay to El Paso a termination fee of
$25 million (the "Termination Fee"), plus up to $10 million in actual out-of-
pocket expenses incurred and payable to third parties by El Paso, if the Merger
Agreement is terminated (i) by El Paso or Tenneco, if prior to approval of the
Transaction by Tenneco stockholders Tenneco enters into an S/I Transaction
which would adversely impact El Paso or the Energy Business or would prevent or
materially delay consummation of the Merger upon a good faith determination
(after consultation with and based upon advice of independent counsel) by
Tenneco's Board of Directors that there is a substantial risk that the failure
to do so would result in a breach of its fiduciary duties under applicable law;
(ii) by El Paso or Tenneco, if the Tenneco stockholders do not adopt and
approve the Transaction; or (iii) by Tenneco or El Paso (but only prior to
approval of the Transaction by Tenneco's stockholders), if Tenneco receives a
Higher Proposal that it advises El Paso in writing that it wishes to accept and
El Paso does not make, within five business days of receipt of such written
notice, an offer that the Board of Directors of Tenneco believes, in good faith
after consultation with its financial advisors, is at least as favorable, from
a financial point of view, to the stockholders of Tenneco as the Higher
Proposal. The Termination Fee shall be payable by Tenneco in exchange for a
complete release of any liabilities under the Merger Agreement from El Paso.
CONSULTING ARRANGEMENT
Tenneco and El Paso have entered into a consulting agreement (the "Consulting
Agreement") pursuant to which El Paso is providing certain consulting services
to Tenneco for the six-month term of the Consulting Agreement with respect to
enhancing the Energy Business' relationships with customers, plaintiffs in
material
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litigation and regulatory authorities. As consideration for these services, El
Paso is entitled to an aggregate consulting fee of $60 million. Under the terms
of the Consulting Agreement, however, this fee is only due and payable by
Tenneco if the Merger Agreement is terminated by El Paso or Tenneco in the
manner described in either clause (i) or (iii) under "--Termination Fee," or in
the manner described in clause (ii) under
"--Termination Fee" if Tenneco's Board of Directors withdraws, amends or
modifies its recommendation of the Transaction prior to the vote of Tenneco
stockholders at the Tenneco Special Meeting.
APPRAISAL RIGHTS
Holders of shares of $4.50 Preferred Stock and, in the event the NPS Issuance
is consummated prior to approval of the Transaction at the Tenneco Special
Meeting, Junior Preferred Stock (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 of more than 75% of the $4.50 Preferred Stock (which are
presently expected to be the holders as of the Tenneco Record Date) 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 SECTION
262, A COPY OF WHICH IS ATTACHED HERETO 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 hereto 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 such
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 Tenneco, 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.
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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 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 Tenneco at 1275 King Street, Greenwich, Connecticut 06831,
Attention: Corporate Secretary.
Within 10 days after the Merger Effective Time, Tenneco, 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 of the date that the Merger has become effective. Within 120 days after
the Merger Effective Time, but not thereafter, Tenneco 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 Junior Preferred Stock, as the case may be. Tenneco
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
Junior 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 Tenneco a statement setting
forth the aggregate number of shares of $4.50 Preferred Stock entitled to
demand appraisal rights, or Junior 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 10 days after a written request therefor has
been received by Tenneco or within 10 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 Junior Preferred Stock,
as the case may be, and a copy thereof is served upon Tenneco, Tenneco 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 Junior 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 Junior
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.
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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 Junior Preferred Stock, as the case may 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 Junior 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 Junior Preferred Stock,
respectively, pursuant to the Merger Agreement as described herein (without
interest). A stockholder will fail to perfect, or effectively loses or
withdraws, 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 Tenneco 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 Tenneco 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
Tenneco 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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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
The following is a summary description of the material federal income tax
consequences of the Transaction. This summary is for general informational
purposes only and is not intended as a complete description of all of the tax
consequences of the Transaction and does not discuss tax consequences under the
laws of state or local governments or of any other jurisdiction.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, EXISTING, PROPOSED AND TEMPORARY TREASURY REGULATIONS THEREUNDER AND
CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE
SUBJECT TO CHANGE WHICH MAY OR MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES
COULD AFFECT THE VALIDITY OF THE FOLLOWING DISCUSSION. SEE "--POSSIBLE FUTURE
LEGISLATION" BELOW.
TAX RULINGS AND OPINIONS
On October 30, 1996, the IRS issued the IRS Ruling Letter, to the effect,
among other things, that:
(a) the Distribution of New Tenneco Common Stock will be tax-free for
federal income tax purposes to Tenneco under Section 355(c)(1) of the Code
and to the Tenneco stockholders under Section 355(a) of the Code;
(b) the Distribution of Newport News Common Stock will be tax-free for
federal income tax purposes to Tenneco under Section 355(c)(1) of the Code
and to the Tenneco stockholders under Section 355(a) of the Code; and
(c) the following distributions to be effected as part of the Corporate
Restructuring Transactions will be tax-free for federal income tax purposes
to the respective transferor corporations under Section 355(c)(1) or 361(c)
of the Code and to the respective stockholders of the transferor
corporations under Section 355(a) of the Code: (i) the distribution by
Newport News of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation; (ii) the distribution by Tenneco Corporation of the capital
stock of Newport News and New Tenneco to TGP; and (iii) the distribution by
TGP of the capital stock of Newport News and New Tenneco to Tenneco.
Receipt of the IRS Ruling Letter satisfied a condition to consummation of the
Distributions.
The IRS Ruling Letter contains certain representations as to factual matters,
including a representation that there is no stockholder of Tenneco who
beneficially owns five percent or more of Tenneco's capital stock, and to the
best knowledge of Tenneco management, there is no plan or intention on the part
of the remaining Tenneco stockholders to sell, exchange or otherwise dispose of
a number of shares of El Paso Common Stock or El Paso Preferred Depositary
Shares received in the Merger that would reduce the Tenneco stockholders'
ownership of El Paso Common Stock and El Paso Preferred Depositary Shares to a
number of shares having a value, as of the Merger Effective Time, of less than
50 percent of the value of all of the shares of Tenneco stock formerly
outstanding as of the Merger Effective Time. For purposes of the foregoing
representation, shares of Tenneco stock surrendered by holders who demand
appraisal rights or exchanged for cash in lieu of fractional shares of El Paso
Common Stock or fractional El Paso Preferred Depositary Shares will be treated
as outstanding Tenneco stock as of the Merger Effective Time. Moreover, shares
of Tenneco stock, El Paso Common Stock and El Paso Preferred Depositary Shares
held by Tenneco stockholders and otherwise sold, redeemed or disposed of prior
to or subsequent to the Merger Effective Time will be considered in connection
with the foregoing representation.
Representations as to factual matters will also include, among other things,
that (i) El Paso has no plan or intention to liquidate Tenneco, to merge
Tenneco into another corporation, to cause Tenneco to sell or otherwise dispose
of its assets, other than certain assets unrelated to (or immaterial in
relation to) Tenneco's interstate
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pipeline or natural gas marketing businesses, or to sell or otherwise dispose
of Tenneco stock acquired in the Merger (except as described in Section
368(a)(2)(C) of the Code), (ii) immediately following the Merger, El Paso will
continue the Energy Business or use a significant portion of the assets of the
Energy Business in a business, (iii) El Paso has no plan or intention to
reacquire any El Paso Common Stock or El Paso Preferred Depositary Shares
issued to Tenneco stockholders in the Merger, (iv) immediately following the
Merger, El Paso will be in control of Tenneco within the meaning of Section
368(c) of the Code, and (v) except as set forth in the Merger Agreement,
Tenneco, El Paso, El Paso Subsidiary and the Tenneco stockholders will pay
their own expenses, if any, incurred in connection with the Merger.
A ruling from the IRS, while generally binding on the IRS, may under certain
circumstances be retroactively revoked or modified by the IRS. The rulings
obtained from the IRS will be based on certain facts and representations, some
of which will have been made by El Paso. Generally, the IRS Ruling Letter would
not be revoked or modified retroactively provided that (i) there has been no
misstatement or omission of material facts, (ii) the facts at the time of the
Transaction are not materially different from the facts upon which the IRS
Ruling Letter was based, and (iii) there has been no change in the applicable
law.
Consummation of the Merger is conditioned upon receipt of the foregoing
rulings and, to the extent not covered by the IRS Ruling Letter, receipt of the
Tax Opinion of Jenner & Block, as counsel to Tenneco, to the effect that:
(a) the Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a)(1)(B) of the Code, and Tenneco, El Paso and El
Paso Subsidiary will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(b) El Paso will not recognize any gain or loss upon receipt of Tenneco
Stock, solely in exchange for El Paso Common Stock and El Paso Preferred
Depositary Shares (if any), as set forth in the Merger Agreement;
(c) El Paso's basis in the Tenneco Stock will, in each case, be equal to
the basis of such stock in the hands of Tenneco stockholders immediately
prior to the Merger;
(d) El Paso's holding period for the Tenneco Common Stock, $7.40
Preferred Stock and $4.50 Preferred Stock will, in each case, include the
period during which such stock was held by the Tenneco stockholders;
(e) the holders of the Tenneco Common Stock, $7.40 Preferred Stock and
$4.50 Preferred Stock (the "Tenneco Stockholders") will not recognize any
gain or loss upon the exchange of such stock for El Paso Common Stock and
El Paso Preferred Depositary Shares (if any);
(f) the basis of the El Paso Common Stock and El Paso Preferred
Depositary Shares (if any) to be received by the holders of the Tenneco
Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock will be the
same as the basis of the Tenneco Stock surrendered in exchange therefor;
and
(g) the holding period for the El Paso Common Stock and El Paso Preferred
Depositary Shares (if any) to be received by the holders of the Tenneco
common stock, $7.40 Preferred Stock and $4.50 Preferred Stock will include
the holding period for the Tenneco Stock surrendered in exchange therefor,
provided that the Tenneco Stock surrendered is held as a capital asset on
the closing date of the Merger.
The Tax Opinion also is to cover, to the extent not covered in the IRS Ruling
Letter, certain other federal tax matters addressed below in this section of
the Prospectus (including treatment of holders of Tenneco Stock receiving cash
in lieu of fractional share interests of El Paso Common Stock or fractional El
Paso Preferred Depositary Shares and treatment of holders of $4.50 Preferred
Stock, if any, who demand appraisal rights in connection with the Merger and
receive cash in accordance with the DGCL).
The IRS Ruling Letter issued on October 30, 1996 covered the matters to be
addressed in the Tax Opinion. Accordingly, delivery of the Tax Opinion is a
condition to consummation of the Merger which has been satisfied.
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THE DISTRIBUTIONS
It is expected that the Distributions will qualify as tax-free distributions
under Section 355 of the Code. Assuming that the Distributions so qualify, (i)
the holders of Tenneco Common Stock will not recognize gain or loss upon
receipt of shares of Newport News Common Stock or shares of New Tenneco Common
Stock, (ii) each holder of Tenneco common stock will allocate his, her or its
aggregate tax basis in such Tenneco common stock immediately before the
Distributions among the Tenneco common stock, Newport News Common Stock and New
Tenneco Common Stock in proportion to their respective fair market values,
(iii) the holding period of each holder of Tenneco common stock for the Newport
News Common Stock and the New Tenneco Common Stock will include the holding
period for his, her or its Tenneco common stock, provided that the Tenneco
common stock is held as a capital asset at the time of the Distributions, and
(iv) Tenneco will not recognize any gain or loss on its distribution of the New
Tenneco Common Stock or Newport News Common Stock to its stockholders.
If the Distributions do not qualify as tax-free distributions under Section
355 of the Code, then, in general, a corporate level federal income tax would
be payable by the consolidated group of which Tenneco is the common parent,
which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing corporations
upon its distribution of the stock of one or more controlled corporations to
its stockholders in the Transaction. Under the terms of the Tax Sharing
Agreement, neither New Tenneco nor Newport News will be liable to indemnify
Tenneco for any additional taxes incurred by reason of the Distributions being
taxable, unless the Distributions fail to qualify for tax-free treatment under
Section 355 of Code as a result of the inaccuracy of certain factual statements
or representations made in connection with the request for the IRS Ruling
Letter or Tax Opinion or New Tenneco or Newport News take any action which is
inconsistent with any factual statements or representations or the tax
treatment of the Transaction as contemplated in the IRS Ruling Letter request
or the Tax Opinion. See the discussion of the Tax Sharing Agreement under "The
Distributions--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions--Tax Sharing Agreement."
Various of the Corporate Restructuring Transactions are intended to be tax-
free for federal income tax purposes, although Tenneco has sought an IRS ruling
to that effect only with respect to certain of such transactions. Except as
otherwise provided in the Tax Sharing Agreement, Tenneco will be liable for any
unintended gain recognized in connection with the Corporate Restructuring
Transactions, other than such gains which are the result of the failure of New
Tenneco or Newport News to comply with certain tax-related representations and
covenants to refrain from taking action which is inconsistent with certain
factual statements or representations or the tax treatment of the Transaction
as contemplated in the IRS Ruling Letter request or in the Tax Opinion. See
"The Distributions--Relationship Among Tenneco, New Tenneco and Newport News
After the Distributions."
THE MERGER
It is expected that the Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(B) of the Code. If the Merger so qualifies, (i)
Tenneco Stockholders will not recognize gain or loss upon the receipt of El
Paso Common Stock and El Paso Preferred Depositary Shares (if any) in exchange
for their Tenneco Stock, (ii) each Tenneco Stockholder's tax basis in the
Tenneco Stock (as determined immediately following the Distributions) will
carry over to the El Paso Common Stock and El Paso Preferred Depositary Shares
(if any), (iii) each Tenneco Stockholder's holding period for Tenneco Stock
will carry over to the El Paso Common Stock and/or El Paso Preferred Depositary
Shares (if any), provided that the Tenneco Stock is held as a capital asset
immediately prior to the Merger Effective Time, and (iv) any Tenneco
Stockholder receiving cash in lieu of fractional shares or any fractional El
Paso Preferred Depositary Shares will recognize capital gain or loss (provided
the shares of Tenneco surrendered are held as capital assets immediately prior
to the Merger Effective Time) equal to the difference between the amount of
cash received and the portion of such stockholder's basis in the shares of
Tenneco Stock allocable to such fractional share interests and such capital
gain or loss will be long-term capital gain or loss if the holding period for
such shares is more than one year.
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In addition, holders of $4.50 Preferred Stock and Junior Preferred Stock who
properly demand appraisal in accordance with the terms of Delaware law and
receive cash in an appraisal proceeding will be treated as having received that
cash as a distribution in redemption of such stock subject to the provisions
and limitations of Section 302 of the Code. Any such holder who holds no El
Paso stock, directly or by reason of attribution under Section 318 of the Code,
will be treated as having a complete termination of their interests within the
meaning of Section 302(b)(3) of the Code, the cash received will be treated as
a distribution in full payment in exchange for their $4.50 Preferred Stock or
Junior Preferred Stock, as the case may be, under Section 302(a) of the Code,
and such stockholders will recognize capital gain or loss, provided such stock
is held as a capital asset at the Merger Effective Time, in an amount equal to
the difference between the amount of the cash received and the stockholders'
basis in the shares surrendered. Such capital gain or loss will be long-term
capital gain or loss if the holding period for such shares is more than one
year. Any such holder who holds El Paso stock, directly or indirectly by reason
of attribution under Section 318 of the Code, will also be entitled to capital
gain treatment unless the receipt of the cash is considered to have the effect
of a dividend distribution under Section 302 of the Code. In this event, the
cash such stockholder receives is treated as a dividend to the extent of the
stockholder's ratable share of applicable current and/or accumulated earnings
and profits. For a stockholder taxed as a domestic corporation (other than an S
corporation), if the cash received is treated as a dividend, such holder may,
subject to the conditions set forth in Section 243 and 246 of the Code, be
entitled to deduct an amount equal to 70 percent of the amount taxed as a
dividend. In general, the receipt of cash or other property will not be
considered to have the effect of a dividend distribution if (a) it is
"substantially disproportionate" with respect to such stockholders, or (b) it
is "not essentially equivalent to a dividend" with respect to such holder.
Stockholders should consult their own tax advisors with respect to the issue of
constructive ownership and the possibility of satisfying the "substantially
disproportionate" or "not essentially equivalent to a dividend" tests.
The failure of the Merger to qualify as a reorganization within the meaning
of Section 368(a)(1)(B) of the Code may cause the Distributions to not qualify
as tax-free distributions under Section 355 of the Code, in which case (as
described in the second paragraph under "--The Distributions" above) Tenneco
will recognize gain or loss on its distribution of the New Tenneco Common Stock
or Newport News Common Stock to its stockholders.
POSSIBLE FUTURE LEGISLATION
The Administration's Budget Proposal issued March 19, 1996 contains several
revenue proposals, including a proposal (the "Anti-Morris Trust Proposal")
which would require a distributing corporation in a transaction otherwise
qualifying as a tax-free distribution under Section 355 of the Code to
recognize gain on the distribution of the stock of the controlled corporation
unless the direct and indirect stockholders of the distributing corporation own
more than 50 percent of the distributing corporation and controlled
corporations at all times during the four year period commencing two years
prior to the distribution. The Anti-Morris Trust Proposal would apply to any
distributions occurring after March 19, 1996, unless such distribution was (i)
pursuant to a binding contract on such date, (ii) described in a ruling request
submitted to the IRS on or before such date, or (iii) described in a public
announcement or Commission filing on or before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways & Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the effect
that should certain of the revenue proposals included in the Administration's
Budget (including the Anti-Morris Trust Proposal) be enacted, their effective
date will be no earlier than the date of "appropriate Congressional action." As
of the date of this Prospectus, no legislation has been introduced relating to
the Anti-Morris Trust Proposal. On June 27, 1996, Tenneco submitted its request
for rulings (including rulings on the tax-free treatment of the Distributions)
to the IRS. Accordingly, in view of the Roth-Archer Statement, any future Anti-
Morris Trust legislation should not apply to the Distributions assuming that
the effective date of such legislation contains a grandfather clause for
transactions for which a ruling request has been filed with the IRS prior to
the date of "appropriate Congressional action." Nevertheless, there can be no
assurances that Congress will not adopt Anti-Morris Trust Proposal legislation
which would apply
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retroactively to the Distributions. In the event such legislation is announced
or introduced prior to the consummation of the Transaction, under the terms of
the Merger Agreement El Paso may elect not to proceed with the Merger if it
reasonably determines that there exists a reasonable likelihood that the
Distributions or the Merger would not be tax-free for federal income tax
purposes. If El Paso elects to proceed with the Merger notwithstanding the
announcement or introduction of Anti-Morris Trust legislation, the
Distributions, if ultimately subject to such legislation, may result in
significant taxable gain to Tenneco under Section 355(c) of the Code. Although
Tenneco Stockholders would not recognize taxable gain or loss on the receipt of
the stock of New Tenneco and Newport News under the current Anti-Morris Trust
Proposal, the taxable gain required to be recognized by Tenneco under Code
Section 355(c) would significantly reduce the value of the El Paso Common Stock
and El Paso Preferred Depositary Shares (if any) received by the Tenneco
Stockholders in the Merger.
The Budget Proposal also contains a proposal (the "Nonqualified Preferred
Stock Proposal") that would, among other things, treat certain preferred stock
received in a reorganization as "other property" (boot) resulting in gain (but
not loss) recognition to the recipient of such stock. The Nonqualified
Preferred Stock Proposal would apply to transactions entered into after
December 7, 1995, with certain exceptions, including an exception for stock
issued pursuant to a written agreement binding (subject to customary
conditions) on such date.
The Roth-Archer Statement provides that should certain revenue proposals
included in the Budget Proposal (including the Nonqualified Preferred Stock
Proposal) be enacted, their effective date will be no earlier than the date of
"appropriate congressional action." As of the date of this Prospectus, no
legislation has been introduced relating to the Nonqualified Preferred Stock
Proposal. The Merger Agreement which provides for the issuance of the El Paso
Preferred Stock, was entered into on June 19, 1996 and amended and restated on
November 1, 1996 (effective as of June 19, 1996). Accordingly, in view of the
Roth-Archer Statement, any future legislation including the Nonqualified
Preferred Stock Proposal should not apply to the El Paso Preferred Stock, if
issued, assuming the effective date of such legislation contains a grandfather
clause for stock issued pursuant to a binding agreement (subject to customary
conditions) entered into on or before the date of such Congressional action.
Nevertheless, there can be no assurances that Congress will not adopt
legislation containing the Nonqualified Preferred Stock Proposal that would
apply retroactively to the issuance of the El Paso Preferred Stock. In the
event such legislation is announced or introduced prior to the consummation of
the Transaction, if either Tenneco or El Paso determines that there exists a
reasonable likelihood that issuance of the El Paso Preferred Stock would cause
the Merger to be taxable to holders of Tenneco stock, El Paso is obligated,
under the terms of the Merger Agreement, at its own cost, to amend the terms of
the El Paso Preferred Stock in a manner so as not to cause the Merger to be
taxable to holders of Tenneco stock. If, however, legislation containing the
Nonqualified Preferred Stock Proposal were enacted following the Transaction,
and such legislation applied retroactively to the issuance of the El Paso
Preferred Stock, it is possible that the Merger would not qualify as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code and
holders of Tenneco stock receiving El Paso Common Stock or El Paso Preferred
Stock in the Merger would recognize gain on the exchange. Even if the issuance
of El Paso Preferred Stock did not prevent qualification of the Merger as a
tax-free reorganization, holders of Tenneco stock receiving El Paso Preferred
Depositary Shares would recognize gain on the exchange. The failure of the
Merger to qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code or the recognition of gain by shareholders as a result
of the receipt of El Paso Preferred Depositary Shares may also cause the
Distributions to not qualify as tax-free distributions under Section 355 of the
Code. For a description of the federal income tax consequences of the failure
of the Distributions to qualify under Section 355 of the Code, see the
discussion under the heading "The Distributions" above.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Under the existing Tenneco Charter, the authorized capital stock of the
Company consists of 15,000,000 shares of Preferred Stock, without par value
("Preferred Stock"); 50,000,000 shares of Junior Preferred Stock and
350,000,000 shares of Tenneco Common Stock. Upon consummation of the Merger,
the Tenneco Charter will be amended to, among other things, (i) provide that
the authorized capital stock of the Company will consist of 20,000,000 shares
of Preferred Stock and 100,000 shares of Tenneco Common Stock, (ii) rename the
Junior Preferred Stock as the Preferred Stock, and (iii) remove all references
to the class of stock formerly identified as "Preferred Stock."
On October 28, 1996, the following shares of capital stock were outstanding:
391,519 shares of $7.40 Preferred Stock, 803,723 shares of $4.50 Preferred
Stock and 170,883,000 shares of Tenneco Common Stock. Upon consummation of the
Merger, the outstanding shares of $7.40 Preferred Stock and $4.50 Preferred
Stock will be converted into the right to receive common stock of El Paso, and
all outstanding shares of Tenneco Common Stock other than shares owned by El
Paso, the Company, and their respective wholly owned subsidiaries will be
converted into the right to receive El Paso Common Stock (and, if the Stock
Issuance is not approved, depositary shares representing fractional interests
in El Paso's Adjustable Rate Cumulative Preferred Stock, par value $.01 per
share). No shares of Junior Preferred Stock were issued and outstanding on
October 28, 1996, although 3,500,000 shares of Series A Participating Junior
Preferred Stock have been authorized for issuance pursuant to a Rights
Agreement (the "Rights Agreement") between the Company and First Chicago Trust
Company of New York, as rights agent, which is described under the subcaption
"--Certain Anti-Takeover Provisions--Rights Agreement." The rights issued
pursuant to the Rights Agreement will expire upon the effectiveness of the
Merger. Junior Preferred Stock issued prior to the Merger 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 thereof in connection with the Merger.
The Tenneco Charter currently provides the holders of Junior Preferred Stock
with various rights, powers and preferences, all of which will be removed from
the Tenneco Charter if the Charter Amendment is adopted. These rights, powers
and preferences include the requirement that Tenneco obtain the consent of the
holders of the Junior Preferred Stock before taking certain actions, including
but not limited to (i) creating a class of stock, or increasing the amount of
any existing class of stock, which ranks prior to or on parity with the Junior
Preferred Stock in respect of dividends or distribution of assets on
liquidation, (ii) amending the Tenneco Charter in a manner which adversely
affects the holders of the Junior Preferred Stock, and (iii) transferring all
or substantially all of the Company's assets or merging with another company
unless the Company is the surviving corporation. Accordingly, the only rights,
powers and preferences of the holders of a series of Junior Preferred Stock
after the effectiveness of the Charter Amendment will be the rights, powers and
preferences set forth in the Certificate of Designation with respect to such
series.
As described above, if the Transaction is approved and the Merger is
consummated, the Tenneco Charter will be amended upon consummation of the
Merger to eliminate the current class of Preferred Stock, to change the name of
the Junior Preferred Stock to Preferred Stock and to remove all references to
the class of stock formerly identified as "Preferred Stock." In addition, the
Tenneco Charter will be further amended in the Merger to eliminate or amend
various provisions applicable to all of the Company's stockholders. For a
description of these additional amendments to the Tenneco Charter. See "The
Merger--Effects of the Merger."
The summaries of the terms of the Preferred Stock, the Junior Preferred Stock
and Tenneco Common Stock contained herein do not purport to be complete and are
subject to, and qualified in their entirety by reference to, all the provisions
of the Tenneco Charter and the Certificates of Designation of Preferences and
Rights of the $7.40 Preferred Stock and the $4.50 Preferred Stock filed as
exhibits to the Registration Statement of which this Prospectus is a part.
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JUNIOR PREFERRED STOCK
The Board of Directors of the Company may authorize from time to time the
issuance in series of additional shares of Junior Preferred Stock. The relative
rights, powers, preferences and limitations of the respective series of the
Junior Preferred Stock offered hereby will be set forth in the respective
Certificates of Designation for each series. The Tenneco Charter contains
certain rights, powers and preferences of the Junior Preferred Stock in
addition to those to be contained in the Certificates of Designation, which
additional rights, powers and preferences will be eliminated pursuant to the
Charter Amendment if the Transaction is approved. The shares of Junior
Preferred Stock, when issued and sold, will be fully paid and nonassessable.
The following description of the terms of the Junior Preferred Stock sets
forth certain general terms and provisions of the Junior Preferred Stock. The
number of shares and all of the terms and conditions of the relative rights,
powers, preferences and limitations of the respective series of Junior
Preferred Stock as established by the Board of Directors will be set forth in
the Prospectus Supplement accompanying this Prospectus relating to the
particular series of Junior Preferred Stock being offered thereby. The terms of
particular series of Junior Preferred Stock may differ, among other things, in
(i) the number of shares that constitute such series, (ii) the dividend rate
(or the method of calculation thereof) on the shares of such series, (iii) the
dividend periods (or the method of calculation thereof), (iv) the stated value
of the shares of such series, (v) the voting rights, if any, of the shares of
such series, (vi) the preferences and rights of the shares of such series upon
any liquidation or winding-up of the Company, (vii) whether or not and on what
terms the shares of such series will be subject to redemption at the option of
the Company and (viii) the other rights and privileges and any qualifications,
limitations or restrictions of such rights or privileges of such series.
The following statements are brief summaries of certain provisions that are
currently contained in the Tenneco Charter, do not purport to be complete and
are qualified in their entirety by reference to such Tenneco Charter. Each of
the following provisions of the Tenneco Charter will be eliminated if the
Transaction is approved and the Charter Amendment becomes effective and
thereafter the holders of Junior Preferred Stock will have such rights only if
provided for in the Certificate of Designation relating to such series.
Rank. The Tenneco Charter currently provides that the Junior Preferred Stock
ranks, as to payment of dividends and amounts payable on liquidation, prior to
the Tenneco Common Stock (see "--Tenneco Common Stock" below) and junior to the
$4.50 Preferred Stock and the $7.40 Preferred Stock.
Dividends. The Tenneco Charter currently provides that holders of shares of
the Junior Preferred Stock will be entitled to receive, when and as declared by
the Board of Directors out of funds legally available for payment, cumulative
cash dividends at an annual rate determined by the Board of Directors therefor
as set forth in the resolution of the Board of Directors fixing the terms of
such series. In addition, unless full cumulative dividends on the outstanding
shares of Junior Preferred Stock have been paid, or declared and set apart for
payment, and the full dividend for the current period shall have been paid or
declared, dividends may not be paid or declared and other distributions may not
be made upon the Tenneco Common Stock nor may any Tenneco Common Stock be
purchased, retired or otherwise acquired by the Company.
Liquidation Rights. The Tenneco Charter currently provides that, in the event
of any liquidation, dissolution or winding up of the Company, the holders of
Junior Preferred Stock will be entitled to receive out of the assets of the
Company available for distribution to stockholders, before any distribution is
made to holders of (i) any other shares of any other class ranking junior to
the Junior Preferred Stock as to rights upon liquidation, dissolution or
winding up that may be issued in the future or (ii) Tenneco Common Stock,
liquidating distributions in an amount equal to the amount per share fixed for
each series of Junior Preferred Stock. Prior to the Merger, the holders of the
shares of Junior Preferred Stock will not be entitled to receive the
liquidation price of such shares until the liquidation preference of any
Preferred Stock shall have been paid in full. The
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Tenneco Charter currently provides that if upon any liquidation, dissolution or
winding up of the Company, the amounts payable with respect to any series of
Junior Preferred Stock are not paid in full, the holders of all series of
Junior Preferred Stock will share ratably in any such distribution in
proportion to the full respective preferential amounts to which they are
entitled. The Tenneco Charter currently provides that after payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of the Junior Preferred Stock are not entitled to any further participation in
any distribution of assets by the Company.
Redemption. The terms of any mandatory or optional redemption or sinking fund
provision applicable to a series of Junior Preferred Stock will be as set forth
in the Certificate of Designation applicable to such series. The Tenneco
Charter currently provides that during the continuance of any default in the
payment of dividends on the Junior Preferred Stock, no shares of Junior
Preferred Stock may be purchased, redeemed or otherwise acquired without the
consent of the holders of at least a majority of the number of shares of Junior
Preferred Stock present at a meeting, provided that a quorum, consisting of at
least a majority of the outstanding shares of Junior Preferred Stock, is
present thereat. If fewer than all the outstanding shares of a series of Junior
Preferred Stock are to be redeemed, the Company will select those to be
redeemed pro rata, by lot or by a substantially equivalent method.
Voting Rights. Except as described below and unless otherwise contained in
the Certificate of Designation providing for such series and except as required
by law, the holders of the Junior Preferred Stock have no voting rights.
The Tenneco Charter currently provides that the Company may not amend any of
the provisions of the Tenneco Charter so as to affect adversely the rights,
powers or preferences of the Junior Preferred Stock (other than provisions
relating exclusively to a particular series of Junior Preferred Stock) without
the consent of the holders of at least two-thirds of the outstanding shares of
Junior Preferred Stock, irrespective of series, and the Company may not amend
any such provisions of the Tenneco Charter or of any resolutions relating
exclusively to the rights of a particular series of Junior Preferred Stock so
as to affect adversely the rights, powers or preferences of such series,
without the consent of the holders of at least two-thirds of the outstanding
shares of such series. In addition, the Tenneco Charter currently provides that
the Company may not, without the consent of the holders of at least a majority
of the outstanding shares of Junior Preferred Stock, (i) create or authorize
any class of stock ranking prior to or on a parity with the Junior Preferred
Stock as to dividends or the distribution of assets on liquidation or increase
the authorized amount of Junior Preferred Stock, Preferred Stock or any class
of stock ranking prior to or on a parity with the Junior Preferred Stock as to
dividends or the distribution of assets on liquidation or create or authorize
any obligation or security convertible into Preferred Stock, Junior Preferred
Stock or shares of stock of any class ranking prior to or on a parity with the
Junior Preferred Stock as to dividends or the distribution of assets on
liquidation, or (ii) transfer substantially all its property or business, or
consolidate with or merge into any other corporation; this provision, however,
does not apply to a merger of another corporation into the Company or to
mortgages of property of the Company. The Tenneco Charter currently provides
that the Company may not, without the affirmative vote of at least a majority
of the outstanding shares of Junior Preferred Stock present at an annual
meeting or special meeting called for that purpose at which at least a majority
of the outstanding shares is present, redeem or otherwise acquire for value any
shares of Junior Preferred Stock or of any other stock ranking on a parity with
the Junior Preferred Stock in respect of dividends or distribution of assets on
liquidation during the continuance of any default in the payment of dividends
on the Junior Preferred Stock.
Notwithstanding the elimination of the voting rights described above to be
effected by the Charter Amendment, pursuant to the DGCL, approval of a majority
of the outstanding shares of Junior Preferred Stock will nonetheless be
necessary to effect an amendment to the Tenneco Charter that increases or
decreases the authorized number of shares of Junior Preferred Stock, increases
or decreases the par value of the Junior Preferred Stock or alters or changes
the powers, preferences or special rights of the shares of Junior Preferred
Stock so as to affect them adversely. If, however, any proposed amendment would
alter or change the powers,
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preferences or special rights of one or more series of Junior Preferred Stock
so as to affect them adversely, but shall not so affect the entire class, then
only the shares of the series so affected by the amendment shall be considered
a separate class for the purpose of the relevant provisions of the DGCL.
PREFERRED STOCK
In addition to the voting rights, redemption and conversion rights and other
terms and provisions fixed for each series of Preferred Stock by the Board of
Directors, the Tenneco Charter currently provides the preferences and rights
for the Preferred Stock as set forth below. Upon consummation of the Merger,
the shares of Preferred Stock currently outstanding will be converted into the
right to receive certain consideration in the Merger, the Tenneco Charter will
be amended to eliminate the class of Preferred Stock (and the provisions
described below) and the class of Junior Preferred Stock will be renamed
Preferred Stock.
Dividends. The holders of Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, out of the Company's assets legally
available therefor, cumulative preferential dividends at the rate per annum
fixed for the respective series. All shares of Preferred Stock rank on a
parity with respect to dividend rights, irrespective of series, and no
dividend may be declared or paid or set apart for payment on the Preferred
Stock of any series unless at the same time a dividend in like proportion to
the dividends accrued upon the Preferred Stock of each other series shall be
declared or paid or set apart for payment, as the case may be, on Preferred
Stock of each other series then outstanding. The dividend rate on the $7.40
Preferred Stock is $7.40 per share per annum and the dividend rate on the
$4.50 Preferred Stock is $4.50 per share per annum.
No dividends whatsoever may be paid or declared, or any distribution made,
on any stock junior to the Preferred Stock, nor may any shares of such junior
stock be purchased, retired or otherwise acquired for valuable consideration
unless all past dividends on the Preferred Stock shall have been paid or
declared and set apart. In addition, the Company may not pay any such dividend
or distribution on, or purchase, retire or otherwise acquire, such junior
stock unless the full dividend on the shares of Preferred Stock for the
current dividend period has been paid or declared.
Liquidation Rights. Holders of each series of Preferred Stock are entitled
to such liquidation preferences as are fixed for such series, provided that
such amount cannot exceed $100 per share in the event of involuntary
liquidation. If there are insufficient assets to permit full payment to
holders of the Preferred Stock of the amount to which they are entitled upon
liquidation, such assets will be distributed to holders of shares of Preferred
Stock pro rata in proportion to the amount payable upon each share thereof.
The amount payable to the holders of outstanding shares of Preferred Stock
upon liquidation will be paid before any distribution is made to the holders
of any class of stock of the Company ranking junior to the Preferred Stock.
The liquidation preference fixed for the $7.40 Preferred Stock is $100 per
share and the liquidation preference fixed for the $4.50 Preferred Stock is
$100 per share.
Voting. The Company is not permitted to amend any of the provisions of the
Tenneco Charter so as to affect adversely the rights, powers or preferences of
the Preferred Stock (other than provisions relating exclusively to a
particular series of Preferred Stock) without the consent of the holders of at
least two-thirds of the outstanding shares of Preferred Stock, irrespective of
series, and the Company may not amend any such provisions of the Tenneco
Charter or of any resolutions relating exclusively to the rights of a
particular series of Preferred Stock so as to the affect adversely the rights,
powers or preferences of such series, without the consent of the holders of at
least two-thirds of the outstanding shares of such series.
The Company may not, without the consent of the holders of at least a
majority of the outstanding shares of Preferred Stock, (i) create or authorize
any class of stock ranking prior to or on a parity with the Preferred Stock as
to dividends or assets, or increase the authorized amount of Preferred Stock
or any class of stock ranking prior to or on a parity with the Preferred Stock
as to dividends or assets or create or authorize any obligation or
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security convertible into shares of stock of any class ranking prior to or on a
parity with the Preferred Stock as to dividends or assets, or (ii) transfer
substantially all its property or business, or consolidate with or merge into
any other corporation; this provision, however, does not apply to a merger of
another corporation into the Company or to mortgages of property of the
Company.
The Company may not, without the affirmative vote of at least a majority of
the outstanding shares of Preferred Stock present at an annual meeting or
special meeting called for that purpose at which at least a majority of the
outstanding shares is present, redeem or otherwise acquire for value any shares
of Preferred Stock or of any other stock ranking on a parity with the Preferred
Stock in respect of dividends or distribution of assets on liquidation during
the continuance of any default in the payment of dividends on the Preferred
Stock.
Holders of the $7.40 Preferred Stock and holders of the Tenneco Common Stock
are entitled to vote together on the basis of one vote for each share held at
all meetings of shareholders of the Company. Holders of the $7.40 Preferred
Stock are not entitled to vote separately as a class except with regard to
matters relating exclusively to the rights of such series so as to adversely
affect the rights, powers or preferences of such series. In addition, holders
of the $7.40 Preferred Stock of the Company become entitled to elect two
additional members of the Board of Directors whenever dividends on such stock
are in arrears in an amount equal to six quarterly dividends thereon. Holders
of any other series of Preferred Stock that may be issued are entitled to such
voting rights, if any, as are fixed for such series. Except as otherwise
provided by the DGCL and except as set forth in the Tenneco Charter with
respect to the rights of holders of Preferred Stock to vote on certain matters
as described above, holders of $4.50 Preferred Stock are not entitled to vote.
TENNECO COMMON STOCK
Dividends. Subject to the prior rights of the holders of the Preferred Stock
and the Junior Preferred Stock as described above, such dividends as may be
determined by the Board of Directors of the Company may be declared and paid on
the Tenneco Common Stock from time to time out of any funds legally available
therefor.
Voting Rights. Holders of the $7.40 Preferred Stock and holders of the
Tenneco Common Stock are entitled to vote together on the basis of one vote for
each share held at all meetings of shareholders of the Company. Subject to the
right of the holders of the $7.40 Preferred Stock of the Company to elect two
additional members of the Board of Directors whenever dividends on the
outstanding $7.40 Preferred Stock are in arrears in an amount equal to six
quarterly dividends thereon, and subject to the voting rights of the Preferred
Stock and the Junior Preferred Stock described above and such additional voting
rights as may be provided for any series of Preferred Stock or Junior Preferred
Stock in the resolution of the Board of Directors providing for the issuance
thereof, holders of Tenneco Common Stock are entitled to one vote for each
share held at all meetings of stockholders.
Liquidation. The holders of Tenneco Common Stock, in the event of any
liquidation, dissolution or winding up of the affairs of the Company, are
entitled to receive pro rata the assets of the Company remaining after
satisfaction of corporate liabilities and the prior payment in full of all
amounts which the holders of the Preferred Stock and the Junior Preferred Stock
are entitled to receive.
Miscellaneous. The holders of Tenneco Common Stock have no preemptive rights,
cumulative voting rights or subscription rights.
The Tenneco Common Stock is listed on the NYSE and the Midwest, Pacific,
Toronto, London, Frankfurt, Dusseldorf, Basel, Geneva, Zurich and Paris Stock
Exchanges.
The following banks are both Transfer Agents and Registrars for the Tenneco
Common Stock: First Chicago Trust Company of New York, New York, New York; and
First Interstate Bank of California, Los Angeles, California. Additionally,
Montreal Trust Company, Toronto, Ontario, is a Transfer Agent for the Tenneco
Common Stock and Canada Permanent Trust Company, Toronto, Ontario, is a
Registrar for the Tenneco Common Stock.
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CERTAIN ANTI-TAKEOVER PROVISIONS
The Tenneco Charter, By-Laws and the Rights Agreement currently contain
provisions, summarized below, that could have the effect of delaying, deferring
or preventing a merger, tender offer or other takeover attempt of the Company.
Upon consummation of the Merger, these provisions will be eliminated from the
Tenneco Charter and By-Laws and the rights issued under the Rights Agreement
will expire.
Tenneco Charter
Election of Board of Directors. The Board of Directors of the Company is
divided into three classes of directors serving staggered three-year terms,
with a minimum of eight directors and a maximum of sixteen directors
constituting the entire Board of Directors. The directors may be removed by the
stockholders of the Company only for cause. The total number of directors and
the number of directors constituting each class of directors (with each of the
three classes being required to be equal as nearly as possible) can be fixed or
changed, from time to time, by the Board of Directors within such authorized
limits. Incumbent directors may fill any vacancies on the Board of Directors,
however occurring, whether by an increase in the number of directors, death,
resignation, retirement, disqualification, removal from office or otherwise.
The foregoing provisions do not apply to directors elected by the holders of
Preferred Stock or Junior Preferred Stock voting separately by class or series,
unless expressly so provided by the terms of such series.
Fair Price Provisions. The Tenneco Charter contains a "fair price" provision
which requires the approval of holders of at least 66 2/3% of the Company's
outstanding voting stock (excluding voting stock owned by any Interested
Stockholder, as defined below, and certain related parties) as a condition to
mergers, consolidations and certain other business combinations and
transactions ("Business Combinations") involving the Company or one of its
subsidiaries with, or proposed by or on behalf of, an Interested Stockholder or
certain related parties unless the Business Combination satisfies certain
minimum price and other procedural safeguards or unless the transaction is
approved by a majority of the Continuing Directors (as defined below).
Amendments to these provisions of the Certificate of Incorporation proposed by
an Interested Stockholder require the approval of holders of 66 2/3 percent of
the Company's voting stock voting together as a single class (excluding voting
stock owned by any Interested Stockholders and certain related parties) unless
such amendment is recommended by the Board of Directors if all such directors
are Continuing Directors.
An "Interested Stockholder" is defined in the Tenneco Charter to include any
person who is or has announced or publicly disclosed a plan or intention to
become the beneficial owner of more than five percent of the voting stock of
the Company (other than the Company, its subsidiaries or employee benefit plans
of the Company and the trustees of such plans). A person is the "beneficial
owner" of voting stock of the Company which such person and certain related
parties, directly or indirectly, own or have the right to acquire or vote such
stock.
A "Continuing Director" is any member of the Board of Directors of the
Company who is not affiliated with an Interested Stockholder and who either was
a director of the Company prior to the time any Interested Stockholder became
an Interested Stockholder or was recommended or elected by a majority of the
Continuing Directors.
The fair price criteria require that, in a Business Combination in which
consideration is to be paid to the Company's stockholders, the consideration
required to be paid must be either cash or the same form of consideration used
by the Interested Stockholder in acquiring beneficial ownership of the largest
portion of its capital stock of the Company. In the case of payments to holders
of the Tenneco Common Stock, the fair market value per share of such payments
would have to be at least equal to the higher value determined under the
following two alternatives: (i) the highest per share price paid by or on
behalf of the Interested Stockholder during the two years prior to the public
announcement of the proposed Business Combination (the "Announcement Date") or
in the transaction in which it became an Interested Stockholder, whichever is
higher,
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for any share of the Tenneco Common Stock beneficially owned by the Interested
Stockholder, and (ii) the fair market value per share of Tenneco Common Stock
on the Announcement Date or on the date on which the Interested Stockholder
became an Interested Stockholder (the "Determination Date"), whichever is
higher. In the case of payments to holders of any shares of a series or class
of capital stock of the Company other than Tenneco Common Stock, the fair
market value per share of such payments would have to be at least equal to the
highest value determined under the following four alternatives: (i) the highest
per share price paid by or on behalf of the Interested Stockholder during the
two years prior to the Announcement Date or in the transaction in which it
became an Interested Stockholder, whichever is higher, for any shares of such
class or series beneficially owned by the Interested Stockholder, (ii) the fair
market value per share of such class or series on the Announcement Date or
Determination Date, whichever is higher, (iii) such fair market value
determined pursuant to the immediately preceding clause multiplied by the ratio
of (x) the highest per share price for such class or series paid by or on
behalf of the Interested Stockholder during the two-year period prior to the
Announcement Date for any shares of such class or series beneficially owned by
the Interested Stockholder to (y) the fair market value per share of such class
or series on the first day in such two-year period on which the Interested
Stockholder acquired beneficial ownership of any share of such class or series,
and (iv) the highest voluntary or involuntary liquidation amount for such class
or series.
In order to avoid the 66 2/3% stockholder vote requirement for Business
Combinations in which consideration is to be paid to the Company's
stockholders, the following procedural requirements would have to be complied
with, as well as the minimum price criteria described above, unless the
Business Combination was approved by a majority of the Continuing Directors.
(i) The Company, after the Interested Stockholder became an Interested
Stockholder, must not have failed to pay full quarterly dividends payable
under the terms of any outstanding capital stock of the Company or have
reduced the rate of dividends paid on the Tenneco Common Stock, unless such
failure or reduction was approved by a majority of the Continuing
Directors.
(ii) After the Interested Stockholder became an Interested Stockholder,
the Interested Stockholder must not have acquired any additional shares of
the Company's capital stock.
(iii) After the Interested Stockholder became an Interested Stockholder,
the Company must have increased the annual dividend rate on the Tenneco
Common Stock to reflect certain stock reclassifications, recapitalizations,
and reorganizations of the Company unless such failure to increase the
dividend was approved by a majority of the Continuing Directors.
(iv) A proxy or information statement describing the proposed Business
Combination must have been prepared and mailed by the Company to all
stockholders of the Company at least 30 days prior to the consummation of
the Business Combination.
(v) The Interested Stockholder must not have made any major change in the
Company's business or equity capital structure without the approval of a
majority of Continuing Directors.
In order to avoid the 66 2/3 percent vote requirement for a Business
Combination not involving the payment of consideration to the Company's
stockholders, the transaction would have to be approved by a majority of the
Continuing Directors. The foregoing voting requirements are in addition to any
vote required by law or otherwise required by the Tenneco Charter.
Other Provisions. In addition to the anti-takeover effects which may exist in
the above described provisions, the ability of the Board of Directors to
authorize the issuance of shares of Preferred Stock and Junior Preferred Stock,
as described under the caption "--General", might deter a third party from
attempting to acquire the Company on a non-negotiated basis such as a tender
offer. The Board of Directors of the Company could issue authorized but
unissued Tenneco Common Stock to a holder that might have sufficient voting
power to make it difficult for any proposal to accomplish certain Business
Combinations opposed by a majority of the Continuing Directors to be approved,
or to receive the stockholder vote required to amend the provisions of the
Certificate of Incorporation relating to such Business Combinations.
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By-Laws
The Company's By-Laws provide for (i) an advance notice procedure with regard
to (a) the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors, and (b) certain business to
be brought before an annual meeting of stockholders of the Company, other than
by or on behalf of the Board of Directors, and (ii) procedures governing the
use of written consents by stockholders. The By-Laws may be altered, amended or
repealed by the Board of Directors, by a majority vote of stockholders at a
meeting thereof (provided, in the case of an annual meeting, that any
stockholder proposing such action shall have given the Company prior notice in
accordance with the procedures prescribed by the By-Laws), or by the holders of
a majority of the outstanding shares of capital stock of the Company entitled
to vote thereon acting by written consent in accordance with the consent
procedures prescribed by the By-Laws.
Rights Agreement
On June 10, 1988, the Company made a dividend distribution to holders of
Tenneco Common Stock of one preferred share purchase right (a "Right") for each
outstanding share of Tenneco Common Stock. Each Right entitles the registered
holder to purchase from the Company a unit consisting of one-hundredth of a
share (a "Unit") of Series A Participating Junior Preferred Stock
("Participating Junior Preferred Stock"), at a purchase price of $130 per Unit
(the "Purchase Price"), subject to adjustment from time to time to prevent
dilution. The description and terms of the Rights are set forth in the Rights
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Rights will expire upon effectiveness of the
Merger.
The Rights are not exercisable until the Rights Distribution Date (as defined
below) and will expire at the close of business on June 10, 1998, unless
earlier redeemed by the Company as described below.
The Rights currently attach to all Tenneco Common Stock certificates
representing the shares thereof outstanding, and no separate certificates
evidencing the Rights ("Rights Certificates") have been distributed. The Rights
will separate from the Tenneco Common Stock and a distribution date (the
"Rights Distribution Date") will occur upon the earliest of (i) 10 business
days following the first date of public announcement (the "Stock Acquisition
Date") that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 20 percent or more of the outstanding shares of Tenneco Common
Stock, (ii) 10 business days (or such later date as may be determined by the
Board of Directors) following the commencement of a tender offer or exchange
offer that would result in a person or group beneficially owning 20 percent or
more of such outstanding shares of Tenneco Common Stock and (iii) 10 business
days after the Board of Directors determines any person, alone or together with
its affiliates and associates, has become the beneficial owner of an amount of
Tenneco Common Stock which the Board of Directors determines to be substantial
(which amount shall in no event be less than 10 percent of the shares of
Tenneco Common Stock outstanding) and at least a majority of the Board of
Directors who are not officers of the Company, after reasonable inquiry and
investigation, including consultation with such persons as such directors shall
deem appropriate, shall determine that (a) such beneficial ownership by such
person is intended to cause the Company to repurchase the Tenneco Common Stock
beneficially owned by such person or to cause pressure on the Company to take
action or enter into a transaction or series of transactions intended to
provide such person with short-term financial gain under circumstances where
the Board of Directors determines that the best long-term interests of the
Company and its stockholders would not be served by taking such action or
entering into such transactions or series of transactions at that time or (b)
such beneficial ownership is causing or reasonably likely to cause a material
adverse impact (including, but not limited to, impairment of relationships with
customers or impairment of the Company's ability to maintain its competitive
position) on the business or prospects of the Company (any such person being
referred to herein and in the Rights Agreement as an "Adverse Person").
Until the Rights Distribution Date, (i) the Rights will be evidenced by the
Tenneco Common Stock certificates and will be transferred with and only with
such Tenneco Common Stock certificates, (ii) new Tenneco
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Common Stock certificates issued after June 10, 1988 will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Tenneco Common Stock outstanding will also
constitute the transfer of the Rights associated with the Tenneco Common Stock
represented by such certificate.
As soon as practicable after the Rights Distribution Date, Rights
Certificates will be mailed to holders of record of the Tenneco Common Stock as
of the close of business on the Rights Distribution Date and, thereafter, the
separate Rights Certificates alone will represent the Rights. Except as
otherwise provided by the Board of Directors, only shares of Tenneco Common
Stock issued prior to the Rights Distribution Date will be issued with Rights.
In the event that (i) a person becomes the beneficial owner of 20 percent or
more of the then outstanding shares of Tenneco Common Stock (except pursuant to
an offer for all outstanding shares of Tenneco Common Stock that the
independent directors determine to be fair and otherwise in the best interests
of the Company and its stockholders), or (ii) the Board of Directors determines
that a person is an Adverse Person, each holder of a Right will thereafter have
the right to receive, upon exercise, Tenneco Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a
value equal to two times the exercise price of the Right. Upon the occurrence
of either of the events set forth in the preceding sentence, all Rights that
are, or (under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or Adverse Person (or certain
related parties) will be null and void. However, Rights are not exercisable
following the occurrence of either of such events set forth above until such
time as the Rights are no longer redeemable by the Company as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction
(other than a merger meeting prescribed terms and conditions that follows an
offer described in the preceding paragraph) or (ii) more than 50 percent of the
Company's assets or earning power is sold or transferred, each holder of a
Right (except Rights that previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
The Purchase Price payable, and the number of Units of Participating Junior
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, Participating Junior Preferred Stock, (ii) if holders of
Participating Junior Preferred Stock are granted certain rights or warrants to
subscribe for Participating Junior Preferred Stock or convertible securities at
less than the current market price of Participating Junior Preferred Stock or
(iii) upon the distribution to holders of the Participating Junior Preferred
Stock of evidences of indebtedness or assets (excluding regular quarterly cash
dividends) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments amount to at least 1% of the Purchase Price. No
fractional Units will be issued and, in lieu thereof, an adjustment in cash
will be made based on the market price of Participating Junior Preferred Stock
on the last trading date prior to the date of exercise.
In general, at any time until ten business days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but not in part,
at a price of $.02 per Right. The Company may not redeem the Rights if the
Board of Directors has previously declared a person to be an Adverse Person.
Immediately upon the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $.02 redemption price.
Until a Right is exercised, the holder thereof, as such, has no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.
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Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company prior to the Rights Distribution Date. After
the Rights Distribution Date, the provisions of the Rights Agreement may be
amended by the Board in order to cure any ambiguity, to make changes that do
not adversely affect the interests of holders of Rights or to shorten or
lengthen any time period under the Rights Agreement; provided however, that no
amendment to adjust the time period governing redemption shall be made at such
time as the Rights are not redeemable.
The Rights will expire upon the effectiveness of the Merger.
PARTICIPATING JUNIOR PREFERRED STOCK
In connection with the Rights Agreement, 3,500,000 shares of Participating
Junior Preferred Stock of the Company (the "Participating Junior Preferred
Stock") have been authorized. No shares of the Participating Junior Preferred
Stock are outstanding. Upon consummation of the Merger, the Participating
Junior Preferred Stock will cease to be authorized. The following summary of
the terms of the Participating Junior Preferred Stock which are in addition to
those terms which apply to the Junior Preferred Stock generally does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the Tenneco Charter. Participating
Junior Preferred Stock ranks junior to the Preferred Stock and senior to the
Tenneco Common Stock with respect to payment of dividends and distributions of
assets on liquidation. See "--Junior Preferred Stock."
Dividends. Subject to the prior rights of the Preferred Stock, holders of the
Participating Junior Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors, quarterly cumulative preferential dividends
equal to the greater of (i) $5.00 per share, or (ii) 100 times the amount of
quarterly dividend paid on, or distributed with respect to, the Tenneco Common
Stock (other than dividends payable in shares of Tenneco Common Stock or
subdivisions of the Tenneco Common Stock), subject to certain adjustments for
stock dividends, subdivisions and combinations.
Liquidation. Subject to the prior rights of the holders of the Preferred
Stock, in the event of the voluntary or involuntary liquidation, dissolution or
winding up of the business of the Company, holders of the Participating Junior
Preferred Stock will be entitled to receive an amount equal to the greater of
(i) $100 per share plus accrued and unpaid dividends and (ii) 100 times the
aggregate amount to be distributed per share to holders of Tenneco Common
Stock, subject to certain adjustments for stock dividends, subdivisions and
combination.
Redemption. The Company has the option to redeem, in whole or in part, the
Participating Junior Preferred Stock at any time at a redemption price equal to
100 times the per share market price of the Tenneco Common Stock, plus accrued
and unpaid dividends, subject to certain adjustments for stock dividends,
subdivisions or combinations. Such market price is the average closing price on
the New York Stock Exchange for the ten consecutive trading days immediately
prior to the date of mailing of the notice of redemption.
Voting. Holders of Participating Junior Preferred Stock are entitled to 100
votes per share (subject to certain adjustments) on all matters submitted to a
vote of the stockholders of the Company and will vote with the Tenneco Common
Stock, as a class, on such matters.
Whenever the dividends on the Participating Junior Preferred Stock are in
arrears in an amount equal to six quarterly dividends thereon, holders of the
Participating Junior Preferred Stock have the right to elect two additional
directors until all accrued and unpaid dividends on the Participating Preferred
Stock are paid in full.
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THE CHARTER AMENDMENT
If the Transaction is approved at the Tenneco Special Meeting, the Tenneco
Charter will be amended the following day to eliminate specified rights, powers
and preferences of the authorized class of Junior Preferred Stock contained
therein. Certain of the rights, powers and preferences eliminated in the
Charter Amendment may be preserved for the holders of Junior Preferred Stock
issued in the NPS Issuance in the Certificates of Designation for such series.
Upon the Charter Amendment becoming effective, the Tenneco Charter will
provide that each series of Junior Preferred Stock will have such dividend and
liquidation preferences, voting rights, redemption prices, conversion rights
and other terms and provisions as may be contained in the Certificate of
Designation creating such series. Thus, each of the following provisions of the
Tenneco Charter will be eliminated upon the effectiveness of the Charter
Amendment:
Dividends. The Charter Amendment would eliminate the provisions contained in
the Tenneco Charter prohibiting any dividends from being paid or declared, or
any distribution being made, on any class of stock ranking junior to Junior
Preferred Stock and prohibiting any shares of stock ranking junior to Junior
Preferred Stock from being purchased, retired or otherwise acquired by Tenneco,
unless all dividends on Junior Preferred Stock for all past periods shall have
been paid, or declared and a sum sufficient for the payment of such dividends
set apart, and the full dividend thereon for the then current dividend period
shall have been paid or declared.
Liquidation Rights. The Charter Amendment would eliminate the sections of the
Tenneco Charter providing that: (i) in the event of any liquidation,
dissolution or winding up of the affairs of Tenneco, then, before any
distribution or payment shall be made to the holders of any class of stock of
Tenneco ranking junior to Junior Preferred Stock, the holders of Junior
Preferred Stock of the respective series (subject to the rights of the
Preferred Stock) shall be entitled to be paid in full the respective amounts
fixed for such series; (ii) after such payment shall have been made in full to
the holders of Junior Preferred Stock, the remaining assets and funds of
Tenneco shall be distributed among the holders of the stock of Tenneco ranking
junior to Junior Preferred Stock according to their respective rights; and
(iii) in the event that the assets of Tenneco available for distribution to
holders of Junior Preferred Stock shall not be sufficient to make the foregoing
payments required to be made in full, such assets shall be distributed to the
holders of the respective shares of Junior Preferred Stock pro rata in
proportion to the amounts payable upon each share thereof.
Voting Rights. The Charter Amendment would eliminate from the Tenneco Charter
existing provisions which, if there are shares of the Junior Preferred Stock
outstanding, require the consent of the holders of a majority of such shares
for the taking of any of the following actions by the Company: (i) creating
additional classes of stock ranking prior to the Junior Preferred Stock, or
increasing the amount of the Preferred Stock or any additional class of stock
ranking prior to the Junior Preferred Stock in respect of dividends or
distribution of assets on liquidation; (ii) creating any obligation or security
convertible into shares of the Preferred Stock or other class of stock ranking
prior to or on parity with the Junior Preferred Stock in respect of dividends
or distribution of assets on liquidation; (iii) creating any class of stock
ranking on a parity with the Junior Preferred Stock or increasing the
authorized amount of the Junior Preferred Stock or of any class of stock
ranking on a parity with the Junior Preferred Stock in respect of dividends or
distribution of assets on liquidation; (iv) the purchase, redemption or other
acquisition for value of any shares of any Junior Preferred Stock or of any
other stock ranking on a parity with the Junior Preferred Stock in respect of
dividends or distribution of assets on liquidation during the continuance of
any default in the payment of dividends on the Junior Preferred Stock; or (v)
selling, leasing, transferring or conveying all, or substantially all, of
Tenneco's property or business, or consolidating with or merging into any other
corporation or corporations (except for mergers of another corporation into the
Company or mortgages, pledges or other hypothecations of the Company's
property).
The Charter Amendment also would eliminate the provisions contained in the
Tenneco Charter requiring the consent of the holders of at least two-thirds of
the number of shares of Junior Preferred Stock at the time outstanding to
amend, alter, or repeal any of the provisions of Article FOURTH of the Tenneco
Charter (other
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than provisions relating exclusively to the shares of Junior Preferred Stock of
a particular series) so as to affect adversely the rights, powers or
preferences of Junior Preferred Stock or of the holders thereof, and requiring
the consent of the holders of at least two-thirds of the number of shares of a
particular series of Junior Preferred Stock of such series at the time
outstanding to amend, alter or repeal any of the provisions of Article FOURTH
of the Tenneco Charter relating exclusively to the shares of Junior Preferred
Stock of such series or of any resolution or resolutions relating exclusively
to the shares of Junior Preferred Stock of such series so as to adversely
affect the rights, powers or preferences of the Junior Preferred Stock of such
series or the holders thereof.
The Charter Amendment would allow the Board of Directors of the Company
additional flexibility in establishing the powers, preferences and relative and
other special rights, including voting rights, of any series of the Junior
Preferred Stock issued in the future, and to take certain actions without first
obtaining the consent of holders of any outstanding shares of the Junior
Preferred Stock, unless otherwise required by law and unless the Board of
Directors elected to provide voting rights with respect to any of such actions
pursuant to the terms of any series of the Junior Preferred Stock issued in the
future.
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PLAN OF DISTRIBUTION
The Company may sell the Junior Preferred Stock being offered hereby in three
ways: (i) through agents, (ii) through underwriters, and (iii) through dealers.
Any such underwriters, dealers or agents in the United States will include
Morgan Stanley & Co. Incorporated.
Offers to purchase Junior Preferred Stock may be solicited by agents
designated by the Company from time to time. Any such agent, who may be deemed
to be an underwriter as that term is defined in the Securities Act, involved in
the offer or sale of the Securities in respect of which this Prospectus is
delivered will be named, and any commissions payable by the Company to such
agent set forth, in the applicable Prospectus Supplement. Any such agent will
be acting on a reasonable efforts basis for the period of its appointment or,
if indicated in the applicable Prospectus Supplement, on a firm commitment
basis. Agents may be entitled under agreements which may be entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for the Company
in the ordinary course of business.
If any underwriters are utilized in the sale of the Junior Preferred Stock in
respect of which this Prospectus is delivered, the Company will enter into an
underwriting agreement with such underwriters at the time of sale to them and
the names of the underwriters and the terms of the transaction will be set
forth in the Prospectus Supplement, which will be used by the underwriters to
make resales of the Junior Preferred Stock in respect of which this Prospectus
is delivered to the public. The underwriters may be entitled, under the
relevant underwriting agreement, to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for the Company
in the ordinary course of business.
If a dealer is utilized in the sale of the Junior Preferred Stock in respect
of which the Prospectus is delivered, the Company will sell such Junior
Preferred Stock to the dealer, as principal. The dealer may then resell such
Junior Preferred Stock to the public at varying prices to be determined by such
dealer at the time of resale. Dealers may be entitled to indemnification by the
Company against certain liabilities, including liabilities under the Securities
Act, and may be customers of, engage in transactions with or perform services
for the Company in the ordinary course of business.
Junior Preferred Stock may also be offered and sold, if so indicated in the
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with their terms, by one or more firms, including Morgan Stanley &
Co. Incorporated ("remarketing firms"), acting as principals for their own
accounts or as agents for the Company. Any remarketing firm will be identified
and the terms of its agreement, if any, with the Company and its compensation
will be described in the Prospectus Supplement. Remarketing firms may be
entitled under agreements which may be entered into with the Company to
indemnification by the Company against certain civil liabilities, including
liabilities under the Securities Act, and may be customers of, engage in
transactions with or perform services for the Company in the ordinary course of
business.
Any underwriters, agents or dealers utilized in the sale of Junior Preferred
Stock will not confirm sales to accounts over which they exercise discretionary
authority.
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LEGAL MATTERS
Certain legal matters regarding the Junior Preferred Stock will be passed
upon for the Company by Theodore R. Tetzlaff, General Counsel of the Company
and a partner of Jenner & Block, Chicago, Illinois. Certain federal income tax
matters are also being passed upon for the Company by Jenner & Block. Mr.
Tetzlaff beneficially owns 33,637 shares of Tenneco Common Stock (including
options to purchase 16,667 shares of Tenneco Common Stock, which options are
either presently exercisable or exercisable within 60 days of such date) and
other Jenner & Block attorneys participating in this matter beneficially own
458 shares of Tenneco Common Stock. Certain legal matters relating to the
Junior 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 and its subsidiaries.
EXPERTS
The following financial statements and schedules included or incorporated by
reference in this Prospectus and elsewhere in this Registration Statement, to
the extent and for the periods indicated in their reports, have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports: (i) Tenneco and consolidated subsidiaries included in
Tenneco's Annual Report on Form 10-K, as amended, for the year ended December
31, 1995, incorporated by reference herein; and (ii) the Businesses of Tenneco
Energy, included herein.
The combined financial statements of Mobil Plastics Division of Mobil
Corporation for the year ended December 28, 1994 appearing in the Current
Report of Tenneco on Form 8-K dated November 17, 1995, which is incorporated by
reference herein, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein. Such financial
statements have been incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BUSINESSES OF TENNECO ENERGY
Report of Independent Public Accountants................................ F-2
Combined Statements of Income for each of the three years in the period
ended
December 31, 1995 and for the six months ended June 30, 1996 and 1995.. F-3
Combined Balance Sheets December 31, 1995 and 1994 and June 30, 1996.... F-4
Combined Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 and for the six months ended June 30,
1996 and 1995.......................................................... F-5
Statements of Changes in Combined Equity for each of the three years in
the period ended December 31, 1995 and for the six months ended June
30, 1996 and 1995...................................................... F-6
Notes to Combined Financial Statements.................................. F-7
FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts--The Businesses of Tenneco Energy..... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses
of Tenneco Energy (see Note 1) as of December 31, 1995 and 1994, and the
related combined statements of income, cash flows and changes in combined
equity for each of the three years in the period ended December 31, 1995.
These combined financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of Tenneco Energy as of December 31, 1995 and 1994, and the results
of its combined operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of Tenneco Energy taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1996
F-2
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
--------------------- -------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues..... $1,921 $2,381 $2,866 $1,370 $ 939
Other income--
Interest income.................... 85 65 25 31 44
Equity in net income of affiliated
companies......................... 65 51 47 18 37
Gain (loss) on sale of assets, net. 11 1 62 42 (7)
Gain on the sale by a subsidiary of
its stock......................... -- 23 -- -- --
Other income, net.................. 29 17 37 6 19
------ ------ ------ ------ ------
2,111 2,538 3,037 1,467 1,032
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of gas sold..................... 954 1,472 1,786 795 493
Operating expenses................... 414 379 442 230 170
General and administrative........... 200 143 169 113 96
Finance charges...................... 79 75 51 34 43
Depreciation, depletion and
amortization........................ 196 102 170 107 90
------ ------ ------ ------ ------
1,843 2,171 2,618 1,279 892
------ ------ ------ ------ ------
Income before interest expense and
income taxes........................ 268 367 419 188 140
Interest expense, net of interest
allocated to affiliates............. 122 142 127 63 61
------ ------ ------ ------ ------
Income before income taxes........... 146 225 292 125 79
Income tax expense (benefit)......... (11) 72 104 22 32
------ ------ ------ ------ ------
Income before extraordinary loss..... 157 153 188 103 47
Extraordinary loss, net of income
tax................................. -- -- (25) -- --
------ ------ ------ ------ ------
Net income .......................... $ 157 $ 153 $ 163 $ 103 $ 47
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements of income.
F-3
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................ $ 249 $ 48 $ 100
Receivables--
Customer notes and accounts (net)................. 508 961 503
Affiliated companies.............................. 199 215 170
Gas transportation and exchange................... 64 214 151
Income taxes...................................... 133 234 105
Other............................................. 436 130 261
Inventories........................................ 24 22 24
Deferred income taxes.............................. -- -- 21
Prepayments and other.............................. 83 92 93
------ ------ ------
1,696 1,916 1,428
------ ------ ------
Investments and other assets:
Investment in affiliated companies................. 280 358 230
Long-term notes and other receivables (net) ....... 352 683 235
Goodwill........................................... 22 25 37
Other.............................................. 601 307 685
------ ------ ------
1,255 1,373 1,187
------ ------ ------
Plant, property and equipment, at cost............... 6,272 5,768 6,436
Less--Reserves for depreciation, depletion and
amortization...................................... 3,431 3,327 3,512
------ ------ ------
2,841 2,441 2,924
------ ------ ------
$5,792 $5,730 $5,539
====== ====== ======
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)................................... $ 456 $ 399 $ 521
Payables--
Trade............................................. 365 324 312
Affiliated companies.............................. 88 47 113
Gas transportation and exchange................... 28 159 107
Taxes accrued...................................... 525 56 25
Deferred income taxes.............................. 65 29 --
Interest accrued................................... 102 124 97
Natural gas pipeline revenue reservation........... 27 190 59
Other.............................................. 428 238 537
------ ------ ------
2,084 1,566 1,771
------ ------ ------
Long-term debt....................................... 1,811 2,242 1,519
------ ------ ------
Deferred income taxes................................ 323 735 413
------ ------ ------
Postretirement benefits.............................. 260 288 246
------ ------ ------
Deferred credits and other liabilities............... 478 351 406
------ ------ ------
Commitments and contingencies
Minority interest.................................... 19 19 18
------ ------ ------
Preferred stock with mandatory redemption provisions. 130 147 112
------ ------ ------
Combined equity...................................... 687 382 1,054
------ ------ ------
$5,792 $5,730 $5,539
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-4
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ----- ----- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 157 $ 153 $ 163 $ 103 $ 47
Adjustments to reconcile net income to net
cash provided (used) by operating
activities --
Extraordinary loss, net of tax.......... -- -- 25 -- --
Depreciation, depletion and
amortization........................... 196 102 170 107 90
Equity in net income of affiliated
companies, net of dividends............ (12) (3) (5) (1) (12)
Deferred income taxes................... 88 51 93 5 (7)
(Gain) loss on sale of assets, net...... (11) (24) (62) (42) 7
Cash paid for interest allocated to
affiliates, net of tax................. (117) (78) (81) (75) (56)
Changes in components of working
capital--
(Increase) decrease in receivables..... 451 17 78 19 163
(Increase) decrease in prepayments and
other current assets.................. 8 35 51 4 8
Increase (decrease) in payables........ (25) (262) (241) (2) (70)
Increase (decrease) in taxes accrued... 40 (252) 90 (235) 9
Increase (decrease) in interest
accrued............................... (52) (39) (32) (15) (27)
Increase (decrease) in natural gas
pipeline revenue reservation.......... (156) (91) 136 11 (179)
Increase (decrease) in other current
liabilities........................... (102) (60) (122) (161) (7)
(Increase) decrease in long-term notes
and other receivables (net)............ 332 228 -- 138 199
Take-or-pay (refunds to customers)
recoupments, net....................... 36 26 (34) 2 25
Other................................... (68) (81) (20) (43) (16)
----- ----- ------- ----- -----
Net cash provided (used) by operating
activities............................... 765 (278) 209 (185) 174
----- ----- ------- ----- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets.......... 17 68 114 278 13
Expenditures for plant, property and
equipment................................ (337) (345) (171) (164) (113)
Acquisitions of businesses................ (241) -- -- -- (225)
Investments and other..................... 24 48 22 3 59
----- ----- ------- ----- -----
Net cash provided (used) by investing
activities............................... (537) (229) (35) 117 (266)
----- ----- ------- ----- -----
FINANCING ACTIVITIES
Issuance of Tenneco Inc. common, treasury
and SECT shares.......................... 102 188 1,215 46 39
Purchase of Tenneco Inc. common stock..... (655) (26) (7) (122) (450)
Redemption of Tenneco Inc. preferred
stock.................................... (20) (20) (30) (20) (20)
Dividends (Tenneco Inc. common and
preferred stock)......................... (286) (318) (307) (158) (146)
Redemption of equity securities by a
subsidiary............................... -- (160) -- -- --
Net increase (decrease) in short-term debt
excluding current maturities on long-term
debt..................................... 415 (97) 19 164 34
Issuance of long-term debt................ 594 -- -- -- --
Retirement of long-term debt.............. (497) (508) (1,335) (292) (180)
Net cash contributions from affiliates.... 320 1,367 396 301 786
----- ----- ------- ----- -----
Net cash provided (used) by financing
activities............................... (27) 426 (49) (81) 63
----- ----- ------- ----- -----
Increase (decrease) in cash and temporary
cash investments......................... 201 (81) 125 (149) (29)
Cash and temporary cash investments, at
beginning of period...................... 48 129 4 249 48
----- ----- ------- ----- -----
Cash and temporary cash investments, at
end of period............................ $ 249 $ 48 $ 129 $ 100 $ 19
===== ===== ======= ===== =====
Cash paid during the year for interest.... $ 420 $ 349 $ 498 $ 220 $ 210
Cash paid during the year for income taxes
(net of refunds and tax payments from
affiliates).............................. $(123) $(129) $ 14 $ 516 $ 56
</TABLE>
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at the date of purchase.
The accompanying notes to combined financial statements are an integral part of
these combined statements of cash flows.
F-5
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
STATEMENTS OF CHANGES IN COMBINED EQUITY
<TABLE>
<CAPTION>
(MILLIONS)
- ----------
<S> <C>
Balance, December 31, 1992............................................ $(1,503)
Net income.......................................................... 163
Cash paid for interest allocated to affiliates, net of tax.......... (81)
Change in corporate debt allocated to affiliates.................... (905)
Cash contributions from (distributions to) affiliates, net.......... 396
Noncash contributions from (distributions to) affiliates, net....... 360
Contributions from (distributions to) shareowners, net.............. 918
-------
Balance, December 31, 1993............................................ (652)
Net income.......................................................... 153
Cash paid for interest allocated to affiliates, net of tax.......... (78)
Change in corporate debt allocated to affiliates.................... (135)
Cash contributions from (distributions to) affiliates, net.......... 1,367
Noncash contributions from (distributions to) affiliates, net....... (98)
Contributions from (distributions to) shareowners, net.............. (175)
-------
Balance, December 31, 1994............................................ 382
Net income.......................................................... 157
Cash paid for interest allocated to affiliates, net of tax.......... (117)
Change in corporate debt allocated to affiliates.................... 930
Cash contributions from (distributions to) affiliates, net.......... 320
Noncash contributions from (distributions to) affiliates, net....... (235)
Contributions from (distributions to) shareowners, net.............. (750)
-------
Balance, December 31, 1995............................................ 687
Net income.......................................................... 103
Cash paid for interest allocated to affiliates, net of tax.......... (75)
Change in corporate debt allocated to affiliates.................... 111
Cash contributions from (distributions to) affiliates, net.......... 301
Noncash contributions from (distributions to) affiliates, net....... 140
Contributions from (distributions to) shareowners, net.............. (213)
-------
Balance, June 30, 1996 (unaudited).................................... $ 1,054
=======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements of changes in combined equity.
F-6
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The accompanying combined financial statements represent the financial
position, results of operations and cash flows of all energy businesses and
operations owned directly or indirectly by Tenneco Inc. ("Tenneco") and its
subsidiaries, and other existing and discontinued operations of Tenneco and
its subsidiaries other than those relating to Tenneco's automotive, packaging,
administrative services and shipbuilding businesses. The combination of these
energy businesses and operations and such other existing and discontinued
operations of Tenneco, together with Tenneco (which will remain the parent
company of such businesses and operations after the Distributions and Merger
described in Note 2 below) are collectively referred to herein as "Tenneco
Energy" or the "Company".
Investments in 20% to 50% owned companies where Tenneco Energy has the
ability to exert significant influence over operating and financial policies
are carried at cost plus equity in undistributed earnings since date of
acquisition. Reference is made to Note 11, "Investment in Affiliated
Companies," for information concerning significant equity method investees.
All significant transactions and balances among combined businesses have been
eliminated.
Description of Business
Tenneco Energy is engaged primarily in the interstate transportation of
natural gas. The Company is also engaged in related businesses that are not
generally subject to regulation by the Federal Energy Regulatory Commission
("FERC"). The principal activities of these businesses include the intrastate
transportation and marketing of natural gas, the development of and
participation in international natural gas pipelines, primarily in Australia,
the participation in international and domestic gas-fired power generation
projects and the development of natural gas production and production
financing programs, primarily in the United States. Tenneco Energy, through
its combined subsidiary Tenneco Credit Corporation ("TCC"), is also engaged in
financing, on a nonrecourse basis, receivables of certain current and former
operating divisions of Tenneco.
2. MERGER AND DISTRIBUTIONS
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged with and into Tenneco (the "Merger") which, immediately following
the distributions discussed below, will consist only of the energy businesses
and operations and the other existing and discontinued operations of Tenneco.
The Merger is part of a larger Tenneco reorganization (the "Transaction"),
which includes the distribution of all of the outstanding shares of common
stock of New Tenneco Inc., a newly formed subsidiary of Tenneco which, after
giving effect to certain corporate restructuring transactions, will hold
substantially all of the assets, liabilities and operations of Tenneco's
current automotive, packaging and administrative services businesses ("New
Tenneco"), and Newport News Shipbuilding Inc., a subsidiary of Tenneco that
was formerly named Tenneco InterAmerica Inc. and that will hold substantially
all of the assets, liabilities and operations of Tenneco's current
shipbuilding business ("Newport News"), to the holders of Tenneco common stock
(collectively, the "Distributions"). Upon completion of the Transaction,
holders of Tenneco common stock will receive equity securities in New Tenneco,
Newport News and El Paso.
Prior to the Transaction Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain New Tenneco
debt will be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for other Tenneco debt, and certain debt issues
may be defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of the Company, New Tenneco
F-7
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(which may declare and pay a dividend to Tenneco) and Newport News (which will
declare and pay a dividend of approximately $600 million to Tenneco). Upon
completion of the debt realignment, Tenneco will have responsibility for $2.65
billion of debt and preferred stock, subject to certain adjustments, Newport
News will have responsibility for the borrowings under its credit lines and New
Tenneco will have responsibility for the remaining debt.
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco's shareowners.
In order to assist in the orderly transition of New Tenneco and Newport News
into separate, publicly held companies, Tenneco intends to modify, amend or
enter into certain contractual agreements with New Tenneco and Newport News,
including a tax sharing agreement (see "Income taxes" in Note 3), an employee
benefits agreement, an insurance agreement, an administrative services
agreement and other ancillary agreements. These agreements will provide, among
other things, that: (i) New Tenneco will become the sole sponsor of the Tenneco
Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various Tenneco Inc.
welfare plans; (ii) New Tenneco and Newport News will retain specific insurance
policies relating to their businesses and will continue to have rights and
obligations under certain parent-company level insurance policies of Tenneco;
and (iii) at the election of Tenneco pursuant to El Paso's request, New Tenneco
will provide certain services, such as mainframe data processing and product
purchasing services, to the Company for a limited period of time following the
Distributions.
3. SUMMARY OF ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions in
determining the reported amounts of the Company's assets, liabilities, revenues
and expenses. Reference is made to the "Revenue Recognition" and "Income Taxes"
sections of this footnote and Notes 9, 13, 14 and 15 for additional information
on significant estimates included in the Company's combined financial
statements.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
the unaudited interim combined financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The interim financial results may not be indicative of operating
results for an entire year.
Notes Receivable and Allowance for Doubtful Accounts and Notes
Short-term notes receivable of $302 million and $305 million were outstanding
at December 31, 1995 and 1994, respectively, of which $216 million and $284
million, respectively, related to TCC. These notes receivable are presented net
of unearned finance charges of $26 million and $43 million at December 31, 1995
and 1994, respectively, which related to TCC. At December 31, 1995 and 1994,
unearned finance charges related to long-term notes and other receivables were
$23 million and $66 million, respectively, which related to TCC.
F-8
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the allowance for doubtful accounts and
notes receivable was $49 million and $21 million, respectively.
Inventory
Inventories, consisting of materials and supplies are valued at the lower of
average cost or market.
Property, Plant and Equipment, at Cost
The majority of the Company's property, plant and equipment consists of its
investment in interstate and intrastate pipeline systems. At December 31, 1995
and 1994, $223 million and $160 million, respectively, of the Company's
property, plant and equipment balance is construction work in progress.
Additionally, the Company has recorded capitalized interest and an allowance
for equity funds used during construction in the cost of property, plant and
equipment. Pursuant to a FERC order, Tennessee Gas Pipeline Company, a
combined subsidiary of the Company ("Tennessee") recorded all natural gas in
storage as a fixed asset. As of December 31, 1995 and 1994, the balance of
Tennessee's natural gas in storage included in property, plant and equipment
was $96 million.
Depreciation, Depletion and Amortization
Depreciation of the Company's regulated transmission plants are provided
using the composite method over the estimated useful lives of the depreciable
facilities. The rates for depreciation range from 2% to 5%. Costs of
properties that are not operating units, as defined by the FERC, which are
retired, sold or abandoned by the regulated subsidiaries are credited or
charged, net of salvage, to accumulated depreciation. Gains or losses on sales
of operating units are credited or charged to income.
Depreciation of the Company's nonregulated properties is provided using the
straight line or composite method which, in the opinion of management, is
adequate to allocate the cost of properties over their estimated useful lives.
Goodwill
Goodwill is being amortized over a 15-year period using the straight-line
method. Such amortization amounted to $1.8 million for 1995, 1994 and 1993 and
is included in "Other income, net" in the accompanying combined statements of
income. Accumulated amortization of goodwill was $5.4 million and $3.6 million
at December 31, 1995 and 1994, respectively.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations,
and which do not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies clean-up experience and
data released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the combined balance sheets at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are
F-9
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
recorded and reported separately from the associated liability in the combined
financial statements. Reference is made to Note 15, "Commitments and
Contingencies--Environmental Matters" for further information on this subject.
Revenue Recognition
The regulated subsidiaries of the Company are subject to FERC regulations
and, accordingly, revenues are collected subject to possible refunds pending
final FERC orders. The regulated subsidiaries record rate refund accruals
based on management's estimate of the expected income impact of the rate
proceedings. The Company has recorded revenue reservations of $27 million and
$190 million as of December 31, 1995 and 1994, respectively. The Company
believes the estimate for revenues subject to refund is adequate.
Other Income
Gains or losses on the sale by a subsidiary of its stock are included in
"Other Income, net" in the accompanying combined statements of income.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
Tenneco, together with certain of its subsidiaries which are owned 80% or
more (including Tenneco Energy), have entered into an agreement to file a
consolidated U.S. federal income tax return. Such agreement provides, among
other things, that (i) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis, and (ii) each company in a tax loss position will
be reimbursed currently to the extent its deductions, including general
business credits, are utilized in the consolidated return. The income tax
amounts reflected in the combined financial statements of Tenneco Energy under
the provisions of the tax sharing arrangement are not materially different
from the income taxes which would have been provided had Tenneco Energy filed
a separate tax return. Under the tax sharing agreement, Tenneco pays all
federal taxes directly and bills or refunds, as applicable, its subsidiaries,
including those comprising Tenneco Energy, for the applicable portion of the
total tax payments.
In connection with the Distributions, the current tax sharing agreement will
be cancelled and the Company will enter into a tax sharing agreement with
Newport News, New Tenneco and El Paso. The tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, Tenneco will be liable for taxes imposed on Tenneco
Energy. In the case of federal income taxes imposed with respect to periods
prior to the consummation of the Distributions on the combined activities of
Tenneco and other members of its consolidated group prior to giving effect to
the Distributions, New Tenneco and Newport News will be liable to Tenneco for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by the Tenneco
consolidated group.
Changes in Accounting Principles
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments
F-10
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of Liabilities," which establishes new accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The statement is effective for transactions occurring after
December 31, 1996. The impact of the new standard has not been determined.
Effective January 1, 1996, the Company adopted FAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". FAS No. 121 establishes new accounting standards for measuring the
impairment of long-lived assets. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees, after employment but before retirement, on the accrual basis rather
than the "pay-as-you-go" basis. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
Risk Management Activities
The Company is currently a party to financial instruments and commodity
contracts to hedge its exposure to changes in interest rates and natural gas
prices. These financial instruments and commodity contracts are accounted for
on the accrual basis with gains and losses being recognized based on the type
of contract and exposure being hedged. The amounts paid or received under
interest rate swap agreements are recognized, on the accrual basis, as an
adjustment to interest expense. Net gains and losses on energy commodity
contracts and financial instruments are deferred and recognized when the
hedged transaction is consummated. In the combined statements of cash flows,
cash receipts or payments related to these financial instruments and commodity
contracts are classified consistent with the cash flows from the transactions
being hedged.
4. ACQUISITIONS
During 1995, the Company acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488-mile pipeline, for
approximately $225 million. Also during 1995, the Company acquired a 50%
interest in two gas-fired cogeneration plants from ARK Energy, a privately-
owned power generation company, for approximately $65 million in cash and
Tenneco common stock. Each of the acquisitions was accounted for as a
purchase. If these assets and investments had been acquired January 1, 1995,
net income would not have been significantly different from the reported
amount.
5. DISPOSITION OF ASSETS AND EXTRAORDINARY LOSS
Disposition of Assets
During the first six months of 1996, the Company sold its 13.2% interest in
Iroquois Gas Transmission System, L.P., its 50% interest in Dauphin Island
Gathering System, an investment in stock and certain other assets, resulting
in a pre-tax gain of $42 million.
In December 1995, the Company sold its 50% interest in Kern River Gas
Transmission Company ("Kern River") for a pre-tax gain of $30 million. Kern
River owns a 904-mile pipeline extending from Wyoming to California. Also in
1995, the Company sold certain other facilities and assets for a combined pre-
tax loss of $19 million.
In 1994, Tenneco Energy Resources Corporation, a combined subsidiary which
operates the Company's nonregulated gas marketing and intrastate pipeline
businesses, issued 50 shares of its common stock, diluting Tenneco's ownership
in this subsidiary to 80% and resulting in a gain of $23 million. No taxes
were provided on the gain because management expects that the recorded
investment will be recovered in a tax-free manner.
F-11
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, the Company disposed of two wholly-owned companies, Viking Gas
Transmission Company and Dean Pipeline Company, and investments in stock and
certain other assets for a total pre-tax gain of $62 million.
Extraordinary Loss
In April 1993, Tenneco issued 23.5 million shares of its common stock for
approximately $1.1 billion. The proceeds were used to retire $327 million of
short-term debt, $688 million of long-term debt and $14 million of variable-
rate preferred stock. In November 1993, Tenneco retired DM250 million bonds.
The redemption premium related to the retirement of long-term debt resulting
from these two transactions ($25 million, net of income tax benefits of $13
million) was recorded as an extraordinary loss.
6. TRANSACTIONS WITH AFFILIATES
Combined Equity
The "Combined equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative investment in the combined
businesses of Tenneco Energy. Changes in the "Combined equity" caption
represent the net income of the Company, cash paid for interest allocated to
affiliates, net of tax, changes in corporate debt allocated to affiliates, net
cash and noncash contributions from (distributions to) affiliates and net
contributions from (distributions to) shareowners. Reference is made to the
Statements of Changes in Combined Equity for an analysis of activity in the
"Combined equity" caption for each of the three years ended December 31, 1995
and for the six months ended June 30, 1996.
General and Administrative Expenses
Included in the total general and administrative expenses for 1995, 1994 and
1993, is $16 million, $13 million, and $17 million, respectively, which
represents Tenneco Energy's share of Tenneco's corporate general and
administrative costs for legal, financial, communication and other
administrative services. Tenneco's corporate general and administrative
expenses are allocated based on the estimated level of effort devoted to
Tenneco's various operations and relative size based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable. Total
general and administrative expenses reflected in the accompanying combined
statements of income are reasonable when compared with the total general and
administrative costs Tenneco Energy would have incurred on a stand-alone
basis.
Corporate Debt and Interest Allocations
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to New Tenneco and Newport News
based upon the portion of Tenneco's investment in New Tenneco and Newport News
which is deemed to be debt, generally based upon the ratio of New Tenneco's
and Newport News' net assets to Tenneco consolidated net assets plus debt.
Interest expense was allocated at a rate equivalent to the weighted-average
cost of all corporate debt, which was 7.7%, 8.3% and 7.4% for 1995, 1994 and
1993, respectively. Total pre-tax interest expense allocated to New Tenneco
and Newport News in 1995, 1994 and 1993 was $180 million, $120 million and
$124 million, respectively. New Tenneco and Newport News have also been
allocated tax benefits totaling approximately 35% of the allocated pre-tax
interest expense. Although interest expense, and the related tax effects, have
been allocated to New Tenneco and Newport News for financial
F-12
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
reporting on a historical basis, New Tenneco and Newport News have not been
billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest expense have been included as a component of the
Company's combined equity. Although, management believes that the historical
allocation of corporate debt and interest expense is reasonable, it is not
necessarily indicative of the Company's debt upon completion of the Debt
Realignment.
Notes and Advances Payable with Affiliates
"Cash contributions from (distributions to) affiliates" in the Statements of
Changes in Combined Equity consist of net cash changes in notes and advances
payable between the Company and New Tenneco and Newport News which have been
included in combined equity. Historically, Tenneco has utilized notes and
advances to centrally manage cash funding requirements for its consolidated
group.
At December 31, 1995 and 1994, the Company had an interest bearing note
payable to New Tenneco totaling $494 million and $310 million, respectively,
which is due on demand and is included as a component of the Company's
combined equity. At December 31, 1995 and 1994, the Company had a non-interest
bearing note payable to Newport News totalling $965 million and $991 million,
respectively, which is due on demand and is included as a component of the
Company's combined equity.
Accounts Receivable and Accounts Payable--Affiliated Companies
The "Payables--Affiliated companies" balance primarily includes billings for
general and administrative costs incurred by New Tenneco and charged to
Tenneco Energy. The "Receivables--Affiliated companies" balance primarily
relates to billings for U.S. income taxes incurred by Tenneco and charged to
New Tenneco and Newport News. Affiliated accounts receivable and accounts
payable between the Company and New Tenneco and Newport News will be settled,
capitalized or converted into ordinary trade accounts, as applicable, as part
of the Distributions.
Employee Benefits
Certain employees of the Company participate in Tenneco's employee stock
ownership and employee stock purchase plans. The Tenneco employee stock
ownership plan provides for the grant of Tenneco common stock options and
other stock awards at a price not greater than market value at the date of
grant. The Tenneco employee stock purchase plan allows employees to purchase
Tenneco common stock at a 15% discount subject to certain thresholds. Certain
employees of New Tenneco and Newport News also participate in Tenneco's
employee stock ownership and employee stock purchase plans. The cost of stock
issued to these employees is billed to New Tenneco and Newport News. In
connection with the Distributions, outstanding options on Tenneco common stock
held by the Company's employees will be vested so that they become fully
exercisable prior to the Merger. If not exercised prior to the Merger, such
options will be cancelled upon consummation of the Merger. Outstanding options
on Tenneco common stock held by New Tenneco and Newport News employees will be
converted into new options of New Tenneco and Newport News, as applicable, so
as to preserve the aggregate value of the options held prior to the
Distributions.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made to Notes 13 and 14 for a further
discussion of the plans.
Sales of Receivables
TCC purchased $513 million and $384 million of trade receivables from New
Tenneco at December 31, 1995 and 1994, respectively. TCC sells these trade
receivables to a third party in the ordinary course of business.
F-13
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Corporate Debt
A summary of long-term corporate debt obligations of the Company at December
31, 1995 and 1994, is set forth in the following table:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ------ ------
<S> <C> <C>
Tenneco Inc.--
Debentures due 1998 through 2025, average effective interest
rate 8.7% in 1995 and 9.7% in 1994 (net of $2 million in 1995
and 1994 of unamortized discount)............................. $ 698 $ 398
Notes due 1996 through 2005, average effective interest rate
8.8% in 1995 and 9.2% in 1994 (net of $5 million in 1995 and
$4 million in 1994 of unamortized discount)................... 1,962 1,681
Tennessee Gas Pipeline Company--
Debentures due 2011, effective interest rate 15.1% in 1995 and
1994 (net of $216 million in 1995 and $219 million in 1994 of
unamortized discount)......................................... 184 181
Notes due 1996 through 1997, average effective interest rate
9.7% in 1995 and 10.1% in 1994 (net of $5 million in 1995 and
$8 million in 1994 of unamortized discount)................... 573 808
Tenneco Credit Corporation--
Senior notes due 1996 through 2001, average effective interest
rate 9.7% in 1995 and 9.6% in 1994 (net of $1 million in 1995
and $2 million in 1994 of unamortized discount)............... 549 749
Medium-term notes due 1996 through 2002, average interest rate
9.0% in 1995 and 9.4% in 1994................................. 38 73
Subordinated notes due 1998 through 2001, average interest rate
9.9% in 1995 and 1994......................................... 92 92
Other subsidiaries--
Notes due 1996 through 2014, average effective interest rate
8.6% in 1995 and 8.0% in 1994 (net of $14 million in 1995 and
$15 million in 1994 of unamortized discount).................. 8 4
------ ------
4,104 3,986
Less--Current maturities......................................... 414 485
------ ------
Total long-term corporate debt............................... $3,690 $3,501
====== ======
</TABLE>
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1995, are $414 million, $513 million, $838
million, $250 million and $175 million for 1996, 1997, 1998, 1999 and 2000,
respectively.
Long-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- -------- --------
<S> <C> <C>
Total long-term corporate debt................................ $ 3,690 $ 3,501
Less: Long-term corporate debt allocated to New Tenneco and
Newport News................................................. (1,879) (1,259)
-------- --------
Total long-term corporate debt, net of allocation to New
Tenneco and Newport News................................... $ 1,811 $ 2,242
======== ========
</TABLE>
- --------
Note: Reference is made to Note 6 for information concerning debt allocated to
New Tenneco and Newport News.
F-14
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Corporate Debt
The Company uses commercial paper, lines of credit and overnight borrowings
to finance its short-term capital requirements. Information regarding short-
term debt for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
TENNECO TENNECO
COMMERCIAL CREDIT COMMERCIAL CREDIT
(MILLIONS) PAPER AGREEMENTS PAPER AGREEMENTS
- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding borrowings at end of
year.............................. $346 $ 85 $ -- $ 17
Weighted average interest rate on
outstanding borrowings at end of
year.............................. 6.2% 7.2% -- 10.7%
Approximate maximum month-end
outstanding borrowings during
year.............................. $615 $467 $362 $133
Approximate average month-end
outstanding borrowings during
year.............................. $109 $104 $164 $ 51
</TABLE>
- --------
Note:Includes borrowings under both committed credit facilities and
uncommitted lines of credit and similar arrangements.
Tenneco had other short-term borrowings outstanding of $24 million at
December 31, 1995, and none at December 31, 1994.
Short-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Current maturities on long-term corporate debt.................... $ 414 $ 485
Commercial paper.................................................. 346 --
Credit agreements................................................. 85 17
Other............................................................. 24 --
----- -----
Total short-term corporate debt (including current maturities on
long-term corporate debt)...................................... 869 502
Less: Short-term corporate debt allocated to New Tenneco and
Newport News................................................... (413) (103)
----- -----
Total short-term corporate debt, net of allocation to New
Tenneco and Newport News..................................... $ 456 $399
===== =====
</TABLE>
- --------
Note:Reference is made to Note 6 for information concerning corporate debt
allocated to New Tenneco and Newport News.
Financing Arrangements
As of December 31, 1995, Tenneco had arranged committed credit facilities of
approximately $2.5 billion:
<TABLE>
<CAPTION>
COMMITTED CREDIT FACILITIES(A)
------------------------------------------
(MILLIONS) TERM COMMITMENTS UTILIZED AVAILABLE
- ---------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Tenneco credit agreements............ 1996-1999 $2,400(b) $346(c) $2,054
Other credit agreements.............. various 79 35 44
------ ---- ------
$2,479 $381 $2,098
====== ==== ======
</TABLE>
- --------
Notes:(a) These facilities generally require the payment of commitment fees on
the unused portion of the total commitment and facility fees on the
total commitment.
(b) In 1996, $400 million of these agreements expire; the remainder are
committed through 1999. Of the total committed long-term credit
facilities, $400 million are available to both Tenneco and TCC.
(c) Tenneco's committed long-term credit facilities support its commercial
paper borrowings; consequently, the amount available under the committed
long-term credit facilities is reduced by outstanding commercial paper
borrowings.
F-15
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments by class at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
(MILLIONS) CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
- -------------------- -------- ------ -------- ------
<S> <C> <C> <C> <C>
Asset and Liability Instruments
Cash and temporary cash investments........ $ 249 $ 249 $ 48 $ 48
Receivables (customer and long-term)....... 860 860 1,644 1,644
Accounts payable (trade)................... (365) (365) (324) (324)
Short-term debt (excluding current
maturities) (Note)........................ (455) (455) (17) (17)
Long-term debt (including current
maturities) (Note)........................ (4,104) (4,692) (3,986) (4,206)
Instruments With Off-Balance-Sheet Risk
Derivative
Interest rate swaps:
In a net receivable position........... -- 10 -- --
In a net payable position.............. -- (22) -- (30)
Natural gas swaps, futures and options... -- 3 -- (5)
Non-derivative
Financial guarantees..................... -- (14) -- (14)
</TABLE>
- --------
Note: The carrying amounts and estimated fair values of short-term debt and
long-term debt are before allocation of corporate debt to New Tenneco
and Newport News. Reference is made to Note 6 for information concerning
corporate debt allocated to New Tenneco and Newport News.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was determined not to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, Tenneco Energy's aggregate
customer and long-term receivable balance was concentrated by industry as
follows: energy industry 22% and 21%; automotive parts industry 9% and 11%;
packaging industry 8% and 13%; and farm and construction equipment industry
52% and 47%; all other amounts were not significant. Receivables in the
automotive parts, packaging and farm and construction equipment industries
result from TCC's financing receivables of current and former operating
divisions of Tenneco. TCC sells these trade receivables to a third party in
the ordinary course of business.
Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates; the carrying
amount of floating-rate debt was assumed to approximate its fair value.
Instruments With Off-Balance-Sheet Risk
Derivative
Interest Rate Swaps--The fair value of interest rate swaps was based on the
cost that would have been incurred to buy out those swaps in a loss position
and the consideration that would have been received to terminate those swaps
in a gain position. At December 31, 1995 and 1994, the Company was a party to
swaps with a notional value of $1.5 billion and $1.6 billion, respectively. At
December 31, 1995, $750 million were in a net receivable position and $795
million were in a net payable position. At December 31, 1994, the entire $1.6
billion was in a net payable position. Notional amounts associated with these
swaps do not represent future cash payment requirements. These contractual
amounts are only used as a base to measure amounts to be exchanged at
specified settlement dates.
F-16
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Consistent with its overall policy, the Company uses these instruments from
time to time only to hedge known, quantifiable risks arising from fluctuations
in interest rates. The counterparties to these interest rate swaps are major
international financial institutions. The risk associated with counterparty
default on interest rate swaps is measured as the cost of replacing, at the
prevailing market rates, those contracts in a gain position. In the event of
non-performance by the counterparties, the cost to replace outstanding
interest rate swaps at December 31, 1995 and 1994, would not have been
material.
Price Risk Management--The Company uses exchange-traded futures and option
contracts and over-the-counter option and swap contracts to reduce its
exposure to fluctuations in the prices of natural gas. The fair value of these
contracts is based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. As of December
31, 1995 and 1994, these contracts, maturing through 1997 and 1996,
respectively, had an absolute notional contract quantity of 321 Bcf and 187
Bcf, respectively. Since the contracts described above are designated as
hedges whose fair values correlate to price movements of natural gas, any
gains or losses on the contracts resulting from market changes will be offset
by losses or gains on the hedged transactions. The Company has off-balance
sheet risk of credit loss in the event of non-performance by counterparties to
all over-the-counter contracts. However, the Company does not anticipate non-
performance by the counterparties.
Non-derivative
Guarantees--At December 31, 1995 and 1994, the Company had guaranteed
payment and performance of approximately $14 million, primarily with respect
to letters of credit and other guarantees supporting various financing and
operating activities.
9. FEDERAL ENERGY REGULATORY COMMISSION REGULATORY MATTERS
Restructuring Proceedings
On April 8, 1992, the FERC issued Order 636 which restructured the natural
gas industry by requiring mandatory unbundling of pipeline sales and
transportation services. Numerous parties appealed, to the U.S. Court of
Appeals for the D.C. Circuit Court, the legality of Order 636 generally, as
well as the legality of specific provisions of Order 636. On July 16, 1996,
the U.S. Court of Appeals for the D.C. Circuit issued its decision upholding,
in large part, Order 636. The Court remanded to the FERC several issues for
further explanation, including further explanation of the FERC's decision to
allow pipelines to recover 100% of their gas supply realignment ("GSR") costs.
Tennessee implemented revisions to its tariff, effective on September 1,
1993, which restructured its transportation, storage and sales services to
convert Tennessee from primarily a merchant to primarily a transporter of gas
as required by Order 636. As a result of this restructuring, Tennessee's gas
sales declined while certain obligations to producers under long-term gas
supply contracts continued, causing Tennessee to incur significant
restructuring transition costs. Pursuant to the provisions of Order 636
allowing for the recovery of transition costs related to the restructuring,
Tennessee has made filings to recover GSR costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" cost of Tennessee's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
Tennessee's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of
Tennessee to file for the recovery of losses upon disposition of these assets.
Tennessee has filed for appellate
F-17
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
review of the FERC actions and is confident that the Bastian Bay costs will
ultimately be recovered as transition costs under Order 636; the FERC has not
contested the ultimate recoverability of these costs.
The filings implementing Tennessee's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery was made subject to refund pending FERC review and approval for
eligibility and prudence: 1) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; 2) recovery of TBO costs,
which Tennessee is obligated to pay under existing contracts, through a
surcharge from firm transportation customers, adjusted annually; and 3) GSR
cost recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers over a period of up to 60 months.
Following negotiations with its customers, Tennessee filed in July 1994 with
the FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides
for the recovery of PGA costs of approximately $100 million and the recovery
of costs associated with the transfer of storage gas inventory to new storage
customers in Tennessee's restructuring proceeding. The PGA Stipulation
eliminates all challenges to the PGA costs, but establishes a cap on the
charges that may be imposed upon former sales customers. On November 15, 1994,
the FERC issued an order approving the PGA Stipulation and resolving all
outstanding issues. On April 5, 1995, the FERC issued its order on rehearing
affirming its initial approval of the PGA Stipulation. Tennessee implemented
the terms of the PGA Stipulation and made refunds in May 1995. The refunds had
no material effect on Tenneco Energy's reported net income. The orders
approving the PGA Stipulation have been appealed to the D.C. Circuit Court of
Appeals by certain customers. Tennessee believes the FERC orders approving the
PGA Stipulation will be upheld on appeal.
Tennessee is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC subsequently issued
an order requiring Tennessee to refund certain costs from this surcharge and
refunds were made in May 1996. Tennessee is appealing this decision and
believes such appeal will likely be successful.
With regard to Tennessee's GSR costs, Tennessee, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
Tennessee of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge ("ALJ"). The hearing, which concluded in
July 1995, was limited to the issue of whether the settlement agreements are
prudent. The ALJ concluded, in his initial decision issued in December 1995,
that the settlement was imprudent. Tennessee has filed exceptions to this
initial decision and believes that this decision will not impair Tennessee's
recovery of the costs resulting from this contract. On July 17, 1996, the FERC
ordered oral arguments to be heard September 1996.
Also related to Tennessee's GSR costs, on October 14, 1993, Tennessee was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that Tennessee had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading sought $1.5 billion from Tennessee for alleged damages caused by
Tennessee's refusal to purchase gas produced from the TransTexas leases
covering the new production and lands. In June 1996, Tennessee reached a
settlement with ICA and TransTexas for $125 million wherein ICA and TransTexas
agreed to terminate the contract, released Tennessee from liability under the
contract, and indemnified Tennessee against future claims, including royalty
owner claims.
F-18
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tennessee has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
Tennessee. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the
Court of Appeals favorable to Tennessee in one of these matters and indicated
that it would remand the case to the trial court. On April 18, 1996, however,
the Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
Tennessee. In June 1996, Tennessee filed a motion for rehearing with the Texas
Supreme Court which was denied in August 1996. The Supreme Court's April 1996
ruling explicitly preserves Tennessee's defenses based on bad faith conduct of
the producers. Nothing in the Supreme Court's decision affects Tennessee's
ability to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, Tennessee has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. Tennessee has accrued amounts which
it believes are appropriate to cover the resolution of the litigation
associated with its contract reformation efforts.
As of June 30, 1996, and December 31, 1995, Tennessee has deferred GSR costs
yet to be recovered from its customers of approximately $551 million and $462
million, respectively, net of $380 million and $316 million, respectively,
previously recovered from its customers, subject to refund. A phased
proceeding is underway at the FERC with respect to the recovery of Tennessee's
GSR costs. Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery; oral argument on
eligibility issues has been set by a FERC ALJ for late October 1996. Phase II
of the proceeding on the prudency of the costs to be recovered and on certain
contract specific eligibility issues has not yet been scheduled, but will
likely occur sometime after the ALJ's decision in Phase I is issued. The FERC
has generally encouraged pipelines to settle such issues through negotiations
with customers. Although the Order 636 transition cost recovery mechanism
provides for complete recovery by pipelines of eligible and prudently incurred
transition costs, certain customers have challenged the prudence and
eligibility of Tennessee's GSR costs and Tennessee has engaged in settlement
discussions with its customers concerning the amount of such costs in response
to the FERC statements acknowledging the desirability of such settlements.
Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, the Company is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its combined financial position or results of operations.
Rate Proceedings
On December 30, 1994, Tennessee filed for a general rate increase (the "1995
Rate Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, Tennessee
began collecting rates, subject to refund, reflecting an $87 million increase
in Tennessee's annual revenue requirement. A Stipulation and Agreement was
filed with an ALJ in this proceeding on April 5, 1996. This Stipulation, which
is currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and Tennessee is reserving revenues it believes are adequate to
cover any refunds that may be required upon final settlement of this
proceeding.
F-19
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Following is a comparative analysis of the components of combined income tax
expense (benefit) for the years 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Current--
U.S. ................................................ $(96) $25 $(11)
State and local...................................... (3) (4) 22
---- --- ----
(99) 21 11
---- --- ----
Deferred--
U.S.................................................. 76 39 82
State and local...................................... 12 12 11
---- --- ----
88 51 93
---- --- ----
Income tax expense (benefit)........................... $(11) $72 $104
==== === ====
</TABLE>
Following is a reconciliation of income taxes computed at the statutory U.S.
federal income tax rate (35% for all years presented) to the income tax
expense (benefit) reflected in the combined statements of income for the years
1995, 1994 and 1993:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal
income tax rate........................................ $ 51 $79 $102
Increases (reductions) in income tax expense resulting
from:
State and local taxes on income, net of U.S. federal
income tax benefit................................... 6 5 21
U.S. federal income tax rate change................... -- -- 4
Permanent differences on sales of assets.............. 12 -- (15)
Realization of unrecognized deferred tax assets....... (72) -- --
Other................................................. (8) (12) (8)
---- --- ----
Income tax expense (benefit)............................ $(11) $72 $104
==== === ====
</TABLE>
Current U.S. income tax expense (benefit) for the years ended December 31,
1995, 1994 and 1993, includes a reduction in tax benefits of $63 million, $42
million and $44 million, respectively, related to the allocation of corporate
interest expense to New Tenneco and Newport News. Reference is made to Note 6
for information concerning corporate debt allocated to New Tenneco and Newport
News from the Company.
F-20
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of the Company's net deferred tax liability at December 31,
1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ------
<S> <C> <C>
Deferred tax assets--
U.S. capital loss carryforwards.......................... $163 $ 267
Postretirement benefits other than pensions.............. 104 107
GSR reserve.............................................. 141 --
Environmental reserve.................................... 75 81
Other.................................................... 76 119
Valuation allowance...................................... (117) (293)
---- ------
Net deferred tax asset................................... 442 281
---- ------
Deferred tax liabilities--
Tax over book depreciation............................... 440 437
Asset related to GSR costs of operations regulated by the
FERC.................................................... 141 --
Other regulatory assets.................................. 67 56
Debt related items....................................... 43 44
Book versus tax gains and losses on asset disposals...... 23 321
Other.................................................... 116 187
---- ------
Total deferred tax liability............................. 830 1,045
---- ------
Net deferred tax liability................................. $388 $ 764
==== ======
</TABLE>
As reflected by the valuation allowance in the table above, the Company had
potential tax benefits of $117 million and $293 million at December 31, 1995
and 1994, respectively, which were not recognized in the combined statements
of income when generated. These benefits resulted primarily from U.S. capital
loss carryforwards which are available to reduce future capital gains. During
1995, the Company reduced its deferred tax asset valuation allowance due to
the recognition of U.S. capital loss carryforwards utilized to offset income
taxes payable on asset dispositions. During 1996, these capital loss
carryforwards were utilized to offset taxes on capital gain transactions.
11. INVESTMENT IN AFFILIATED COMPANIES
The Company holds investments in various affiliates which are accounted for
on the equity method of accounting. The principal equity method investments
were the Company's 50% investment in Kern River, and joint venture interests
in power generation plants, interstate pipelines, gathering systems and
natural gas storage facilities.
At December 31, 1995 and 1994, the Company's combined equity included equity
in undistributed earnings from equity method investments of $25 million and
$69 million, respectively. Dividends and distributions received from
affiliates accounted for on the equity method were $53 million, $48 million
and $42 million during 1995, 1994 and 1993, respectively.
F-21
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information of the Company's proportionate share of 50%
or less owned companies accounted for by the equity method of accounting as of
December 31, 1995, 1994 and 1993, and for the years then ended is as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Current assets............................................ $ 60 $ 47 $ 41
Non-current assets........................................ 543 901 829
Short-term debt........................................... 122 19 17
Other current liabilities................................. 24 61 37
Long-term debt............................................ 152 494 496
Other non-current liabilities............................. 25 16 13
Equity in net assets...................................... 280 358 307
Revenues and other income................................. 184 183 164
Costs and expenses........................................ 119 132 117
Net income................................................ 65 51 47
</TABLE>
- --------
Note: Balance sheet amounts related to Kern River are not included in the
table above as of December 31, 1995, due to the Company's sale of its
investment in Kern River in December 1995. Reference is made to Note 5 for
information concerning the sale of Kern River.
12. PREFERRED STOCK
At December 31, 1995, Tenneco had authorized 15,000,000 shares of preferred
stock. In addition, Tenneco has an authorized class of stock consisting of
50,000,000 shares of junior preferred stock, without par value, none of which
has been issued.
The preferred stock issues outstanding at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
SHARES REDEMPTION PERIODS OPTIONAL
ISSUED AND ------------------- REDEMPTION
ISSUE OUTSTANDING OPTIONAL MANDATORY PRICE
----- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
$7.40 preferred (no par
value)....................... 587,270 1996-1998 1996-1998 $100
$4.50 preferred (no par
value)....................... 803,723 1996-1999 1999 $100
---------
1,390,993
=========
</TABLE>
The $7.40 and $4.50 preferred stock issues have a mandatory redemption value
of $100 per share (an aggregate of $139 million and $159 million at December
31, 1995 and 1994, respectively). Tenneco recorded these preferred stocks at
their fair value at the date of original issue (an aggregate of $250 million)
and is making periodic accretions of the excess of the redemption value over
the fair value at the date of issue.
During 1993, Tenneco retired the remainder of a variable rate preferred
stock issue at the redemption price of $100 per share, or $17 million.
The aggregate maturities applicable to preferred stock issues outstanding at
December 31, 1995, are $20 million for each of the years 1996 and 1997, $19
million for 1998 and $80 million for 1999.
F-22
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Changes in Preferred Stock with Mandatory Redemption Provisions
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- -----------------
(MILLIONS EXCEPT SHARE
AMOUNTS) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ---------------------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1........ 1,586,764 $147 1,782,508 $163 2,084,796 $191
Shares redeemed........ (195,771) (20) (195,744) (20) (302,288) (31)
Accretion of excess of
redemption value over
fair value at date of
issue................. -- 3 -- 4 -- 3
--------- ---- --------- ---- --------- ----
Balance December 31...... 1,390,993 $130 1,586,764 $147 1,782,508 $163
========= ==== ========= ==== ========= ====
</TABLE>
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
Tenneco has postretirement health care and life insurance plans which cover
substantially all of Tenneco Energy's employees. For salaried employees, the
plans cover employees retiring from the Company on or after attaining age 55
who have had at least 10 years service with the Company after attaining age
45. For hourly employees, the postretirement benefit plans generally cover
employees who retire pursuant to one of Tenneco's hourly employee retirement
plans. Tenneco Energy is also obligated to provide certain benefits to former
employees of operations previously disposed of by Tenneco. Tenneco Energy will
retain this liability after the Distributions. In addition, Tenneco Energy
will retain liabilities with respect to welfare benefits of its current and
former employees of Tenneco Energy and their dependents in connection with the
Distributions. All of these benefits may be subject to deductibles, copayment
provisions and other limitations, and Tenneco has reserved the right to change
these benefits.
The majority of Tenneco's postretirement benefit plans are not funded. In
June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of the Company. The contributions are collected from
customers in FERC approved rates. As of December 31, 1995, cumulative
contributions were $10 million. Plan assets consist principally of fixed
income securities.
The funded status of the postretirement benefit plans reconciles with
amounts recognized on the combined balance sheets at December 31, 1995 and
1994, as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit
obligation at September 30:
Retirees....................................................... $ 320 $ 321
Fully eligible active plan participants........................ 5 5
Other active plan participants................................. 2 2
----- -----
Total accumulated postretirement benefit obligation.............. 327 328
Plan assets at fair value at September 30........................ 3 2
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (324) (326)
Claims paid during the fourth quarter............................ 14 10
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (68) (83)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 74 65
----- -----
Accrued postretirement benefit cost at December 31............... $(304) $(334)
===== =====
</TABLE>
- --------
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
F-23
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic postretirement benefit cost for the years 1995, 1994 and
1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year......... $ 1 $ 1 $ 1
Interest cost on accumulated postretirement benefit
obligation.............................................. 26 17 8
Net amortization of unrecognized amounts................. (13) (6) (1)
---- --- ---
Net periodic postretirement benefit cost................. $ 14 $12 $ 8
==== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $14 million, $14 million and $7 million,
respectively, and would increase the aggregate of the service cost and
interest cost components of the net postretirement benefit cost for 1995, 1994
and 1993 by approximately $1 million, $3 million and $1 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
14. PENSION PLANS
Tenneco has retirement plans which cover substantially all of the Company's
employees. Benefits are based on years of service and, for most salaried
employees, on final average compensation. Tenneco's funding policies are to
contribute to the plans amounts necessary to satisfy the funding requirements
of federal laws and regulations. Plan assets consist principally of listed
equity and fixed income securities. Certain employees of the Company
participate in the Tenneco Inc. Retirement Plan (the "TRP").
New Tenneco will become the sole sponsor of the TRP upon consummation of the
Distributions. The benefits accrued by the employees of Tenneco Energy who
participate in the TRP will be frozen as of the last day of the calendar month
including the Distributions and New Tenneco will amend the TRP to provide that
all benefits accrued through that day by the employees of Tenneco Energy are
fully vested and non-forfeitable.
F-24
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconciles with amounts recognized on the
combined balance sheets at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
ALL PLANS
----------
(MILLIONS) 1995 1994
- ---------- ---- ----
<S> <C> <C>
Actuarial present value of benefits based on service to date and
present pay levels at September 30:
Vested benefit obligation....................................... $187 $169
Non-vested benefit obligation................................... 12 11
---- ----
Accumulated benefit obligation.................................. 199 180
Additional amounts related to projected salary increases.......... 41 37
---- ----
Total projected benefit obligation at September 30................ 240 217
Plan assets at fair value at September 30......................... 259 224
---- ----
Plan assets in excess of total projected benefit obligation at
September 30..................................................... 19 7
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions......................................... 14 26
Unrecognized prior service obligations resulting from plan
amendments....................................................... 2 3
Remaining unrecognized net asset at initial application........... (14) (16)
---- ----
Prepaid pension cost at December 31............................... $ 21 $ 20
==== ====
</TABLE>
- --------
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid pension cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
Net periodic pension income for the years 1995, 1994 and 1993 consist of the
following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year. $ 6 $ 6 $ 7
Interest accrued on prior year's projected
benefit obligation........................... 18 16 15
Expected return on plan assets--
Actual (return) loss........................ (45) 4 (31)
Unrecognized excess (deficiency) of actual
return over expected return................ 22 (26) 10
--- --- ---
(23) (22) (21)
Net amortization of unrecognized amounts...... (2) (2) (2)
---- ---- ----
Net periodic pension income................... $ (1) $ (2) $ (1)
==== ==== ====
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.3% and 7.5%, respectively. The rate of
increase in future compensation was 4.9%, in 1995, 1994, and 1993. The
weighted average expected long-term rate of return on plan assets was 10% in
1995, 1994 and 1993.
15. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company estimates that expenditures aggregating approximately $636
million will be required after December 31, 1995, to complete facilities and
projects authorized at such date, and substantial commitments have been made
in connection therewith.
F-25
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Purchase Obligations
In connection with the financing commitments of certain joint ventures, the
Company has entered into unconditional purchase obligations for products and
services of $145 million ($106 million on a present value basis) at December
31, 1995. The Company's annual obligations under these agreements are $22
million for the years 1996 through 2000. Payments under such obligations,
including additional purchases in excess of contractual obligations, were $26
million, $34 million and $31 million for the years 1995, 1994 and 1993,
respectively. In addition, in connection with the Great Plains coal
gasification project (Dakota Gasification Company), Tennessee has contracted
to purchase 30% of the output of the plant's original design capacity for a
remaining period of 14 years. Tennessee has executed a settlement of this
contract as a part of its gas supply realignment negotiations discussed in
Note 9.
Litigation
Reference is made to Note 9, "Federal Energy Regulatory Commission
Regulatory Matters," for information concerning gas supply litigation. The
Company is party to numerous other legal proceedings arising from their
operations. The Company believes that the outcome of these proceedings,
individually and in the aggregate, will have no material effect on the
combined financial position or results of operations of the Company.
Environmental Matters
Since 1988, Tennessee has been engaged in an internal project to identify
and deal with the presence of polychlorinated biphenyls ("PCBs") and other
substances of concern, including substances on the U.S. Environmental
Protection Agency ("EPA") List of Hazardous Substances ("HS List") at
compressor stations and other facilities operated by both its interstate and
intrastate natural gas pipeline systems. While conducting this project,
Tennessee has been in frequent contact with federal and state regulatory
agencies, both through informal negotiation and formal entry of consent
orders, in order to assure that its efforts meet regulatory requirements.
The Company has established a reserve for Tennessee's environmental
expenses, which includes: 1) expected remediation expense and associated
onsite, offsite and groundwater technical studies, 2) legal fees and 3)
settlement of third party and governmental litigation, including civil
penalties. Through June 30, 1996, and December 31, 1995, the Company has
charged approximately $156 million and $147 million, respectively, against the
environmental reserve, excluding recoveries related to Tennessee's
environmental settlement as discussed below. Of the remaining reserve at June
30, 1996 and December 31, 1995, $24 million and $38 million, respectively, has
been recorded on the combined balance sheets under "Payables-trade" and $132
million and $126 million, respectively, under "Deferred credits and other
liabilities."
Due to the current uncertainty regarding the further activity necessary for
Tennessee to address the presence of the PCBs, the substances on the HS List
and other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, Tennessee cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
Tennessee's evaluation and experience to date, the Company continues to
believe that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, Tennessee in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that establishes a mechanism for recovering a substantial
portion of the environmental costs. In November 1995, the FERC issued an order
approving the Environmental Stipulation. Although one shipper filed for
rehearing, the FERC denied rehearing of its order on
F-26
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
February 20, 1996. This shipper filed a Petition for Review on April 22, 1996
in the D.C. Circuit Court of Appeals; Tennessee believes the FERC Order
approving the Environmental Stipulation will be upheld on appeal. The effects
of the Environmental Stipulation, which was effective as of July 1, 1995, have
been recorded with no material effect on the Company's combined financial
position or results of operations. As of June 30, 1996, and December 31, 1995,
the balance of the regulatory asset is $61 million and $74 million,
respectively.
The Company has completed settlements with and has received payments from
the majority of its liability insurance policy carriers for remediation costs
and related claims. The Company believes that the likelihood of recovery of a
portion of its remediation costs and claims against the remaining carriers in
its pending litigation is reasonably possible. In addition, Tennessee has
settled its pending litigation against and received payment from the
manufacturer of the PCB-containing lubricant. These recoveries have been
considered in Tennessee's recording of its environmental settlement with its
customers.
The Company has identified other sites where environmental remediation
expense may be required should there be a change in ownership, operations or
applicable regulations. These possibilities cannot be predicted or quantified
at this time and accordingly, no provision has been recorded. However,
provisions have been made for all instances where it has been determined that
the incurrence of any material remedial expense is reasonably possible. The
Company believes that the provisions recorded for environmental exposures are
adequate based on current estimates.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET SALES INCOME
AND BEFORE INTEREST
QUARTER OPERATING EXPENSE AND NET
(MILLIONS) REVENUES INCOME TAXES INCOME
- ---------- --------- --------------- ------
<S> <C> <C> <C>
1996 1st....................................... $ 748 $119 $ 78
2nd....................................... 622 69 25
------ ---- ----
$1,370 $188 $103
====== ==== ====
1995 1st....................................... $ 505 $ 71 $ 32
2nd....................................... 434 69 15
3rd....................................... 429 43 5
4th....................................... 553 85 105
------ ---- ----
$1,921 $268 $157
====== ==== ====
1994 1st....................................... $ 693 $ 89 $ 18
2nd....................................... 607 80 60
3rd....................................... 549 71 (38)
4th....................................... 532 127 113
------ ---- ----
$2,381 $367 $153
====== ==== ====
</TABLE>
- --------
Note: Reference is made to Notes 4 and 5 and "Managements' Discussion and
Analysis of Financial Condition and Results of Operations" for
discussion of items affecting quarterly results.
The preceding notes to combined financial statements are an integral part of
the foregoing combined financial statements.
F-27
<PAGE>
SCHEDULE II
THE BUSINESSES OF TENNECO ENERGY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $21 $26 $ 9 $ 7 $49
=== === === === ===
Year Ended December 31,
1994.................. $37 $ 2 $22 $20 $21
=== === === === ===
Year Ended December 31,
1993.................. $15 $23 $ 3 $ 4 $37
=== === === === ===
</TABLE>
S-1
<PAGE>
APPENDIX A
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)(S) 251 (other than a merger effected pursuant to
subsection (g) of (S) 251), 252, 254, 257, 258, 263, or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all
A-1
<PAGE>
or substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only to be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in accordance
with this subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the
A-2
<PAGE>
value of the stock of all such stockholders. Notwithstanding the foregoing,
at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement
is received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the right
of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be
dismissed as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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