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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4101
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TENNESSEE GAS PIPELINE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1056569
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
TENNECO ENERGY BUILDING, HOUSTON, 77002
TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 757-2131
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE. Common Stock, par value $5 per
share, 200 shares as of June 30, 1996.
TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH A
REDUCED DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I--Financial Information
Tennessee Gas Pipeline Company and Consolidated Subsidiaries--
Statements of Income.................................................. 2
Statements of Cash Flows.............................................. 3
Balance Sheets........................................................ 4
Statements of Changes in Shareowner's Equity.......................... 6
Notes to Financial Statements......................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12
Part II--Other Information
Item 1. Legal Proceedings............................................... 20
Item 2. Changes in Securities........................................... *
Item 3. Defaults Upon Senior Securities................................. *
Item 4. Submission of Matters to a Vote of Security Holders............. *
Item 5. Other Information............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 22
</TABLE>
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* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
1
<PAGE>
PART I--FINANCIAL INFORMATION
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
THREE MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 30,
-------------- --------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Net sales and operating revenues--
Automotive................................. $ 766 $ 648 $1,435 $1,237
Energy..................................... 622 432 1,366 937
Packaging.................................. 910 682 1,763 1,318
Shipbuilding............................... 477 424 915 845
Other...................................... (4) (3) (6) (4)
------ ------ ------ ------
2,771 2,183 5,473 4,333
Other income--
Interest income--
Affiliated companies..................... 82 96 167 180
Other.................................... 7 12 14 20
Equity in net income of affiliated
companies................................. 9 22 19 38
Gain (loss) on sale of businesses and as-
sets, net................................. 55 (7) 66 7
Other income, net.......................... 19 17 23 26
------ ------ ------ ------
2,943 2,323 5,762 4,604
------ ------ ------ ------
Costs and Expenses:
Cost of sales (exclusive of depreciation
shown below)................................ 1,595 1,285 3,072 2,527
Cost of gas sold............................. 361 221 795 493
Operating expenses........................... 119 94 260 193
Selling, general and administrative.......... 255 181 490 356
Depreciation, depletion and amortization..... 142 107 280 209
------ ------ ------ ------
2,472 1,888 4,897 3,778
------ ------ ------ ------
Income Before Interest Expense, Income Taxes
and Minority Interest......................... 471 435 865 826
------ ------ ------ ------
Interest Expense (net of interest capitalized):
Affiliated companies......................... 38 43 76 71
Other........................................ 24 36 49 73
------ ------ ------ ------
62 79 125 144
------ ------ ------ ------
Income Before Income Taxes and Minority Inter-
est........................................... 409 356 740 682
Income Tax Expense............................. 159 145 268 278
------ ------ ------ ------
Income Before Minority Interest................ 250 211 472 404
Minority Interest.............................. 9 10 15 18
------ ------ ------ ------
Income From Continuing Operations.............. 241 201 457 386
Income From Discontinued Operations, Net of In-
come Tax...................................... -- 5 37 5
------ ------ ------ ------
Net Income..................................... $ 241 $ 206 $ 494 $ 391
====== ====== ====== ======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
statements of income.)
2
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
SIX MONTHS ENDED
JUNE 30,
---------------
1996 1995
----- ------
<S> <C> <C>
Cash Flows From Operating Activities:
Income from continuing operations......................... $ 457 $ 386
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations--
Depreciation, depletion and amortization................ 280 209
Equity in net (income) loss of affiliated companies, net
of dividends........................................... (1) (12)
Deferred income taxes................................... (27) 13
Gain on sale of businesses and assets, net.............. (66) (7)
Changes in components of working capital--
(Increase) decrease in receivables.................... (111) (149)
(Increase) decrease in inventories.................... 7 (182)
(Increase) decrease in prepayments and other current
assets............................................... (21) (6)
Increase (decrease) in payables....................... 147 (15)
Increase (decrease) in taxes accrued.................. (40) (53)
Increase (decrease) in interest accrued............... (14) (19)
Increase (decrease) in natural gas pipeline revenue
reservation.......................................... 11 (179)
Increase (decrease) in other current liabilities...... (103) (3)
Take-or-pay (refunds to customers) recoupments, net..... 2 25
Other................................................... (206) 124
----- ------
Cash provided (used) by continuing operations......... 315 132
Cash provided (used) by discontinued operations....... -- 13
----- ------
Net Cash Provided (Used) by Operating Activities............ 315 145
----- ------
Cash Flows From Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations.................................. 27 697
Net proceeds from sale of businesses and assets........... 284 46
Expenditures for plant, property and equipment--
Continuing operations................................... (431) (321)
Discontinued operations................................. -- (4)
Acquisitions of businesses................................ (24) (271)
(Increase) decrease in Tenneco Inc. receivables........... 159 (156)
(Increase) decrease in notes receivable from other
affiliates............................................... (1) (271)
Investments and other..................................... (55) 6
----- ------
Net Cash Provided (Used) by Investing Activities............ (41) (274)
----- ------
Cash Flows From Financing Activities:
Capital distribution to affiliate......................... -- (28)
Issuance of long-term debt................................ 2 --
Retirement of long-term debt.............................. (259) (152)
Net increase (decrease) in short-term debt excluding
current maturities on long-term debt..................... (12) 10
----- ------
Net Cash Provided (Used) by Financing Activities............ (269) (170)
----- ------
Effect of Foreign Exchange Rate Changes on Cash and
Temporary Cash Investments................................. (1) 5
----- ------
Increase (Decrease) in Cash and Temporary Cash Investments.. 4 (294)
Cash and Temporary Cash Investments, January 1.............. 193 459
----- ------
Cash and Temporary Cash Investments, June 30 (Note)......... $ 197 $ 165
===== ======
Cash Paid During the Period for Interest.................... $ 134 $ 158
Cash Paid During the Period for Income Taxes (net of
refunds)................................................... $ 341 $ 357
</TABLE>
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NOTE: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at date of purchase.
(The accompanying notes to financial statements are an integral part of these
statements of cash flows.)
3
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
JUNE 30, DECEMBER 31, JUNE 30,
ASSETS 1996 1995 1995
------ -------- ------------ --------
<S> <C> <C> <C>
Current Assets:
Cash and temporary cash investments........... $ 197 $ 193 $ 165
Receivables--
Customer notes and accounts (net)........... 662 465 456
Affiliated companies........................ 645 757 407
Gas transportation and exchange............. 151 64 198
Other....................................... 390 486 272
Notes receivable from Tenneco Inc............. 3,195 3,354 3,357
Inventories--
Finished goods.............................. 378 395 312
Work in process............................. 100 101 90
Long-term contracts in progress, less
progress billings.......................... 282 264 212
Raw materials............................... 245 248 206
Materials and supplies...................... 163 166 152
Deferred income taxes......................... 57 18 69
Prepayments and other......................... 297 253 240
------- ------- -------
6,762 6,764 6,136
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies............ 223 286 424
Long-term receivables--
Notes and other (net)....................... 32 105 176
Affiliated companies........................ 18 1 279
Investment in subsidiaries in excess of fair
value of net assets at date of acquisition,
less amortization............................ 583 616 305
Deferred income taxes......................... 61 52 60
Other......................................... 1,770 1,656 1,297
------- ------- -------
2,687 2,716 2,541
------- ------- -------
Plant, Property and Equipment, at cost.......... 12,167 11,824 10,661
Less--Reserves for depreciation, depletion and
amortization................................. 5,806 5,611 5,517
------- ------- -------
6,361 6,213 5,144
------- ------- -------
$15,810 $15,693 $13,821
======= ======= =======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
4
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS)
JUNE 30, DECEMBER 31, JUNE 30,
LIABILITIES AND SHAREOWNER'S EQUITY 1996 1995 1995
----------------------------------- -------- ------------ --------
<S> <C> <C> <C>
Current Liabilities:
Short-term debt (including current maturities on
long-term debt).................................. $ 407 $ 346 $ 426
Payables--
Trade........................................... 1,037 1,065 800
Affiliated companies............................ 354 216 367
Gas transportation and exchange................. 107 28 129
Taxes accrued..................................... 205 391 88
Interest accrued.................................. 23 27 41
Natural gas pipeline revenue reservation.......... 59 27 3
Other............................................. 1,018 1,020 1,015
------- ------- -------
3,210 3,120 2,869
------- ------- -------
Long-term Debt...................................... 228 550 536
------- ------- -------
Deferred Income Taxes............................... 958 989 1,239
------- ------- -------
Postretirement Benefits............................. 610 609 600
------- ------- -------
Deferred Credits and Other Liabilities.............. 529 623 601
------- ------- -------
Commitments and Contingencies
Minority Interest................................... 493 492 483
------- ------- -------
Shareowner's Equity:
Common stock, par value $5 per share, authorized,
issued and outstanding 200 shares................ -- -- --
Premium on common stock and other capital surplus. 4,903 4,903 3,466
Cumulative translation adjustments................ 10 32 (3)
Retained earnings................................. 4,869 4,375 4,030
------- ------- -------
9,782 9,310 7,493
------- ------- -------
$15,810 $15,693 $13,821
======= ======= =======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
5
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(MILLIONS EXCEPT SHARE
AMOUNTS)
SIX MONTHS ENDED JUNE 30,
----------------------------
1996 1995
------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Common Stock:
Balance January 1 and June 30................. 200 $ -- 200 $ --
===== ------ ===== ------
Premium on Common Stock and Other Capital
Surplus:
Balance January 1 ............................ 4,903 3,494
Capital distribution to affiliate........... -- (28)
------ ------
Balance June 30............................... 4,903 3,466
------ ------
Cumulative Translation Adjustments:
Balance January 1............................. 32 (174)
Translation of foreign currency statements.. (22) 44
Sale of investment in foreign subsidiary.... -- 127
------ ------
Balance June 30............................... 10 (3)
------ ------
Retained Earnings:
Balance January 1............................. 4,375 3,639
Net income.................................. 494 391
------ ------
Balance June 30............................... 4,869 4,030
------ ------
Total..................................... $9,782 $7,493
====== ======
</TABLE>
(The accompanying notes to financial statements are an integral part of these
statements of changes in shareowner's equity.)
6
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) In the opinion of Tennessee Gas Pipeline Company (the "Company"), the
accompanying unaudited financial statements of Tennessee Gas Pipeline Company
and consolidated subsidiaries ("Tennessee") contain all adjustments necessary
to present fairly the financial position as of June 30, 1996, and the results
of operations; changes in shareowner's equity; and cash flows for the periods
indicated. The financial statements of Tennessee include all majority-owned
subsidiaries. Investments in 20% to 50% owned companies where Tennessee has
the ability to exert significant influence over operating and financial
policies are carried at cost plus equity in undistributed earnings since date
of acquisition and cumulative translation adjustments.
Prior year's financial statements have been reclassified where appropriate
to conform to 1996 presentations. Also, prior year's financial statements have
been restated where appropriate to reflect the farm and construction equipment
segment as discontinued operations. See Note 5 for additional information.
(2) On April 8, 1992, the Federal Energy Regulatory Commission ("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.
The Company implemented revisions to its tariff, effective on September 1,
1993, which restructured its transportation, storage and sales services to
convert the Company from primarily a merchant to primarily a transporter of
gas as required by Order 636. As a result of this restructuring, the Company's
gas sales declined while certain obligations to producers under long-term gas
supply contracts continued, causing the Company to incur significant
restructuring transition costs. Pursuant to the provisions of Order 636
allowing for the recovery of transition costs related to the restructuring,
the Company 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 the Company's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
The Company'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 the
Company to file for the recovery of losses upon disposition of these assets.
The Company has filed for appellate 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 the Company'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 the Company 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, the Company 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 the Company'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. The Company
7
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
implemented the terms of the PGA Stipulation and made refunds in May 1995. The
refunds had no material effect on Tennessee's reported net income. The orders
approving the PGA Stipulation have been appealed to the D.C. Circuit Court of
Appeals by certain customers. The Company believes the FERC orders approving
the PGA Stipulation will be upheld on appeal.
The Company is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC subsequently issued
an order requiring the Company to refund certain costs from this surcharge and
refunds were made in May 1996. The Company is appealing this decision and
believes such appeal will likely be successful.
With regard to the Company's GSR costs, the Company, 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
the Company 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. The Company has filed exceptions to this
initial decision and believes that this decision will not impair the Company'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 the Company's GSR costs, on October 14, 1993, the Company
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 the Company 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 the Company for alleged damages caused by
the Company's refusal to purchase gas produced from the TransTexas leases
covering the new production and lands. In June 1996, the Company reached a
settlement with ICA and TransTexas for $125 million wherein ICA and TransTexas
agreed to terminate the contract, released the Company from liability under
the contract, and indemnified the Company against certain future claims,
including royalty owner claims.
The Company has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
the Company. On August 1, 1995, the Texas Supreme Court affirmed a ruling of
the Court of Appeals favorable to the Company 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 the Company. In June 1996, the Company filed a motion for
rehearing with the Texas Supreme Court. The Court has not yet acted on that
motion. The Supreme Court's ruling explicitly preserves the Company's defenses
based on bad faith conduct of the producers. Nothing in the Supreme Court's
decision affects the Company'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, the Company has
initiated two lawsuits against the holders of this gas purchase contract,
seeking damages related to their conduct in connection with that contract. The
Company has accrued amounts which it believes are appropriate to cover the
resolution of the litigation associated with its contract reformation efforts.
8
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1996, the Company 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 the
Company'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
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 the Company's GSR costs and the
Company 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 the
Company 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, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
On December 30, 1994, the Company 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,
the Company began collecting rates, subject to refund, reflecting an $87
million increase in the Company'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 the Company is reserving revenues it
believes adequate to cover any refunds that may be required upon final
settlement of this proceeding.
(3) Reference is made to Note 2 for information concerning gas supply
litigation. Tennessee Gas Pipeline Company and its subsidiaries are parties to
numerous other legal proceedings arising from their operations. The Company
believes that the outcome of these other proceedings, individually and in the
aggregate, will have no material effect on Tennessee's financial position or
results of operations.
(4) Since 1988, the Company 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, the
Company 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.
Tennessee has established a reserve for the Company'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, Tennessee has charged approximately $156
million against the environmental reserve, excluding recoveries related to the
Company's environmental settlement as discussed below. Of the remaining
reserve, $24 million has been recorded on the balance sheet under "Payables-
trade" and $132 million under "Deferred credits and other liabilities."
9
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Due to the current uncertainty regarding the further activity necessary for
the Company 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, the Company 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
the Company's evaluation and experience to date, Tennessee continues to
believe that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, the Company 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; the Company 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 Tennessee's financial position or results
of operations. As of June 30, 1996, the balance of the regulatory asset is $61
million.
Tennessee has completed settlements with and has received payments from the
majority of its liability insurance policy carriers for remediation costs and
related claims. Tennessee 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, the Company has
settled its pending litigation against and received payment from the
manufacturer of the PCB-containing lubricant. These recoveries have been
considered in the Company's recording of its environmental settlement with its
customers.
Tennessee has identified other sites in its various operating divisions
where environmental remediation expense may be required should there be a
change in ownership, operations or applicable regulations. These possibilities
cannot be predicted or quantified at this time and accordingly, no provision
has been recorded. However, provisions have been made for all instances where
it has been determined that the incurrence of any material remedial expense is
reasonably possible. Tennessee believes that the provisions recorded for
environmental exposures are adequate based on current estimates.
(5) In March 1996, Tenneco sold its remaining ownership of 15.2 million
shares of common stock of Case Corporation in a public offering at $53.75 per
share. Of the 15.2 million shares sold, approximately 690,800 shares were
owned by Tennessee. In connection with the offering, Tennessee received net
proceeds of $36 million and recognized a gain of $37 million, including $29
million of income tax benefit. Tenneco in the aggregate recorded a gain of
$340 million, net of $83 million in income tax expense. As a result of this
sale, the financial statements have been restated to reflect the operating
results and the gains on the sale of the farm and construction equipment
segment as "discontinued operations" for all periods presented.
(6) As part of the ongoing strategic realignment of its businesses, Tenneco
has announced its intention to spin off Newport News Shipbuilding and the
combined businesses of its Automotive and Packaging segments to its
shareowners as separate, publicly traded companies in tax-free transactions.
At the completion of these two spin-off transactions, Tenneco would consist of
Tenneco Inc., the Company, the Energy business, Tenneco Credit Corporation and
certain assets and liabilities related to operations previously disposed of by
Tenneco. Pursuant to a merger agreement signed in June 1996 between Tenneco
and El Paso Natural Gas Company ("El Paso"), the remaining Tenneco businesses
subsequent to the spinoffs will be merged with a subsidiary of El Paso through
an exchange of Tenneco shares for shares of El Paso valued at $750 million.
10
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At the completion of these transactions, current Tenneco shareowners will
hold shares of Newport News Shipbuilding Inc., the combined Automotive and
Packaging business (to be renamed Tenneco Inc.) and El Paso.
Prior to the spinoff and merger transactions, Tenneco intends to initiate a
realignment of its existing indebtedness. As part of the debt realignment
plan, certain debt of the combined Automotive and Packaging business will be
offered in exchange for certain existing Tenneco debt issues. Tenneco will
initiate tender offers for other debt issues and certain issues may be
defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of the combined Automotive and Packaging
business, Newport News Shipbuilding and Tenneco Inc. At the conclusion of the
debt realignment, the existing debt obligations of Tenneco will be allocated
among the three companies with El Paso assuming responsibility for $2.65
billion of debt and preferred stock, subject to certain adjustments, and
Newport News Shipbuilding and the combined Automotive and Packaging business
assuming responsibility for the remainder. The difference between the market
value of the consideration issued in the tender offers, exchanges and
defeasances and the net carrying amount of the Tenneco debt will be recognized
as an extraordinary charge.
The consummation of these transactions is subject to certain conditions,
including receipt of a favorable ruling from the Internal Revenue Service on
the tax-free nature of the transactions and approval by Tenneco Inc.'s
shareowners.
(7) In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes new accounting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The statement is effective for
transactions occurring after December 31, 1996. The impact of the adoption of
the new standard has not been quantified.
(The above notes are an integral part of the foregoing financial statements.)
11
<PAGE>
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPOSED MERGER WITH EL PASO NATURAL GAS COMPANY
In the first quarter of 1996, Tenneco announced its intention to focus
Tenneco on its automotive parts and packaging businesses. This strategic
action included the spinoff of Newport News Shipbuilding to Tenneco's
shareowners and the development of options to separate Tenneco Energy from the
packaging and automotive parts divisions. On June 19, 1996, Tenneco announced
that it has signed a definitive agreement to merge Tenneco Inc. with El Paso
Natural Gas Company ("El Paso"). Prior to the merger, Tenneco will spin off
its Newport News Shipbuilding and the combined businesses of the Automotive
and Packaging segments to Tenneco shareowners as separate public companies.
The merger represents a total value for Tenneco shareowners of $4 billion
which includes:
.New shares of El Paso equity valued at $750 million.
.Assumption by El Paso of $2.65 billion (subject to certain adjustments) of
Tenneco's debt and preferred stock.
Consequently, after the transactions are complete, current Tenneco
shareowners will hold shares of Newport News Shipbuilding Inc., the combined
Automotive and Packaging businesses (to be renamed Tenneco Inc.) and El Paso.
Tenneco would then consist of two industrial manufacturing businesses, Tenneco
Packaging and Tenneco Automotive, both of which reported record earnings and
revenues in 1995, and Tenneco Business Services, the company's administrative
services unit.
Tenneco's automotive parts business is a leading manufacturer of Walker(R)
automotive exhaust and emission control products, and Monroe(R) ride control
products, for both original equipment and the replacement market. Tenneco's
Walker business group manufactures a variety of automotive exhaust systems and
emission control products and its Monroe(R) business group manufactures
various types of shock absorbers, struts and suspension systems. Tenneco's
packaging business is a leading manufacturer of packaging materials, cartons,
containers and specialty packaging products for consumer and commercial
markets. Its paperboard businesses focus on value-added corrugated packaging,
folding cartons, recycled paperboard and container board, as well as specialty
products such as point of purchase displays and kraft honeycomb products. Its
specialty businesses are market leaders in food containers and packaging made
from aluminum foil, clear plastic, polystyrene foam, molded fiber and pressed
paperboard, as well as polyethylene bags and industrial stretch wrap. Consumer
products include Hefty(R) trash bags, Hefty OneZip(R) and Baggies(R) food
storage bags, E-Z Foil(R) single use cookware and Diamond(R) tableware.
Prior to the spinoff and merger transactions, Tenneco intends to initiate a
realignment of its existing indebtedness. As part of the debt realignment
plan, certain debt of the combined Automotive and Packaging business will be
offered in exchange for certain existing Tenneco debt issues. Tenneco will
initiate tender offers for other debt issues and certain issues may be
defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of the combined Automotive and Packaging
business, Newport News Shipbuilding and Tenneco Inc. At the conclusion of the
debt realignment, the existing debt obligations of Tenneco will be allocated
among the three companies with El Paso assuming responsibility for $2.65
billion of debt and preferred stock, subject to certain adjustments, and
Newport News Shipbuilding and the combined Automotive and Packaging business
assuming responsibility for the remainder. The difference between the market
value of the consideration issued in the tender offers, exchanges and
defeasances and the net carrying amount of the Tenneco debt will be recognized
as an extraordinary charge.
The consummation of these transactions is subject to certain conditions,
including receipt of a favorable ruling from the Internal Revenue Service on
the tax-free nature of the transactions and approval by Tenneco Inc.'s
shareowners.
12
<PAGE>
OTHER STRATEGIC ACTIONS
In the second quarter of 1996, Tennessee continued its strategy to redeploy
capital to faster-growing, more profitable and less cyclical business
opportunities. In June, Tenneco Packaging and Caraustar Industries announced
their agreement to form a joint venture which will operate clay-coated
recycled paperboard mills in Rittman, Ohio and Tama, Iowa and a recovered
fiber recycling and brokerage business with operations in Rittman and
Cleveland, Ohio. Tenneco Packaging contributed these assets to the joint
venture for cash and an equity position in the new venture. This strategic
action resulted in a pre-tax gain of $50 million.
In addition, Tennessee announced intentions to acquire the following new
businesses:
.Tenneco Automotive announced it has reached agreement to acquire The
Pullman Company and its Clevite products division ("Clevite") for
approximately $330 million. Clevite is a leading original equipment
manufacturer of automotive vibration control components, including bushings
and engine mounts for the auto, light truck and heavy truck markets.
Clevite will be integrated into Monroe to form an operation with all of the
components necessary to design, manufacturer, test and sell a complete
automotive suspension system. The acquisition was completed in July.
.Tenneco Packaging announced that it will acquire the stock of Amoco Foam
Products Company, a unit of Amoco Chemical Company, for $310 million. Amoco
Foam Products manufactures expanded polystyrene tableware, including cups,
plates and carrying trays; hinged-lid food containers; packaging trays,
primarily for meat and poultry and industrial products for residential and
commercial construction applications. The acquisition is expected to close
in the third quarter.
THREE MONTHS RESULTS
Tennessee's income from continuing operations for the 1996 second quarter
was $241 million, an improvement of 20 percent compared with $201 million in
the year ago quarter. Tenneco Automotive, Tenneco Energy and Tenneco
Packaging, which included the gain from the sale of the recycled paperboard
mills to a joint venture, contributed to this improvement.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
SECOND QUARTER
----------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Automotive.............................................. $ 766 $ 648
Energy.................................................. 622 432
Packaging............................................... 910 682
Shipbuilding............................................ 477 424
Other................................................... (4) (3)
------- -------
$2,771 $2,183
======= =======
</TABLE>
13
<PAGE>
Second quarter 1996 revenues increased $588 million or 27 percent. All
operating divisions achieved double digit revenue growth. Tenneco Automotive's
revenues increased in both the exhaust and ride control operations. Tenneco
Packaging's improvement resulted primarily from the less cyclical specialty
acquisitions made in 1995. Tenneco Energy's revenue increase was generated
from higher gas prices in the nonregulated operations and increased rates in
the regulated business. The results of each business are discussed in detail
below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
SECOND QUARTER
---------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Automotive................................................ $ 103 $ 77
Energy.................................................... 87 68
Packaging................................................. 157 141
Shipbuilding.............................................. 40 46
Other..................................................... 84 103
------- -------
$471 $435
======= =======
</TABLE>
Tennessee's operating income for the second quarter of 1996 increased by $36
million compared with the 1995 period. Tenneco Energy benefited from favorable
market conditions in the gas industry and Tenneco Automotive benefited from
improved results in both the exhaust and ride control sectors. Also, Tenneco
Packaging recognized a pre-tax gain from the sale of the recycled paperboard
mills to a joint venture of $50 million in the 1996 second quarter. These
increases were partially offset by lower operating income at Tenneco
Packaging, excluding the paperboard mills gain, due to lower paperboard prices
and at Newport News Shipbuilding due to reduced activity on carrier
construction and lower margins on conversion and commercial work. The results
of each business are discussed in detail below.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
SECOND QUARTER
---------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Revenues.................................................. $ 766 $ 648
Operating income.......................................... 103 77
</TABLE>
Tenneco Automotive's revenues in the second quarter rose 18 percent to set a
record for eleven consecutive quarters of quarter over quarter improvement.
Both the exhaust and ride control operations reported increased revenues.
Exhaust revenues increased 17 percent to $448 million. North American and
European original equipment volumes were up driven by new vehicle production
and new acquisitions. Aftermarket volumes also increased primarily due to the
recent Fonos acquisition.
Ride control reported increased revenues of $52 million or 20 percent.
Monroe's North American aftermarket revenues increased 19 percent as a result
of consumer response to aggressive marketing programs. European original
equipment revenues improved 42 percent driven by car manufacturers' marketing
campaigns to consumers. In addition, revenues in Australia increased as a
result of the acquisition of National Springs.
Operating income from the exhaust operations improved 38 percent to $51
million primarily due to increased volumes, improved price realizations in
both North America and Europe, and improved manufacturing efficiencies along
with lower distribution costs. Ride control's operating income increase of $12
million was generated by strong volumes due to consumer response to aggressive
marketing programs and improved pricing and product mix.
14
<PAGE>
TENNECO ENERGY
<TABLE>
<CAPTION>
SECOND QUARTER
---------------
1996 1995
------- -------
(MILLIONS)
<S> <C> <C>
Revenues.................................................. $ 622 $ 432
Operating income.......................................... 87 68
</TABLE>
Tenneco Energy achieved second quarter 1996 operating income of $87 million,
a 28 percent increase from the $68 million recorded in the 1995 second
quarter. In addition, revenues rose 44 percent, to $622 million from $432
million.
Nonregulated revenues increased 46 percent to $425 million, the result of
higher gas prices, an 18 percent increase in gas volumes due to acquisitions
and new processing and gathering projects. Regulated revenues increased to
$197 million, or 40 percent, primarily due to a new rate structure, an
increase in transportation volumes, and non-recurring regulatory settlements
that had no operating income impact.
Nonregulated operating income decreased to $1 million in the 1996 second
quarter from $8 million due to lower margins on marketing sales resulting from
increased competition and unfavorable legal settlements. Partially offsetting
the nonregulated earnings decline was higher operating income from Tenneco
Ventures' oil and gas production and the South Australia Pipeline.
Operating income from regulated pipelines in the U.S. rose $26 million to
$86 million. The increase included $15 million for a favorable legal
settlement along with the gain on the sale of Tennessee's interest in Iroquois
Gas Transmission System L.P. Higher transportation rates and volumes more than
compensated for the absence of earnings contributed by the Kern River
pipeline, which amounted to $8 million in the year ago quarter. Energy's 50
percent interest in Kern River Gas Transmission Company was sold in late 1995.
TENNECO PACKAGING
<TABLE>
<CAPTION>
SECOND
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
<S> <C> <C>
Revenues...................................................... $ 910 $ 682
Operating income.............................................. 157 141
</TABLE>
Operating income for Tenneco Packaging for the 1996 second quarter was $157
million compared with $141 million in the year-ago quarter. The 1996 results
included a $50 million pre-tax gain on the sale of two recycled paperboard
mills and a recovered fiber recycling and brokerage business to a new joint
venture between Tenneco Packaging and Caraustar Industries. The results were
also driven by a strong performance from its recently acquired plastics
operation, which were offset by lower paperboard pricing and volumes. The
recently acquired plastics business contributed $42 million in operating
income on revenues of $286 million in the 1996 second quarter.
In the paperboard business, revenues were down $67 million to $436 million
compared with the 1995 second quarter. Operating income in the paperboard
business declined $78 million to $34 million compared with the 1995 second
quarter, excluding the 1996 second quarter $50 million pre-tax gain on the
sale of assets to the joint venture with Caraustar. Operating income and
revenues were reduced by lower volumes and price realizations due to the
weaker market conditions and by a $14 million cost as a result of downtime
taken at the mills to keep inventories in line.
Revenues in Tenneco Packaging's specialty packaging business increased $295
million to $474 million compared with the 1995 second quarter, primarily as a
result of the recently acquired plastics business. The specialty packaging
business, which included the strong results of the recently acquired plastics
operation, earned
15
<PAGE>
$73 million in operating income for the 1996 second quarter, a $44 million
increase compared with the year ago results.
NEWPORT NEWS SHIPBUILDING
<TABLE>
<CAPTION>
SECOND
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
<S> <C> <C>
Revenues...................................................... $ 477 $ 424
Operating income.............................................. 40 46
</TABLE>
Shipbuilding revenues for the 1996 second quarter increased $53 million to
$477 million compared with the 1995 period primarily due to increased activity
on the Eisenhower overhaul, partially offset by lower submarine program
revenues. Construction activity on the Los Angeles-class submarines declined
in the 1996 second quarter as this program nears completion.
Second quarter operating income for Shipbuilding decreased $6 million, to
$40 million due to reduced activity in carrier construction and lower margins
on conversion and commercial work.
The shipyard's backlog was $4.1 billion at June 30, 1996 substantially all
of which is U.S. Navy-related. It included second quarter additions of
approximately $150 million, including a planning contract for $119 million for
the refueling and overhaul of the carrier Nimitz. The Nimitz is scheduled to
arrive in May 1998 for a two-year, $1 billion refueling and overhaul. The
backlog at June 30, 1995 was $4.9 billion.
The backlog at June 30, 1996 included one Los Angeles-class submarine, two
Nimitz-class aircraft carriers (Harry S. Truman and Ronald Reagan), the two-
ship Sealift conversion contract, surface ship overhaul contracts and
contracts to construct nine "Double Eagle" product tankers. In addition,
Newport News has ongoing engineering contracts as the lead design yard for the
Los Angeles-class and Seawolf-class submarines. Subject to new orders, this
backlog will decline as the remaining submarine is delivered in 1996 and the
aircraft carriers are delivered in 1998 and 2002.
OTHER
Tennessee's other operations reported operating income of $84 million for
the 1996 second quarter compared with operating income of $103 million in the
1995 second quarter. This decrease in operating income resulted from lower
interest income from affiliated companies and other investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense decreased from $79 million in the 1995 second quarter to
$62 million in the 1996 second quarter. The decrease was primarily
attributable to lower debt levels. Interest capitalized increased from $1
million in the 1995 second quarter to $5 million in the 1996 second quarter
due to an increase of capital projects under construction.
INCOME TAXES
Income tax expense for the second quarter of 1996 was $159 million compared
with $145 million for the 1995 second quarter. The effective tax rate for the
second quarter of 1996 was 39 percent compared with 41 percent in the prior
year quarter.
DISCONTINUED OPERATIONS
Income from discontinued operations in the 1995 second quarter of $5 million
was attributable to the farm and construction equipment segment.
16
<PAGE>
SIX MONTHS RESULTS
Tennessee's income from continuing operations for the 1996 first half was
$457 million, an improvement of 18 percent compared with $386 million in the
year ago period. Tenneco Automotive, Tenneco Energy, and Tenneco Packaging,
which included the gain on the sale of the recycled paperboard mills to a joint
venture, contributed to this improvement.
Net income was $494 million compared with net income of $391 million in the
first half of 1995. The first half of 1996 net income included income from
discontinued operations of $37 million compared with $5 million in the 1995
first half.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Automotive............................................ $ 1,435 $ 1,237
Energy................................................ 1,366 937
Packaging............................................. 1,763 1,318
Shipbuilding.......................................... 915 845
Other................................................. (6) (4)
-------- --------
$5,473 $ 4,333
======== ========
</TABLE>
Net sales and operating revenues for the first six months of 1996 were $5.47
billion, up 26 percent from $4.33 billion reported in 1995 due to higher gas
prices and increased rates in the regulated business along with revenues from
acquisitions made in late 1994 and 1995. Higher revenues were reported by all
divisions: Tenneco Packaging (up $445 million or 34 percent), Tenneco
Automotive (up $198 million or 16 percent), Tenneco Energy (up $429 million or
46 percent), and Shipbuilding (up $70 million or 8 percent).
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Automotive.............................................. $ 160 $ 130
Energy.................................................. 185 148
Packaging............................................... 270 257
Shipbuilding............................................ 81 90
Other................................................... 169 201
-------- --------
$865 $ 826
======== ========
</TABLE>
Operating income for the first six months of 1996 was $865 million compared
with $826 million reported for the same period of 1995, an improvement of 5
percent.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Revenues................................................ $ 1,435 $ 1,237
Operating income........................................ 160 130
</TABLE>
17
<PAGE>
Tenneco Automotive reported first half 1996 operating income of $160 million
compared with $130 million recorded in the same period a year ago. Year-to-
date revenues for 1996 totaled $1.44 billion compared with last year's amount
of $1.24 billion. Revenues increased primarily as a result of improved
worldwide exhaust and ride control sales. Profit margins improved in the first
half of 1996 due to increased volumes, pricing and product mix, and
improvements in manufacturing efficiencies.
TENNECO ENERGY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
--------- --------
(MILLIONS)
<S> <C> <C>
Revenues................................................ $ 1,366 $ 937
Operating income........................................ 185 148
</TABLE>
Tenneco Energy reported operating income of $185 million for the 1996 first
half compared with $148 million in the year ago period. Revenues increased to
$1.37 billion compared with $937 million in the first six months of 1995
primarily due to the increase in gas spot prices in the nonregulated segment
and a new rate structure in the regulated pipelines. Operating income
increased in the first half of 1996 due to a new rate structure, a favorable
legal settlement. Volumes increased in both the regulated and nonregulated
operations.
TENNECO PACKAGING
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Revenues................................................ $ 1,763 $ 1,318
Operating income........................................ 270 257
</TABLE>
Tenneco Packaging had operating income of $270 million in the first six
months of 1996 compared with $257 million in the prior year period. Revenues
were $1.76 billion in the first half of 1996 compared with $1.32 billion in
the first half of 1995. Higher revenues and operating income were primarily
due to the strong performance from the plastics business. The recently
acquired plastics business contributed $73 million in operating income on
revenues of $516 million in the 1996 first half. In Tenneco Packaging's
paperboard business, revenues and operating income were down due to lower
volumes and price realizations resulting from weak market conditions in both
linerboard and corrugated medium. Operating income included a $50 million pre-
tax gain in the 1996 second quarter from the sale of recycled paperboard mills
to a joint venture with Caraustar. The 1995 first half included a $14 million
gain on the sale of a North Carolina mill.
NEWPORT NEWS SHIPBUILDING
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1996 1995
-------- --------
(MILLIONS)
<S> <C> <C>
Revenues................................................ $ 915 $ 845
Operating income........................................ 81 90
</TABLE>
Shipbuilding reported 1996 first half operating income of $81 million
compared with $90 million in the 1995 period. Revenues were $915 million for
the 1996 first half compared with $845 million in the year ago period.
Revenues increased due to higher volumes on the Eisenhower overhaul, partially
offset by lower activity on conversion work and submarine construction.
Operating income declined due to lower margins on conversion and commercial
work and reduced activity on aircraft carrier construction. These reductions
were partially offset by increased activity on the Eisenhower overhaul.
18
<PAGE>
OTHER
Tenneco's other operations reported operating income of $169 million for the
1996 first half compared with operating income of $201 million in the first
half of 1995. The decrease in operating income was due to lower interest
income from affiliated companies and other investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense decreased from $144 million in the 1995 first half to $125
million in the first half of 1996, while interest capitalized was $11 million
in the first half of 1996 compared with $3 million in the 1995 period. The
year-to-year change in these items was due to the same reasons discussed under
"Three Months Results" above.
INCOME TAXES
Income tax expense for the 1996 first half was $268 million compared with
$278 million in the same period of 1995.
DISCONTINUED OPERATIONS
Income from discontinued operations for the first half of 1996 of $37
million was attributable to the farm and construction equipment segment.
Income from discontinued operations related to the farm and construction
equipment operations for the first half of 1995 was $5 million.
CAPITAL EXPENDITURES
Tennessee invested $431 million in capital expenditures in its existing
businesses during the first half of 1996. Capital expenditures during the
first half of 1996 included $81 million for Automotive, $153 million for
Energy, $149 million for Packaging, $36 million for Shipbuilding and $12
million related to Tennessee's other operations. Capital expenditures were
higher at Automotive, Packaging and Energy during the first half of 1996,
while Shipbuilding capital expenditures were approximately the same as the
prior year quarter. During the first half of 1995, capital expenditures were
$321 million for continuing operations.
19
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(1) Environmental Proceedings.
The Company is a party in proceedings involving federal and state
authorities regarding the past use by the Company of a lubricant containing
polychlorinated biphenyls ("PCBs") in its starting air systems. The Company
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 the Company and the Pennsylvania Department of Environmental
Protection, the Company funded an environmentally beneficial project for
$450,000 in April 1996. Tennessee believes that the ultimate resolution of
this matter will not have a material adverse effect on the financial position
or results of operations of the Company and its consolidated subsidiaries.
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 the Company 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. The Company 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 Tennessee are unable to express an opinion as to its ultimate outcome.
Tennessee believes that the resolution of this issue will not have a material
adverse effect on its consolidated financial position or results of
operations.
The Company sold its subsidiary which owns a 13.2% general partnership
interest in Iroquois Gas Transmission System, L.P. ("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. The Company is still under contract to
provide gas dispatching as well as post-construction field operation and
maintenance services for the operator of Iroquois, but the Company 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, Tennessee 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 financial position or results of operations of
the Company and its consolidated subsidiaries.
On August 2, 1993, the Department of Justice filed suit against Tenneco
Packaging Inc. ("Tenneco Packaging") in the Federal District Court for the
Northern District of Indiana, alleging that wastewater from Tenneco
Packaging's molded fiber products plant in Griffith, Indiana, interfered with
or damaged the Town of Griffith's municipal sewage pumping station on two
occasions in 1991 and 1993, resulting in discharges by the Town of Griffith of
untreated wastewater into a river. Tenneco Packaging and the Department of
Justice have agreed in principle to settle the suit. A consent decree has been
agreed to, finalized, signed by Tenneco Packaging and returned to the
Department of Justice for its signature. Tennessee believes that the
resolution of this matter will not have a material adverse effect on the
financial position or results of operations of the Company and its
consolidated subsidiaries.
(2) Potential Superfund Liability.
At June 30, 1996, Tennessee has been designated as a potentially responsible
party in 50 "Superfund" sites. With respect to its pro rata share of the
remediation costs of certain sites, Tennessee is fully indemnified by third
parties. With respect to certain other sites, Tennessee has sought to resolve
its liability through payments to the
20
<PAGE>
other potentially responsible parties. For the remaining sites, Tennessee has
estimated its share of the remediation costs to be between $10 million and $64
million or 0.4% to 2.2% of the total remediation costs for those sites and has
provided reserves that it believes are adequate for such costs. Because the
clean-up costs are estimates and are subject to revision as more information
becomes available about the extent of remediation required, Tennessee's
estimate of its share of remediation costs could change. Moreover, liability
under the Comprehensive Environmental Response, Compensation and Liability Act
is joint and several, meaning that Tennessee could be required to pay in
excess of its pro rata share of remediation costs. Tennessee's understanding
of the financial strength of other potentially responsible parties has been
considered, where appropriate, in Tennessee's determination of its estimated
liability. Tennessee believes that the costs associated with its current
status as a potentially responsible party in the Superfund sites described
above will not be material to its consolidated financial position or results
of operations.
(3) Other Proceedings.
On October 14, 1993, the Company 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
the Company 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
the Company for alleged damages caused by the Company's refusal to purchase
gas produced from the TransTexas leases covering the new production and lands.
In June 1996, the Company reached a settlement with ICA and TransTexas for
$125 million wherein ICA and TransTexas agreed to terminate the contract,
released the Company from liability under the contract, and indemnified the
Company against certain future claims, including royalty owner claims.
The Company has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
the Company. On August 1, 1995, the Texas Supreme Court affirmed a ruling of
the Court of Appeals favorable to the Company 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 the Company. In June 1996, the Company filed a motion for
rehearing with the Texas Supreme Court. The Court has not yet acted on that
motion. The Supreme Court's ruling explicitly preserves the Company's defenses
based on bad faith conduct of the producers. Nothing in the Supreme Court's
decision affects the Company'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, the Company has
initiated two lawsuits against the holders of this gas purchase contract,
seeking damages related to their conduct in connection with that contract. The
Company has accrued amounts which it believes are appropriate to cover the
resolution of the litigation associated with its contract reformation efforts.
The Company and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. The Company believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on the Company's consolidated financial position or
results of operations.
ITEM 5. OTHER INFORMATION.
Recent Developments.
On June 21, 1996, Tenneco Inc. distributed a letter dated June 19, 1996,
from Dana G. Mead, Chairman and Chief Executive Officer of Tenneco Inc. to its
shareowners regarding, among other things, (i) the announcement of a
definitive agreement to merge a subsidiary of El Paso Natural Gas Company with
and into Tenneco in a tax-free reorganization (the total value of the
transaction to Tenneco shareowners is estimated at approximately $4 billion),
(ii) that the previously announced spinoff of Newport News Shipbuilding and
Dry Dock Company is proceeding and (iii) a new company, that will carry the
"Tenneco" name, consisting of Tenneco Packaging, Tenneco Automotive and
Tenneco Business Services will also be spun off to the Tenneco Inc.
shareowners.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27--Financial Data Schedule.
(b) Reports on Form 8-K. Tennessee Gas Pipeline Company did not file any
Current Reports on Form 8-K during the quarter ended June 30, 1996.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENNESSEE GAS PIPELINE COMPANY
Robert T. Blakely
By __________________________________
Robert T. Blakely
Senior Vice President--Principal
Financial
and Accounting Officer
Date: August 14, 1996
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 197
<SECURITIES> 0
<RECEIVABLES> 662
<ALLOWANCES> 0
<INVENTORY> 1,168
<CURRENT-ASSETS> 6,762
<PP&E> 12,167
<DEPRECIATION> 5,806
<TOTAL-ASSETS> 15,810
<CURRENT-LIABILITIES> 3,210
<BONDS> 228
0
0
<COMMON> 0
<OTHER-SE> 9,782
<TOTAL-LIABILITY-AND-EQUITY> 15,810
<SALES> 5,473
<TOTAL-REVENUES> 5,473
<CGS> 4,127
<TOTAL-COSTS> 4,127
<OTHER-EXPENSES> 770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> 740
<INCOME-TAX> 268
<INCOME-CONTINUING> 457
<DISCONTINUED> 37
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
