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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 MARCH 31, 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 1-9864
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TENNECO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0233548
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1275 KING STREET, GREENWICH, CONNECTICUT 06831
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 863-1000
----------------
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: 173,964,703 shares as of April 30,
1996.
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TABLE OF CONTENTS
PAGE
----
Part I--Financial Information
Tenneco Inc. and Consolidated Subsidiaries--
Statements of Income.................................................. 2
Statements of Cash Flows.............................................. 3
Balance Sheets........................................................ 4
Statements of Changes in Shareowners' Equity.......................... 5
Statements of Changes in Preferred Stock With Mandatory Redemption
Provisions........................................................... 6
Notes to Financial Statements......................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 11
Part II--Other Information
Item 1. Legal Proceedings............................................... 17
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............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
- --------
* No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
1
PART I
FINANCIAL INFORMATION
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
- -------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE AMOUNTS) 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Net sales and operating revenues--
Automotive........................................ $ 683 $ 602
Energy............................................ 744 505
Packaging......................................... 859 636
Shipbuilding...................................... 438 421
Other............................................. 1 (1)
----------- -----------
2,725 2,163
Other income--
Interest income................................... 20 27
Equity in net income of affiliated companies...... 10 17
Gain on sale of businesses and assets, net........ 40 14
Other income, net................................. 6 7
----------- -----------
2,801 2,228
----------- -----------
Costs and Expenses:
Cost of sales (exclusive of depreciation shown
below)............................................. 1,485 1,249
Cost of gas sold.................................... 434 272
Operating expenses.................................. 143 103
Selling, general and administrative................. 262 187
Finance charges--Tenneco Finance.................... 18 23
Depreciation, depletion and amortization............ 140 103
----------- -----------
2,482 1,937
----------- -----------
Income Before Interest Expense, Income Taxes and
Minority Interest.................................... 319 291
Interest Expense (net of interest capitalized)........ 89 75
----------- -----------
Income Before Income Taxes and Minority Interest...... 230 216
Income Tax Expense.................................... 69 83
----------- -----------
Income Before Minority Interest....................... 161 133
Minority Interest..................................... 5 5
----------- -----------
Income From Continuing Operations..................... 156 128
Income From Discontinued Operations, Net of Income
Tax.................................................. 339 25
----------- -----------
Net Income............................................ 495 153
Preferred Stock Dividends............................. 3 3
----------- -----------
Net Income to Common Stock............................ $ 492 $ 150
=========== ===========
Average Number of Shares of Common Stock Outstanding.. 170,440,074 177,792,872
=========== ===========
Earnings Per Average Share of Common Stock:
Continuing operations .............................. $ .90 $ .71
Discontinued operations............................. 1.99 .13
----------- -----------
$ 2.89 $ .84
=========== ===========
Cash Dividends Per Share of Common Stock.............. $ .45 $ .40
=========== ===========
(The accompanying notes to financial statements are an integral part of these
statements of income.)
2
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
- -------------------------------------------------------------------------------
(MILLIONS) 1996 1995
- -------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Income from continuing operations............................. $ 156 $ 128
Adjustments to reconcile income from continuing operations to
cash provided (used) by continuing operations--
Depreciation, depletion and amortization..................... 140 103
Equity in net (income) loss of affiliated companies, net of
dividends................................................... (6) (16)
Deferred income taxes........................................ (34) 7
Gain on sale of businesses and assets, net................... (40) (14)
Changes in components of working capital--
(Increase) decrease in receivables.......................... (557) 5
(Increase) decrease in inventories.......................... (68) (156)
(Increase) decrease in prepayments and other current
assets..................................................... (6) 4
Increase (decrease) in payables............................. (61) (75)
Increase (decrease) in taxes accrued........................ (325) 16
Increase (decrease) in interest accrued..................... 10 (14)
Increase (decrease) in natural gas pipeline revenue
reservation................................................ 17 (177)
Increase (decrease) in other current liabilities............ (78) (29)
(Increase) decrease in long-term notes and receivables....... 70 114
Take-or-pay (refunds to customers) recoupments, net.......... 1 14
Other........................................................ (8) 15
------ ------
Cash provided (used) by continuing operations............... (789) (75)
Cash provided (used) by discontinued operations............. 1 62
------ ------
Net Cash Provided (Used) by Operating Activities............... (788) (13)
------ ------
Cash Flows from Investing Activities:
Net proceeds (expenditures) related to the sale of
discontinued operations....................................... 780 701
Net proceeds from sale of businesses and assets............... 246 33
Expenditures for plant, property and equipment--
Continuing operations........................................ (193) (118)
Discontinued operations...................................... -- (4)
Acquisitions of businesses.................................... (14) (3)
Investments and other......................................... (14) 7
------ ------
Net Cash Provided (Used) by Investing Activities............... 805 616
------ ------
Cash Flows from Financing Activities:
Issuance of common, treasury and SECT shares.................. 18 20
Purchase of common stock...................................... (61) (300)
Redemption of preferred stock................................. (20) (20)
Retirement of long-term debt.................................. (2) (49)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt.................................. 13 (19)
Dividends (common and preferred).............................. (81) (76)
------ ------
Net Cash Provided (Used) by Financing Activities............... (133) (444)
------ ------
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments............................................... (1) 5
------ ------
Increase (Decrease) in Cash and Temporary Cash Investments..... (117) 164
Cash and Temporary Cash Investments, January 1................. 354 405
------ ------
Cash and Temporary Cash Investments, March 31 (Note)........... $ 237 $ 569
====== ======
Cash Paid During the Period for:
Interest...................................................... $ 96 $ 119
Income taxes (net of refunds)................................. $ 425 $ 56
- --------
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
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31,
(MILLIONS) 1996 1995 1995
- -------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and temporary cash investments.......... $ 237 $ 354 $ 569
Receivables--
Customer notes and accounts (net).......... 1,509 921 1,293
Affiliated companies....................... 54 112 62
Gas transportation and exchange............ 115 64 221
Income taxes............................... 17 172 93
Other...................................... 326 514 252
Inventories--
Finished goods............................. 435 396 268
Work in process............................ 101 102 90
Long-term contracts in progress, less pro-
gress billings............................ 299 264 207
Raw materials.............................. 256 253 226
Materials and supplies..................... 161 166 142
Deferred income taxes........................ 5 -- 39
Prepayments and other........................ 296 264 269
------- ------- -------
3,811 3,582 3,731
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies........... 282 620 937
Long-term receivables--
Notes and other (net)...................... 337 435 702
Affiliated companies....................... -- -- 271
Investment in subsidiaries in excess of fair
value of net assets at date of acquisition,
less amortization........................... 600 642 311
Deferred income taxes........................ 61 52 55
Other........................................ 1,825 1,801 1,362
------- ------- -------
3,105 3,550 3,638
------- ------- -------
Plant, Property and Equipment, at cost........ 12,144 11,962 10,309
Less--Reserves for depreciation, depletion
and amortization............................ 5,748 5,643 5,458
------- ------- -------
6,396 6,319 4,851
------- ------- -------
$13,312 $13,451 $12,220
======= ======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt (including current
maturities on long-term debt)............... $ 1,195 $ 908 $ 484
Payables--
Trade...................................... 1,010 1,102 782
Affiliated companies....................... 2 2 39
Gas transportation and exchange............ 77 28 160
Taxes accrued................................ 158 572 102
Deferred income taxes........................ -- 13 --
Interest accrued............................. 135 103 146
Natural gas pipeline revenue reservation..... 45 27 5
Other........................................ 851 1,081 1,050
------- ------- -------
3,473 3,836 2,768
------- ------- -------
Long-term Debt................................ 3,482 3,751 3,559
------- ------- -------
Deferred Income Taxes......................... 897 962 1,309
------- ------- -------
Postretirement Benefits....................... 623 616 608
------- ------- -------
Deferred Credits and Other Liabilities........ 874 688 602
------- ------- -------
Commitments and Contingencies
Minority Interest............................. 320 320 314
------- ------- -------
Preferred Stock with Mandatory Redemption
Provisions................................... 111 130 128
------- ------- -------
Shareowners' Equity:
Common stock................................. 957 957 957
Stock Employee Compensation Trust (common
stock held in trust)........................ (205) (215) (295)
Premium on common stock and other capital
surplus..................................... 3,618 3,602 3,584
Cumulative translation adjustments........... 18 26 (39)
Retained earnings (accumulated deficit)...... (55) (469) (829)
------- ------- -------
4,333 3,901 3,378
Less--Shares held as treasury stock, at
cost........................................ 801 753 446
------- ------- -------
3,532 3,148 2,932
------- ------- -------
$13,312 $13,451 $12,220
======= ======= =======
(The accompanying notes to financial statements are an integral part of these
balance sheets.)
4
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE AMOUNTS) 1996 1995
- --------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------ ----------- ------
Common Stock:
Balance January 1......................... 191,351,615 $ 957 191,335,193 $ 957
Issued pursuant to benefit plans........ 3,317 -- 1,476 --
Other................................... -- -- 1,536 --
----------- ------ ----------- ------
Balance March 31.......................... 191,354,932 957 191,338,205 957
=========== ------ =========== ------
Stock Employee Compensation Trust (SECT):
Balance January 1......................... (215) (298)
Shares issued........................... 34 31
Adjustment to market value.............. (24) (28)
------ ------
Balance March 31.......................... (205) (295)
------ ------
Premium on Common Stock and Other Capital
Surplus:
Balance January 1......................... 3,602 3,553
Dividends on shares held by SECT........ 2 3
Adjustment of SECT to market value...... 24 28
Other................................... (10) --
------ ------
Balance March 31.......................... 3,618 3,584
------ ------
Cumulative Translation Adjustments:
Balance January 1......................... 26 (237)
Translation of foreign currency
statements............................. (12) 68
Sale of investment in foreign
subsidiaries........................... -- 139
Hedges of net investment in foreign
subsidiaries (net of income taxes)..... 4 (9)
------ ------
Balance March 31.......................... 18 (39)
------ ------
Retained Earnings (Accumulated Deficit):
Balance January 1......................... (469) (905)
Net income.............................. 495 153
Dividends--
Preferred stock....................... (2) (2)
Common stock.......................... (78) (74)
Accretion of excess of redemption value
of preferred stock over fair value at
date of issue.......................... (1) (1)
------ ------
Balance March 31.......................... (55) (829)
------ ------
Less--Common Stock Held as Treasury Stock,
at Cost:
Balance January 1......................... 16,422,619 753 3,617,510 170
Shares acquired......................... 996,500 51 6,252,519 276
Shares issued pursuant to benefit and
dividend reinvestment plans............ (60,674) (3) (11,686) --
----------- ------ ----------- ------
Balance March 31.......................... 17,358,445 801 9,858,343 446
=========== ------ =========== ------
Total............................... $3,532 $2,932
====== ======
(The accompanying notes to financial statements are an integral part of these
statements of changes in shareowners' equity.)
5
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CHANGES IN PREFERRED STOCK
WITH MANDATORY REDEMPTION PROVISIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE AMOUNTS) 1996 1995
- -------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------
Preferred Stock:
Balance January 1........................ 1,390,993 $130 1,586,764 $147
Shares redeemed........................ (195,751) (20) (195,761) (20)
Accretion of excess of redemption value
over fair value at date of issue...... -- 1 -- 1
--------- ---- --------- ----
Balance March 31......................... 1,195,242 $111 1,391,003 $128
========= ==== ========= ====
(The accompanying notes to financial statements are an integral part of these
statements of changes in preferred stock with mandatory redemption provisions.)
6
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) In the opinion of Tenneco Inc. (hereinafter referred to as the
"Company"), the accompanying unaudited financial statements of Tenneco Inc.
and consolidated subsidiaries (hereinafter referred to as "Tenneco") contain
all adjustments necessary to present fairly the financial position as of March
31, 1996, and the results of operations; changes in shareowners' equity;
changes in preferred stock with mandatory redemption provisions; and cash
flows for the periods indicated. The financial statements of Tenneco include
all majority-owned subsidiaries including wholly-owned finance subsidiaries.
Investments in 20% to 50% owned companies where Tenneco 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) Pursuant to Order 636 issued by the Federal Energy Regulatory Commission
("FERC") on April 8, 1992, Tennessee Gas Pipeline Company ("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 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 gas supply realignment ("GSR") costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" cost of Tennessee's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
Tennessee's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of
Tennessee to file for the recovery of losses upon disposition of these assets.
Tennessee has filed for appellate review of the FERC actions and 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'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.
7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. The refunds had no material effect on Tenneco's
reported net income. 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. The FERC has committed to
issuing a final order by December 31, 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 seeks $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. Neither ICA nor TransTexas were
original parties to that contract. However, they contend that any stranger
acquiring a fractional interest in the original committed reserves thereby
obtains a right to add to the contract unlimited volumes of gas production
from locations in South Texas. Tennessee filed a motion for partial summary
judgment, asserting that the Texas statutes of frauds precluded the plaintiffs
from adding new production or acreage to the contract. On May 4, 1995, the
trial court granted Tennessee's motion for partial summary judgment; the
plaintiffs have filed a notice of appeal and oral arguments were conducted on
March 28, 1996. ICA and TransTexas filed a motion for partial summary judgment
on a separate issue involving the term "committed reserves" and whether
Tennessee has a contractual obligation to purchase gas produced from a lease
not described in the gas contract. On November 8, 1995, the trial court
granted ICA's and TransTexas' motion in part. That order, which would be
finalized upon conclusion of the trial, also held that ICA's and TransTexas'
rights are subject to certain limitations of the Texas Business and Commerce
Code. In addition to these defenses, which are to be resolved at trial,
Tennessee has other defenses which it has asserted and intends to pursue.
Tennessee filed a Motion to Clarify the November 8, 1995 order together with a
new motion for partial summary judgment concerning the committed reserve
issue. On February 22, 1996, the trial court clarified its November 8, 1995
order, but denied Tennessee's new motion for partial summary judgment. The
November 8, 1995 and February 22, 1996 rulings do not affect the trial court's
previous May 4, 1995 order granting summary judgment to Tennessee.
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. Tennessee will file a motion for rehearing with the Texas Supreme
Court in June 1996. The Supreme Court's ruling explicitly preserves
Tennessee's defenses based on bad faith conduct of the producers. In addition,
nothing in the Supreme Court's decision affects Tennessee's ability to seek
recovery of its above-market costs of
8
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
purchasing gas under the contract from its customers as gas supply
restructuring costs in proceedings currently pending before the Federal Energy
Regulatory Commission. 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 March 31, 1996, Tennessee has deferred GSR costs yet to be recovered
from its customers of approximately $455 million, net of $342 million
previously recovered from its customers, subject to refund. Phase I of the
proceeding before a FERC ALJ on the eligibility of the costs to be recovered
has been completed. The ALJ's decision of this Phase is expected in 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 Order 636
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 and customer statements acknowledging the desirability of such
settlements.
Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tenneco is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
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
proposed to resolve the rates subject to the 1995 Rate Case, including
structural rate design and increased revenue requirements, and Tennessee is
reserving revenues it believes adequate to cover 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. Tenneco Inc. and its subsidiaries are parties to numerous other
legal proceedings arising from their operations. Tenneco Inc. believes that
the outcome of these other proceedings, individually and in the aggregate,
will have no material effect on the financial position or results of
operations of Tenneco Inc. and its consolidated subsidiaries.
(4) 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.
Tenneco 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 March
31, 1996, Tenneco has charged approximately $152 million against the
environmental reserve, excluding recoveries related to Tennessee's
environmental settlement as discussed below. Of the remaining reserve, $46
million has been recorded on the balance sheet under "Payables-trade" and $114
million under "Deferred credits and other liabilities."
9
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, Tenneco continues to believe
that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, Tennessee in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that addresses the recovery of environmental costs currently
being recovered in its rates and also establishes a mechanism for recovering a
substantial portion of the environmental costs that will be expended in the
future. In November 1995, the FERC issued an order approving the Environmental
Stipulation. Although one shipper filed for rehearing, the FERC denied
rehearing of its order on February 20, 1996. This shipper filed a Petition for
Review on April 22, 1996 in the D.C. Circuit Court of Appeals; Tennessee
believes the FERC Order approving the Environmental Stipulation will be upheld
on appeal. The effects of the Environmental Stipulation, which was effective
as of July 1, 1995, have been recorded with no material effect on Tenneco's
financial position or results of operations. As of March 31, 1996, the balance
of the regulatory asset is $68 million.
Tenneco has completed settlements with and has received payments from the
majority of its liability insurance policy carriers for remediation costs and
related claims. Tenneco believes that the likelihood of recovery of a portion
of 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.
Tenneco 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. Tenneco 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. Net proceeds of approximately $788 million were received, resulting in
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) In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 which establishes new accounting
standards for the impairment of long-lived assets and for long-lived assets to
be disposed of. Tenneco adopted the new standard in the first quarter of 1996
with no material effect on Tenneco's consolidated financial position or
results of operations.
(7) On March 21, 1996, the Company announced that it intends to spin off
Newport News Shipbuilding and Dry Dock Company to its shareholders in a tax-
free transaction, and is developing strategic options to separate Tenneco
Energy from its packaging and automotive parts divisions and to maximize
shareowner value through a tax-free spinoff, a sale, strategic alliance or
other action. The development of these options related to Tenneco Energy is
expected to be completed during the second quarter of 1996. The spinoff of
Newport News Shipbuilding and Dry Dock Company is targeted to be completed
late in 1996, but remains subject to a number of conditions including the
receipt of a favorable ruling from the Internal Revenue Service on the tax-
free nature of the proposed transaction and authorization by Tenneco's board
of directors.
(The above notes are an integral part of the foregoing financial statements.)
10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1996 STRATEGIC ACTIONS
On March 21, 1996, Tenneco announced that the board of directors approved
steps to focus Tenneco on its packaging and automotive parts businesses
including:
.A tax-free spinoff of Newport News Shipbuilding to Tenneco's shareowners,
and
.The development of strategic options to separate Tenneco Energy from the
packaging and automotive parts divisions through a tax-free spinoff, a
sale, strategic alliance or other action. The development of these options
is expected to be completed during the second quarter of 1996.
Following a spinoff of Newport News Shipbuilding and should a separation of
Tenneco Energy be effected, 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.
The spinoff of Newport News Shipbuilding from Tenneco is targeted to be
completed late in 1996, but remains subject to a number of conditions
including the receipt of a favorable ruling from the Internal Revenue Service
on the tax-free nature of the proposed transaction and authorization by
Tenneco's board of directors.
In the first quarter of 1996, Tenneco continued its strategy to redeploy
capital to faster-growing, more profitable and less cyclical business
opportunities. One of the largest sales in this asset redeployment program was
completed in March with the sale of Tenneco's remaining 21 percent ownership
of Case Corporation. The sale resulted in an after-tax gain of $340 million
and generated net proceeds of approximately $788 million.
Also during the first quarter of 1996, Tenneco repurchased $42 million of
common stock under its repurchase program. This program is designed to offset
the growth in common shares resulting from shares issued pursuant to employee
benefit plans. Since December 1994, Tenneco repurchased a total of 15.1
million common shares at a cost of $688 million.
THREE MONTHS RESULTS
Tenneco's income from continuing operations for the first quarter of 1996 of
$156 million improved by 22 percent compared with $128 million in the first
quarter of 1995. Tenneco Energy and Tenneco Automotive, in addition to the
deferred gain on the sale of an investment, contributed to this improvement in
income. Partially offsetting these improvements was lower operating income at
Tenneco Packaging and Newport News Shipbuilding, all of which are discussed
below.
Earnings per share from continuing operations improved by 27 percent to $.90
per average common share in the 1996 first quarter from $.71 in the prior year
first quarter. Net income to common stock in the first quarter of 1996 was
$492 million or $2.89 per share compared with net income to common stock of
$150 million or $.84 per share in the 1995 first quarter. The first quarter
1996 net income to common stock included income from discontinued operations
of $339 million, or $1.99 per average common share. The 1995 first quarter net
income to common stock included income from discontinued operations of $25
million, or 13 cents per average common share. Average common shares
outstanding during the 1996 first quarter were 170 million, a four percent
decrease from the 1995 first quarter primarily resulting from Tenneco's share
repurchase programs.
11
NET SALES AND OPERATING REVENUES
FIRST QUARTER
-------------
1996 1995
------ ------
(MILLIONS)
Automotive................................................. $ 683 $ 602
Energy..................................................... 744 505
Packaging.................................................. 859 636
Shipbuilding............................................... 438 421
Other...................................................... 1 (1)
------ ------
$2,725 $2,163
====== ======
Tenneco's first quarter 1996 revenues increased $562 million or 26 percent,
and have benefited from strong market conditions in the gas industry along
with revenues from acquisitions made in late 1994 and 1995. The results of
each business are discussed in detail below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
FIRST QUARTER
-------------
1996 1995
------ ------
(MILLIONS)
Automotive................................................. $ 59 $ 56
Energy..................................................... 98 80
Packaging.................................................. 106 116
Shipbuilding............................................... 41 44
Other...................................................... 15 (5)
------ ------
$ 319 $ 291
====== ======
Tenneco's operating income for the first quarter of 1996 increased by $28
million compared with the 1995 period. Tenneco Energy benefited from favorable
market conditions in the gas industry and Tenneco Automotive benefited from
improved market conditions in the exhaust aftermarket. Also, Tenneco
recognized a deferred gain on the sale of an investment in the 1996 first
quarter that was in excess of amounts recorded in the 1995 period. These
increases were offset by lower operating income at Tenneco Packaging due to
lower paperboard prices and at Newport News Shipbuilding due in part to the
settlement of a dispute on a cruise ship repair contract and higher material
costs related to commercial product tankers. The results of each business are
discussed in detail below.
TENNECO AUTOMOTIVE
FIRST QUARTER
-------------
1996 1995
------ ------
(MILLIONS)
Revenues.................................................... $ 683 $ 602
Operating income............................................ 59 56
Revenues from Tenneco Automotive's original equipment business increased
during the first quarter of 1996 by $55 million to $345 million. North
American and European original equipment volumes were up significantly in the
first quarter of 1996 driven by a record number of new product launches and an
excellent market mix. Over 60 percent of Tenneco Automotive's original
equipment sales are for use on light trucks, minivans and sport utility
vehicles.
Operating income in the original equipment business for the first quarter of
1996 decreased $3 million to $13 million compared with last year's first
quarter. The operating income change in 1996 is due primarily to a
12
high level of costs related to a new process, hydroforming. Hydroforming is a
liquid, high-pressure process for bending and shaping metal parts not
available with traditional manufacturing technology. Reductions in shipments
related to the labor strike at General Motors also reduced operating income.
Revenues from aftermarket sales increased $26 million to $338 million
compared with the 1995 first quarter. North American aftermarket revenues rose
9 percent over last year, driven by a significant number of major new
customers and strong marketing programs.
Operating income in the aftermarket business was $46 million for the 1996
first quarter compared with $40 million for the prior year quarter. The
positive impact of higher sales volumes in North America and Europe, and
continued strong marketing programs contributed to the increase in operating
income.
TENNECO ENERGY
FIRST
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
Revenues...................................................... $ 744 $ 505
Operating income.............................................. 98 80
Tenneco Energy achieved first quarter 1996 operating income of $98 million,
a 23 percent increase from the $80 million posted in the 1995 first quarter.
In addition, revenues rose 47 percent, to $744 million from $505 million.
Revenues from the non-regulated business increased 75 percent to $518
million, the result of higher gas prices and a 17 percent increase in gas
volumes. Regulated revenues increased to $226 million, or eight percent, due
to a new pipeline rate structure and a 12 percent increase in volumes.
Operating income from the non-regulated business increased to $18 million in
the 1996 first quarter from $6 million which included Venture's natural gas
producing properties, the South Australia pipeline, and marketing and
intrastate activities. The Ventures group increased production 70 percent from
the year-ago level and contributed $5 million in operating income.
Operating income from regulated pipelines in the U.S. rose $6 million to $80
million. The increase was achieved despite the sale last December of Energy's
50 percent interest in the Kern River pipeline, which contributed $8 million
to operating income in the year-ago quarter. The benefits derived from the
Tennessee Gas Pipeline Company ("Tennessee") rate case implementation
contributed to the improvement.
On April 18, 1996, the Texas Supreme Court issued a decision adverse to
Tennessee in a proceeding involving a gas supply contract containing a "take-
or-pay" provision and above-market pricing terms. The decision reversed an
earlier opinion of the Texas Supreme Court which held that the contract in
question was an "output" contract under the Texas Business and Commerce Code
and therefore subject to the requirement that any increase in production under
the contract must be made in good faith and in reasonable proportion to
historical levels. Tennessee intends to ask the court to again rehear the
issue. The Supreme Court's ruling explicitly preserves Tennessee's defenses
based on bad faith conduct of the producers. In addition, 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
gas supply restructuring costs in proceedings currently pending before the
Federal Energy Regulatory Commission. Reference is made to Note 2 in the
"Notes to Financial Statements" for additional information concerning these
gas purchase agreements.
13
TENNECO PACKAGING
FIRST
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
Revenues...................................................... $ 859 $ 636
Operating income.............................................. 106 116
Tenneco Packaging had a strong quarter despite an average decline of 10
percent in linerboard prices from the year-ago quarter. The results were
driven by strong performance from its plastics business. The recently acquired
plastics business contributed $31 million in operating income on revenues of
$230 million in the 1996 first quarter. In the first quarter of 1995, when not
part of Tenneco, this recently acquired plastics business earned $15 million
from operations.
In Tenneco Packaging's paperboard business, revenues were down $14 million
to $461 million compared with the 1995 first quarter. Operating income in the
paperboard business declined $30 million to $63 million compared with the 1995
first quarter, excluding the 1995 first quarter $14 million pre-tax gain on
the sale of a North Carolina mill. Earnings and sales were reduced by lower
volumes and price realizations in both linerboard and corrugated medium.
Revenues in Tenneco Packaging's specialty packaging business increased $237
million to $398 million compared with the 1995 first quarter, primarily as a
result of the recently acquired plastics business.
The specialty packaging business earned $43 million in operating income for
the 1996 first quarter, a $34 million increase compared with the 1995 first
quarter results. The strong results of the recently acquired plastics business
generated $31 million of this improvement. The plastics and molded fiber
businesses continued to improve but these results were partially offset by
weaker aluminum operations.
A $30 million restructuring program to reduce costs in aluminum and molded
fiber operations was announced and accounted for in the fourth quarter of
1995. These actions should result in improved performance in the second half
of this year.
NEWPORT NEWS SHIPBUILDING
FIRST
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
Revenues...................................................... $ 438 $ 421
Operating income.............................................. 41 44
Shipbuilding revenues for the 1996 first quarter increased slightly compared
with the 1995 period due to greater levels of activity on the surface ship
overhaul program, partially offset by lower submarine program revenues.
Construction activity on the Los Angeles-class submarines declined in the 1996
first quarter as this program nears completion.
Operating income for Shipbuilding decreased for the 1996 first quarter due
in part to the settlement of a dispute on a cruise ship repair contract and
higher material costs related to commercial product tankers.
The shipyard's backlog was $4.4 billion at March 31, 1996 substantially all
of which is U.S. Navy-related. This compared with $5.3 billion at March 31,
1995.
The backlog at the end of the 1996 first quarter 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
14
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
Tenneco's other operations reported operating income of $15 million during
the first quarter of 1996 compared with an operating loss of $5 million in the
1995 first quarter. This increase in operating income was due to the
recognition of a $32 million deferred gain on the sale of Tenneco's investment
in Cummins Engine Company stock partially offset by lower interest income
along with higher corporate administrative and general expenses.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense increased from $75 million in the 1995 first quarter to $89
million in the 1996 first quarter. The increase was primarily attributable to
higher debt levels that resulted from the Tenneco Plastics acquisition in
November 1995. Interest capitalized increased from $1 million in the 1995
first quarter to $6 million in the 1996 first quarter due to an increase of
major projects under construction.
INCOME TAXES
Income tax expense for the first quarter of 1996 was $69 million compared
with $83 million for the 1995 first quarter.
DISCONTINUED OPERATIONS
Income from discontinued operations in the first quarter of 1996 of $339
million (net of income tax expense of $83 million) was attributable to the
farm and construction equipment segment.
In March 1996, Tenneco sold its remaining investment in the common stock of
Case Corporation, resulting in net proceeds of approximately $788 million. The
gain on the sale, which was recorded in the 1996 first quarter as
"discontinued operations", was $340 million, net of income tax expense of $83
million.
Loss from the farm and construction equipment operations in the 1996 first
quarter was $1 million. Income from discontinued operations in the 1995 first
quarter of $25 million was also attributable to the farm and construction
equipment operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
FIRST
QUARTER
-----------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ ----- ----
(MILLIONS)
Operating activities....................................... $(788) $(13)
Investing activities....................................... 805 616
Financing activities....................................... (133) (444)
Tenneco's operating results, combined with proceeds from sales of assets and
businesses, including discontinued operations, and short-term borrowings, have
provided funds for acquisitions and capital investments in existing businesses
and to repurchase its common stock. Operating cash flow for the first quarter
of 1996 declined as customer receivables increased $557 million primarily due
to lower sales of customer receivables compared with cash generated in the
1995 first quarter of $5 million. This decrease was due primarily to trade
receivables sold to Asset Securitization Cooperative Corporation, which were
$470 million lower in the first
15
quarter of 1996 compared with the 1995 first quarter. Operating cash flow in
the first quarter of 1996 also declined as a result of higher tax payments
compared with the 1995 first quarter due to the final settlement of years 1987
through 1989 federal tax liabilities. The sale of discontinued operations and
sales of businesses and assets, primarily the 15.2 million shares of Case
common stock and Tenneco's 50 percent interest in Kern River Gas Transmission
Company, generated an additional $1,026 million of cash during the 1996 first
quarter.
Tenneco invested $193 million in capital expenditures in its existing
businesses during the 1996 first quarter. Capital expenditures during the 1996
first quarter included $42 million for Automotive, $44 million for Energy, $64
million for Packaging, $13 million for Shipbuilding and $30 million related to
Tenneco's other operations. Capital expenditures were higher at Automotive,
Packaging and Energy during the 1996 first quarter while Shipbuilding capital
expenditures were approximately the same as the prior year quarter.
During the 1995 first quarter, Tenneco's cash sources included $734 million
in proceeds from the sale of discontinued operations and sales of businesses
and assets (primarily the Albright & Wilson chemicals operations for $700
million). Capital expenditures were $118 million for continuing operations.
CAPITALIZATION
MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
--------- ------------ ---------
(MILLIONS)
Short-term debt and
current maturities..... $1,195 $ 908 $ 484
Long-term debt.......... 3,482 3,751 3,559
Minority interest....... 320 320 314
Preferred stock......... 111 130 128
Common shareowners'
equity................. 3,532 3,148 2,932
------- ------ ------
Total capitalization.... $8,640 $8,257 $7,417
======= ====== ======
The primary reason for the net increase in debt outstanding at March 31,
1996 compared with March 31, 1995 is the debt issued for the acquisition of
the plastics business from Mobil. Tenneco initially funded this acquisition
primarily with short-term debt. In December 1995, Tenneco issued $600 million
of long-term debt to refinance part of the purchase price.
Tenneco's ratio of debt to total capitalization at March 31, 1996 was 54.1
percent compared with 56.4 percent at December 31, 1995. Including the market
value of the SECT shares, the ratio of total debt to total capitalization at
March 31, 1996 was 52.9 percent compared with 55.0 percent at December 31,
1995.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(1) Environmental Proceedings.
Tennessee is a party in proceedings involving federal and state authorities
regarding the past use by Tennessee of a lubricant containing polychlorinated
biphenyls ("PCBs") in its starting air systems. Tennessee has executed a
consent order with the EPA governing the remediation of certain of its
compressor stations and is working with the Pennsylvania and New York
environmental agencies to specify the remediation requirements at the
Pennsylvania and New York stations. Remediation activities in Pennsylvania are
essentially complete; in addition, pursuant to the Consent Order dated August
1, 1995, between the Company and the Pennsylvania Department of Environmental
Protection, the Company funded an environmentally beneficial project for
$450,000 in April 1996. Tenneco believes that the ultimate resolution of this
matter will not have a material adverse effect on the financial position or
results of operations of Tenneco Inc. 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 Tennessee discharged pollutants into the waters of the state
without a permit, and disposed of PCBs without a permit. The agency sought an
injunction against future discharges, sought an order to remediate or remove
PCBs and sought a civil penalty. Tennessee has entered into agreed orders with
the agency to resolve many of the issues raised in the original allegations,
has received water discharge permits for its Kentucky stations from the agency
and continues to work to resolve the remaining issues. Counsel for Tenneco are
unable to express an opinion as to its ultimate outcome. Tenneco believes that
the resolution of this issue will not have a material adverse effect on its
consolidated financial position or results of operations.
A subsidiary of Tennessee owns a 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois"), which owns an interstate
natural gas pipeline from the Canadian border through the states of New York
and Connecticut to Long Island. The operator of the pipeline is Iroquois
Pipeline Operating Company (the "Operator"), which, as of May 1996, is a
subsidiary of TransCanada Pipelines, Ltd., an affiliate of TransCanada
Iroquois, Ltd., which is also a partner in Iroquois. Tennessee has a contract
to provide gas dispatching as well as post-construction field operation and
maintenance services for the Operator of Iroquois, but Tennessee is not the
Operator and is not an affiliate of the Operator.
Iroquois has been informed of investigations and allegations regarding
alleged environmental violations which occurred during the construction of the
pipeline. Communications have been received from U.S. Attorneys' Offices, the
Enforcement Staff of the FERC's Office of the General Counsel, the Army Corps
of Engineers, the Public Service Commission of the State of New York, the EPA
and the Federal Bureau of Investigation. Iroquois is in the process of
negotiating a settlement with the Government regarding certain environmental
and safety allegations asserted by the Government. Tenneco anticipates that a
global settlement will be reached in the second quarter of 1996 that will
resolve all criminal, civil and administrative enforcement actions
contemplated by federal and state authorities respecting the pending
investigations.
As a general partner, Tennessee's subsidiary may be jointly and severally
liable with the other partners for the liabilities of Iroquois. The foregoing
proceedings and investigations have not affected pipeline operations. Based
upon information available to Tennessee, Tennessee believes that neither it
nor any of its subsidiaries is a target of the criminal investigation
described above. Further, while a global resolution of these inquiries could
have a material adverse effect on the financial condition of Iroquois, Tenneco
believes that the ultimate resolution of these matters will not have a
material adverse effect on the financial position or results of operations of
Tenneco Inc. 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
17
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 is being negotiated by Tenneco Packaging and the Department of Justice.
Tenneco believes that the resolution of this matter will not have a material
adverse effect on the financial position or results of operations of Tenneco
Inc. and its consolidated subsidiaries.
(2) Potential Superfund Liability.
At March 31, 1996, Tenneco has been designated as a potentially responsible
party in 57 "Superfund" sites. With respect to its pro rata share of the
remediation costs of certain sites, Tenneco is fully indemnified by third
parties. With respect to certain other sites, Tenneco has sought to resolve
its liability through payments to the other potentially responsible parties.
For the remaining sites, Tenneco has estimated its share of the remediation
costs to be between $10 million and $65 million or 0.4% to 2.4% 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, Tenneco's estimate of its share of remediation costs
could change. Moreover, liability under the Comprehensive Environmental
Response, Compensation and Liability Act is joint and several, meaning that
Tenneco 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
Tenneco's determination of its estimated liability. Tenneco believes that the
costs associated with its current status as a potentially responsible party in
the Superfund sites described above will not be material to its consolidated
financial position or results of operations.
(3) Other Proceedings.
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 seeks $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. Neither ICA nor
TransTexas were original parties to that contract. However, they contend that
any stranger acquiring a fractional interest in the original committed
reserves thereby obtains a right to add to the contract unlimited volumes of
gas production from locations in South Texas. Tennessee filed a motion for
partial summary judgment, asserting that the Texas statutes of frauds
precluded the plaintiffs from adding new production or acreage to the
contract. On May 4, 1995, the trial court granted Tennessee's motion for
partial summary judgment; the plaintiffs have filed a notice of appeal and
oral arguments were conducted on March 28, 1996. ICA and TransTexas filed a
motion for partial summary judgment on a separate issue involving the term
"committed reserves" and whether Tennessee has a contractual obligation to
purchase gas produced from a lease not described in the gas contract. On
November 8, 1995, the trial court granted ICA's and TransTexas' motion in
part. That order, which would be finalized upon conclusion of the trial, also
held that ICA's and TransTexas' rights are subject to certain limitations of
the Texas Business and Commerce Code. In addition to these defenses, which are
to be resolved at trial, Tennessee has other defenses which it has asserted
and intends to pursue. Tennessee filed a Motion to Clarify the November 8,
1995 order together with a new motion for partial summary judgment concerning
the committed reserve issue. On February 22, 1996, the trial court clarified
its November 8, 1995 order, but denied Tennessee's new motion for partial
summary judgment. The November 8, 1995 and February 22, 1996 rulings do not
affect the trial court's previous May 4, 1995 order granting partial summary
judgment to Tennessee.
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
18
Tennessee. Tennessee will file a motion for rehearing with the Texas Supreme
Court in June 1996. 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. Tenneco is unable to predict the
ultimate outcome of the litigation associated with its contract reformation
efforts or the impact which it may have upon its consolidated financial
position or results of operations, however, Tennessee has accrued amounts
which it believes are appropriate to cover the resolution of these matters.
Tenneco Inc. and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. Tenneco Inc. believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on Tenneco's consolidated financial position or
results of operations.
ITEM 5. OTHER INFORMATION.
Recent Developments.
On March 21, 1996, the Company announced that it intends to spin off Newport
News Shipbuilding and Dry Dock Company to its shareholders in a tax-free
transaction, and is developing strategic options to separate Tenneco Energy
from its packaging and automotive parts divisions and to maximize shareowner
value through a tax-free spinoff, a sale, strategic alliance or other action.
The development of these options related to Tenneco Energy is expected to be
completed during the second quarter of 1996. The spinoff of Newport News
Shipbuilding and Dry Dock Company is expected to be completed late in 1996,
subject to receipt of a favorable ruling from the Internal Revenue Service on
the tax-free nature of the proposed transaction.
On April 18, 1996, the Texas Supreme Court issued a decision adverse to
Tennessee in a proceeding involving a gas supply contract containing a "take-
or-pay" provision and above-market pricing terms. The decision reversed an
earlier opinion of the Texas Supreme Court which held that the contract in
question was an "output" contract under the Texas Business and Commerce Code
and therefore subject to the requirement that any increase in production under
the contract must be made in good faith and in reasonable proportion to
historical levels. Tennessee intends to ask the court to again rehear the
issue. The Supreme Court's ruling explicitly preserves Tennessee's defenses
based on bad faith conduct of the producers. In addition, 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
gas supply restructuring costs in proceedings currently pending before the
Federal Energy Regulatory Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(1) Exhibits.
3--Certificate of Incorporation as amended and supplemented as of
February 27, 1996.
11--Computation of Earnings Per Share of Common Stock.
12--Computation of Ratio of Earnings to Fixed Charges.
27.1--Financial Data Schedule.
27.2--Financial Data Schedule for December 31, 1995 (Restated).
27.3--Financial Data Schedule for September 30, 1995 (Restated).
27.4--Financial Data Schedule for June 30, 1995 (Restated).
27.5--Financial Data Schedule for March 31, 1995 (Restated).
27.6--Financial Data Schedule for December 31, 1994 (Restated).
27.7--Financial Data Schedule for September 30, 1994 (Restated).
(2) Reports on Form 8-K. Tenneco Inc. filed two Current Reports on Form 8-K
during the quarter ended March 31, 1996: on February 2, 1996 with respect to a
(i) letter to shareowners dated February 2, 1996 from Dana G. Mead, Chairman
and Chief Executive Officer, regarding Tenneco's businesses, and (ii) press
release issued January 30, 1996 regarding, among other things, earnings of
Tenneco Inc. for the year ended December 31, 1995; and on March 21, 1996 with
respect to a (i) letter to shareowners dated March 21, 1996 from Dana G. Mead,
Chairman and Chief Executive Officer, regarding Tenneco's businesses, and (ii)
press release issued March 21, 1996 regarding, among other things, a spinoff
of Newport News Shipbuilding and Dry Dock Company and other strategic options.
19
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.
TENNECO INC.
Robert T. Blakely
By __________________________________
Robert T. Blakely
Senior Vice President and
Chief Financial Officer
Date: May 15, 1996
20
EXHIBIT 11
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(UNAUDITED)
(MILLIONS EXCEPT SHARE
AMOUNTS)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1996 1995
------------ ------------
COMPUTATION FOR STATEMENTS OF INCOME
Primary Earnings Per Share (average shares
outstanding):
Income from continuing operations.......... $ 156 $ 128
Income from discontinued operations, net of
income tax................................ 339 25
------------ ------------
Net income................................. 495 153
Preferred stock dividends.................. 3 3
------------ ------------
Net income to common stock................. $ 492 $ 150
============ ============
Average shares of common stock
outstanding(a)............................ 170,440,074 177,792,872
============ ============
Earnings per average share of common stock:
Continuing operations.................... $ .90 $ .71
Discontinued operations.................. 1.99 .13
------------ ------------
$ 2.89 $ .84
============ ============
ADDITIONAL COMPUTATIONS(B)
Net income to common stock, per above....... $ 492 $ 150
============ ============
Primary Earnings Per Share (including common
stock equivalents):
Average shares of common stock
outstanding(a)............................ 170,440,074 177,792,872
Incremental common shares applicable to
common stock options based on the common
stock daily average market price during
the period................................ 535,013 49,907
Incremental common shares applicable to
performance units based upon the
attainment of specified goals............. 88,125 27,625
------------ ------------
Average common shares, as adjusted......... 171,063,212 177,870,404
============ ============
Earnings per average share of common stock
(including common stock equivalents):
Continuing operations.................... $ .90 $ .71
Discontinued operations.................. 1.98 .13
------------ ------------
$ 2.88 $ .84
============ ============
Fully Diluted Earnings Per Share:
Average shares of common stock
outstanding(a)............................ 170,440,074 177,792,872
Incremental common shares applicable to
common stock options based on the more
dilutive of the common stock ending or
average market price during the period.... 774,770 64,438
Average common shares issuable assuming
conversion of Tenneco Inc. 10% loan stock. -- 39,329
Incremental common shares applicable to
performance units based upon the
attainment of specified goals............. 88,125 27,625
------------ ------------
Average common shares assuming full
dilution.................................. 171,302,969 177,924,264
============ ============
Fully diluted earnings per average share,
assuming conversion of all applicable
securities:
Continuing operations.................... $ .89 $ .71
Discontinued operations.................. 1.98 .13
------------ ------------
$ 2.87 $ .84
============ ============
- --------
NOTES:(a) In 1992, 12,000,000 shares of common stock were issued to the Stock
Employee Compensation Trust ("SECT"). Shares of common stock issued
to a related trust are not considered to be outstanding in the
computation of average shares of common stock until the shares are
utilized to fund the obligations for which the trust was
established. For the periods ended March 31, 1996 and 1995, the SECT
utilized 717,256 and 737,799 shares, respectively.
(b) These calculations are submitted in accordance with Securities and
Exchange Commission requirements although not required by Accounting
Principles Board Opinion No. 15 because they result in dilution of
less than 3%.
EXHIBIT 12
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE
MONTHS
ENDED
MARCH 31,
----------
1996 1995
---- ----
Income from continuing operations.................................. $156 $128
Add:
Interest......................................................... 108 107
Portion of rentals representative of interest factor............. 15 14
Preferred stock dividend requirements of majority-owned
subsidiaries.................................................... 5 6
Income tax expense and other taxes on income..................... 69 83
Amortization of interest capitalized applicable to nonutility
companies....................................................... 1 1
Undistributed earnings of affiliated companies in which less than
a 50% voting interest is owned.................................. (4) (2)
---- ----
Earnings as defined............................................ $350 $337
==== ====
Interest........................................................... $108 $107
Interest capitalized............................................... 6 1
Portion of rentals representative of interest factor............... 15 14
Preferred stock dividend requirements of majority-owned
subsidiaries on a pretax basis.................................... 7 10
---- ----
Fixed charges as defined....................................... $136 $132
==== ====
Ratio of earnings to fixed charges................................. 2.57 2.55
==== ====
[LOGO OF TENNECO INC. APPEARS HERE]