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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 1-9864
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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: 170,865,721 shares as of June 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................................................ 12
Part II--Other Information
Item 1. Legal Proceedings............................................... 21
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............................................... 22
Item 6. Exhibits and Reports on Form 8-K................................ 23
- --------
* 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE
AMOUNTS) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Revenues:
Net sales and operating
revenues--
Automotive............. $ 780 $ 661 $ 1,463 $ 1,263
Energy................. 622 432 1,366 937
Packaging.............. 916 682 1,775 1,318
Shipbuilding........... 477 424 915 845
Other.................. (3) (1) (2) (2)
----------- ----------- ----------- -----------
2,792 2,198 5,517 4,361
Other income--
Interest income........ 14 27 34 54
Equity in net income of
affiliated companies.. 8 21 18 38
Gain (loss) on sale of
businesses and assets,
net................... 51 (7) 91 7
Other income, net...... 19 12 25 19
----------- ----------- ----------- -----------
2,884 2,251 5,685 4,479
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales (exclusive
of depreciation shown
below).................. 1,606 1,295 3,091 2,544
Cost of gas sold......... 361 221 795 493
Operating expenses....... 121 96 264 199
Selling, general and
administrative.......... 272 195 534 382
Finance charges--Tenneco
Finance................. 17 23 35 46
Depreciation, depletion
and amortization........ 145 107 285 210
----------- ----------- ----------- -----------
2,522 1,937 5,004 3,874
----------- ----------- ----------- -----------
Income Before Interest
Expense, Income Taxes and
Minority Interest......... 362 314 681 605
Interest Expense (net of
interest capitalized)..... 90 77 179 152
----------- ----------- ----------- -----------
Income Before Income Taxes
and Minority Interest..... 272 237 502 453
Income Tax Expense......... 106 102 175 185
----------- ----------- ----------- -----------
Income Before Minority
Interest.................. 166 135 327 268
Minority Interest.......... 5 6 10 11
----------- ----------- ----------- -----------
Income From Continuing
Operations................ 161 129 317 257
Income From Discontinued
Operations, Net of Income
Tax....................... -- 56 339 81
----------- ----------- ----------- -----------
Net Income................. 161 185 656 338
Preferred Stock Dividends.. 2 3 5 6
----------- ----------- ----------- -----------
Net Income to Common Stock. $ 159 $ 182 $ 651 $ 332
=========== =========== =========== ===========
Average Number of Shares of
Common Stock Outstanding.. 170,264,386 173,699,875 170,351,740 175,829,883
=========== =========== =========== ===========
Earnings Per Average Share
of Common Stock:
Continuing operations ... $ .93 $ .72 $ 1.83 $ 1.43
Discontinued operations.. -- .33 1.99 .46
----------- ----------- ----------- -----------
$ .93 $ 1.05 $ 3.82 $ 1.89
=========== =========== =========== ===========
Cash Dividends Per Share of
Common Stock.............. $ .45 $ .40 $ .90 $ .80
=========== =========== =========== ===========
(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)
SIX MONTHS
ENDED
JUNE 30,
- --------------------------------------------------------------------------------
(MILLIONS) 1996 1995
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Income from continuing operations................................ $317 $ 257
Adjustments to reconcile income from continuing operations to
cash provided (used) by continuing operations--
Depreciation, depletion and amortization........................ 285 210
Equity in net (income) loss of affiliated companies, net of
dividends...................................................... -- (12)
Deferred income taxes........................................... (2) 8
Gain on sale of businesses and assets, net...................... (91) (7)
Changes in components of working capital--
(Increase) decrease in receivables............................. (128) 60
(Increase) decrease in inventories............................. 6 (184)
(Increase) decrease in prepayments and other current assets.... (15) (3)
Increase (decrease) in payables................................ 23 (123)
Increase (decrease) in taxes accrued........................... (193) (3)
Increase (decrease) in interest accrued........................ (14) (25)
Increase (decrease) in natural gas pipeline revenue
reservation................................................... 11 (179)
Increase (decrease) in other current liabilities............... (103) (27)
(Increase) decrease in long-term notes and receivables.......... 138 199
Take-or-pay (refunds to customers) recoupments, net............. 2 25
Other........................................................... (207) 32
---- -----
Cash provided (used) by continuing operations.................. 29 228
Cash provided (used) by discontinued operations................ (244) 27
---- -----
Net Cash Provided (Used) by Operating Activities.................. (215) 255
---- -----
Cash Flows from Investing Activities:
Net proceeds (expenditures) related to the sale of discontinued
operations....................................................... 773 690
Net proceeds from sale of businesses and assets.................. 288 46
Expenditures for plant, property and equipment--
Continuing operations........................................... (464) (322)
Discontinued operations......................................... -- (4)
Acquisitions of businesses....................................... (24) (271)
Investments and other............................................ (68) 44
---- -----
Net Cash Provided (Used) by Investing Activities.................. 505 183
---- -----
Cash Flows from Financing Activities:
Issuance of common, treasury and SECT shares..................... 46 39
Purchase of common stock......................................... (122) (450)
Redemption of preferred stock.................................... (20) (20)
Issuance of long-term debt....................................... 2 --
Retirement of long-term debt..................................... (302) (192)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt..................................... 141 28
Dividends (common and preferred)................................. (158) (146)
---- -----
Net Cash Provided (Used) by Financing Activities.................. (413) (741)
---- -----
Effect of Foreign Exchange Rate Changes on Cash and Temporary Cash
Investments....................................................... (2) 5
---- -----
Increase (Decrease) in Cash and Temporary Cash Investments........ (125) (298)
Cash and Temporary Cash Investments, January 1.................... 354 405
---- -----
Cash and Temporary Cash Investments, June 30 (Note)............... $229 $ 107
==== =====
Cash Paid During the Period for:
Interest......................................................... $224 $ 235
Income taxes (net of refunds).................................... $621 $ 203
- --------
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)
JUNE 30, DECEMBER 31, JUNE 30,
(MILLIONS) 1996 1995 1995
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and temporary cash investments............ $ 229 $ 354 $ 107
Receivables--
Customer notes and accounts (net)............ 1,104 921 1,192
Affiliated companies......................... 55 112 60
Gas transportation and exchange.............. 151 64 198
Income taxes................................. 138 172 133
Other........................................ 450 514 304
Inventories--
Finished goods............................... 381 396 312
Work in process.............................. 100 102 90
Long-term contracts in progress, less pro-
gress billings.............................. 282 264 212
Raw materials................................ 249 253 209
Materials and supplies....................... 163 166 153
Deferred income taxes.......................... 44 -- 33
Prepayments and other.......................... 305 264 254
------- ------- -------
3,651 3,582 3,257
------- ------- -------
Investments and Other Assets:
Investment in affiliated companies............. 264 297 369
Long-term notes and other receivables (net).... 251 435 614
Investment in subsidiaries in excess of fair
value of net assets at date of acquisition,
less amortization............................. 608 642 307
Deferred income taxes.......................... 61 52 60
Other.......................................... 1,931 1,801 1,397
------- ------- -------
3,115 3,227 2,747
------- ------- -------
Plant, Property and Equipment, at cost.......... 12,338 11,962 10,760
Less--Reserves for depreciation, depletion and
amortization.................................. 5,842 5,643 5,548
------- ------- -------
6,496 6,319 5,212
------- ------- -------
Net Assets of Discontinued Operations........... -- 323 874
------- ------- -------
$13,262 $13,451 $12,090
======= ======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt (including current maturities
on long-term debt)............................ $ 1,146 $ 908 $ 635
Payables--
Trade........................................ 1,061 1,102 806
Affiliated companies......................... 2 2 20
Gas transportation and exchange.............. 107 28 129
Taxes accrued.................................. 103 572 77
Deferred income taxes.......................... -- 13 --
Interest accrued............................... 99 103 125
Natural gas pipeline revenue reservation....... 59 27 3
Other.......................................... 1,086 1,081 1,060
------- ------- -------
3,663 3,836 2,855
------- ------- -------
Long-term Debt.................................. 3,374 3,751 3,309
------- ------- -------
Deferred Income Taxes........................... 1,004 962 1,308
------- ------- -------
Postretirement Benefits......................... 617 616 606
------- ------- -------
Deferred Credits and Other Liabilities.......... 603 688 657
------- ------- -------
Commitments and Contingencies
Minority Interest............................... 320 320 315
------- ------- -------
Preferred Stock with Mandatory Redemption
Provisions..................................... 112 130 129
------- ------- -------
Shareowners' Equity:
Common stock................................... 957 957 957
Stock Employee Compensation Trust (common
stock held in trust).......................... (58) (215) (272)
Premium on common stock and other capital
surplus....................................... 3,605 3,602 3,587
Cumulative translation adjustments............. 4 26 (50)
Retained earnings (accumulated deficit)........ 26 (469) (718)
------- ------- -------
4,534 3,901 3,504
Less--Shares held as treasury stock, at cost... 965 753 593
------- ------- -------
3,569 3,148 2,911
------- ------- -------
$13,262 $13,451 $12,090
======= ======= =======
(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)
SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------------------------
(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........ 3,986 -- 2,742 --
Other................................... -- -- 1,536 --
----------- ------ ----------- ------
Balance June 30........................... 191,355,601 957 191,339,471 957
=========== ------ =========== ------
Stock Employee Compensation Trust (SECT):
Balance January 1......................... (215) (298)
Shares issued........................... 161 51
Adjustment to market value.............. (4) (25)
------ ------
Balance June 30........................... (58) (272)
------ ------
Premium on Common Stock and Other Capital
Surplus:
Balance January 1......................... 3,602 3,553
Dividends on shares held by SECT........ 3 5
Adjustment of SECT to market value...... 4 25
Other................................... (4) 4
------ ------
Balance June 30........................... 3,605 3,587
------ ------
Cumulative Translation Adjustments:
Balance January 1......................... 26 (237)
Translation of foreign currency
statements............................. (21) 52
Sale of investment in foreign
subsidiaries........................... -- 139
Hedges of net investment in foreign
subsidiaries (net of income taxes)..... (1) (4)
------ ------
Balance June 30........................... 4 (50)
------ ------
Retained Earnings (Accumulated Deficit):
Balance January 1......................... (469) (905)
Net income.............................. 656 338
Dividends--
Preferred stock....................... (3) (4)
Common stock.......................... (156) (145)
Accretion of excess of redemption value
of preferred stock over fair value at
date of issue.......................... (2) (2)
------ ------
Balance June 30........................... 26 (718)
------ ------
Less--Common Stock Held as Treasury Stock,
at Cost:
Balance January 1......................... 16,422,619 753 3,617,510 170
Shares acquired......................... 4,184,368 217 9,400,669 423
Shares issued pursuant to benefit and
dividend reinvestment plans............ (117,107) (5) (11,686) --
----------- ------ ----------- ------
Balance June 30........................... 20,489,880 965 13,006,493 593
=========== ------ =========== ------
Total............................... $3,569 $2,911
====== ======
(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)
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------
(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) (195,771) (20)
Accretion of excess of redemption value
over fair value at date of issue...... -- 2 -- 2
--------- ---- --------- ----
Balance June 30.......................... 1,195,242 $112 1,390,993 $129
========= ==== ========= ====
(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 June
30, 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) 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.
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 required by Order 636. As a result of this
restructuring, Tennessee's gas sales declined while certain obligations to
producers under long-term gas supply contracts continued, causing Tennessee to
incur significant restructuring transition costs. Pursuant to the provisions
of Order 636 allowing for the recovery of transition costs related to the
restructuring, Tennessee has made filings to recover GSR costs resulting from
remaining gas purchase obligations, costs related to its Bastian Bay
facilities, the remaining unrecovered balance of purchased gas ("PGA") costs
and the "stranded" cost of Tennessee's continuing contractual obligation to
pay for capacity on other pipeline systems ("TBO costs").
Tennessee's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of
Tennessee to file for the recovery of losses upon disposition of these assets.
Tennessee has filed for appellate 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
7
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Tennessee is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC subsequently issued
an order requiring Tennessee to refund certain costs from this surcharge and
refunds were made in May 1996. Tennessee is appealing this decision and
believes such appeal will likely be successful.
With regard to Tennessee's GSR costs, Tennessee, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
Tennessee of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge ("ALJ"). The hearing, which concluded in
July 1995, was limited to the issue of whether the settlement agreements are
prudent. The ALJ concluded, in his initial decision issued in December 1995,
that the settlement was imprudent. Tennessee has filed exceptions to this
initial decision and believes that this decision will not impair Tennessee's
recovery of the costs resulting from this contract. On July 17, 1996, the FERC
ordered oral arguments to be heard September 1996.
Also related to Tennessee's GSR costs, on October 14, 1993, Tennessee was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that Tennessee had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading sought $1.5 billion from Tennessee for alleged damages caused by
Tennessee's refusal to purchase gas produced from the TransTexas leases
covering the new production and lands. In June 1996, Tennessee reached a
settlement with ICA and TransTexas for $125 million wherein ICA and TransTexas
agreed to terminate the contract, released Tennessee from liability under the
contract, and indemnified Tennessee against certain future claims, including
royalty owner claims.
Tennessee has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
Tennessee. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the
Court of Appeals favorable to Tennessee in one of these matters and indicated
that it would remand the case to the trial court. On April 18, 1996, however,
the Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
Tennessee. In June 1996, Tennessee filed a motion for rehearing with the Texas
Supreme Court. The Court has not yet acted on that motion. The Supreme Court's
ruling explicitly preserves Tennessee's defenses based on bad faith conduct of
the producers. Nothing in the Supreme Court's decision affects Tennessee's
ability to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, Tennessee has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. Tennessee has accrued amounts which
it believes are appropriate to cover the resolution of the litigation
associated with its contract reformation efforts.
8
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1996, Tennessee 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 Tennessee's
GSR costs. Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery; oral argument on
eligibility issues has been set by a FERC ALJ for late October 1996. Phase II
of the proceeding on the prudency of the costs to be recovered has not yet
been scheduled, but will likely occur sometime after the ALJ's decision in
Phase I is issued. The FERC has generally encouraged pipelines to settle such
issues through negotiations with customers. Although the Order 636 transition
cost recovery mechanism provides for complete recovery by pipelines of
eligible and prudently incurred transition costs, certain customers have
challenged the prudence and eligibility of Tennessee's GSR costs and Tennessee
has engaged in settlement discussions with its customers concerning the amount
of such costs in response to the FERC statements acknowledging the
desirability of such settlements.
Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, 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, which
is currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and Tennessee is reserving revenues it believes 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. The Company believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on Tenneco's financial position or results of
operations.
(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 June 30,
1996, Tenneco has charged approximately $156 million against the environmental
reserve, excluding recoveries related to Tennessee'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."
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
9
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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; 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 June 30, 1996, the balance of the regulatory asset is $61
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) 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 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.
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
10
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
TENNECO INC. 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.
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.
OTHER STRATEGIC ACTIONS
In the second quarter of 1996, Tenneco 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 ownership position in the new venture. This
strategic action resulted in a pre-tax gain of $50 million.
12
In addition, Tenneco 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, manufacture, 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.
Also during the second quarter of 1996, Tenneco repurchased $61 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 16.2
million common shares at a cost of $750 million.
THREE MONTHS RESULTS
Tenneco's income from continuing operations for the 1996 second quarter was
$161 million, an improvement of 25 percent compared with $129 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.
Earnings per share from continuing operations improved by 29 percent to $.93
per average common share in the 1996 second quarter from $.72 in the prior
year quarter. Net income to common stock was $159 million or $.93 per average
share compared with net income to common stock of $182 million or $1.05 per
share in the 1995 second quarter. The 1995 second quarter net income to common
stock included income from discontinued operations of $56 million, or $.33 per
average common share. Average common shares outstanding for the 1996 second
quarter were 170.3 million, a two percent decrease from the prior year quarter
resulting primarily from Tenneco's share repurchase programs. Preferred stock
dividends were $2 million for the 1996 second quarter compared with $3 million
for the year ago period.
NET SALES AND OPERATING REVENUES
SECOND
QUARTER
--------------
1996 1995
------ ------
(MILLIONS)
Automotive................................................ $ 780 $ 661
Energy.................................................... 622 432
Packaging................................................. 916 682
Shipbuilding.............................................. 477 424
Other..................................................... (3) (1)
------ ------
$2,792 $2,198
====== ======
Second quarter 1996 revenues increased $594 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.
13
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
SECOND
QUARTER
--------------
1996 1995
------ ------
(MILLIONS)
Automotive................................................ $ 104 $ 78
Energy.................................................... 87 68
Packaging................................................. 150 128
Shipbuilding.............................................. 40 46
Other..................................................... (19) (6)
------ ------
$ 362 $ 314
====== ======
Tenneco's operating income for the second quarter of 1996 increased by $48
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
SECOND QUARTER
---------------
1996 1995
------- -------
(MILLIONS)
Revenues.................................................. $ 780 $ 661
Operating income.......................................... 104 78
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.
TENNECO ENERGY
SECOND QUARTER
---------------
1996 1995
------- -------
(MILLIONS)
Revenues.................................................. $ 622 $ 432
Operating income.......................................... 87 68
14
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
SECOND
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
Revenues...................................................... $ 916 $ 682
Operating income.............................................. 150 128
Operating income for Tenneco Packaging for the 1996 second quarter was $150
million compared with $128 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 $61 million to $442 million
compared with the 1995 second quarter. Operating income in the paperboard
business declined $77 million to $35 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 $65 million in operating income for the 1996 second quarter,
a $49 million increase compared with the year ago results. Operating margins
increased to 14 percent from 9 percent for the year-ago quarter.
NEWPORT NEWS SHIPBUILDING
SECOND
QUARTER
-----------
1996 1995
----- -----
(MILLIONS)
Revenues...................................................... $ 477 $ 424
Operating income.............................................. 40 46
15
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
Tenneco's other operations reported an operating loss of $19 million for the
1996 second quarter compared with an operating loss of $6 million in the year
ago quarter. This decrease resulted primarily from lower interest income from
the rolloff of the Case retail receivables and lower cash investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense increased from $77 million in the 1995 second quarter to
$90 million in the 1996 second quarter. The increase was primarily
attributable to lower amounts of interest allocated to discontinued operations
in 1996 and higher debt levels that resulted from the funding of the recently
acquired plastics business in November 1995. Interest capitalized increased
from $2 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 $106 million compared
with $102 million for the 1995 second quarter. The effective tax rate for the
second quarter of 1996 was 39 percent compared with 43 percent in the prior
year quarter.
DISCONTINUED OPERATIONS
Income from discontinued operations in the 1995 second quarter of $56
million was attributable to the farm and construction equipment segment.
SIX MONTHS RESULTS
Tenneco's income from continuing operations for the first half of 1996 was
$317 million, an improvement of 23 percent compared with $257 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.
Earnings per share from continuing operations improved by 28 percent to
$1.83 per average common share in the first half of 1996 from $1.43 in the
prior year period. Net income to common stock was $651 million or $3.82 per
average share compared with net income to common stock of $332 million or
$1.89 per share in
16
the first half of 1995. The first half of 1996 net income to common stock
included income from discontinued operations of $339 million, or $1.99 per
average common share, compared with $81 million, or $.46 per share, in the
1995 first half. Preferred stock dividends were $5 million in the 1996 first
half and $6 million in the prior year period. Average common shares
outstanding for the 1996 first half were 170.4 million compared with 175.8
million in the 1995 first half. The decrease was primarily the result of
Tenneco's share repurchase programs partially offset by the issuance of SECT
shares to employee benefit plans.
NET SALES AND OPERATING REVENUES
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
-------- --------
(MILLIONS)
Automotive............................................ $ 1,463 $ 1,263
Energy................................................ 1,366 937
Packaging............................................. 1,775 1,318
Shipbuilding.......................................... 915 845
Other................................................. (2) (2)
-------- --------
$5,517 $ 4,361
======== ========
Net sales and operating revenues for the first six months of 1996 were $5.52
billion, up 27 percent from $4.36 billion reported in the 1995 period 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 $457 million or 35 percent),
Tenneco Automotive (up $200 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)
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
-------- --------
(MILLIONS)
Automotive............................................ $ 163 $ 134
Energy................................................ 185 148
Packaging............................................. 256 244
Shipbuilding.......................................... 81 90
Other................................................. (4) (11)
-------- --------
$681 $605
======== ========
Operating income for the first six months of 1996 was $681 million compared
with $605 million reported for the 1995 period, an improvement of 13 percent.
TENNECO AUTOMOTIVE
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
-------- --------
(MILLIONS)
Revenues.............................................. $ 1,463 $ 1,263
Operating income...................................... 163 134
Tenneco Automotive's revenues increased in both the exhaust and ride control
operations. Revenues for exhaust increased 16 percent to $847 million. North
American and European original equipment revenues were up, driven by a record
number of new product launches, new vehicle production and recent
acquisitions. Exhaust aftermarket volumes also increased primarily due to the
recent Fonos acquisition.
17
Ride control reported increased revenues of $83 million or 16 percent. Ride
control's North American aftermarket revenues increased 13 percent as a result
of new customers and consumer response to aggressive marketing programs. The
European original equipment revenues improved $25 million driven by new vehicle
production. Revenues in Australia increased as a result of the acquisition of
National Springs.
Exhaust's operating income for the 1996 first half improved 30 percent to $74
million primarily due to increased volumes and improved manufacturing
efficiencies. Ride control's operating income increase of $12 million was due
primarily to higher sales volumes, improved pricing and product mix.
TENNECO ENERGY
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
--------- --------
(MILLIONS)
Revenues................................................ $ 1,366 $ 937
Operating income........................................ 185 148
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. Volumes increased in both
the regulated and nonregulated operations. Operating income increased in the
1996 first half due to a new rate structure and a favorable legal settlement.
TENNECO PACKAGING
SIX MONTHS
ENDED JUNE
30,
-------------
1996 1995
------ ------
(MILLIONS)
Revenues.................................................... $1,775 $1,318
Operating income............................................ 256 244
Tenneco Packaging's operating income was $256 million in the first six months
of 1996 compared with $244 million in the prior year period. Revenues were $1.78
billion 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
declined 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 the
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
SIX MONTHS
ENDED JUNE
30,
-------------
1996 1995
------ ------
(MILLIONS)
Revenues.................................................... $ 915 $ 845
Operating income............................................ 81 90
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
OTHER
Tenneco's other operations reported an operating loss of $4 million for the
1996 first half compared with an operating loss of $11 million in the first
half of 1995. The increase in operating income was due to the first quarter
1996 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 from the rolloff of Case retail receivables.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Interest expense increased from $152 million in the 1995 first half to $179
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 $175 million compared with
$185 million in the 1995 period.
DISCONTINUED OPERATIONS
Income from discontinued operations for the first half of 1996 of $339
million included a $340 million gain (net of income tax expense of $83
million) on the sale of Tenneco's remaining investment in the common stock of
Case Corporation. Income from discontinued operations related to the farm and
construction equipment operations for the first half of 1995 was $81 million,
net of income tax benefit of $12 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
SIX MONTHS ENDED
JUNE 30,
------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ -------- --------
(MILLIONS)
Operating activities................................ $ (215) $ 255
Investing activities................................ 505 183
Financing activities................................ (413) (741)
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 the repurchase of its common stock. Operating cash flow for the first six
months of 1996 declined due to lower sales of customer receivables compared
with the first half of 1995. This decrease was due primarily to trade
receivables sold to Asset Securitization Cooperative Corporation, which were
$140 million lower in the first half of 1996 compared with the first half of
1995. Operating cash flow in the first half of 1996 also declined as a result
of higher tax payments compared with the first half of 1995 due to the
settlement of 1987 through 1989 federal tax liabilities and Tennessee's gas
contract settlement with ICA and TransTexas for $125 million. The sale of
discontinued operations and sales of other 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 $1,061 million
of cash during the first half of 1996.
Tenneco invested $464 million in capital expenditures in its existing
businesses during the 1996 first half. Capital expenditures included $84
million for Automotive, $153 million for Energy, $155 million for Packaging,
$36 million for Shipbuilding and $36 million related to Tenneco's other
operations. Capital expenditures were higher at Packaging, Shipbuilding and
Energy during the first half of 1996, while capital expenditures at Automotive
were lower compared with the prior year period.
19
During the first six months of 1995, Tenneco's cash sources included $736
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 $322 million for continuing
operations.
Based upon Tenneco's estimates of anticipated funding needs and expected
results of its operations, together with anticipated market conditions and
including any payments associated with the settlement of the GSR issues
discussed in Note 2 of the "Notes to Financial Statements", Tenneco expects
adequate sources of funds to be available to finance its future requirements
through internally generated funds, the sale of assets, the use of credit
facilities, and the issuance of long-term securities.
CAPITALIZATION
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
-------- ------------ --------
(MILLIONS)
Short-term debt and current maturities........... $1,146 $ 908 $ 635
Long-term debt................................... 3,374 3,751 3,309
Minority interest................................ 320 320 315
Preferred stock.................................. 112 130 129
Common shareowners' equity....................... 3,569 3,148 2,911
------ ------ ------
Total capitalization............................. $8,521 $8,257 $7,299
====== ====== ======
Debt increased $576 million at June 30, 1996 compared with June 30, 1995
primarily to fund acquisitions of new businesses and capital programs.
Tenneco's ratio of debt to total capitalization at June 30, 1996 was 53.0
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
June 30, 1996 was 52.7 percent compared with 55.0 percent at December 31,
1995. The ratio of debt to total capitalization at June 30, 1995 was 54.0
percent and 52.1 percent including the market value of the SECT shares.
Prior to the spinoff and merger transactions as discussed under the caption
"Proposed Merger with El Paso Natural Gas Company," 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.
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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.
Tennessee 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. Tennessee is still under 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 of Iroquois' pipeline system.
A global settlement was entered into during the second quarter of 1996 by
Iroquois and the operator of Iroquois' pipeline system with the Federal and
New York state authorities resolving all criminal, civil and administrative
enforcement actions contemplated by such authorities as a result of their
investigation of alleged environmental violations which occurred during the
construction of the pipeline. Due to the sale of Tenneco's interest in
Iroquois, Tenneco believes that any environmental matters relating to the
construction and operation of the pipeline system by Iroquois will not have a
material adverse effect on the 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 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. 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 June 30, 1996, Tenneco 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, Tenneco is fully indemnified by third
parties. With respect to certain other sites, Tenneco has sought to resolve
its liability through payments to the
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other potentially responsible parties. For the remaining sites, Tenneco 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, 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 sought $1.5 billion from Tennessee for
alleged damages caused by Tennessee's refusal to purchase gas produced from
the TransTexas leases covering the new production and lands. In June 1996,
Tennessee reached a settlement with ICA and TransTexas for $125 million
wherein ICA and TransTexas agreed to terminate the contract, released
Tennessee from liability under the contract, and indemnified Tennessee against
certain future claims, including royalty owner claims.
Tennessee has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
Tennessee. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the
Court of Appeals favorable to Tennessee in one of these matters and indicated
that it would remand the case to the trial court. On April 18, 1996, however,
the Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
Tennessee. In June 1996, Tennessee filed a motion for rehearing with the Texas
Supreme Court. The Court has not yet acted on that motion. The Supreme Court's
ruling explicitly preserves Tennessee's defenses based on bad faith conduct of
the producers. Nothing in the Supreme Court's decision affects Tennessee's
ability to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, Tennessee has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. Tennessee has accrued amounts which
it believes are appropriate to cover the resolution of the litigation
associated with its contract reformation efforts.
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 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(1) Exhibits.
11--Computation of Earnings Per Share of Common Stock.
12--Computation of Ratio of Earnings to Fixed Charges.
27--Financial Data Schedule.
(2) Reports on Form 8-K. Tenneco Inc. filed two Current Reports on Form 8-K
during the quarter ended June 30, 1996: on June 6, 1996 with respect to (i) a
press release issued on June 6, 1996 by Tenneco Energy Inc. announcing it had
agreed to sell its 13.2 percent interest in the Iroquois Gas Transmission
System to a subsidiary of ANR Pipeline Company for approximately $30 million
and (ii) the receipt at the end of May 1996 by Newport News Shipbuilding and
Dry Dock Company of a subpoena from the Inspector General of the Department of
Defense requesting documents in connection with an investigation being
conducted by the Department of Defense in conjunction with the Civil Division
of the Department of Justice on whether information supplied by Newport News
Shipbuilding and Dry Dock Company to the U.S. Navy during negotiations for the
Ronald Reagan (CVN-76) was current, accurate and complete; and on June 19,
1996 with respect to a (i) letter to Shareowners dated June 19, 1996, from
Dana G. Mead, Chairman and Chief Executive Officer of Tenneco Inc., regarding,
among other things, Tenneco's announcement of a definitive agreement to merge
Tenneco with a subsidiary of El Paso Natural Gas Company ("El Paso"), and (ii)
press release issued June 19, 1996, announcing Tenneco had signed a definitive
agreement to merge with a subsidiary of El Paso.
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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
Executive Vice President and
Chief Financial Officer
Date: August 14, 1996
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