<PAGE>

 
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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 SEPTEMBER 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
 
                               ----------------
 
                                 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: 170,755,576 shares as of September 30,
1996.
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
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................................................  15
Part II--Other Information
  Item 1. Legal Proceedings...............................................  25
  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...............................................  27
  Item 6. Exhibits and Reports on Form 8-K................................  28
</TABLE>
--------
*  No response to this item is included herein for the reason that it is
   inapplicable or the answer to such item is negative.
 
                                       1
<PAGE>
 
                                     PART I
                             FINANCIAL INFORMATION
 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                              STATEMENTS OF INCOME
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                               THREE MONTHS ENDED         NINE MONTHS ENDED
                                  SEPTEMBER 30,             SEPTEMBER 30,
--------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE
AMOUNTS)                        1996         1995         1996         1995
--------------------------------------------------------------------------------
<S>                          <C>          <C>          <C>          <C>
Revenues:
  Net sales and operating
   revenues--
    Automotive.............  $       760  $       600  $     2,223  $     1,863
    Energy.................          627          427        1,993        1,364
    Packaging..............          896          665        2,671        1,983
    Shipbuilding...........          522          445        1,437        1,290
    Other..................           (2)          (1)          (4)          (3)
                             -----------  -----------  -----------  -----------
                                   2,803        2,136        8,320        6,497
  Other income--
    Interest income........           15           22           49           76
    Equity in net income of
     affiliated companies..            8           14           26           52
    Gain (loss) on sale of
     businesses and assets,
     net...................            5           (1)          96            6
    Other income, net......           46          (15)          71            4
                             -----------  -----------  -----------  -----------
                                   2,877        2,156        8,562        6,635
                             -----------  -----------  -----------  -----------
Costs and Expenses:
  Cost of sales (exclusive
   of depreciation shown
   below)..................        1,674        1,302        4,765        3,846
  Cost of gas sold.........          360          178        1,155          671
  Operating expenses.......          118          103          382          302
  Selling, general and
   administrative..........          271          188          805          570
  Finance charges--Tenneco
   Finance.................           18           22           53           68
  Depreciation, depletion
   and amortization........          154          113          439          323
                             -----------  -----------  -----------  -----------
                                   2,595        1,906        7,599        5,780
                             -----------  -----------  -----------  -----------
Income Before Interest
 Expense, Income Taxes and
 Minority Interest.........          282          250          963          855
Interest Expense (net of
 interest capitalized).....           89           70          268          222
                             -----------  -----------  -----------  -----------
Income Before Income Taxes
 and Minority Interest.....          193          180          695          633
Income Tax Expense.........           72           80          247          265
                             -----------  -----------  -----------  -----------
Income Before Minority
 Interest..................          121          100          448          368
Minority Interest..........            5            6           15           17
                             -----------  -----------  -----------  -----------
Income From Continuing
 Operations................          116           94          433          351
Income From Discontinued
 Operations, Net of Income
 Tax.......................           --          120          339          201
                             -----------  -----------  -----------  -----------
Income Before Extraordinary
 Loss......................          116          214          772          552
Extraordinary Loss, Net of
 Income Tax................           (1)          --           (1)          --
                             -----------  -----------  -----------  -----------
Net Income.................          115          214          771          552
Preferred Stock Dividends..            2            2            7            8
                             -----------  -----------  -----------  -----------
Net Income to Common Stock.  $       113  $       212  $       764  $       544
                             ===========  ===========  ===========  ===========
Average Number of Shares of
 Common Stock Outstanding..  170,365,089  172,429,542  170,418,046  174,804,413
                             ===========  ===========  ===========  ===========
Earnings (Loss) Per Average
 Share of Common Stock:
  Continuing operations ...  $       .67  $       .53  $      2.50  $      1.96
  Discontinued operations..           --          .70         1.99         1.15
  Extraordinary loss.......         (.01)          --         (.01)          --
                             -----------  -----------  -----------  -----------
                             $       .66  $      1.23  $      4.48  $      3.11
                             ===========  ===========  ===========  ===========
Cash Dividends Per Share of
 Common Stock..............  $       .45  $       .40  $      1.35  $      1.20
                             ===========  ===========  ===========  ===========
</TABLE>
 
 (The accompanying notes to financial statements are an integral part of these
                             statements of income.)
 
                                       2
<PAGE>
 
                  TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                           STATEMENTS OF CASH FLOWS
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                 NINE MONTHS
                                                                    ENDED
                                                                  SEPTEMBER
                                                                     30,
-------------------------------------------------------------------------------
(MILLIONS)                                                       1996    1995
-------------------------------------------------------------------------------
<S>                                                              <C>    <C>
Cash Flows from Operating Activities:
 Income from continuing operations.............................. $ 433  $  351
 Adjustments to reconcile income from continuing operations to
 cash provided (used) by continuing operations--
  Depreciation, depletion and amortization......................   439     323
  Equity in net income of affiliated companies, net of
   dividends....................................................    (2)     (7)
  Deferred income taxes.........................................   (29)      4
  Gain on sale of businesses and assets, net....................   (96)     (6)
  Changes in components of working capital--
   (Increase) decrease in receivables...........................   (75)    320
   (Increase) decrease in inventories...........................   (17)   (207)
   (Increase) decrease in prepayments and other current assets..    --     (21)
   Increase (decrease) in payables..............................   (75)   (130)
   Increase (decrease) in taxes accrued.........................  (123)     71
   Increase (decrease) in interest accrued......................    (2)    (23)
   Increase (decrease) in natural gas pipeline revenue
    reservation.................................................    23    (169)
   Increase (decrease) in other current liabilities.............  (121)    (84)
  (Increase) decrease in long-term notes and receivables........   183     260
  Gas supply litigation payments................................  (318)     --
  Other.........................................................  (133)      7
                                                                 -----  ------
   Cash provided (used) by continuing operations................    87     689
   Cash provided (used) by discontinued operations..............  (244)      4
                                                                 -----  ------
Net Cash Provided (Used) by Operating Activities................  (157)    693
                                                                 -----  ------
Cash Flows from Investing Activities:
 Net proceeds (expenditures) related to the sale of discontinued
 operations.....................................................   766   1,225
 Net proceeds from sale of businesses and assets................   419      49
 Expenditures for plant, property and equipment--
  Continuing operations.........................................  (710)   (566)
  Discontinued operations.......................................    --      (4)
 Acquisitions of businesses.....................................  (718)   (323)
 Investments and other..........................................   (94)     20
                                                                 -----  ------
Net Cash Provided (Used) by Investing Activities................  (337)    401
                                                                 -----  ------
Cash Flows from Financing Activities:
 Issuance of common, treasury and SECT shares...................   105      74
 Purchase of common stock.......................................  (149)   (496)
 Redemption of preferred stock..................................   (20)    (20)
 Issuance of long-term debt.....................................     5      --
 Retirement of long-term debt...................................  (379)   (393)
 Net increase (decrease) in short-term debt excluding current
 maturities on long-term debt...................................   980     258
 Dividends (common and preferred)...............................  (236)   (216)
                                                                 -----  ------
Net Cash Provided (Used) by Financing Activities................   306    (793)
                                                                 -----  ------
Effect of Foreign Exchange Rate Changes on Cash and Temporary
Cash Investments................................................    (1)      6
                                                                 -----  ------
Increase (Decrease) in Cash and Temporary Cash Investments......  (189)    307
Cash and Temporary Cash Investments, January 1..................   354     405
                                                                 -----  ------
Cash and Temporary Cash Investments, September 30 (Note)........ $ 165  $  712
                                                                 =====  ======
Cash Paid During the Period for:
 Interest....................................................... $ 316  $  331
 Income taxes (net of refunds).................................. $ 657  $  251
</TABLE>
--------
NOTE: Cash and temporary cash investments include highly liquid investments
      with a maturity of three months or less at date of purchase.
 
 (The accompanying notes to financial statements are an integral part of these
                          statements of cash flows.)
 
                                       3
<PAGE>

 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                                 BALANCE SHEETS
 
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                        SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(MILLIONS)                                  1996          1995         1995
--------------------------------------------------------------------------------
ASSETS
<S>                                     <C>           <C>          <C>
Current Assets:
 Cash and temporary cash investments..     $   165      $   354       $   712
 Receivables--
   Customer notes and accounts (net)..       1,040          921         1,026
   Affiliated companies...............          54          112            58
   Gas transportation and exchange....         144           64           145
   Income taxes.......................          89          172           104
   Other..............................         470          514           299
 Inventories--
   Finished goods.....................         403          396           312
   Work in process....................         118          102            96
   Long-term contracts in progress,
    less progress billings............         298          264           227
   Raw materials......................         269          253           215
   Materials and supplies.............         166          166           152
 Deferred income taxes................          75           --            56
 Prepayments and other................         294          264           263
                                           -------      -------       -------
                                             3,585        3,582         3,665
                                           -------      -------       -------
Investments and Other Assets:
 Investment in affiliated companies...         324          297           388
 Long-term notes and other
  receivables (net)...................         203          435           518
 Investment in subsidiaries in excess
  of fair value of net assets at date
  of acquisition, less amortization...       1,002          642           327
 Deferred income taxes................          61           52            53
 Other................................       1,898        1,801         1,468
                                           -------      -------       -------
                                             3,488        3,227         2,754
                                           -------      -------       -------
Plant, Property and Equipment, at
 cost.................................      12,795       11,962        11,000
 Less--Reserves for depreciation,
  depletion and amortization..........       5,891        5,643         5,629
                                           -------      -------       -------
                                             6,904        6,319         5,371
                                           -------      -------       -------
Net Assets of Discontinued Operations.          --          323           593
                                           -------      -------       -------
                                           $13,977      $13,451       $12,383
                                           =======      =======       =======
<CAPTION>
LIABILITIES AND SHAREOWNERS' EQUITY
<S>                                     <C>           <C>          <C>
Current Liabilities:
 Short-term debt (including current
  maturities on long-term debt).......     $ 1,913      $   908       $   666
 Payables--
   Trade..............................       1,008        1,102           846
   Affiliated companies...............           2            2             1
   Gas transportation and exchange....         103           28           117
 Taxes accrued........................         118          572            99
 Deferred income taxes................          --           13            --
 Interest accrued.....................         139          103           142
 Natural gas pipeline revenue
  reservation.........................          73           27            13
 Other................................         889        1,081           991
                                           -------      -------       -------
                                             4,245        3,836         2,875
                                           -------      -------       -------
Long-term Debt........................       3,399        3,751         3,310
                                           -------      -------       -------
Deferred Income Taxes.................       1,024          962         1,333
                                           -------      -------       -------
Postretirement Benefits...............         650          616           603
                                           -------      -------       -------
Deferred Credits and Other
 Liabilities..........................         583          688           689
                                           -------      -------       -------
Commitments and Contingencies
Minority Interest.....................         301          320           315
                                           -------      -------       -------
Preferred Stock with Mandatory
 Redemption Provisions................         113          130           129
                                           -------      -------       -------
Shareowners' Equity:
 Common stock.........................         957          957           957
 Stock Employee Compensation Trust
  (common stock held in trust)........          --         (215)         (232)
 Premium on common stock and other
  capital surplus.....................       3,605        3,602         3,588
 Cumulative translation adjustments...           9           26            36
 Retained earnings (accumulated
  deficit)............................          62         (469)         (578)
                                           -------      -------       -------
                                             4,633        3,901         3,771
 Less--Shares held as treasury stock,
  at cost.............................         971          753           642
                                           -------      -------       -------
                                             3,662        3,148         3,129
                                           -------      -------       -------
                                           $13,977      $13,451       $12,383
                                           =======      =======       =======
</TABLE>
 
 (The accompanying notes to financial statements are an integral part of these
                                balance sheets.)
 
                                       4
<PAGE>
 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                  STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE AMOUNTS)                     1996                 1995
--------------------------------------------------------------------------------------
                                               SHARES     AMOUNT    SHARES     AMOUNT
                                             -----------  ------  -----------  ------
<S>                                          <C>          <C>     <C>          <C>
Common Stock:
  Balance January 1......................... 191,351,615  $  957  191,335,193  $  957
    Issued pursuant to benefit plans........       4,004      --        2,900      --
    Other...................................          --      --        4,390      --
                                             -----------  ------  -----------  ------
  Balance September 30...................... 191,355,619     957  191,342,483     957
                                             ===========  ------  ===========  ------
Stock Employee Compensation Trust (SECT):
  Balance January 1.........................                (215)                (298)
    Shares issued...........................                 216                   87
    Adjustment to market value..............                  (1)                 (21)
                                                          ------               ------
  Balance September 30......................                  --                 (232)
                                                          ------               ------
Premium on Common Stock and Other Capital
 Surplus:
  Balance January 1.........................               3,602                3,553
    Dividends on shares held by SECT........                   3                    7
    Adjustment of SECT to market value......                   1                   21
    Other...................................                  (1)                   7
                                                          ------               ------
  Balance September 30......................               3,605                3,588
                                                          ------               ------
Cumulative Translation Adjustments:
  Balance January 1.........................                  26                 (237)
    Translation of foreign currency
     statements.............................                 (13)                  40
    Sale of investment in foreign
     subsidiaries...........................                  --                  235
    Hedges of net investment in foreign
     subsidiaries (net of income taxes).....                  (4)                  (2)
                                                          ------               ------
  Balance September 30......................                   9                   36
                                                          ------               ------
Retained Earnings (Accumulated Deficit):
  Balance January 1.........................                (469)                (905)
    Net income..............................                 771                  552
    Dividends--
      Preferred stock.......................                  (4)                  (6)
      Common stock..........................                (233)                (217)
    Accretion of excess of redemption value
     of preferred stock over fair value at
     date of issue..........................                  (3)                  (2)
                                                          ------               ------
  Balance September 30......................                  62                 (578)
                                                          ------               ------
Less--Common Stock Held as Treasury Stock,
 at Cost:
  Balance January 1.........................  16,422,619     753    3,617,510     170
    Shares acquired.........................   4,657,165     241   10,411,799     472
    Shares issued pursuant to benefit and
     dividend reinvestment plans............    (479,741)    (23)     (11,686)     --
                                             -----------  ------  -----------  ------
  Balance September 30......................  20,600,043     971   14,017,623     642
                                             ===========  ------  ===========  ------
        Total...............................              $3,662               $3,129
                                                          ======               ======
</TABLE>
 
 (The accompanying notes to financial statements are an integral part of these
                 statements of changes in shareowners' equity.)
 
                                       5
<PAGE>
 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                    STATEMENTS OF CHANGES IN PREFERRED STOCK
                      WITH MANDATORY REDEMPTION PROVISIONS
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                             NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
(MILLIONS EXCEPT SHARE AMOUNTS)                   1996              1995
-------------------------------------------------------------------------------
                                             SHARES    AMOUNT  SHARES    AMOUNT
                                            ---------  ------ ---------  ------
<S>                                         <C>        <C>    <C>        <C>
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......        --      3         --      2
                                            ---------   ----  ---------   ----
  Balance September 30..................... 1,195,242   $113  1,390,993   $129
                                            =========   ====  =========   ====
</TABLE>
 
 
 
 (The accompanying notes to financial statements are an integral part of these
statements of changes in preferred stock with mandatory redemption provisions.)
 
                                       6
<PAGE>
 
                  TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                         NOTES TO FINANCIAL STATEMENTS
 
                                  (UNAUDITED)
 
  (1) In the opinion of Tenneco Inc. (hereinafter referred to as "Tenneco"),
the accompanying unaudited financial statements of Tenneco Inc. and
consolidated subsidiaries (hereinafter referred to as "the Company") contain
all adjustments necessary to present fairly the financial position as of
September 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 the Company
include all majority-owned subsidiaries including wholly-owned finance
subsidiaries. Investments in 20% to 50% owned companies where the Company 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
<PAGE>
 
                  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 the Company'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. The Company believes that this decision will not impair
Tennessee's recovery of the costs resulting from this contract. Oral arguments
were held before the full FERC on September 25, 1996. A decision by the FERC
is expected by the end of the year.
 
  Also related to Tennessee's GSR costs, in June 1996, Tennessee settled
certain litigation with ICA Energy, Inc. ("ICA") and TransTexas Gas
Corporation ("TransTexas") by making a payment of $125 million. This payment
is included in the deferred GSR costs described below. In the settlement, ICA
and TransTexas agreed to terminate the contract, release Tennessee from
liability under the contract, and indemnify Tennessee against certain future
claims, including royalty owner claims. In July 1996, certain royalty interest
owners filed a claim against Tennessee in Webb County, Texas, alleging that
they are sellers entitled to tender gas to Tennessee under the settled
contract. This claim falls under the indemnification provisions of the
settlement agreement, which requires TransTexas and ICA to defend and
indemnify Tennessee on this claim.
 
  In a separate declaratory judgment action relating to another gas purchase
contract, the Texas Supreme Court affirmed a ruling of the Court of Appeals
favorable to Tennessee on August 1, 1995. On April 18, 1996, the Texas Supreme
Court withdrew its initial opinion and issued an opinion reversing the Court
of Appeals opinion on the matter which was favorable to Tennessee. That Texas
Supreme Court ruling, however, explicitly preserves Tennessee's defenses based
on bad faith conduct of the producers. In June 1996, Tennessee filed a motion
for rehearing with the Texas Supreme Court. On August 16, 1996, the Texas
Supreme Court denied Tennessee's motion. Nothing in the Supreme Court's
decision affects Tennessee's ability to seek recovery from its customers of
its above-market costs of purchasing gas under the contract as GSR costs in
the phased 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.
 
  During the declaratory judgment lawsuit, Tennessee had either paid, or
provided for the payment of, amounts it believes were appropriate to cover the
resolution of its contract reformation litigation, including providing a bond
in the amount of $206 million. On September 30, 1996, Tennessee paid
approximately $193 million to the producers and the producers agreed to
release all but approximately $2 million of the bonded
 
                                       8
<PAGE>
 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
amount. On November 1, 1996, a final order was issued which assessed only
$456,000 of the $2 million to Tennessee and Tennessee will request release from
this remaining bond amount. On October 1, 1996, Tennessee filed to recover the
pricing differential portion of this payment from its customers. It is
anticipated that Tennessee will also continue to pay the above-market contract
price for the gas tendered by the producers through the expiration of the
contract in 1999, and will seek recovery of those amounts from its customers in
the FERC proceedings as well. Tennessee plans to amend its complaint in one of
the separate lawsuits pending against the producers to seek recovery of amounts
Tennessee believes it is entitled to recover as a result of the producers' bad
faith conduct.
 
  As of September 30, 1996, Tennessee has deferred GSR costs yet to be
recovered from its customers of approximately $527 million, net of $414 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 was originally set by a FERC ALJ for late October 1996. The Chief Judge
of the FERC has since issued orders (i) canceling the October oral argument,
(ii) convening settlement discussions which commenced on October 9, 1996, and
(iii) postponing scheduling oral argument on eligibility issues. Phase II of
the proceeding on the prudency of the costs to be recovered and on certain
contract specific eligibility issues has not yet been scheduled, but will
likely occur sometime after the ALJ's decision in Phase I is issued.
 
  The FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although the Order 636 transition cost recovery
mechanism provides for complete recovery by pipelines of eligible and prudently
incurred transition costs, certain customers have challenged the prudence and
eligibility of 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.
However, as described under Note 6, El Paso Natural Gas Company ("El Paso") has
reached, contingent upon consummation of the Merger (as defined in Note 6) and
various other conditions (including approval by the FERC), a preliminary
understanding with certain of Tennessee's customers regarding the customers'
challenges to Tennessee's ability to recover GSR and other costs from its
customers (the "El Paso Preliminary GSR Understanding").
 
  Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, the Company is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its 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 changes and increased revenue requirements. On October
30, 1996, the FERC approved the Stipulation for the settlement of the 1995 Rate
Case, with certain modifications and clarifications which are not material and
which should not cause changes which are adverse to Tennessee. Tennessee has
reserved revenues it believes adequate to cover the income impact of any
refunds that may be required.
 
  (3) Reference is made to Note 2 for information concerning gas supply
litigation. Tenneco and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. Tenneco believes that the outcome of
these other proceedings, individually and in the aggregate, will have no
material effect on the Company's financial position or results of operations.
 
                                       9
<PAGE>
 
                  TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  (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.
 
  The Company has established a reserve for Tennessee's environmental
expenses, which includes: 1) expected remediation expense and associated
onsite, offsite and groundwater technical studies, 2) legal fees and 3)
settlement of third party and governmental litigation, including civil
penalties. Through September 30, 1996, the Company has charged approximately
$160 million against the environmental reserve, excluding recoveries related
to Tennessee's environmental settlement as discussed below. Of the remaining
reserve at September 30, 1996, $24 million has been recorded on the balance
sheet under "Payables-trade" and $128 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 remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
Tennessee's evaluation and experience to date, the Company continues to
believe that the recorded estimate for the reserve is adequate.
 
  Following negotiations with its customers, Tennessee in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that establishes a mechanism for recovering a substantial
portion of the environmental costs. In November 1995, the FERC issued an order
approving the Environmental Stipulation. Although one shipper filed for
rehearing, the FERC denied rehearing of its order on February 20, 1996. This
shipper filed a Petition for Review on April 22, 1996 in the D.C. Circuit
Court of Appeals; Tennessee believes the FERC Order approving the
Environmental Stipulation will be upheld on appeal. The effects of the
Environmental Stipulation, which was effective as of July 1, 1995, have been
recorded with no material effect on the Company's financial position or
results of operations. As of September 30, 1996, the balance of the regulatory
asset is $54 million.
 
  The Company has completed settlements with and has received payments from
the majority of its liability insurance policy carriers for remediation costs
and related claims. The Company believes that the likelihood of recovery of a
portion of its remediation costs and claims against the remaining carriers in
its pending litigation is reasonably possible. In addition, Tennessee has
settled its pending litigation against and received payment from the
manufacturer of the PCB-containing lubricant. These recoveries have been
considered in Tennessee's recording of its environmental settlement with its
customers.
 
  The Company has identified other sites 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. The Company believes that the provisions recorded for
environmental exposures are adequate based on current estimates.
 
  (5) In March 1996, the Company 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
 
                                      10
<PAGE>
 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
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, on June
19, 1996, Tenneco's Board of Directors approved a plan to reorganize Tenneco
(the "Transaction") pursuant to which (i) Tenneco will restructure (the "Debt
Realignment") its and certain of its consolidated subsidiaries' debt through a
series of tender offers, exchange offers, payments, redemptions, prepayments
and defeasances involving Tenneco, New Tenneco Inc., a newly formed, wholly
owned subsidiary of Tenneco ("New Tenneco"), and Newport News Shipbuilding
Inc., a wholly owned subsidiary of Tenneco ("Newport News"); (ii) Tenneco and
its subsidiaries will, pursuant to a distribution agreement (the "Distribution
Agreement") among Tenneco, New Tenneco and Newport News, undertake various
intercompany transfers and distributions (collectively, the "Corporate
Restructuring Transactions") designed to restructure, divide and separate their
various businesses and assets so that substantially all of the assets,
liabilities and operations of (A) their automotive parts, packaging and
administrative services businesses ("Industrial Business") are owned and
operated by New Tenneco and (B) their shipbuilding business ("Shipbuilding
Business") is owned and operated by Newport News; (iii) Tenneco will then
distribute (the "Distributions") pro rata to holders of Tenneco common stock,
all of the outstanding common stock of New Tenneco (the "New Tenneco Common
Stock") and Newport News (the "Newport News Common Stock"); and (iv) thereafter
an indirect wholly owned subsidiary of El Paso will merge with and into Tenneco
(the "Merger"), which will then consist of the remaining assets, liabilities
and operations of Tenneco and its subsidiaries other than those relating to the
Industrial Business or the Shipbuilding Business, including the transmission
and marketing of natural gas (collectively, the "Energy Business" or "Tenneco
Energy") pursuant to an Amended and Restated Agreement and Plan of Merger dated
as of June 19, 1996 between El Paso and Tenneco.
 
  For the past several years, the Company has been undergoing a corporate
transformation from a highly diversified industrial corporation to a global
manufacturing company focused on its automotive and packaging businesses. The
Transaction is designed to complete this process. Consummation of the
Transaction is conditioned upon, among other things, the approval by Tenneco
shareowners of the Transaction and a favorable ruling from the Internal Revenue
Service ("IRS") regarding the tax-free nature of certain components of the
Transaction. Tenneco received a favorable ruling from the IRS regarding the
applicable components of the Transaction on October 30, 1996. The Transaction
will be submitted as a single, unified proposal at a special meeting of Tenneco
shareowners, presently scheduled to be held on December 10, 1996.
 
  As a part of the Transaction, Tenneco will specifically undertake the
following actions:
 
 . New Preferred Stock Issuance. Tenneco will issue in a registered public
   offering shares of one or more new series of junior preferred stock of
   Tenneco (the "Tenneco Junior Preferred Stock") in an amount calculated, to
   the extent possible, to have an aggregate value equal to approximately 25%
   of the total value of all shares of Tenneco capital stock outstanding upon
   consummation of the Merger (the "NPS Issuance"). The proceeds (the "NPS
   Issuance Proceeds") to Tenneco from the sale of the Tenneco Junior
   Preferred Stock in the NPS Issuance (which are currently estimated to be
   approximately $300 million) will, net of underwriting commissions and other
   expenses, be used to repay certain existing indebtedness of Tenneco and
   certain of its subsidiaries in connection with the Debt Realignment.
 
 . Debt Realignment. Pursuant to the Debt Realignment, indebtedness for
   borrowed money of Tenneco and certain of its consolidated subsidiaries
   ("Tenneco Consolidated Debt") will be restructured and refinanced through a
   series of tender offers, exchange offers, payments, redemptions,
   prepayments and defeasances. The Debt Realignment is intended to reduce the
   total amount of Tenneco Consolidated Debt to an amount that, when added to
   the total amount of certain other liabilities and obligations of Tenneco
   Energy
 
                                       11
<PAGE>
 
                  TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
   outstanding as of the effective time of the Merger ("Actual Energy Debt
   Amount") equals $2.65 billion, less the NPS Issuance Proceeds and subject
   to certain other adjustments (the "Base Debt Amount"). If the Actual Energy
   Debt Amount varies from the Base Debt Amount, the amount of such variance
   will be accounted for in a post-Transaction cash adjustment. If the
   Transaction had been consummated on September 30, 1996, on a pro forma
   basis (assuming 100% acceptance of the Cash Tender Offers and Exchange
   Offers, as defined below), Tenneco and New Tenneco would have had
   indebtedness for money borrowed of approximately $2519 million, ($1819
   million after giving effect to the Refinancing Transactions described
   below) and $2200 million, respectively.
 
 . Cash Realignment. The total amount of cash and cash equivalents of Tenneco
   and its consolidated subsidiaries at the time of the Merger will be
   allocated $25 million to Tenneco (subject to certain adjustments), $5
   million to Newport News and the balance to New Tenneco.
 
 . Charter Amendment. Prior to the Merger, Tenneco will file an amendment to
   eliminate specified rights, powers and preferences of its junior preferred
   stock (certain of which may be preserved or modified in the certificates of
   designation for the Tenneco Junior Preferred Stock to be issued in the NPS
   Issuance) contained in the Tenneco Certificate of Incorporation, as
   amended.
 
 . The Distributions. On the effective date of the Distributions, Tenneco will
   distribute to all holders of Tenneco common stock, par value $5.00 per
   share, of record as of the close of business on November 6, 1996, (i) one
   share of New Tenneco Common Stock, $.01 par value per share, for every
   share of Tenneco common stock held and (ii) one share of Newport News
   Common Stock, $.01 par value per share, for every five shares of Tenneco
   common stock held. Cash will be paid in lieu of fractional shares. The
   Distribution Agreement and various agreements to be entered into in
   connection therewith will govern the post-Transaction allocation of various
   other rights and obligations among Tenneco, New Tenneco and Newport News.
 
 . The Merger. El Paso Merger Company, an indirect wholly owned subsidiary of
   El Paso, will be merged with and into Tenneco, which will then consist
   solely of the Energy Business. Tenneco will survive the Merger, with 100%
   of its common equity and approximately 75% of its combined equity value at
   that time held indirectly by El Paso (and the remainder held by the holders
   of the Tenneco Junior Preferred Stock issued pursuant to the NPS Issuance).
 
  The Company expects to incur an extraordinary charge as a result of the Debt
Realignment. The Company estimates that this cost will be approximately $300
million after-tax based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions which the Company estimates will be
approximately $100 million after tax.
 
 New Tenneco after the Transaction
 
  Although the separation of the Industrial Business from the remainder of the
businesses, operations and companies currently constituting the "Tenneco
Group" has been structured as a "spin-off" of New Tenneco for legal, tax and
other reasons, New Tenneco will succeed to certain important aspects of the
existing Tenneco business, organization and affairs, namely: (i) New Tenneco
will be renamed "Tenneco Inc." upon the consummation of the Merger; (ii) New
Tenneco will be headquartered at Tenneco's current headquarters in Greenwich,
Connecticut; (iii) New Tenneco's Board of Directors will consist of those
persons currently constituting the Tenneco Board of Directors; (iv) New
Tenneco's executive management will consist substantially of the current
Tenneco executive management; and (v) the Industrial Business to be conducted
by New Tenneco will consist largely of Tenneco Automotive and Tenneco
Packaging, which combined represent over half of the assets, revenues and
operating income of the businesses, operations and companies presently
 
                                      12
<PAGE>
 
                   TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
constituting the "Tenneco Group." Consequently, pending approval of the
transaction by Tenneco Stockholders, New Tenneco will reflect the spin-off of
Newport News and the Merger of the Energy Business with El Paso as discontinued
operations in its financial statements.
 
  As part of the Debt Realignment, New Tenneco will offer to exchange (the
"Debt Exchange Offers") $1,950 million aggregate principal amount of new,
publicly traded debt securities of New Tenneco for an equal amount of Tenneco
Consolidated Debt. New Tenneco debt will have similar maturities, but higher
interest rates than the Tenneco Consolidated Debt for which it is being
exchanged. Upon consummation of the Debt Exchange Offers, Tenneco will purchase
(and thereafter extinguish) the Tenneco Consolidated Debt held by New Tenneco,
and New Tenneco will then distribute such proceeds as a dividend to Tenneco.
 
  Additionally, the Debt Realignment will include tender offers by Tenneco (the
"Cash Tender Offers") to purchase for cash approximately $1,580 million
aggregate principal amount of current Tenneco Consolidated Debt. The Tenneco
Consolidated Debt acquired in the Cash Tender Offers will be extinguished. The
Cash Tender Offers and the other cash components of the Debt Realignment will
principally be financed by internally generated cash, the NPS Issuance Proceeds
and borrowings under several new credit facilities and other financing
arrangements as discussed below.
 
  In addition, New Tenneco will enter into a $1,750 million revolving credit
facility (the "New Tenneco Credit Facility"). New Tenneco will use the New
Tenneco Credit Facility for working capital, acquisitions and other general
corporate purposes; in addition, New Tenneco is likely to borrow funds under
the New Tenneco Credit Facility and declare and pay a dividend to Tenneco in
connection with the Debt Realignment.
 
 Newport News after the Transaction
 
  Upon completion of the Distributions, Newport News will be an independent,
publicly-held holding company which will conduct substantially all of its
operations through its direct and indirect consolidated subsidiaries.
Immediately following the Distributions, Tenneco will not have an ownership
interest in Newport News. In connection with the Distributions and to provide
for working capital needs, Newport News intends to issue $200 million of Senior
Notes due 2006 (the "Senior Notes") and $200 million of Senior Subordinated
Notes due 2006 (the "Senior Subordinated Notes" and together with the Senior
Notes, the "Notes"). In addition, Newport News recently entered into a $415
million secured senior credit facility (the "Senior Credit Facility") comprised
of a $200 million six-year amortizing term loan (the "Term Loan") and a $215
million six-year revolving credit facility (the "Revolving Credit Facility"),
of which $125 million may be used for advances and letters of credit and $90
million may be used for standby letters of credit. In addition, Newport News
will utilize the proceeds of the Notes and Term Loan and borrowings of $14
million under the Revolving Credit Facility to distribute (i) $600 million as a
dividend to Tenneco or one or more of its subsidiaries for use in retiring
Tenneco Consolidated Debt and (ii) $14 million in payment of certain fees and
expenses incurred in connection with Senior Credit Facility and the Notes.
 
 Energy Business after the Transaction
 
  In connection with the cash funding requirements of the Debt Realignment,
Tenneco will enter into a $3 billion credit facility (the "Tenneco Credit
Facility") which will consist of a 364-day revolving credit facility with a
two-year term thereafter. The Tenneco Credit Facility and the borrowings
hereunder, will continue to be part of the Energy Business subsequent to the
Transaction.
 
  El Paso is currently engaged in a comprehensive review of the business and
operations of the Energy Business. Following the completion of such review and
the consummation of the Merger, El Paso has indicated
 
                                       13
<PAGE>
 
that it plans to integrate, for the most part, the operations of the Energy
Business with those of El Paso in order to increase operating and
administrative efficiency through consolidation and reengineering of
facilities, workforce reductions and coordination of purchasing, sales and
marketing activities. El Paso has indicated that it anticipates that the
complementary interstate and intrastate pipeline operations and gas marketing
activities of El Paso and the Energy Business should provide the combined
company with increased operating flexibility and access to additional customers
and markets.
 
  El Paso has indicated that it intends to undertake various transactions with
respect to the Energy Business (the "Refinancing Transactions") in order to
reduce the amount of Tenneco debt that would otherwise be outstanding after
consummation of the Transaction including (i) the monetization of certain
assets of the Energy Business for anticipated net proceeds of approximately
$500 million, and (ii) a public equity offering by El Paso of approximately
$200 million and the use of the net proceeds thereof to purchase a subordinated
series of junior preferred stock (the "Subordinated Tenneco Preferred Stock")
from Tenneco. The cash proceeds received by Tenneco from El Paso's purchase of
the Subordinated Tenneco Preferred Stock will be used by Tenneco to repay a
portion of its post-Transaction debt. In addition, as market conditions allow,
El Paso may refinance Tenneco's remaining post-Transaction debt through the
sale of senior debt of Tenneco and/or Tennessee.
 
  On October 23, 1996, in anticipation of consummation of the Merger, El Paso
reached a preliminary understanding with certain of Tennessee's customers ("the
El Paso Preliminary GSR Understanding"). Under the El Paso Preliminary GSR
Understanding, if the Merger is consummated prior to April 1, 1997, then El
Paso will settle the customers' challenges to Tennessee's GSR and other
transition costs, effective January 1, 1997. It is unlikely that the El Paso
Preliminary GSR Understanding will be finalized and filed with the FERC prior
to December 31, 1996. Finalization of the El Paso Preliminary GSR Understanding
is subject to consummation of the Merger before April 1, 1997, and certain
other conditions. If the Merger is not consummated prior to April 1, 1997, then
Tennessee has the option to terminate the El Paso Preliminary GSR
Understanding.
 
  Assuming the El Paso Preliminary GSR Understanding is finalized and filed
with the FERC, non-consenting customers will have the opportunity to object to
the proposed settlement.
 
  (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.)
 
                                       14
<PAGE>
 
                  TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
PROPOSED SPIN-OFFS AND MERGER WITH EL PASO NATURAL GAS COMPANY
 
  As part of the ongoing strategic realignment of its businesses, on June 19,
1996, Tenneco's Board of Directors approved a plan to reorganize Tenneco (the
"Transaction") pursuant to which (i) Tenneco will restructure (the "Debt
Realignment") its and certain of its consolidated subsidiaries' debt through a
series of tender offers, exchange offers, payments, redemptions, prepayments
and defeasances involving Tenneco, New Tenneco Inc., a newly formed, wholly
owned subsidiary of Tenneco ("New Tenneco"), and Newport News Shipbuilding
Inc., a wholly owned subsidiary of Tenneco ("Newport News"); (ii) Tenneco and
its subsidiaries will, pursuant to a distribution agreement (the "Distribution
Agreement") among Tenneco, New Tenneco and Newport News, undertake various
intercompany transfers and distributions (collectively, the "Corporate
Restructuring Transactions") designed to restructure, divide and separate
their various businesses and assets so that substantially all of the assets,
liabilities and operations of (A) their automotive parts, packaging and
administrative services businesses ("Industrial Business") are owned and
operated by New Tenneco and (B) their shipbuilding business ("Shipbuilding
Business") is owned and operated by Newport News; (iii) Tenneco will then
distribute (the "Distributions") pro rata to holders of Tenneco common stock,
all of the outstanding common stock of New Tenneco (the "New Tenneco Common
Stock") and Newport News (the "Newport News Common Stock"); and (iv)
thereafter an indirect wholly owned subsidiary of El Paso will merge with and
into Tenneco (the "Merger"), which will then consist of the remaining assets,
liabilities and operations of Tenneco and its subsidiaries other than those
relating to the Industrial Business or the Shipbuilding Business, including
the transmission and marketing of natural gas (collectively, the "Energy
Business" or "Tenneco Energy") pursuant to an Amended and Restated Agreement
and Plan of Merger dated as of June 19, 1996 between El Paso and Tenneco.
 
  For the past several years, the Company has been undergoing a corporate
transformation from a highly diversified industrial corporation to a global
manufacturing company focused on its automotive and packaging businesses. The
Transaction is designed to complete this process. Consummation of the
Transaction is conditioned upon, among other things, the approval by Tenneco
shareowners of the Transaction and a favorable ruling from the Internal
Revenue Service ("IRS") regarding the tax-free nature of certain components of
the Transaction. Tenneco received a favorable ruling from the IRS regarding
the applicable components of the Transaction on October 30, 1996. The
Transaction will be submitted as a single, unified proposal at a special
meeting of Tenneco shareowners, presently scheduled to be held on December 10,
1996. (For details of the transactions, see Note 6 in the "Notes to Financial
Statements" for additional information.)
 
  The Company expects to incur an extraordinary charge as a result of the Debt
Realignment. The Company estimates that this cost will be approximately $300
million after-tax based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions which the Company estimates will be
approximately $100 million after-tax.
 
OTHER STRATEGIC ACTIONS
 
  In the 1996 third quarter, Tenneco completed the acquisition of the
following new businesses:
 
  .Tenneco Automotive acquired 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.
 
  .Tenneco Automotive also acquired Luis Minuzzi e Hijos, an Argentinean
  exhaust system manufacturer ("Minuzzi"). The acquisition will expand
  Walker's presence in the rapidly growing Argentinean and South American
  automobile markets.
 
  .Tenneco Packaging acquired the stock of Amoco Foam Products Company
  ("Amoco Foam"), a unit of Amoco Chemical Company, for $310 million. Amoco
  Foam manufactures expanded polystyrene carrying trays and disposable
  tableware, including plates and cups; hinged-lid food containers; packaging
  trays, primarily for meat and poultry; and industrial foam products for
  residential and commercial construction applications.
 
                                      15
<PAGE>
 
  Also during the third quarter of 1996, Tenneco repurchased $27 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. During the third quarter, Tenneco completed the stock buyback
program which began in December 1994. Since inception of this program, Tenneco
repurchased a total of 16.7 million common shares at a cost of $771 million.
 
THREE MONTHS RESULTS
 
  Tenneco's income from continuing operations for the 1996 third quarter was
$116 million, an improvement of 23 percent compared with $94 million in the
year ago quarter. Both Tenneco Automotive and Tenneco Energy contributed to
this improvement.
 
  Earnings per share from continuing operations improved by 26 percent to $.67
per average common share in the 1996 third quarter from $.53 in the prior year
quarter. Net income to common stock was $113 million or $.66 per average share
compared with net income to common stock of $212 million or $1.23 per share in
the 1995 third quarter. The 1996 third quarter net income to common stock
included an extraordinary loss of $1 million, or one cent per share, associated
with the premium on early debt retirement. The 1995 third quarter net income to
common stock included income from discontinued operations, which related
primarily to the gain on sale of Case Corporation common stock, of $120
million, or $.70 per average common share. Average common shares outstanding
for the 1996 third quarter were 170.4 million, a one percent decrease from the
prior year quarter resulting primarily from Tenneco's share repurchase
programs. Preferred stock dividends were $2 million for both periods.
 
NET SALES AND OPERATING REVENUES
 
<TABLE>
<CAPTION>
                                                                 THIRD QUARTER
                                                                 --------------
                                                                  1996    1995
                                                                 ------  ------
                                                                  (MILLIONS)
      <S>                                                        <C>     <C>
      Automotive................................................ $  760  $  600
      Energy....................................................    627     427
      Packaging.................................................    896     665
      Shipbuilding..............................................    522     445
      Other.....................................................     (2)     (1)
                                                                 ------  ------
                                                                 $2,803  $2,136
                                                                 ======  ======
</TABLE>
 
  Third quarter 1996 revenues increased $667 million, or 31 percent as 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 and 1996 offset in part by lower pricing from
paperboard packaging. Tenneco Energy's revenue increase was generated primarily
from higher gas prices and gas volumes in both the nonregulated and regulated
operations. The results of each business are discussed in detail below.
 
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
 
<TABLE>
<CAPTION>
                                                                 THIRD QUARTER
                                                                 --------------
                                                                  1996    1995
                                                                 ------  ------
                                                                  (MILLIONS)
      <S>                                                        <C>     <C>
      Automotive................................................ $   82  $   61
      Energy....................................................     97      81
      Packaging.................................................     85     111
      Shipbuilding..............................................     36      35
      Other.....................................................    (18)    (38)
                                                                 ------  ------
                                                                 $  282  $  250
                                                                 ======  ======
</TABLE>
 
                                       16
<PAGE>
 
  Tenneco's operating income for the 1996 third quarter increased by $32
million, or 13 percent 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
and operating earnings from recent acquisitions. These increases were partially
offset by lower operating income at Tenneco Packaging due to lower paperboard
prices. The results of each business are discussed in detail below.
 
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
                                                                   THIRD QUARTER
                                                                   -------------
                                                                    1996   1995
                                                                   ------ ------
                                                                    (MILLIONS)
      <S>                                                          <C>    <C>
      Revenues.................................................... $  760 $  600
      Operating income............................................     82     61
</TABLE>
 
  Operating income from the exhaust operations improved 20 percent to $48
million, excluding last year's $10 million charge for start-up costs related to
hydroforming, primarily due to increased volumes, recent acquisitions, and
improved manufacturing efficiencies, along with lower distribution costs. Ride
control's operating income increase of $3 million was generated primarily by
recent acquisitions.
 
  Tenneco Automotive's revenues in the third quarter rose 27 percent to set a
record for twelve consecutive quarters of quarter over quarter improvement.
Revenues from recent acquisitions contributed slightly over 70 percent of the
revenue improvement including Clevite which contributed $57 million.
 
  Exhaust revenues increased 20 percent to $423 million primarily due to
increased North American and European original equipment volumes driven by new
vehicle production and recent acquisitions. Aftermarket volumes also increased
in Europe primarily due to the recent Fonos acquisition.
 
  Ride control reported increased revenues of $90 million, up 36 percent. Ride
Control's North American original equipment revenues more than doubled to $83
million due to the third quarter acquisition of Clevite. European original
equipment revenues improved 53 percent driven by widespread dealer incentives,
new vehicle production, and the recent Ateso acquisition. In addition, revenues
in Australia increased as a result of the acquisition of National Springs.
 
TENNECO ENERGY
 
<TABLE>
<CAPTION>
                                                                   THIRD QUARTER
                                                                   -------------
                                                                    1996   1995
                                                                   ------ ------
                                                                    (MILLIONS)
      <S>                                                          <C>    <C>
      Revenues.................................................... $  627 $  427
      Operating income............................................     97     81
</TABLE>
 
  Tenneco Energy reported a 20 percent increase in operating income for the
1996 third quarter as compared with the same period a year ago. In addition,
revenues rose 47 percent to $627 million from $427 million in the 1995 third
quarter.
 
  Nonregulated revenues increased $184 million or 82 percent, primarily due to
higher natural gas prices and volumes. Regulated revenues increased $16 million
as a result of transportation volume increases and other regulatory
adjustments.
 
  Nonregulated operating income increased to $12 million from $7 million in the
1995 third quarter. This increase was primarily due to improved power marketing
margins, as well as higher volumes and improved pricing in oil and gas
production. Regulated operating income increased to $85 million compared with
$74 million in the year ago period. The improvement resulted from higher
transportation volumes, operating efficiencies and legal settlements. The prior
year results included $8 million in operating income from the Kern River
pipeline, which was sold in the fourth quarter last year.
 
                                       17
<PAGE>
 
TENNECO PACKAGING
 
<TABLE>
<CAPTION>
                                                                        THIRD
                                                                       QUARTER
                                                                     -----------
                                                                     1996  1995
                                                                     ----- -----
                                                                     (MILLIONS)
      <S>                                                            <C>   <C>
      Revenues...................................................... $ 896 $ 665
      Operating income..............................................    85   111
</TABLE>
 
  Operating income for Tenneco Packaging for the 1996 third quarter was $85
million compared with $111 million in the year ago quarter. The specialty
packaging unit's operating income increased to $64 million from $9 million in
the year ago quarter. Volume growth, primarily from the November 1995 plastics
acquisition and lower raw materials costs were key factors in operating income
improvement. This recently acquired plastics business contributed $38 million
in operating income on revenues of $274 million in the 1996 third quarter.
 
  The paperboard packaging operations' operating income was $21 million
compared with $102 million in the prior year quarter. Linerboard and
corrugating medium prices averaged $340 per ton and $280 per ton compared with
$530 per ton and $520 per ton, respectively in the year ago period.
 
  In the paperboard business, revenues were down $76 million to $408 million
compared with the 1995 third quarter. Operating income in the paperboard
business declined $81 million to $21 million compared with the 1995 third
quarter. Operating income and revenues were reduced by lower price
realizations due to the weaker market conditions compared with record levels a
year ago.
 
  Revenues in Tenneco Packaging's specialty packaging business increased $307
million to $488 million compared with the 1995 third quarter, primarily as a
result of the recently acquired plastics and foam products businesses. The
specialty packaging business, which included the strong results of the
November 1995 plastics acquisition, earned $64 million in operating income for
the 1996 third quarter, a $55 million increase compared with the year ago
results. Operating margins in the specialty packaging business increased to 13
percent from 5 percent in the year-ago quarter.
 
NEWPORT NEWS SHIPBUILDING
 
<TABLE>
<CAPTION>
                                                                        THIRD
                                                                       QUARTER
                                                                     -----------
                                                                     1996  1995
                                                                     ----- -----
                                                                     (MILLIONS)
      <S>                                                            <C>   <C>
      Revenues...................................................... $ 522 $ 445
      Operating income..............................................    36    35
</TABLE>
 
  Third quarter operating income for Shipbuilding increased $1 million over
the prior year quarter due to higher volume and productivity improvements on
the Eisenhower overhaul, partially offset by lower submarine construction
income due to the conclusion of the Los Angeles-class program and lower
margins on commercial and conversion work. The third quarter 1996 results
included a charge of $31 million to cover estimated contract losses related to
construction of commercial product tankers compared with a $14 million charge
recorded in the year ago period.
 
  Shipbuilding revenues for the 1996 third quarter increased $77 million to
$522 million compared with the 1995 period primarily due to increased activity
on carrier construction and the Eisenhower overhaul partially offset by lower
submarine and conversion program revenues. Construction activity on the Los
Angeles-class submarines was completed in August with the delivery of
Cheyenne.
 
  The shipyard's backlog was $3.7 billion at September 30, 1996, substantially
all of which is U.S. Navy-related. The backlog at September 30, 1995 was $4.9
billion.
 
  The backlog at September 30, 1996 included two Nimitz-class aircraft
carriers (Harry S. Truman and Ronald Reagan), surface ship overhaul contracts
and contracts to construct nine "Double Eagle" product tankers. In addition,
Newport News has ongoing engineering contracts related to submarine and
carrier work. Subject to new orders, this backlog will decline as the
remaining aircraft carriers are delivered in 1998 and 2002.
 
                                      18
<PAGE>
 
OTHER
 
  Tenneco's other operations reported an operating loss of $18 million for the
1996 third quarter compared with an operating loss of $38 million in the year
ago quarter. The operating loss for the 1995 third quarter included a $25
million reserve for the liquidation of surplus real estate holdings and notes.
 
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
 
  Interest expense increased from $70 million in the 1995 third quarter to $89
million in the 1996 third 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 recent acquisitions
including the November 1995 plastics acquisition and Clevite and Amoco Foam in
1996. Interest capitalized increased from $2 million in the 1995 third quarter
to $3 million in the 1996 third quarter due to increased capital spending.
 
INCOME TAXES
 
  Income tax expense for the third quarter of 1996 was $72 million compared
with $80 million for the 1995 third quarter. The effective tax rate for the
third quarter of 1996 was 37 percent compared with 44 percent in the prior
year quarter.
 
DISCONTINUED OPERATIONS
 
  Income from discontinued operations in the 1995 third quarter of $120
million was attributable to the farm and construction equipment segment and
included a gain of $101 million on the sale of Case Corporation common stock
in August 1995.
 
EXTRAORDINARY LOSS
 
  An extraordinary loss of $1 million (net of tax) or one cent per average
share was recorded in the 1996 third quarter related to a prepayment penalty
on early debt retirement.
 
NINE MONTHS RESULTS
 
  Tenneco's income from continuing operations for the first nine months of
1996 was $433 million, an improvement of 23 percent compared with $351 million
in the year ago period. Both Tenneco Automotive and Tenneco Energy contributed
to this improvement.
 
  Earnings per share from continuing operations improved by 28 percent to
$2.50 per average common share in the first nine months of 1996 from $1.96 in
the prior year period. Net income to common stock was $764 million or $4.48
per average share compared with net income to common stock of $544 million or
$3.11 per share in the first nine months of 1995. The first nine months of
1996 net income to common stock included income from discontinued operations
of $339 million, or $1.99 per average common share, compared with $201
million, or $1.15 per share, in the 1995 period. Net income to common stock
for the first nine months of 1996 also included an extraordinary loss of $1
million, or one cent per share, associated with the premium on early debt
retirement. Preferred stock dividends were $7 million in the 1996 period
compared with $8 million in the prior year. Average common shares outstanding
for the 1996 first nine months were 170.4 million compared with 174.8 million
in the 1995 period. The decrease was primarily the result of Tenneco's share
repurchase programs partially offset by the issuance of SECT shares to
employee benefit plans.
 
                                      19
<PAGE>
 
NET SALES AND OPERATING REVENUES
 
<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                             ------------------
                                                               1996      1995
                                                             --------  --------
                                                                (MILLIONS)
      <S>                                                    <C>       <C>
      Automotive............................................ $  2,223  $  1,863
      Energy................................................    1,993     1,364
      Packaging.............................................    2,671     1,983
      Shipbuilding..........................................    1,437     1,290
      Other.................................................       (4)       (3)
                                                             --------  --------
                                                               $8,320  $  6,497
                                                             ========  ========
 
  Net sales and operating revenues for the first nine months of 1996 were $8.32
billion, up 28 percent from $6.50 billion reported in the 1995 period due to
higher gas prices and increased demand in Tenneco Energy's nonregulated
business and increased rates and volume in the regulated business along with
revenues from recent acquisitions. Higher revenues were reported by all
divisions: Tenneco Packaging (up $688 million or 35 percent), Tenneco
Automotive (up $360 million or 19 percent), Tenneco Energy (up $629 million or
46 percent), and Shipbuilding (up $147 million or 11 percent).
 
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
 
<CAPTION>
                                                             NINE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                             ------------------
                                                               1996      1995
                                                             --------  --------
                                                                (MILLIONS)
      <S>                                                    <C>       <C>
      Automotive............................................ $    245  $    195
      Energy................................................      282       229
      Packaging.............................................      341       355
      Shipbuilding..........................................      117       125
      Other.................................................      (22)      (49)
                                                             --------  --------
                                                             $    963      $855
                                                             ========  ========
 
  Operating income for the first nine months of 1996 improved $108 million, or
13 percent to $963 million.
 
  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 and from recent acquisitions. These increases were
partially offset by lower operating income at Tenneco Packaging due to lower
paperboard prices and at Shipbuilding due to higher costs associated with
conversion work and commercial product tankers. The results of each business
are discussed in detail below.
 
TENNECO AUTOMOTIVE
 
<CAPTION>
                                                             NINE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                             ------------------
                                                               1996      1995
                                                             --------  --------
                                                                (MILLIONS)
      <S>                                                    <C>       <C>
      Revenues.............................................. $  2,223  $  1,863
      Operating income......................................      245       195
</TABLE>
 
  Tenneco Automotive's revenues increased in both the exhaust and ride control
operations. Revenues for exhaust increased 17 percent to $1,270 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 in North America and
Europe.
 
                                      20
<PAGE>
 
  Ride control reported increased revenues of $173 million or 22 percent.
North American and European original equipment revenues increased as the
result of the Clevite and Ateso acquisitions and new vehicle production. Ride
control's aftermarket revenues also increased in North America due to improved
product mix.
 
  Exhaust's operating income for the first nine months of 1996 improved 40
percent to $122 million primarily due to increased volumes, improved
manufacturing efficiencies and recent acquisitions. Ride control's operating
income increase of $15 million was due primarily to higher sales volumes,
improved product mix and recent acquisitions including Clevite.
 
TENNECO ENERGY
 
<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                               -----------------
                                                                 1996     1995
                                                               -------- --------
                                                                  (MILLIONS)
      <S>                                                      <C>      <C>
      Revenues................................................ $  1,993 $  1,364
      Operating income........................................      282      229
</TABLE>
 
  Tenneco Energy revenues increased 46 percent to $1,993 million compared with
the prior period. Nonregulated revenues increased 67 percent to $1,352 million
primarily due to higher natural gas prices and volumes. In addition, the South
Australia Pipeline acquired in June 1995 and new processing and gathering
projects contributed $38 million to the revenue increase. Regulated revenues
increased 16 percent to $641 million primarily due to increased transportation
volumes, the benefits derived from a new rate structure that occurred July 1,
1995 and regulatory adjustments, the majority of which had no material
operating income impact.
 
  Tenneco Energy operating income increased 23 percent to $282 million for the
first nine months of 1996 as compared with the year ago period. Nonregulated
operating income increased to $31 million or 48 percent due to a full nine
months operating income from the June 1995 acquisition of the South Australia
Pipeline, increased operating income of $14 million from Tenneco Ventures' oil
and gas production partially offset by lower margins from marketing activities
and legal settlements. Regulated operating income increased to $251 million or
21 percent primarily due to implementation of a new rate structure that
occurred July 1, 1995, favorable legal settlements, the gain on the sale of
Tenneco's interest in Iroquois Gas Transmission, L.P. and improved operating
efficiencies. Partially offsetting these increases were earnings lost from the
sale of the Kern River pipeline in December 1995.
 
TENNECO PACKAGING
 
<TABLE>
<CAPTION>
                                                                    NINE MONTHS
                                                                       ENDED
                                                                   SEPTEMBER 30,
                                                                   -------------
                                                                    1996   1995
                                                                   ------ ------
                                                                    (MILLIONS)
      <S>                                                          <C>    <C>
      Revenues.................................................... $2,671 $1,983
      Operating income............................................    341    355
</TABLE>
 
  Tenneco Packaging's operating income decreased $14 million, or four percent
in the nine month period compared with the 1995 period. Revenues increased
$688 million, or 35 percent compared with the nine months of 1995. Higher
revenues from the specialty operations were primarily the result of the
recently acquired plastics business of Mobil and the Amoco Foam acquisition.
This increase was partially offset by lower revenues in the paperboard
business. Specialty packaging earned $172 million in operating income for the
nine-month period in 1996 compared with $34 million in the year ago period. Of
this increase of $138 million, $111 million was the result of the late 1995
acquisition of the plastics business of Mobil. 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 corrugating medium. Operating income included a $50 million
pre-tax gain in the 1996 second quarter from the sale of two recycled
paperboard mills and a recovered fiber recycling and brokerage business to
form a joint venture with Caraustar. The 1995 period included a $14 million
gain on the sale of a North Carolina mill.
 
                                      21
<PAGE>
 
NEWPORT NEWS SHIPBUILDING
 
<TABLE>
<CAPTION>
                                                                    NINE MONTHS
                                                                       ENDED
                                                                   SEPTEMBER 30,
                                                                   -------------
                                                                    1996   1995
                                                                   ------ ------
                                                                    (MILLIONS)
      <S>                                                          <C>    <C>
      Revenues.................................................... $1,437 $1,290
      Operating income............................................    117    125
</TABLE>
 
  Shipbuilding reported operating income of $117 million in the first nine
months of 1996 compared with $125 million in the 1995 period. Revenues were
$1,437 million for the nine months of 1996 compared with $1,290 million in the
year ago period. Revenues increased due to higher volumes on carrier
construction and the Eisenhower overhaul, partially offset by lower activity
on conversion work and submarine construction. Operating income declined due
to additional costs of $30 million in the first nine months of 1996 compared
with the prior year associated with conversion work and $57 million of higher
than expected costs associated with the production of commercial product
tankers, an increase of $43 million over the comparable prior year period.
These reductions were partially offset by increased activity on the Eisenhower
overhaul and productivity improvements.
 
OTHER
 
  Tenneco's other operations reported an operating loss of $22 million for the
1996 first nine months compared with an operating loss of $49 million in the
year ago period. 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 Corporation retail receivables and a lower
cash balance. The operating loss for the 1995 period included a $25 million
reserve for the liquidation of surplus real estate holdings and notes.
 
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
 
  Interest expense increased from $222 million in the 1995 first nine months
to $268 million in the first nine months of 1996, while interest capitalized
was $14 million in the first nine months of 1996 compared with $5 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 nine months was $247 million compared
with $265 million in the 1995 period.
 
DISCONTINUED OPERATIONS
 
  Income from discontinued operations for the first nine months 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 segment for the first nine months of 1995 was $201
million, including a gain of $101 million on the sale of Case Corporation
common stock in August 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
CASH FLOW
 
<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED
                                                             SEPTEMBER 30,
                                                           ------------------
      CASH PROVIDED (USED) BY:                               1996      1995
      ------------------------                             --------  --------
                                                              (MILLIONS)
      <S>                                                  <C>       <C>
      Operating activities................................ $   (157) $    693
      Investing activities................................     (337)      401
      Financing activities................................      306      (793)
</TABLE>
 
 
                                      22
<PAGE>
 
  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 nine months
of 1996 declined due to lower sales of trade receivables to the Asset
Securitization Cooperative Corporation, which were $328 million lower than in
the prior year period. In addition, operating cash flow in the first nine
months of 1996 declined as a result of higher tax payments due to the
settlement of 1987 through 1989 federal tax liabilities and Tennessee's gas
contract settlement of $125 million with ICA and TransTexas and $193 million
with other producers. The sale of discontinued operations and sales of other
businesses and assets, primarily the 15.2 million shares of Case Corporation
common stock and Tenneco's 50 percent interest in Kern River Gas Transmission
Company, generated an additional $1,185 million of cash during the first nine
months of 1996.
 
  Tenneco invested $710 million in capital expenditures in its existing
businesses during the first nine months of 1996. Capital expenditures included
$123 million for Automotive, $255 million for Energy, $223 million for
Packaging, $55 million for Shipbuilding and $54 million related to Tenneco's
other operations. Capital expenditures were higher at Packaging, Shipbuilding
and Energy during the first nine months of 1996, while capital expenditures at
Automotive were lower compared with the prior year period.
 
  Cash used in the acquisition of businesses was $718 million for the 1996 nine
month period. Several key acquisitions were completed in the third quarter
including Automotive's acquisitions of The Pullman Company and its Clevite
product division for approximately $330 million and Packaging's acquisition of
Amoco Foam in late August for $310 million.
 
  During the first nine months of 1995, Tenneco's cash sources included $1,274
million in proceeds from the sale of discontinued operations and sales of
businesses and assets (primarily the Albright & Wilson chemicals operations for
$700 million and 16.1 million shares of Case Corporation common stock for $540
million). Capital expenditures were $566 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
 
<TABLE>
<CAPTION>
                                       SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
                                           1996          1995         1995
                                       ------------- ------------ -------------
                                                      (MILLIONS)
<S>                                    <C>           <C>          <C>
Short-term debt and current
 maturities...........................    $1,913        $  908       $  666
Long-term debt........................     3,399         3,751        3,310
Minority interest.....................       301           320          315
Preferred stock.......................       113           130          129
Common shareowners' equity............     3,662         3,148        3,129
                                          ------        ------       ------
Total capitalization..................    $9,388        $8,257       $7,549
                                          ======        ======       ======
</TABLE>
 
  Total debt increased $1,336 million at September 30, 1996 compared with
September 30, 1995 primarily to fund acquisitions of new businesses and capital
programs.
 
  Tenneco's ratio of debt to total capitalization at September 30, 1996 was
56.6 percent compared with 55.0 percent at December 31, 1995 including the
market value of the SECT shares. The ratio of debt to total capitalization at
September 30, 1995 was 52.7 percent and 51.1 percent including the market value
of the SECT shares.
 
 
                                       23
<PAGE>
 
  Prior to the spin-off and Merger transactions as discussed under the caption
"Proposed Spin-Offs and Merger with El Paso Natural Gas Company," Tenneco
intends to initiate a realignment of its existing indebtedness. As part of the
Debt Realignment, New Tenneco will offer to exchange (the "Debt Exchange
Offers") $1,950 million aggregate principal amount of new, publicly traded debt
securities of New Tenneco for an equal amount of Tenneco public debt. New
Tenneco debt will have similar maturities, but higher interest rates than the
Tenneco public debt for which it is being exchanged. Upon consummation of the
Debt Exchange Offers, Tenneco will purchase (and thereafter extinguish) the
Tenneco public debt held by New Tenneco, and New Tenneco will then distribute
such proceeds as a dividend to Tenneco.
 
  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 assuming responsibility for $600 million (plus fees,
costs and expenses) 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.
 
  In addition, New Tenneco will enter into a $1,750 million Revolving Credit
Facility (the "New Tenneco Credit Facility"). New Tenneco will use the New
Tenneco Credit Facility for working capital, acquisitions and other general
corporate purposes; in addition, New Tenneco is likely to borrow funds under
the New Tenneco Credit Facility and declare and pay a dividend to Tenneco in
connection with the Debt Realignment.
 
                                       24
<PAGE>
 
                                    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 paid the full amount of a civil penalty agreed upon
with the Pennsylvania Department of Environmental Protection and 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
executed a consent decree, which has been lodged with the court and published
for public notice and comment. 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.
 
  In 1993 and 1995, the EPA issued notices of violation for particulate and
opacity violations at the three coal-fired boilers of the Rittman, Ohio
paperboard mill (owned by Tenneco Packaging until June 1996). Tenneco Packaging
filed responses disputing the alleged violations. Stack testing has
demonstrated Tenneco Packaging's compliance. In July 1996, Tenneco Packaging
received an EPA administrative complaint seeking a $126,997
 
                                       25
<PAGE>
 
penalty for alleged emissions violations. Tenneco Packaging has filed its
answer to the complaint. Tenneco believes that the resolution of this matter
will not have a material adverse effect on the financial condition or results
of operations of Tenneco Inc. and its consolidated subsidiaries.
 
 (2) Potential Superfund Liability.
 
  At September 30, 1996, Tenneco has been designated as a potentially
responsible party in 37 "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 $64 million or 0.4% to 2.3% 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.
 
  In June 1996, Tennessee settled certain litigation with ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas") by making a payment of
$125 million. This payment is included in the deferred GSR costs described in
Note 2 in the "Notes to Financial Statements". In the settlement, ICA and
TransTexas agreed to terminate the contract, release Tennessee from liability
under the contract, and indemnify Tennessee against certain future claims,
including royalty owner claims. In July 1996, certain royalty interest owners
filed a claim against Tennessee in Webb County, Texas, alleging that they are
sellers entitled to tender gas to Tennessee under the settled contract. This
claim falls under the indemnification provisions of the settlement agreement
which requires TransTexas and ICA to defend and indemnify Tennessee on this
claim.
 
  In a separate declaratory judgment action relating to another gas purchase
contract, the Texas Supreme Court affirmed a ruling of the Court of Appeals
favorable to Tennessee on August 1, 1995. On April 18, 1996, the Texas Supreme
Court withdrew its initial opinion and issued an opinion reversing the Court
of Appeals opinion on the matter which was favorable to Tennessee. That Texas
Supreme Court ruling, however, explicitly preserves Tennessee's defenses based
on bad faith conduct of the producers. In June 1996, Tennessee filed a motion
for rehearing with the Texas Supreme Court. On August 16, 1996, the Texas
Supreme Court denied Tennessee's motion. Nothing in the Supreme Court's
decision affects Tennessee's ability to seek recovery from its customers of
its above-market costs of purchasing gas under the contract as GSR costs in
the phased proceedings currently pending before the FERC. However, as
described under Note 6, El Paso Natural Gas Company ("El Paso") has reached,
contingent upon consummation of the Merger (as defined in Note 6) and various
other conditions (including approval by the FERC), a preliminary understanding
with certain of Tennessee's customers regarding the customers' challenges to
Tennessee's ability to recover GSR and other costs from its customers (the "El
Paso Preliminary GSR Understanding"). 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.
 
  In July 1996, Tennessee was served with a complaint in the matter of Jack J.
Grynberg v. Alaska Pipeline Co., et al., filed in the U.S. District Court for
the District of Columbia. Plaintiff brings this action under the False Claims
Act against several interstate pipelines and others alleging Defendants
mismeasured natural gas produced from federal and Indian lands, which deprived
the U.S. of royalties otherwise due it. Plaintiff seeks,
 
                                      26
<PAGE>
 
among other things, to recover, on behalf of the U.S. unspecified treble
damages, his finder's fee and attorneys' fees. All Defendants have been
granted an extension until November 13, 1996 to respond to the complaint. It
is believed that there are valid jurisdictional and procedural defenses to
Plaintiff's complaint; however, even if Plaintiff is ultimately entitled to
pursue his claims, Tennessee believes that it has substantive defenses,
including that Tennessee's measurement practices are consistent with industry
practice and all applicable standards, regulations, contracts, and tariffs and
that Tennessee should not be liable in any event. Based on information
available at this time, Tenneco does not believe that the ultimate resolution
of this matter will have a material adverse effect on the financial condition
or results of operations of Tenneco Inc. and its consolidated subsidiaries.
 
  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.
 
  (1) Tenneco Inc.'s Board of Directors has called a Special Meeting of
Shareholders on December 10, 1996 for the following purposes:
 
  I. To consider and vote upon a single, unified proposal relating to the
proposed reorganization of Tenneco (the "Transaction"):
 
    A. to approve and adopt the Distribution Agreement, dated as of November
  1, 1996, as such may be amended, supplemented or modified from time to time
  (the "Distribution Agreement"), among Tenneco, New Tenneco and Newport
  News, pursuant to which (i) Tenneco and its subsidiaries will undertake
  various intercompany transfers and distributions designed to restructure,
  divide and separate their existing businesses and assets so that the
  assets, liabilities and operations of (A) their automotive parts, packaging
  and administrative services businesses are owned and operated by New
  Tenneco, and (B) their shipbuilding business is owned and operated by
  Newport News, and (ii) Tenneco will subsequently distribute (the
  "Distributions") pro rata to holders of Tenneco common stock, par value
  $5.00 per share (the "Tenneco Common Stock"), all of the outstanding common
  stock, $.01 par value per share, of New Tenneco and all of the outstanding
  common stock, $.01 par value per share, of Newport News;
 
    B. to approve and adopt the Amended and Restated Agreement and Plan of
  Merger, dated as of June 19, 1996, as such may be amended, supplemented or
  modified from time to time (the "Merger Agreement"), among El Paso Natural
  Gas Company, a Delaware corporation ("El Paso"), El Paso Merger Company, a
  Delaware corporation and an indirect wholly owned subsidiary of El Paso
  ("El Paso Subsidiary"), and Tenneco pursuant to which (i) El Paso
  Subsidiary will be merged with and into Tenneco (the "Merger"), which will
  then (as a result of the Distributions) consist only of Tenneco Energy, and
  (ii) shares of Tenneco stock (other than certain preferred shares held by
  holders entitled to demand and who properly demand appraisal of such shares
  and shares of one or more new series of Tenneco junior preferred stock to
  be issued prior to the Merger) will be converted into the right to receive
  shares of El Paso common stock, par value $3.00 per share, and possibly, in
  the case of holders of Tenneco Common Stock, depositary shares representing
  interests in shares of a new series of El Paso preferred stock, pursuant to
  formulas set forth in the Merger Agreement and described more fully in the
  Joint Proxy Statement-Prospectus dated November 4, 1996;
 
    C. to approve the transactions contemplated by the Merger Agreement and
  the Distribution Agreement; and
 
    D. to approve an amendment (the "Charter Amendment") to the Certificate
  of Incorporation of Tenneco, as amended, which will eliminate the rights,
  powers and preferences of the junior preferred stock of Tenneco specified
  therein.
 
                                      27
<PAGE>
 
  II. To transact such other business, including, without limitation, the
adjournment of the Special Meeting (including an adjournment of the Special
Meeting to obtain a quorum, solicit additional votes in favor of proposal I
and/or allow for the fulfillment of certain conditions precedent to the
Transaction), as may properly come before the Special Meeting or any
adjournments or postponements thereof.
 
  The Board action follows receipt by Tenneco Inc. of a favorable Internal
Revenue Service ruling on the tax-free nature of these previously announced
strategic actions and clearance by the Securities and Exchange Commission of
various filings related to the Transaction.
 
  (2) On November 8, 1996, Green Canyon Gathering Company ("GCGC"), a
subsidiary of Tennessee, entered into a Memorandum of Understanding (the "MOU")
with National Fuel Gas Supply Corporation ("National Fuel") under which GCGC
and National Fuel will negotiate to form a joint venture to construct, own and
operate (i) natural gas pipeline facilities commencing at locations offshore to
gather gas produced in the Green Canyon and other areas located in the Outer
Continental Shelf and terminating onshore in Louisiana and (ii) natural gas
processing facilities to be located at or near the terminus of those pipeline
facilities (collectively the "Project"). The MOU contemplates that GCGC and
National Fuel will each have a 50% ownership interest in entities that will be
created to develop, construct, finance, own and operate the $200 million
Project, which has been under development by GCGC for more than a year. GCGC
contemplates that definitive agreements with National Fuel relating to the
Project will be entered into on or about January 1, 1997, and that non-recourse
project financing will be put in place for a significant portion of the total
Project costs.
 
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. did not file any Current Reports on
Form 8-K during the quarter ended September 30, 1996.
 
                                       28
<PAGE>
 
                                   SIGNATURE
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                          TENNECO INC.
 
                                                    Robert T. Blakely
                                          By __________________________________
                                                    Robert T. Blakely
                                              Executive Vice President and
                                                 Chief Financial Officer
 
Date: November 13, 1996
 
                                       29
<PAGE>
 
                                                                     EXHIBIT 11
                  TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
 
               COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                      (MILLIONS EXCEPT SHARE AMOUNTS)
                              -------------------------------------------------
                                THREE MONTHS ENDED        NINE MONTHS ENDED
                                   SEPTEMBER 30,            SEPTEMBER 30,
                              ------------------------ ------------------------
                                 1996         1995        1996         1995
                              -----------  ----------- -----------  -----------
<S>                           <C>          <C>         <C>          <C>
COMPUTATION FOR STATEMENTS
 OF INCOME
  Primary Earnings Per Share
   (average shares
   outstanding):
   Income from continuing
    operations..............  $       116  $        94 $       433  $       351
   Income from discontinued
    operations, net of
    income tax..............           --          120         339          201
                              -----------  ----------- -----------  -----------
   Income before
    extraordinary loss......          116          214         772          552
   Extraordinary loss, net
    of income tax...........           (1)          --          (1)          --
                              -----------  ----------- -----------  -----------
   Net income...............          115          214         771          552
   Preferred stock
    dividends...............            2            2           7            8
                              -----------  ----------- -----------  -----------
   Net income to common
    stock...................  $       113  $       212 $       764  $       544
                              ===========  =========== ===========  ===========
   Average shares of common
    stock outstanding(a)....  170,365,089  172,429,542 170,418,046  174,804,413
                              ===========  =========== ===========  ===========
   Earnings (loss) per
    average share of common
    stock:
     Continuing operations..  $       .67  $       .53 $      2.50  $      1.96
     Discontinued
      operations............           --          .70        1.99         1.15
     Extraordinary loss.....         (.01)          --        (.01)          --
                              -----------  ----------- -----------  -----------
                              $       .66  $      1.23 $      4.48  $      3.11
                              ===========  =========== ===========  ===========
ADDITIONAL COMPUTATIONS(b)
  Net income to common
   stock, per above.........  $       113  $       212 $       764  $       544
                              ===========  =========== ===========  ===========
  Primary Earnings Per Share
   (including common stock
   equivalents):
   Average shares of common
    stock outstanding(a)....  170,365,089  172,429,542 170,418,046  174,804,413
   Incremental common shares
    applicable to common
    stock options based on
    the common stock daily
    average market price
    during the period.......      210,701       93,096     462,904       67,648
   Incremental common shares
    applicable to
    performance units based
    upon the attainment of
    specified goals.........       88,125       27,625      88,125       27,625
                              -----------  ----------- -----------  -----------
   Average common shares, as
    adjusted................  170,663,915  172,550,263 170,969,075  174,899,686
                              ===========  =========== ===========  ===========
   Earnings (loss) per
    average share of common
    stock (including common
    stock equivalents):
     Continuing operations..  $       .67  $       .53 $      2.49  $      1.96
     Discontinued
      operations............           --          .70        1.99         1.15
     Extraordinary loss.....         (.01)          --        (.01)          --
                              -----------  ----------- -----------  -----------
                              $       .66  $      1.23 $      4.47  $      3.11
                              ===========  =========== ===========  ===========
  Fully Diluted Earnings Per
   Share:
   Average shares of common
    stock outstanding(a)....  170,365,089  172,429,542 170,418,046  174,804,413
   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.......      233,326       93,096     550,364       72,492
   Average common shares
    issuable assuming
    conversion of Tenneco
    Inc. 10% loan stock.....           --       36,805          --       38,242
   Incremental common shares
    applicable to
    performance units based
    upon the attainment of
    specified goals.........       88,125       27,625      88,125       27,625
                              -----------  ----------- -----------  -----------
   Average common shares
    assuming full dilution..  170,686,540  172,587,068 171,056,535  174,942,772
                              ===========  =========== ===========  ===========
   Fully diluted earnings
    (loss) per average
    share, assuming
    conversion of all
    applicable securities:
     Continuing operations..  $       .67  $       .53 $      2.49  $      1.96
     Discontinued
      operations............           --          .70        1.98         1.15
     Extraordinary loss.....         (.01)          --        (.01)          --
                              -----------  ----------- -----------  -----------
                              $       .66  $      1.23 $      4.46  $      3.11
                              ===========  =========== ===========  ===========
</TABLE>
-------
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 three months and nine months ended September
          30, 1996 and 1995, the SECT utilized 1,123,648, 783,555, 4,358,084
          and 1,989,652 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%.
<PAGE>
 
                                                                      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)
 
<TABLE>
<CAPTION>
                                                                  NINE MONTHS
                                                                     ENDED
                                                                 SEPTEMBER 30,
                                                                 --------------
                                                                  1996   1995
                                                                 ------- ------
<S>                                                              <C>     <C>
Income from continuing operations............................... $   433 $ 351
Add:
  Interest......................................................     325   317
  Portion of rentals representative of interest factor..........      45    44
  Preferred stock dividend requirements of majority-owned
   subsidiaries.................................................      15    17
  Income tax expense and other taxes on income..................     247   265
  Amortization of interest capitalized applicable to nonutility
   companies....................................................       4     3
  Interest capitalized applicable to utility companies..........      --     1
  Undistributed earnings of affiliated companies in which less
   than a 50% voting interest is owned..........................       1    (9)
                                                                 ------- -----
    Earnings as defined......................................... $ 1,070 $ 989
                                                                 ======= =====
Interest........................................................ $   325 $ 317
Interest capitalized............................................      14     5
Portion of rentals representative of interest factor............      45    44
Preferred stock dividend requirements of majority-owned
 subsidiaries on a pretax basis.................................      24    29
                                                                 ------- -----
    Fixed charges as defined.................................... $   408 $ 395
                                                                 ======= =====
Ratio of earnings to fixed charges..............................    2.62  2.50
                                                                 ======= =====
</TABLE>
<PAGE>
 
 
 
 
 
 
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