<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                  
                               FORM 10-K/A     
 
 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
                                      OR
    [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                             EXCHANGE ACT OF 1934
 
                         COMMISSION FILE NUMBER 1-4101
 
                        TENNESSEE GAS PIPELINE COMPANY
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              76-1056569
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
                                                        77002
   TENNECO BUILDING, HOUSTON, TEXAS                  (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 757-2131
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                          NAME OF EACH EXCHANGE
                  TITLE OF EACH CLASS                      ON WHICH REGISTERED
                  -------------------                     ---------------------
<S>                                                      <C>
9 1/4% Notes due 1996; 9% Notes due 1997;
 6% Debentures due 2011................................. New York Stock Exchange
</TABLE>
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
 
  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 [_]
 
  STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE
TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES
OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF
FILING.
 
                                     None
 
  INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par
value $5 per share, 200 shares outstanding as of February 21, 1996.
 
  TENNESSEE GAS PIPELINE COMPANY MEETS THE CONDITIONS OF GENERAL INSTRUCTION
J(1)(A) AND (B) TO THE FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH A
REDUCED DISCLOSURE FORMAT AS PERMITTED BY SUCH INSTRUCTION.
 
                   DOCUMENTS INCORPORATED BY REFERENCE: NONE
 
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<PAGE>
 
                               TABLE OF CONTENTS
   
  THIS FORM 10-K/A AMENDS ITEMS 1, 7, 8, 14 AND EXHIBIT 27 OF THE TENNESSEE
GAS PIPELINE COMPANY ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON FEBRUARY 21, 1996. THE COMPLETE TEXT OF EACH ITEM WHICH
HAS BEEN AMENDED IS INCLUDED; TEXT OF ITEMS WHICH HAVE NOT BEEN AMENDED ARE
NOT INCLUDED.     
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
ITEM  1.   BUSINESS.......................................................    1
ITEM  7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF
        OPERATIONS........................................................   13
ITEM  8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................   22
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
 K........................................................................   53
</TABLE>    
 
                                       i
<PAGE>
 
   
  The Tennessee Gas Pipeline Company Form 10-K for the fiscal year ended
December 31, 1995 is hereby amended to reflect the disposition of Tennessee's
remaining investment in Case Corporation during March 1996 and to reflect the
results of operations for its farm and construction equipment business as
"discontinued operations."     
       
ITEM 1. BUSINESS.
 
  Tennessee Gas Pipeline Company, a Delaware corporation (the "Company"), is a
wholly-owned subsidiary of Tenneco Inc. As used herein, "Tennessee" refers to
the Company and its consolidated subsidiaries.
 
  The major businesses of Tennessee are the manufacture and sale of automotive
exhaust system parts and ride control products; natural gas transportation and
marketing; manufacture and sale of packaging materials, cartons, containers
and specialty packaging products for consumer and commercial markets; and
construction and repair of ships.
 
  In March 1995, Tenneco Inc. sold, in a public flotation primarily in the
United Kingdom, all of the capital stock of Albright & Wilson plc, which is
engaged in the chemical business. See Note 3 to the Financial Statements of
Tennessee Gas Pipeline Company and Consolidated Subsidiaries for additional
information concerning the sale of this subsidiary.
 
  At December 31, 1995, Tennessee had approximately 59,000 employees.
 
                       CONTRIBUTIONS OF MAJOR BUSINESSES
 
  Information concerning Tennessee's principal industry segments and
geographic areas is set forth in Note 11 to the Financial Statements of
Tennessee Gas Pipeline Company and Consolidated Subsidiaries. The following
tables summarize (i) net sales and operating revenues from continuing
operations, (ii) income from continuing operations before interest expense,
income taxes and minority interest and (iii) capital expenditures for
continuing operations of the major business groups of Tennessee for the
periods indicated.
 
NET SALES AND OPERATING REVENUES FROM CONTINUING OPERATIONS
 
<TABLE>   
<CAPTION>
                                             1995         1994         1993
                                          -----------  -----------  -----------
                                            (DOLLAR AMOUNTS IN MILLIONS)
<S>                                       <C>     <C>  <C>     <C>  <C>     <C>
Automotive............................... $2,427   27% $1,850   23% $1,628   20%
Energy...................................  1,916   22   2,378   29   2,862   34
Packaging................................  2,750   31   2,184   27   2,042   24
Shipbuilding.............................  1,756   20   1,753   21   1,861   22
Other....................................     --   --      --   --       1   --
Intergroup sales.........................     (9)  --      (7)  --      (8)  --
                                          ------  ---  ------  ---  ------  ---
  Total.................................. $8,840  100% $8,158  100% $8,386  100%
                                          ======  ===  ======  ===  ======  ===
</TABLE>    
 
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES AND
MINORITY INTEREST
 
<TABLE>   
<CAPTION>
                                                             1995   1994   1993
                                                            ------ ------ ------
                                                                 (MILLIONS)
<S>                                                         <C>    <C>    <C>
Automotive................................................. $  235 $  205 $  198
Energy.....................................................    333    415    411
Packaging..................................................    457    209    139
Shipbuilding...............................................    160    200    225
Other......................................................    381    261    219
                                                            ------ ------ ------
  Total.................................................... $1,566 $1,290 $1,192
                                                            ====== ====== ======
</TABLE>    
 
                                       1
<PAGE>
 
CAPITAL EXPENDITURES FOR CONTINUING OPERATIONS
 
<TABLE>   
<CAPTION>
                                                     1995      1994      1993
                                                   --------  --------  --------
                                                       (DOLLAR AMOUNTS IN
                                                           MILLIONS)
<S>                                                <C>  <C>  <C>  <C>  <C>  <C>
Automotive........................................ $204  22% $106  16% $ 89  21%
Energy............................................  334  36   331  51   170  41
Packaging.........................................  316  34   166  26   124  30
Shipbuilding......................................   77   8    29   5    36   8
Other.............................................    4  --    14   2     1  --
                                                   ---- ---  ---- ---  ---- ---
  Total........................................... $935 100% $646 100% $420 100%
                                                   ==== ===  ==== ===  ==== ===
</TABLE>    
 
  The interest expense, income taxes and minority interest from continuing
operations that are not allocated to the major businesses were as follows:
 
<TABLE>     
<CAPTION>
                                                                 1995 1994 1993
                                                                 ---- ---- ----
                                                                   (MILLIONS)
   <S>                                                           <C>  <C>  <C>
   Interest Expense (net of interest capitalized)............... $287 $262 $276
   Income Tax Expense...........................................  478  325  359
   Minority Interest............................................   33    1   --
</TABLE>    
 
                              TENNECO AUTOMOTIVE
 
  The principal business operations of Tenneco Automotive and its affiliates
are Walker Manufacturing Company and Monroe Auto Equipment Company.
 
  Walker Manufacturing Company and its affiliates ("Walker") manufacture a
variety of automotive exhaust systems and emission control products. In the
United States, Walker operates nine manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities,
and also has two research and development facilities. In addition, Walker
operates 25 manufacturing facilities located in Australia, Canada, the United
Kingdom, Mexico, Denmark, Germany, France, Spain, Portugal and Sweden, and
also has one engineering and technical center in Germany.
 
  Walker's products are sold to automotive manufacturers for use as original
equipment and to wholesalers and retailers for sale as replacement equipment.
Sales to the original equipment market are directly dependent on new car
sales, and sales to the replacement market are related to the service life of
original equipment and to the level of maintenance by individual owners of
their automobiles. The service life of exhaust systems has increased in recent
years, resulting in a longer time period for the exhaust replacement rate.
 
                                       2
<PAGE>
 
  The following table sets forth information relating to Walker's sales:
<TABLE>
<CAPTION>
                                                                 PERCENTAGE OF
                                                                     SALES
                                                                 ----------------
                                                                 1995  1994  1993
                                                                 ----  ----  ----
      <S>                                                        <C>   <C>   <C>
      United States Sales
        Automotive replacement equipment (primarily exhaust
         system parts)..........................................  46%   48%   52%
        Automotive original equipment...........................  54    52    48
                                                                 ---   ---   ---
                                                                 100%  100%  100%
                                                                 ===   ===   ===
      Foreign Sales
        Automotive replacement equipment........................  42%   74%   78%
        Automotive original equipment...........................  58    26    22
                                                                 ---   ---   ---
                                                                 100%  100%  100%
                                                                 ===   ===   ===
      Total Sales by Geographic Area
        United States...........................................  42%   65%   67%
        European Union..........................................  45    27    26
        Canada..................................................   7    --    --
        Other areas.............................................   6     8     7
                                                                 ---   ---   ---
                                                                 100%  100%  100%
                                                                 ===   ===   ===
</TABLE>
 
  In November 1994, Walker acquired ownership of Heinrich Gillet GmbH & Co. KG
and its affiliates ("Gillet"), a manufacturer of exhaust systems headquartered
at Edenkoben, Germany. The combination of Gillet, Europe's largest original
equipment exhaust supplier, and Walker's European division, which is Europe's
largest replacement market supplier, increased Walker's European sales in 1995
by approximately 150%.
 
  Monroe Auto Equipment Company and its affiliates ("Monroe") are engaged
principally in the design, manufacture and distribution of ride control
products. Monroe ride control products consist of hydraulic shock absorbers,
air adjustable shock absorbers, spring assisted shock absorbers, gas charged
shock absorbers, struts, replacement cartridges and electronically adjustable
suspension systems. Monroe manufactures and markets replacement shock
absorbers for virtually all domestic and most foreign makes of automobiles. In
addition, Monroe manufactures and markets shock absorbers and struts for use
as original equipment on passenger cars and trucks, as well as for other uses.
Monroe has seven manufacturing facilities in the United States and ten foreign
manufacturing operations in Australia, Belgium, Canada, Mexico, the United
Kingdom, Spain and New Zealand. (The manufacturing operations in Brazil are
not owned by subsidiaries of the Company.)
 
  The following table sets forth information relating to Monroe's sales:
<TABLE>
<CAPTION>
                                                               PERCENTAGE OF
                                                                   SALES
                                                               ----------------
                                                               1995  1994  1993
                                                               ----  ----  ----
      <S>                                                      <C>   <C>   <C>
      United States Sales
        Automotive replacement equipment......................  70%   72%   72%
        Automotive original equipment.........................  30    28    28
                                                               ---   ---   ---
                                                               100%  100%  100%
                                                               ===   ===   ===
      Foreign Sales
        Automotive replacement equipment......................  64%   66%   65%
        Automotive original equipment.........................  36    34    35
                                                               ---   ---   ---
                                                               100%  100%  100%
                                                               ===   ===   ===
      Total Sales by Geographic Area
        United States.........................................  52%   55%   58%
        European Union........................................  39    36    33
        Canada................................................   3    --    --
        Other areas...........................................   6     9     9
                                                               ---   ---   ---
                                                               100%  100%  100%
                                                               ===   ===   ===
</TABLE>
 
  In 1995, Tenneco Automotive acquired a 51% interest in a joint venture that
has two ride control manufacturing facilities in India and a 51% interest in a
joint venture that has one ride control manufacturing facility in China. It is
anticipated that the joint venture in India will also manufacture exhaust
systems.
 
                                       3
<PAGE>
 
  Tenneco Automotive owns and licenses the rights under a number of domestic
and foreign patents and trademarks relating to its products and businesses. It
manufactures and distributes its products primarily under the names "Walker"
and "Monroe," which are well recognized in the marketplace.
 
  Tenneco Automotive is actively pursuing opportunities to expand its business
by entering additional geographic areas, including countries in Eastern
Europe, Asia and South America. It is anticipated that this expansion will
occur through a variety of means, including joint ventures and acquisitions.
 
  The operations of Tenneco Automotive face intense competition from other
manufacturers of automotive equipment.
 
                                TENNECO ENERGY
 
  Tennessee is engaged in the interstate and intrastate transportation and
marketing of natural gas, with operations conducted by Tenneco Energy Inc. and
other related subsidiaries of the Company (collectively, "Tenneco Energy").
Tenneco Energy is also engaged in related businesses that are not generally
subject to regulation by the Federal Energy Regulatory Commission ("FERC")
which Tenneco Energy believes have the potential to generate higher returns
than its regulated businesses. The principal activities of these business
units include the development of and participation in international natural
gas pipelines, primarily in Australia, and in international and domestic gas-
fired power generation projects, and the development of natural gas production
and production financing programs for producers, primarily in the United
States.
 
INTERSTATE PIPELINE OPERATIONS
 
  Tenneco Energy's interstate pipeline operations include the pipeline systems
of the Company, Midwestern Gas Transmission Company ("Midwestern") and East
Tennessee Natural Gas Company ("East Tennessee"), which are primarily engaged
in the transportation and storage of natural gas for producers, marketers,
end-users, and other gas transmission and distribution companies.
 
  The Company's multiple-line system begins in gas-producing regions of Texas
and Louisiana, including the continental shelf of the Gulf of Mexico, and
extends into the northeastern section of the United States, including the New
York City and Boston metropolitan areas. Midwestern's pipeline system extends
from Portland, Tennessee, to Chicago, and principally serves the Chicago
metropolitan area. East Tennessee's pipeline system serves the states of
Tennessee, Virginia and Georgia.
 
  At December 31, 1995, Tenneco Energy's interstate gas transmission systems
included approximately 16,300 miles of pipeline, gathering lines and sales
laterals, together with related facilities that include 90 compressor stations
with an aggregate of approximately 1.5 million horsepower. These systems also
include underground and above-ground gas storage facilities to permit
increased deliveries of gas during peak demand periods. The total design
delivery capacity of Tenneco Energy's interstate systems at December 31, 1995,
was approximately 4,800 million cubic feet ("MMCF") of gas per day, and
approximately 5,600 MMCF on peak demand days, which includes gas withdrawn
from storage.
 
  Tenneco Energy also has a 13.2% interest in Iroquois Gas Transmission
System, L.P. ("Iroquois"). The 370-mile Iroquois pipeline extends from the
Canadian border at Waddington, New York, to Long Island, New York, and is
designed to deliver (directly or through interconnecting pipelines such as
Tennessee Gas Pipeline Company) 818 MMCF of gas per day to local distribution
companies and electric generation facilities in six states. For more
information on Iroquois, see Item 3, "Legal Proceedings."
 
  In December 1995, Tenneco Energy sold its 50% interest in Kern River Gas
Transmission Company ("Kern River"). This sale was a part of Tennessee's
ongoing plan to redeploy assets into its primary growth businesses, which
include the nonregulated natural gas operations. Kern River owns a 904-mile
pipeline system extending from Wyoming to California.
 
                                       4
<PAGE>
 
 Gas Sales and Transportation Volumes
 
  The following table sets forth the volumes of gas, stated in billions of
British thermal units ("BBtu"), sold and transported by Tenneco Energy's
interstate pipeline systems for the periods shown.
 
<TABLE>
<CAPTION>
                                                     1995      1994      1993
                                                   --------- --------- ---------
   <S>                                             <C>       <C>       <C>
   Sales*.........................................    95,397   131,097   213,210
   Transportation*................................ 2,139,169 2,183,944 2,118,936
                                                   --------- --------- ---------
     Total........................................ 2,234,566 2,315,041 2,332,146
                                                   ========= ========= =========
</TABLE>
--------
*  These sales and transportation volumes include all natural gas sold or
   transported by Tenneco Energy's interstate pipeline companies. The table
   includes Tenneco Energy's proportionate share of transportation volumes of
   the joint ventures in which it had interests during 1995; of the total
   transportation volumes shown, 183,281 BBtu was attributable to these joint
   venture interests in 1995, 167,961 BBtu in 1994 and 169,871 BBtu in 1993.
   Intercompany deliveries of natural gas have not been eliminated from the
   table.
 
 Federal Regulation
 
  Tenneco Energy's interstate natural gas pipeline companies are "natural gas
companies" as defined in the Natural Gas Act of 1938, as amended (the "Natural
Gas Act"). As such, these companies are subject to the jurisdiction of the
FERC. Tenneco Energy's interstate pipeline operations are operated pursuant to
certificates of public convenience and necessity issued under the Natural Gas
Act and pursuant to the Natural Gas Policy Act of 1978. The FERC regulates the
interstate transportation and certain sales of natural gas, including, among
other things, rates and charges allowed natural gas companies, extensions and
abandonments of facilities and service, rates of depreciation and amortization
and the accounting system utilized by the companies.
 
  Prior to the FERC's industry restructuring initiatives in the 1980's,
Tenneco Energy's interstate pipeline companies operated primarily as
merchants, purchasing natural gas under long-term contracts and reselling the
gas to customers, also under long-term contracts. Pursuant to Order 636 issued
by the FERC, the Company implemented revisions to its tariff, effective on
September 1, 1993, which restructured its transportation, storage and sales
services to convert the Company from primarily a merchant to primarily a
transporter of gas. As a result of this restructuring, the Company's gas sales
declined while certain obligations to producers under long-term gas supply
contracts continued, causing the Company to incur significant restructuring
transition costs. Pursuant to the provisions of Order 636 allowing for the
recovery of transition costs related to the restructuring, the Company has
made filings to recover gas supply realignment ("GSR") costs resulting from
remaining gas purchase obligations, costs related to its Bastian Bay
facilities, the remaining unrecovered balance of purchased gas ("PGA") costs
and the "stranded" cost of the Company's continuing contractual obligation to
pay for capacity on other pipeline systems ("TBO costs").
 
  The Company's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of the
Company to file for the recovery of losses upon disposition of these assets.
The Company has filed for appellate review of the FERC actions and is
confident that the Bastian Bay costs will ultimately be recovered as
transition costs under Order 636; the FERC has not contested the ultimate
recoverability of these costs.
 
  The filings implementing the Company's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery is subject to refund pending FERC review and approval for
eligibility: 1) direct-billing of unrecovered PGA costs to its former sales
customers over a twelve-month period; 2) recovery of TBO costs, which the
Company is obligated to pay under existing contracts, through a surcharge from
firm transportation customers, adjusted annually; and 3) GSR cost recovery of
90% of such costs over a period of up to 36 months from firm transportation
customers and recovery of 10% of such costs from interruptible transportation
customers over a period of up to 60 months.
 
                                       5
<PAGE>
 
  Following negotiations with its customers, the Company filed in July 1994
with the FERC a Stipulation and Agreement (the "PGA Stipulation"), which
provides for the recovery of PGA costs of approximately $100 million and the
recovery of costs associated with the transfer of storage gas inventory to new
storage customers in the Company's restructuring proceeding. The PGA
Stipulation eliminates all challenges to the PGA costs, but establishes a cap
on the charges that may be imposed upon former sales customers. On November
15, 1994, the FERC issued an order approving the PGA Stipulation and resolving
all outstanding issues. On April 5, 1995, the FERC issued its order on
rehearing affirming its initial approval of the PGA Stipulation. The Company
implemented the terms of the PGA Stipulation and made refunds in May 1995. The
refunds had no material effect on Tennessee's reported net income. The orders
approving the PGA Stipulation have been appealed to the D.C. Circuit Court of
Appeals by certain customers. The Company believes the FERC orders approving
the PGA Stipulation will be upheld on appeal.
 
  The Company is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function, pending FERC review of data
submitted by the Company. The FERC subsequently issued an order requiring the
Company to refund certain costs from this surcharge. The Company is appealing
this decision and believes such appeal will likely be successful.
 
  With regard to the Company's GSR costs, the Company, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
the Company of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge ("ALJ"). The hearing, which concluded in
July 1995, was limited to the issue of whether the settlement agreements are
prudent. The ALJ concluded, in his initial decision issued in December 1995,
that the settlement was imprudent. The Company has filed exceptions to this
initial decision and believes that this decision will not impair the Company's
recovery of the costs resulting from this contract. The FERC has committed to
issuing a final order by December 31, 1996.
 
  Also related to the Company's GSR costs, on October 14, 1993, the Company
was sued in the State District Court of Ector County, Texas, by ICA Energy,
Inc. ("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA
and TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading seeks $1.5 billion from the Company for alleged damages caused by the
Company's refusal to purchase gas produced from the TransTexas leases covering
the new production and lands. Neither ICA nor TransTexas were original parties
to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds precluded the plaintiffs from adding new
production or acreage to the contract. On May 4, 1995, the trial court granted
the Company's motion for summary judgment; the plaintiffs have filed a notice
of appeal. Thereafter, ICA and TransTexas filed a motion for summary judgment
on a separate issue involving the term "committed reserves" and whether the
Company has a contractual obligation to purchase gas produced from a lease not
described in the gas contract. On November 8, 1995, the trial court granted
ICA's and TransTexas' motion in part. That order, which would be finalized
upon conclusion of the trial, also held that ICA's and TransTexas' rights are
subject to certain limitations of the Texas Business and Commerce Code. In
addition to these defenses, which are to be resolved at trial, the Company has
other defenses which it has asserted and intends to pursue. The Company has
filed a Motion to Clarify the November 8, 1995 order together with a new
motion for partial summary judgment concerning the committed reserve issue.
The November 8, 1995 ruling does not affect the trial court's previous May 4,
1995 order granting summary judgment to the Company.
 
                                       6
<PAGE>
 
  The Company has been engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company accrued amounts in the
first quarter of 1995 which it believes are adequate to cover the resolution
of these matters. On August 1, 1995, the Texas Supreme Court affirmed a ruling
of the Court of Appeals favorable to the Company in one of these matters and
indicated that it would remand the case to the trial court. Motions for
rehearing have been filed by the producers. As of the date hereof, the court
had not ruled on those motions and mandate had not been issued.
 
  As of December 31, 1995, the Company has deferred GSR costs yet to be
recovered from its customers of approximately $462 million, net of $316
million previously recovered from its customers, subject to refund. A
proceeding before a FERC ALJ is scheduled to commence in early 1996 to
determine whether the Company's GSR costs are eligible for cost recovery. The
FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although Order 636 provides for complete recovery
by pipelines of eligible and prudently incurred transition costs, certain
customers have challenged the prudence and eligibility of the Company's GSR
costs and the Company has engaged in settlement discussions with its customers
concerning the amount of such costs in response to the FERC and customer
statements acknowledging the desirability of such settlements.
 
  Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
 
  On December 30, 1994, the Company filed for a general rate increase (the
"1995 Rate Case"). On January 25, 1995, the FERC accepted the filing,
suspended its effectiveness for the maximum period of five months pursuant to
normal regulatory process, and set the matter for hearing. On July 1, 1995,
the Company began collecting rates, subject to refund, reflecting an $87
million increase in the Company's annual revenue requirement. Settlement
discussions with the FERC staff and customers regarding 1995 Rate Case issues,
including structural rate design and increased revenue requirements, are
ongoing and the Company is reserving revenues it believes adequate to cover
any refunds that may be required upon final settlement of this proceeding. A
hearing is scheduled to commence in March 1996.
 
 Competition
 
  The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, Tenneco Energy's
interstate pipelines face competitive pressure from other major pipeline
systems, enabling local distribution companies and end users to choose a
supplier or switch suppliers based on the short term price of gas and the cost
of transportation. Competition between pipelines is particularly intense in
Midwestern's Chicago and Northern Indiana markets, in East Tennessee's
Roanoke, Chattanooga and Atlanta markets, and in the Company's supply area,
Louisiana and Texas. In some instances, Tenneco Energy's pipelines have been
required to discount their transportation rates in order to maintain their
market share. Additionally, transportation contracts representing
approximately 70% of firm transportation capacity will be expiring over the
next five years, principally in the year 2000. The renegotiation of these
contracts may be impacted by these competitive factors.
 
 Gas Supply
 
  With full implementation of Order 636, the Company's firm sales obligations
requiring maintenance of long-term gas purchase contracts have declined from
over a 1.4 billion dekatherm maximum daily delivery obligation to less than a
200 million dekatherm maximum daily delivery obligation. As discussed above
under
 
                                       7
<PAGE>
 
the caption "Federal Regulation," the Company has substantially reduced its
natural gas purchase portfolio in line with these requirements through
termination and assignment to third parties. Although the Company's
requirements for purchased gas are substantially less than prior to its
implementation of Order 636, Tenneco Energy is pursuing the attachment of gas
supplies to the Company's pipeline system for transportation by others.
Current gas supply activities include development of offshore and onshore
pipeline gathering projects and utilization of production financing programs
to spur exploration and development drilling in areas adjacent to the
Company's system. Major gathering systems in the Gulf of Mexico were completed
during the fourth quarter of 1994.
 
GAS MARKETING AND INTRASTATE PIPELINES
   
  Tenneco Energy Resources Corporation, an 80% owned subsidiary of Tennessee,
and its subsidiaries (collectively, "Tenneco Resources") are engaged in the
businesses of marketing natural gas and owning and operating approximately
1,300 miles of pipelines that serve the Texas Gulf Coast and West Texas
markets. Its businesses include the buying, selling, storage and
transportation of natural gas and price risk management services, including
the offering of fixed, floating and other natural gas pricing for short or
long terms using natural gas futures contracts or other financial instruments.
These businesses serve third parties, including producers, marketers, end-
users, distribution companies and gas transmission companies. During 1995
Tenneco Resources transported, processed or sold approximately 2.3 billion
cubic feet of natural gas per day for its customers. Tenneco Resources also
owns and manages gas gathering systems and natural gas liquids plants in
Pennsylvania, Texas, Louisiana and the outer continental shelf of the Gulf of
Mexico.     
 
  The following table sets forth the volumes of gas, stated in BBtu, sold and
transported by subsidiaries of Tenneco Resources for the periods indicated:
 
<TABLE>
<CAPTION>
                                                        1995     1994     1993
                                                       ------- --------- -------
   <S>                                                 <C>     <C>       <C>
   Sales.............................................. 642,096   739,432 741,800
   Transportation..................................... 229,415   273,587 235,940
                                                       ------- --------- -------
     Total............................................ 871,511 1,013,019 977,740
                                                       ======= ========= =======
</TABLE>
 
  In February 1994, a 20% interest in Tenneco Resources was sold to Ruhrgas
AG, Germany's largest natural gas company.
 
INTERNATIONAL
 
  Tenneco Gas International Inc. and other subsidiaries of Tennessee
(collectively, "TGI") was organized to extend the Company's traditional
activities in North American pipelines to international pipeline, power, and
energy-related projects, with a current focus on activities in South America,
Southeast Asia, Australia and Europe. TGI was selected to construct, own and
operate a 470 mile natural gas pipeline in Queensland, Australia; construction
of the pipeline commenced in late 1995 with completion expected in early 1997.
In June 1995, Tennessee acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488 mile pipeline, for
approximately $225 million. The purchase resulted from the privatization of
Australia's natural gas industry. TGI also has interests in two consortiums
pursuing the development of two natural gas pipeline projects in South
America, from Argentina to Chile and from Bolivia to Brazil, including related
gas-fired electric generation plants.
 
  In December 1995, TGI was selected by the Beijing Natural Gas Transportation
Company ("BGTC") to serve as technical advisor for the construction of China's
first major onshore natural gas pipeline. BGTC, a joint venture between the
Chinese National Petroleum Corporation and the city of Beijing, will build a
600 mile line linking the Jingbian gas field in central China's Ordos Basin
with Beijing. Construction is scheduled to commence in March 1996, with an in-
service date scheduled for October 1997.
 
                                       8
<PAGE>
 
POWER GENERATION
 
  Tenneco Power Generation Company ("Tenneco Power") has a 17.5% interest in a
power plant in Springfield, Massachusetts and a 50% interest in a cogeneration
project in Florida.
 
  In December 1995, Tenneco Power entered into an agreement with Energy Equity
Corp., Ltd., an Australian company, to purchase 50% of two of its subsidiaries
subject to satisfaction of certain conditions. The new joint venture will
construct a 135 megawatt gas fired power plant.
 
TENNECO VENTURES
 
  Tenneco Gas Production Corporation ("Tenneco Production") and Tenneco
Ventures Corporation ("Tenneco Ventures"), subsidiaries of Tennessee, together
with institutional investors and partners, invest in oil and gas properties
and finance independent producers engaged in exploration and development
projects. Tenneco Ventures and Tenneco Production hold various ownership
interests in oil and gas fields located primarily in the Gulf of Mexico, Texas
and Louisiana. The reserves in those fields are estimated to be in excess of
approximately 150 billion cubic feet of natural gas. Tenneco Ventures is also
involved in TGI's international projects through exploration and development
of gas reserves in Indonesia, Poland and Bolivia.
 
                               TENNECO PACKAGING
   
  Tenneco Packaging Inc. and other related Tennessee subsidiaries
(collectively, "Tenneco Packaging") manufacture and sell containerboard,
paperboard, corrugated shipping containers, folding cartons, plastic food
storage and trash bags, stretch film, disposable plastic and aluminum
containers, molded fiber products and other related products. Its shipping
container products are used in the packaging of food, paper products, metal
products, rubber and plastics, automotive products and point of purchase
displays. Its folding cartons are used in the packaging of soap and detergent,
food products and a wide range of other consumer goods. Uses for its molded
fiber products include produce and egg packaging, food service items and
institutional and consumer disposable dinnerware, as well as a wide range of
other consumer and industrial goods. Its disposable plastic and aluminum
containers are sold to the food service, food processing and related
industries. Plastic food storage and trash bags, foam dinnerware and related
products are sold through a variety of retail outlets. In addition to products
bearing the name "Tenneco Packaging", Tenneco Packaging manufactures and
distributes products under the names "EZ FOIL(R)," "Revere Foil Containers,"
"Dahlonega Packaging," "Agri-Pak," "PRESSWARE(R) International," "HEFTY(R),"
"HEFTY ONE ZIP(R)," "BAGGIES(R)" and "KORDITE(R)".     
 
  The following table sets forth information with respect to Tenneco
Packaging's sales during the past three years:
<TABLE>
<CAPTION>
                                                                  PERCENTAGE OF
                                                                      SALES
                                                                  ----------------
                                                                  1995  1994  1993
                                                                  ----  ----  ----
   <S>                                                            <C>   <C>   <C>
   Sales by Product Type
     Corrugated shipping containers and containerboard products.   58%   56%   53%
     Disposable plastic and aluminum products...................   22    20    22
     Molded fiber products......................................    7     9     9
     Folding cartons and recycled paperboard mill products......    7     9    10
     Paper stock and other......................................    6     6     6
                                                                  ---   ---   ---
                                                                  100%  100%  100%
                                                                  ===   ===   ===
   Total Sales by Geographic Area
     United States..............................................   90%   90%   88%
     European Union.............................................    5     5     7
     Canada.....................................................    1     2     2
     Other areas................................................    4     3     3
                                                                  ---   ---   ---
                                                                  100%  100%  100%
                                                                  ===   ===   ===
</TABLE>
 
                                       9
<PAGE>
 
  At December 31, 1995, Tenneco Packaging operated 69 container plants, seven
folding carton plants and 12 corrugated containerboard and paperboard machines
at six mills. Two of the mills (located in Georgia and Wisconsin), including
substantially all of the equipment associated with both mills, are leased from
third parties. Tenneco Packaging also has eight molded fiber products plants,
one pressed paperboard plant, three lumber plants, one pole mill, three paper
stock plants, and 25 disposable plastic and aluminum container plants. Tenneco
Packaging's plants are located primarily in the United States. Its foreign
plants are located in Great Britain, Spain, Canada, Switzerland and Germany.
In the United States, Tenneco Packaging has a 50% ownership interest in a
molded fiber distribution company and in a hardwood chip mill. In addition,
Tenneco Packaging has a 50% interest in a folding carton plant in Dongguan,
China, and a 50% interest in a folding carton plant in Bucharest, Romania.
   
  In November 1995, Tenneco Inc. acquired the assets of Mobil Corporation's
plastics division for $1.3 billion. As part of the acquisition transaction,
Tenneco Inc. made a capital contribution to Tennessee of the acquired net
assets of the plastics business. The business manufactures HEFTY(R) trash bags
and BAGGIES(R) food storage bags for the consumer market. It also manufactures
polystyrene foam foodservice containers, plates and meat trays; clear take-out
containers from thermoformed polystyrene packaging; and polyethylene film
products including liners, produce and retail bags, and medical and industrial
disposable packaging. The division employs 4,100 people at 11 manufacturing
plants and 16 distribution centers in the United States and Canada.     
 
  Additionally, during 1995 Tenneco Packaging made eight other acquisitions in
the packaging segment. The total purchase price for these acquisitions was
$104 million. Tenneco Inc. acquired an additional packaging operation for $58
million and made a capital contribution to Tennessee of the acquired net
assets of this business.
 
  Tenneco Packaging owns and licenses the rights under a number of domestic
and foreign patents and trademarks relating to its products and businesses.
The patents, trademarks and other intellectual property owned by Tenneco
Packaging are important in the manufacturing and distribution of its products.
 
  Generally, Tenneco Packaging faces intense competition from numerous
competitors and alternative products in each of its geographic and product
markets.
 
  The principal raw materials used by Tenneco Packaging in its mill operations
are virgin pulp and reclaimed paper stock and, in its specialty products
operations, aluminum and plastics. Tenneco Packaging obtains virgin pulp and
reclaimed paper stock from independent logging contractors, from timberlands
owned or controlled by it, from operation of its reclaimed paper stock
collecting and processing plants and from other sources. Tenneco Packaging
obtains aluminum rolling stock and plastic feed stock from various suppliers.
 
  At December 31, 1995, Tenneco Packaging owned 187,000 acres of timberland in
Alabama, Michigan, Mississippi and Tennessee and leased, managed or had
cutting rights on an additional 808,000 acres of timberland in those states
(excluding Michigan) and in Florida, Wisconsin and Georgia. During the years
1995, 1994 and 1993 approximately 31%, 20% and 22%, respectively, of the
virgin fiber and timber used by Tenneco Packaging in its operations was
obtained from timberlands controlled by it.
 
                                      10
<PAGE>
 
                           NEWPORT NEWS SHIPBUILDING
 
  Newport News Shipbuilding and Dry Dock Company ("Newport News"), a Tennessee
subsidiary located in Newport News, Virginia, is the largest privately owned
shipbuilding company in the United States. Its primary business is
constructing and overhauling nuclear-powered aircraft carriers for the United
States Navy. Newport News also overhauls and repairs U.S. Navy and commercial
vessels and refuels nuclear-powered ships. Newport News returned to the
commercial shipbuilding market with the October 1994 award of product tanker
contracts from a foreign owner for two ships. Options for two additional ships
were exercised in June 1995. Additionally, Newport News was awarded a contract
to construct five additional "Double Eagle" tankers which will be used in U.S.
domestic trade. In February 1996, the owners secured financing guarantees from
the Maritime Administration. Newport News is also pursuing international sales
of its fast frigate design and is currently being considered under
congressional budgets for additional submarine work. Newport News'
shipbuilding facilities are located on the James River on approximately 475
acres of property which it owns.
 
  At December 31, 1995, the aggregate amount of Newport News' backlog of work
was approximately $4.6 billion (substantially all of which is U.S. Navy-
related), a decrease from the previous backlog of $5.6 billion as of December
31, 1994. Although cuts in naval shipbuilding have continued to put pressure
on the Newport News backlog, Newport News was successful in adding $1 billion
in new work during 1995. Major additions to the backlog included the overhaul
contract for the nuclear-powered aircraft carrier USS Eisenhower, two Double
Eagle product tankers and engineering design work for aircraft carriers and
submarines. At December 31, 1995, Newport News anticipated that it would
complete approximately $1.5 billion of the current backlog by December 31,
1996, and an additional $1.0 billion in 1997. The December 31, 1995, backlog
of Newport News included contracts for the construction of two Nimitz-class
aircraft carriers, scheduled for delivery in 1998 and 2002, and two Los
Angeles-class attack submarines to be delivered in 1996. The backlog also
included contracts for the construction of the four product tankers, the
conversion of two Sealift ships, and the Eisenhower overhaul. The present
backlog extends into 2002. For information concerning the impact of the
conversion work on Newport News' margins, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
 
  Newport News has various other contracts for U.S. Navy design work and for
industrial products. As is typical for similar Government contracts, all of
Newport News' contracts with the U.S. Navy are unilaterally terminable by the
U.S. Navy at its convenience with compensation for work completed and costs
incurred.
 
  To increase its competitiveness worldwide and in response to the anticipated
decline in U.S. Navy budgets, Newport News has reduced its workforce by
approximately 11,000 or 37% between December 31, 1990 and December 31, 1995.
 
  Newport News is aggressively pursuing new business opportunities and
attempting to expand its business base in light of the declining U.S. Navy
backlog; however, Newport News faces intense worldwide competition in its
efforts to enter new markets. During 1995, Newport News entered into contracts
to construct two additional product tankers. In addition it has a 40% interest
in a venture that will design, construct, own and operate a shipyard in Abu
Dhabi, United Arab Emirates. Construction of the shipyard is expected to be
completed in 1998. While the percentage of Newport News' total business for
commercial work is expected to increase, the U.S. Navy will continue to be its
primary customer. Newport News is pursuing new submarine design and
construction work, major U.S. Navy overhaul and repair work, new commercial
construction contracts, and foreign military sales. For additional
information, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
                                      11
<PAGE>
 
                               BUSINESS STRATEGY
 
  Since September 1991, Tenneco Inc., Tennessee's parent company, has focused
on various initiatives and taken steps designed to strengthen its financial
results and improve its financial flexibility and create greater returns to
its stockholders. Asset evaluation and redeployment have been and will
continue to be important parts of this strategy. Tenneco Inc. continues to
study opportunities for the strategic repositioning and restructuring of its
operations (including through acquisitions, dispositions, divestitures, spin-
offs and joint venture participation, wholly and partially, of various
businesses). Tenneco Inc. has expressed an intention to act on a broad range
of options--spin-offs, sales, public offerings, mergers, joint ventures and
acquisitions--until it is satisfied that its strategic mix and corporate
structure maximize stockholder value. These actions may include one, two or
all of Tennessee's businesses.
 
                             ENVIRONMENTAL MATTERS
 
  The Company estimates that its subsidiaries will make capital expenditures
for environmental matters of approximately $60 million in 1996 and that
capital expenditures for environmental matters will range from approximately
$161 million to $201 million in the aggregate for the years 1997 through 2007.
 
  For information regarding environmental matters see Item 3, "Legal
Proceedings--Environmental Proceedings" and "--Potential Superfund Liability,"
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Environmental Matters," and Note 12, "Commitments and
Contingencies" in the "Notes to Financial Statements." See also Note 1,
"Control and Summary of Accounting Policies--Environmental Liabilities," in
the "Notes to Financial Statements."
 
                                      12
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
   
  The following review of Tennessee's financial condition and results of
operations should be read in conjunction with the financial statements and
related notes of Tennessee Gas Pipeline Company and Consolidated Subsidiaries
presented on pages 22 to 52.     
   
1996 STRATEGIC ACTIONS     
   
  In March 1996, Tenneco sold its remaining ownership of 15.2 million shares
of common stock of Case Corporation in a public offering at $53.75 per share.
Of the 15.2 million shares sold, Tennessee owned approximately 691,000 shares.
Tennessee's net proceeds from the offering were $36 million, resulting in a
gain of $37 million, including $29 million of income tax benefit. Tenneco in
the aggregate recorded a gain of $340 million, net of $83 million of income
tax expense. As a result of this sale, Tennessee's financial statements have
been restated to reflect the operating results and the losses on the sale of
the farm and construction equipment segment as "discontinued operations" for
all periods presented.     
 
YEARS 1995 AND 1994
 
1995 STRATEGIC ACTIONS
 
  Tennessee's diversified businesses are organized and operated through
several industry segments, including "Tenneco Automotive," "Tenneco Energy,"
"Tenneco Packaging," and "Newport News Shipbuilding."
 
  During 1995, Tennessee continued implementing its strategy to redeploy
capital from non-core assets into less cyclical, higher-growth businesses. The
following asset dispositions were completed or announced during 1995:
 
  . In March 1995, Tenneco Inc. completed the initial public offering of its
    Albright & Wilson chemicals segment, resulting in net proceeds of
    approximately $700 million. Tennessee's loss on the sale, which was
    recorded in December 1994 as "discontinued operations", was $166 million,
    including income tax expense of $117 million.
     
  . Tenneco sold approximately 16.1 million shares of Case Corporation
    ("Case") common stock in a public offering in August 1995, reducing
    Tenneco's ownership in Case from 44 percent to 21 percent. Of the 16.1
    million shares sold, Tennessee owned approximately 646,000 shares.
    Tennessee's net proceeds from the offering were $22 million, resulting in
    a loss of $35 million, including $35 million of tax benefit which was
    reflected as "loss from discontinued operations." Although Tennessee
    recorded a loss on this transaction, Tenneco in the aggregate recorded a
    pre-tax gain of $101 million.     
 
  . In December 1995, Tenneco Energy sold its 50 percent interest in Kern
    River Gas Transmission Company ("Kern River"), a joint venture that owns
    a 904-mile pipeline extending from Wyoming to California. The sales price
    was $206 million, resulting in a pre-tax gain of $30 million.
 
  Tennessee acquired or announced intentions to acquire several new businesses
during 1995, including:
     
  . Tenneco Inc. acquired the plastics business of Mobil Corporation
    ("Mobil") which is the largest North American producer of polyethylene
    and polystyrene packaging on November 17, 1995 for $1.3 billion. Its
    consumer products are marketed under the HEFTY(R), KORDITE(R) and
    BAGGIES(R) brand names. The acquired plastics business is also a leader
    in polystyrene foam packaging, thermoformed polystyrene packaging and
    polyethylene film products for food service and industrial consumers. As
    part of the acquisition transaction, Tenneco Inc. made a capital
    contribution to Tennessee of the acquired net assets of the plastics
    business. In addition to this acquisition, Tenneco Packaging acquired two
    plastics packaging operations in the United Kingdom for $25 million
    during 1995.     
 
  . Tenneco Packaging also completed six acquisitions in the paperboard
    packaging business during 1995 for $79 million in cash and notes. Tenneco
    Inc. acquired an additional paperboard packaging operation for $58
    million and made a capital contribution to Tennessee of the acquired net
    assets of this business.
 
                                      13
<PAGE>
 
  . Tenneco Energy acquired the natural gas pipeline assets of the Pipeline
    Authority of South Australia ("PASA"), which includes a 488-mile
    pipeline, in June 1995 for approximately $225 million and a 50 percent
    interest in a gas-fired cogeneration plant from ARK Energy for
    approximately $25 million in cash.
 
  . Tenneco Automotive acquired an exhaust company and a catalytic converter
    company in 1995 for $40 million and entered into two ride control joint
    ventures for $14 million. Tenneco Automotive also announced that it will
    acquire two additional ride control companies for $36 million in 1996.
 
  Tenneco Inc. has expressed an intention to act on a broad range of options--
spin-offs, sales, public offerings, mergers, joint ventures and acquisitions--
until it is satisfied that its strategic mix and corporate structure maximize
shareowner value. These actions may include one, two or all of Tennessee's
businesses.
 
RESULTS OF OPERATIONS
   
  Tennessee's income from continuing operations in 1995 of $768 million
improved by 9 percent compared with $702 million in 1994. Improved results
from Tenneco Packaging and Tenneco Automotive and interest income from
affiliated companies were partially offset by declines in results at Tenneco
Energy and Newport News Shipbuilding, all of which are discussed below.     
   
  In 1995, Tennessee recorded a loss of $32 million on the discontinued
operations of its farm and construction equipment business. In 1994, Tennessee
recorded a loss of $199 million on the discontinued operations of its farm and
construction equipment business, Albright & Wilson chemicals business and
Tenneco Automotive's brake operations. Also, 1994 results included a charge of
$13 million for the adoption of a new accounting principle. No similar costs
were incurred in 1995. Net income in 1995 was $736 million compared with net
income of $490 million in 1994.     
 
NET SALES AND OPERATING REVENUES
 
<TABLE>       
<CAPTION>
                                                                  1995    1994
                                                                 ------  ------
                                                                  (MILLIONS)
      <S>                                                        <C>     <C>
      Automotive................................................ $2,427  $1,850
      Energy....................................................  1,916   2,378
      Packaging.................................................  2,750   2,184
      Shipbuilding..............................................  1,756   1,753
      Other.....................................................     (9)     (7)
                                                                 ------  ------
                                                                 $8,840  $8,158
                                                                 ======  ======
</TABLE>    
   
  Tennessee's 1995 revenues increased $682 million and have benefited from
strong market conditions in the packaging industry along with revenues from
acquisitions made in late 1994 and 1995. These increases more than offset
lower natural gas sales at Tenneco Energy. The results of each segment are
discussed in detail below.     
 
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
 
<TABLE>       
<CAPTION>
                                                                    1995   1994
                                                                   ------ ------
                                                                    (MILLIONS)
      <S>                                                          <C>    <C>
      Automotive.................................................. $  235 $  205
      Energy......................................................    333    415
      Packaging...................................................    457    209
      Shipbuilding................................................    160    200
      Other.......................................................    381    261
                                                                   ------ ------
                                                                   $1,566 $1,290
                                                                   ====== ======
</TABLE>    
   
  Tennessee's 1995 operating income increased by $276 million compared with
1994. Tenneco Packaging benefited from favorable market conditions in the
packaging industry and Tenneco Automotive improved as     
 
                                      14
<PAGE>
 
European original equipment and aftermarkets performed well. These increases
were offset by lower operating income at Tenneco Energy in both its regulated
and nonregulated businesses and at Newport News Shipbuilding due to lower
margins on conversion work, costs incurred to enter the highly competitive
international commercial shipbuilding markets and a charge for staff
downsizing. The results of each segment are discussed in detail below.
 
  Significant transactions affecting the comparability of operating income
between 1995 and 1994 are:
     
  . Pre-tax net gains on sales of assets and businesses of $38 million in
    1995 (primarily a mill in North Carolina and Tenneco Energy's interest in
    Kern River) compared with gains of $30 million in 1994 primarily from the
    sale of a 20 percent interest in Tenneco Energy Resources Corporation
    ("Tenneco Resources").     
 
  . Reserves established in 1995 of $30 million for estimated regulatory and
    legal settlement costs at Tenneco Energy, $30 million for restructuring
    at Tenneco Packaging's molded fiber and aluminum foil packaging
    operations and $24 million in charges at Newport News Shipbuilding
    related to staff downsizing and costs related to entering the highly
    competitive international commercial markets.
 
  . A gain from a 1994 contract settlement between Tenneco Energy and
    Columbia Gas Transmission Corporation ("Columbia Gas") of $11 million.
 
  . Charges in 1994 of $22 million at Tenneco Automotive for a plant closing
    in Ohio and consolidations in Europe associated with the acquisition of
    Heinrich Gillet GmbH & Co. KG ("Gillet"), the German exhaust
    manufacturer.
 
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
                                                                    1995   1994
                                                                   ------ ------
                                                                    (MILLIONS)
   <S>                                                             <C>    <C>
   Revenues....................................................... $2,427 $1,850
   Operating income............................................... $  235 $  205
</TABLE>
 
  Revenues for automotive parts increased $577 million to $2,427 million in
1995 from $1,850 million in 1994 because of increased sales in both the
aftermarket and original equipment market. European original equipment and
aftermarket revenues were up significantly in 1995 for both the exhaust and
ride control businesses. This increase is largely related to improved economic
conditions in many European countries where Gillet is the leading original
equipment manufacturer of exhaust components.
 
  Automotive operating income for 1995 was $235 million, compared with $205
million in 1994. The 1994 operating income included a $17 million charge for
plant consolidations in Europe associated with the Gillet acquisition and a $5
million charge taken for closing a plant in Ohio. The addition of Gillet
contributed $16 million to operating income in 1995. Operating income for 1995
included a high level of costs related to new product launches. Tenneco
Automotive completed 68 product launches for 1996 model year vehicles in 1995,
more than twice the normal levels, which strained plant capabilities and
adversely affected 1995 earnings. In connection with the new product launches,
Tenneco Automotive incurred additional costs of $10 million in 1995 including
those related to a new process, hydroforming. Hydroforming is a liquid, high-
pressure process for bending and shaping metal parts not available with
traditional manufacturing technology. The positive impact of higher sales
volumes in the European aftermarket was essentially offset by the negative
impact of lower North American aftermarket sales. Industry-wide, the North
American aftermarket experienced its sharpest decline in more than a decade.
The unusually mild winter weather in 1995 in the Northeast and Midwest slowed
automotive parts replacement rates.
 
OUTLOOK
 
  The consolidation of the exhaust operations of Walker Europe and Gillet
which was undertaken during 1995 is substantially complete and is expected to
result in improved earnings from the European original equipment business in
1996. Also, Tenneco Automotive's international expansion, including joint
ventures in India and China, acquisitions in Spain and Australia and new
international plants such as the new ride control plant in
 
                                      15
<PAGE>
 
Mexico, are expected to contribute to future earnings. Tenneco Automotive
anticipates higher original equipment volumes as a result of the high level of
new product launches undertaken in 1995 and interest by additional customers
in hydroforming technology. Tenneco also anticipates the North American
aftermarket to improve to more normal activity levels in 1996.
 
TENNECO ENERGY
<TABLE>
<CAPTION>
                                                                    1995   1994
                                                                   ------ ------
                                                                    (MILLIONS)
   <S>                                                             <C>    <C>
   Revenues....................................................... $1,916 $2,378
   Operating income............................................... $  333 $  415
</TABLE>
 
  The regulated portion of Tenneco Energy's business experienced a decline in
revenues from $918 million in 1994 to $761 million in 1995. Lower regulated
merchant gas sales along with a small decrease in transportation revenues
caused the decline. Under Federal Energy Regulatory Commission ("FERC") Order
636, customers assume the responsibility for acquiring their gas supplies,
reducing sales by the pipeline. The contract settlement reached with Columbia
Gas in 1994 as part of its bankruptcy proceedings reduced its contract volume,
contributing to the transportation revenue decline in 1995.
 
  Operating income in the regulated portion of Tenneco Energy's business was
down by $27 million in 1995 as compared with 1994. The 1995 results included
the $30 million pre-tax gain on the sale of Tennessee's interest in Kern River
and a $21 million reserve for estimated regulatory and legal settlement costs
while 1994 included the $11 million benefit from the Columbia Gas contract
settlement. Excluding these transactions, Tenneco Energy's regulated business
operating income decrease was primarily due to the reduction of revenues
related to the early termination of transportation contracts and lower returns
earned on regulated assets due to the operating environment created by Order
636. This decrease was partially offset by the benefit Tennessee realized
through the implementation of a new rate structure in July 1995.
 
  Revenues in Tenneco Energy's nonregulated businesses were $1,155 million,
down $305 million compared with 1994. Average natural gas prices were lower in
1995 compared with 1994, contributing approximately $175 million to the
revenue decrease. Natural gas volumes declined also, contributing $148 million
to the revenue decrease. Warmer weather in early 1995 resulted in lower levels
of storage activity during the year, decreasing demand for natural gas and
forcing prices lower. These effects were offset somewhat by $18 million in
revenues earned by the PASA assets which were acquired by Tenneco Energy in
June 1995.
 
  The 1995 operating income for the nonregulated business decreased $55
million compared with 1994. Operating income in 1994 included a $23 million
gain from the sale of a 20 percent interest in Tenneco Resources to Ruhrgas
AG. The remainder of the operating income decline was due to increased startup
and development costs on international programs, a $9 million reserve for
estimated legal settlement costs and lower margins and volumes due to lower
demand in gas marketing. Tenneco Energy operating results included $9 million
in income from operating the PASA assets during the last half of 1995.
 
OUTLOOK
   
  During 1995, Tenneco Energy sold its interest in Kern River and purchased
the PASA assets in Australia. Tenneco Energy also began construction during
1995 of a 470-mile pipeline in Queensland, Australia, has been chosen to
participate in constructing a pipeline from Bolivia to Brazil, is
participating in feasibility studies for the construction of a pipeline in
Taiwan and was selected as a technical advisor for the construction of China's
first major onshore natural gas pipeline. Tenneco Energy and its partners
continue to pursue pre-construction commitments from prospective natural gas
shippers and obtaining right-of-way concessions for the construction of the
Argentina to Chile pipeline. Also, Tenneco Energy has acquired a stake in
GreyStar Corp., a Houston-based offshore services company that serves
production and pipeline facilities in the Gulf of Mexico. These actions are
intended to reduce Tenneco Energy's reliance on regulated businesses,
increasing the opportunity to earn higher returns.     
 
                                      16
<PAGE>
 
  The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, Tenneco Energy's
interstate pipelines face competitive pressure from other major pipeline
systems, enabling local distribution companies and end users to choose a
supplier or switch suppliers based on the short term price of gas and the cost
of transportation. Competition between pipelines is particularly intense in
Midwestern Gas Transmission's Chicago and Northern Indiana markets, in East
Tennessee Natural Gas' Roanoke, Chattanooga and Atlanta markets, and in
Tennessee Gas Pipeline Company's supply area, Louisiana and Texas. In some
instances, Tenneco Energy's pipelines have been required to discount their
transportation rates in order to maintain their market share. Additionally,
transportation contracts representing approximately 70 percent of firm
transportation capacity will be expiring over the next five years, principally
in the year 2000. The renegotiation of these contracts may be impacted by
these competitive factors.
 
TENNECO PACKAGING
 
<TABLE>
<CAPTION>
                                                                    1995   1994
                                                                   ------ ------
                                                                    (MILLIONS)
   <S>                                                             <C>    <C>
   Revenues....................................................... $2,750 $2,184
   Operating income............................................... $  457 $  209
</TABLE>
 
  Tenneco Packaging's paperboard business experienced excellent results during
1995. Revenues were up $399 million to $1,928 million in 1995, primarily as a
result of strong pricing improvements. As a result of the move into higher
margin graphics and specialty corrugated segments, Tenneco Packaging realized
higher revenues on comparable volumes. In addition, strong industry demand for
linerboard and corrugated products served to substantially increase prices for
those products in 1995 and contributed to record revenues.
 
  Operating income in the paperboard business improved by $287 million to $426
million in 1995. This improvement includes the 1995 pre-tax gain of $14
million on the sale of a mill in North Carolina. Effective mix management
allowed Tenneco Packaging to absorb rapidly rising raw material prices for
corrugated products while posting increased margins. Additionally, Tenneco
Packaging continued to post new productivity gains, especially in the
operation of its containerboard mills, resulting in record operating margins
in 1995.
 
  Revenues in Tenneco Packaging's specialty packaging business increased by
$167 million to $822 million during 1995. Revenues of $106 million from the
recently acquired plastics business (November 1995) are included in the
results of the specialty packaging business. The remainder of the revenue
increase over 1994 results from price increases realized during the year.
 
  The specialty packaging business earned $31 million in operating income in
1995, a $39 million decrease compared with 1994 results. Specialty packaging
recorded a restructuring charge of $30 million in 1995 for its molded fiber
and aluminum foil packaging operations and recognized income from the recently
acquired plastics business of $15 million. Excluding these two items, the
decline in operating income for specialty packaging resulted from raw material
cost increases that more than offset the positive effects of the pricing
increases initiated during the year. The major contributors to the raw
material cost increases were higher prices for polystyrene, aluminum and old
newspaper. However, these prices declined during the second half of the year
and are expected to remain at their current lower levels.
 
  In its restructuring actions, specialty packaging expects to complete in
1996 a realignment of molded fiber assets, enter into joint venture agreements
to reduce egg packaging and fruit tray costs and close an aluminum rolling
mill, whose production will be outsourced.
 
OUTLOOK
 
  The plastics business is expected to be a major contributor to earnings. Its
revenues, combined with specialty packaging's existing business, will comprise
approximately one-half of Tenneco Packaging's revenues in 1996. The plastics
business is expected to generate less cyclical earnings than the paperboard
segment has
 
                                      17
<PAGE>
 
historically. Tenneco Packaging has also been working to reduce the
cyclicality of its paperboard business. Four of the paperboard acquisitions
completed in 1995 were in enhanced graphics and displays, a business less
sensitive to changes in linerboard pricing. These acquisitions, along with the
corrugated requirements of the recently acquired plastics business, have
increased Tenneco Packaging's level of integration, reducing exposure to
linerboard pricing volatility. Tenneco Packaging expects some softening in the
paperboard market in the first and second quarters of 1996 followed by an
improvement in the second half of the year.
 
NEWPORT NEWS SHIPBUILDING
 
<TABLE>
<CAPTION>
                                                                    1995   1994
                                                                   ------ ------
                                                                    (MILLIONS)
   <S>                                                             <C>    <C>
   Revenues....................................................... $1,756 $1,753
   Operating income............................................... $  160 $  200
</TABLE>
 
  Shipbuilding revenues for 1995 increased slightly compared with 1994 due to
greater levels of activity on the conversion program, offset by lower carrier
and submarine program revenues. Construction activity on the Los Angeles-class
submarines declined in 1995 as two of the remaining four vessels were
delivered during the year. Carrier activity declined for the year as 1994
activity included the overhaul of the Enterprise; the overhaul of the
Eisenhower began in the third quarter of 1995 and construction activity on the
Ronald Reagan replaced construction of the John C. Stennis which was delivered
in the fourth quarter of 1995.
 
  Operating income for the Shipbuilding segment was down for the year due to
lower margins for conversion work and costs of approximately $24 million
incurred related to staff downsizing and Newport News' reentry into the highly
competitive international commercial markets.
 
OUTLOOK
 
  Shipbuilding will continue to rely on the U.S. Navy for a significant amount
of its revenue; however, Shipbuilding is actively pursuing the large, global
commercial and military markets. Newport News has contracts to build four
"Double Eagle" product tankers. Additionally, Newport News was awarded a
contract to construct five additional "Double Eagle" tankers which will be
used in U.S. domestic trade. In February 1996, the owners secured financing
guarantees from the Maritime Administration. Shipbuilding is also pursuing
sales of its fast frigate to Middle East and Pacific Rim countries. U.S. Navy
work accounted for 95 percent of Shipbuilding revenues in 1995.
 
  The shipyard's backlog was $4.6 billion at December 31, 1995 substantially
all of which is U.S. Navy-related. This compares with $5.6 billion at the end
of 1994. During 1995, Shipbuilding delivered one aircraft carrier (John C.
Stennis) and two submarines.
 
  The yearend backlog included two Los Angeles-class submarines, two Nimitz-
class aircraft carriers (Harry S. Truman and Ronald Reagan), the two ship
Sealift conversion contract and contracts to construct four "Double Eagle"
product tankers. In addition, Newport News has ongoing engineering contracts
as the lead design yard for the Los Angeles-class and Seawolf-class
submarines. Subject to new orders, this backlog will decline as the remaining
submarines are delivered in 1996 and the aircraft carriers are delivered in
1998 and 2002.
 
OTHER
   
  Tennessee's other operations reported operating income of $381 million for
1995. Other operating income is comprised primarily of affiliated interest
income. During 1994, other operations reported operating income of $261
million.     
 
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
   
  Tennessee's interest expense in 1995 was $287 million compared with $262
million in 1994. Interest capitalized was $9 million in 1995 compared with $4
million in 1994 due to higher levels of capital spending in 1995.     
 
                                      18
<PAGE>
 
MINORITY INTEREST
 
  Minority interest of $33 million in 1995 primarily related to dividends on
preferred stock of a U.S. subsidiary which was issued in December 1994.
Minority interest for 1994 was $1 million.
 
INCOME TAXES
   
  Income tax expense for 1995 was $478 million compared with $325 million in
1994. The increase in tax expense in 1995 was primarily from higher pre-tax
income in 1995 and lower levels of tax benefits compared with 1994. In 1994,
Tennessee recorded tax benefits from the realization of previously
unrecognized deferred tax assets resulting from consolidation of Tennessee's
German operations and the sale of businesses.     
 
DISCONTINUED OPERATIONS
   
  Loss from discontinued operations in 1995 of $32 million, net of income tax
benefit of $30 million, was attributable to the farm and construction
equipment business and included a $35 million loss, net of income tax benefit
of $35 million, on the sale of the Case Stock and net income from operations
of $3 million, net of income tax expense of $5 million. Loss from discontinued
operations in 1994 of $199 million, net of income tax expense of $83 million,
resulted from the sale of Tennessee's farm and construction equipment,
chemicals and brakes businesses. The loss of $224 million, net of $68 million
income tax expense, on the sale of these businesses included a $166 million
loss, net of income tax expense of $117 million, from the sale of the
chemicals business, a $33 million loss, net of income tax benefit of $35
million, from the sale of the farm and construction equipment business, and a
$25 million loss from the sale of the brakes business, net of income tax
benefit of $14 million. Net income from the chemicals operations in 1994 was
$32 million, net of income tax expense of $19 million. Net loss from the farm
and construction equipment operations in 1994 was $4 million. Net loss in 1994
from the brakes operations was $3 million, net of income tax benefit of $4
million.     
 
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
 
  Effective January 1, 1994, Tennessee adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits," using the cumulative catch-up method.
It requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. As a result of adopting this statement,
an after-tax charge of $13 million was recorded in 1994.
 
  Tennessee will adopt FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first
quarter of 1996. FAS No. 121 establishes new accounting standards for
measuring the impairment of long-lived assets. Adoption of the new standard
will not have a material effect on Tennessee's consolidated financial position
or results of operations.
 
CAPITAL EXPENDITURES
   
  Expenditures for plant, property and equipment from continuing operations
for 1995 were $935 million compared with $646 million for 1994. Capital
expenditures increased at Packaging ($150 million), Automotive ($98 million),
Shipbuilding ($48 million), and Energy ($3 million). Capital expenditures
decreased $10 million at Tennessee's other operations.     
 
FERC MATTERS
 
  The Company has deferred certain costs it has incurred associated with
renegotiating gas supply contracts ("GSR" costs) as a result of FERC Order
636. As of December 31, 1995, the Company has deferred GSR costs yet to be
recovered from its customers of approximately $462 million, net of $316
million previously recovered from its customers, subject to refund. A
proceeding before a FERC administrative law judge is scheduled to
 
                                      19
<PAGE>
 
commence in early 1996 to determine whether the Company's GSR costs are
eligible for cost recovery. The FERC has generally encouraged pipelines to
settle such issues through negotiations with customers. Although Order 636
provides for complete recovery by pipelines of eligible and prudently incurred
transition costs, certain customers have challenged the prudence and
eligibility of the Company's GSR costs and the Company has engaged in
settlement discussions with its customers concerning the amount of such costs
in response to the FERC and customer statements acknowledging the desirability
of such settlements.
 
  Also related to the Company's GSR costs, on October 14, 1993, the Company
was sued in the State District Court of Ector County, Texas, by ICA Energy,
Inc. ("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA
and TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading seeks $1.5 billion from the Company for alleged damages caused by the
Company's refusal to purchase gas produced from the TransTexas leases covering
the new production and lands. Neither ICA nor TransTexas were original parties
to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds precluded the plaintiffs from adding new
production or acreage to the contract. On May 4, 1995, the trial court granted
the Company's motion for summary judgment; the plaintiffs have filed a notice
of appeal. Thereafter, ICA and TransTexas filed a motion for summary judgment
on a separate issue involving the term "committed reserves" and whether the
Company has a contractual obligation to purchase gas produced from a lease not
described in the gas contract. On November 8, 1995, the trial court granted
ICA's and TransTexas' motion in part. That order, which would be finalized
upon conclusion of the trial, also held that ICA's and TransTexas' rights are
subject to certain limitations of the Texas Business and Commerce Code. In
addition to these defenses, which are to be resolved at trial, the Company has
other defenses which it has asserted and intends to pursue. The Company has
filed a Motion to Clarify the November 8, 1995 order together with a new
motion for partial summary judgment concerning the committed reserve issue.
The November 8, 1995 ruling does not affect the trial court's previous May 4,
1995 order granting summary judgment to the Company.
 
  The Company has been engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company accrued amounts in the
first quarter of 1995 which it believes are adequate to cover the resolution
of these matters. On August 1, 1995, the Texas Supreme Court affirmed a ruling
of the Court of Appeals favorable to the Company in one of these matters and
indicated that it would remand the case to the trial court. Motions for
rehearing have been filed by the producers. As of the date hereof, the court
had not ruled on those motions and mandate had not been issued.
 
  Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
 
ENVIRONMENTAL MATTERS
 
  The Company and certain of its subsidiaries and affiliates are parties to
environmental proceedings. Expenditures for ongoing compliance with
environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and
other societal and economic factors. All available evidence is considered,
including prior experience in remediation of contaminated sites, other
companies' cleanup experience and data released by the United States
Environmental Protection Agency
 
                                      20
<PAGE>
 
("EPA") or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new circumstances. These
liabilities are included in the balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are recorded and reported separately from the associated liability in
the financial statements.
 
  The Company is a party in proceedings involving federal and state
authorities regarding the past use by the Company of a lubricant containing
polychlorinated biphenyls ("PCBs") in its starting air systems. The Company
has executed a consent order with the EPA governing the remediation of certain
of its compressor stations and is working with the Pennsylvania and New York
environmental agencies to specify the remediation requirements at the
Pennsylvania and the New York stations. Tennessee believes that the ultimate
resolution of this matter will not have a material adverse effect on the
financial condition or results of operations of the Company and its
consolidated subsidiaries.
 
  A subsidiary of the Company owns a 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois"), which owns an interstate
natural gas pipeline from the Canadian border through the states of New York
and Connecticut to Long Island. The operator of the pipeline is Iroquois
Pipeline Operating Company (the "Operator"), a subsidiary of TransCanada
Pipelines, Ltd., an affiliate of TransCanada Iroquois, Ltd. which is also a
partner in Iroquois. The Company has a contract to provide gas dispatching as
well as post-construction field operation and maintenance services for the
Operator of Iroquois, but the Company is not the Operator and is not an
affiliate of the Operator.
 
  Iroquois has been informed of investigations and allegations regarding
alleged environmental violations which occurred during the construction of the
pipeline. Communications have been received from U.S. Attorneys' Offices, the
Enforcement Staff of the FERC's Office of the General Counsel, the Army Corps
of Engineers, the Public Service Commission of the State of New York, the EPA
and the Federal Bureau of Investigation. Proceedings have not been commenced
against Iroquois in connection with these inquiries. However, communications
have indicated possible allegation of civil and criminal violations. Iroquois
has held discussions with certain of the agencies to explore the possibility
of a negotiated resolution of the issues. In the absence of a negotiated
resolution, Iroquois believes that indictments will be sought and, in them,
substantial fines and other sanctions may be requested.
 
  As a general partner, the Company's subsidiary may be jointly and severally
liable with the other partners for the liabilities of Iroquois. The foregoing
proceedings and investigations have not affected pipeline operations. Based
upon information available to the Company, the Company believes that neither
it nor any of its subsidiaries is a target of the criminal investigation
described above. Further, while a global resolution of these inquiries could
have a material adverse effect on the financial condition of Iroquois,
Tennessee believes that the ultimate resolution of these matters will not have
a material adverse effect on the financial condition or results of operations
of the Company and its consolidated subsidiaries.
 
  At December 31, 1995, Tennessee has been designated as a potentially
responsible party in 55 "Superfund" sites. With respect to its pro rata share
of the remediation costs of certain sites, Tennessee is fully indemnified by
third parties. With respect to certain other sites, Tennessee has sought to
resolve its liability through payments to the other potentially responsible
parties. For the remaining sites, Tennessee has estimated its share of
remediation costs to be between $11 million and $69 million or 0.5% to 2.5% of
the total remediation costs for those sites and has provided reserves that it
believes are adequate for such costs. Because the cleanup costs are estimates
and are subject to revision as more information becomes available about the
extent of remediation required, Tennessee's estimate of its share of
remediation costs could change. Moreover, liability under the Comprehensive
Environmental Response, Compensation and Liability Act is joint and several,
meaning that Tennessee could be required to pay in excess of its pro rata
share of remediation costs. Tennessee's understanding of the financial
strength of other potentially responsible parties has been considered, where
appropriate, in Tennessee's determination of its estimated liability.
Tennessee believes that the costs associated with its current status as a
potentially responsible party in the Superfund sites described above will not
be material to its consolidated financial position or results of operations.
 
                                      21
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
        INDEX TO FINANCIAL STATEMENTS OF TENNESSEE GAS PIPELINE COMPANY
                         AND CONSOLIDATED SUBSIDIARIES
 
<TABLE>   
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of independent public accountants..................................  23
Statements of income for each of the three years in the period ended
 December 31, 1995........................................................  24
Balance sheets--December 31, 1995 and 1994................................  25
Statements of cash flows for each of the three years in the period ended
 December 31, 1995........................................................  26
Statements of changes in shareowner's equity for each of the three years
 in the period ended
 December 31, 1995........................................................  27
Notes to financial statements............................................. 28
</TABLE>    
 
                                       22
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Tennessee Gas Pipeline Company:
 
  We have audited the accompanying balance sheets of Tennessee Gas Pipeline
Company (a Delaware corporation and a wholly-owned subsidiary of Tenneco Inc.)
and Tennessee Gas Pipeline Company and consolidated subsidiaries as of
December 31, 1995 and 1994, and the related statements of income, cash flows
and changes in shareowner's equity for each of the three years in the period
ended December 31, 1995. These financial statements and the schedule referred
to below are the responsibility of Tennessee Gas Pipeline Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial positions of Tennessee Gas Pipeline
Company and Tennessee Gas Pipeline Company and consolidated subsidiaries as of
December 31, 1995 and 1994, and the results of their operations, cash flows
and changes in shareowner's equity for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
 
  As discussed in Note 1 to the financial statements, effective January 1,
1994, Tennessee Gas Pipeline Company and its consolidated subsidiaries changed
their method of accounting for postemployment benefits.
 
  Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to Part IV, Item 14 relating to Tennessee Gas Pipeline Company and
consolidated subsidiaries is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
of Tennessee Gas Pipeline Company and consolidated subsidiaries taken as a
whole.
 
                                          Arthur Andersen LLP
 
Houston, Texas
February 8, 1996
   
(except with respect to
the matter discussed in
Note 3, as to which the
date is March 7, 1996)
    
                                      23
<PAGE>
 
          TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
                              STATEMENTS OF INCOME
 
<TABLE>   
<CAPTION>
                                                              (MILLIONS)
                                                         YEARS ENDED DECEMBER
                                                                 31,
                                                         ----------------------
                                                          1995    1994    1993
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
REVENUES
Net sales and operating revenues--
  Automotive...........................................  $2,427  $1,850  $1,628
  Energy...............................................   1,916   2,378   2,862
  Packaging............................................   2,750   2,184   2,042
  Shipbuilding.........................................   1,756   1,753   1,861
  Other................................................      (9)     (7)     (7)
                                                         ------  ------  ------
                                                          8,840   8,158   8,386
Other income--
  Interest income:
    Affiliated companies...............................     360     247     185
    Other..............................................      41      34      14
  Equity in net income of affiliated companies.........      66      52      50
  Gain on sale of businesses and assets, net...........      38       7     106
  Gain on the sale by a subsidiary of its stock........      --      23      --
  Other income, net....................................      58     (13)     (3)
                                                         ------  ------  ------
                                                          9,403   8,508   8,738
                                                         ------  ------  ------
COSTS AND EXPENSES
  Cost of sales (exclusive of depreciation shown
   below)..............................................   5,226   4,439   4,322
  Operating expenses...................................   1,414   1,880   2,264
  Selling, general and administrative..................     751     596     595
  Finance charges of Tennessee's finance subsidiaries..      --       4       3
  Depreciation, depletion and amortization.............     446     299     362
                                                         ------  ------  ------
                                                          7,837   7,218   7,546
                                                         ------  ------  ------
Income before interest expense, income taxes and
 minority interest.....................................   1,566   1,290   1,192
                                                         ------  ------  ------
Interest expense (net of interest capitalized):
  Affiliated companies.................................     155     101      66
  Other................................................     132     161     210
                                                         ------  ------  ------
                                                            287     262     276
                                                         ------  ------  ------
Income before income taxes and minority interest.......   1,279   1,028     916
Income tax expense.....................................     478     325     359
                                                         ------  ------  ------
Income before minority interest........................     801     703     557
Minority interest......................................      33       1      --
                                                         ------  ------  ------
Income from continuing operations......................     768     702     557
Income (loss) from discontinued operations, net of
 income tax............................................     (32)   (199)    136
                                                         ------  ------  ------
Income before extraordinary loss.......................     736     503     693
Extraordinary loss, net of income tax..................      --      --     (24)
                                                         ------  ------  ------
Income before cumulative effect of change in accounting
 principle.............................................     736     503     669
Cumulative effect of change in accounting principle,
 net of income tax.....................................      --     (13)     --
                                                         ------  ------  ------
Net income.............................................  $  736  $  490  $  669
                                                         ======  ======  ======
</TABLE>    
 
  The accompanying notes to financial statements are an integral part of these
                             statements of income.
 
                                       24
<PAGE>
 
          TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                  (MILLIONS)
                                                                 DECEMBER 31,
                                                                ---------------
                            ASSETS                               1995    1994
                            ------                              ------- -------
<S>                                                             <C>     <C>
Current Assets:
 Cash and temporary cash investments..........................  $   193 $   459
 Receivables--
 Customer notes and accounts (net)............................      465     644
 Affiliated companies.........................................      757     297
 Gas transportation and exchange..............................       64     214
 Other........................................................      486     164
 Notes receivable from Tenneco Inc............................    3,354   3,201
 Inventories..................................................    1,174     909
 Deferred income taxes........................................       18      43
 Prepayments and other........................................      253     301
                                                                ------- -------
                                                                  6,764   6,232
                                                                ------- -------
Investments and other assets:
 Investment in affiliated companies...........................      286     523
 Long-term notes and other receivables (net)..................      106     157
 Investment in subsidiaries in excess of fair value of net as-
  sets at date of acquisition, less amortization..............      616     329
 Deferred income taxes........................................       52      49
 Other........................................................    1,656     782
                                                                ------- -------
                                                                  2,716   1,840
                                                                ------- -------
Plant, property and equipment, at cost........................   11,824  11,009
 Less--Reserves for depreciation, depletion and amortization..    5,611   5,851
                                                                ------- -------
                                                                  6,213   5,158
                                                                ------- -------
                                                                $15,693 $13,230
                                                                ======= =======
<CAPTION>
              LIABILITIES AND SHAREOWNER'S EQUITY
              -----------------------------------
<S>                                                             <C>     <C>
Current Liabilities:
 Short-term debt (including current maturities on long-term
  debt).......................................................   $  346 $   298
 Payables--
 Trade........................................................    1,065   1,029
 Affiliated companies.........................................      216     244
 Gas transportation and exchange..............................       28     159
 Taxes accrued................................................      391      49
 Interest accrued.............................................       27      37
 Natural gas pipeline revenue reservation.....................       27     190
 Other........................................................    1,020     787
                                                                ------- -------
                                                                  3,120   2,793
                                                                ------- -------
Long-term debt................................................      550     793
                                                                ------- -------
Deferred income taxes.........................................      989   1,408
                                                                ------- -------
Postretirement benefits.......................................      609     380
                                                                ------- -------
Deferred credits and other liabilities........................      623     422
                                                                ------- -------
Commitments and contingencies
Minority interest.............................................      492     475
                                                                ------- -------
Shareowner's Equity:
 Common stock, par value $5 per share, authorized, issued and
  outstanding 200 shares......................................       --      --
 Premium on common stock and other capital surplus............    4,903   3,494
 Cumulative translation adjustments...........................       32    (174)
 Retained earnings............................................    4,375   3,639
                                                                ------- -------
                                                                  9,310   6,959
                                                                ------- -------
                                                                $15,693 $13,230
                                                                ======= =======
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                balance sheets.
 
                                       25
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                           STATEMENTS OF CASH FLOWS
<TABLE>   
<CAPTION>
                                                            (MILLIONS)
                                                     YEARS ENDED DECEMBER 31,
                                                     --------------------------
                                                      1995     1994      1993
                                                     ----------------  --------
<S>                                                  <C>     <C>       <C>
Operating Activities:
 Income from continuing operations.................  $  768  $    702  $    557
 Adjustments to reconcile income from continuing
  operations to
  cash provided (used) by continuing operations--
   Depreciation, depletion and amortization........     446       299       362
   Equity in net income of affiliated companies,
    net of dividends...............................     (13)       (4)       (5)
   Deferred income taxes...........................      78        10        63
   Gain on sale of businesses and assets, net......     (38)      (30)     (106)
   Changes in components of working capital--
    (Increase) decrease in receivables.............    (249)      616      (172)
    (Increase) decrease in inventories.............    (237)     (122)       47
    (Increase) decrease in prepayments and other
     current assets................................     (34)       10        18
    Increase (decrease) in payables................     (58)      (70)     (194)
    Increase (decrease) in taxes accrued...........      29      (150)      (21)
    Increase (decrease) in interest accrued........     (30)      (17)      (28)
    Increase (decrease) in natural gas pipeline
     revenue reservation...........................    (156)      (91)      136
    Increase (decrease) in other current
     liabilities...................................     (59)      (22)       (9)
   (Increase) decrease in long-term notes and
    receivables....................................      --        (3)       --
   Take-or-pay (refunds to customers) recoupments,
    net............................................      36        26       (34)
   Other...........................................     104       (21)      (54)
                                                     ------  --------  --------
    Cash provided (used) by continuing operations..     587     1,133       560
    Cash provided (used) by discontinued
     operations....................................       2       113       425
                                                     ------  --------  --------
Net Cash Provided (Used) by Operating Activities...     589     1,246       985
                                                     ------  --------  --------
Investing Activities:
 Net proceeds (expenditures) related to the sale of
 discontinued operations...........................     716       188       (54)
 Net proceeds from sale of businesses and assets...      71        96       249
 Expenditures for plant, property and equipment--
   Continuing operations...........................    (935)     (646)     (420)
   Discontinued operations.........................      (4)      (71)      (73)
 Acquisitions of businesses........................    (428)      (51)      (33)
 (Increase) decrease in Tenneco Inc. receivables...    (153)   (2,456)      472
 (Increase) decrease in notes receivable from other
  affiliates.......................................      --     1,770       151
 Investments and other.............................     (21)       91       (24)
                                                     ------  --------  --------
Net Cash Provided (Used) by Investing Activities...    (754)   (1,079)      268
                                                     ------  --------  --------
Financing Activities:
 Capital contribution from (distribution to)
  affiliates, net..................................     116        --        --
 Issuance of equity securities by a subsidiary.....      --       294        --
 Issuance of long-term debt........................       1        --         3
 Retirement of long-term debt......................    (256)     (156)     (977)
 Net increase (decrease) in short-term debt
  excluding current maturities on long-term debt...      30       (70)     (163)
                                                     ------  --------  --------
Net Cash Provided (Used) by Financing Activities...    (109)       68    (1,137)
                                                     ------  --------  --------
Effect of Foreign Exchange Rate Changes on Cash and
 Temporary Cash Investments........................       8         4        (4)
                                                     ------  --------  --------
Increase (Decrease) in Cash and Temporary Cash
 Investments.......................................    (266)      239       112
Cash and Temporary Cash Investments, January 1.....     459       220       108
                                                     ------  --------  --------
Cash and Temporary Cash Investments, December 31
 (Note)............................................  $  193  $    459  $    220
                                                     ======  ========  ========
Cash Paid During the Year for Interest.............  $  327  $    284  $    330
Cash Paid During the Year for Income Taxes (net of
 refunds)..........................................  $  444  $    427  $    334
</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.
 
                                      26
<PAGE>
 
          TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  STATEMENTS OF CHANGES IN SHAREOWNER'S EQUITY
 
<TABLE>
<CAPTION>
                                        (MILLIONS EXCEPT SHARE AMOUNTS)
                                           YEARS ENDED DECEMBER 31,
                                   -------------------------------------------
                                       1995           1994           1993
                                   -------------  -------------  -------------
                                   SHARES AMOUNT  SHARES AMOUNT  SHARES AMOUNT
                                   ------ ------  ------ ------  ------ ------
<S>                                <C>    <C>     <C>    <C>     <C>    <C>
Common Stock:
  Balance January 1 and December
   31.............................  200   $   --   200   $   --   200   $   --
                                    ===   ------   ===   ------   ===   ------
Premium on Common Stock and Other
 Capital Surplus:
  Balance January 1...............         3,494          3,494          3,494
    Capital contribution from
     (distribution to) affiliates,
     net..........................         1,409             --             --
                                          ------         ------         ------
  Balance December 31.............         4,903          3,494          3,494
                                          ------         ------         ------
Cumulative Translation
 Adjustments:
  Balance January 1...............          (174)          (297)          (218)
    Translation of foreign
     currency statements..........            13            124            (83)
    Sale of investment in foreign
     subsidiaries.................           193             --             --
    Hedges of net investment in
     foreign subsidiaries (net of
     income taxes)................            --             (1)             4
                                          ------         ------         ------
  Balance December 31.............            32           (174)          (297)
                                          ------         ------         ------
Retained Earnings:
  Balance January 1...............         3,639          3,149          2,480
    Net income....................           736            490            669
                                          ------         ------         ------
  Balance December 31.............         4,375          3,639          3,149
                                          ------         ------         ------
    Total.........................        $9,310         $6,959         $6,346
                                          ======         ======         ======
</TABLE>
 
 
 
  The accompanying notes to financial statements are an integral part of these
                 statements of changes in shareowner's equity.
 
                                       27
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. CONTROL AND SUMMARY OF ACCOUNTING POLICIES
 
 Control
 
  All of the outstanding common stock of Tennessee Gas Pipeline Company (the
"Company") is owned by Tenneco Inc. Tennessee Gas Pipeline Company and
consolidated subsidiaries ("Tennessee") are thus members of an operating group
under the control of Tenneco Inc. As such, Tennessee engages in transactions
characteristic of group administration and operation with other members of the
group. Tennessee's diversified businesses are organized and operated through
several industry segments, including "Tenneco Automotive," "Tenneco Energy,"
"Tenneco Packaging," and "Newport News Shipbuilding." Reference is made to
Note 11, "Segment and Geographic Area Information," for additional information
on Tennessee's industry segments.
 
 Consolidation and Presentation
   
  The financial statements of Tennessee include all majority-owned
subsidiaries. Investments in 20% to 50% owned companies where Tennessee has
the ability to exert significant influence over operating and financial
policies are carried at cost plus equity in undistributed earnings since date
of acquisition and cumulative translation adjustments. At December 31, 1995,
Tennessee's shareowner's equity included equity in undistributed earnings and
cumulative translation adjustments from equity method investments of $28
million and none, respectively; at December 31, 1994, the corresponding
amounts were $117 million and $(20) million, respectively. Dividends and
distributions received from affiliates accounted for on the equity method were
$53 million, $48 million and $45 million during 1995, 1994 and 1993,
respectively. All significant intercompany transactions have been eliminated.
    
       
  Gains or losses on the sale by a subsidiary of its stock are included in the
Statements of Income.
 
 Depreciation, Depletion and Amortization
 
  Depreciation of Tennessee's properties is provided on a straight-line basis
in amounts which, in the opinion of management, are adequate to allocate the
cost of properties over their estimated useful lives.
 
  The excess of investment in subsidiaries over fair value of net assets at
date of acquisition is being amortized over periods ranging from 15 years to
40 years. Such amortization relative to continuing operations amounted to $12
million, $9 million and $10 million for 1995, 1994 and 1993, respectively, and
is included in the income statement caption, "Other income, net."
 
  Tennessee has capitalized certain other intangible assets, primarily
trademarks and patents, based on their estimated fair value at date of
acquisition. Amortization is provided on these intangible assets on a
straight-line basis over periods ranging from five to 40 years. The majority
of other intangible assets at December 31, 1995, resulted from the acquisition
of the plastics division of Mobil Corporation during 1995. See Note 2,
"Acquisitions," for further information on the acquisition.
 
 Revenue Recognition
 
  Newport News Shipbuilding and Dry Dock Company ("Newport News"), a wholly-
owned subsidiary, reports profits on its long-term shipbuilding contracts on
the percentage-of-completion method of accounting, determined on the basis of
total costs incurred to date to estimated final total costs. Losses on
contracts are reported when first estimated. The performance of contracts
usually extends over several years, requiring periodic reviews and revisions
of estimated final contract prices and costs during the term of the contracts.
The effect of these revisions to estimates is included in income in the period
the revisions are made.
 
  Tennessee's other divisions recognize revenue on the accrual method when
title passes to the customer or when the service is performed.
 
                                      28
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Risk Management Activities
 
  Tennessee has utilized financial instruments for many years to mitigate its
exposure to various risks. Tennessee is currently a party to financial
instruments to hedge its exposure to changes in interest rates, foreign
currency exchange rates and natural gas prices. These financial instruments
are accounted for on the accrual basis with gains and losses being recognized
based on the type of contract and exposure being hedged. The amounts paid or
received under interest rate swap agreements are recognized as an adjustment
to interest expense. After-tax net gains or losses on foreign currency
contracts designated as hedges of Tennessee's net investments in foreign
subsidiaries are recognized in the balance sheet caption, "Cumulative
translation adjustments." Net gains and losses of foreign currency contracts
designated as hedges of firm commitments or other specific transactions are
deferred and recognized when the offsetting gains or losses are recognized on
the hedged items. Net gains and losses on energy commodity contracts are
deferred and recognized when the hedged transaction is consummated.
 
  In the statements of cash flows, cash receipts or payments related to the
financial instruments discussed above are classified consistent with the cash
flows from the transactions being hedged.
 
 Income Taxes
 
  Tennessee Gas Pipeline Company and its parent, Tenneco Inc., together with
certain of their respective subsidiaries which are owned 80% or more, have
entered into an agreement to file a consolidated U.S. federal income tax
return. Such agreement provides, among other things, that (1) each company in
a taxable income position will be currently charged with an amount equivalent
to its federal income tax computed on a separate return basis and (2) each
company in a tax loss position will be currently reimbursed to the extent its
deductions, including general business credits, are utilized in the
consolidated return.
 
  Tennessee utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. Deferred
tax assets are reduced by a valuation allowance when, based upon management's
estimates, it is more likely than not that a portion of the deferred tax
assets will not be realized in a future period. The estimates utilized in the
recognition of deferred tax assets are subject to revision in future periods
based on new facts or circumstances.
 
  Tennessee does not provide for U.S. income taxes on unremitted earnings of
foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries is approximately $495 million at December 31, 1995. It is
not practicable to determine the amount of U.S. income taxes that would be
payable upon remittance of the assets that represent those earnings.
 
 Changes in Accounting Principles
 
  Tennessee will adopt Statement of Financial Accounting Standards ("FAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121
establishes new accounting standards for measuring the impairment of long-
lived assets. The adoption of this new standard will not have a significant
effect on Tennessee's consolidated financial position or results of
operations.
 
  Effective January 1, 1994, Tennessee adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. Tennessee recorded an after-tax charge of $13
million which was reported as a cumulative effect of change in accounting
principle.
 
                                      29
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Inventories
 
  At December 31, 1995 and 1994, inventory by major classification was as
follows:
 
<TABLE>
<CAPTION>
                                                                    1995   1994
                                                                   ------ ------
                                                                    (MILLIONS)
      <S>                                                          <C>    <C>
      Finished goods.............................................. $  395 $  355
      Work in process.............................................    101     82
      Long-term contracts in progress, less progress billings.....    264    138
      Raw materials...............................................    248    178
      Materials and supplies......................................    166    156
                                                                   ------ ------
                                                                   $1,174 $  909
                                                                   ====== ======
</TABLE>
 
  Inventories are stated at the lower of cost or market. A portion of
inventories are valued using the "last-in, first-out" method (38% and 27% at
December 31, 1995 and 1994, respectively). All other inventories are valued on
the "first-in, first-out" ("FIFO") or "average" methods. If the FIFO or
average method of inventory accounting had been used by Tennessee for all
inventories, inventories would have been $56 million, $54 million and $47
million higher at December 31, 1995, 1994 and 1993, respectively.
 
 Plant, Property and Equipment, at Cost
 
  At December 31, 1995 and 1994, plant, property and equipment, at cost, by
major segment was as follows:
 
<TABLE>
<CAPTION>
                                                                 1995    1994
                                                                ------- -------
                                                                  (MILLIONS)
      <S>                                                       <C>     <C>
      Automotive............................................... $ 1,382 $ 1,313
      Energy...................................................   6,262   5,654
      Packaging................................................   2,617   1,661
      Shipbuilding.............................................   1,552   1,494
      Discontinued chemicals operations........................      --     780
      Other....................................................      11     107
                                                                ------- -------
                                                                $11,824 $11,009
                                                                ======= =======
</TABLE>
 
 Notes Receivable and Allowance for Doubtful Accounts and Notes
 
  Short-term notes receivable of $89 million and $37 million were outstanding
at December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994,
the allowance for doubtful accounts and notes receivable was $50 million and
$48 million, respectively.
 
 Environmental Liabilities
 
  Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations
and that do not contribute to current or future revenue generation are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies' clean-up experience and
data released by the United States Environmental Protection Agency ("EPA") or
other organizations. These estimated liabilities are subject to revision in
future periods based on actual costs or new circumstances. These liabilities
are included in the balance sheet at their undiscounted amounts. Recoveries
are evaluated separately from the liability and, when recovery is assured, are
recorded and reported separately from the associated liability in the
financial statements.
 
                                      30
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  For further information on this subject, reference is made to Note 12,
"Commitments and Contingencies--Environmental Matters."
 
 Foreign Currency Translation
 
  Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses and gains and losses. Translation adjustments are
reflected in the balance sheet caption "Cumulative translation adjustments."
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of Tennessee's assets,
liabilities, revenues and expenses. Reference is made to the "Revenue
Recognition" and "Income Taxes" sections of this footnote and Notes 6, 9, 10
and 12 for additional information on significant estimates included in
Tennessee's financial statements.
 
 Reclassifications
 
  Prior years' financial statements have been reclassified where appropriate
to conform to 1995 presentations.
 
2. ACQUISITIONS
 
  In November 1995, Tenneco Inc. acquired the plastics division of Mobil
Corporation for $1.3 billion. The plastics business is the largest North
American producer of polyethylene and polystyrene consumer and food service
packaging and became part of Tennessee's packaging segment, Tenneco Packaging.
 
   The acquisition of the plastics business was accounted for as a purchase;
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based on preliminary estimates of their fair values.
Final purchase price allocations will be based on more complete evaluations
and may differ from the original allocation. The excess of the purchase price
over the fair value of the net assets acquired is included in the balance
sheet caption, "Investment in subsidiaries in excess of fair value of net
assets at date of acquisition, less amortization" and is being amortized on a
straight-line basis over 40 years. The purchase was initially financed by a
combination of Tenneco Inc. short-term debt and cash. As part of the
acquisition transaction, Tenneco Inc. made a capital contribution to Tennessee
of the acquired net assets of the plastics business.
 
  The following unaudited pro forma information of Tennessee Gas Pipeline
Company and consolidated subsidiaries illustrates the effect of the plastics
business acquisition as if it had occurred at the beginning of 1994, after
giving effect to certain pro forma adjustments including amortization of the
excess purchase price, depreciation and other adjustments based on the
preliminary purchase price allocation related to the acquisition, together
with estimates of the related income tax effects.
 
<TABLE>       
<CAPTION>
                                                              (UNAUDITED)
                                                        YEARS ENDED DECEMBER 31
                                                        -----------------------
                                                           1995        1994
                                                        ----------- -----------
                                                              (MILLIONS)
      <S>                                               <C>         <C>
      Net sales and operating revenues................. $     9,836 $     9,195
      Income from continuing operations................ $       814 $       685
</TABLE>    
 
  The summarized pro forma information has been prepared for comparative
purposes only. It is not intended to be indicative of the actual operating
results that would have occurred had the acquisition been consummated at the
beginning of 1994, or the results which may be attained in the future.
 
                                      31
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  During 1995, Tennessee made various other acquisitions of assets and
investments. Tenneco Energy acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488-mile pipeline, for
approximately $225 million. Tenneco Energy also acquired a 50% interest in a
gas-fired cogeneration plant from ARK Energy, a privately-owned power
generation company, for approximately $25 million in cash. Tenneco Packaging
completed acquisitions of 8 packaging businesses for total consideration of
approximately $104 million in cash and notes. Tenneco Inc. acquired an
additional packaging operation for $58 million and made a capital contribution
to Tennessee of the acquired net assets of this business. In addition, Tenneco
Automotive completed four acquisitions for approximately $54 million.
 
  Each of the acquisitions was accounted for as a purchase. If these assets
and investments had been acquired January 1, 1995, net income would not have
been significantly different from the reported amount.
 
  In 1994, Tenneco Automotive acquired Heinrich Gillet GmbH & Co. KG for $44
million in cash and $69 million in assumed debt.
 
  On December 29, 1994, Tenneco International Holding Corp. ("TIHC"), a
majority-owned subsidiary, acquired 100% of the issued and outstanding common
stock of Tenneco Canada Inc. from a Tenneco Inc. subsidiary in exchange for
TIHC common stock.
 
3. DISCONTINUED OPERATIONS, DISPOSITION OF ASSETS AND EXTRAORDINARY LOSS
 
 Discontinued Operations
   
  Chemicals and Brakes Operations     
   
  In March 1995, Tenneco Inc. and its subsidiaries ("Tenneco") completed an
initial public offering of 100% of its Albright & Wilson chemicals segment.
The offering was underwritten in the United Kingdom and was offered primarily
in the United Kingdom. Also in 1994, Tenneco sold its brakes operation. Net
proceeds from the sales of the chemicals and the brakes operations were
approximately $700 million and $18 million, respectively.     
 
  Net assets and results from discontinued operations included in Tennessee's
financial statements as of and for the years ended December 31, 1994 and 1993,
are as follows:
<TABLE>   
<CAPTION>
                                                      1994             1993
                                                ---------------- ----------------
                                                CHEMICALS BRAKES CHEMICALS BRAKES
                                                --------- ------ --------- ------
                                                           (MILLIONS)
<S>                                             <C>       <C>    <C>       <C>
Net assets at December 31.....................    $ 633    $ --    $554      $61
                                                  =====    ====    ====     ====
Net sales and operating revenues..............    $ 986    $ 57    $914      $48
                                                  =====    ====    ====     ====
Income (loss) before income taxes.............    $  51    $ (7)   $ 78     $ (7)
Income tax (expense) benefit from discontinued
 operations...................................      (19)      4     (15)       3
                                                  -----    ----    ----     ----
Net income (loss).............................       32      (3)     63       (4)
                                                  -----    ----    ----     ----
Loss on disposition...........................      (49)    (39)     --       --
Income tax (expense) benefit from loss on
 disposition..................................     (117)     14      --       --
                                                  -----    ----    ----     ----
Net loss on disposition.......................     (166)    (25)     --       --
                                                  -----    ----    ----     ----
  Net income (loss) from discontinued
   operations.................................    $(134)   $(28)   $ 63     $ (4)
                                                  =====    ====    ====     ====
</TABLE>    
 
                                      32
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
   
  Farm and Construction Equipment Operations     
   
  In June 1994, Tenneco completed an initial public offering ("IPO") of
approximately 29% of the common stock of Case Corporation ("Case"), the holder
of Tenneco's farm and construction equipment segment. In November 1994, a
secondary offering of Case common stock reduced Tenneco's ownership interest
in Case to approximately 44%. Combined proceeds from the two transactions was
$694 million, net of commissions and offering expenses. Prior to the IPO,
Tenneco reorganized this segment resulting in Tennessee selling all of its
farm and construction equipment net assets to Case Corporation for
consideration of Case Corporation common stock and cash. In connection with
the reorganization, IPO and November 1994 secondary offering, Tennessee
received net proceeds of $204 million and recognized a loss of $33 million,
including $35 million of income tax benefit. Although Tennessee recorded a
loss on these transactions, Tenneco in the aggregate recorded a gain of $36
million, including a $7 million tax benefit. In an August 1995 public
offering, Tenneco sold an additional 16.1 million shares of Case common stock
for net proceeds of approximately $540 million. The sale reduced Tenneco's
ownership in Case from 44% to 21%. Of the 16.1 million shares sold,
approximately 646,000 shares were owned by Tennessee. In connection with the
offering, Tennessee received net proceeds of $22 million and recognized a loss
of $35 million, including $35 million of income tax benefit. Although
Tennessee recorded a loss on this transaction, Tenneco in the aggregate
recorded a pre-tax gain of $101 million.     
   
  In March 1996, Tenneco sold its remaining 15.2 million shares of common
stock of Case in a public offering. Of the 15.2 million shares sold,
approximately 691,000 shares were owned by Tennessee. In connection with the
sale, Tennessee received net proceeds of approximately $36 million, resulting
in a gain of $37 million, including $29 million of income tax benefit. Tenneco
in the aggregate recorded a gain of $340 million, net of $83 million in income
tax expense. As a result of this sale, Tennessee's financial statements have
been restated to reflect the operating results and the losses on the sale of
the farm and construction equipment segment as "discontinued operations" for
all periods presented.     
   
  Net assets and results from the discontinued farm and construction equipment
operations as of and for the years ended December 31, 1995, 1994 and 1993, are
as follows:     
 
<TABLE>   
<CAPTION>
                                                               1995  1994   1993
                                                               ----  ----  ------
                                                                  (MILLIONS)
<S>                                                            <C>   <C>   <C>
Net assets at December 31..................................... $ 29  $ 56  $  476
                                                               ====  ====  ======
Net sales and operating revenues.............................. $ --  $518  $1,014
                                                               ====  ====  ======
Income (loss) before income taxes............................. $  8  $ (4) $   47
Income tax (expense) benefit from discontinued operations.....   (5)   --      30
                                                               ----  ----  ------
Net income (loss).............................................    3    (4)     77
                                                               ----  ----  ------
Loss on disposition...........................................  (70)  (68)     --
Income tax benefit from loss on disposition...................   35    35      --
                                                               ----  ----  ------
Net loss on disposition.......................................  (35)  (33)     --
                                                               ----  ----  ------
  Net income (loss) from discontinued operations.............. $(32) $(37) $   77
                                                               ====  ====  ======
</TABLE>    
 
 Disposition of Assets
       
       
       
          
  In December 1995, Tenneco Energy sold its 50% interest in Kern River Gas
Transmission Company ("Kern River") for a pre-tax gain of $30 million. Kern
River owns a 904-mile pipeline extending from Wyoming to California. Also in
1995, Tennessee sold certain other facilities and assets, principally at its
Tenneco Packaging and Tenneco Energy segments, for a combined pre-tax net gain
of $8 million.     
 
                                      33
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
   
  During 1994, Tennessee disposed of several assets and investments including
a facility, machinery and equipment at Tenneco Packaging resulting in a pre-
tax net gain of $7 million. Also in 1994, Tenneco Energy Resources
Corporation, a subsidiary which operates nonregulated gas marketing and
intrastate pipeline businesses, issued 50 shares of its common stock, diluting
Tennessee's ownership in this subsidiary to 80%. Cash proceeds were $41
million resulting in a gain of $23 million. No taxes were provided on the gain
because management expects that the recorded investment will be recovered in a
tax-free manner.     
   
  During 1993, Tennessee disposed of a number of assets and investments
including its Newport News' Sperry Marine business; several Tenneco Packaging
operations; two wholly-owned Tenneco Energy companies, Viking Gas Transmission
Company and Dean Pipeline Company. These dispositions resulted in a pre-tax
net gain of $106 million.     
 
 Extraordinary Loss
 
  In April 1993, the Company's parent Tenneco Inc. issued 23.5 million shares
of common stock for approximately $1.1 billion, a portion of which was loaned
to the Company and used to retire approximately $688 million of long-term
debt. In November 1993, Tennessee retired DM250 million bonds. The redemption
premium related to the retirement of long-term debt resulting from these two
transactions ($24 million, net of income tax benefits of $12 million) was
recorded as an extraordinary loss.
 
4. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
 
 Long-Term Debt
 
  A summary of long-term debt outstanding at December 31, 1995 and 1994, is
set forth in the following table:
 
<TABLE>
<CAPTION>
                                                                    1995 1994
                                                                    ---- -----
                                                                    (MILLIONS)
<S>                                                                 <C>  <C>
Tennessee Gas Pipeline Company--
  Debentures due 2011, effective interest rate 15.1% in 1995 and
   1994 (net of $216 million in 1995 and $219 million in 1994 of
   unamortized discount)........................................... $184 $ 181
  Notes due 1996 through 1997, average effective interest rate 9.7%
   in 1995 and 10.1% in 1994 (net of $5 million in 1995 and $8
   million in 1994 of unamortized discount)........................  573   808
Other subsidiaries--
  Notes due 1996 through 2014, average effective interest rate 8.5%
   in 1995 and 8.6% in 1994 (net of $19 million in 1995 and $20
   million in 1994 of unamortized discount)........................   47    51
                                                                    ---- -----
                                                                     804 1,040
                                                                    ---- -----
Less--Current maturities...........................................  254   247
                                                                    ---- -----
                                                                    $550 $ 793
                                                                    ==== =====
</TABLE>
 
  At December 31, 1995 and 1994, approximately $2 million and $84 million,
respectively, of gross plant, property and equipment was pledged as collateral
to secure $2 million and $1 million, respectively, principal amounts of long-
term debt.
 
  The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1995, are $254 million, $330 million, $4
million, $2 million and $1 million for 1996, 1997, 1998, 1999 and 2000,
respectively.
 
                                      34
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Short-Term Debt
 
  Information for the years ended December 31, 1995 and 1994, regarding credit
facilities, including borrowings under both committed and uncommitted credit
facilities and similar arrangements, follows:
 
<TABLE>   
<CAPTION>
                                                                   1995   1994
                                                                   -----  -----
                                                                   (MILLIONS)
<S>                                                                <C>    <C>
Outstanding borrowings at end of year............................  $  75  $  42
Weighted average interest rate on outstanding borrowings at end
 of year.........................................................    7.5%   9.8%
Approximate maximum month-end outstanding borrowings during year.  $  76  $ 167
Approximate average month-end outstanding borrowings during year.  $  62  $  65
Weighted average interest rate on approximate average month-end
 outstanding borrowings
 during year.....................................................   10.2%   7.3%
</TABLE>    
 
  Tennessee had other short-term borrowings of $17 million at December 31,
1995 and $9 million at December 31, 1994.
 
 Financing Arrangements
 
  Tennessee has arranged $122 million of committed credit facilities ($43
million of which expire in 1996) with various banks to provide short-term
financing at various rates. TIHC has an additional $50 million committed
credit facility with Tenneco Credit Corporation, a Tenneco Inc. subsidiary. At
December 31, 1995, TIHC had borrowed $25 million under this credit facility.
The credit facilities generally provide for commitment fees on the unused
portion of the total commitment and some credit facilities also provide for
facility fees on the total commitment.
 
 Restrictions on the Payment of Dividends
 
  At December 31, 1995, under the most restrictive dividend provisions
contained in indentures under which certain notes and debentures have been
issued, the Company has approximately $3.7 billion of retained earnings
available for the payment of dividends on common stock.
 
  Certain of the Company's subsidiaries have provisions under financing
arrangements and statutory requirements which limit the amount of their
retained earnings available for dividends. The restriction of the ability to
pay dividends by such subsidiaries would not affect the amount of retained
earnings of the Company available for dividends on common stock.
 
                                      35
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
5. FINANCIAL INSTRUMENTS
 
  The carrying and estimated fair values of Tennessee's financial instruments
by class at December 31, 1995 and 1994, were as follows:
 
<TABLE>
<CAPTION>
                                                  1995               1994
                                            -----------------  -----------------
                                            CARRYING   FAIR    CARRYING   FAIR
                                             AMOUNT    VALUE    AMOUNT    VALUE
                                            --------  -------  --------  -------
                                                       (MILLIONS)
                                                  ASSETS (LIABILITIES)
<S>                                         <C>       <C>      <C>       <C>
Asset and Liability Instruments
  Cash and temporary cash investments...... $   193   $   193  $   459   $   459
  Receivables (customer and long-term).....     571       571      801       801
  Accounts payable (trade).................  (1,065)   (1,065)  (1,029)   (1,029)
  Short-term debt (excluding current
   maturities).............................     (92)      (92)     (51)      (51)
  Long-term debt (including current
   maturities).............................    (804)   (1,001)  (1,040)   (1,175)
Instruments With Off-Balance-Sheet Risk
  Derivative
    Interest rate swaps:
      In a net receivable position.........      --        --       --        --
      In a net payable position............      --       (18)      --       (10)
    Foreign currency contracts.............      (2)       (3)       1         2
    Natural gas swaps, futures and options.      --         3       --        (5)
  Non-derivative
    Financial guarantees...................      --       (30)      --       (50)
</TABLE>
 
 Asset and Liability Instruments
 
  The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was not determined to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, Tennessee's aggregate customer
and long-term receivable balance was concentrated by industry segment as
follows: Tenneco Automotive, 51% and 28%; Tenneco Energy, 12% and 11%; Tenneco
Packaging, 12% and 9%; Newport News Shipbuilding, 22% and 24%; all other
amounts were not significant.
 
  Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates; the carrying
amount of floating-rate debt was assumed to approximate its fair value.
 
 Instruments With Off-Balance-Sheet Risk
 
 Derivative
 
  Interest Rate Swaps--The fair value of interest rate swaps was based on the
cost that would have been incurred to buy out those swaps in a loss position
and the consideration that would have been received to terminate those swaps
in a gain position. At December 31, 1995 and 1994, Tennessee was a party to
swaps with a notional value of $750 million, which were in a net payable
position at the end of both years. Notional amounts associated with these
swaps do not represent future cash payment requirements. These contractual
amounts are only used as a base to measure amounts to be exchanged at
specified settlement dates.
 
                                      36
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Consistent with its overall policy, Tennessee uses these instruments from
time to time only to hedge known, quantifiable risks arising from fluctuations
in interest rates. The counterparties to these interest rate swaps are major
international financial institutions. The risk associated with counterparty
default on interest rate swaps is measured as the cost of replacing, at the
prevailing market rates, those contracts in a gain position. In the event of
non-performance by the counterparties, the cost to replace outstanding
interest rate swaps at December 31, 1995 and 1994, would not have been
material.
 
  Foreign Currency Contracts--Tennessee periodically utilizes foreign currency
contracts to hedge certain translation effects of Tennessee's investment in
net assets in certain foreign subsidiaries. Pursuant to these arrangements,
Tennessee recognized aggregate after-tax translation gains (losses) of none,
$(1) million and $4 million for 1995, 1994 and 1993, respectively, which have
been included in the balance sheet caption, "Cumulative translation
adjustments."
 
  In the normal course of business, Tennessee and its foreign subsidiaries
also routinely enter into various foreign currency forward purchase and sale
contracts to hedge the transaction effect of exchange rate movements on
receivables and payables denominated in foreign currencies. These foreign
currency contracts generally mature in one year or less.
 
  In managing its foreign currency exposures, Tennessee identifies naturally
occurring offsetting positions and then hedges residual exposures. The
following table summarizes by major currency the contractual amounts of
foreign currency contracts utilized by Tennessee. These contracts include
those entered into with third parties, as well as other Tenneco affiliates.
 
<TABLE>
<CAPTION>
                                                     NOTIONAL AMOUNT
                                            -----------------------------------
                                                                 DECEMBER 31,
                                            DECEMBER 31, 1995        1994
                                            ------------------- ---------------
                                             PURCHASE   SELL    PURCHASE  SELL
                                            ---------- -------- -------- ------
                                                       (MILLIONS)
<S>                                         <C>        <C>      <C>      <C>
Foreign currency contracts (in US$):
  Australian Dollars.......................   $      1 $    202  $   94  $   26
  British Pounds...........................        508       86     277     455
  Canadian Dollars.........................         23       50      81      65
  French Francs............................         44       16      94      15
  U.S. Dollars.............................        261      509     244     377
  Other....................................        127      104     274     123
                                              -------- --------  ------  ------
                                              $    964 $    967  $1,064  $1,061
                                              ======== ========  ======  ======
</TABLE>
 
  Based on exchange rates at December 31, 1995 and 1994, the cost of replacing
these contracts in the event of non-performance by the counterparties would
not have been material.
 
  Price Risk Management--Tennessee uses exchange-traded futures and option
contracts and over-the-counter option and swap contracts to reduce its
exposure to fluctuations in the prices of natural gas. The fair value of these
contracts is based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. As of December
31, 1995 and 1994, these contracts, maturing through 1997 and 1996,
respectively, had an absolute notional contract quantity of 321 Bcf and 187
Bcf, respectively. Since the contracts described above are designated as
hedges whose fair values correlate to price movements of natural gas, any
gains or losses on the contracts resulting from market changes will be offset
by losses or gains on the hedged transactions. Tennessee has off-balance sheet
risk of credit loss in the event of non-performance by counterparties to all
over-the-counter contracts. However, Tennessee does not anticipate non-
performance by the counterparties.
 
                                      37
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
   
 Non-derivative     
 
  Guarantees--At December 31, 1995 and 1994, Tennessee had guaranteed payment
and performance of approximately $30 million and $50 million, respectively,
primarily with respect to letters of credit and other guarantees supporting
various financing and operating activities.
 
6. FEDERAL ENERGY REGULATORY COMMISSION ("FERC") REGULATORY MATTERS
 
 Restructuring Proceedings
 
  Pursuant to Order 636 issued by the FERC on April 8, 1992, the Company
implemented revisions to its tariff, effective on September 1, 1993, which
restructured its transportation, storage and sales services to convert the
Company from primarily a merchant to primarily a transporter of gas. As a
result of this restructuring, the Company's gas sales declined while certain
obligations to producers under long-term gas supply contracts continued,
causing the Company to incur significant restructuring transition costs.
Pursuant to the provisions of Order 636 allowing for the recovery of
transition costs related to the restructuring, the Company has made filings to
recover gas supply realignment ("GSR") costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" cost of the Company's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
 
  The Company's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of the
Company to file for the recovery of losses upon disposition of these assets.
The Company has filed for appellate review of the FERC actions and is
confident that the Bastian Bay costs will ultimately be recovered as
transition costs under Order 636; the FERC has not contested the ultimate
recoverability of these costs.
 
  The filings implementing the Company's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery is subject to refund pending FERC review and approval for
eligibility: 1) direct-billing of unrecovered PGA costs to its former sales
customers over a twelve-month period; 2) recovery of TBO costs, which the
Company is obligated to pay under existing contracts, through a surcharge from
firm transportation customers, adjusted annually; and 3) GSR cost recovery of
90% of such costs over a period of up to 36 months from firm transportation
customers and recovery of 10% of such costs from interruptible transportation
customers over a period of up to 60 months.
 
  Following negotiations with its customers, the Company filed in July 1994
with the FERC a Stipulation and Agreement (the "PGA Stipulation"), which
provides for the recovery of PGA costs of approximately $100 million and the
recovery of costs associated with the transfer of storage gas inventory to new
storage customers in the Company's restructuring proceeding. The PGA
Stipulation eliminates all challenges to the PGA costs, but establishes a cap
on the charges that may be imposed upon former sales customers. On
November 15, 1994, the FERC issued an order approving the PGA Stipulation and
resolving all outstanding issues. On April 5, 1995, the FERC issued its order
on rehearing affirming its initial approval of the PGA Stipulation. The
Company implemented the terms of the PGA Stipulation and made refunds in May
1995. The refunds had no material effect on Tennessee's reported net income.
The orders approving the PGA Stipulation have been appealed to the D.C.
Circuit Court of Appeals by certain customers. The Company believes the FERC
orders approving the PGA Stipulation will be upheld on appeal.
 
  The Company is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function, pending FERC review of data
submitted by the Company. The FERC subsequently
 
                                      38
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
issued an order requiring the Company to refund certain costs from this
surcharge. The Company is appealing this decision and believes such appeal
will likely be successful.
 
  With regard to the Company's GSR costs, the Company, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
the Company of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge ("ALJ"). The hearing, which concluded in
July 1995, was limited to the issue of whether the settlement agreements are
prudent. The ALJ concluded, in his initial decision issued in December 1995,
that the settlement was imprudent. The Company has filed exceptions to this
initial decision and believes that this decision will not impair the Company's
recovery of the costs resulting from this contract. The FERC has committed to
issuing a final order by December 31, 1996.
 
  Also related to the Company's GSR costs, on October 14, 1993, the Company
was sued in the State District Court of Ector County, Texas, by ICA Energy,
Inc. ("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA
and TransTexas contended that the Company had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading seeks $1.5 billion from the Company for alleged damages caused by the
Company's refusal to purchase gas produced from the TransTexas leases covering
the new production and lands. Neither ICA nor TransTexas were original parties
to that contract. However, they contend that any stranger acquiring a
fractional interest in the original committed reserves thereby obtains a right
to add to the contract unlimited volumes of gas production from locations in
South Texas. The Company filed a motion for summary judgment, asserting that
the Texas statutes of frauds precluded the plaintiffs from adding new
production or acreage to the contract. On May 4, 1995, the trial court granted
the Company's motion for summary judgment; the plaintiffs have filed a notice
of appeal. Thereafter, ICA and TransTexas filed a motion for summary judgment
on a separate issue involving the term "committed reserves" and whether the
Company has a contractual obligation to purchase gas produced from a lease not
described in the gas contract. On November 8, 1995, the trial court granted
ICA's and TransTexas' motion in part. That order, which would be finalized
upon conclusion of the trial, also held that ICA's and TransTexas' rights are
subject to certain limitations of the Texas Business and Commerce Code. In
addition to these defenses, which are to be resolved at trial, the Company has
other defenses which it has asserted and intends to pursue. The Company has
filed a Motion to Clarify the November 8, 1995 order together with a new
motion for partial summary judgment concerning the committed reserve issue.
The November 8, 1995 ruling does not affect the trial court's previous May 4,
1995 order granting summary judgment to the Company.
 
  The Company has been engaged in separate settlement and contract reformation
discussions with holders of certain gas purchase contracts who have sued the
Company. Although the Company believes that its defenses in the underlying gas
purchase contract actions are meritorious, the Company accrued amounts in the
first quarter of 1995 which it believes are adequate to cover the resolution
of these matters. On August 1, 1995, the Texas Supreme Court affirmed a ruling
of the Court of Appeals favorable to the Company in one of these matters and
indicated that it would remand the case to the trial court. Motions for
rehearing have been filed by the producers. As of the date hereof, the court
had not ruled on those motions and mandate had not been issued.
 
  As of December 31, 1995, the Company has deferred GSR costs yet to be
recovered from its customers of approximately $462 million, net of $316
million previously recovered from its customers, subject to refund. A
 
                                      39
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
proceeding before a FERC ALJ is scheduled to commence in early 1996 to
determine whether the Company's GSR costs are eligible for cost recovery. The
FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although Order 636 provides for complete recovery
by pipelines of eligible and prudently incurred transition costs, certain
customers have challenged the prudence and eligibility of the Company's GSR
costs and the Company has engaged in settlement discussions with its customers
concerning the amount of such costs in response to the FERC and customer
statements acknowledging the desirability of such settlements.
 
  Given the uncertainty over the results of ongoing discussions between the
Company and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, Tennessee is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its consolidated financial position or results of operations.
 
 Rate Proceedings
 
  On December 30, 1994, the Company filed for a general rate increase (the
"1995 Rate Case"). On January 25, 1995, the FERC accepted the filing,
suspended its effectiveness for the maximum period of five months pursuant to
normal regulatory process, and set the matter for hearing. On July 1, 1995,
the Company began collecting rates, subject to refund, reflecting an $87
million increase in the Company's annual revenue requirement. Settlement
discussions with the FERC staff and customers regarding 1995 Rate Case issues,
including structural rate design and increased revenue requirements, are
ongoing and the Company is reserving revenues it believes adequate to cover
any refunds that may be required upon final settlement of this proceeding. A
hearing is scheduled to commence in March 1996.
 
7. INCOME TAXES
 
  The domestic and foreign components of income from continuing operations
before income taxes are as follows:
 
<TABLE>       
<CAPTION>
                                                                YEARS ENDED
                                                                DECEMBER 31
                                                             ------------------
                                                              1995   1994  1993
                                                             ------ ------ ----
                                                                 (MILLIONS)
      <S>                                                    <C>    <C>    <C>
      U.S. income before income taxes....................... $1,117 $  948 $792
      Foreign income before income taxes....................    162     80  124
                                                             ------ ------ ----
      Income before income taxes............................ $1,279 $1,028 $916
                                                             ====== ====== ====
</TABLE>    
 
                                      40
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Following is a comparative analysis of the components of consolidated income
tax expense applicable to continuing operations:
 
<TABLE>       
<CAPTION>
                                                                  YEARS ENDED
                                                                  DECEMBER 31
                                                                 ---------------
                                                                 1995 1994  1993
                                                                 ---- ----  ----
                                                                   (MILLIONS)
      <S>                                                        <C>  <C>   <C>
      Current--
        U.S..................................................... $285 $249  $224
        State and local.........................................   50   32    46
        Foreign.................................................   65   34    26
                                                                 ---- ----  ----
                                                                  400  315   296
                                                                 ---- ----  ----
      Deferred--
        U.S.....................................................   65   24    43
        State and local.........................................   12   10    11
        Foreign.................................................    1  (24)    9
                                                                 ---- ----  ----
                                                                   78   10    63
                                                                 ---- ----  ----
      Income tax expense........................................ $478 $325  $359
                                                                 ==== ====  ====
</TABLE>    
 
  Following is a reconciliation of income taxes computed at the U.S. federal
income tax rate (35% for all years presented) to the income tax expense from
continuing operations reflected in the Statements of Income:
 
<TABLE>   
<CAPTION>
                                                               YEARS ENDED
                                                               DECEMBER 31
                                                              ----------------
                                                              1995  1994  1993
                                                              ----  ----  ----
                                                                (MILLIONS)
<S>                                                           <C>   <C>   <C>
Tax expense computed at the U.S. federal income tax rate..... $448  $360  $321
Increases (reductions) in income tax expense resulting from:
  Foreign income taxed at different rates and foreign losses
   with no tax benefit.......................................   (2)  (12)   14
  Permanent differences on sale of businesses................   25   (10)   (6)
  State and local taxes on income, net of U.S. federal income
   tax benefit...............................................   40    27    37
  U.S. federal income tax rate change........................   --    --    11
  Realization of unrecognized deferred tax assets............  (46)  (12)   --
  Other......................................................   13   (28)  (18)
                                                              ----  ----  ----
Income tax expense........................................... $478  $325  $359
                                                              ====  ====  ====
</TABLE>    
 
                                      41
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  The components of Tennessee's net deferred tax liability at December 31,
1995 and 1994, were as follows:
 
<TABLE>
<CAPTION>
                                                                 1995    1994
                                                                ------  ------
                                                                 (MILLIONS)
<S>                                                             <C>     <C>
Deferred tax assets--
  Tax loss carryforwards....................................... $  163  $  217
  Postretirement benefits other than pensions..................    176      90
  GSR reserve..................................................    141      --
  Environmental reserve........................................     76      83
  Other........................................................    117     163
  Valuation allowance..........................................   (142)   (235)
                                                                ------  ------
    Net deferred tax asset.....................................    531     318
                                                                ------  ------
Deferred tax liabilities--
  Tax over book depreciation...................................    785     781
  Pension......................................................    166     107
  Asset related to GSR costs of operations regulated by the
   FERC........................................................    141      --
  Long-term shipbuilding contracts.............................     62      54
  Debt related items...........................................     43      44
  Book versus tax gains and losses on asset disposals..........     89     418
  Other........................................................    164     230
                                                                ------  ------
    Total deferred tax liability...............................  1,450   1,634
                                                                ------  ------
Net deferred tax liability..................................... $  919  $1,316
                                                                ======  ======
</TABLE>
 
  As reflected by the valuation allowance in the table above, Tennessee had
potential tax benefits of $142 million and $235 million at December 31, 1995
and 1994, respectively, which were not recognized in the Statements of Income
when generated. These benefits resulted primarily from tax loss carryforwards
which are available to reduce future tax liabilities. During 1995, Tennessee
reduced its deferred tax asset valuation allowance due to the recognition of
tax loss carryforwards utilized to offset income taxes payable on asset and
investment dispositions.
 
  At December 31, 1995, Tennessee had tax benefits of $80 million related to
U.S. capital loss carryforwards which expire in 1999 and $83 million from
foreign net operating loss carryforwards which will carry forward
indefinitely.
 
8. MINORITY INTEREST
 
  At December 31, 1995 and 1994, Tennessee reported minority interest in the
balance sheet of $492 million and $475 million, respectively. At December 31,
1995, $293 million of minority interest resulted from the December 1994 sale
by Tennessee of a 25% preferred stock interest in TIHC to a financial
investor. Additionally, $174 million and $156 million, respectively, of
minority interest at December 31, 1995 and 1994 resulted from the December
1994 issuance of TIHC common stock to a Tenneco Inc. subsidiary in exchange
for 100% of the issued and outstanding common stock of Tenneco Canada Inc.
TIHC is a separate legal entity from the Company and holds certain assets
including the capital stock of Tenneco Canada Inc., Monroe Europe N.V., Monroe
Australia Proprietary Limited, Walker France S.A. and other subsidiaries
included in the Tenneco Automotive segment. TIHC also holds financial
obligations of Tenneco Inc. or guaranteed by Tenneco Inc. For financial
reporting purposes, the assets, liabilities and earnings of TIHC and its
subsidiaries have continued to be consolidated in Tennessee's financial
statements, and the investor's preferred stock interest has been recorded as
"Minority interest" in the balance sheet.
 
                                      42
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Dividends on the TIHC preferred stock are based on the issue price ($300
million) times a rate per annum equal to 1.12% over LIBOR and are payable
quarterly in arrears on the last business day of each quarter commencing on
March 31, 1995. For 1995, the weighted average rate paid on TIHC preferred
stock was 7.30%. Additionally, beginning in 1996, the holder of the 12,000,000
shares of preferred stock will be entitled to receive, when and if declared by
the Board of Directors of TIHC, participating dividends based on the operating
income growth rate of TIHC. For financial reporting purposes, dividends paid
by TIHC to its financial investors have been recorded in Tennessee's income
statement as "Minority interest."
 
9. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
 
 Postretirement Benefits
 
  Tennessee has postretirement health care and life insurance plans which
cover substantially all of its domestic employees. For salaried employees, the
plans cover employees retiring from Tennessee on or after attaining age 55 who
have had at least 10 years service with Tennessee after attaining age 45. For
hourly employees, the postretirement benefit plans generally cover employees
who retire pursuant to one of Tennessee's hourly employee retirement plans.
All of these benefits may be subject to deductibles, copayment provisions and
other limitations, and Tennessee has reserved the right to change these
benefits.
 
  The majority of Tennessee's postretirement benefit plans are not funded. In
June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of the Tenneco Energy segment. The contributions are
collected from customers in FERC approved rates. As of December 31, 1995,
cumulative contributions were $10 million. Plan assets consist principally of
fixed income securities.
 
  The funded status of the postretirement benefit plans reconciles with
amounts recognized on the balance sheet at December 31, 1995 and 1994, as
follows (Note):
 
<TABLE>
<CAPTION>
                                                                  1995   1994
                                                                  -----  -----
                                                                  (MILLIONS)
<S>                                                               <C>    <C>
Actuarial present value of accumulated postretirement benefit
 obligation at September 30:
  Retirees....................................................... $ 504  $ 271
  Fully eligible active plan participants........................    47     45
  Other active plan participants.................................    63     60
                                                                  -----  -----
Total accumulated postretirement benefit obligation..............   614    376
Plan assets at fair value at September 30........................     3      2
                                                                  -----  -----
Accumulated postretirement benefit obligation in excess of plan
 assets at September 30..........................................  (611)  (374)
Claims paid during the fourth quarter............................    20      8
Unrecognized reduction of prior service obligations resulting
 from plan amendments............................................   (99)   (34)
Unrecognized net loss resulting from plan experience and changes
 in actuarial assumptions........................................   161     95
                                                                  -----  -----
Accrued postretirement benefit cost at December 31............... $(529) $(305)
                                                                  =====  =====
</TABLE>
--------
Note: The accrued postretirement benefit cost has been recorded based upon
      certain actuarial estimates as described below. Those estimates are
      subject to revision in future periods given new facts or circumstances.
 
                                      43
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  In conjunction with the Case IPO in June 1994, active Case salaried
employees were transferred from the Tenneco Inc. plans to new Case salaried
plans, and Case hourly retirees were transferred from the Case hourly plans to
the Tenneco Inc. plans. Amendments to reduce the cost of providing future
benefits for Case hourly retirees were reflected at that time. In January
1995, the liability related to Case retirees covered by Tenneco Inc. plans,
$251 million at December 31, 1994, was transferred, with an equal amount of
cash, from Tenneco Inc. to Tenneco Corporation, a wholly-owned subsidiary of
the Company.
   
  Prior to the June 1994 IPO, Tennessee sold all of its farm and construction
equipment net assets to Case Corporation. Therefore, all Case liabilities for
the new Case plans are excluded from the Tennessee disclosure information
beginning in 1994. Benefit costs for these plans have been included up to the
date of the sale (for six months of 1994) in income from discontinued
operations. For additional information concerning Tennessee's changing
ownership in Case, reference is made to Note 3, "Discontinued Operations,
Dispositions of Assets and Extraordinary Loss."     
 
  The net periodic postretirement benefit cost from continuing operations for
the years 1995, 1994 and 1993 consist of the following components:
 
<TABLE>       
<CAPTION>
                                                                1995  1994  1993
                                                                ----  ----  ----
                                                                  (MILLIONS)
      <S>                                                       <C>   <C>   <C>
      Service cost for benefits earned during the year......... $  6  $ 7   $ 7
      Interest cost on accumulated postretirement benefit
       obligation..............................................   49   28    28
      Net amortization of unrecognized amounts.................  (13)  (2)   (1)
                                                                ----  ---   ---
      Net periodic postretirement benefit cost................. $ 42  $33   $34
                                                                ====  ===   ===
</TABLE>    
 
  The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
 
  Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $36 million, $24 million and $19 million,
respectively, and would increase the aggregate of the service cost and
interest cost components of the net postretirement benefit cost for 1995, 1994
and 1993 by approximately $4 million, $3 million and $4 million, respectively.
 
  The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
 
 Postemployment Benefits
 
  Tennessee adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. Implementation of this new rule reduced 1994
net income by $13 million, net of income tax benefits of $7 million, which was
reported as the cumulative effect of a change in accounting principle.
 
                                      44
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
10. PENSION PLANS
 
  Tennessee has retirement plans which cover substantially all of its
employees. Benefits are based on years of service and, for most salaried
employees, on final average compensation. Tennessee's funding policies are to
contribute to the plans amounts necessary to satisfy the funding requirements
of federal laws and regulations. Plan assets consist principally of listed
equity and fixed income securities.
 
  The funded status of the plans reconciles with amounts recognized on the
balance sheet at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
                                                    PLANS IN
                                     PLANS IN         WHICH
                                   WHICH ASSETS    ACCUMULATED
                                      EXCEED        BENEFITS
                                    ACCUMULATED      EXCEED        ALL PLANS
                                     BENEFITS        ASSETS         (NOTE)
                                   --------------  ------------  --------------
                                    1995    1994   1995   1994    1995    1994
                                   ------  ------  -----  -----  ------  ------
                                                 (MILLIONS)
<S>                                <C>     <C>     <C>    <C>    <C>     <C>
Actuarial present value of bene-
 fits based on service to date
 and present pay levels at Sep-
 tember 30:
 Vested benefit obligation.......  $2,446  $1,729  $  28  $  18  $2,474  $1,747
 Non-vested benefit obligation...      90      86      2      2      92      88
                                   ------  ------  -----  -----  ------  ------
 Accumulated benefit obligation..   2,536   1,815     30     20   2,566   1,835
Additional amounts related to
 projected salary increases......     206     222      2      2     208     224
                                   ------  ------  -----  -----  ------  ------
Total projected benefit obliga-
 tion at September 30............   2,742   2,037     32     22   2,774   2,059
Plan assets at fair value at Sep-
 tember 30.......................   3,088   2,310      3      4   3,091   2,314
                                   ------  ------  -----  -----  ------  ------
Plan assets in excess of (less
 than) total projected benefit
 obligation at
 September 30....................     346     273    (29)   (18)    317     255
Contributions during the fourth
 quarter.........................       4      17     --     --       4      17
Unrecognized net (gain) loss re-
 sulting from plan experience and
 changes in
 actuarial assumptions...........     166      96      1      1     167      97
Unrecognized prior service obli-
 gations resulting from plan
 amendments......................      82      99     --      1      82     100
Remaining unrecognized net obli-
 gation (asset) at initial appli-
 cation..........................    (132)   (165)    --      1    (132)   (164)
Adjustment recorded to recognize
 minimum liability...............      --      --     --     (1)     --      (1)
                                   ------  ------  -----  -----  ------  ------
Prepaid (accrued) pension cost at
 December 31.....................  $  466  $  320  $ (28) $ (16) $  438  $  304
                                   ======  ======  =====  =====  ======  ======
</TABLE>
--------
Note: Assets of one plan may not be utilized to pay benefits of other plans.
   Additionally, the prepaid (accrued) pension cost has been recorded based
   upon certain actuarial estimates as described below. Those estimates are
   subject to revision in future periods given new facts or circumstances.
   
  In December 1993, all liabilities and assets were transferred from the Case
Corporation Pension Plan for Hourly-Paid Employees ("Case Plan") to the
Tenneco Inc. Retirement Plan. These liabilities are currently overfunded and
in January 1995, plan assets and liabilities (totaling a $133 million net
asset) were transferred, in exchange for cash, from Tenneco Inc. to Tenneco
Corporation, a wholly-owned subsidiary of the Company. In June 1994, all
future accruals for the salaried and hourly active Case employees were
transferred from the Tenneco Inc. Retirement Plan to new Case plans. Prior to
the June 1994 IPO, Tennessee sold all of its farm and construction equipment
net assets to Case Corporation. Therefore, all domestic and foreign Case
liabilities and assets in the new Case plans are excluded from the Tennessee
disclosure information beginning in 1994. Pension cost (income) for these
plans has been included up to the date of the sale (for six months of 1994) in
income from discontinued operations.     
 
                                      45
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Net periodic pension costs (income) from continuing operations for the years
1995, 1994 and 1993 consist of the following components:
<TABLE>   
<CAPTION>
                                        1995         1994          1993
                                     -----------  ------------  -----------
                                                  (MILLIONS)
<S>                                  <C>   <C>    <C>    <C>    <C>   <C>    <C>
Service cost--benefits earned
 during the year...................        $  50         $  55        $  49
Interest accrued on prior year's
 projected benefit obligation......          205           120          114
Expected return on plan assets--
Actual (return) loss...............  (536)          143         (259)
Unrecognized excess (deficiency) of
 actual return over expected
 return............................   261          (323)          88
                                     ----         -----         ----
                                            (275)         (180)        (171)
Net amortization of unrecognized
 amounts...........................          (10)          (13)         (14)
                                           -----         -----        -----
Net periodic pension costs
 (income)..........................        $ (30)        $ (18)       $ (22)
                                           =====         =====        =====
</TABLE>    
 
  The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.5% and 7.7%, respectively. The rate of
increase in future compensation was 5.0% in 1995 and 5.1% in 1994 and 1993.
The weighted average expected long-term rate of return on plan assets was
10.0% in 1995 and 1994 and 9.8% in 1993.
 
11. SEGMENT AND GEOGRAPHIC AREA INFORMATION
 
  Tennessee is a diversified industrial conglomerate with multinational
operations. Tennessee's principal business segments are as follows:
 
  Tenneco Automotive--       International manufacturer of exhaust system
                             parts and ride control products for automobiles,
                             which are sold in both the original equipment and
                             replacement markets.
 
  Tenneco Energy--           Transporter and marketer of natural gas,
                             operating in both the regulated and nonregulated
                             environments. Additionally, holds interests in
                             international natural gas pipelines and domestic
                             power generation projects.
 
  Tenneco Packaging--        Manufacturer of packaging materials, cartons,
                             containers and specialty packaging products for
                             consumer and commercial markets.
 
  Newport News               Primary business includes the design,
  Shipbuilding--             construction and repair of U.S. Naval ships and
                             submarines, and commercial vessels.
   
  In March 1996, Tennessee sold its remaining ownership interest in Case, a
leading manufacturer of farm and construction equipment with primary
operations in the U.S. and European Union. Also, during 1995, Tennessee sold
its Albright & Wilson chemicals segment, which was involved in the production
of phosphorous chemicals and surfactants, as well as a range of specialty
chemicals. For more discussion of Tennessee's farm and construction equipment
and chemicals segments, see Note 3.     
 
                                      46
<PAGE>
 
          TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
  The following tables summarize certain segment and geographic information of
Tennessee's businesses:
 
<TABLE>   
<CAPTION>
                                                        SEGMENT
                          ---------------------------------------------------------------------
                                                                 FARM AND                        RECLASS.
                            AUTO-                      SHIP-   CONSTRUCTION                         AND     CONSOL-
       (MILLIONS)         MOTIVE(D) ENERGY  PACKAGING BUILDING EQUIPMENT(D) CHEMICALS(D) OTHER  ELIMINATION IDATED
       ----------         --------- ------  --------- -------- ------------ ------------ ------ ----------- -------
<S>                       <C>       <C>     <C>       <C>      <C>          <C>          <C>    <C>         <C>
AT DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED
Net sales and operating
 revenues(a)............   $2,427   $1,916   $2,750    $1,756      $--          $ --     $   --    $  (9)   $ 8,840
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Operating profit........      243      286      467       172       --            --        379       --      1,547
Equity in net income of
 affiliated companies...        1       63       --        --       --            --          2       --         66
General corporate
 expenses...............       (9)     (16)     (10)      (12)      --            --         --       --        (47)
                           ------   ------   ------    ------      ---          ----     ------    -----    -------
Income before interest
 expense, income taxes
 and minority interest..      235      333      457       160       --            --        381       --      1,566
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Identifiable assets.....    1,864    4,098    3,862     1,467       --            --      4,221     (105)    15,407
Investment in affiliated
 companies..............        3      239        4         9       --            --          2       --        257
Investment in affiliated
 companies related to
 discontinued
 operations.............       --       --       --        --       29            --         --       --         29
                           ------   ------   ------    ------      ---          ----     ------    -----    -------
   Total assets.........    1,867    4,337    3,866     1,476       29            --      4,223     (105)    15,693
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Depreciation, depletion
 and amortization.......       79      195      104        67       --            --          1       --        446
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Capital expenditures
 for continuing
 operations.............      204      334      316        77       --            --          4       --        935
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
AT DECEMBER 31, 1994, AND FOR THE YEAR THEN ENDED
Net sales and operating
 revenues(a)............   $1,850   $2,378   $2,184    $1,753      $--          $ --     $   --    $  (7)   $ 8,158
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Operating profit........      214      379      217       213       --            --        261       --      1,284
Equity in net income of
 affiliated companies...       --       52       --        --       --            --         --       --         52
General corporate
 expenses...............       (9)     (16)      (8)      (13)      --            --         --       --        (46)
                           ------   ------   ------    ------      ---          ----     ------    -----    -------
Income before interest
 expense, income taxes
 and minority interest..      205      415      209       200       --            --        261       --      1,290
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Identifiable assets.....    1,477    3,241    1,884     1,353       --            --      4,056     (149)    11,862
Investment in affiliated
 companies..............        2      359        3        --       --            --         --       --        364
Identifiable assets
 related to discontinued
 operations.............       --       --       --        --       --           849         --       (4)       845
Investment in affiliated
 companies related
 to discontinued
 operations.............       --       --       --        --       56           103         --       --        159
                           ------   ------   ------    ------      ---          ----     ------    -----    -------
   Total assets.........    1,479    3,600    1,887     1,353       56           952      4,056     (153)    13,230
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Depreciation, depletion
 and amortization.......       45      100       82        70       --            --          2       --        299
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
Capital expenditures
 for continuing
 operations.............      106      331      166        29       --            --         14       --        646
                           ======   ======   ======    ======      ===          ====     ======    =====    =======
</TABLE>    
   
See notes at the end of these tables.     
 
                                       47
<PAGE>
 
          TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>   
<CAPTION>
                                                        SEGMENT
                          ---------------------------------------------------------------------
                                                                 FARM AND                         RECLASS.
                            AUTO-                      SHIP-   CONSTRUCTION                          AND     CONSOL-
       (MILLIONS)         MOTIVE(D) ENERGY  PACKAGING BUILDING EQUIPMENT(D) CHEMICALS(D) OTHER   ELIMINATION IDATED
       ----------         --------- ------  --------- -------- ------------ ------------ ------  ----------- -------
<S>                       <C>       <C>     <C>       <C>      <C>          <C>          <C>     <C>         <C>
AT DECEMBER 31, 1993, AND FOR THE YEAR THEN ENDED
Net sales and operating
 revenues(a)............   $1,628   $2,862   $2,042    $1,861      $--          $ --     $    1     $ (8)    $8,386
                           ======   ======   ======    ======      ===          ====     ======     ====     ======
Operating profit .......      206      376      146       238       --            --        220       --      1,186
Equity in net income
 (loss) of affiliated
 companies..............       --       49        2        --       --            --         (1)      --         50
General corporate
 expenses...............       (8)     (14)      (9)      (13)      --            --         --       --        (44)
                           ------   ------   ------    ------      ---          ----     ------     ----     ------
Income before interest
 expense, income taxes
 and minority interest..      198      411      139       225       --            --        219       --      1,192
                           ======   ======   ======    ======      ===          ====     ======     ====     ======
Identifiable assets.....    1,044    2,953    1,712     1,277       --            --      3,392      (70)    10,308
Investment in affiliated
 companies..............        4      307        6        --       --            --         75       --        392
Identifiable assets
 related to discontinued
 operations.............       69       --       --        --      911           815         --       (9)     1,786
Investment in affiliated
 companies related
 to discontinued
 operations.............       --       --       --        --      (44)           62         --       --         18
                           ------   ------   ------    ------      ---          ----     ------     ----     ------
   Total assets.........    1,117    3,260    1,718     1,277      867           877      3,467      (79)    12,504
                           ======   ======   ======    ======      ===          ====     ======     ====     ======
Depreciation, depletion
 and amortization.......       44      166       77        72       --            --          3       --        362
                           ======   ======   ======    ======      ===          ====     ======     ====     ======
Capital expenditures for
 continuing operations..       89      170      124        36       --            --          1       --        420
                           ======   ======   ======    ======      ===          ====     ======     ====     ======
</TABLE>    
 
<TABLE>   
<CAPTION>
                                GEOGRAPHIC AREA(C)(D)
                           --------------------------------
                                                             RECLASS.
                           UNITED          EUROPEAN  OTHER      AND     CONSOL-
       (MILLIONS)          STATES   CANADA  UNION   FOREIGN ELIMINATION IDATED
       ----------          -------  ------ -------- ------- ----------- -------
<S>                        <C>      <C>    <C>      <C>     <C>         <C>
AT DECEMBER 31, 1995, AND
 FOR THE YEAR THEN ENDED
Net sales and operating
 revenues:
 Sales to unaffiliated
  customers(a)...........  $ 7,336   $149   $1,140   $215      $  --    $ 8,840
 Transfers among
  geographic areas(b)....       74     43       27     29       (173)        --
                           -------   ----   ------   ----      -----    -------
   Total.................    7,410    192    1,167    244       (173)     8,840
                           =======   ====   ======   ====      =====    =======
Operating profit.........    1,378     21      118     30         --      1,547
Equity in net income of
 affiliated companies....       65     --        1     --         --         66
General corporate
 expenses................      (47)    --       --     --         --        (47)
                           -------   ----   ------   ----      -----    -------
Income before interest
 expense, income taxes
 and
 minority interest.......    1,396     21      119     30         --      1,566
                           =======   ====   ======   ====      =====    =======
Identifiable assets......   13,067    277    1,252    904        (93)    15,407
Investment in affiliated
 companies...............      215      2        2     38         --        257
Investment in affiliated
 companies related to
 discontinued operations.       29     --       --     --         --         29
                           -------   ----   ------   ----      -----    -------
   Total assets..........   13,311    279    1,254    942        (93)    15,693
                           =======   ====   ======   ====      =====    =======
</TABLE>    
See notes on following page.
 
                                       48
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>   
<CAPTION>
                                 GEOGRAPHIC AREA(C)(D)
                            --------------------------------
                                                              RECLASS.
                            UNITED          EUROPEAN  OTHER      AND     CONSOL-
        (MILLIONS)          STATES   CANADA  UNION   FOREIGN ELIMINATION IDATED
        ----------          -------  ------ -------- ------- ----------- -------
<S>                         <C>      <C>    <C>      <C>     <C>         <C>
AT DECEMBER 31, 1994, AND
 FOR THE YEAR THEN ENDED
Net sales and operating
 revenues:
 Sales to unaffiliated
  customers(a)............  $ 7,327   $16    $ 618    $197      $  --    $8,158
 Transfers among
  geographic areas(b).....       19    --       44      37       (100)       --
                            -------   ---    -----    ----      -----    ------
   Total..................    7,346    16      662     234       (100)    8,158
                            =======   ===    =====    ====      =====    ======
Operating profit..........    1,202     2       48      32         --     1,284
Equity in net income
 (loss) of affiliated
 companies................       53    --       --      (1)        --        52
General corporate
 expenses.................      (46)   --       --      --         --       (46)
                            -------   ---    -----    ----      -----    ------
Income before interest
 expense, income taxes and
 minority interest........    1,209     2       48      31         --     1,290
                            =======   ===    =====    ====      =====    ======
Identifiable assets.......   10,151   155    1,339     327       (110)   11,862
Investment in affiliated
 companies................      361    --       --       3         --       364
Identifiable assets
 related to discontinued
 operations...............      177    43      602      42        (19)      845
Investment in affiliated
 companies related to
 discontinued operations..       82    --        3      74         --       159
                            -------   ---    -----    ----      -----    ------
   Total assets...........   10,771   198    1,944     446       (129)   13,230
                            =======   ===    =====    ====      =====    ======
AT DECEMBER 31, 1993, AND
 FOR THE YEAR THEN ENDED
Net sales and operating
 revenues:
 Sales to unaffiliated
  customers(a)............  $ 7,608   $11    $ 597    $170      $  --    $8,386
 Transfers among
  geographic areas(b).....       31    --       40      27        (98)       --
                            -------   ---    -----    ----      -----    ------
   Total..................    7,639    11      637     197        (98)    8,386
                            =======   ===    =====    ====      =====    ======
Operating profit .........    1,065     1       67      53         --     1,186
Equity in net income of
 affiliated companies.....       48    --        2      --         --        50
General corporate
 expenses.................      (44)   --       --      --         --       (44)
                            -------   ---    -----    ----      -----    ------
Income before interest
 expense, income taxes and
 minority interest........    1,069     1       69      53         --     1,192
                            =======   ===    =====    ====      =====    ======
Identifiable assets.......    9,321     7      754     256        (30)   10,308
Investment in affiliated
 companies................      313    --       71       8         --       392
Identifiable assets
 related to discontinued
 operations...............      219    64    1,331     183        (11)    1,786
Investment in affiliated
 companies related to
 discontinued operations..       26    --      (39)     31         --        18
                            -------   ---    -----    ----      -----    ------
   Total assets...........    9,879    71    2,117     478        (41)   12,504
                            =======   ===    =====    ====      =====    ======
</TABLE>    
--------
Notes: (a) Contracts with U.S. government agencies (primarily shipbuilding
      contracts with the U.S. Navy) accounted for $1.7 billion, $1.7 billion
      and $1.8 billion for 1995, 1994 and 1993, respectively.
(b) Products are transferred between geographic areas on a basis intended to
      reflect as nearly as possible the "market value" of the products.
          
(c)   As reflected above, Tennessee's segments principally market their
      products and services in the United States, with significant sales in
      the European Union and other foreign countries.     
   
(d) Tennessee's farm and construction equipment, chemicals and brakes
      operations have been reflected as discontinued operations in the
      accompanying financial statements. Reference is made to Note 3,
      "Discontinued Operations, Disposition of Assets and Extraordinary Loss,"
      for further information.     
 
                                      49
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Tennessee is engaged in the sale of products for export from the United
States. Such sales are reflected in the table below:
 
<TABLE>   
<CAPTION>
    GEOGRAPHIC AREA               PRINCIPAL PRODUCTS          1995 1994 1993
    ---------------               ------------------          ---- ---- ----
                                                                (MILLIONS)
<S>                      <C>                                  <C>  <C>  <C>  <C>
Canada.................. Paperboard products, molded and
                          pressed pulp goods, corrugated
                          boxes, aluminum and plastics,
                          natural gas ....................... $ 87 $ 75 $115
European Union.......... Molded and pressed pulp goods,
                          paperboard products, corrugated
                          boxes, aluminum and plastics,
                          navigation aids (1993 only), tanker
                          construction and repair work (1995
                          only)..............................  164   23   36
Other Foreign........... Ride control systems, molded and
                          pressed pulp goods, paperboard
                          products, corrugated boxes,
                          aluminum and plastics .............  113   49   60
                                                              ---- ---- ----
Total Export Sales........................................... $364 $147 $211
                                                              ==== ==== ====
</TABLE>    
 
12. COMMITMENTS AND CONTINGENCIES
 
 Capital Commitments
 
  Tennessee estimates that expenditures aggregating approximately $1.2 billion
will be required after December 31, 1995, to complete facilities and projects
authorized at such date, and substantial commitments have been made in
connection therewith.
 
 Purchase Obligations
 
  In connection with the financing commitments of certain joint ventures,
Tennessee has entered into unconditional purchase obligations for products and
services of $145 million ($106 million on a present value basis) at December
31, 1995. Tennessee's annual obligations under these agreements are $22
million for the years 1996 through 2000. Payments under such obligations,
including additional purchases in excess of contractual obligations, were $26
million, $34 million and $31 million for the years 1995, 1994 and 1993,
respectively. In addition, in connection with the Great Plains coal
gasification project (Dakota Gasification Company), the Company has contracted
to purchase 30% of the output of the plant's original design capacity for a
remaining period of 14 years. The Company has executed a settlement of this
contract as a part of its gas supply realignment negotiations discussed in
Note 6.
 
 Lease Commitments
 
  Tennessee holds certain of its facilities and equipment under long-term
leases. The minimum rental commitments under non-cancelable operating leases
with lease terms in excess of one year are $145 million, $134 million, $132
million, $119 million and $123 million for the years 1996, 1997, 1998, 1999
and 2000, respectively, and $925 million for subsequent years. Of these
amounts, $81 million for 1996, $84 million for 1997, $93 million for 1998, $86
million for 1999, $92 million for 2000 and $689 million for subsequent years
are lease payment commitments to GECC, John Hancock and Metropolitan Life for
assets purchased from
 
                                      50
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
   
Georgia-Pacific in January 1991 and leased to Tenneco Packaging. Commitments
under capital leases were not significant to the accompanying financial
statements. Total rental expense for continuing operations for the years 1995,
1994 and 1993, was $178 million, $169 million and $169 million, respectively,
including minimum rentals under non-cancelable operating leases of $172
million, $164 million and $166 million for the corresponding periods.     
 
 Litigation
 
  Reference is made to Note 6, "Federal Energy Regulatory Commission ("FERC")
Regulatory Matters," for information concerning gas supply litigation.
Tennessee Gas Pipeline Company and its subsidiaries are parties to numerous
other legal proceedings arising from their operations. Tennessee believes that
the outcome of these proceedings, individually and in the aggregate, will have
no material effect on the financial position or results of operations of
Tennessee Gas Pipeline Company and its consolidated subsidiaries.
 
 Environmental Matters
 
  Since 1988, the Company has been engaged in an internal project to identify
and deal with the presence of polychlorinated biphenyls ("PCBs") and other
substances of concern, including substances on the U.S. Environmental
Protection Agency List of Hazardous Substances ("HS List") at compressor
stations and other facilities operated by both its interstate and intrastate
natural gas pipeline systems. While conducting this project, the Company has
been in frequent contact with federal and state regulatory agencies, both
through informal negotiation and formal entry of consent orders, in order to
assure that its efforts meet regulatory requirements.
 
  Tennessee has established a reserve for the Company's environmental
expenses, which includes: 1) expected remediation expense and associated
onsite, offsite and groundwater technical studies, 2) legal fees and 3)
settlement of third party and governmental litigation, including civil
penalties. Through December 31, 1995, Tennessee has charged approximately $147
million against the environmental reserve, excluding recoveries related to the
Company's environmental settlement as discussed below. Of the remaining
reserve, $38 million has been recorded on the balance sheet under "Payables-
trade" and $126 million under "Deferred credits and other liabilities."
 
  Due to the current uncertainty regarding the further activity necessary for
the Company to address the presence of the PCBs, the substances on the HS List
and other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, the Company cannot at this
time accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
the Company's evaluation and experience to date, Tennessee continues to
believe that the recorded estimate for the reserve is adequate.
 
  Following negotiations with its customers, the Company in May 1995 filed
with the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that addresses the recovery of environmental costs currently
being recovered in its rates and also establishes a mechanism for recovering a
substantial portion of the environmental costs that will be expended in the
future. In November 1995, the FERC issued an order approving the Environmental
Stipulation. Although one shipper on its system has filed for rehearing, the
Company believes the Environmental Stipulation will be upheld. The effects of
the Environmental Stipulation, which is effective as of July 1, 1995, have
been recorded with no material effect on Tennessee's financial position or
results of operations. As of December 31, 1995, the balance of the regulatory
asset is $74 million.
 
 
                                      51
<PAGE>
 
         TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
  Tennessee has completed settlements with and has received payments from the
majority of its liability insurance policy carriers for remediation costs and
related claims. Tennessee believes that the likelihood of recovery of a
portion of its remediation costs and claims against the remaining carriers in
its pending litigation is reasonably possible. In addition, the Company has
settled its pending litigation against and received payment from the
manufacturer of the PCB-containing lubricant. These recoveries have been
considered in the Company's recording of its environmental settlement with its
customers.
 
  Tennessee has identified other sites in its various operating divisions
where environmental remediation expense may be required should there be a
change in ownership, operations or applicable regulations. These possibilities
cannot be predicted or quantified at this time and accordingly, no provision
has been recorded. However, provisions have been made for all instances where
it has been determined that the incurrence of any material remedial expense is
reasonably possible. Tennessee believes that the provisions recorded for
environmental exposures are adequate based on current estimates.
 
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                           INCOME                     INCOME
                                       BEFORE INTEREST             (LOSS) FROM     CUMULATIVE
                             NET SALES    EXPENSE,                 DISCONTINUED EFFECT OF CHANGE
                                AND     INCOME TAXES   INCOME FROM OPERATIONS,   IN ACCOUNTING
        QUARTER              OPERATING  AND MINORITY   CONTINUING     NET OF     PRINCIPLE, NET   NET
       (MILLIONS)            REVENUES     INTEREST     OPERATIONS   INCOME TAX   OF INCOME TAX   INCOME
       ----------            --------- --------------- ----------- ------------ ---------------- ------
<S>                      <C> <C>       <C>             <C>         <C>          <C>              <C>
1995.................... 1st  $2,150       $  391         $185        $  --           $ --        $185
                         2nd   2,183          435          201            5             --         206
                         3rd   2,121          381          180          (35)            --         145
                         4th   2,386          359          202           (2)            --         200
                              ------       ------         ----        -----           ----        ----
                              $8,840       $1,566         $768        $ (32)          $ --        $736
                              ======       ======         ====        =====           ====        ====
1994.................... 1st  $2,016       $  270         $130        $  (2)          $(13)       $115
                         2nd   2,101          299          142          (53)            --          89
                         3rd   2,011          370          211           12             --         223
                         4th   2,030          351          219         (156)            --          63
                              ------       ------         ----        -----           ----        ----
                              $8,158       $1,290         $702        $(199)          $(13)       $490
                              ======       ======         ====        =====           ====        ====
</TABLE>    
--------
Notes: Reference is made to Notes 2 and 3 for discussion of items affecting
     quarterly results.
 
     (The preceding notes are an integral part of the foregoing financial
                                 statements.)
 
                                      52
<PAGE>
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
                    FINANCIAL STATEMENTS INCLUDED IN ITEM 8
 
  See "Index to Financial Statements of Tennessee Gas Pipeline Company and
Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and
Supplementary Data."
 
        INDEX TO FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 14
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Tennessee Gas Pipeline Company--
  Statements of income for each of the three years ended December 31,
   1995...................................................................   54
  Statements of cash flows for each of the three years ended December 31,
   1995...................................................................   55
  Balance Sheets--December 31, 1995 and 1994..............................   56
  Notes to financial statements...........................................   57
Schedule of Tennessee Gas Pipeline Company and Consolidated Subsidiaries--
  Schedule II--Valuation and qualifying accounts--three years ended
   December 31, 1995......................................................   58
</TABLE>    
 
               SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
 
                  Schedule I--Condensed financial information of registrant
 
                  Schedule III--Real estate and accumulated depreciation
 
                  Schedule IV--Mortgage loans on real estate
 
                  Schedule V--Supplemental Information Concerning Property--
                  Casualty
Insurance Operations
 
                                      53
<PAGE>
 
                         TENNESSEE GAS PIPELINE COMPANY
 
                              STATEMENTS OF INCOME
 
<TABLE>   
<CAPTION>
                                                          (MILLIONS)
                                                   YEARS ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1995      1994      1993
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues:
  Net sales and operating revenues--
    Automotive................................... $    647  $    621  $    559
    Energy.......................................      830     1,040     1,212
                                                  --------  --------  --------
                                                     1,477     1,661     1,771
  Interest income--
    Affiliated companies.........................       60        92        39
    Other........................................       18        16         9
  Gain (loss) on sale of businesses and assets,
   net...........................................       (7)       --        11
  Other income, net..............................       75        18        42
                                                  --------  --------  --------
                                                     1,623     1,787     1,872
                                                  --------  --------  --------
Costs and Expenses:
  Cost of sales (exclusive of depreciation shown
   below)........................................      481       424       362
  Operating expenses.............................      378       591       688
  Selling, general and administrative............      251       224       219
  Depreciation and amortization..................      167        97       170
  Interest expense (net of interest
   capitalized)--
    Affiliated companies.........................      126       118        52
    Other........................................      134       158       198
                                                  --------  --------  --------
                                                     1,537     1,612     1,689
                                                  --------  --------  --------
Income From Continuing Operations Before Income
 Tax Expense and Equity in Net Income From
 Continuing Operations of Affiliated Companies...       86       175       183
                                                  --------  --------  --------
Income Tax Expense (Benefit):
  Current........................................       (7)       42        53
  Deferred.......................................       52        (1)        8
                                                  --------  --------  --------
                                                        45        41        61
                                                  --------  --------  --------
Equity in Net Income From Continuing Operations
 of Affiliated Companies.........................      727       568       435
                                                  --------  --------  --------
Income From Continuing Operations................      768       702       557
Income (Loss) From Discontinued Operations, Net
 of Income Tax...................................      (32)     (199)      136
                                                  --------  --------  --------
Income Before Extraordinary Loss.................      736       503       693
Extraordinary Loss, Net of Income Tax............       --        --       (24)
                                                  --------  --------  --------
Income Before Cumulative Effect of Change in
 Accounting Principle............................      736       503       669
Cumulative Effect of Change in Accounting
 Principle, Net of Income Tax....................       --       (13)       --
                                                  --------  --------  --------
Net Income....................................... $    736  $    490  $    669
                                                  ========  ========  ========
</TABLE>    
 
 (The accompanying notes to financial statements are an integral part of these
                             statements of income.)
 
                                       54
<PAGE>
 
                        TENNESSEE GAS PIPELINE COMPANY
 
                           STATEMENTS OF CASH FLOWS
<TABLE>   
<CAPTION>
                                                           (MILLIONS)
                                                    YEARS ENDED DECEMBER 31,
                                                   ----------------------------
                                                     1995      1994      1993
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Operating Activities:
 Income from continuing operations...............  $    768  $    702  $    557
 Adjustments to reconcile income from continuing
  operations to
  cash provided (used) by continuing operations--
   Depreciation and amortization.................       167        97       170
   Deferred income taxes.........................        52        (1)        8
   Equity in net income of affiliated companies,
    net of dividends.............................      (682)     (568)     (403)
   (Gain) loss on sale of businesses and assets,
    net..........................................         7        --       (11)
   Changes in components of working capital--
    (Increase) decrease in receivables...........       243        (4)      201
    (Increase) decrease in inventories...........       (11)       (7)       (6)
    (Increase) decrease in prepayments and other
     current assets..............................       (34)       20        14
    Increase (decrease) in payables..............        (3)        4      (258)
    Increase (decrease) in taxes accrued.........       (32)      (18)       37
    Increase (decrease) in interest accrued......       (20)       (7)      (21)
    Increase (decrease) in natural gas pipeline
     revenue reservation.........................      (161)     (103)      141
    Increase (decrease) in other current
     liabilities.................................       (64)      (21)      (60)
   Take-or-pay (refunds to customers)
    recoupments, net.............................        36        26       (34)
   Other.........................................        (3)      (87)      (58)
                                                   --------  --------  --------
    Cash provided (used) by continuing
     operations..................................       263        33       277
    Cash provided (used) by discontinued
     operations..................................        --        (4)       (5)
                                                   --------  --------  --------
Net Cash Provided (Used) by Operating Activities.       263        29       272
                                                   --------  --------  --------
Investing Activities:
 Net proceeds (expenditures) related to the sale
 of discontinued operations......................        (2)        5        --
 Net proceeds from sale of investments and other
 assets..........................................        56        18        12
 Expenditures for plant, property and equipment--
   Continuing operations.........................      (269)     (254)     (172)
   Discontinued operations.......................        --        (1)       (2)
 Acquisitions of businesses......................        (8)       (4)      (10)
 Decrease in Tenneco Inc. receivables............        --       203       716
 Investments in affiliated companies and other...      (291)       47      (161)
                                                   --------  --------  --------
Net Cash Provided (Used) by Investing Activities.      (514)       14       383
                                                   --------  --------  --------
Financing Activities:
 Capital contribution from (distribution to)
  affiliates, net ...............................       112        --        --
 Retirement of long-term debt....................      (242)       --      (795)
 Net increase (decrease) in short-term debt
  excluding current maturities on
  long-term debt.................................      (388)     (123)      (76)
 Increase in notes payable to Tenneco Inc. ......       440       181        --
 Increase in note payable to Tenneco United
  Kingdom Holdings Limited.......................       474        --        --
 Net increase in advances from affiliated
  companies......................................      (145)     (101)      213
                                                   --------  --------  --------
Net Cash Provided (Used) by Financing Activities.       251       (43)     (658)
                                                   --------  --------  --------
Increase (Decrease) in Cash and Temporary Cash
 Investments.....................................        --        --        (3)
Cash and Temporary Cash Investments, January 1...        --        --         3
                                                   --------  --------  --------
Cash and Temporary Cash Investments, December 31
 (Note)..........................................  $     --  $     --  $     --
                                                   ========  ========  ========
Cash Paid During the Year for Interest...........  $    275  $    276  $    271
Cash Paid During the Year for Income Taxes (net
 of refunds).....................................  $     46  $     50  $     15
</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.)
 
                                      55
<PAGE>
 
                         TENNESSEE GAS PIPELINE COMPANY
 
                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                 (MILLIONS)
                                                                DECEMBER 31,
                                                               ---------------
                            ASSETS                              1995    1994
                            ------                             ------- -------
<S>                                                            <C>     <C>
Current Assets:
 Receivables--
  Customers (net)............................................. $    32 $    53
  Affiliated companies........................................     171     207
  Gas transportation and exchange.............................      46     178
  Other.......................................................     124      50
 Inventories--
  Raw material, work in process and finished products.........      59      46
  Materials and supplies......................................      18      18
 Deferred income taxes........................................      --      18
 Prepaid pension..............................................      62      55
 Prepayments and other........................................      55      54
                                                               ------- -------
                                                                   567     679
                                                               ------- -------
Investments and Other Assets:
 Investment in affiliated companies...........................  13,885  11,697
 Other........................................................     617     288
                                                               ------- -------
                                                                14,502  11,985
                                                               ------- -------
Plant, Property and Equipment, at cost:
 Automotive...................................................     358     285
 Energy.......................................................   5,142   5,027
                                                               ------- -------
                                                                 5,500   5,312
 Less--Reserves for depreciation and amortization.............   3,281   3,207
                                                               ------- -------
                                                                 2,219   2,105
                                                               ------- -------
                                                               $17,288 $14,769
                                                               ======= =======
<CAPTION>
             LIABILITIES AND SHAREOWNER'S EQUITY
             -----------------------------------
<S>                                                            <C>     <C>
Current Liabilities:
 Current maturities on long-term debt......................... $   251  $  242
 Notes payable to Tenneco Inc. ...............................     621     181
 Note payable to Tenneco United Kingdom Holdings Limited......     474      --
 Subordinated demand note payable to Tenneco Corporation......   4,107   4,495
 Payables--
  Trade and other.............................................     139     178
  Affiliated companies........................................     108      17
  Gas transportation and exchange.............................      12     118
 Taxes accrued................................................      26      54
 Deferred income taxes........................................      20      --
 Interest accrued.............................................      26      35
 Natural gas pipeline revenue reservation.....................      26     187
 Other........................................................     329     143
                                                               ------- -------
                                                                 6,139   5,650
                                                               ------- -------
Long-term Debt................................................     506     748
                                                               ------- -------
Advances from Affiliated Companies............................     583     755
                                                               ------- -------
Deferred Income Taxes.........................................     363     357
                                                               ------- -------
Deferred Credits and Other Liabilities........................     387     300
                                                               ------- -------
Commitments and Contingencies
Shareowner's Equity:
 Common stock, par value $5 per share, authorized, issued and
  outstanding 200 shares......................................      --      --
 Premium on common stock and other capital surplus............   4,903   3,494
 Cumulative translation adjustments...........................      32    (174)
 Retained earnings............................................   4,375   3,639
                                                               ------- -------
                                                                 9,310   6,959
                                                               ------- -------
                                                               $17,288 $14,769
                                                               ======= =======
</TABLE>
 
 (The accompanying notes to financial statements are an integral part of these
                                balance sheets.)
 
                                       56
<PAGE>
 
                        TENNESSEE GAS PIPELINE COMPANY
 
                         NOTES TO FINANCIAL STATEMENTS
 
  The financial statements of Tennessee Gas Pipeline Company should be read in
conjunction with the financial statements of Tennessee Gas Pipeline Company
and Consolidated Subsidiaries presented in this document.
 
Accounting Policies
 
  Majority-owned subsidiaries and companies in which at least a 20% voting
interest is owned are carried at cost plus equity in undistributed earnings
since date of acquisition and cumulative translation adjustments. At December
31, 1995, equity in undistributed earnings and cumulative translation
adjustments amounted to $1,987 million and $31 million, respectively; at
December 31, 1994, the corresponding amounts were $1,244 million and $(150)
million, respectively.
 
  Dividends received from companies accounted for on an equity basis amounted
to $45 million, none and $32 million for 1995, 1994 and 1993, respectively.
 
  Tennessee Gas Pipeline Company charged corporate overhead expenses to its
subsidiaries in the amount of $32 million, $31 million and $36 million for the
years 1995, 1994 and 1993, respectively.
 
Income Taxes
 
  Tennessee Gas Pipeline Company and its parent, Tenneco Inc., together with
certain of their respective subsidiaries which are owned 80% or more, have
entered into an agreement to file a consolidated U.S. federal income tax
return. Such agreement provides, among other things, that (1) each company in
a taxable income position will be currently charged with an amount equivalent
to its federal income tax computed on a separate return basis and (2) each
company in a tax loss position will be currently reimbursed to the extent its
deductions, including general business credits, are utilized in the
consolidated return.
   
  Tennessee Gas Pipeline Company's pre-tax earnings from continuing operations
(excluding equity in net income from continuing operations of affiliated
companies) for the years 1995, 1994 and 1993 are principally domestic. The
differences between the income tax expense, reflected in the Statements of
Income, of $45 million, $41 million and $61 million for the years 1995, 1994
and 1993 and the income tax expense, computed based on pre-tax income from
continuing operations at the U.S. federal income tax rates, of $284 million,
$260 million and $216 million, respectively, consisted principally of the tax
effect of equity in net income from continuing operations of affiliated
companies in each of the three years and permanent differences on the sale of
businesses in 1995.     
 
Long-Term Debt and Current Maturities
 
  The aggregate maturities and sinking fund requirements applicable to the
long-term debt issues outstanding at December 31, 1995, are $251 million, $326
million, $1 million, none and none for 1996, 1997, 1998, 1999 and 2000,
respectively.
 
Financial Instruments
 
  Tennessee Gas Pipeline Company has agreed to cause and enable Newport News
Shipbuilding and Dry Dock Company (a wholly-owned subsidiary) to perform its
covenants and agreements under certain major shipbuilding contracts.
 
  Tennessee Gas Pipeline Company has guaranteed the performance of certain
affiliates pursuant to arrangements under which receivables are factored on a
nonrecourse basis with Tenneco Credit Corporation.
 
 (The above notes are an integral part of the foregoing financial statements.)
 
                                      57
<PAGE>
 
                                                                     SCHEDULE II
 
          TENNESSEE GAS PIPELINE COMPANY AND CONSOLIDATED SUBSIDIARIES
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                   (MILLIONS)
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
        COLUMN A           COLUMN B        COLUMN C         COLUMN D  COLUMN E
------------------------------------------------------------------------------
                                           ADDITIONS
                                     ---------------------
                          BALANCE AT CHARGED TO CHARGED TO            BALANCE
                          BEGINNING  COSTS AND    OTHER    DEDUCTIONS  AT END
       DESCRIPTION         OF YEAR    EXPENSES   ACCOUNTS    (NOTE)   OF YEAR
------------------------------------------------------------------------------
<S>                       <C>        <C>        <C>        <C>        <C>
Allowance for Doubtful
 Accounts Deducted from
 Assets to Which it
  Applies:
  Year Ended December 31,
   1995..................    $48        $29        $--        $27       $50
                             ===        ===        ===        ===       ===
  Year Ended December 31,
   1994..................    $66        $16        $ 2        $36       $48
                             ===        ===        ===        ===       ===
  Year Ended December 31,
   1993..................    $51        $39        $ 1        $25       $66
                             ===        ===        ===        ===       ===
</TABLE>
--------
   
Note: For 1994, primarily the result of the reorganization and sale of Case.
      For 1995, 1994 and 1993, includes uncollectible accounts written off, net
      of recoveries on accounts previously written off.     
 
                                       58
<PAGE>
 
                              REPORTS ON FORM 8-K
 
  During the fourth quarter of the fiscal year ended December 31, 1995, the
Company did not file with the Securities and Exchange Commission any Current
Reports on Form 8-K.
 
                                   EXHIBITS
   
  The exhibit listed below is filed with this Form 10K/A Amendment:     
 
<TABLE>     
   <C> <S>
    27 --Financial Data Schedules
</TABLE>    
   
  The following exhibits were filed with Tennessee Gas Pipeline Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, or
incorporated therein by reference, at the time such Report was originally
filed on February 21, 1996 (exhibits designated by an asterisk were filed with
the Report; all other exhibits were incorporated by reference):     
 
 
<TABLE>
   <C>       <S>
     3(a)    --Certificate of Incorporation as amended and supplemented as of
              January 31, 1995 (Exhibit 3(a) to Form 10-K for the fiscal year
              ended December 31, 1994, File No. 1-4101).
     3(b)    --Copy of By-Laws of Tennessee Gas Pipeline Company as amended
              October 2, 1989 (Exhibit 3(b) to Form 10-K for fiscal year ended
              December 31, 1992, File No. 1-4101).
     4       --Included in Exhibits 3(a) and 3(b).
     9       --None.
    10(b)(1) --Lease Agreement, Tomahawk, dated as of January 30, 1991, between
              The Connecticut National Bank, as Owner Trustee, and Packaging
              Corporation of America (Exhibit 10(b)(1) to Form 10-K of Tenneco
              Inc. for the fiscal year ended December 31, 1990, File No. 1-
              9864).
    10(b)(2) --Lease Agreement, Valdosta, dated as of January 30, 1991, between
              The Connecticut National Bank, Philip G. Kane, Jr., Frank
              McDonald, Jr., and William R. Monroe, as Owner Trustee, and
              Packaging Corporation of America (Exhibit 10(b)(2) to Form 10-K
              of Tenneco Inc. for the fiscal year ended December 31, 1990, File
              No. 1-9864).
    10(b)(3) --Timberland Lease dated January 31, 1991, by and between Four
              States Timber Venture and Packaging Corporation of America
              (Exhibit 10(b)(3) to Form 10-K of Tenneco Inc. for the fiscal
              year ended December 31, 1990, File No. 1-9864).
    11       --None.
    12       --None.
    13       --None.
    16       --None.
    18       --None.
    21       --None.
    22       --Omitted pursuant to the reduced disclosure format permitted by
              General Instruction J to Form 10-K.
    23       --None.
    24       --None.
   *27       --Financial Data Schedule.
    28       --None.
    99       --None.
</TABLE>
 
 
UNDERTAKING.
 
  The undersigned, Tennessee Gas Pipeline Company, hereby undertakes, pursuant
to Regulation S-K, Item 601(b), paragraph (4)(iii), to furnish to the
Securities and Exchange Commission upon request all constituent instruments
defining the rights of holders of long-term debt of Tennessee Gas Pipeline
Company and its consolidated subsidiaries not filed herewith for the reason
that the total amount of securities authorized under any of such instruments
does not exceed 10% of the total consolidated assets of Tennessee Gas Pipeline
Company and its consolidated subsidiaries.
 
                                      59
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          Tennessee Gas Pipeline Company
                                                
                                                Robert T. Blakely            
                                          By __________________________________
                                              
                                             Robert T. Blakely  Senior Vice
                                           President--Principal Financial and
                                                 Accounting Officer     
   
Date: October 30, 1996     
 
 
                                      60