1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1994 Commission File No. 1-5591
PENNZOIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-4000
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 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 .
Number of shares outstanding of each class of common stock, as of latest
practicable date,
July 31, 1994:
Common stock, $.83-1/3 par value, 46,028,485 shares.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 651,809 $ 685,177 $1,273,885 $1,335,718
COSTS AND EXPENSES
Cost of sales 378,001 401,941 749,640 790,148
Selling, general and administrative expenses 102,097 86,244 192,077 171,340
Depreciation, depletion and amortization 78,356 77,804 153,806 156,415
Exploration expenses 8,506 5,394 18,189 7,461
Taxes, other than income 15,305 16,730 32,374 34,544
Interest charges, net 43,581 47,014 85,170 95,992
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 25,963 50,050 42,629 79,818
Income tax 9,153 15,811 15,081 24,054
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 16,810 34,239 27,548 55,764
Extraordinary item - (4,724) - (4,724)
Cumulative effect of change in accounting principle (See Note 2) - - (4,948) -
----------- ----------- ----------- -----------
NET INCOME $ 16,810 $ 29,515 $ 22,600 $ 51,040
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE
Income before extraordinary item and cumulative
effect of change in accounting principle $ 0.37 $ 0.84 $ 0.60 $ 1.37
Extraordinary item - (0.12) - (0.12)
Cumulative effect of change in accounting principle - - (0.11) -
----------- ----------- ----------- -----------
TOTAL $ 0.37 $ 0.72 $ 0.49 $ 1.25
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ 0.75 $ 0.75 $ 1.50 $ 1.50
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING 45,989 40,776 45,961 40,756
=========== =========== =========== ===========
NUMBER OF SHARES OUTSTANDING 46,013 40,796 46,013 40,796
=========== =========== =========== ===========
<FN>
See notes to condensed consolidated financial statements.
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PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1994 1993
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 831,943 $ 262,275
Marketable securities and other investments 46,086 684,308
Receivables 420,896 363,287
Inventories
Crude oil, natural gas and sulphur 40,938 38,965
Motor oil and refined products 118,742 123,282
Deferred income tax 13,703 13,587
Other current assets 52,453 58,098
------------- -------------
Total current assets 1,524,761 1,543,802
Property, plant and equipment, net 2,674,917 2,324,444
Marketable securities and other investments (See Note 3) 804,709 654,973
Other assets 363,931 362,984
------------- -------------
TOTAL ASSETS $ 5,368,318 $ 4,886,203
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 6,641 $ 19,568
Notes payable 413,080 433,031
Accounts payable and accrued liabilities 286,688 248,724
Taxes accrued 15,735 93,242
Other current liabilities 38,403 26,702
------------- -------------
Total current liabilities 760,547 821,267
Long-term debt 2,362,104 1,973,488
Deferred income tax 389,929 304,902
Other liabilities 293,796 280,742
------------- -------------
TOTAL LIABILITIES 3,806,376 3,380,399
------------- -------------
COMMITMENTS AND CONTINGENCIES (See Note 7)
SHAREHOLDERS' EQUITY (See Note 3) 1,561,942 1,505,804
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,368,318 $ 4,886,203
============= =============
<FN>
See notes to condensed consolidated financial statements.
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PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
---------------------------------
1994 1993
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,600 $ 51,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 153,806 156,415
Dry holes and impairments 8,276 464
Deferred income tax (3,532) (6,090)
Non-cash and other nonoperating items 16,907 (2,526)
Extraordinary Item - 4,724
Cumulative effect of change in accounting principle 4,948 -
Change in operating assets and liabilities (100,744) (21,463)
----------- -----------
Net cash provided by operating activities 102,261 182,564
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (256,047) (160,219)
Acquisition of Co-enerco Resources Ltd. (230,924) -
Purchases of marketable securities and other investments (220,400) (104,259)
Proceeds from sales of marketable securities and other
investments 857,044 116,237
Proceeds from sales of assets 28,201 11,020
Other investing activities 2,456 5,016
----------- -----------
Net cash provided by (used in) investing activities 180,330 (132,205)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term debt, net (19,951) (18,191)
Debt and capital lease obligation repayments (105,469) (740,254)
Proceeds from issuance of debt 481,194 774,453
Dividends paid (68,953) (61,143)
Other financing activities 256 235
----------- -----------
Net cash provided by (used in) financing activities 287,077 (44,900)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 569,668 5,459
CASH AND CASH EQUIVALENTS, beginning of period 262,275 20,732
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 831,943 $ 26,191
=========== ===========
<FN>
See notes to condensed consolidated financial statements.
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PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General -
The condensed consolidated financial statements included herein have been
prepared by Pennzoil Company ("Pennzoil") without audit and should be read in
conjunction with the financial statements and the notes thereto included in
Pennzoil's latest annual report. The foregoing financial statements include
only normal recurring accruals and all adjustments which Pennzoil considers
necessary for a fair presentation.
(2) Employers' Accounting for Postemployment Benefits -
Effective January 1, 1994, Pennzoil changed its method of accounting for
postemployment benefits by adopting the new requirements of Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits." This standard requires employers to recognize the
obligation to provide postemployment benefits if the obligation is attributable
to employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable and the amounts can be
reasonably estimated. If those four conditions are not met, the employer should
recognize the obligation to provide postemployment benefits when it is probable
that a liability has been incurred and the amount can be reasonably estimated.
Pennzoil recorded a charge of $4.9 million ($7.6 million before tax), or $.11
per share, as of January 1, 1994 to reflect the cumulative effect of the change
in accounting principle for periods prior to 1994. Postemployment benefit costs
during 1994 are not expected to be materially different as a result of adopting
the new standard.
(3) Accounting for Certain Investments in Debt and Equity Securities -
Effective January 1, 1994, Pennzoil changed its method of accounting for
certain investments in debt and equity securities by adopting the new
requirements of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This standard requires that, except for debt securities
classified as "held-to-maturity securities," investments in debt and equity
securities must be reported at fair value. As a result, Pennzoil's investment
in Chevron Corporation ("Chevron") common stock is reported at fair value, with
the unrealized gain excluded from earnings and reported as a separate component
of shareholders' equity. At January 1, 1994, Pennzoil beneficially owned
9,035,518 shares of Chevron common stock that were acquired at an average cost
of $67.36 per share. The fair market value for the shares of Chevron common
stock held by Pennzoil as of December 31, 1993, was $87.125 per share (based on
the closing transaction price for Chevron shares reported on the New York Stock
Exchange ("NYSE") on that date). After a "two-for-one" stock split of Chevron
common stock in June 1994, Pennzoil beneficially owned 18,071,036 shares of
common stock at June 30, 1994, acquired at an average cost of $33.68 per share.
The fair market value for the shares of Chevron common stock held by Pennzoil as
of June 30, 1994 was $41.875 per share (based on the closing transaction price
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PART I. FINANCIAL INFORMATION - continued
for Chevron shares reported on the NYSE on that date). Adoption of the standard
resulted in an increase in shareholders' equity of $106.8 million as of January
1, 1994, representing the net unrealized gain related to Pennzoil's investment
in Chevron common stock. Prior year financial statements have not been restated
to reflect the new accounting method. As of June 30, 1994, the net unrealized
gain included in shareholders' equity related to Pennzoil's investment in
Chevron common stock was $96.3 million.
Pennzoil's investments in debt securities are classified as
"held-to-maturity" based on Pennzoil's ability and intent to hold those
securities to maturity. Such securities are carried at cost, net of unamortized
premium or discount, if any, and consist solely of domestic commercial paper.
All of Pennzoil's "held-to-maturity" securities have contractual maturities of
less than one year. The carrying amounts of Pennzoil's "held-to-maturity"
securities approximate their fair values based on the relatively short
maturities of those investments and on quoted market prices, where such prices
are available.
(4) Acquisition of Co-enerco Resources Ltd. -
In June 1994, Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect
wholly owned subsidiary of Pennzoil, completed a cash tender offer for all
outstanding common shares and 6% convertible subordinated debentures of
Co-enerco Resources Ltd. ("Co-enerco"), which is engaged principally in oil and
gas acquisition, exploration, development and production in Western Canada.
Pursuant to the offer, Pennzoil Canada acquired approximately 22.9 million
common shares of Co-enerco (approximately 94% on a diluted basis) and
approximately Cdn. $49.6 million principal amount of the Co-enerco debentures
(approximately 99%). Subsequent to the completion of the tender offer, Pennzoil
Canada took the necessary steps under the compulsory acquisition provisions of
applicable Canadian law to acquire the remaining Co-enerco common shares and
debentures on the same terms as under the tender offer. The acquisition of
these remaining common shares and debentures of Co-enerco was completed in July
1994.
Pennzoil Canada paid $230.9 million in cash in connection with the
acquisition of Co-enerco common shares and debentures and repayment of
Co-enerco's outstanding bank debt. The acquisition was accounted for using the
purchase method of accounting and the results of operations of Co-enerco will be
included in Pennzoil's consolidated statement of income subsequent to June 1994.
(5) Investment in Chevron Common Stock; Exchange of Stock with Chevron
Corporation -
From 1989 through 1991, Pennzoil acquired 32,944,100 shares of Chevron
common stock with approximately $2.2 billion of the net proceeds of the $3.0
billion payment received by Pennzoil from Texaco Inc. ("Texaco") in 1988 in
settlement of certain litigation.
In October 1992, Pennzoil completed a transaction with Chevron, pursuant to
which Pennzoil exchanged 15,750,000 shares of Chevron common stock held by
Pennzoil for all the capital stock of Pennzoil Petroleum Company ("Pennzoil
Petroleum"), which owns Gulf of Mexico, Gulf Coast, Permian Basin and other
domestic oil and gas producing properties.
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PART I. FINANCIAL INFORMATION - continued
In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the NYSE for a price of $89.00 per share before commissions
($88.38 per share net of commissions). The sale resulted in a net realized gain
of $137.0 million ($171.6 million before tax), or $3.25 per share.
In June 1994, Chevron declared a "two-for-one" stock split, thus increasing the
number of Chevron shares beneficially held by Pennzoil from 9,035,518 to
18,071,036 as of June 30, 1994. All share and per share information related
to Pennzoil's investment in Chevron common stock prior to June 1994 has not been
adjusted to reflect the "two-for-one" stock split.
The 18,071,036 shares of Chevron common stock currently held by Pennzoil
have been deposited with exchange agents for possible exchange for $402.5
million principal amount of Pennzoil's 6-1/2% Exchangeable Senior Debentures due
January 15, 2003, and $500.0 million principal amount of Pennzoil's 4-3/4%
Exchangeable Senior Debentures due October 1, 2003.
(6) Debt -
In June 1993, Pennzoil called for redemption $96.1 million principal amount
of indebtedness (including $66.1 million of Pennzoil's 10% debentures due 2011
and $30.0 million of Pennzoil's 10-1/8% debentures due 2011). The redemptions
were completed in July 1993. As of June 30, 1993, this indebtedness was
defeased by placing funds required for the redemption with the trustee for the
indebtedness. The premiums and related unamortized discount and debt issue
costs relating to these redemptions resulted in an extraordinary charge of $4.7
million, net of tax, or $.12 per share, in the second quarter of 1993.
(7) Commitments and Contingencies -
In 1988, Pennzoil received $3.0 billion from Texaco in settlement of
all litigation between Pennzoil and Texaco arising out of Texaco's tortious
interference with Pennzoil's contractual rights to purchase a minority interest
in Getty Oil Company. From 1989 through 1991, Pennzoil acquired 32,944,100
shares of Chevron common stock with approximately $2.2 billion of the net Texaco
settlement proceeds.
For federal income tax purposes, Pennzoil originally reported that it
recognized no gain upon receipt of the $3.0 billion and obtained no tax basis in
the Chevron shares. Pennzoil's reporting position was based on its belief that,
under Section 1033 of the Internal Revenue Code, the $3.0 billion received from
Texaco was an amount realized as a result of the involuntary conversion of
property and that the Chevron shares were similar or related in service or use
to the property converted by Texaco. During 1990 and 1991, Pennzoil
recalculated its 1988 federal income tax liability to recognize approximately
$800 million of income, being the excess of the $3.0 billion received over the
amount expended to acquire Chevron shares. As a result of these adjustments,
current taxes were increased, and deferred taxes were decreased, by $120.4
million in 1990 and $13.2 million in 1991. In addition, Pennzoil paid interest
on such taxes of $17.6 million during 1990 and $3.7 million in 1991.
In January 1994, Pennzoil received a letter and examination report from the
District Director of the Internal Revenue Service ("IRS") that proposes a tax
deficiency based on an audit of Pennzoil's 1988 federal income tax return. The
examination report proposes two principal adjustments with which Pennzoil
disagrees.
The first adjustment challenges Pennzoil's position under Section 1033 of
the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion
cash payment received from Texaco in 1988 in settlement of certain litigation
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PART I. FINANCIAL INFORMATION - continued
was realized as a result of the involuntary conversion of property and (ii) the
shares of Chevron common stock purchased with $2.2 billion of the net Texaco
settlement proceeds were similar or related in service or use to the property
converted by Texaco. Although these issues have not been resolved, Pennzoil
believes that its position is sound, and it intends to contest the proposed
adjustment in court unless an acceptable settlement is reached. The proposed
tax deficiency relating to this proposed adjustment is $550.9 million, net of
available offsets. Pennzoil estimates that the additional after-tax interest on
this proposed deficiency would be approximately $257.3 million as of June 30,
1994. If Pennzoil's position is not sustained by the courts, Pennzoil would be
required to pay the assessed taxes, plus the accrued interest, and Pennzoil's
tax basis in the shares of common stock of Chevron and Pennzoil Petroleum (see
Note 5) would be Pennzoil's cost. This assessed amount would be reduced by the
$103.0 million of additional taxes paid in the first quarter of 1994 as a result
of the gain realized from the November 1993 sale of 8,158,582 Chevron shares
(see Note 5), which gain was calculated based on the Chevron shares sold having
no tax basis. Pennzoil's consolidated financial statements do not include an
accrual for the interest that would be due in such event.
The second adjustment proposed by the IRS would permanently capitalize,
rather than allow Pennzoil to deduct, approximately $366 million incurred by
Pennzoil in 1988 and earlier years for litigation and related expenses in
connection with the Texaco settlement, even if it were determined that the
entire $3.0 billion is includable in Pennzoil's 1988 taxable income. Pennzoil
believes that this proposed adjustment is irrational and capricious and will not
be sustained in court. The proposed tax deficiency relating to the disallowance
of deductions is $124.6 million, and the estimated additional after-tax interest
on this proposed deficiency would be approximately $52.2 million as of June 30,
1994. If the deductions for legal and related expenses were ultimately
disallowed, Pennzoil would be required to pay the assessed taxes, plus the
accrued interest. Pennzoil's consolidated financial statements do not include
an accrual for the taxes that would be assessed as a result of the proposed
disallowance of deductions or the related interest that would be due in such
event.
Pennzoil has formally protested the IRS' proposed tax deficiency in
writing. The issue has been forwarded to the IRS Appeals Office, which is
empowered to settle disputes with taxpayers, taking into account the hazards of
litigation. Pennzoil and the IRS Appeals Office are currently negotiating their
positions on these tax issues. If Pennzoil and the IRS Appeals Office are
unable to reach a negotiated resolution of these tax issues, the IRS would
forward a letter requiring Pennzoil to pay the assessed taxes, plus the accrued
interest, within 90 days, unless Pennzoil files a petition with the United
States Tax Court. If Pennzoil were to choose to file suit in the Tax Court,
Pennzoil would not pay any taxes unless and until the Tax Court rendered a
judgment against Pennzoil, but interest would continue to accrue on any taxes
ultimately determined to be due. Alternatively, Pennzoil would be entitled to
choose to pay the assessed taxes, plus the accrued interest, and file a claim
for a refund in either the United States Court of Claims or the United States
District Court for the Southern District of Texas. Paying the assessed taxes
would halt the accrual of interest on any taxes finally determined to be owing
by Pennzoil. In such event, any refund to Pennzoil would include a refund by
the IRS of the prior interest paid by Pennzoil, as well as a payment by the IRS
of additional interest accrued on the assessed taxes previously paid by
Pennzoil. If litigation is necessary, a case of this kind would normally take
several years in the absence of a settlement, which could occur at any stage in
the process.
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PART I. FINANCIAL INFORMATION - continued
Pennzoil had cash and cash equivalents and current marketable securities
and other investments of $878.0 million at June 30, 1994. As a result of these
available liquid assets and Pennzoil's available credit facilities, Pennzoil
believes that it has the financial flexibility to deal with any eventuality that
may occur in connection with the dispute with the IRS, including the possibility
of paying the taxes assessed, plus the accrued interest, and suing for a refund
if Pennzoil is not able to resolve the disputed matters through discussions with
the IRS.
Reference is made to Note 8 of Notes to Consolidated Financial Statements
in Pennzoil's Annual Report on Form 10-K for the year ended December 31, 1993
for additional information.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net income for the quarter and six months ended June 30, 1994 was $16.8
million, or $.37 per share, and $22.6 million, or $.49 per share, respectively.
This compares with net income of $29.5 million, or $.72 per share, for the
second quarter of 1993 and $51.0 million, or $1.25 per share, for the six months
ended June 30, 1993. Effective January 1, 1994, Pennzoil changed its method of
accounting for postemployment benefit costs by adopting the new requirements of
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits." As a result, Pennzoil recorded a charge of $4.9
million, or $.11 per share, as of January 1, 1994, to reflect the cumulative
effect of change in accounting principle for periods prior to 1994. Income
before extraordinary item and cumulative effect of change in accounting
principle for the quarter and six months ended June 30, 1994 decreased $17.4
million and $28.2 million, respectively, compared to the prior year. The
decrease in earnings for both the quarter and six months ended June 30, 1994,
compared to the prior year, was primarily attributable to lower results from the
oil and gas and motor oil and refined products segments and lower other
operating income. These decreases were partially offset by lower net interest
expense.
Oil and Gas
Operating income from this segment for the quarter and six months ended
June 30, 1994 was $54.1 million and $91.7 million, respectively. This compares
with operating income of $68.4 million and $119.3 million, respectively, for the
same periods in 1993. The decrease in operating results for the quarter compared
to the prior year was primarily due to lower natural gas and liquids prices.
The decrease in operating results for the six months ended June 30, 1994,
compared to the prior year, was primarily due to lower liquids prices and higher
exploration expense. Liquids prices averaged $14.11 per barrel and $13.05 per
barrel, respectively, during the quarter and six months ended June 30, 1994
compared to $16.42 per barrel and $16.31 per barrel, respectively, for the same
periods in 1993. Natural gas prices averaged $1.88 per MCF and $2.05 per MCF,
respectively, during the quarter and six months ended June 30, 1994 compared to
$2.16 per MCF and $2.00 per MCF, respectively, for the same periods in 1993.
10
PART I. FINANCIAL INFORMATION - continued
In June 1994, Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect wholly
owned subsidiary of Pennzoil, completed the acquisition of substantially all
outstanding common shares and 6% convertible subordinated debentures of
Co-enerco Resources Ltd. ("Co-enerco"). Co-enerco is engaged principally in oil
and gas acquisition, exploration, development and production in Western Canada
(see Note 4).
In July 1994, Pennzoil Qatar, Inc. ("Pennzoil Qatar"), an indirect wholly
owned subsidiary of Pennzoil, was awarded the rights to explore acreage of Block
8 offshore Qatar. The block is located 50 miles from shore in the Arabian Gulf
and is adjacent to three large producing oil fields. Under the production
sharing agreement, Pennzoil Qatar has committed to a seismic acquisition and
drilling program over the next four years. Evaluation activities will start
immediately, with drilling beginning in late 1995.
Motor Oil & Refined Products
Operating income from this segment for the quarter and six months ended
June 30, 1994 was $16.6 million and $42.4 million, respectively. This compares
to operating income of $29.4 million and $48.5 million, respectively, for the
same periods in 1993. The decrease in operating income for the quarter was
primarily attributed to lower refinery margins and throughput, and higher
manufacturing, advertising and other marketing expenses. Partially offsetting
these were higher motor oil margins, increased specialty product volumes sold
and higher volumes of motor oil sold internationally. The decrease in operating
income for the six months ended June 30, 1994 was primarily attributed to higher
manufacturing, advertising and other marketing expenses. Partially offsetting
these were higher motor oil margins, increased specialty product volumes sold
and higher volumes of motor oil sold internationally.
In June 1994, Conoco, Inc. ("Conoco") and Pennzoil agreed to carry out a
joint venture project at Conoco's refinery in Westlake, Louisiana. Operating
through a 50-50 joint venture, the companies will construct a new, state-of-the
art lube oil hydrocracker facility estimated to cost approximately $500 million,
which is expected to be funded with project financing. The facility will
produce more than 15,000 barrels per day of high quality base oils. Base oils
are the basic ingredients in finished lubricants. Site preparation is expected
to begin late this year and the facility is expected to be completed in about 33
months. Conoco will act as construction manager and operator of the lubricating
base oil plant with support positions staffed by both companies.
Franchise Operations
The franchise operations segment recorded operating income of $2.3 million
for the quarter ended June 30, 1994 and $1.6 million for the six months ended
June 30, 1994. This compares to an operating loss of $.2 million and operating
income of $2.2 million, respectively, for the same periods in 1993. The
increase in operating results for the quarter is attributable to same center
increases in average cars serviced per day and average ticket prices as well as
higher company store operating results. The decrease in operating results for
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PART I. FINANCIAL INFORMATION - continued
the six months ended June 30, 1994, as compared to the prior year, is due to
higher operating expenses primarily due to an insurance reserve for self-insured
claims. These higher operating expenses were partially offset by improved
company store results.
Domestic systemwide sales reported by Jiffy Lube centers for the quarter
and six months ended June 30, 1994 increased $18.6 million and $33.3 million,
respectively, from comparable periods in 1993. Average ticket prices increased
to $34.30 and $34.04 for the quarter and six months ended June 30, 1994,
respectively, compared with $33.67 and $33.46, respectively, for the same
periods in 1993. There were 1,086 domestic lube centers open (including 416
Jiffy Lube company-operated centers) as of June 30, 1994.
Sulphur
The sulphur segment recorded operating losses of $3.4 million and $7.1
million for the quarter and six months ended June 30, 1994, respectively. This
compares to losses of $2.8 million and $5.6 million, respectively, for the same
periods in 1993. The decrease was primarily due to lower sulphur prices as
evidenced by a decrease in the average Green Markets Tampa Recovered Contract
Price range mid-point from $66.50 per long ton and $69.00 per long ton,
respectively, during the quarter and six months ended June 30, 1993 to
mid-points of $53.00 per long ton and $51.50 per long ton, respectively, during
the same periods in 1994. Intense competition in the domestic market has pushed
sulphur prices down, primarily because of aggressive marketing by U.S.
producers. Partially offsetting these lower sulphur prices were lower unit
costs primarily due to reduced workforce expenses and reduced gas and water
treatment costs at the Culberson mine. Sales volumes for the quarter and six
months ended June 30, 1994 have increased 27,000 and 52,000 long tons,
respectively, compared with the same periods in 1993. So long as sulphur prices
and volumes remain at these levels, operating results in the sulphur segment
will continue to be adversely affected and the sulphur segment will likely
generate an operating loss.
Sulphur prices have recently strengthened as evidenced by an increase of
$2.50 per long ton in the average Green Markets Tampa Recovered Contract Price
range mid-point for the second quarter of 1994 as compared to the first quarter
of 1994 and an additional increase of $5.50 per long ton at the beginning of the
third quarter of 1994.
Other
Other operating income for the quarter and six months ended June 30, 1994,
was $17.8 million and $34.7 million, respectively. This compares to other
operating income of $19.1 million and $44.3 million, respectively, for the same
periods in 1993. Other operating income for the first quarter of 1993 included
a $10.5 million pretax gain on the sale of common stock of Pogo Producing
Company held by Pennzoil.
Net interest expense for the quarter and six months ended June 30, 1994
decreased $3.4 million and $10.8 million, respectively, from the same periods in
1993 primarily due to Pennzoil's efforts throughout 1993 to retire higher cost
debt.
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PART I. FINANCIAL INFORMATION - continued
Capital Resources and Liquidity
As of June 30, 1994, Pennzoil had cash and cash equivalents and current
marketable securities and other investments of $878.0 million. During the six
months ended June 30, 1994, Pennzoil's cash and cash equivalents and current
marketable securities and other investments decreased $68.6 million. Cash flows
from operating activities totaled $102.3 million for the six months ended June
30, 1994 and included net income tax payments of $132.6 million, of which $103.0
million was paid as a result of the gain realized from the November 1993 sale of
8,158,582 shares of Chevron Corporation ("Chevron") common stock (see Notes 5
and 7 of Notes to Condensed Consolidated Financial Statements).
Pennzoil's other income includes dividend income from its investment in
Chevron common stock of $8.4 million and $16.7 million for the quarter and six
months ended June 30, 1994, respectively, compared to $15.0 million and $30.1
million, respectively, for the same periods in 1993.
In June 1994, in connection with its acquisition of Co-enerco, Pennzoil
Canada established a Cdn. $260 million credit facility with a syndicate of
Canadian banks, borrowings of which are guaranteed by Pennzoil. Also in June
1994, Pennzoil Canada established a Cdn. $40 million credit facility with a
Canadian bank, borrowings of which are guaranteed by Pennzoil. Borrowings under
these facilities can be made in any combination of U.S. or Canadian dollars and
were $185.0 million and $10.0 million, respectively, as of June 30, 1994.
Investment in Chevron Common Stock-
From 1989 through 1991, Pennzoil acquired 32,944,100 shares of Chevron
common stock with approximately $2.2 billion of the net proceeds of the $3.0
billion payment received by Pennzoil from Texaco Inc. in 1988 in settlement of
certain litigation.
In October 1992, Pennzoil completed a transaction with Chevron, pursuant to
which Pennzoil exchanged 15,750,000 shares of Chevron common stock held by
Pennzoil for all the capital stock of Pennzoil Petroleum Company, which owns
Gulf of Mexico, Gulf Coast, Permian Basin and other domestic oil and gas
producing properties.
In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the New York Stock Exchange for a price of $89.00 per share
before commissions ($88.38 per share net of commissions). The sale resulted in
a net realized gain of $137.0 million ($171.6 million before tax), or $3.25 per
share.
In June 1994, Chevron declared a "two-for-one" stock split, thus increasing
the number of Chevron shares beneficially held by Pennzoil from 9,035,518 to
18,071,036 as of June 30, 1994. All share and per share information related to
Pennzoil's investment in Chevron common stock prior to June 1994 has not been
adjusted to reflect the "two-for-one" stock split.
The 18,071,036 shares of Chevron common stock currently held by Pennzoil
have been deposited with exchange agents for possible exchange for $402.5
million principal amount of Pennzoil's 6-1/2% Exchangeable Senior Debentures due
January 15, 2003 and $500.0 million principal amount of Pennzoil's 4-3/4%
Exchangeable Senior Debentures due October 1, 2003.
13
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
The following tables show revenues and operating income by segment, other components of income and operating data.
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(Expressed in thousands)
REVENUES
Oil and Gas $ 210,353 $ 232,127 $ 414,317 $ 444,808
Motor Oil & Refined Products 387,574 403,169 744,979 771,825
Franchise Operations 65,136 53,399 127,354 105,602
Sulphur 14,896 17,467 30,827 37,634
Other 16,721 18,372 38,256 48,423
Intersegment Sales (42,871) (39,357) (81,848) (72,574)
----------- ----------- ----------- -----------
Total revenues $ 651,809 $ 685,177 $1,273,885 $1,335,718
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)
Oil and Gas $ 54,121 $ 68,399 $ 91,707 $ 119,278
Motor Oil & Refined Products 16,600 29,406 42,358 48,494
Franchise Operations 2,335 (174) 1,598 2,214
Sulphur (3,406) (2,779) (7,136) (5,626)
Other 17,760 19,145 34,702 44,331
----------- ----------- ----------- -----------
Total operating income 87,410 113,997 163,229 208,691
Corporate administrative expenses 17,866 16,933 35,430 32,881
Interest charges, net 43,581 47,014 85,170 95,992
----------- ----------- ----------- -----------
Income before income tax 25,963 50,050 42,629 79,818
Income tax 9,153 15,811 15,081 24,054
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 16,810 34,239 27,548 55,764
Extraordinary item - (4,724) - (4,724)
Cumulative effect of change in accounting principle - - (4,948) -
----------- ----------- ----------- -----------
NET INCOME $ 16,810 $ 29,515 $ 22,600 $ 51,040
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 1.38 1.68
=========== ===========
14
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 66,203 61,945 64,811 63,293
Natural gas produced for sale (Mcf per day) 720,463 672,043 690,161 676,810
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 14.11 $ 16.42 $ 13.05 $ 16.31
Natural gas (per Mcf) $ 1.88 $ 2.16 $ 2.05 $ 2.00
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 25,695 25,857 25,268 25,678
Distillates and gas oils 31,118 31,450 30,212 29,851
Lubricating oil and other specialty products 22,662 24,135 22,765 23,235
Residual fuel oils 3,931 2,490 3,582 2,303
----------- ----------- ----------- -----------
Total sales (barrels per day) 83,406 83,932 81,827 81,067
=========== =========== =========== ===========
Raw materials processed (barrels per day) 58,621 63,336 57,647 61,018
Refining capacity (barrels per day) 70,700 70,700 70,700 70,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 154,096 $ 135,464 $ 291,588 $ 258,277
Same center sales (in thousands) $ 149,811 $ 135,224 $ 283,906 $ 257,922
Centers open (U.S.) 1,086 1,058 1,086 1,058
SULPHUR
Sales (thousands of long tons) 267 240 557 505
Average Green Markets Tampa Recovered
Contract Price range (1) (per long ton) $51.00-55.00 $65.00-68.00 $49.00-54.00 $67.00-71.00
<FN>
(1) This is a representative market price and does not
necessarily reflect what is received by Pennzoil.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) In June 1994, Pennzoil received an Administrative Complaint from the
United States Environmental Protection Agency ("EPA") alleging violation of the
Superfund Amendments and Reauthorization Act in connection with reporting
requirements under this statute and the EPA regulations relating thereto with
respect to Pennzoil's refinery in Roosevelt, Utah. The Complaint seeks civil
penalties of $329,000. Pennzoil intends to vigorously contest both the alleged
liability and the amount of the proposed penalty.
(b) In July 1994, the West Virginia Division of Environmental Protection
opened negotiations with Pennzoil and Pennzoil's indirect subsidiary Eureka Pipe
Line Company ("Eureka") for a consent order addressing numerous environmental
matters relating to operations of Pennzoil and Eureka. As currently proposed by
the state agency, the consent order would require Eureka to undertake
environmental remediation at several locations and would impose civil penalties
of approximately $1.5 million. Pennzoil and Eureka are investigating the
state's position, but currently intend to vigorously contest many of the state's
claims and the amount of any civil penalty assessed.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting of Shareholders
May 19, 1994
Broker
(c) Proposals For Against Withheld Abstain Non-Votes
--------- ---------- ------- ---------- --------- -----------
Election of Directors
Howard H. Baker, Jr. 39,114,670 - 251,592 - -
Harry H. Cullen 39,140,730 - 225,532 - -
James L. Pate 39,136,417 - 229,845 - -
Approval of Appointment of
Arthur Andersen & Co.
as Independent Public
Accountants 39,045,653 171,203 - 149,406 -
16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
3(a) Bylaws of Pennzoil Company, as amended through May 19, 1994.
12 Computation of Ratio of Earnings to Fixed Charges for the
six months ended June 30, 1994 and 1993.
99 Exhibit index
(b) Reports --
No reports on Form 8-K were filed during the quarter for which this
report is filed.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNZOIL COMPANY
Registrant
S/N Mark A. Malinski
Mark A. Malinski
Group Vice President - Accounting
and Controller
August 10, 1994