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 September 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, October 31, 1994:
Common stock, $.83-1/3 par value, 46,083,057 shares.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 631,654 $ 655,867 $1,905,539 $1,991,585
COSTS AND EXPENSES
Cost of sales 423,763 379,908 1,173,403 1,170,056
Selling, general and administrative expenses 99,786 91,625 291,863 262,965
Depreciation, depletion and amortization (See Notes 8 and 9) 261,410 73,778 415,216 230,193
Exploration expenses 17,557 7,043 35,746 14,504
Taxes, other than income 14,408 16,746 46,782 51,290
Interest charges, net (See Note 8) 338,609 45,400 423,779 141,392
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (523,879) 41,367 (481,250) 121,185
Income tax provision (benefit) (See Note 8) (224,077) 29,331 (208,996) 53,385
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (299,802) 12,036 (272,254) 67,800
Extraordinary items - (13,656) - (18,380)
Cumulative effect of change in accounting
principle (See Note 2) - - (4,948) -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(299,802) $ (1,620) $(277,202) $ 49,420
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle $ (6.51) $ 0.29 $ (5.92) $ 1.66
Extraordinary items - (0.33) - (0.45)
Cumulative effect of change in accounting principle - - (0.11) -
----------- ----------- ----------- -----------
TOTAL $ (6.51) $ (0.04) $ (6.03) $ 1.21
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ 0.75 $ 0.75 $ 2.25 $ 2.25
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING 46,038 41,315 45,987 40,945
=========== =========== =========== ===========
NUMBER OF SHARES OUTSTANDING 46,066 45,852 46,066 45,852
=========== =========== =========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements.
2
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1994 1993
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 898,870 $ 262,275
Marketable securities and other investments - 684,308
Receivables 367,730 363,287
Inventories
Crude oil, natural gas and sulphur 41,628 38,965
Motor oil and refined products 124,608 123,282
Deferred income tax 15,442 13,587
Other current assets 54,444 58,098
------------- -------------
Total current assets 1,502,722 1,543,802
Property, plant and equipment, net (See Notes 8 and 9) 2,904,068 2,324,444
Marketable securities and other investments (See Note 3) 801,083 654,973
Other assets 320,724 362,984
------------- -------------
TOTAL ASSETS $ 5,528,597 $ 4,886,203
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 4,319 $ 19,568
Notes payable 417,353 433,031
Accounts payable and accrued liabilities 255,776 219,186
Interest accrued (See Note 8) 338,773 29,538
Taxes accrued (See Note 8) 177,670 93,242
Other current liabilities 43,095 26,702
------------- -------------
Total current liabilities 1,236,986 821,267
Long-term debt 2,392,052 1,973,488
Deferred income tax 372,922 304,902
Other liabilities 299,235 280,742
------------- -------------
TOTAL LIABILITIES 4,301,195 3,380,399
------------- -------------
COMMITMENTS AND CONTINGENCIES (See Note 8)
SHAREHOLDERS' EQUITY (See Notes 3 and 10) 1,227,402 1,505,804
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,528,597 $ 4,886,203
============= =============
<FN>
See Notes to Condensed Consolidated Financial Statements.
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
---------------------------------
1994 1993
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (277,202) $ 49,420
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 415,216 230,193
Dry holes and impairments 19,527 2,934
Deferred income tax (102,743) 5,602
Accrued interest on IRS settlement 290,703 -
Non-cash and other nonoperating items (20,565) (9,137)
Extraordinary items - 18,380
Cumulative effect of change in accounting principle 4,948 -
Change in operating assets and liabilities (85,617) (28,768)
----------- -----------
Net cash provided by operating activities 244,267 268,624
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (361,522) (314,548)
Acquisition of Co-enerco Resources Ltd. (230,924) -
Purchases of marketable securities and other investments (310,614) (168,393)
Proceeds from sales of marketable securities and other
investments 992,454 179,975
Proceeds from sales of assets 31,852 50,232
Other investing activities (11,485) 20,227
----------- -----------
Net cash provided by (used in) investing activities 109,761 (232,507)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term debt, net (15,678) (8,357)
Debt and capital lease obligation repayments (108,487) (1,150,137)
Proceeds from issuance of debt 509,963 941,216
Net proceeds from issuance of common stock - 303,300
Dividends paid (103,486) (91,773)
Other financing activities 255 716
----------- -----------
Net cash provided by (used in) financing activities 282,567 (5,035)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 636,595 31,082
CASH AND CASH EQUIVALENTS, beginning of period 262,275 20,732
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 898,870 $ 51,814
=========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements.
4
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. Certain prior period items have been
reclassified in the condensed consolidated financial statements in order to
conform with the current year financial 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," 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
5
PART I. FINANCIAL INFORMATION - continued
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 giving effect to a "two-for-one" stock split of
Chevron common stock (which occurred in June 1994), Pennzoil beneficially owned
18,071,036 shares of common stock at September 30, 1994, acquired at an average
cost of $33.68 per share. The fair market value of the shares of Chevron common
stock held by Pennzoil as of September 30, 1994 was $ 41.625 per share (based
on the closing transaction price for Chevron shares reported on the NYSE on that
date).
Adoption of this 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
September 30, 1994, the net unrealized gain included in shareholders' equity
related to Pennzoil's investment in Chevron common stock was $93.4 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 of domestic commercial paper and U.S.
government obligations. 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 are
included in Pennzoil's consolidated statement of income subsequent to June 1994.
6
PART I. FINANCIAL INFORMATION - continued
(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.
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. As a result, the
number of Chevron shares beneficially held by Pennzoil was 18,071,036 as of
September 30, 1994. None of the share or per share information related to
Pennzoil's investment in Chevron common stock prior to June 1994 has 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) Issuance of Common Stock -
In September 1993, Pennzoil completed the sale, pursuant to underwritten
public offerings, of 5,000,000 shares of its common stock, par value $0.83-1/3
per share, at a price of $62.50 per share.
The net proceeds from the sale of the shares of Pennzoil common stock
offered, prior to the payment of expenses, totaled approximately $303.3 million.
Primarily utilizing funds from such offerings, Pennzoil called for redemption an
aggregate of $292.5 million principal amount of Pennzoil's debentures, which
redemption was reflected in Pennzoil's condensed consolidated balance sheet at
September 30, 1993 (see Note 7). Pro forma earnings per share for the nine
months ended September 30, 1993, assuming the stock offering and redemption of
debentures had occurred at the beginning of 1993, was $1.42 per share.
(7) 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. 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.
In September 1993, Pennzoil called for redemption $292.5 million principal
amount of indebtedness (including $120.0 million of Pennzoil's 10-1/8%
debentures due 2011, $111.0 million of Pennzoil's 10% debentures due 2011 and
$61.5 million of Pennzoil's 9% debentures due 2017). The premiums and related
unamortized discount and debt issue costs relating to these redemptions resulted
in an extraordinary charge of $13.7 million, net of tax, or $.33 per share, in
the third quarter of 1993.
7
PART I. FINANCIAL INFORMATION - continued
In August 1994, Pennzoil entered into an amended and restated credit
facility with a group of banks which provides for up to $600 million of
unsecured revolving credit borrowings through August 16, 1995, with any
outstanding borrowings on such date being converted into a term credit facility
terminating on September 1, 1996. A facility fee of .125% per annum is payable
on the aggregate amount of the banks' commitments. Pennzoil has the option,
subject to the extension of additional credit by new or existing banks, of
increasing the size of the facility by $100 million. This amended and restated
credit facility replaces and supersedes the previous revolving credit facility
of Pennzoil. Borrowings under the facility totaled $425.0 million at September
30, 1994.
(8) Settlement of IRS Dispute -
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 financial reporting purposes, Pennzoil reported an extraordinary gain
of $1.656 billion (after expenses and estimated current and deferred taxes), or
$42.62 per share, associated with the $3.0 billion in cash received from Texaco
in April 1988.
For federal income tax purposes, Pennzoil originally reported that it
recognized no gain upon receipt of the $3.0 billion and that the $366 million in
legal and other costs incurred in the litigation were fully deductible. During
1990 and 1991, Pennzoil recalculated its 1988 federal income tax liability to
recognize approximately $800 million of income, calculated as 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.
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 from the involuntary conversion of property and that the Chevron
shares were similar or related in service or use to the property converted by
Texaco. A corollary of this position was that Pennzoil had no tax basis in the
Chevron shares.
In January 1994, following an audit of Pennzoil's 1988 return, the District
Director of Internal Revenue proposed a tax deficiency of $551 million (net of
available offsets), plus interest, based on treating the entire $2.2 billion as
taxable income in 1988 and treating the $366 million in litigation costs as
capital expenditures.
In October 1994, Pennzoil entered into a binding agreement with the
Internal Revenue Service ("IRS") to treat $618 million of the $2.2 billion as
the proceeds from an involuntary conversion; to reduce such amount by $72
million of the litigation costs; to recognize the balance of the settlement
proceeds as taxable income in 1988; and to allow the balance of the litigation
costs as deductions in 1988. As a result, Pennzoil sustained a tax deficiency
for 1988 of $261.7 million (net of available offsets), plus interest, and its
tax basis in each Chevron share was its cost less $8.28, after giving effect to
8
PART I. FINANCIAL INFORMATION - continued
a "two-for-one" stock split of Chevron common stock which occurred in June 1994
(see Note 5). Total interest charges on the tax deficiency were $294.3
million, of which $290.7 million was expensed in September 1994, resulting in a
total cash payment to the IRS of $556.0 million in October 1994.
As a result of the settlement of this tax contingency, Pennzoil increased
the balance of property, plant and equipment ("PP&E") related to its
acquisition of Pennzoil Petroleum in October 1992 (see Note 5) by $390.3
million. As a result of the increase in PP&E, Pennzoil increased depreciation,
depletion and amortization expense by $93.9 million, based upon its adjusted
basis in Pennzoil Petroleum's oil and gas properties. These adjustments
resulted in a net increase in PP&E of $296.4 million at September 30, 1994
($212.4 million net of related deferred taxes), while interest charges and
depreciation, depletion and amortization expense adjustments related to the
settlement reduced Pennzoil's 1994 third quarter pretax income by $384.6
million. After consideration of available tax offsets, the settlement resulted
in an after-tax charge of $208.1 million, or $4.52 per share.
(9) Sale of Domestic Sulphur Assets -
In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
Resource Partners, Limited Partnership ("Freeport-McMoRan") to sell
substantially all the domestic assets of Pennzoil's sulphur segment.
As consideration under the agreement, Freeport-McMoRan will assume certain
liabilities of Pennzoil relating to or arising out of the business of Pennzoil's
sulphur segment and Pennzoil will receive a series of quarterly installment
payments from Freeport-McMoRan based on prevailing future market prices of
sulphur over a period not to exceed 20 years from the closing date under the
agreement. The installment payments, recorded at their net present value of
$22.5 million as of September 30, 1994, may be terminated earlier either by
Freeport-McMoRan (through the exercise of a call option, providing for a $65
million payment to Pennzoil), or by Pennzoil (through the exercise of a put
option, providing for a $10 million payment to Pennzoil). Neither the call
option nor the put option may be exercised within the first four years after the
closing date under the agreement.
In connection with this transaction, Pennzoil recorded a charge to
depreciation, depletion and amortization expense of $50.2 million ($32.6
million after-tax, or $.71 per share), in September 1994. Completion of the
transaction, which is anticipated by December 31, 1994, is subject to a number
of conditions, including the receipt of required governmental approvals.
(10) Shareholder Rights Plan -
In October 1994, Pennzoil's board of directors adopted a five-year
shareholder rights plan. The plan entails a distribution of one right for each
outstanding share of Pennzoil common stock. Each right will entitle the holder
to buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $140 per share. Each one-hundredth of a
share of participating preferred stock would be essentially the economic
equivalent of a share of Pennzoil common stock. The rights will attach to and
trade with Pennzoil common stock and will not be exercisable until after a
person or group acquires fifteen percent of Pennzoil's common stock or commences
a tender offer that would result in ownership of fifteen percent of Pennzoil's
common stock. The record date for distribution of the rights is the close of
business on November 11, 1994.
9
PART I. FINANCIAL INFORMATION - continued
The rights may be redeemed for $.01 per right by action of the board of
directors at any time prior to the tenth day following the first public
announcement of a fifteen percent acquisition of beneficial ownership of
Pennzoil's common stock.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the quarter and nine months ended September 30, 1994, Pennzoil recorded
a net loss of $299.8 million, or $6.51 per share, and $277.2 million, or $6.03
per share, respectively. This compares with a net loss of $1.6 million, or $.04
per share, for the third quarter of 1993 and net income of $49.4 million, or
$1.21 per share, for the nine months ended September 30, 1993. Results for the
quarter and nine months ended September 30, 1994 include net charges of $208.1
million, or $4.52 per share, associated with the settlement of a tax dispute
with the Internal Revenue Service ("IRS") respecting reinvestment of the
settlement proceeds which Pennzoil received from Texaco, Inc. ("Texaco") in 1988
in settlement of certain litigation (see Note 8 of Notes to Condensed
Consolidated Financial Statements).
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. Excluding
the net charges associated with the tax dispute settlement with the IRS, income
before extraordinary item and cumulative effect of change in accounting
principle for the quarter and nine months ended September 30, 1994 decreased
$103.7 million and $132.0 million, respectively, compared to the prior year.
The decrease in earnings for both the quarter and nine months ended September
30, 1994, compared to the prior year, was primarily attributable to a write-down
of the value of certain assets associated with the sale of Pennzoil's domestic
sulphur assets (see Note 9 of Notes to Condensed Consolidated Financial
Statements), lower results from the oil and gas, motor oil and refined products
and franchise operations segments and lower other operating income.
Oil and Gas
The oil and gas segment recorded operating losses for the quarter and nine
months ended September 30, 1994 of $102.9 million and $11.1 million,
respectively. This compares with operating income of $57.6 million and $176.8
million, respectively, for the same periods in 1993.
As a result of the settlement of a tax dispute with the IRS, the oil and
gas segment increased the balance of property, plant and equipment ("PP&E")
related to the acquisition of Pennzoil Petroleum in October 1992 by $390.3
million. As a result of the increase in PP&E, the oil and gas segment increased
depreciation, depletion and amortization expense by $93.9 million, based upon
its adjusted basis in Pennzoil Petroleum's oil and gas properties (see Notes 5
10
PART I. FINANCIAL INFORMATION - continued
and 8 of Notes to Condensed Consolidated Financial Statements) resulting in a
net increase in PP&E of $296.4 million at September 30, 1994 ($212.4 million net
of related deferred taxes). In addition, oil and gas segment earnings will be
reduced in future periods by comparably higher depreciation, depletion and
amortization expense as a result of the increase in the basis of Pennzoil
Petroleum's oil and gas properties.
In addition to the $93.9 million increase in depreciation, depletion and
amortization expense discussed above, operating results for the quarter and nine
months ended September 30,1994 included a charge of $24.3 million for the
write-down of an investment in a Siberian drilling partnership and $10.0 million
in charges associated with the impending disposition of other various non-core
assets. Operating results for the quarter and nine months ended September 30,
1993 included a $12.8 million gain on the disposition of certain non-core oil
and gas properties.
Excluding the effects of these nonrecurring items, operating results for
the quarter and nine months ended September 30, 1994 decreased $19.5 million and
$46.9 million, respectively, compared to the same periods in 1993. The decrease
in income for the quarter ended September 30, 1994, compared to the same period
in the prior year, was primarily due to lower natural gas prices and higher
exploration expense. The decrease in operating income for the nine months ended
September 30, 1994, compared to the same period in 1993, was primarily due to
lower natural gas and liquids prices and higher exploration expense. Exploration
expense was up primarily due to increased dry hole charges associated with
increased drilling activity.
Oil and gas production volumes increased approximately 16% in the third
quarter of 1994 compared to the third quarter of 1993 despite a reduction in
production associated with the 1993 sale of a net 60 Bcf of proved natural gas
reserves and a net 3 million barrels of proved oil reserves. These sales
occurred primarily late in the third quarter and during the fourth quarter of
1993. Natural gas volumes produced for sale increased from 620 MMcf per day in
the third quarter of 1993 to 733 MMcf per day in the third quarter of 1994. In
addition, liquids production volume increased from 63.8 Mbbls per day in the
third quarter of 1993 to 71.9 Mbbls per day in the third quarter of 1994.
Approximately 48% of the volume increase in the third quarter is attributable
to Pennzoil's acquisition of Co-enerco Resources Ltd. ("Co-enerco") in June
1994 (see Note 4 of Notes to Condensed Consolidated Financial Statements).
The oil and gas division had approximately 30 MMcf per day of natural gas
shut-in during the third quarter of 1994. A portion of the gas was involuntarily
curtailed due to Canadian pipeline constraints and a portion was voluntarily
curtailed due to offshore facility upgrades and downhole testing which were
scheduled during the current period in response to lower prices.
Natural gas volumes produced for sale during the nine months ending
September 30, 1994 were 705 MMcf per day compared to 658 MMcf per day during the
nine months ending September 30, 1993. Liquids production volume was 67.2 Mbbls
per day for the nine months ending September 30, 1994 compared to 63.5 Mbbls per
day for the nine months ending September 30, 1993.
Liquids prices averaged $14.72 per barrel and $13.65 per barrel,
respectively, during the quarter and nine months ended September 30, 1994
compared to $14.30 per barrel and $15.63 per barrel, respectively, for the same
periods in 1993. Natural gas prices averaged $1.65 per MCF and $1.92 per MCF,
respectively, during the quarter and nine months ended September 30, 1994
compared to $2.05 per MCF and $2.01 per MCF, respectively, for the same periods
in 1993.
11
PART I. FINANCIAL INFORMATION - continued
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 or early 1996.
In September 1994, the State Oil Company of the Azerbaijan Republic
("SOCAR") and a consortium of foreign oil companies, which included Pennzoil,
signed an oil production sharing contract for development of the Azeri, Chirag
and a deep-water portion of the Guneshli field. The contract will be presented
to the companies' boards of directors for approval, and then to the Azerbaijan
Parliament for ratification. Once formal approval is received from each board
and the contract has been ratified by the Azerbaijan Parliament, the contract
becomes effective and initial work can commence.
This contract covers basic tenets of the project, including profit splits,
taxation, project management mechanism, legal issues, hiring practices, and
other details. The combined fields, which include Azeri, Chirag and the
deep-water portion of the Guneshli field, are located 120 miles offshore in the
southern portion of the Caspian Sea in approximately 400 feet of water.
Aggregate capital investment for all the participants in the consortium is
estimated to be between $7.0 and $8.0 billion over the 30-year life of this
project to develop an estimated 4 billion barrels of recoverable reserves.
Participants in the development and their respective interests are SOCAR
(20.00 percent), Amoco (17.01 percent), British Petroleum (17.127 percent),
Delta-Nimir (1.68 percent), Lukoil (10.00 percent), McDermott (2.45 percent),
Pennzoil (9.82 percent), Ramco (2.08 percent), Statoil (8.563 percent), Turkish
Petroleum Company (1.75 percent) and Unocal (9.52 percent). The contract
includes a $300 million bonus to be paid to the government of Azerbaijan in a
phased manner over the life of the project. Azerbaijan also would receive
approximately 80 percent of the profit.
Motor Oil & Refined Products
The motor oil and refined products segment recorded an operating loss of
$16.0 million for the quarter ended September 30, 1994 and operating income of
$26.4 million for the nine months ended September 30, 1994. This compares to
operating income of $34.0 million and $82.5 million, respectively, for the same
periods in 1993.
After extensive studies, Pennzoil Products Company ("PPC") concluded that
it was no longer economically feasible to process crude oil at its Roosevelt,
Utah refinery. As of September 30, 1994, PPC stopped processing crude oil at
its refinery in Roosevelt. In connection with the cessation of crude oil
processing at Roosevelt, PPC recorded a charge of $32.5 million in the third
quarter of 1994. PPC plans to continue purchasing crude oil and will maintain a
transportation terminal at the refinery site.
Excluding the charge of $32.5 million associated with the cessation of crude oil
processing at the refinery in Roosevelt, operating results for the motor oil and
refined products segment decreased $17.5 million and $23.6 million,
respectively, for the third quarter and nine months ended September 30, 1994 as
compared to the same periods in 1993. The decrease in operating income for the
quarter was primarily attributed to lower refinery margins and throughput and
higher advertising and other marketing expenses, which was partially offset by
increased motor oil and specialty product volumes sold and higher volumes of
motor oil sold internationally. The decrease in operating income for the nine
months ended September 30, 1994, compared to the same period in 1993, was
12
PART I. FINANCIAL INFORMATION - continued
primarily attributed to lower refinery margins and throughput, higher
advertising and other marketing and manufacturing expenses, which was partially
offset by 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, the basic
ingredients in finished lubricants. Site preparation began in the third quarter
of 1994 and the facility is expected to be completed in approximately three
years. Conoco will act as construction manager and operator of the lubricating
base oil plant with support positions staffed by both companies.
In September 1994, PPC and the Polymers Division of Petrolite Corporation
("Petrolite") agreed in principle to form a 50-50 partnership aimed at providing
a broad line of wax products to domestic and international purchasers of
paraffin, microcrystalline and related synthetic waxes. PPC will transport
partially refined feedstock from Utah to its refinery in Rouseville,
Pennsylvania. The feedstock will then be used to produce paraffinic waxes and
related products. The new Rouseville products will then be sold, along with
certain waxes from Petrolite and existing wax products from Pennzoil's Atlas and
Rouseville refineries, through the newly formed partnership. More than $23
million will be invested by PPC at its Rouseville refinery and packaging plant
in nearby Reno, Pennsylvania. The project will begin in the fourth quarter of
1994 and continue through the first two quarters of 1995.
Franchise Operations
The franchise operations segment recorded operating losses of $2.2 million
and $0.6 million, respectively, for the quarter and nine months ended September
30, 1994. This compares to operating income of $1.5 million and $3.7 million,
respectively, for the same periods in 1993. The decrease in operating results
for the quarter ended September 30, 1994, compared to the same period in 1993,
is primarily attributable to higher operating expense and higher selling,
general and administrative expenses. The increase in operating expense was
primarily due to a $3.0 million increase in the franchise operations' reserve
for estimated environmental remediation costs. The increase in selling,
general and administrative expense was primarily due to expenses incurred in the
settlements of certain litigation. These higher expenses were partially offset
by improved company store results. The decrease in operating results for the
nine months ended September 30, 1994, compared to the prior year, is due to
higher operating expenses and higher selling, general and administrative
expenses. The increase in operating expense was primarily due to the increased
environmental reserve and an insurance reserve for self-insured claims. The
increase in selling, general and administrative expense was primarily due to
$2.7 million in litigation settlement charges. These higher expenses were
partially offset by improved company store results.
Domestic systemwide sales reported by Jiffy Lube centers for the quarter
and nine months ended September 30, 1994 increased $16.3 million and $49.6
million, respectively, from comparable periods in 1993. Average ticket prices
increased to $33.60 and $33.95 for the quarter and nine months ended September
30, 1994, respectively, compared with $33.38 and $33.41, respectively, for the
same periods in 1993. There were 1,098 domestic lube centers open (including 415
Jiffy Lube company-operated centers) as of September 30, 1994.
13
PART I. FINANCIAL INFORMATION - continued
Sulphur
In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
Resource Partners, Limited Partnership ("Freeport-McMoRan") to sell
substantially all the domestic assets of Pennzoil's sulphur segment (see Note 9
of Notes to Condensed Consolidated Financial Statements). As consideration
under the agreement, Freeport-McMoRan will assume certain liabilities of
Pennzoil relating to or arising out of the business of Pennzoil's sulphur
segment and Pennzoil will receive a series of quarterly installment payments
from Freeport-McMoRan based on prevailing future market prices of sulphur over a
period not to exceed 20 years from the closing date of the agreement. The
installment payments, recorded at their net present value of $22.5 million as of
September 30, 1994, may be terminated earlier either by Freeport-McMoRan
(through the exercise of a call option, providing for a $65 million payment to
Pennzoil), or by Pennzoil (through the exercise of a put option, providing for a
$10 million payment to Pennzoil). Neither the call option nor the put option
may be exercised within the first four years after the closing date under the
agreement. In connection with this transaction, the sulphur segment recorded a
$50.2 million ($32.6 million after-tax, or $.71 per share), charge in September
1994.
Excluding the $50.2 million pretax charge for asset write-downs, the
sulphur segment recorded operating losses of $1.3 million and $8.5 million for
the quarter and nine months ended September 30, 1994.
The losses were primarily due to lower sulphur prices as evidenced by a decrease
in the average Green Markets Tampa Recovered Contract Price range mid-point from
$62.00 per long ton and $67.00 per long ton, respectively, during the quarter
and nine months ended September 30, 1993 to mid-points of $58.50 per long ton
and $54.00 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. 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 nine months ended September 30, 1994 have increased 17,000
and 69,000 long tons, respectively, compared with the same periods in 1993.
Other
Other operating income for the quarter and nine months ended September 30,
1994, was $4.7 million and $39.4 million, respectively. This compares to other
operating income of $17.0 million and $61.3 million, respectively, for the same
periods in 1993. Other income for the quarter and nine months ended September
30, 1994 included a $15.2 million charge to reflect adjustment of recorded
values of certain real estate properties. Other operating income for the nine
months ended September 30, 1993 included a first quarter 1993 $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 nine months ended September 30,
1994, included interest expense of $290.7 million associated with the IRS
settlement (see Note 8 of Notes to Condensed Consolidated Financial Statements).
Excluding the interest expense associated with the IRS settlement, net interest
expense increased $2.5 million for the quarter and decreased $8.3 million for
14
PART I. FINANCIAL INFORMATION - continued
the nine months ended September 30, 1994, respectively, when compared to the
same periods in 1993. The increase in interest expense for the quarter ended
September 30, 1994 compared to the same period in 1993 is primarily due to
borrowings on credit facilities associated with the acquisition of Co-enerco
(see "---- Capital Resources and Liquidity"). The decrease in the nine month
interest expense from the same period in 1993 is primarily due to Pennzoil's
efforts throughout 1993 to retire higher-cost debt.
Capital Resources and Liquidity
As of September 30, 1994, Pennzoil had cash and cash equivalents of $898.9
million. During the nine months ended September 30, 1994, Pennzoil's cash and
cash equivalents and current marketable securities and other investments
decreased by $47.7 million. Cash flows from operating activities totaled $244.3
million for the nine months ended September 30, 1994 and included net income tax
payments of $134.3 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 Note 5 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 $25.1 million for the quarter and nine
months ended September 30, 1994, respectively, compared to $15.0 million and
$45.1 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, the borrowings of which are guaranteed by Pennzoil. Also in
June 1994, Pennzoil Canada established a Cdn. $40 million credit facility with a
Canadian bank, the 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
September 30, 1994.
In August 1994, Pennzoil entered into an amended and restated credit
facility with a group of banks which provides for up to $600 million of
unsecured revolving credit borrowings through August 16, 1995, with any
outstanding borrowings on such date being converted into a term credit facility
terminating on September 1, 1996. A facility fee of .125% per annum is payable
on the aggregate amount of the banks' commitments. Pennzoil has the option,
subject to the extension of additional credit by new or existing banks, of
increasing the size of the facility by $100 million. This amended and restated
credit facility replaces and supersedes the previous revolving credit facility
of Pennzoil. Borrowings under the facility totaled $425.0 million at September
30, 1994.
In October 1994, Pennzoil announced the settlement of a tax dispute with
the IRS respecting the reinvestment of the settlement proceeds which Pennzoil
received from Texaco in 1988 in settlement of certain litigation. In October
1994, Pennzoil made a cash payment to the IRS of $556.0 million using cash and
cash equivalents on hand (see Note 8 of Notes to Condensed Consolidated
Financial Statements). Subsequent to the cash payment to the IRS in October
1994, Pennzoil reduced its outstanding borrowings under its unsecured revolving
credit facility and short-term variable credit arrangements by $290.0 million
and $24.0 million respectively, using available cash and cash equivalents.
15
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 Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Oil and Gas $ 181,737 $ 218,415 $ 596,054 $ 663,223
Motor Oil & Refined Products 405,954 387,889 1,150,933 1,159,714
Franchise Operations 65,403 56,085 192,757 161,687
Sulphur 18,019 17,977 48,846 55,611
Other 5,488 16,803 43,744 65,226
Intersegment sales (44,947) (41,302) (126,795) (113,876)
----------- ----------- ----------- -----------
Total revenues $ 631,654 $ 655,867 $1,905,539 $1,991,585
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)
Oil and Gas $ (102,852) $ 57,560 $ (11,145) $ 176,838
Motor Oil & Refined Products (15,993) 33,971 26,365 82,465
Franchise Operations (2,155) 1,459 (557) 3,673
Sulphur (51,520) (6,071) (58,656) (11,697)
Other 4,676 17,015 39,378 61,346
----------- ----------- ----------- -----------
Total operating income (loss) (167,844) 103,934 (4,615) 312,625
Corporate administrative expenses 17,426 17,167 52,856 50,048
Interest charges, net 338,609 45,400 423,779 141,392
----------- ----------- ----------- -----------
Income (loss) before income taxes (523,879) 41,367 (481,250) 121,185
Income tax provision (benefit) (224,077) 29,331 (208,996) 53,385
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (299,802) 12,036 (272,254) 67,800
Extraordinary items - (13,656) - (18,380)
Cumulative effect of change in accounting principle - - (4,948) -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (299,802) $ (1,620) $ (277,202) $ 49,420
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES - 1.70
=========== ===========
AMOUNT BY WHICH FIXED CHARGES EXCEED EARNINGS $ 488,159 $ -
=========== ===========
16
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 71,930 63,796 67,210 63,462
Natural gas produced for sale (Mcf per day) 732,781 619,689 704,524 657,561
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 14.72 $ 14.30 $ 13.65 $ 15.63
Natural gas (per Mcf) $ 1.65 $ 2.05 $ 1.92 $ 2.01
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 25,357 25,772 25,298 25,710
Distillates and gas oils 31,094 29,141 30,509 29,612
Lubricating oil and other specialty products 24,447 24,068 23,332 23,516
Residual fuel oils 2,956 2,350 3,371 2,319
----------- ----------- ----------- -----------
Total sales (barrels per day) 83,854 81,331 82,510 81,157
=========== =========== =========== ===========
Raw materials processed (barrels per day) 61,844 63,036 59,056 61,698
Refining capacity <F1> (barrels per day) 70,700 70,700 70,700 70,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 157,316 $ 140,985 $ 448,904 $ 399,262
Same center sales (in thousands) $ 150,955 $ 139,491 $ 432,060 $ 395,051
Centers open (U.S.) 1,098 1,063 1,098 1,063
SULPHUR
Sales (thousands of long tons) 274 257 831 762
Average Green Markets Tampa Recovered
Contract Price range <F2> (per long ton) $57.00-60.00 $59.00-65.00 $52.00-56.00 $65.00-69.00
<FN>
<F1> After September 30, 1994 Pennzoil will no longer
be processing crude at its refinery in Roosevelt, Utah.
The Roosevelt refinery had a refining capacity of 8,000
barrels per day.
<F2> This is a representative market price and does not
necessarily reflect what is received by Pennzoil.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits --
12 Computation of Ratio of Earnings to Fixed Charges for the
nine months ended September 30, 1994 and 1993.
27 Financial Data Schedule
(b) Reports --
Pennzoil filed with the Securities and Exchange Commission a current
report on Form 8-K dated October 28, 1994 relating to Pennzoil's
adoption of a five-year shareholder rights plan. See Note 10 of
Notes to Condensed Consolidated Financial Statements.
18
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
November 11, 1994