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 September 30, 1995 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, 1995:
Common stock, par value $0.83-1/3 per share, 46,318,652
shares.
2
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
---------------------------- ----------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 600,012 $ 631,654 $1,881,965 $1,905,539
COSTS AND EXPENSES
Cost of sales 373,665 423,763 1,129,101 1,173,403
Selling, general and administrative expenses 103,759 99,786 306,217 291,863
Depreciation, depletion and amortization 73,050 261,410 256,476 415,216
Exploration expenses 4,706 17,557 25,087 35,746
Taxes, other than income 12,736 14,408 41,318 46,782
Impairment of long-lived assets (See Note 4) 399,830 - 399,830 -
Interest charges, net 48,322 338,609 144,568 423,779
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX (416,056) (523,879) (420,632) (481,250)
Income tax benefit (140,770) (224,077) (143,299) (208,996)
----------- ----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (275,286) (299,802) (277,333) (272,254)
Cumulative effect of change in accounting
principle (See Note 2) - - - (4,948)
----------- ----------- ----------- -----------
NET LOSS $ (275,286) $ (299,802) $ (277,333) $ (277,202)
=========== =========== =========== ===========
LOSS PER SHARE
Loss before cumulative effect of
change in accounting principle $ (5.95) $ (6.51) $ (6.00) $ (5.92)
Cumulative effect of change in accounting principle - - - (0.11)
----------- ----------- ----------- -----------
TOTAL $ (5.95) $ (6.51) $ (6.00) $ (6.03)
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ 0.75 $ 0.75 $ 2.25 $ 2.25
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING 46,273 46,038 46,216 45,987
=========== =========== =========== ===========
NUMBER OF SHARES OUTSTANDING 46,303 46,066 46,303 46,066
=========== =========== =========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1995 1994
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 50,858 $ 24,884
Receivables 351,325 460,248
Inventories
Crude oil, natural gas and sulphur 20,478 38,239
Motor oil and refined products 137,126 126,019
Deferred income tax 17,146 19,735
Other current assets 51,767 59,127
------------- -------------
Total current assets 628,700 728,252
Property, plant and equipment, net 2,343,506 2,828,843
Marketable securities and other investments 874,701 833,400
Other assets 373,663 325,315
------------- -------------
TOTAL ASSETS $ 4,220,570 $ 4,715,810
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,825 $ 1,760
Notes payable 502,547 337,212
Accounts payable and accrued liabilities 252,374 252,575
Interest accrued 48,041 33,066
Other current liabilities 59,931 52,048
------------- -------------
Total current liabilities 864,718 676,661
Long-term debt 1,987,096 2,174,921
Deferred income tax 234,390 371,644
Other liabilities 279,583 288,320
------------- -------------
TOTAL LIABILITIES 3,365,787 3,511,546
------------- -------------
COMMITMENTS AND CONTINGENCIES (See Note 5)
SHAREHOLDERS' EQUITY 854,783 1,204,264
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,220,570 $ 4,715,810
============= =============
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
---------------------------------
1995 1994
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (277,333) $ (277,202)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 256,476 415,216
Impairment of long-lived assets 399,830 -
Dry holes and impairments 7,917 19,527
Deferred income tax (148,461) (102,743)
Accrued interest on IRS settlement - 290,703
Non-cash and other nonoperating items (4,978) (20,565)
Cumulative effect of change in accounting principle - 4,948
Change in operating assets and liabilities 158,624 (85,617)
----------- -----------
Net cash provided by operating activities 392,075 244,267
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (288,801) (361,522)
Acquisition of Co-enerco Resources Ltd. - (230,924)
Acquisition of Viscosity Oil (33,642) -
Purchases of marketable securities and other investments (496,287) (310,614)
Proceeds from sales of marketable securities and other
investments 490,056 992,454
Proceeds from sales of assets 90,964 31,852
Other investing activities (5,975) (11,485)
----------- -----------
Net cash provided by (used in) investing activities (243,685) 109,761
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayment) of short-term debt, net 165,334 (15,678)
Debt and capital lease obligation repayments (208,741) (108,487)
Proceeds from issuance of debt 25,000 509,963
Dividends paid (104,009) (103,486)
Other financing activities - 255
----------- -----------
Net cash provided by (used in) financing activities (122,416) 282,567
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,974 636,595
CASH AND CASH EQUIVALENTS, beginning of period 24,884 262,275
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 50,858 $ 898,870
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
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 benefit costs by adopting the
requirements of Statement of Financial Accounting Standards
("SFAS") No. 112, "Employers' Accounting for Postemployment
Benefits," and recorded a charge of $4.9 million ($7.6 million
before tax), or $.11 per share, as of that date to reflect the
cumulative effect of the change in accounting principle for periods
prior to 1994.
(3) Acquisitions -
In September 1995, Pennzoil Products Company ("PPC"), a wholly
owned subsidiary of Pennzoil, acquired the assets of the Viscosity
Oil division ("Viscosity") of Case Corporation for $33.6 million.
The acquisition was financed by a combination of cash on hand and
borrowings under Pennzoil's commercial paper and money market line
facilities. The acquisition was accounted for using the purchase
method of accounting, and the results of operations of Viscosity
subsequent to September 1995 will be reflected in Pennzoil's
consolidated statement of income.
In June 1994, Pennzoil Canada, Inc. ("Pennzoil Canada"), an
indirect wholly owned subsidiary of Pennzoil, acquired Co-enerco
Resources Ltd. ("Co-enerco"), a Canadian oil and gas exploration
and production company operating in Western Canada.
Pennzoil Canada paid $230.9 million in cash in connection with
the acquisition of Co-enerco and the 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 subsequent to June 1994 are included in Pennzoil's
consolidated statement of income.
(4) Accounting for the Impairment of Long-Lived Assets -
Effective July 1, 1995, Pennzoil adopted the requirements of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which is intended to
establish more consistent accounting standards for measuring the
recoverability of long-lived assets. In certain instances, the
statement specifies that the carrying values of assets be written
down to fair values, which, for Pennzoil, resulted in write-downs
that were previously not required under its prior impairment
6
PART I. FINANCIAL INFORMATION - continued
policy. The charges, which totaled $265.5 million ($399.8 million
before tax), or $5.74 per share, as of July 1, 1995, resulted
primarily from the more detailed impairment review procedures that
were required on Pennzoil's proved oil and gas properties. In
determining whether an asset is impaired under the new standard,
assets are required to be grouped at the lowest level for which
there are identifiable cash flows that are largely independent of
the cash flows of other groups of assets. On this basis, certain
fields in North America were deemed to be impaired because they
were not expected to recover their entire carrying value through
the future cash flows expected to result from the operation of the
field and its eventual disposition. Under Pennzoil's prior policy,
oil and gas assets reviewed for impairment were grouped at a
higher level.
(5) Commitments and Contingencies -
On October 16, 1995, an explosion and fire occurred at PPC's
Rouseville Refinery, located near Oil City, Pennsylvania. Two
Pennzoil employees and three contractor employees were killed. In
addition to the fatalities, one contract employee was critically
injured and several other injuries were reported. As of the date
hereof, Pennzoil and the Occupational Safety and Health
Administration ("OSHA") investigations have not been completed.
Although full damage and repair estimates have not been completed,
Pennzoil's preliminary assessment is that none of the major
processing units at the refinery was damaged. The major damage
identified has been to the tanks, piping and electrical lines in
the area of the fire. Some portions of the new wax plant
construction project were damaged, which may delay completion of
the project. The packaging facilities at the plant are now fully
operational, and products are being shipped to customers. At this
time, Pennzoil cannot accurately estimate the impact that the
explosion and fire will have to its financial condition. However,
initial estimates of damages to facilities and business
interruption appear to be less than $20 million.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
A net loss was reported for the quarter and nine months ended
September 30, 1995 of $275.3 million, or $5.95 per share, and
$277.3 million, or $6.00 per share, respectively. This compares
with a net loss of $299.8 million, or $6.51 per share, for the
third quarter of 1994 and a net loss of $277.2 million, or $6.03
per share, for the nine months ended September 30, 1994. Effective
July 1, 1995, Pennzoil adopted the requirements of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." As a result, Pennzoil recorded a
charge of $265.5 million ($399.8 million before tax), or $5.74 per
share, as of July 1, 1995 to reflect the impairment of long-lived
assets. 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. in 1988 in
settlement of certain litigation. 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, 1994 for
additional information. Effective January 1, 1994, Pennzoil changed
its method of accounting for postemployment benefit costs by
adopting the requirements of SFAS 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,
7
PART I. FINANCIAL INFORMATION - continued
to reflect the cumulative effect of change in accounting
principle for periods prior to 1994. Results of operations for
the quarter and nine months ended September 30, 1994 also include
a $21.1 million ($32.5 million before tax) charge associated with
the cessation of crude oil processing at Pennzoil's Roosevelt, Utah
refinery, a $32.6 million ($50.2 million before tax) charge in
connection with the agreement providing for the sale by Pennzoil to
Freeport-McMoRan Resource Partners, Limited Partnership ("Freeport-
McMoRan") of substantially all the domestic assets of Pennzoil's
sulphur segment, and a $9.9 million ($15.2 million before tax)
charge to reflect adjustments of recorded values of certain real
estate properties.
Oil and Gas
Operating income from this segment, excluding the SFAS No. 121
impairment of $378.9 million, for the quarter and nine months ended
September 30, 1995, was $19.5 million and $64.9 million,
respectively. This compares with an operating loss of $102.9
million and $11.1 million, respectively, for the same periods in
1994. This increase was primarily due to a depreciation, depletion
and amortization ("DD&A") charge of $93.9 million recorded in
September 1994 as a result of a settlement with the IRS related to
a tax dispute. 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, 1994 for additional
information. In addition to the $93.9 million increase in DD&A
expense, 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.
Excluding the effects of the items discussed above, operating
results for the quarter and nine months ended September 30, 1995
decreased $5.8 million and $52.2 million, respectively, compared to
the same periods in 1994. The decrease in income for both the
quarter and nine months ended September 30, 1995, compared to the
same period in 1994, was primarily due to lower natural gas
prices. Natural gas prices averaged $1.32 per Mcf and $1.39 per
Mcf, respectively, during the quarter and nine months ended
September 30, 1995 compared to $1.65 per Mcf and $1.92 per Mcf,
respectively, for the same periods in 1994.
Natural gas volumes produced for sale during the quarter and
nine months ended September 30, 1995 were 662.9 MMcf per day and
687.9 MMcf per day, respectively. This compares to 732.8 MMcf per
day and 704.5 MMcf per day, respectively, for the same periods in
1994. Liquids production volumes were 64.6 Mbbls per day and 69.1
Mbbls per day, respectively, for the quarter and nine months ended
September 30, 1995 compared to 71.9 Mbbls per day and 67.2 Mbbls
per day, respectively, for the quarter and nine months ended
September 30, 1994.
The decreases in volumes were offset by lower operating
expenses for the quarter and nine months ended September 30, 1995.
Operating costs per barrel of oil equivalent ("BOE") produced for
the quarter and nine months ended September 30, 1995, excluding
DD&A and exploration expense, decreased $.15 and $.38,
respectively, compared to the same periods in 1994. In addition,
exploration expense was down $12.9 million and $10.7 million,
respectively, for the quarter and nine months ended September 30,
1995 compared to the same periods in 1994, primarily due to lower
dry hole expense. Average DD&A rates were down $.70 per BOE for
the quarter ended September 30, 1995 compared to the same period in
1994 as a result of the adoption of SFAS No. 121.
8
PART I. FINANCIAL INFORMATION - continued
Effective July 1, 1995, Pennzoil adopted the requirements of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which is intended to
establish more consistent accounting standards for measuring the
recoverability of long-lived assets. In certain instances, the
statement specifies that the carrying values of assets be written
down to fair values, which, for Pennzoil, resulted in write-downs
that were previously not required under its prior impairment
policy. In determining whether an asset is impaired under the new
standard, assets are required to be grouped at the lowest level
for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. On this
basis, certain fields in North America were deemed to be impaired
because they were not expected to recover their entire carrying
value through the future cash flows expected to result from the
operation of the field and its eventual disposition. Under
Pennzoil's prior policy, oil and gas assets reviewed for impairment
were grouped at a higher level.
The pretax charge for the asset impairment in the oil and gas
segment was $378.9 million. The fair values of the impaired oil
and gas segment assets were determined by using the present value
of expected future cash flows or estimates of market value. As a
result of the impairment charge, earnings for the oil and gas
segment in future periods should be higher due to lower DD&A
expense as a result of the decrease in oil and gas asset
carrying value.
In July 1995, Pennzoil entered into an operating service
agreement with a Petroleos De Venezuela S.A. affiliate,
Maraven, S.A., to operate the East Falcon Unit in Northwestern
Venezuela. This unit includes an oil field in which production
operations were suspended in 1968, two undeveloped gas fields and
several prospects. Under this service contract, Pennzoil would be
required to incur all costs attributable to exploration,
development and production activities. The agreement allows for
Pennzoil to recover such costs through a per barrel fee for
operating this unit, which contains estimated gross proved
remaining reserves available through field reactivation of 12
million barrels of oil equivalent.
In September 1995, Pennzoil and Forum Exploration Co., an
independent Egyptian oil company, signed an agreement giving
Pennzoil an 87.5 percent working interest in Forum's South-West
Gebel El-Zeit concession in the southern Gulf of Suez, offshore
Egypt. Pennzoil Egypt, Inc. will be the operator for this farm-
in agreement. The Pennzoil/Forum partnership is committed to a
minimum of $3 million in exploration expenditures over the next
three years. The final phase, which is optional, will constitute
three additional years with a minimum expenditure of $5 million.
In November 1995, Pennzoil announced that its Pennzoil
Caspian Development subsidiary had entered into a definitive
exploration, development and production sharing contract with the
State Oil Company of the Azerbaijan Republic ("SOCAR") covering the
Karabakh prospect in the Caspian Sea offshore Azerbaijan.
Participating in the project with Pennzoil (30%) are units of
LUKoil of Russia (7.5%), Agip of Italy (5%) and LUKAgip, a
subsidiary of LUKoil and Agip (50%). In addition, a commercial
affiliate of SOCAR has 7.5% interest as a contractor party. The
exploration, development and production sharing agreement will
become effective upon its ratification by the Azerbaijan
Parliament. The Karabakh prospect is located north of the Azeri-
Chirag-Guneshli Deepwater Unit and outside the Apsheron trend
approximately 80 kilometers offshore in approximately 185 meters of
water. The work commitment will include a seismic program and
9
PART I. FINANCIAL INFORMATION - continued
exploratory drilling over the exploratory period of three years,
and the exploratory period may be extended an additional one-and-a-
half years. Should commercial hydrocarbons be discovered, the
agreement will have a development and production period of 25
years, which may be extended an additional 5 years.
Motor Oil & Refined Products
Operating income from this segment for the quarter and nine
months ended September 30, 1995 was $11.9 million and $39.6
million, respectively. This compares to an operating loss of $16.0
million and operating income of $26.4 million, respectively, for
the same periods in 1994.
In July 1995, PPC announced plans to close The Eureka Pipe
Line Company ("Eureka"). Eureka, a wholly owned subsidiary,
operates a crude oil gathering system in West Virginia. In
connection with the decision to close the facility, PPC recorded a
charge of $5.7 million in June 1995 for estimated costs associated
with the closing.
As of September 30, 1994, PPC stopped processing crude oil at
its Roosevelt, Utah refinery. 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 has continued purchasing
crude oil and is maintaining a transportation terminal at the
refinery site.
Excluding the charges discussed above, operating income for
the quarter and nine months ended September 30, 1995 decreased $4.6
million and $13.6 million, respectively, compared to the same
periods in 1994. The decrease in income for the quarter ended
September 30, 1995 compared to the same period in 1994 was
primarily due to lower motor oil and specialty product volumes.
These decreases were partially offset by higher motor oil and
specialty product margins. The decrease in income for the nine
months ended September 30, 1995 compared to the same period in 1994
was primarily due to higher manufacturing expenses, higher
expenses associated with the Excel Paralubes partnership and a $4.0
million litigation settlement charge. Partially offsetting these
were higher margins for motor oil.
In July 1995, PPC agreed to purchase a one-third ownership in
a manufacturing and marketing company located in Caracas,
Venezuela. The company, Aceites y Solventes Venezolanos VASSA
S.A., is constructing a facility in Cardon, Venezuela to
manufacture white oils, solvents, and transformer oils for sale
primarily in South America, Central America, and the Caribbean.
Pennzoil's capital investment will be approximately $14.5 million,
a portion of which will be financed through non-recourse project
financing.
In September 1995, PPC acquired the Viscosity Oil division of
Case Corporation ("Case"), for $33.6 million. Viscosity is a
leading supplier of premium-quality lubricants to the North
American off-road industry and it supplies lubricants to
substantially all of the Case dealer network, with locations in all
50 states and Canada. In addition, Viscosity supplies virtually
all of the factory fill lubricants for Case's North American
manufacturing plants. As part of the acquisition, a long-term
supply agreement was entered into whereby Pennzoil will supply the
aftermarket lubricant products that Case will continue to sell to
its dealerships. The agreement also calls for Pennzoil to supply
factory-fill lubricants to Case. The acquisition was financed by
a combination of cash on hand and borrowings under Pennzoil's
commercial paper and money market line facilities.
10
PART I. FINANCIAL INFORMATION - continued
On October 16, 1995, an explosion and fire occurred at PPC's
Rouseville Refinery, located near Oil City, Pennsylvania. Two
Pennzoil employees and three contractor employees were killed. In
addition to the fatalities, one contract employee was critically
injured and several other injuries were reported. As of the date
hereof, Pennzoil and OSHA investigations have not been completed.
Although full damage and repair estimates have not been completed,
Pennzoil's preliminary assessment is that none of the major
processing units at the refinery was damaged. The major damage
identified has been to the tanks, piping and electrical lines in
the area of the fire. Some portions of the new wax plant project
were damaged, which may delay completion of the project. The
packaging facilities at the plant are now fully operational, and
products are being shipped to customers. At this time, Pennzoil
cannot accurately estimate the impact that the explosion and fire
will have to its financial condition. However, initial estimates
of damages to facilities and business interruption appear to be
less than $20 million.
Franchise Operations
The franchise operations segment, operating through Pennzoil's
wholly owned subsidiary Jiffy Lube International, Inc. ("Jiffy
Lube"), recorded operating income of $5.4 million and $10.3
million, respectively, for the quarter and nine months ended
September 30, 1995. This compares with an operating loss of $2.2
million and $0.6 million, respectively, for the same periods in
1994. The increase in operating income for the quarter and nine
months ended September 30, 1995 is primarily due to higher company
store results and lower operating expenses. Results for the nine
months ended September 30, 1995 include a $6.0 million litigation
settlement charge.
Domestic systemwide sales reported on a comparable store basis
for the quarter and nine months ended September 30, 1995 increased
$7.6 million, or 4.9%, and $23.7 million, or 5.3%, respectively,
from comparable periods in 1994. Comparable stores in the Jiffy
Lube system for the quarter and nine months ended September 30,
1995 reported an increase in the total number of vehicles serviced
of 2.4% and 3.4%, respectively. There were 1,165 domestic lube
centers (including 462 Jiffy Lube company-operated centers) open as
of September 30, 1995.
In March 1995, Jiffy Lube and the Sears Merchandise Group
("Sears") agreed to open fast-oil change units in Sears Auto
Centers over the next three years. Under the agreement, Jiffy
Lube remodels, equips and operates service areas within the Sears
Auto Centers, while Sears continues to utilize the remaining bays
for its operations. As a first step, Sears and Jiffy Lube have
agreed to set up approximately 180 company-owned units and
anticipate having approximately 50 to 60 of these centers open by
year-end 1995.
Sulphur
In October 1994, Pennzoil entered into an agreement with
Freeport-McMoRan providing for the sale of substantially all the
domestic assets of Pennzoil's sulphur segment to Freeport-McMoRan.
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. The sales transaction was completed in January
1995. Pennzoil continues to operate its related international
sulphur business. Beginning in January 1995, the results of such
operations are included in other segment operating income.
11
PART I. FINANCIAL INFORMATION - continued
Other
Other operating income for the quarter and nine months ended
September 30, 1995 was $10.5 million and $58.4 million,
respectively, compared with $4.7 million and $39.4 million,
respectively, for the same periods in 1994. The increase in other
operating income for the quarter ended September 30, 1995, compared
to the same period in 1994, was primarily the result of a third-
quarter 1994 charge of $15.2 million to reflect the adjustment of
recorded values of certain real estate properties.
In addition to the 1994 third quarter charge of $15.2 million
to reflect the adjustment of recorded values of certain real estate
properties, the increase in other operating income for the nine
months ended September 30, 1995, compared to the same period in
1994, was primarily due to the favorable resolution of a Texas
franchise tax issue, which resulted in Pennzoil receiving a $23.2
million refund. In addition, Pennzoil received approximately $1.5
million in interest associated with the franchise tax refund. This
increase was partially offset by lower investment income as the
result of having lower investable funds.
Net interest expense for the quarter and nine months ended
September 30, 1994, included interest expense of $290.7 million
associated with a settlement with the IRS related to a tax dispute.
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, 1994 for additional information. Excluding the
interest expense associated with the IRS settlement in 1994, net
interest expense for the quarter and nine months ended September
30, 1995 increased $.4 million and $11.5 million, respectively,
compared to the same periods in 1994. The increase was primarily
due to higher average rates.
Capital Resources and Liquidity
As of September 30, 1995, Pennzoil had cash and cash
equivalents of $50.8 million, an increase of $26.0 million over
December 31, 1994. Cash flows from operating activities totaled
$392.1 million during the nine months ended 1995.
Pennzoil's other income includes dividend income from its
investment in common stock of Chevron Corporation ("Chevron") of
$9.0 million and $25.8 million for the quarter and nine months
ended September 30, 1995, respectively, compared to $8.4 million
and $25.1 million, respectively, for the same periods in 1994. In
July 1995, Chevron announced an increase in the amount of quarterly
dividends paid to holders of its common stock from $.4625 per share
to $.50 per share.
In February 1995, Pennzoil's board of directors increased the
limit on the aggregate amount of commercial paper that Pennzoil may
issue under its domestic commercial paper program and/or its Euro-
commercial paper program from $250.0 million to $500.0 million.
Borrowings under Pennzoil's commercial paper facilities totaled
$329.1 million and $243.9 million at September 30, 1995 and
December 31, 1994, respectively. The cash provided by the increase
in borrowings under Pennzoil's commercial paper facilities was used
primarily to repay $205.0 million in borrowings under an unsecured
revolving credit facility with a group of banks.
In April 1995, Pennzoil received a cash tax refund of $116.9
million from the IRS which was used to reduce borrowings under its
commercial paper facilities.
12
PART I. FINANCIAL INFORMATION - continued
In May 1995, 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 May 28,
1996, with any outstanding borrowings on such date being converted
into a term credit facility terminating on May 30, 1997.
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. There were no borrowings under the facility
at September 30, 1995.
In May 1995, Pennzoil Canada, an indirect wholly owned
subsidiary of Pennzoil, entered into an amended and restated U.S.
$185 million credit facility with a syndicate of banks, the
borrowings of which are guaranteed by Pennzoil. Also in May 1995,
Pennzoil Canada entered into an amended and restated working
capital credit facility with a Canadian bank, the borrowings of
which are guaranteed by Pennzoil. Both facilities provide revolving
credit borrowings through May 28, 1996, with any outstanding
borrowings on such date being converted into term facilities
terminating on May 30, 1997. Combined borrowings under these
facilities were U.S. $220.0 million as of September 30, 1995.
In October 1995, Pennzoil announced certain actions intended
to increase capital available for investment and growth
opportunities. Pennzoil announced that, in addition to the
adoption of SFAS No. 121 (See "- Results of Operations"), it was
implementing a new program intended to reduce annual general and
administrative expenses, thereby resulting in future annual cost
savings, and it was reducing its fourth quarter dividend payment to
$0.25 per share from the $0.75 per share quarterly dividend that
had been made since 1988. At the reduced quarterly dividend level,
equivalent to an annualized dividend of $1.00 per share, Pennzoil
will conserve $92 million annually which can be used for investment
and growth opportunities.
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 Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Oil and Gas $ 166,700 $ 181,737 $ 557,719 $ 596,054
Motor Oil & Refined Products 380,801 405,954 1,159,802 1,150,933
Franchise Operations 76,791 65,403 216,790 192,757
Sulphur - 18,019 - 48,846
Other 15,353 5,488 70,809 43,744
Intersegment sales (39,633) (44,947) (123,155) (126,795)
----------- ----------- ----------- -----------
Total revenues $ 600,012 $ 631,654 $1,881,965 $1,905,539
=========== =========== =========== ===========
OPERATING INCOME (LOSS)
Oil and Gas $ 19,548 $ (102,852) $ 64,931 $ (11,145)
Motor Oil & Refined Products 11,891 (15,993) 39,550 26,365
Franchise Operations 5,416 (2,155) 10,314 (557)
Sulphur - (51,520) - (58,656)
Impairment of long-lived assets (399,830) - (399,830) -
Other 10,475 4,676 58,389 39,378
----------- ----------- ----------- -----------
Total operating loss (352,500) (167,844) (226,646) (4,615)
Corporate administrative expenses 15,234 17,426 49,418 52,856
Interest charges, net 48,322 338,609 144,568 423,779
----------- ----------- ----------- -----------
Loss before income tax (416,056) (523,879) (420,632) (481,250)
Income tax benefit (140,770) (224,077) (143,299) (208,996)
----------- ----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (275,286) (299,802) (277,333) (272,254)
Cumulative effect of change in accounting principle - - - (4,948)
----------- ----------- ----------- -----------
NET LOSS $ (275,286) $ (299,802) $ (277,333) $ (277,202)
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES - -
=========== ===========
AMOUNT BY WHICH FIXED CHARGES EXCEED EARNINGS $ 424,080 $ 488,159
=========== ===========
14
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 64,604 71,930 69,139 67,210
Natural gas produced for sale (Mcf per day) 662,923 732,781 687,863 704,524
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 14.00 $ 14.72 $ 14.46 $ 13.65
Natural gas (per Mcf) $ 1.32 $ 1.65 $ 1.39 $ 1.92
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 19,586 25,357 20,168 25,298
Distillates and gas oils 24,681 31,094 27,148 30,509
Lubricating oil and other specialty products 22,156 24,447 23,435 23,332
Residual fuel oils 3,140 2,956 3,654 3,371
----------- ----------- ----------- -----------
Total sales (barrels per day) 69,563 83,854 74,405 82,510
=========== =========== =========== ===========
Raw materials processed (barrels per day) 50,650 61,844 53,492 59,056
Refining capacity (barrels per day) <F1> 62,700 70,700 62,700 70,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 171,627 $ 157,316 $ 491,839 $ 448,904
Same center sales (in thousands) $ 163,068 $ 155,479 $ 466,636 $ 442,968
Centers open (U.S.) 1,165 1,098 1,165 1,098
<FN>
<F1>
As of September 1994, Pennzoil stopped processing
crude oil at its refinery in Roosevelt, Utah. The
Roosevelt Refinery had a refining capacity of
8,000 barrels per day.
</FN>
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) In April 1994, a lawsuit styled Lazy Oil, Inc. vs. Witco
Corporation; Quaker State Corporation; and Pennzoil Company, was
filed in the United States District Court for the Western
District of Pennsylvania. Three other suits, Andreassi vs. Witco
Corporation; Quaker State Corporation; and Pennzoil Company and
Thomas A. Miller Oil vs. Witco Corporation; Quaker State
Corporation; and Pennzoil Company, and Wynnewood Drilling
Associates v. Witco Corporation; Quaker State Corporation; Quaker
State Oil Refining Corporation; Pennzoil Company; and Pennzoil
Products Company, were also filed in 1994, containing allegations
substantially identical to those in the Lazy Oil case. All four
suits have been consolidated for discovery and trial. The
consolidated case, styled Lazy Oil Co., John B. Andreassi and
Thomas A. Miller Oil Co. on behalf of themselves and others
similarly situated vs. Witco Corporation; Quaker State
Corporation; Quaker State Oil Refining Corp.; Pennzoil Company
and Pennzoil Products Company is currently pending in the United
States District Court for the Western District of Pennsylvania,
Erie Division. This class action suit alleges that, from as
early as 1981 to the present, the defendants engaged in a
combination and conspiracy in unreasonable restraint of trade in
violation of Section 1 of the Sherman Act, by allegedly acting to
fix, lower, maintain and stabilize the purchase price of "Penn
Grade crude" sold by the plaintiffs and the other purported class
members to the defendants. The plaintiffs also allege that the
defendants have fraudulently concealed their alleged combination
and conspiracy. The plaintiffs seek injunctive relief, alleged
damages sustained by the plaintiffs and the putative class
members and recovery of attorneys' fees and costs. Plaintiffs'
motion for class certification was not opposed by defendants, and
the Court had certified a class of plaintiffs consisting of all
person who sold "Penn Grade crude" to any of the defendants
between 1981 and June 30, 1995. Pennzoil is contesting the case
vigorously.
(b) In October 1995, Pennzoil Exploration and Production
Company, Pennzoil International, Inc., and Pennzoil Caspian
Corporation (collectively "Pennzoil") filed an action, styled
Pennzoil Exploration and Production Company, et al. v. Ramco
Energy Limited and Ramco Hazar Energy Limited, in the United
States District Court for the Southern District of Texas, Houston
Division, against Ramco Energy Limited and its subsidiary Ramco
Hazar Energy Limited (collectively "Ramco"). The federal suit
seeks to compel Ramco to arbitrate certain disputes that have
arisen between it and Pennzoil pursuant to the Federal
Arbitration Act and the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards. After the filing of the
federal action, Pennzoil filed an Original Petition for
Declaratory Relief in the 281st Judicial District Court of Harris
County, Texas. The state suit, styled Pennzoil Exploration and
Production Company, et al. v. Ramco Energy Limited and Ramco
Hazar Energy Limited, which is expressly conditioned upon a
determination in the federal suit that the disputes between
Pennzoil and Ramco are not subject to arbitration, seeks a
declaration that Pennzoil has not breached any agreement with
Ramco, and does not owe and/or has not breached any fiduciary or
other legal duty to Ramco including, without limitation, a duty
of good faith and fair dealing.
16
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, 1995 and 1994.
27 Financial Data Schedule
(b) Reports -
Pennzoil filed with the Securities and Exchange Commission a
current report on Form 8-K dated October 26, 1995 which included
two press releases dated October 26, 1995 as exhibits.
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 Michael J. Maratea
Michael J. Maratea
Controller
November 13, 1995