<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NO. 1-5591
PENNZOIL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (713) 546-4000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, par value $0.83 1/3 per share New York Stock Exchange
Pacific Stock Exchange
Debentures New York Stock Exchange
</TABLE>
6 1/2% Exchangeable Senior Debentures due January 15, 2003
4 3/4% Exchangeable Senior Debentures due October 1, 2003
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
/ /
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $2.5 billion as of March 1, 1994.
Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date, March 1, 1994: Common Stock, par value
$0.83 1/3 per share -- 45,940,688
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE COMPANY'S 1994
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF (TO THE EXTENT SET FORTH IN ITEMS 10, 11, 12 AND 13 OF PART III OF THIS
ANNUAL REPORT ON FORM 10-K).
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<PAGE> 2
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.
Pennzoil Company ("Pennzoil") is a natural resource company engaged
primarily in oil and gas exploration and production, in processing, refining and
marketing of oil and motor oil and automotive products and in mining and
marketing of sulphur. Pennzoil's operations are conducted primarily through
subsidiaries. Pennzoil Exploration and Production Company ("PEPCO") and Pennzoil
Petroleum Company ("Pennzoil Petroleum") conduct the majority of Pennzoil's oil
and gas exploration and production operations. The refining of oil and the
processing and marketing of motor oil, automotive products and industrial
specialties are conducted by Pennzoil Products Company ("PPC"). Jiffy Lube
International, Inc. ("Jiffy Lube") franchises, owns and operates automotive fast
lubrication and fluid maintenance service centers. Pennzoil Sulphur Company
("PSC"), a division of Pennzoil, conducts Pennzoil's sulphur mining and
marketing operations. Richland Development Corporation ("Richland") manages
Pennzoil's real estate holdings and provides staff support for Pennzoil and its
subsidiaries.
As of December 31, 1993, Pennzoil beneficially owned 9,035,518 shares of
common stock of Chevron Corporation ("Chevron"), which have been deposited with
exchange agents for possible exchange for $402.5 million and $500.0 million
principal amount of exchangeable debentures of Pennzoil due January 15, 2003 and
October 1, 2003, respectively, at exchange rates equivalent to $84 1/8 and
$117 5/8 per Chevron share, respectively. At current dividend rates, Pennzoil
receives $33.4 million annually in dividends on the 9,035,518 Chevron shares.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" for
additional information.
INDUSTRY SEGMENT FINANCIAL INFORMATION
The tabular presentation below sets forth certain financial information
regarding Pennzoil's industry segments (i.e., oil and gas, motor oil and
automotive products, franchise operations and sulphur). Pennzoil's foreign
operations historically have not been material in relation to consolidated
revenues, operating income and identifiable assets.
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Oil and Gas............................................. $ 878,630 $ 568,819 $ 457,015
Motor Oil & Automotive Products......................... 1,507,563 1,509,777 1,521,159
Franchise Operations.................................... 219,865 174,386 129,678
Sulphur................................................. 74,021 147,964 225,518
Other(1)................................................ 258,129 105,395 129,509
Intersegment sales(2)................................... (155,841) (149,660) (148,040)
---------- ---------- ----------
$2,782,367 $2,356,681 $2,314,839
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS)
Oil and Gas............................................. $ 159,180 $ 134,655 $ 48,643
Motor Oil & Automotive Products......................... 90,029 77,925 108,313
Franchise Operations.................................... (17,573) (13,422) (7,795)
Sulphur................................................. (20,763) 1,033 42,742
Other(1)................................................ 253,668 88,168 127,841
---------- ---------- ----------
Total operating income........................ 464,541 288,359 319,744
Corporate administrative expense........................ 65,552 65,103 56,210
Interest expense, net................................... 179,548 224,629 243,496
Income tax (benefit).................................... 59,205 (18,783) (20,060)
---------- ---------- ----------
Income from continuing operations....................... $ 160,236 $ 17,410 $ 40,098
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(Table continued on following page)
1
<PAGE> 3
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Oil and Gas(3).......................................... $2,059,115 $1,988,007 $1,321,424
Motor Oil & Automotive Products......................... 656,313 609,753 620,545
Franchise Operations.................................... 305,669 289,791 270,159
Sulphur................................................. 100,888 114,035 144,435
Other................................................... 177,353 176,173 165,004
Corporate............................................... 1,590,766 1,285,097 2,375,800
Net assets of discontinued operations(4)................ -- -- 229,202
Intersegment eliminations............................... (3,901) (5,679) (18,619)
---------- ---------- ----------
$4,886,203 $4,457,177 $5,107,950
---------- ---------- ----------
---------- ---------- ----------
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Oil and Gas............................................. $ 275,489 $ 175,442 $ 143,600
Motor Oil & Automotive Products......................... 27,014 23,415 26,929
Franchise Operations.................................... 14,123 11,344 7,921
Sulphur................................................. 8,386 6,130 7,823
Other................................................... 805 859 1,011
Corporate............................................... 5,162 5,355 5,269
--------- --------- ---------
$ 330,979 $ 222,545 $ 192,553
--------- --------- ---------
--------- --------- ---------
CAPITAL EXPENDITURES(5)(6)
Oil and Gas............................................. $ 360,496 $1,103,212 $ 177,905
Motor Oil & Automotive Products......................... 71,535 35,841 32,260
Franchise Operations.................................... 21,701 25,810 4,939
Sulphur................................................. 2,295 2,898 6,999
Other................................................... 329 2,906 3,174
Corporate............................................... 28,766 1,331 4,717
--------- ---------- ---------
$ 485,122 $1,171,998 $ 229,994
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
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(1) In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock
for a net price of $88.38 per share, resulting in a pretax gain of $171.6
million. For 1992 and 1991, these amounts primarily represent dividend
income from Pennzoil's investment in Chevron common stock.
(2) Substantially all intersegment sales, which are priced at market, are from
the oil and gas segment to the motor oil and automotive products segment.
(3) In 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 a Chevron subsidiary subsequently
renamed Pennzoil Petroleum. Reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources and Liquidity" and Note 10 of Notes to Consolidated Financial
Statements for additional information.
(4) In 1992, Pennzoil sold all its shares of capital stock of Purolator
Products Company ("Purolator"). Purolator's net assets and results of
operations for all periods have been reclassified as discontinued
operations for financial reporting purposes. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Discontinued Operations" and Note 11 of Notes to Consolidated
Financial Statements for additional information.
(5) Includes interest capitalized of $11,420,000, $8,731,000 and $10,447,000 in
1993, 1992 and 1991, respectively.
(6) For 1992, capital expenditures for the oil and gas segment include
$1,009,410,000 allocated to the oil and gas properties added as a result of
the acquisition of Pennzoil Petroleum. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity" and Note 10 of Notes to
Consolidated Financial Statements for additional information.
Narrative descriptions of these business segments follow, with emphasis on
1993 developments. Unless otherwise indicated by the context, references to
Pennzoil include its subsidiaries.
2
<PAGE> 4
OIL AND GAS
In the oil and gas segment, Pennzoil engages in the acquisition,
exploration, exploitation and development of prospective and proved oil and gas
properties, the production and sale of crude oil, condensate and natural gas
liquids and the production, treatment and sale of natural gas. The bulk of
Pennzoil's production is derived from established fields in Texas, Louisiana,
West Virginia, Pennsylvania, Utah and federal waters offshore Louisiana, Texas
and California.
In 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, which owns Gulf of Mexico, Gulf
Coast, Permian Basin and other domestic oil and gas producing properties.
Pennzoil Petroleum's results subsequent to October 30, 1992 have been included
in Pennzoil's oil and gas segment results. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 10 of Notes to Consolidated Financial Statements for additional
information.
OIL AND GAS RESERVES. The following table sets forth information regarding
Pennzoil's net proved reserves and the present value (discounted at 10%) of the
estimated future net cash flows before deduction of income taxes from the
production and sale of those reserves, as reported by Ryder Scott Company
Petroleum Engineers, Houston, Texas ("Ryder Scott") in accordance with criteria
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 69,
"Disclosures About Oil and Gas Producing Activities." The summary report of
Ryder Scott on the reserve estimates as of December 31, 1993, which includes
certain definitions and assumptions, is set forth as an exhibit to this Annual
Report on Form 10-K. Such information as to reserve estimates includes reserves
of each of Pennzoil Petroleum, PEPCO, PPC and Pennzoil. The summary reports of
Ryder Scott on the reserve estimates as of December 31, 1992 and 1991 are
included in Pennzoil's previously filed Annual Reports on Form 10-K for the
respective years.
Information regarding ownership interests, prices, costs and other factual
data was furnished to Ryder Scott by Pennzoil. To facilitate timely issuance of
the reserve estimates, estimated production data were used for the last few
months of each year. Pennzoil believes that use of the actual production data
would not have resulted in any material change in the estimates of reserves or
pretax future net cash flows.
<TABLE>
<CAPTION> ----------------------------
TOTAL PROVED RESERVES
----------------------------
DECEMBER 31
----------------------------
1993 1992(1) 1991
------ ------- ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids
(millions of barrels)
United States......................................... 199 218 137
Foreign............................................... 2 2 2
------ ------ ------
201 220 139
------ ------ ------
------ ------ ------
Natural gas (Bcf)
United States(2)...................................... 1,453 1,617 892
Foreign............................................... 38 35 34
------ ------ ------
1,491 1,652 926
------ ------ ------
------ ------ ------
Present value (10% discount rate) of estimated future net
cash flows before deduction of income taxes (in
millions)(3)
United States......................................... $2,213 $2,484 $1,370
Foreign............................................... 45 35 39
------ ------ ------
$2,258 $2,519 $1,409
------ ------ ------
------ ------ ------
</TABLE>
(Table continued on following page)
3
<PAGE> 5
<TABLE>
<CAPTION>
PROVED DEVELOPED RESERVES
----------------------------
DECEMBER 31
----------------------------
1993 1992(1) 1991
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids
(millions of barrels)
United States.............................................. 162 181 108
Foreign.................................................... 2 2 2
------ ------ ------
164 183 110
------ ------ ------
------ ------ ------
Natural gas (Bcf)
United States(2)........................................... 1,306 1,412 803
Foreign.................................................... 35 34 34
------ ------ ------
1,341 1,446 837
------ ------ ------
------ ------ ------
Present value (10% discount rate) of estimated future net
cash flows before deduction of income taxes (in
millions)(3)
United States.............................................. $2,049 $2,263 $1,297
Foreign.................................................... 40 35 39
------ ------ ------
$2,089 $2,298 $1,336
------ ------ ------
------ ------ ------
</TABLE>
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(1) The increase in United States total proved reserves in 1992 was primarily
attributable to the acquisition of Pennzoil Petroleum. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 10 of Notes to Consolidated Financial Statements for
additional information.
(2) United States natural gas reserves for 1993, 1992 and 1991 exclude 162 Bcf,
124 Bcf and 129 Bcf, respectively, of carbon dioxide gas for sale or use in
Pennzoil's operations.
(3) Reference is made to "Supplemental Financial and Statistical Information --
Unaudited -- Oil and Gas Information" on pages F-33 through F-39 hereof for
additional information regarding Pennzoil's proved reserves and estimated
future net revenues therefrom, including presentation of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves calculated in
accordance with SFAS No. 69.
No significant change in Pennzoil's proved reserves as set forth above has
occurred as a result of any major discovery or other event since December 31,
1993.
No estimates of Pennzoil's total proved net oil or gas reserves have been
filed with or included in reports to any federal authority or agency other than
the Securities and Exchange Commission ("SEC") since January 1, 1993.
4
<PAGE> 6
OIL AND GAS PROPERTIES. The following table shows Pennzoil's developed and
undeveloped oil and gas acreage as of December 31, 1993.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE(1) ACREAGE(2)
----------------- -----------------
GROSS NET GROSS NET
----- ----- ----- -----
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
United States
Alabama..................................... 15 7 -- --
Arkansas.................................... 27 5 31 10
Colorado.................................... -- -- 35 35
Kansas...................................... 40 37 1 --
Louisiana................................... 259 203 47 41
Michigan.................................... 2 1 6 3
Mississippi................................. 23 18 16 12
Montana..................................... -- -- 352 170
New Mexico.................................. 35 25 695 692
New York.................................... 16 14 5 4
North Dakota................................ 4 2 -- --
Ohio........................................ 6 6 1 1
Oklahoma.................................... 2 1 17 5
Pennsylvania................................ 191 158 181 161
Texas....................................... 582 398 97 53
Utah........................................ 113 73 60 33
West Virginia............................... 396 365 81 61
United States Waters
Offshore Alabama......................... 13 8 -- --
Offshore Alaska.......................... 7 1 39 8
Offshore California...................... 4 1 11 3
Offshore Florida......................... -- -- 11 2
Offshore Louisiana....................... 409 216 131 88
Offshore Mississippi..................... 28 8 -- --
Offshore Texas........................... 159 62 128 114
----- ----- ----- -----
Total United States........................... 2,331 1,609 1,945 1,496
Foreign(3)
Canada...................................... 142 44 183 118
Papua New Guinea............................ -- -- 1,980 396
Indonesia................................... -- -- 690 100
----- ----- ----- -----
Total Foreign................................. 142 44 2,853 614
----- ----- ----- -----
Total......................................... 2,473 1,653 4,798 2,110
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ---------------
(1) Developed acreage represents the spacing units or other acreage assignable
to productive wells.
(2) Undeveloped acreage is acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether such acreage contains
proved reserves.
(3) Acreage in foreign areas other than Canada is operated under production
sharing arrangements, service contracts or other contractual arrangements
not involving lease or fee ownership.
5
<PAGE> 7
The following table shows the approximate number of Pennzoil's productive
oil and gas wells as of year end. Productive wells consist of producing wells
and wells capable of production in commercial quantities.
<TABLE>
<CAPTION>
GROSS WELLS(1) NET WELLS(1)
------------------------- -----------------------
1993 1992 1991 1993 1992 1991
------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil
United States(2).................. 7,632 10,528 4,688 4,316 4,667 2,785
Foreign........................... 330 356 358 52 57 59
Natural gas
United States(2).................. 2,243 3,068 2,544 1,237 1,373 1,364
Foreign........................... 114 119 117 22 26 26
------ ------ ----- ----- ----- -----
10,319 14,071 7,707 5,627 6,123 4,234
------ ------ ----- ----- ----- -----
------ ------ ----- ----- ----- -----
</TABLE>
- ---------------
(1) "Gross Wells" includes all wells in which Pennzoil has an interest. "Net
Wells" reflects Pennzoil's percentage ownership interest in each "Gross
Well." One or more completions in the same bore hole are counted as one
well. Any well in which one of multiple completions is an oil completion is
classified as an oil well.
(2) The increase in 1992 gross and net wells is primarily attributable to the
acquisition of Pennzoil Petroleum. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 10 of Notes to Consolidated Financial Statements for additional
information.
PRODUCTION AND SALES. The following table summarizes the average daily
production of Pennzoil, net of all royalties, overriding royalties and other
outstanding interests for the periods indicated. Natural gas production refers
only to marketable production of natural gas on an "as sold" basis.
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (barrels per
day)
United States(1)............................................ 63,294 38,430 29,916
Foreign..................................................... 979 1,032 981
------- ------- -------
64,273 39,462 30,897
------- ------- -------
------- ------- -------
Natural gas (Mcf per day)
United States............................................... 641,111 443,905 397,629
Foreign..................................................... 8,288 3,656 3,331
------- ------- -------
649,399 447,561 400,960
------- ------- -------
------- ------- -------
</TABLE>
- ---------------
(1) Excludes natural gas liquids production obtained as a result of processing
plant ownership of 274, 224 and 309 barrels per day for 1993, 1992 and
1991, respectively.
The following table shows the weighted average sales prices received by
Pennzoil for its production and the average production (lifting) costs per unit
of production.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per barrel)....... $14.90 $14.45 $14.90
Natural gas (per Mcf)............................................ $ 2.05 $ 1.32 $ 2.04
Production (lifting) costs per equivalent barrel(1)(2)........... $ 4.16 $ 4.02 $ 4.16
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per barrel)....... $16.97 $16.17 $16.95
Natural gas (per Mcf)............................................ $ 1.81 $ 1.05 $ 1.81
Production (lifting) costs per equivalent barrel(1)(2)........... $ 3.97 $ 4.05 $ 3.98
</TABLE>
(Table continued on following page)
6
<PAGE> 8
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1991
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per barrel)....... $18.30 $18.32 $18.30
Natural gas (per Mcf)............................................ $ 1.54 $ 1.14 $ 1.54
Production (lifting) costs per equivalent barrel(1)(2)........... $ 4.17 $ 5.38 $ 4.19
</TABLE>
- ---------------
(1) For purposes of providing common units of measure, natural gas is converted
to a Btu-equivalent barrel of liquid on the basis of relative energy
content (6 Mcf per barrel).
(2) Production (lifting) costs are costs incurred to operate and maintain wells
and related equipment and facilities. They do not include depreciation,
depletion and amortization of capitalized acquisition, exploration and
development costs, exploration expenses, general and administrative
expenses, interest expense or income tax. Differences between sales prices
and production (lifting) costs do not represent profit.
Pennzoil sells its crude oil and condensate production generally at posted
field prices less any applicable transportation charges, its natural gas liquids
production at negotiated prices and its natural gas production generally under a
combination of 30-day spot, short-term and long-term sales contracts.
Pennzoil has substantial control in marketing its natural gas production.
Pennzoil's natural gas marketing efforts are primarily constrained only by
normal free marketplace competition and by regulatory limitations generally
described below under the caption "Government Regulation."
Since 1986, Pennzoil has restricted spot gas sales from time to time during
periods when prices have fallen below levels considered acceptable. Pennzoil did
not restrict spot gas sales in 1993.
DRILLING ACTIVITY. The following table shows Pennzoil's net productive and
dry exploratory and development wells completed for the periods shown.
Completion occurs upon the installation of permanent equipment for the
production of oil or gas, or, in the case of dry holes, upon reporting
abandonment to the appropriate regulatory agency.
<TABLE>
<CAPTION>
NET EXPLORATORY NET DEVELOPMENT
WELLS WELLS
-------------------- ---------------------
1993 1992 1991 1993 1992 1991
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Oil Wells(1)
United States.................................... 1.3 0.9 4.4 41.3 18.2 53.6
Foreign.......................................... -- -- -- -- 0.1 --
Gas Wells(1)
United States.................................... 13.0 0.9 9.6 29.7 6.2 44.1
Foreign.......................................... -- 1.5 0.9 2.2 -- --
Dry Holes(2)
United States.................................... 2.6 0.8 8.1 1.0 -- 0.4
Foreign.......................................... 2.0 0.1 2.0 -- 1.0 --
---- ---- ---- ---- ---- -----
18.9 4.2 25.0 74.2 25.5 98.1
---- ---- ---- ---- ---- -----
---- ---- ---- ---- ---- -----
</TABLE>
- ------------
(1) For purposes of this tabulation, a productive well is an exploratory or a
development well that is not a dry hole. One or more completions in the
same bore hole are counted as one well. Any well in which one of multiple
completions is an oil completion is classified as an oil well.
(2) A dry hole is an exploratory or development well found to be incapable of
producing either oil or gas in sufficient quantities to justify completion
as an oil or gas well.
As of December 31, 1993, Pennzoil was participating in the drilling or
awaiting completion of 58 gross (47 net) wells onshore and 14 gross (10 net)
wells offshore the United States.
7
<PAGE> 9
EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES. 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, which owns Gulf of Mexico, Gulf Coast,
Permian Basin and other domestic oil and gas producing properties. The exchange
of stock has been accounted for using the purchase method of accounting, and
Pennzoil Petroleum's results of operations subsequent to October 30, 1992 have
been included in Pennzoil's oil and gas segment results. During the four-month
period between the "effective date" and the closing date of the transaction,
Chevron continued operation of the Pennzoil Petroleum oil and gas properties
and, immediately prior to closing, contributed $57.4 million in cash to Pennzoil
Petroleum (for the benefit of Pennzoil), representing the cash flow from
Pennzoil Petroleum's operations during this four-month period, less production
costs, provisions for taxes and approximately $11 million of nonrecurring
closing adjustments. As a result of an audit completed during 1993, Chevron
contributed an additional $9.9 million in cash to Pennzoil Petroleum,
representing an adjustment to the initial $57.4 million cash contribution made
by Chevron to Pennzoil Petroleum prior to closing.
During 1993, Pennzoil's domestic business focused on assimilating the
Pennzoil Petroleum properties acquired from Chevron, building the investment
program, controlling operating costs, rationalizing the asset portfolio and
reversing a declining production trend. The Pennzoil Petroleum properties added
about 70% to Pennzoil's 1992 proved reserve base and are believed to possess
significant additional reserves. During 1993, geologic, engineering and
accounting data were transferred from Chevron and field studies were begun to
define the additional potential. These studies provided the basis for an upswing
in the capital investment program, which occurred during the second half of
1993. The investment program in both the Pennzoil Petroleum properties and
Pennzoil's existing portfolio is exploitation led, concentrating on potential in
and around known accumulations rather than traditional high risk exploration.
The program is based primarily upon the techniques of 3-D seismic interpretation
in the Gulf of Mexico, microstratigraphic studies in the Gulf Coast region and
waterflood rejuvenation in West Texas. Capital expenditures in North America
increased consistently during 1993 from $23.4 million in the first quarter to
$105.0 million in the fourth quarter.
In the Gulf of Mexico, approximately 85% of Pennzoil's core properties are
covered by 3-D seismic surveys. Where applicable, the use of 3-D seismic surveys
allows Pennzoil to better define its drilling objectives and, therefore, reduce
drilling risk. Application of this technique can, in certain cases, provide
substantial reversals in declining production from mature fields. For example,
production from the Eugene Island 330 Field, operated by Pennzoil, has tripled
since Pennzoil's acquisition and successful application of 3-D seismic
information with respect to the field, which is now producing at its highest
rate in 12 years. During 1993, successful exploitation programs were also
implemented in South Marsh Island 23, West Cameron 587, Main Pass 141, Eugene
Island 316, High Island 140 and other blocks in the surrounding areas. In 1993,
Pennzoil continued its low-cost exploitation of Cotton Valley and Travis Peak
formations of the Carthage Field. Other Gulf Coast region exploitation focused
primarily on the Wilcox trend in South Texas and the Frio sands along the coast.
The Permian Basin has also become a core area for Pennzoil with the acquisition
of Pennzoil Petroleum. Pennzoil's share of production from the Harvest Platform
offshore California increased from about 4,500 barrels per day in late 1992 to
over 8,000 barrels per day during the fourth quarter of 1993. In West Virginia,
the Stringtown Field waterflood was expanded and preparations were begun to
waterflood the Wolf Summit Field. As part of its effort to focus on core
businesses, Pennzoil has initiated a program to dispose of its West Virginia
noncore oil and gas fields, gas gathering pipelines and gas public utility
during 1994.
Controlling operating costs is of critical importance in maturing fields,
such as Pennzoil's high-cost areas in West Texas, the Bluebell Field in Utah and
West Virginia/Pennsylvania fields. Operating cost efficiencies were realized in
these areas by realigning waterfloods, establishing vendor alliances, selling
noncore properties in West Texas, reducing drilling costs at Bluebell and
reducing assets and staff in West Virginia/Pennsylvania.
Pennzoil began 1993 with interests in approximately 800 producing fields.
The majority of the value associated with these producing properties is
concentrated in approximately 100 core fields, with the remaining fields
generally containing minor reserves and/or small Pennzoil-owned working
interests. As a result of an asset highgrading program initiated in 1993,
Pennzoil disposed of approximately 300 of these fields, which in the aggregate
represented less than 3% of the total value of Pennzoil's proved oil and gas
reserves. Pennzoil
8
<PAGE> 10
realized gains of $34.9 million from these asset sales on total proceeds of
$87.5 million. In addition, four asset swaps were finalized during 1993 to
increase working interests in core Gulf of Mexico fields. Pennzoil intends to
continue disposal of noncore properties during 1994, with the proceeds from
these sales intended for reinvestment in or reallocation to Pennzoil's core
properties.
Internationally, Pennzoil in 1992 announced agreements for the exclusive
right to negotiate with the Azerbaijan Republic and the State Oil Company of the
Azerbaijan Republic ("SOCAR") to develop the Guneshli Field offshore Azerbaijan
in the southern portion of the Caspian Sea. In May 1993, the Azeri government
announced its intention to jointly develop, under a unified development plan,
three fields (the Guneshli, Chirag and Azeri Fields) then under negotiation with
western oil companies. In October 1993, the group of eight western oil
companies, including Pennzoil, entered into an Area of Mutual Interest ("AMI")
agreement that reaffirmed the equity distribution among the companies set out in
a Declaration of Unitization previously signed by the western oil companies and
SOCAR and established the basis for the companies' development of the
three-field unit. Subsequently, during October 1993, the Azeri government
elected to withdraw the Guneshli Field from the unit to be developed by the
western oil companies and develop the Guneshli Field on its own. Under the terms
of the AMI agreement, Pennzoil and Ramco Energy Ltd. of Scotland will have a 17%
working interest in any development of the three fields by the western oil
companies party to the AMI agreement, including the current two-field unit
composed of the Chirag and Azeri Fields.
Also in Azerbaijan, Pennzoil continued work on a comprehensive gas
gathering and compression system during 1993. This project is designed to
capture, compress and transport to shore approximately 150 million cubic feet
per day of gas presently being vented from the Guneshli Field. The gas
utilization project accounted for approximately $98 million of the $361 million
in capital expenditures for the oil and gas segment in 1993. Pennzoil has signed
a gas utilization agreement with SOCAR that provides for recovery of Pennzoil's
costs incurred in connection with the gas utilization project by payment in hard
currency or oil or petroleum products or by a credit against a signature bonus
for the first exploration, exploitation and/or development contract entered into
between Pennzoil and SOCAR in Azerbaijan. The gas utilization project should be
completed during the first quarter of 1994. Pennzoil's total investment related
to its Azerbaijan activities, including the gas utilization project, was $116
million as of December 31, 1993.
In the Russian Federation, Pennzoil has an interest in a joint venture
formed with a Russian partner, Agansk Geological Enterprise, to appraise and
evaluate the West Mogotlorsk oil field in western Siberia. At year end, a
long-term production test was underway.
In Indonesia, a declaration of commerciality for the Madura Straits Block
was issued by the Indonesian state oil company in January 1993. Operations are
presently suspended awaiting negotiation of a gas sales contract.
Pennzoil's capital budget currently provides that its capital expenditures,
including interest capitalized, for domestic and international petroleum
exploration and development during 1994 will total approximately $223.9 million,
net of expected recoveries from the gas utilization project discussed above,
compared to approximately $360.5 million of capital expenditures in 1993.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" for
additional information.
Pennzoil conducts or participates in certain offshore oil and gas
operations which are subject to the hazards of marine operations, such as
capsizing, collision and adverse weather and sea conditions, as well as risks of
blowouts and fires, which are generally present in all oil and gas drilling. In
the past, production from offshore blocks has been delayed on several occasions
as a result of pipeline breaks, hurricanes, blowouts and other unforeseen
events.
MOTOR OIL & AUTOMOTIVE PRODUCTS
Pennzoil's motor oil and automotive products operations are conducted by
PPC. These operations include the procurement and refining of crude oil and the
blending, packaging and marketing of motor oil and automotive products.
9
<PAGE> 11
MANUFACTURING. PPC owns and operates two lube oil and specialty refineries,
one located near Oil City, Pennsylvania and the other, operated by PPC's wholly
owned subsidiary Atlas Processing Company ("Atlas"), located in Shreveport,
Louisiana. The paraffinic lube base stocks produced by these refineries are used
primarily in the blending of motor oil and other lubricants by PPC's marketing
division. The lube oil and specialty refineries also produce waxes, petrolatums,
special cut kerosenes, transformer oils, process oils and other naphthenic base
oils for use in producing industrial specialty products or for sale to
industrial customers. Jet fuel is also supplied by the Shreveport refinery to
several commercial airlines.
A third PPC refinery, located at Roosevelt, Utah, primarily produces
gasoline and diesel fuels. Gasoline and distillate production from PPC's
refineries is marketed locally and through exchanges with other marketers.
The profitability of Pennzoil's refineries is directly affected by the
supply and price of the grade and quality of crude oil purchased or otherwise
obtained for refinery throughput. Because of shortages in the supply of crude
oil meeting the unique grade and quality requirements for each of Pennzoil's
refineries, and possible declining refinery margins resulting from such
shortages, Pennzoil continually considers and evaluates crude oil supply
arrangements for each of its refineries and the corresponding impact on the
operating profitability of the affected refineries. In response to these crude
oil supply shortages, Pennzoil is evaluating, among other things, the
feasibility of increasing production from nearby fields and the possible
reduction or consolidation of refinery operations. The magnitude and timing of
crude oil supply shortages, and the resultant impact on Pennzoil's operating
results and business operations, cannot be predicted with accuracy.
The following table sets forth information with respect to raw material
supplied and processed, refining capacity and utilization of PPC's refineries
during the years indicated.
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(BARRELS PER DAY EXCEPT
PERCENTAGES)
<S> <C> <C> <C>
Raw Material
Supplied
Crude oil and condensate
Pennzoil's domestic production.......................... 22,623 19,829 19,300
Purchased from others................................... 36,062 38,596 42,213
Net decrease in inventory................................. 537 30 392
------ ------ ------
59,222 58,455 61,905
------ ------ ------
------ ------ ------
Processed
Oil City, Pennsylvania.................................... 15,629 15,576 16,104
Shreveport, Louisiana..................................... 37,356 36,424 39,375
Roosevelt, Utah........................................... 6,237 6,455 6,426
------ ------ ------
59,222 58,455 61,905
------ ------ ------
------ ------ ------
Refining capacity (at year end)
Oil City, Pennsylvania....................................... 16,500 16,500 16,500
Shreveport, Louisiana........................................ 46,200 46,200 46,200
Roosevelt, Utah.............................................. 8,000 8,000 8,000
------ ------ ------
70,700 70,700 70,700
------ ------ ------
------ ------ ------
Refinery utilization........................................... 83.8% 82.7% 87.6%
------ ------ ------
------ ------ ------
</TABLE>
PPC purchases from others the requirements of its marketing operations not
produced in its own refineries.
PPC owns and operates two lubricating specialty plants located in Karns
City, Pennsylvania and Dickinson, Texas. These plants manufacture petrolatums,
white oils, ink solvents, sulfonates, waxes and other specialty petroleum
products using feedstocks from PPC's refineries. These products are marketed by
PPC's PENRECO(R) and MAGIE BROS(R) divisions directly to manufacturers and
end-users. Additionally, Pennzoil
10
<PAGE> 12
continues to expand industrial specialty sales into international markets,
particularly in Asia, South America and Central America.
PPC also owns the Eureka Pipe Line Company, which operates a crude oil
gathering system in West Virginia.
PPC continues to search for ways to reduce costs and improve quality
through more efficient manufacturing processes and purchasing and handling of
materials. An important goal for the division is to secure the supply of quality
base stocks necessary for the production of PENNZOIL(R) motor oils. A major
component of this effort involves negotiations and construction engineering
analyses for a state-of-the-art, 15,000 barrel per day base oil plant to be
built as a joint venture with Conoco, Inc. If approved, the plant, which would
be built at Conoco's Lake Charles, Louisiana refinery, would utilize the most
sophisticated technology available and would produce low-cost base oils. The
facility would be intended to make PPC substantially self-sufficient in
low-cost, high-quality lube base stocks. Additionally, engineering design is
under way for a residual catalytic cracking unit at the Atlas refinery, which
should substantially lower the effective cost of base oils produced at the
facility.
MARKETING. PENNZOIL(R) motor oil and lubricants are produced in six
domestic company-owned and operated blending and packaging plants (Alameda,
California; Portland, Oregon; Shreveport, Louisiana; Rouseville, Pennsylvania;
Vernon, California; and St. Louis, Missouri). In addition, two industrial
packaging plants, one located in Mundy's Corner, Pennsylvania and the other in
Marion, Illinois, produce lubricants for the commercial and industrial markets.
PENNZOIL(R) products are sold in all 50 states through 153 independent
distributors and 71 company-owned distribution facilities. Additionally,
PENNZOIL(R) brand gasoline is marketed through approximately 361 retail outlets
located in Pennsylvania, Ohio, New York, West Virginia, Tennessee, Kentucky,
Indiana, Utah and Colorado. Kerosenes, diesel oils, fuel oils and other
distillates are marketed at both the retail and wholesale levels through
distributors.
PPC competes with a number of other companies in the sale of motor oil and
automotive products. Competition is based on price, service and quality, with
quality being of particular importance in the case of motor oils and other
petroleum specialty products.
Domestically, growth in the motor oil industry is expected to remain low
for the foreseeable future. Changes in consumer buying habits and in
distribution channels used to bring products to market are expected to continue
to affect all motor oil marketers. Large mass merchandisers and auto parts
chains are expected to increasingly be the channel of choice for consumers who
buy and change their own motor oil. Consumers who have oil changes performed for
them are, in greater numbers, turning to "fast lube" outlets for this service.
PPC is also continuing its efforts to maintain PENNZOIL(R) as the leading
motor oil used by the installed market segment (fast lubes, service stations,
auto dealers, etc.). The installed market is expected to grow faster than the
industry as a whole. As consumers become increasingly concerned about the
environmental issues associated with changing their own oil, a continuing shift
to installers, who are generally better prepared to handle the disposition of
used oil and filters, is expected. Currently, nearly 40% of all oil changes are
done by installers. Fast lube operations, by making oil changes convenient for
the consumer, are capturing an even larger share of the installed market by
attracting consumers who no longer change their own oil as well as business from
the other installer outlets (service stations, auto dealers, etc.). This shift,
which has been occurring since the early 1980s, is expected to continue,
although at a slower rate than was experienced over most of the last decade. PPC
remains well positioned within the installed market segment and is continuing
its efforts to satisfy the needs of this customer group to assure that the
benefits associated with this expected growth will be fully realized.
PPC's GUMOUT(R) division is one of America's leading producers of fuel
injector and carburetor cleaners and other car care products. WOLF'S HEAD(R)
lubricants and related products, produced at a blending and packaging plant in
Reno, Pennsylvania, are marketed in substantially all states east of the
Mississippi River. PPC's consumer products division's sales, trade support
practices, pricing and use of media are being heavily influenced by major retail
changes taking place in the 1990s. The dominant retailers are becoming larger
and
11
<PAGE> 13
stronger and their demands on suppliers are increasing. Many retailers are
beginning to introduce their own brand names, resulting in a resurgence of
private label goods in many categories, including those in which the consumer
products division competes. In addition, consumers are accepting the Every Day
Low Price ("EDLP") concept as an alternative to sales, list prices and
markdowns. While these factors are generally characteristic of all PPC's
marketing businesses, these demands create disproportionate complexities for
smaller and/or local marketing units. As a result, the consumer products
division has made major changes in how retailers earned trade support funds in
1993, and, for 1994, has expanded its use of EDLP to include carburetor and fuel
injector cleaning systems. In addition, the division will continue to support
its 1994 marketing efforts through increased media expenditures.
Internationally, PENNZOIL(R) motor oil and lubricants are marketed in 59
foreign countries through 44 distributors, five licensees, three joint ventures
and seven company-owned distribution facilities. PPC has strong footholds in
many large markets and will continue to seize opportunities to increase
PENNZOIL(R) brand penetration in countries around the world. PPC will be active
in Europe in the next year, entering Austria, as well as expanding its presence
in Italy and Eastern Europe. During the first quarter of 1993, PPC finalized the
acquisition of a blending and packaging plant in Barcelona to support increasing
volume in southern Europe. PPC's Bolivian licensee started producing in the
second quarter of 1993. PPC also entered several countries in South America in
1993, including Ecuador, Peru and Chile. PPC will continue its expansion into
South American countries in 1994. Despite severe economic weakness in Australia,
PPC is well positioned to enjoy growth and profitability by capitalizing on an
excellent sales organization, and PPC expanded its presence to include all
states in Australia in 1993. In 1994, PPC will re-enter Indonesia, having
finalized a licensing agreement that will make PENNZOIL(R) that country's only
authorized foreign branded lubricant. PPC entered the Indian market in 1993
through a joint venture operation. In addition, 1993 marked the first complete
year that a nationwide sales force was in place in Canada. PPC expects to
continue its growth in Canada on the strength of its sales efforts and the brand
recognition enjoyed there due to the proximity to the United States.
PPC considers the above-mentioned trademarks used in its motor oil and
automotive products operations to have significant marketing value, primarily in
identifying Pennzoil and its products.
The following table sets forth information with respect to quantities sold
externally by the marketing and manufacturing operations during the years
indicated.
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(BARRELS PER DAY)
<S> <C> <C> <C>
Gasoline and naphtha................................. 25,106 23,873 22,281
Distillates and gas oils............................. 28,512 29,038 30,596
Lubricating oil and other specialty products......... 23,072 22,595 22,087
Residual fuel oils................................... 2,160 1,785 1,691
------ ------ ------
78,850 77,291 76,655
------ ------ ------
------ ------ ------
</TABLE>
FRANCHISE OPERATIONS
During 1990 and 1991, Pennzoil acquired all outstanding Jiffy Lube common
stock. Reference is made to Note 10 of Notes to Consolidated Financial
Statements for additional information.
Jiffy Lube franchises, owns and operates automotive fast lubrication and
fluid maintenance service centers. The service centers provide a JIFFY LUBE(R)
"Standard Service" that requires no customer appointment and can be completed in
approximately 10 minutes. The Standard Service consists of a 14-point preventive
maintenance program for motor vehicles, which includes oil change and filter
replacement, chassis lubrication, checking for proper tire inflation, window
washing, interior vacuuming, checking and topping off of transmission, brake,
differential, windshield washer, battery and power steering fluid levels and air
filter and windshield wiper blade examination. The service centers also provide
other authorized services and products at additional cost.
12
<PAGE> 14
At December 31, 1993, 1,081 JIFFY LUBE(R) service centers were open
worldwide, including 1,071 in the United States. Domestically, franchisees
operated 661 of the service centers and Jiffy Lube operated the remaining 410.
The service centers generally are clustered in metropolitan areas throughout the
United States.
SULPHUR
Pennzoil's sulphur operations are conducted by PSC, a division of Pennzoil.
PSC's sulphur operations include the mining and marketing of sulphur. PSC
produces and sells sulphur from its Culberson County property ("Culberson") in
West Texas. PSC also obtains sulphur recovered from oil and gas operations for
some of its domestic sales. Sulphur sales are made primarily to phosphate
industry customers for use in the manufacture of phosphate fertilizer materials.
RESERVES, PRODUCTION AND SALES INFORMATION. The following table sets forth
certain information regarding Pennzoil's proved sulphur reserves and related
production and sales data. The 1993 reserves were estimated by DeGolyer and
MacNaughton. The summary report of DeGolyer and MacNaughton on the reserve
estimates as of January 1, 1994, which includes certain definitions and
assumptions, is set forth as an exhibit to this Annual Report on Form 10-K. The
summary reports of DeGolyer and MacNaughton on the reserve estimates as of
January 1, 1993, 1992, 1991 and 1990 are included as exhibits to Pennzoil's
previously filed Annual Reports on Form 10-K for the respective years.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------------- ------------- --------------- --------------- ---------------
(EXPRESSED IN THOUSANDS OF LONG TONS EXCEPT PRICES)
<S> <C> <C> <C> <C> <C>
Sulphur(1)
Proved reserves at end of year........ 24,669 26,319 27,225 29,648 29,671
Production............................ 655 1,171 1,696 2,128 1,968
Sales................................. 1,071 1,690 1,970 2,091 2,186
Average Green Markets Tampa Recovered
Contract Price range(2)............. $62.00-$66.00 $85.00-$88.00 $114.00-$116.00 $119.00-$121.00 $123.00-$125.00
</TABLE>
- ---------------
(1) Gross volumes subject to various royalties. Royalties as a percentage of
production value, f.o.b. mine site, are estimated to average 9%.
(2) The Green Markets Tampa Recovered Contract Price is a benchmark price for
liquid sulphur sales in the United States domestic market, the market in
which 87% of PSC's total sales in 1993 were made.
During 1993, 1992 and 1991, the Culberson facilities were operated at
approximately 26%, 47% and 68%, respectively, of design capacity. PSC owns or
leases water rights located approximately 38 miles southeast of the plant site.
PSC believes that the water reserves, together with recycled mine water, will be
sufficient to mine the sulphur reserves at Culberson. PSC has installed a
pipeline from the water reserves to the plant site.
The average Green Markets Tampa Recovered Contract Price range for 1993 had
a mid-point of $64.00 per long ton, which was approximately 26% below the 1992
mid-point and 44% below the 1991 mid-point.
In October 1993, Pennzoil announced intended capital expenditures of
approximately $7.4 million to modify the process of heating recycled mine water
for reinjection into the production zone at the Culberson mine and the
replacement of inefficient steam turbines with a gas-fired turbine. The
modification resulted in a one-time charge of approximately $3.6 million for the
write-off of obsolete property, plant and equipment. In addition, PSC began a
work force reduction program in 1993, which resulted in a fourth quarter charge
of $3.2 million. Annual expense savings at current production rates as a result
of these actions are estimated at $12 million.
So long as sulphur prices and volumes remain at current levels, operating
results in the sulphur segment will continue to be adversely affected, and the
sulphur segment will likely generate an operating loss. The magnitude and timing
of the effect on operating results of any future sulphur price fluctuation
cannot be accurately predicted.
MARKETING. All of PSC's sulphur production in 1993 was sold in the United
States. Most of PSC's sulphur production is transported in liquid form by unit
train to Galveston, Texas, where PSC's primary sulphur terminal facilities are
located. The term of the unit train contract covers the life of the mine in
order to
13
<PAGE> 15
maintain long-term transportation stability. PSC also operates a sulphur
terminal in Antwerp, Belgium, where solid sulphur can be unloaded, remelted and
piped into liquid sulphur storage facilities to serve its customers in western
Europe. Currently, sales to European customers through the Antwerp terminal are
from sources of locally produced molten sulphur. In addition, PSC has shipped
solid sulphur from the Galveston terminal directly to customers in other areas
of the world. PSC both owns and leases, under long-term leasing arrangements,
vessels for water transportation of liquid sulphur and has effected charter
arrangements for water transportation of dry sulphur.
The largest portion of domestic sulphur sales is made to manufacturers of
phosphate fertilizers. In addition, sulphur is sold to the general chemicals
industry for use in the manufacture of a variety of products. PSC competes with
a number of other companies in its sulphur operations, including both Frasch and
recovered sulphur producers. PSC estimates that it accounted for approximately
7% of domestic elemental sulphur production during 1993. In addition to price
competition, dependability of supply is particularly important in the case of
sulphur, and traditionally long-term contracts have been of substantial
significance to the sulphur business. Substantially all of PSC's sales are made
under long-term contracts. Market conditions from time to time require that some
portions of the mine output be stockpiled or that production be curtailed.
DISCONTINUED OPERATIONS
In December 1992, Pennzoil sold in initial public offerings all its shares
of capital stock of Purolator, previously a wholly owned subsidiary of Pennzoil.
Purolator's net assets and results of operations for all periods have been
reclassified as discontinued operations for financial reporting purposes.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discontinued Operations" and Note 11 of
Notes to Consolidated Financial Statements for additional information.
OTHER INTERESTS
Richland owns approximately 576,000 acres of surface properties and certain
mineral rights to approximately 726,000 acres in the Raton Basin area of New
Mexico and Colorado. The table included under the caption "Oil and Gas -- Oil
and Gas Properties," showing Pennzoil's developed and undeveloped oil and gas
acreage, includes the mineral rights to 726,000 acres held by Richland in the
Raton Basin.
In December 1991, Richland, through its subsidiary Duval Corporation of
Indonesia ("Duval"), entered into an agreement with Ashton Mining Limited to
sell Richland's approximately 90% interest in PT Indo Muro Kencana, which holds
confirmed gold and silver deposits in Kalimantan, the Indonesian portion of the
island of Borneo. The sale was conditioned upon approval by Indonesian
authorities and additional exploration and feasibility studies conducted by the
purchaser. Approvals and studies were finalized and the sale was completed in
January 1993. Part of the consideration received by Duval was a payment
agreement resulting in the right to receive payments from future mineral
production. The payments will be based on a percentage of revenues that will be
determined by a sliding scale tied to London Metal Exchange gold prices.
14
<PAGE> 16
EMPLOYEES
The following table sets forth the number of Pennzoil employees by segment
at December 31 of each of the years indicated:
<TABLE>
<CAPTION>
1993 1992 1991
----- ------ ------
<S> <C> <C> <C>
Oil and Gas....................................................... 1,627 1,544 1,417
Motor Oil & Automotive Products................................... 2,929 2,907 2,969
Franchise Operations.............................................. 4,425 3,532 2,465
Sulphur........................................................... 257 379 509
Corporate and Other............................................... 663 763 785
----- ------ ------
Total Continuing Operations....................................... 9,901 9,125 8,145
Discontinued Operations --
Filtration Products............................................. -- -- 3,549
----- ------ ------
Total................................................... 9,901 9,125 11,694
----- ------ ------
----- ------ ------
</TABLE>
The increase in employees for continuing operations as of December 31, 1993
is primarily attributable to an increase in the number of company-owned service
centers in the franchise operations segment. This increase was partially offset
by a reduction in the PSC workforce.
Approximately 10.4% of Pennzoil's employees are represented by various
labor unions. Collective bargaining agreements are in force with most of the
unions.
Pennzoil is subject to various federal and state laws and regulations
governing employment practices and working conditions, including Title VII of
the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1963, the Civil
Rights Act of 1991, the Americans with Disabilities Act of 1990, the Family and
Medical Leave Act of 1993, the Drug Free Workplace Act of 1989, the Age
Discrimination in Employment Act of 1967, as amended, the Rehabilitation Act of
1973, as amended, the Vietnam Era Veterans' Readjustment Assistance Act of 1974,
as amended, the Occupational Safety and Health Act of 1970, the Fair Labor
Standards Act of 1938, as amended, the National Labor Relations Act of 1935, as
amended, and Executive Order 11246.
GOVERNMENT REGULATION
Pennzoil's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and gas operations and economics are affected by changing price
control, tax and other laws relating to the petroleum industry and by constantly
changing administrative regulations.
NATURAL GAS ACT, NATURAL GAS POLICY ACT AND NATURAL GAS WELLHEAD DECONTROL
ACT. In the past, Pennzoil has been subject to natural gas pricing and sales
regulation by the Federal Energy Regulatory Commission ("FERC") under the
Natural Gas Act and the Natural Gas Policy Act of 1978. The Natural Gas Wellhead
Decontrol Act of 1989 provided for the phased elimination of all remaining
natural gas pricing and sales regulation at the wellhead by January 1, 1993.
The FERC also regulates natural gas pipeline transportation rates and
service conditions which directly affect the revenues received by Pennzoil for
its natural gas sales. The FERC's jurisdiction over natural gas transportation
is unaffected by the Natural Gas Wellhead Decontrol Act.
In 1992, the FERC issued Order No. 636, which requires natural gas
pipelines to restructure their transportation rates and service conditions to
ensure that non-pipeline natural gas merchants are treated on a parity with
pipeline natural gas merchants. The implementation of Order No. 636, which
occurred prior to the 1993-1994 winter heating season, significantly enhances
marketing flexibility of non-pipeline natural gas merchants such as Pennzoil.
15
<PAGE> 17
PETROLEUM PRICE CONTROL AND ALLOCATION LAWS. From time to time, the federal
government has imposed allocation and price controls upon firms engaged in
marketing crude oil and other petroleum products. At the present time, all price
and allocation controls on crude oil and other petroleum products have been
lifted.
STATE PRODUCTION REGULATIONS. State statutory provisions often require
permits for the drilling of wells and also cover the spacing of wells, the
prevention of waste of oil and gas resources, the rates of production, the
prevention and cleanup of pollution and other matters.
CLEAN AIR ACT. Recent amendments to the federal Clean Air Act require,
among other things, tighter controls on industrial plants in areas of high air
pollution, a tightening of fuel and emission standards for motor vehicles
(including certain requirements for reformulated gasoline) and the imposition by
the Environmental Protection Agency ("EPA") of tighter controls on sources of
hazardous air pollutants. The effect of the Clean Air Act amendments on Pennzoil
and other industrial companies is uncertain because most of the Clean Air Act
requirements will be implemented through EPA regulations over a period of years.
However, it is likely that the EPA requirements as to hazardous air pollutants
and auto fuels and emissions will require changes in procedures and equipment in
certain of Pennzoil's operations. Such changes could impose material costs on
Pennzoil and its operations. In 1993, Pennzoil made capital expenditures of
$26.6 million for a diesel, desulphurization and dewaxing project at the Atlas
refinery in Shreveport, Louisiana, which was required to meet the new
regulations promulgated under the federal Clean Air Act.
OIL POLLUTION ACT OF 1990. The U.S. Oil Pollution Act of 1990 ("OPA '90")
and regulations promulgated pursuant thereto impose a variety of regulations on
"responsible parties" related to the prevention of oil spills and liability for
damages resulting from such spills. A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. OPA '90 assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages. While liability limits apply in some circumstances, a responsible party
for an Outer Continental Shelf facility must pay all spill removal costs
incurred by a federal, state or local government. OPA '90 also imposes ongoing
requirements on a responsible party, including proof of financial responsibility
to cover at least some costs in a potential spill and preparation of an oil
spill contingency plan. The effect of OPA '90 on Pennzoil and other offshore oil
and gas operators is uncertain because the Minerals Management Service ("MMS")
has not yet finalized implementing regulations under OPA '90. Pennzoil cannot
predict the final form of the financial responsibility regulations that will be
adopted by the MMS, but such regulations have the potential to result in the
imposition of material costs on Pennzoil.
OTHER ENVIRONMENTAL MATTERS. Pennzoil's operations are subject to numerous
United States federal, state and local laws and regulations controlling the
discharge of materials into the environment or otherwise relating to the
protection of the environment and plant safety.
Pennzoil is also subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act and similar state statutes. In response
to liabilities associated with these activities, accruals have been established
when reasonable estimates are possible. Pennzoil adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.
Pennzoil's assessment of the potential impact of these environmental laws
is subject to uncertainty due to the difficult process of estimating and
refining remediation costs that are subject to ongoing and evolving change.
Initial estimates of remediation costs reflect a broad-based analysis of site
conditions and potential environmental and human health impacts derived from
preliminary site investigations. Later changes in initial estimates may be based
on additional site investigations, completion of feasibility studies and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and finally the actual implementation of the remediation plan. This
process occurs over relatively long periods of time and is sequential, highly
influenced by regulatory and community approval processes and subject to ongoing
development of remediation technologies. Pennzoil's assessment analysis takes
into account the state of the process each site is in at the time of estimation,
the degree of uncertainty surrounding the estimates for each phase of
remediation and other site specific factors. Reference
16
<PAGE> 18
is made to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources and Liquidity -- Environmental
Matters" for additional information.
Capital outlays of approximately $70 million have been made by Pennzoil
since January 1991 with respect to environmental protection. Capital
expenditures for environmental control facilities are currently expected to be
approximately $18 million in 1994.
FRANCHISEE MATTERS. Jiffy Lube is subject to, and devotes substantial
efforts to compliance with, a variety of federal and state laws governing
franchise sales and marketing and franchise trade practices. Although the
regulatory environment differs by state, applicable laws and regulations
generally require disclosure of business information in connection with the sale
of franchises. Certain state regulations also affect the ability of the
franchisor to revoke or refuse to renew a franchise. Jiffy Lube seeks to comply
with applicable regulatory requirements. However, given the scope of Jiffy
Lube's business and the nature of franchise regulations, compliance problems can
be encountered from time to time.
ITEM 3. LEGAL PROCEEDINGS.
(a) TAX DISPUTE. Reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity -- Tax Dispute" and Note 8 of Notes to Consolidated Financial
Statements for information regarding a letter and examination report received
from the District Director of the Internal Revenue Service in January 1994 that
proposes a tax deficiency based on an audit of Pennzoil's 1988 federal income
tax return.
(b) CURTAILMENT DAMAGE ACTIONS. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for information regarding a lawsuit in which
Pennzoil has been joined as a defendant for damages allegedly caused by
curtailment of deliveries of gas by United Gas Pipe Line Company, a former
Pennzoil subsidiary, to its customers.
(c) EATON V. PENNZOIL COMPANY. In December 1992, two former employees of
Pennzoil filed a purported class action suit in the United States District Court
for the Southern District of Texas, Galveston Division. The suit alleges that
one of Pennzoil's deferred compensation plans had been improperly administered
because of the absence of an adjustment under the plan for a significant event
occurring in 1988 in determining the value of awards under the plan maturing in
1988 and 1990. The plaintiffs allege breach of contract, common law fraud and
breach of fiduciary duty and seek compensatory and consequential damages of
$40.0 million and punitive damages of $400.0 million. Pennzoil believes that the
plan was administered properly and that the lawsuit is without merit. In October
1993, the court granted Pennzoil's motion for summary judgment. The plaintiffs
have appealed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1993 to a vote of
security holders.
17
<PAGE> 19
ITEM S-K 401(B). EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Set forth below are the names and ages of the executive officers of
Pennzoil (at March 4, 1994). Positions, unless otherwise specified, are with
Pennzoil.
DAVID P. ALDERSON, II (44)
Group Vice President -- Finance and Treasurer
CLYDE W. BEAHM (56)
Group Vice President -- Franchise Operations
LINDA F. CONDIT (46)
Corporate Secretary
JOHN L. DAVIS (46)
Group Vice President -- Sulphur
THOMAS M. HAMILTON (50)
Group Vice President -- Oil and Gas
TERRY HEMEYER (55)
Group Vice President -- Administration
J. HUGH LIEDTKE (72)(1)
Chairman of the Board
MARK A. MALINSKI (38)
Group Vice President -- Accounting and Controller
JAMES L. PATE (58)(1)
President and Chief Executive Officer
WILLIAM M. ROBB (49)
Group Vice President -- Products Manufacturing
JAMES W. SHADDIX (47)
General Counsel
WILLIAM E. WELCHER (61)
Group Vice President -- Products Marketing
- ---------------
(1) Director of Pennzoil and member of Executive Committee.
(b) Officers are appointed annually to serve for the ensuing year or until
their successors have been appointed. Officers listed above have held their
present offices for at least the past five years except for those named below,
who have had the business experience indicated during that period. Positions,
unless specified otherwise, are with Pennzoil.
DAVID P. ALDERSON, II -- Group Vice President -- Finance since February 1992 and
Treasurer since August 1989. Senior Vice President -- Finance from March 1990
to February 1992. Assistant Treasurer prior thereto.
CLYDE W. BEAHM -- Group Vice President -- Franchise Operations since July 1992.
Executive Vice President -- Franchise Operations from February 1992 to July
1992. Senior Vice President -- Franchise Operations from May 1991 to February
1992. Vice President -- Quick Lube Operations from November 1989 to May 1991.
Assistant Vice President -- Wholesale Market Development of Western Auto
Supply Company's wholesale supply division prior thereto.
LINDA F. CONDIT -- Corporate Secretary since March 1990. Director -- Treasury
Operations prior thereto.
JOHN L. DAVIS -- Group Vice President -- Sulphur since June 1991. Senior Vice
President -- Pennzoil Sulphur Company from June 1990 to June 1991. Vice
President -- Legal of Pennzoil Sulphur Company prior thereto.
THOMAS M. HAMILTON -- Group Vice President -- Oil and Gas since December 1991.
Chief Executive -- Frontier and International Operating Company of BP
Exploration from September 1989 to June 1991. General Manager -- East Asia,
Australia and Latin America of BP Exploration prior thereto.
TERRY HEMEYER -- Group Vice President -- Administration since February 1992.
Senior Vice President -- Administration from March 1990 to February 1992. Vice
President -- Public Affairs prior thereto.
MARK A. MALINSKI -- Group Vice President -- Accounting since February 1992 and
Controller since March 1990. Senior Vice President -- Accounting from March
1990 to February 1992. Corporate Secretary prior thereto.
JAMES L. PATE -- President and Chief Executive Officer since March 1990. Chief
Operating Officer from February to March 1990 and Executive Vice President
from July 1989 to March 1990. Senior Vice President -- Finance and Treasurer
prior thereto.
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<PAGE> 20
WILLIAM M. ROBB -- Group Vice President -- Products Manufacturing since October
1992. Executive Vice President -- Manufacturing of Pennzoil Products Company
prior thereto.
JAMES W. SHADDIX -- General Counsel since March 1990. Assistant General Counsel
prior thereto.
WILLIAM E. WELCHER -- Group Vice President -- Products Marketing since October
1992. Executive Vice President -- Marketing of Pennzoil Products Company prior
thereto.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table shows high and low sales prices for the common stock of
Pennzoil as reported on the New York Stock Exchange (consolidated transactions
reporting system), the principal market in which the common stock is traded and
dividends paid per share for the calendar quarters indicated. The common stock
is also listed for trading on the Pacific Stock Exchange, as well as the
Toronto, London and Swiss stock exchanges.
<TABLE>
<CAPTION>
1993 1992
----------------------------- -----------------------------
MARKET PRICE MARKET PRICE
---------------- ----------------
QUARTER ENDED HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
-------------------------------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
March 31........................ $59.00 $49.38 $ .75 $56.50 $43.13 $ .75
June 30......................... $65.75 $56.88 $ .75 $50.38 $43.50 $ .75
September 30.................... $70.75 $60.50 $ .75 $55.25 $44.00 $ .75
December 31..................... $66.25 $52.00 $ .75 $57.50 $48.00 $ .75
</TABLE>
Pennzoil has paid quarterly dividends for 70 consecutive years.
As of December 31, 1993, Pennzoil had 20,590 record holders of its common
stock.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
The following table contains selected financial data for the five years
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................... $2,782.4 $2,356.7 $2,314.8 $2,366.7 $2,329.8
Income (loss) from
Continuing operations.................... $ 160.3 $ 17.4 $ 40.1 $ 93.8 $ 235.5
Discontinued operations (1).............. -- 11.7 29.9 -- (132.0)
Extraordinary items (2).................. (18.4) (16.6) -- -- --
Cumulative effect of change in accounting
principle (3)......................... -- 115.7 (49.0) -- --
------- ------- ------- ------- -------
Net income................................. $ 141.9 $ 128.2 $ 21.0 $ 93.8 $ 103.5
Earnings (loss) per share
Continuing operations.................... $ 3.80 $ .43 $ .99 $ 2.37 $ 6.06
Discontinued operations (1).............. -- .29 .74 -- (3.64)
------- ------- ------- ------- -------
Earnings per share before extraordinary
items and cumulative effect of change
in accounting principle............... $ 3.80 $ .72 $ 1.73 $ 2.37 $ 2.42
Extraordinary items (2).................. (.44) (.41) -- -- --
Cumulative effect of change in accounting
principle (3)......................... -- 2.85 (1.21) -- --
------- ------- ------- ------- -------
Total............................ $ 3.36 $ 3.16 $ .52 $ 2.37 $ 2.42
Dividends per common share................. $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00
Total assets............................... $4,886.2 $4,457.2 $5,108.0 $5,262.5 $4,882.0
Long-term debt, including current
maturities, and capital lease
obligations.............................. $2,077.8 $2,031.7 $2,321.7 $2,467.5 $1,790.2
Preference common stock.................... $ -- $ -- $ -- $ -- $ 257.1
Total shareholders' equity................. $1,505.8 $1,180.2 $1,164.1 $1,251.6 $1,282.0
</TABLE>
- ---------------
(1) Reference is made to Note 11 of Notes to Consolidated Financial Statements.
(2) Reference is made to Note 3 of Notes to Consolidated Financial Statements.
(3) Reference is made to Notes 2 and 6 of Notes to Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to Industry Segment Financial Information included in
Item 1, Business and Item 2, Properties and the Consolidated Financial
Statements beginning on page F-3 for additional information.
RESULTS OF OPERATIONS
Net income for 1993 was $141.9 million, or $3.36 per share, compared with
net income of $128.2 million, or $3.16 per share, for 1992 and $21.0 million, or
$.52 per share, for 1991. In November 1993, Pennzoil sold 8,158,582 shares of
Chevron Corporation ("Chevron") common stock in a block trade on the New York
Stock Exchange ("NYSE") for a net price of $88.38 per share. The sale resulted
in a net realized gain of $137.0 million ($171.6 million before tax), or $3.25
per share. Reference is made to "-- Capital Resources and Liquidity" for
additional information.
In September 1993, Pennzoil called for redemption an aggregate of $292.5
million principal amount of indebtedness. The premiums and related unamortized
discount and debt issue costs relating to these redemptions resulted in an
extraordinary charge of $13.7 million ($21.1 million before tax), or $.33 per
share, in the third quarter of 1993. Reference is made to "-- Capital Resources
and Liquidity" for additional information.
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<PAGE> 22
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted,
establishing a new 35% corporate income tax rate effective January 1, 1993. As a
result of the increase in the marginal income tax rate and other tax law
changes, Pennzoil recorded a one-time, non-cash charge of approximately $16
million, or $.38 per share, in the third quarter of 1993 to adjust its deferred
income tax liabilities and assets for the effect of the change in income tax
rates.
In June 1993, Pennzoil called for redemption $96.1 million principal amount
of indebtedness (which redemption occurred 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 ($7.2 million before tax),
or $.12 per share, in the second quarter of 1993. Reference is made to
"-- Capital Resources and Liquidity" for additional information.
In December 1992, Pennzoil announced its decision to change its method of
accounting for income taxes by adopting the new requirements of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective as of January 1, 1992. As a result, Pennzoil recognized an increase to
net income of $119.1 million in 1992. Of this amount, $115.7 million, or $2.85
per share, is reported as the one-time cumulative effect on prior year results.
The remaining $3.4 million, or $.08 per share, reflects the impact of adoption
of this standard on 1992 income from continuing operations.
In December 1992, Pennzoil sold in initial public offerings all its shares
of capital stock of Purolator Products Company ("Purolator"). Pennzoil recorded
a net gain on the disposition of Purolator of $1.5 million, or $.04 per share,
in the fourth quarter of 1992. Reference is made to "-- Discontinued Operations"
and Note 11 of Notes to Consolidated Financial Statements for additional
information.
In December 1992, Pennzoil called for redemption $272.9 million principal
amount of indebtedness (which redemption occurred in February 1993). As of
December 31, 1992, this indebtedness was defeased by placing funds required for
the redemption with the trustee for the indebtedness. As a result, the funds
deposited with the trustee for the redemption of the debentures and the
principal amount of the indebtedness are not reflected in Pennzoil's
consolidated balance sheet at December 31, 1992. The premiums and related
unamortized discount and debt issue costs relating to this redemption resulted
in an extraordinary charge of $16.6 million ($25.2 million before tax), or $.41
per share, in the fourth quarter of 1992. Reference is made to "-- Capital
Resources and Liquidity" for additional information.
In December 1991, Pennzoil announced its decision to change its method of
accounting for postretirement benefit costs other than pensions by adopting the
new requirements of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective as of January 1, 1991. As a result,
Pennzoil recorded a charge of $49.0 million (including $11.4 million related to
Purolator), or $1.21 per share, in the first quarter of 1991 to reflect the
cumulative effect of the change in accounting principle for periods prior to
1991. In addition to the cumulative effect, Pennzoil's 1991 postretirement
health care and life insurance costs increased $1.7 million, or $.04 per share,
as a result of adopting the new standard.
Net income for 1991 was increased by adjustments of approximately $27.6
million, or $.68 per share, required to reclassify Purolator from a discontinued
operation to a continuing operation as a result of Pennzoil's 1991 decision to
retain Purolator. Reference is made to Note 11 of Notes to Consolidated
Financial Statements for additional information.
Investment and other income for 1993 primarily represents a gain on the
sale of 8,158,582 shares of Chevron common stock and dividend income from
Pennzoil's investment in Chevron common stock. Investment and other income for
1992 and 1991 primarily represents dividend income from Pennzoil's investment in
Chevron common stock. From 1989 through 1991, Pennzoil acquired 32,944,100
shares of common stock of Chevron. As of December 31, 1993, Pennzoil
beneficially owned 9,035,518 shares of Chevron common stock, which is classified
as non-current marketable securities and other investments in the accompanying
consolidated balance sheet. Reference is made to "-- Capital Resources and
Liquidity" for additional information.
21
<PAGE> 23
OIL AND GAS
Operating income for the oil and gas segment was $159.2 million, compared
with operating income of $134.7 million in 1992 and $48.6 million in 1991,
reflecting the inclusion of a full year of results of Pennzoil Petroleum Company
("Pennzoil Petroleum"). Gas and liquids volume increases along with higher gas
prices and gains on asset sales were primarily responsible for the increase in
operating income. These increases were partially offset by lower crude oil
prices, generally higher expenses associated with the higher level of activity
within the oil and gas segment and higher exploration expenses described below.
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, which owns Gulf of
Mexico, Gulf Coast, Permian Basin and other domestic oil and gas producing
properties. The exchange of stock has been accounted for using the purchase
method of accounting, and Pennzoil Petroleum's results of operations subsequent
to October 30, 1992 have been included in Pennzoil's oil and gas segment
results. Reference is made to Note 10 of Notes to Consolidated Financial
Statements for additional information.
During the four-month period between the "effective date" and the closing
date of the transaction, Chevron continued operation of the Pennzoil Petroleum
oil and gas properties and, immediately prior to closing, contributed $57.4
million in cash to Pennzoil Petroleum (for the benefit of Pennzoil),
representing the cash flow from Pennzoil Petroleum's operations during this
four-month period, less production costs, provisions for taxes and approximately
$11 million of nonrecurring closing adjustments. As a result of an audit
completed during 1993, Chevron contributed an additional $9.9 million in cash to
Pennzoil Petroleum, representing an adjustment to the initial $57.4 million cash
contribution made by Chevron to Pennzoil Petroleum prior to closing. This
additional contribution from Chevron was accounted for as an adjustment to the
original purchase price of Pennzoil Petroleum.
Natural gas produced for sale in 1993 was 649,399 Mcf per day, compared
with 447,561 Mcf per day and 400,960 Mcf per day in 1992 and 1991, respectively.
Natural gas prices averaged $2.04 per Mcf in 1993 compared to $1.81 per Mcf in
1992 and $1.54 per Mcf in 1991. Liquids volumes in 1993 were 64,273 barrels per
day, compared to 39,462 and 30,897 barrels per day in 1992 and 1991,
respectively. The average liquids price received in 1993 dropped to $14.90 per
barrel compared with $16.95 per barrel in 1992 and $18.30 per barrel in 1991.
The results of operations from Pennzoil's oil and gas segment are subject
to volatility resulting from changes in crude oil and natural gas prices.
Pennzoil has used in the past, and may use in the future, a limited price risk
management strategy to provide protection against temporary declines in domestic
natural gas prices. To date, these price risk management activities have
encompassed no more than 3% of Pennzoil's total annual natural gas production.
During 1993, Pennzoil recorded $34.9 million in gains on sales of assets,
primarily oil and gas producing properties. Proceeds from these asset sales were
$87.5 million. These properties were categorized as noncore properties as a part
of Pennzoil's continuing assessment of its domestic oil and gas properties,
which commenced early in 1992. These properties, while constituting a
significant number of fields, were, as a whole, immaterial to Pennzoil.
Management estimates that Pennzoil's proved reserves at December 31, 1993 were
reduced by approximately 13.7 million barrels of proved oil equivalents, or less
than 3% of Pennzoil's proved reserves, as a result of these sales. Pennzoil
intends to continue disposal of noncore properties during 1994, with the
proceeds from these sales intended for reinvestment in or reallocation to
Pennzoil's core properties.
Expenses associated with exploration activities in 1993 increased to $70.7
million compared with $11.7 million in 1992 and $47.3 million in 1991. This
increase was due to a $46.9 million charge for impairments of unproved offshore
property costs, primarily in the Mobile Bay area, and an increase in geological
and geophysical expenses of $12.9 million over 1992 associated with an increase
in Pennzoil's domestic exploration and development activity and the continuing
assessment of its domestic oil and gas properties. In the early stages of this
assessment, Pennzoil curtailed domestic exploration activity and, as a result,
reduced its 1992 capital budget related to both exploration and development
activity and geological and
22
<PAGE> 24
geophysical expenses. As this assessment has progressed, more exploration and
development activity has occurred in and around core areas. As a result, both
domestic capital expenditures and geological and geophysical expenses for 1993
have more than doubled from the previous year as new opportunities were
evaluated and exploration and development programs were implemented.
Depreciation, depletion and amortization expense in 1993 included a charge
of $17.7 million to increase an impairment reserve originally established in
1988 related to Pennzoil's net investment in offshore California producing
properties. Generally lower offshore California oil price forecasts in the
fourth quarter, led management to determine that an additional impairment was
necessary.
Internationally, Pennzoil in 1992 announced agreements for the exclusive
right to negotiate with the Azerbaijan Republic and the State Oil Company of the
Azerbaijan Republic ("SOCAR") to develop the Guneshli Field offshore Azerbaijan
in the southern portion of the Caspian Sea. In May 1993, the Azeri government
announced its intention to jointly develop, under a unified development plan,
three fields (the Guneshli, Chirag and Azeri Fields) then under negotiation with
western oil companies. In October 1993, the group of eight western oil
companies, including Pennzoil, entered into an Area of Mutual Interest ("AMI")
agreement that reaffirmed the equity distribution among the companies set out in
a Declaration of Unitization previously signed by the western oil companies and
SOCAR and established the basis for the companies' development of the
three-field unit. Subsequently, during October 1993, the Azeri government
elected to withdraw the Guneshli Field from the unit to be developed by the
western oil companies and develop the Guneshli Field on its own. Under the terms
of the AMI agreement, Pennzoil and Ramco Energy Ltd. of Scotland will have a 17%
working interest in any development of the three fields by the western oil
companies party to the AMI agreement, including the current two-field unit
composed of the Chirag and Azeri Fields.
Also in Azerbaijan, Pennzoil continued work on a comprehensive gas
gathering and compression system during 1993. This project is designed to
capture, compress and transport to shore approximately 150 million cubic feet
per day of gas presently being vented from the Guneshli Field. The gas
utilization project accounted for approximately $98 million of the $361 million
in capital expenditures for the oil and gas segment in 1993. Pennzoil has signed
a gas utilization agreement with SOCAR that provides for recovery of Pennzoil's
costs incurred in connection with the gas utilization project by payment in hard
currency or oil or petroleum products or by a credit against a signature bonus
for the first exploration, exploitation and/or development contract entered into
between Pennzoil and SOCAR in Azerbaijan. The gas utilization project should be
completed during the first quarter of 1994. Pennzoil's total investment related
to its Azerbaijan activities, including the gas utilization project, was $116
million as of December 31, 1993.
Capital expenditures for the oil and gas segment in 1993 were $360.5
million compared to $93.8 million in 1992, excluding expenditures related to
Pennzoil's acquisition of Pennzoil Petroleum, and $177.9 million in 1991. Total
capital expenditures for this segment in 1994 are estimated to be $223.9
million, net of expected recoveries from the gas utilization project in
Azerbaijan. Reference is made to "-- Capital Resources and Liquidity" for
additional information.
MOTOR OIL & AUTOMOTIVE PRODUCTS
Operating income in 1993 for this segment was $90.0 million, compared with
$77.9 million in 1992 and $108.3 million in 1991. Higher income in the marketing
division in 1993 resulted primarily from higher domestic motor oil margins,
which increased by approximately 6% due to lower crude oil prices in 1993.
Domestic motor oil volumes were about even with 1992 but 4% higher than 1991
(lower 1991 volumes were the result of a recessionary decrease in total market
demand). Domestic motor oil margin gains in 1993 were partially offset by higher
advertising and selling expenditures. International motor oil and other
lubricating product volumes increased 25% when compared to 1992 and 51% when
compared to 1991. The revenue increases resulting from the higher international
motor oil volumes were partially offset by higher selling and depreciation
expenses. Higher income in the manufacturing division in 1993 was the result of
higher refining and specialty product margins. Higher refining margins were due
to higher fuels and other light product margins and higher base oil margins, all
resulting from lower crude prices. Total processed volume at the refineries of
59,222 barrels per day was 767 barrels per day higher than 1992 but 2,683
barrels per day lower
23
<PAGE> 25
than 1991. The lower volumes in 1993 and 1992 were primarily due to major
maintenance turnarounds. Higher refinery operating and maintenance expenses
slightly offset the increased margin. Income from the specialty products Penreco
division was up 47% in 1993 due to higher volumes and margins coupled with a
division-wide focus on reducing operating expenses.
The profitability of Pennzoil's refineries is directly affected by the
supply and price of the grade and quality of crude oil purchased or otherwise
obtained for refinery throughput. Because of shortages in the supply of crude
oil meeting the unique grade and quality requirements for each of Pennzoil's
refineries, and possible declining refinery margins resulting from such
shortages, Pennzoil continually considers and evaluates crude oil supply
arrangements for each of its refineries and the corresponding impact on the
operating profitability of the affected refineries. In response to these crude
oil supply shortages, Pennzoil is evaluating, among other things, the
feasibility of increasing production from nearby fields and the possible
reduction or consolidation of refinery operations. The magnitude and timing of
crude oil supply shortages, and the resultant impact on Pennzoil's operating
results and business operations, cannot be predicted with accuracy.
Capital expenditures for the motor oil and automotive products segment were
$71.5 million in 1993, $35.8 million in 1992 and $32.3 million in 1991. The 1993
expenditures included $26.6 million for a diesel desulphurization and dewaxing
project at the Atlas Processing Company ("Atlas") refinery in Shreveport,
Louisiana, required to meet the new standards of the Clean Air Act. Also
included were expenditures of $6.3 million for a feasibility study for a
state-of-the-art base oil plant to be built as a joint venture and $4.8 million
for the acquisition of property, plant and equipment of a blending plant in
Spain (acquired in the first quarter of 1993). Total capital expenditures for
this segment in 1994 are estimated to be $59.1 million.
FRANCHISE OPERATIONS
The operating loss from franchise operations during 1993 was $17.6 million,
compared with an operating loss of $13.4 million in 1992 and an operating loss
of $7.8 million in 1991. Operating results for 1993 include a charge of $10.0
million for estimated costs associated with centers that Jiffy Lube
International, Inc. ("Jiffy Lube") has decided to eliminate. Jiffy Lube has
determined that these centers are not viable as company-operated centers and has
been unsuccessful in subleasing many of these centers for alternative uses. This
provision for estimated costs takes into consideration the present value of
future lease obligations related to operating leases (less estimated sublease
rental revenue of existing subleases) and the estimated fair value of land,
buildings, leaseholds and leasehold improvements. Additionally, 1993 results
include approximately $12.7 million for the settlement of certain litigation,
estimated environmental costs and write-downs of other individually
insignificant investments to reflect Jiffy Lube's estimate of the net
realizability of those investments. The decline in operating results in 1992 as
compared to 1991 was due in part to increased selling, general and
administrative expenses incurred in connection with the settlement of certain
litigation ($6.8 million in 1992 compared to $1.1 million in 1991) and increased
start-up expenses incurred in association with the development and installation
of a new point-of-sale system ($2.6 million in 1992 compared to $1.1 million in
1991). As of December 31, 1993, Jiffy Lube operated 410 service centers, of
which 19 are currently held for resale.
Systemwide service center sales reported to Jiffy Lube for the year ended
December 31, 1993 increased $39 million, or approximately 8%, to $539 million,
compared with the prior year and increased $64 million, or approximately 13%,
compared with 1991. Average ticket prices increased to $33.60 for the year ended
December 31, 1993, compared with $33.23 and $32.15 for the years ended December
31, 1992 and 1991, respectively.
During the year ended December 31, 1993, Jiffy Lube acquired 70 centers
with estimated values of $15.8 million and real estate with estimated values of
$.9 million in exchange for cash of $12.2 million, forgiveness of amounts due
Jiffy Lube of $.9 million, liabilities assumed of $.5 million, debt assumed of
$.4 million and real estate valued at $1.6 million. During the year ended
December 31, 1992, Jiffy Lube acquired 104 service centers with estimated values
of $29.7 million in exchange for cash of $16.7 million, forgiveness of amounts
due Jiffy Lube of $2.8 million, liabilities assumed of $8.7 million and debt
issued of $1.5 million. During the year ended December 31, 1991, Jiffy Lube
acquired 106 service centers with estimated values of $31.9 million
24
<PAGE> 26
in exchange for cash of $13.3 million, forgiveness of amounts due Jiffy Lube of
$6.3 million, liabilities assumed of $11.5 million and debt issued of $6.5
million.
Capital expenditures for the franchise operations segment were $21.7
million in 1993, compared to $25.8 million and $4.9 million in 1992 and 1991,
respectively. Capital expenditures for 1994 are estimated to be approximately
$14.5 million.
SULPHUR
The operating loss from this segment was $20.8 million in 1993, down from
$1.0 million of operating income earned in 1992 and from $42.7 million of
operating income reported in 1991. The decrease in operating income in the
sulphur segment during 1993 was primarily attributable to reduced sales volumes
and sharply lower prices received for sulphur during 1993. The average Green
Markets Tampa Recovered Contract Price range for sulphur in 1993 had a mid-point
of $64.00 per long ton, which was approximately 26% below the 1992 mid-point and
44% below the mid-point in 1991. A downturn related to aggressive pricing by
Canadian and U.S. recovered sulphur producers began in mid-1991, with average
mid-point prices falling by $77.00 per ton from a weekly high of $131.00 in June
1991 to a weekly low of $54.00 in December 1993.
During 1993, sulphur sales volumes were 1.1 million long tons, a decrease
of approximately 37% and 46% from 1992 and 1991 levels, respectively, due to
reduced market share resulting from lower priced imports from Canada and
increased recovered production domestically. Consumption of sulphur in North
America was also estimated to be down one million tons due to lower phosphate
exports. Sales volume commitments from certain Pennzoil customers have also been
reduced or eliminated, including the elimination of commitments in the second
half of 1992 from a customer accounting for approximately 10% of annual sulphur
sales.
In October 1993, Pennzoil announced intended capital expenditures of
approximately $7.4 million to modify the process of heating recycled mine water
for reinjection into the production zone at the Culberson mine and the
replacement of inefficient steam turbines with a gas-fired turbine. The
modification resulted in a one-time charge of approximately $3.6 million for the
write-off of obsolete property, plant and equipment. In addition, Pennzoil
Sulphur Company began a work force reduction program in 1993, which resulted in
a fourth quarter charge of $3.2 million. Annual expense savings at current
production rates as a result of these actions are estimated at $12 million.
Pennzoil announced a voluntary workforce reduction for the sulphur segment
effective in September 1992 and an involuntary workforce reduction program at
two locations in October 1992. These measures resulted in one-time charges of
$1.3 million and $1.1 million, respectively, and estimated cost reductions of
$2.2 million and $3.2 million annually.
So long as sulphur prices and volumes remain at current levels, operating
results in the sulphur segment will continue to be adversely affected, and the
sulphur segment will likely generate an operating loss. The magnitude and timing
of the actual effect on operating results of any future sulphur price
fluctuation cannot be accurately predicted.
A significant portion of Pennzoil's sulphur sales is made to United States
phosphate fertilizer producers who sell in both domestic and foreign
agricultural markets. Domestic agricultural markets typically peak during spring
and fall planting seasons, which are in the first and third quarters of the
year. Foreign markets are also cyclical, but seasonal variations among
individual foreign countries tend to offset each other.
Capital expenditures for the sulphur segment were $2.3 million in 1993,
compared with $2.9 million and $7.0 million in 1992 and 1991, respectively.
Total capital expenditures for this segment in 1994 have been budgeted at $6.2
million.
OTHER
Other operating income for 1993 was $253.7 million, compared to $88.2
million in 1992 and $127.8 million in 1991. The higher level of other income in
1993 was primarily due to the gains on the sales of shares of Chevron common
stock of $171.6 million and Pogo Producing Company common stock of $10.5
million. Dividend income on the Chevron common stock was $60.2 million for 1993,
$95.7 million for 1992 and $107.0 million for 1991.
25
<PAGE> 27
Other revenues, net of related expenses, are included in the consolidated
statement of income under "Investment and Other Income, Net" which consists of
the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................... $ 11,002 $ 8,050 $ 22,547
Dividend income.................................... 60,496 95,722 106,963
Realized gains on sales of marketable securities
and other investments............................ 182,057 298 --
Gains on sales of assets........................... 35,222 3,198 1,631
Settlements and refunds............................ 824 3,501 11,422
Other income....................................... 15,299 23,239 13,956
-------- -------- --------
$304,900 $134,008 $156,519
-------- -------- --------
-------- -------- --------
</TABLE>
Substantially all interest and dividend income is from marketable
securities and other cash investments.
INTEREST CHARGES, NET
During 1993, Pennzoil's interest charges, net of interest capitalized,
decreased $45.1 million over 1992 levels. This decrease is primarily due to a
decrease in the average amount of debt outstanding and lower average interest
rates during 1993 compared to 1992. In addition, interest expense for 1991
includes $3.7 million in interest payments related to federal income tax paid on
a portion of the $3.0 billion settlement received by Pennzoil from Texaco, Inc.
("Texaco") in 1988 in settlement of certain litigation. Reference is made to
"-- Capital Resources and Liquidity -- Investment in Chevron Corporation" for
additional information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1993 1992 1991
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest expense............................... $190,968 $233,360 $253,943
Less: Interest capitalized..................... 11,420 8,731 10,447
-------- -------- --------
$179,548 $224,629 $243,496
-------- -------- --------
-------- -------- --------
</TABLE>
DISCONTINUED OPERATIONS
In early 1990, Pennzoil decided to sell or otherwise dispose of Purolator.
In connection with this decision, Pennzoil recorded a 1989 fourth quarter
write-down of $125.0 million to reflect the estimated loss to be incurred from
the then anticipated sale or other disposition of Purolator's filtration
products operations, including estimated future costs and operating results from
the segment until the date of disposition.
In August 1991, Pennzoil concluded that, because of Purolator's improved
performance, the intrinsic value of Purolator could be more effectively realized
by retaining Purolator. Accordingly, Pennzoil reclassified Purolator's net
assets and results of operations for all periods as part of continuing
operations. As a result of Pennzoil's decision to retain Purolator, the
remaining reserve of $115.7 million for the estimated loss on the disposition of
Purolator originally established in the fourth quarter of 1989 was reversed.
Concurrent with the reversal of the reserve, Pennzoil recorded, during the third
quarter of 1991, a provision of $108.0 million ($88.0 million after tax) to
reflect losses due to asset impairment and other identified liabilities related
to Purolator.
In October 1992, as a result of Pennzoil's conclusion that disposal of
Purolator's filtration products operations would enhance Pennzoil's efforts to
focus on its strategic businesses and to reduce indebtedness, Purolator filed a
registration statement pursuant to which Pennzoil offered to the public all
shares of Purolator stock held by Pennzoil. Accordingly, Purolator's net assets
and results of operations for all periods have been reclassified as discontinued
operations for financial reporting purposes. In December 1992, Pennzoil sold in
initial public offerings all its shares of capital stock of Purolator. The total
amount received by Pennzoil, prior
26
<PAGE> 28
to the payment of expenses, from the net proceeds of the offerings and the
repayment of indebtedness by Purolator was $206.0 million. Pennzoil also expects
to receive a tax refund of approximately $23 million as a result of the
transaction. Pennzoil recorded a net gain on the disposition of Purolator stock
of $1.5 million, or $.04 per share, in the fourth quarter of 1992.
Reference is made to "-- Capital Resources and Liquidity -- Environmental
Matters" and Note 8 of Notes to Consolidated Financial Statements for
information concerning an environmental indemnification agreement between
Pennzoil and Purolator entered into in connection with Pennzoil's disposition of
Purolator.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. Pennzoil had cash and cash equivalents and current marketable
securities and other investments of $946.6 million and $20.7 million at December
31, 1993 and 1992, respectively. Cash flow generated from operations, net
proceeds from the sale of 8.2 million shares of Chevron common stock and
proceeds from the sale of assets totaled approximately $1.1 billion. These funds
were primarily used for the payment of cash dividends ($126.2 million) and for
capital expenditures ($475.0 million).
INVESTMENT IN CHEVRON CORPORATION. As of December 31, 1993, Pennzoil
beneficially owned 9,035,518 shares of Chevron common stock. From 1989 through
1991, Pennzoil acquired 32,944,100 shares of Chevron common stock at an average
cost of $67.36 per share with approximately $2.2 billion of the net proceeds
from the Texaco settlement. In anticipation of not reinvesting in excess of $2.2
billion of the original $3.0 billion of proceeds from the Texaco settlement in
property that is similar or related in service or use to the property
involuntarily converted by Texaco, Pennzoil paid $13.2 million in federal income
tax and $3.7 million in related interest in 1991 in addition to payments of
$120.4 million in federal income tax and $17.6 million in related interest made
during 1990. The interest payments are included in interest expense for 1991 and
1990, respectively. Provision for the income tax was previously made when the
proceeds from the Texaco settlement were received in 1988. Reference is made to
Note 8 of Notes to Consolidated Financial Statements for additional information.
In April 1991, Chevron increased the amount of quarterly dividends paid to
holders of its common stock from $.775 per share to $.825 per share, and, in
January 1993, Chevron announced an increase in the amount of quarterly dividends
paid to holders of its common stock from $.825 per share to $.875 per share. In
January 1994, Chevron announced an increase in the amount of quarterly dividends
paid to holders of its common stock from $.875 per share to $.925 per share. At
March 4, 1994, the closing price for Chevron common stock on the NYSE was $88.25
per share.
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 capital stock of Pennzoil Petroleum, which owns Gulf of Mexico,
Gulf Coast, Permian Basin and other domestic oil and gas producing properties.
The exchange of stock has been accounted for using the purchase method of
accounting, and Pennzoil Petroleum's results subsequent to October 30, 1992 are
included in Pennzoil's oil and gas segment results.
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 gain of $137.0
million ($171.6 million before tax), or $3.25 per share. The tax liability
resulting from the sale of shares of Chevron common stock has been reduced by
$25.5 million as a result of the utilization of a net operating loss
carryforward. Realization of the net operating loss carryforward resulted in the
reversal of a valuation allowance related to the deferred tax asset. Reference
is made to Note 2 of Notes to Consolidated Financial Statements for additional
information.
EXCHANGEABLE DEBENTURES. In 1993, Pennzoil completed public offerings of
$402.5 million principal amount of its 6 1/2% Exchangeable Senior Debentures due
January 15, 2003 (the "6 1/2% Debentures") and $500.0 million principal amount
of its 4 3/4% Exchangeable Senior Debentures due October 1, 2003 (the "4 3/4%
Debentures"). The 6 1/2% Debentures and the 4 3/4% Debentures are exchangeable
at the option of the holders thereof at any time prior to maturity, unless
previously redeemed, for shares of Chevron common stock owned by Pennzoil at
exchange rates of 11.887 shares and 8.502 shares, respectively, per $1,000
principal amount of
27
<PAGE> 29
the 6 1/2% Debentures and the 4 3/4% Debentures (the equivalent of $84 1/8 per
share and $117 5/8 per share, respectively), subject to adjustment in certain
events. In lieu of delivering certificates representing shares of Chevron common
stock in exchange for the 6 1/2% Debentures and the 4 3/4% Debentures, Pennzoil
may, at its option, pay to any holder surrendering the 6 1/2% Debentures and the
4 3/4% Debentures an amount in cash equal to the market price of the shares for
which the 6 1/2% Debentures and the 4 3/4% Debentures are exchangeable. Pennzoil
has deposited 9,035,518 shares of Chevron common stock deliverable in exchange
for the 6 1/2% Debentures and the 4 3/4% Debentures with exchange agents.
Under the instruments governing the 6 1/2% Debentures and the 4 3/4%
Debentures, Pennzoil may not pledge, mortgage, hypothecate or grant a security
interest in, or permit any mortgage, pledge, security interest or other lien
upon, the shares of Chevron common stock deposited with exchange agents and
deliverable in exchange for the 6 1/2% Debentures and the 4 3/4% Debentures.
Pennzoil may at any time obtain from the exchange agents or otherwise authorize
or direct the exchange agents to release all or part of the 9,035,518 shares of
Chevron common stock deposited with the exchange agents. However, in the event
Pennzoil obtains or otherwise releases any shares of Chevron common stock
subject to exchange, each holder of a 6 1/2% Debenture or a 4 3/4% Debenture
will generally have the right, at such holder's option, to require Pennzoil to
repurchase all or a portion of such holder's debentures at a premium.
From the proceeds from the sale in January 1993 of the 6 1/2% Debentures,
Pennzoil in March 1993 redeemed $223.4 million principal amount of indebtedness
(including $80.1 million of Pennzoil's 12 1/8% and 12 1/4% debentures due 2007,
$100.0 million of Pennzoil's 9 1/8% notes due 1996 and $43.3 million of
Pennzoil's 9% debentures due 2001). The call premiums and related unamortized
net premiums and debt issue costs relating to the redemption of these series of
indebtedness resulted in a charge of $1.4 million, net of tax, or $.02 per
share, for the first quarter of 1993. Also with such proceeds, approximately
$23.3 million of additional indebtedness has been retired, repaid or repurchased
in 1993 and $100.0 million principal amount of Pennzoil's 9% notes was retired
upon maturity in May 1993. From the proceeds from the sale of the 4 3/4%
Debentures, Pennzoil in October 1993 reduced its borrowings outstanding under
its unsecured revolving credit facility.
ASSESSMENT OF OIL AND GAS PROPERTIES. Pennzoil is continuing its assessment
of its domestic oil and gas properties commenced in early 1992. This assessment
has resulted in, and is expected to continue to result in, the categorization of
Pennzoil's oil and gas properties into core and noncore producing areas and core
and noncore producing fields within core areas. In the early stages of this
assessment, Pennzoil curtailed domestic exploration and development activity
and, as a result, reduced its 1992 capital expenditures for domestic exploration
and development by approximately one-half, excluding expenditures related to
Pennzoil's acquisition of Pennzoil Petroleum. This ongoing assessment now
includes the properties added in October 1992 as a result of the acquisition of
Pennzoil Petroleum, which has created additional core areas and enhanced other
core areas. With respect to properties to date categorized as noncore, Pennzoil
sought to dispose of certain of these properties during 1992, and Pennzoil
responded to inquiries from third parties with respect to other of these
properties. As a result, Pennzoil disposed of approximately $35 million of these
noncore properties and fields during 1992. No significant gain or loss was
realized as a result of these dispositions. Pennzoil began 1993 with interests
in approximately 800 producing fields owning small working interests and/or
insignificant reserves in the majority of these fields. The successful first
step in an asset highgrading program resulted in the disposal of approximately
300 of these fields representing less than 3% of the total value of Pennzoil's
proved oil and gas reserves. Pennzoil realized gains of $34.9 million from these
asset sales on total proceeds of $87.5 million. In addition, four asset swaps
were finalized during 1993 to increase working interests in core Gulf of Mexico
fields. Pennzoil intends to continue disposal of noncore properties during 1994
with the proceeds from these sales intended for reinvestment in or reallocation
to Pennzoil's core properties.
CREDIT FACILITIES. In August 1993, Pennzoil entered into an amended and
restated credit facility with a group of banks that provides for up to $600.0
million of unsecured revolving credit borrowings through August 19, 1994, with
any outstanding borrowings on such date being converted into a term credit
facility terminating on September 1, 1995. A facility fee of .15% per annum is
payable on the aggregate amount of the banks' commitments. This amended and
restated credit facility replaces and supersedes the previous revolving
28
<PAGE> 30
credit facilities of Pennzoil and Pennzoil Exploration and Production Company.
Borrowings under the facility totaled $195.0 million and $200.0 million at
December 31, 1993 and March 1, 1994, respectively.
During 1993, 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 $150.0
million to $250.0 million. Borrowings under Pennzoil's commercial paper
facilities totaled $249.4 million and $247.1 million at December 31, 1993 and
March 1, 1994, respectively.
Pennzoil has several short-term variable-rate credit arrangements with
certain banks. Pennzoil's Board of Directors has limited borrowings under these
credit arrangements to $200.0 million. Outstanding borrowings totaled $183.6
million at December 31, 1993 and $193.9 million at March 1, 1994. None of the
banks has any obligation to continue to extend credit after the maturities of
outstanding borrowings or to extend the maturities of any borrowings under these
credit arrangements.
OTHER REDEMPTIONS OF INDEBTEDNESS. In December 1992, Pennzoil called for
redemption $272.9 million principal amount of indebtedness (including $250.0
million of Pennzoil's 10 5/8% debentures due 2018 and $22.9 million of
Pennzoil's 10% debentures due 2011), using proceeds from the disposition of
Purolator, from the disposition of certain oil and gas properties and from cash
contributed by Chevron to Pennzoil Petroleum for the benefit of Pennzoil. The
redemptions were completed in February 1993. As of December 31, 1992, this
indebtedness was defeased by placing funds required for the redemption with the
trustee for the indebtedness. As a result, the funds deposited with the trustee
for the redemption of the debentures and the principal amount of the
indebtedness are not reflected in Pennzoil's consolidated balance sheet at
December 31, 1992. The premiums and related unamortized discount and debt issue
costs relating to these redemptions resulted in an extraordinary charge of $16.6
million ($25.2 million before tax), or $.41 per share, in the fourth quarter of
1992.
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 funds used for these redemptions were obtained
from (i) the cash proceeds from the completed sale of a subsidiary holding
Pennzoil's Indonesian gold properties in January 1993, (ii) the cash proceeds
from the sale in March 1993 of common stock of Pogo Producing Company held by
Pennzoil and (iii) the cash payments received from Chevron from and as a result
of the net cash flows from operations of the oil and gas properties of Pennzoil
Petroleum through March 31, 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 redemptions were
completed in November 1993. The funds used for these redemptions were primarily
obtained from the net proceeds from the sale in September 1993 of 5,000,000
shares of Pennzoil common stock. 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.
In November 1993, Pennzoil redeemed $24.0 million principal amount of
indebtedness (including $21.3 million of Pennzoil's 8 3/8% and 8 5/8% debentures
due 1996 and $2.7 million of Pennzoil's 8 3/4% debentures due 2001). No
significant gain or loss resulted from these early retirements.
TAX DISPUTE. In January 1994, Pennzoil received a letter and examination
report from the District Director of the Internal Revenue Service ("IRS") that
proposes a tax deficiency based on an audit of Pennzoil's 1988 federal income
tax return. The examination report proposes two principal adjustments with which
Pennzoil disagrees.
The first adjustment challenges Pennzoil's position under Section 1033 of
the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion
cash payment received from Texaco in 1988 in settlement of certain litigation
was realized as a result of the involuntary conversion of property and (ii) the
shares of Chevron common stock purchased with $2.2 billion of the net Texaco
settlement proceeds were similar or related in
29
<PAGE> 31
service or use to the property converted by Texaco. Although these issues have
not been resolved, Pennzoil believes that its position is sound, and it intends
to contest the proposed adjustment in court unless an acceptable settlement is
reached. The proposed tax deficiency relating to this proposed adjustment is
$550.9 million, net of available offsets. Pennzoil estimates that the additional
after-tax interest on this proposed deficiency would be approximately $234.3
million as of December 31, 1993. If Pennzoil's position is not sustained by the
courts, Pennzoil would be required to pay the assessed taxes, plus the accrued
interest. Pennzoil's consolidated financial statements do not include an accrual
for the interest that would be due in such event.
The second adjustment proposed by the IRS would permanently capitalize,
rather than allow Pennzoil to deduct, approximately $366 million incurred by
Pennzoil in 1988 and earlier years for litigation and related expenses in
connection with the Texaco settlement, even if it were determined that the
entire $3.0 billion is includable in Pennzoil's 1988 taxable income. Pennzoil
believes that this proposed adjustment is irrational and capricious and will not
be sustained in court. The proposed tax deficiency relating to the disallowance
of deductions is $124.6 million, and the estimated additional after-tax interest
on this proposed deficiency would be approximately $46.7 million as of December
31, 1993. If the deductions for legal and related expenses were ultimately
disallowed, Pennzoil would be required to pay the assessed taxes, plus the
accrued interest. Pennzoil's consolidated financial statements do not include an
accrual for the taxes that would be assessed as a result of the proposed
disallowance of deductions or the related interest that would be due in such
event.
Pennzoil has formally protested the IRS' proposed tax deficiency in writing
within the required 30-day time period. The issue has been forwarded to the IRS
Appeals Office, which is empowered to settle disputes with taxpayers, taking
into account the hazards of litigation. If Pennzoil and the IRS Appeals Office
are unable to reach a negotiated resolution of these tax issues, the IRS would
forward a letter requiring Pennzoil to pay the assessed taxes, plus the accrued
interest, within 90 days, unless Pennzoil files a petition with the United
States Tax Court. If Pennzoil were to choose to file suit in the Tax Court,
Pennzoil would not pay any taxes unless and until the Tax Court rendered a
judgment against Pennzoil, but interest would continue to accrue on any taxes
ultimately determined to be due. Alternatively, Pennzoil would be entitled to
choose to pay the assessed taxes, plus the accrued interest, and file a claim
for a refund in either the United States Court of Claims or the United States
District Court for the Southern District of Texas. Paying the assessed taxes
would halt the accrual of interest on any taxes finally determined to be owing
by Pennzoil. In such event, any refund to Pennzoil would include a refund by the
IRS of the prior interest paid by Pennzoil, as well as a payment by the IRS of
additional interest accrued on the assessed taxes previously paid by Pennzoil.
If litigation is necessary, a case of this kind would normally take several
years in the absence of a settlement, which could occur at any stage in the
process.
Pennzoil had cash and cash equivalents and current marketable securities
and other investments of $946.6 million at December 31, 1993 and approximately
$850 million at March 1, 1994. As a result of these available liquid assets and
Pennzoil's available credit facilities, Pennzoil believes that it has the
financial flexibility to deal with any eventuality that may occur in connection
with the dispute with the IRS, including the possibility of paying the taxes
assessed, plus the accrued interest, and suing for a refund if Pennzoil is not
able to resolve the disputed matters through discussions with the IRS.
Deferred income taxes originally resulted from the timing difference in the
recognition of the settlement income for tax and financial reporting purposes
under the deferred method of accounting for income taxes and not from the
accrual of a contingency reserve for taxes due in the event Pennzoil's tax
reporting position ultimately were determined to be incorrect. Under the
liability method of accounting for income taxes adopted by Pennzoil in December
1992, since the excess of the financial reporting basis over the tax basis of
Pennzoil's investment in Pennzoil Petroleum is not expected to result in a
future income tax liability, deferred income taxes attributable to the
15,750,000 shares of Chevron common stock exchanged for the stock of Pennzoil
Petroleum have been reflected as a reduction of the cost of Pennzoil's
investment in Pennzoil Petroleum. Deferred income taxes remain related to the
9,035,518 shares of Chevron common stock currently owned by Pennzoil. Resolution
of the tax dispute could result in an increase in the carrying cost of
Pennzoil's investment in Pennzoil Petroleum and, therefore, an increase in
future depreciation, depletion and amortization expense.
30
<PAGE> 32
CAPITAL EXPENDITURES. Total capital expenditures for 1993 were $485.1
million, including $11.4 million of interest capitalized, representing an
increase of $322.5 million from comparable 1992 capital expenditure levels.
The table below summarizes the current 1994 capital budget by segment
compared with 1993 and 1992 capital expenditures, excluding expenditures related
to Pennzoil's acquisition of Pennzoil Petroleum in 1992. The capital budget is
reassessed from time to time, and could, for example, be adjusted to reflect
changes in oil and gas prices and other economic factors.
<TABLE>
<CAPTION>
1994
BUDGET 1993 1992
------ ------ ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C>
Oil and Gas(1)................................. $223.9 $360.5 $ 93.8
Motor Oil & Automotive Products................ 59.1 71.5 35.8
Franchise Operations........................... 14.5 21.7 25.8
Sulphur........................................ 6.2 2.3 2.9
Corporate and Other............................ 6.6 29.1 4.3
------ ------ ------
$310.3 $485.1 $162.6
------ ------ ------
------ ------ ------
</TABLE>
- ---------------
(1) The 1994 capital expenditures for this segment are net of expected
recoveries from the gas utilization project in Azerbaijan.
Pennzoil currently expects to generate funds for its budgeted 1994 capital
expenditures from cash flows from operations, borrowings under its revolving
credit facility, available cash, proceeds from future debt issuances or a
combination of some or all of the foregoing.
ENVIRONMENTAL MATTERS. Pennzoil continues to make capital and operating
expenditures relating to the environment, including expenditures associated with
the compliance with increasing federal, state and local environmental
regulations. As they continue to evolve, environmental protection laws are
expected to have an increasing impact on Pennzoil's operations. In connection
with pollution abatement efforts related to current operations, Pennzoil made
capital expenditures of approximately $35 million in 1993. The 1993 expenditures
included $26.6 million for a diesel desulphurization and dewaxing project at the
Atlas refinery in Shreveport, Louisiana, which was required to meet the new
regulations promulgated under the federal Clean Air Act. Capital expenditures in
connection with pollution abatement are expected to be approximately $18 million
in 1994. Pennzoil's recurring operating expenditures relating to environmental
compliance activities are not material.
Pennzoil is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Such accruals
primarily include estimated costs associated with remediation. Pennzoil has not
used discounting in determining its accrued liabilities for environmental
remediation, and no claims for possible recovery from third party insurers or
other parties related to environmental costs have been recognized in Pennzoil's
consolidated financial statements. Pennzoil adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.
Pennzoil's assessment of the potential impact of these environmental laws
is subject to uncertainty due to the difficult process of estimating and
refining remediation costs that are subject to ongoing and evolving change.
Initial estimates of remediation costs reflect a broad-based analysis of site
conditions and potential environmental and human health impacts derived from
preliminary site investigations (including soil and water analysis, migration
pathways, and potential risk). Later changes to initial estimates may be based
on additional site investigations, completion of feasibility studies (comparing
and selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and finally the
31
<PAGE> 33
actual implementation of the remediation plan. This process occurs over
relatively long periods of time and is sequential, highly influenced by
regulatory and community approval processes and subject to ongoing development
of remediation technologies. Pennzoil's assessment analysis takes into account
the state of the process each site is in at the time of estimation, the degree
of uncertainty surrounding the estimates for each phase of remediation and other
site specific factors.
In connection with Pennzoil's disposition of Purolator, Pennzoil and
Purolator entered into an indemnification agreement pursuant to which Pennzoil
has agreed to reimburse Purolator for costs and expenses of certain
environmental remediation relating to a plant operated by Purolator in Elmira
Heights, New York, and certain environmental remediation, if any, relating to
one other site located near the Elmira facility and a landfill site located in
Metamora, Michigan. The indemnification provided by Pennzoil applies to all
remediation required by Purolator under CERCLA that has been identified at the
Elmira facility in the Environmental Protection Agency's September 1992 Record
of Decision with respect to the Elmira facility, but does not extend to certain
additional environmental expenditures relating to the Elmira facility or other
sites for which Purolator is or may be held responsible. Pennzoil had a reserve
of $16.3 million and $17.7 million recorded with respect to its obligations
under its indemnification agreement with Purolator as of December 31, 1993 and
1992, respectively.
Certain of Pennzoil's subsidiaries are involved in matters in which it has
been alleged that such subsidiaries are potentially responsible parties ("PRPs")
under CERCLA or similar state legislation with respect to various waste disposal
areas owned or operated by third parties. In addition, certain of Pennzoil's
subsidiaries are involved in other environmental remediation activities,
including the removal, inspection and replacement, as necessary, of underground
storage tanks. As of December 31, 1993 and 1992, Pennzoil's consolidated balance
sheet included accrued liabilities for environmental remediation of $33.1
million and $34.2 million, respectively, which amounts include reserves with
respect to Pennzoil's obligations under its indemnification agreement with
Purolator referred to in the previous paragraph. Of these reserves, $4.8 million
and $4.9 million is reflected on the consolidated balance sheet as other current
liabilities as of December 31, 1993 and 1992, respectively, and $28.3 million
and $29.3 million is reflected as other liabilities as of December 31, 1993 and
1992, respectively. Pennzoil does not currently believe there is a reasonable
possibility of incurring additional material amounts in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Pennzoil's current belief that its share of wastes at a
particular site is or will be less than the threshold deemed by the
Environmental Protection Agency or recognized by the relevant group of PRPs as
being de minimis (and as a result Pennzoil's monetary exposure is not expected
to be material).
OTHER MATTERS. Pennzoil does not currently consider the impact of inflation
to be significant in the businesses in which Pennzoil operates.
Reference is made to Notes 1 and 6 of Notes to Consolidated Financial
Statements for a discussion of the impact that recently issued accounting
standards are expected to have on Pennzoil's consolidated financial statements,
when adopted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Pennzoil, together with the report
thereon of Arthur Andersen & Co. dated March 4, 1994 and the supplementary
financial data specified by Item 302 of Regulation S-K, are set forth on pages
F-1 through F-39 hereof. (See Item 14 for Index.)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
32
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Nominees," "Directors with
Terms Expiring in 1995 and 1996" and "Compliance with Section 16(a) of the
Exchange Act" set forth within the section entitled "Election of Directors" in
Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
See also Item S-K 401(b) appearing in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "Director Remuneration,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" set forth within the section entitled "Election of Directors" in
Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Directors and Officers" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" in Pennzoil's
definitive Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions Concerning
Continuing Directors" and "Certain Transactions Concerning Retiring Directors"
set forth within the section entitled "Election of Directors" and under the
caption "Security Ownership of Certain Shareholders" set forth within the
section entitled "Additional Information" in Pennzoil's definitive Proxy
Statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Report of Independent Public Accountants............................. F-1
Consolidated Statement of Income..................................... F-3
Consolidated Balance Sheet........................................... F-4
Consolidated Statement of Shareholders' Equity....................... F-6
Consolidated Statement of Cash Flows................................. F-7
Notes to Consolidated Financial Statements........................... F-8
</TABLE>
The supplementary financial data specified by Item 302 of Regulation S-K
are included in the Supplemental Financial and Statistical
Information -- Unaudited beginning on page F-33.
33
<PAGE> 35
(A)(2) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Schedule I. Marketable Securities and Other Investments............ S-1
Schedule V. Consolidated Property, Plant and Equipment............. S-2
Schedule VI. Consolidated Accumulated Depreciation, Depletion,
Amortization and Valuation Allowances of Property,
Plant and Equipment.................................... S-3
Schedule IX. Short-Term Borrowings.................................. S-4
Schedule X. Supplementary Consolidated Income Statement
Information............................................ S-5
</TABLE>
Other schedules of Pennzoil and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(A)(3) EXHIBITS.
<TABLE>
<S> <C>
*3(a) -- Restated Certificate of Incorporation of Pennzoil Company, as amended
through July 27, 1984 (Pennzoil Company 10-K (1984), SEC File No.
1-5591, Exhibit 3(a)).
*3(b) -- Certificate of Retirement of Stock of Pennzoil Company dated March
26, 1985 (Pennzoil Company 10-K (1985), SEC File No. 1-5591, Exhibit
3(b)).
*3(c) -- Certificate of Amendment to the Restated Certificate of Incorporation
of Pennzoil Company dated April 25, 1985 (Pennzoil Company 10-K
(1985), SEC File No. 1-5591, Exhibit 3(c)).
*3(d) -- Certificate of Reduction in Number of Shares of Series of Pennzoil
Company dated June 10, 1986 (Pennzoil Company 10-K (1987), SEC File
No. 1-5591, Exhibit 3(e)).
*3(e) -- Certificate of Retirement of Stock of Pennzoil Company dated June 10,
1986 (Pennzoil Company 10-K (1987), SEC File No. 1-5591, Exhibit
3(f)).
*3(f) -- Certificate of Amendment to the Restated Certificate of Incorporation
of Pennzoil Company dated April 30, 1987 (Pennzoil Company 10-Q (1st
Quarter 1987), SEC File No. 1-5591, Exhibit 3(a)).
*3(g) -- Certificate of Designation, Preferences and Rights of Series A
Participating Preferred Stock of Pennzoil Company dated April 18,
1988 (Pennzoil Company 10-Q (1st Quarter 1988), SEC File No. 1-5591,
Exhibit 3(b)).
*3(h) -- Certification of Elimination of Designation of Pennzoil Company dated
November 20, 1991 (Pennzoil Company 10-K (1991), SEC File No. 1-5591,
Exhibit 3(h)).
*3(i) -- By-laws of Pennzoil Company, as amended through September 16, 1993
(Pennzoil Company 8-K (September 15, 1993), SEC File No. 1-5591,
Exhibit 4).
*4(a) -- Indenture dated as of February 15, 1986 (the "1986 Indenture")
between Pennzoil Company and Mellon Bank, N.A., Trustee (Pennzoil
Company 10-Q (2nd Quarter 1986), SEC File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of March 16, 1987 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 9% Debentures due April 1, 2017 (Pennzoil Company
10-Q (1st Quarter 1987), SEC File
No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of April 14, 1989 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 10 5/8% Debentures due June 1, 2001 (Pennzoil
Company 10-Q (1st Quarter 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(d) -- Officer's Certificate dated as of November 14, 1989 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/8% Debentures due November 15, 2009 and
9 5/8% Notes due November 15, 1999 (Pennzoil Company 10-K (1989), SEC
File No. 1-5591, Exhibit 4(n)).
</TABLE>
34
<PAGE> 36
<TABLE>
<S> <C>
*4(e) -- Officer's Certificate dated as of November 19, 1990 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/4% Debentures due November 1, 2005
(Pennzoil Company 10-K (1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(f) -- Instrument of Resignation, Appointment and Acceptance dated as of
April 1, 1991 among Pennzoil Company, Mellon Bank, N.A., as Retiring
Trustee, and Texas Commerce Bank National Association, as Successor
Trustee, under the 1986 Indenture (Pennzoil Company 10-K (1991), SEC
File No. 1-5591, Exhibit 4(p)).
*4(g) -- Indenture dated as of December 15, 1992 (the "1992 Indenture")
between Pennzoil Company and Texas Commerce Bank National
Association, Trustee (Pennzoil Company 10-K (1992), SEC File No.
1-5591, Exhibit 4(o)).
*4(h) -- First Supplemental Indenture dated as of January 13, 1993 to the 1992
Indenture (Pennzoil Company 10-K (1992), SEC File No. 1-5591, Exhibit
4(p)).
4(i) -- Second Supplemental Indenture dated as of October 12, 1993 to the
1992 Indenture.
Pennzoil Company agrees to furnish to the Commission upon request a copy
of any agreement defining the rights of holders of long-term debt of
Pennzoil Company and all its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed, under
which the total amount of securities authorized does not exceed 10%
of the total assets of Pennzoil Company and its subsidiaries on a
consolidated basis.
+*10(a) -- 1978 Stock Option Plan of Pennzoil Company, as amended (Registration
No. 2-67268, Exhibit 4(a)).
+*10(b) -- 1981 Stock Option Plan of Pennzoil Company (Registration No. 2-76935,
Exhibit 4(a)).
+*10(c) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(d) -- Pennzoil Company Salary Continuation Plan (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(e) -- Pennzoil Company Supplemental Disability Plan effective January 1,
1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591, Exhibit
5(y)).
+*10(f) -- Pennzoil Company Supplemental Life Insurance Plan effective January
1, 1978, as amended (Pennzoil Company 10-K (1980), SEC File No.
1-5591, Exhibit 10(g)).
+*10(g) -- Pennzoil Company Deferred Compensation Plan (Pennzoil Company 10-K
(1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(h) -- Specimen of Pennzoil Company Deferred Compensation Agreement
(Pennzoil Company 10-K (1982), SEC File No. 1-5591, Exhibit
10(j)(1)).
+*10(i) -- Specimen of Pennzoil Company agreements regarding certain benefits
payable in the event of a change in control (Pennzoil 10-Q (3rd
Quarter 1982), SEC File
No. 1-5591, Exhibit 28).
+*10(j) -- Pennzoil Company Section 415 Excess Benefit Agreements (Pennzoil
Company 10-Q (1st Quarter 1980), SEC File No. 1-5591, Exhibit 5).
+*10(k) -- Pennzoil Company Medical Expenses Reimbursement Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591,
Exhibit 5(v)).
+*10(l) -- Pennzoil Company 1985 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (4-25-85), SEC File No. 1-5591,
Exhibit B).
+*10(m) -- Pennzoil Company Executive Severance Plan (Pennzoil Company 10-K
(1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(n) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (4-26-90), SEC File No. 1-5591, Exhibit A).
+*10(o) -- Pennzoil Company 1990 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (4-26-90), SEC File No. 1-5591,
Exhibit B).
+*10(p) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (4-13-93), SEC File No. 1-5591, Exhibit A).
</TABLE>
35
<PAGE> 37
<TABLE>
<S> <C>
+*10(q) -- Pennzoil Company 1993 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (4-13-93), SEC File No. 1-5591,
Exhibit B).
11 -- Computation of Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Dividends for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989.
21 -- List of Subsidiaries of Pennzoil Company.
23(a) -- Consent of Arthur Andersen & Co.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
23(c) -- Consent of DeGolyer and MacNaughton.
24 -- Powers of Attorney.
27(a) -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers
as of December 31, 1993 relating to oil and gas reserves.
27(b) -- Letter Report of DeGolyer and MacNaughton on Certain Sulphur Reserves
as of January 1, 1994.
</TABLE>
- ---------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(B) REPORTS ON FORM 8-K.
During the fourth quarter of 1993, Pennzoil filed a Current Report on Form
8-K with the SEC dated as of November 26, 1993 to report the completion of the
sale of 8,158,582 shares of the common stock of Chevron.
36
<PAGE> 38
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PENNZOIL COMPANY
By: JAMES L. PATE
----------------------------------
(JAMES L. PATE, PRESIDENT AND
CHIEF EXECUTIVE OFFICER)
Date: March 11, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
JAMES L. PATE Principal Executive Officer March 11, 1994
- --------------------------------------------- and Director
(JAMES L. PATE, PRESIDENT AND
CHIEF EXECUTIVE OFFICER)
MARK A. MALINSKI Principal Accounting Officer March 11, 1994
- ---------------------------------------------
(MARK A. MALINSKI, GROUP VICE PRESIDENT --
ACCOUNTING AND CONTROLLER)
DAVID P. ALDERSON, II Principal Financial Officer March 11, 1994
- ---------------------------------------------
(DAVID P. ALDERSON, II, GROUP VICE PRESIDENT --
FINANCE AND TREASURER)
HOWARD H. BAKER, JR.*
DOUGLAS J. BOURNE*
W. J. BOVAIRD*
W. L. LYONS BROWN, JR.*
ALLEN H. CARRUTH*
ERNEST H. COCKRELL*
HARRY H. CULLEN* A majority of the Directors March 11, 1994
ALFONSO FANJUL* of the Registrant
C. W. FLINT, JR.*
BAINE P. KERR*
BERDON LAWRENCE*
J. HUGH LIEDTKE*
BRENT SCOWCROFT*
CYRIL WAGNER, JR.*
*By: MARK A. MALINSKI
----------------------------------------
(MARK A. MALINSKI, ATTORNEY-IN-FACT)
</TABLE>
37
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennzoil Company:
We have audited the accompanying consolidated balance sheet of Pennzoil
Company (a Delaware corporation) and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1993. These financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pennzoil Company and
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 8 to the Consolidated Financial Statements, in January
1994, the Company received a letter and examination report from the District
Director of the Internal Revenue Service ("IRS") that proposes a tax deficiency
based on an audit of the Company's 1988 federal income tax return. The proposed
tax deficiency relates primarily to the Company's tax reporting position with
regard to the receipt of $3.0 billion in 1988 in settlement of certain
litigation. Deferred income taxes were provided in the Consolidated Financial
Statements in 1988 in connection with the Company's receipt of the $3.0 billion
settlement; however, no accrual has been made for interest on the proposed tax
deficiency. The Company has filed a protest with the IRS asserting the Company's
disagreement with the examination report; however, the ultimate outcome of this
matter is not presently determinable.
As discussed in Note 2 to the Consolidated Financial Statements, as of
January 1, 1992, the Company changed its method of accounting for income taxes.
Also, as discussed in Note 6 to the Consolidated Financial Statements, as of
January 1, 1991, the Company changed its method of accounting for postretirement
benefit costs other than pensions.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules listed
in Item 14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
The financial statement schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 4, 1994
F-1
<PAGE> 40
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE> 41
PENNZOIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1993 1992 1991
---------- ---------- ----------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales.......................................... $2,477,467 $2,222,673 $2,158,320
Investment and other income, net................... 304,900 134,008 156,519
---------- ---------- ----------
2,782,367 2,356,681 2,314,839
COSTS AND EXPENSES
Cost of sales...................................... 1,543,054 1,488,119 1,447,148
Selling, general and administrative expenses....... 372,473 356,137 306,269
Depreciation, depletion and amortization........... 330,979 222,545 192,553
Exploration expenses............................... 70,713 13,821 52,868
Taxes, other than income........................... 66,159 52,803 52,467
Interest charges................................... 190,968 233,360 253,943
Interest capitalized............................... (11,420) (8,731) (10,447)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX......................................... 219,441 (1,373) 20,038
Income tax (benefit)................................. 59,205 (18,783) (20,060)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.................... 160,236 17,410 40,098
DISCONTINUED OPERATIONS (Note 11)
Income (loss) from operations, net of taxes........ -- 10,208 (82,118)
Gain on disposition................................ -- 1,455 --
Income from operations previously offset against
reserve for estimated loss on disposition....... -- -- (3,706)
Reversal of remaining reserve for estimated loss on
disposition..................................... -- -- 115,742
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............................ 160,236 29,073 70,016
Extraordinary items (Note 3)......................... (18,380) (16,612) --
Cumulative effect of change in accounting principle
(Notes 2 and 6).................................... -- 115,703 (48,974)
---------- ---------- ----------
NET INCOME........................................... $ 141,856 $ 128,164 $ 21,042
---------- ---------- ----------
---------- ---------- ----------
EARNINGS (LOSS) PER SHARE
Continuing operations.............................. $ 3.80 $ .43 $ .99
Discontinued operations............................ -- .29 .74
---------- ---------- ----------
Total before extraordinary items and
cumulative effect of change in accounting
principle................................ 3.80 .72 1.73
Extraordinary items................................ (.44) (.41) --
Cumulative effect of change in accounting
principle....................................... -- 2.85 (1.21)
---------- ---------- ----------
TOTAL...................................... $ 3.36 $ 3.16 $ .52
---------- ---------- ----------
---------- ---------- ----------
DIVIDENDS PER COMMON SHARE........................... $ 3.00 $ 3.00 $ 3.00
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 42
PENNZOIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1993 1992
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................ $ 262,275 $ 20,732
Marketable securities and other investments...................... 684,308 --
Receivables...................................................... 363,287 369,647
Inventories
Crude oil, natural gas and sulphur............................ 38,965 39,899
Motor oil and automotive products............................. 123,282 125,236
Materials and supplies, at average cost.......................... 26,792 22,647
Deferred income tax.............................................. 13,587 40,420
Other current assets............................................. 31,306 27,196
---------- ----------
TOTAL CURRENT ASSETS..................................... 1,543,802 645,777
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and Gas, successful efforts method of accounting............. 4,102,181 4,310,392
Motor Oil & Automotive Products.................................. 837,932 776,536
Franchise Operations............................................. 154,877 136,539
Sulphur.......................................................... 188,427 186,425
Other............................................................ 179,530 186,501
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT...................... 5,462,947 5,596,393
Less accumulated depreciation, depletion, amortization and
valuation allowances.......................................... 3,138,503 3,284,343
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT........................ 2,324,444 2,312,050
---------- ----------
OTHER ASSETS
Marketable securities and other investments...................... 654,973 1,207,916
Other............................................................ 362,984 291,434
---------- ----------
TOTAL OTHER ASSETS....................................... 1,017,957 1,499,350
---------- ----------
TOTAL ASSETS....................................................... $4,886,203 $4,457,177
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 43
PENNZOIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1993 1992
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt............................. $ 19,568 $ 138,345
Notes payable.................................................... 433,031 339,346
Accounts payable................................................. 196,083 196,700
Taxes accrued.................................................... 93,242 6,700
Interest accrued................................................. 29,538 37,276
Payroll accrued.................................................. 23,103 23,344
Other current liabilities........................................ 26,702 31,922
---------- ----------
TOTAL CURRENT LIABILITIES................................ 821,267 773,633
LONG-TERM DEBT, less current maturities............................ 1,973,488 1,811,807
DEFERRED INCOME TAX................................................ 304,902 415,513
OTHER LIABILITIES.................................................. 280,742 275,975
---------- ----------
TOTAL LIABILITIES........................................ 3,380,399 3,276,928
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common stock, $0.83 1/3 par -- authorized 75,000,000 shares,
issued 52,208,888 shares...................................... 43,507 43,507
Additional capital............................................... 327,939 293,009
Retained earnings................................................ 1,474,741 1,459,069
Cumulative foreign currency translation adjustment and other..... (2,746) 705
Common stock in treasury, at cost, 6,298,581 shares in 1993
and 11,492,557 shares in 1992................................. (337,637) (616,041)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................... 1,505,804 1,180,249
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $4,886,203 $4,457,177
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 44
PENNZOIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1993 1992 1991
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- ------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK, $0.83 1/3 par --
Authorized 75,000,000 shares
Balance January 1 and December
31.............................. 52,209 $ 43,507 52,209 $ 43,507 52,209 $ 43,507
------- ---------- ------- ---------- ------- ----------
ADDITIONAL CAPITAL
Balance January 1.................. 293,009 294,256 293,384
Shares reissued................. 34,930 (1,247) 872
---------- ---------- ----------
Balance December 31................ 327,939 293,009 294,256
---------- ---------- ----------
RETAINED EARNINGS
Balance January 1.................. 1,459,069 1,452,680 1,552,661
Net income...................... 141,856 128,164 21,042
Dividends on common stock....... (126,184) (121,775) (121,023)
---------- ---------- ----------
Balance December 31................ 1,474,741 1,459,069 1,452,680
---------- ---------- ----------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT AND OTHER
Balance January 1.................. 705 3,713 3,389
Translation adjustment.......... (3,446) (3,043) 320
Change in additional minimum
pension liability............. (5) 35 4
---------- ---------- ----------
Balance December 31................ (2,746) 705 3,713
---------- ---------- ----------
COMMON STOCK IN TREASURY, at cost
Balance January 1.................. (11,493) (616,041) (11,748) (630,072) (11,968) (641,390)
Shares acquired................. -- -- -- -- (1) (57)
Shares reissued................. 5,194 278,404 255 14,031 221 11,375
------- ---------- ------- ---------- ------- ----------
Balance December 31................ (6,299) (337,637) (11,493) (616,041) (11,748) (630,072)
------- ---------- ------- ---------- ------- ----------
TOTAL SHAREHOLDERS' EQUITY........... 45,910 $1,505,804 40,716 $1,180,249 40,461 $1,164,084
------- ---------- ------- ---------- ------- ----------
------- ---------- ------- ---------- ------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 45
PENNZOIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1992 1991
----------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................... $ 141,856 $ 128,164 $ 21,042
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........ 330,979 222,545 192,553
Dry holes and impairments....................... 51,140 6,163 35,888
Deferred income tax............................. (77,475) (27,829) (38,898)
Settlement income tax payments (Note 2)......... -- -- (13,180)
Reserve for estimated loss on disposition of
discontinued operations...................... -- -- (115,742)
Provision for write-down of assets and other
charges...................................... -- -- 107,976
Extraordinary loss on early extinguishment of
debt......................................... 18,380 16,612 --
Realized gains on sales of marketable securities
and other investments........................ (182,057) (298) --
Gains on sales of assets........................ (35,222) (3,198) (1,631)
Non-cash and other nonoperating items........... 33,592 13,234 22,467
Cumulative effect of change in accounting
principle.................................... -- (115,703) 48,974
Change in operating assets and liabilities (Note
1)........................................... 5,684 (52,793) (24,461)
----------- --------- ---------
Net cash provided by operating activities.... 286,877 186,897 234,988
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................. (474,992) (143,303) (227,078)
Acquisition of Jiffy Lube International, Inc., net of
cash acquired (Note 10)........................... -- -- (9,267)
Investment in discontinued operations (Purolator
Products Company)................................. -- (4,270) 37,757
Proceeds from disposition of Purolator Products
Company, net...................................... -- 205,217 --
Cash contribution from Chevron to Pennzoil Petroleum
(Note 10)......................................... 9,936 57,400 --
Purchases of marketable securities and other
investments....................................... (928,159) (202,857) (215,038)
Proceeds from sales of marketable securities and
other investments................................. 981,101 199,244 210,011
Proceeds from sales of assets........................ 97,102 37,497 4,596
Other investing activities........................... (7,987) (27,311) (39,750)
----------- --------- ---------
Net cash provided by (used in) investing
activities................................. (322,999) 121,617 (238,769)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt............ 93,685 48,389 124,342
Debt repayments...................................... (1,624,612) (319,800) (178,780)
Proceeds from issuances of debt...................... 1,630,759 -- 23,679
Net proceeds from issuance of common stock........... 303,300 -- --
Dividends paid....................................... (126,184) (121,775) (121,023)
Other financing activities........................... 717 240 2,129
----------- --------- ---------
Net cash provided by (used in) financing
activities................................. 277,665 (392,946) (149,653)
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 241,543 (84,432) (153,434)
CASH AND CASH EQUIVALENTS, beginning of period......... 20,732 105,164 258,598
----------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period............... $ 262,275 $ 20,732 $ 105,164
----------- --------- ---------
----------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 46
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Principles of Consolidation --
The accompanying consolidated financial statements include all
majority-owned subsidiaries of Pennzoil Company ("Pennzoil"). All significant
intercompany accounts and transactions have been eliminated. Certain prior
period items have been reclassified in the Consolidated Financial Statements in
order to conform with the current year presentation. The results of operations
of Pennzoil Petroleum Company ("Pennzoil Petroleum") have been included in
Pennzoil's consolidated financial statements subsequent to October 30, 1992 (see
Note 10).
Marketable Securities and Other Investments --
At December 31, 1993, marketable securities and other investments included
in current assets were comprised of domestic commercial paper, Federal National
Mortgage Association notes, a certificate of deposit and treasury bills.
Marketable securities and other investments are carried at the lower of
aggregate cost or market value, as shown below.
<TABLE>
<CAPTION>
GROSS
AND NET
UNREALIZED
AT DECEMBER 31 COST MARKET GAINS
---------- ---------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
1993
Current marketable securities and other
investments...................................... $ 684,308 $ 684,308 $ --
---------- ---------- --------
---------- ---------- --------
Non-current marketable securities and other
investments:
Chevron Corporation common stock................. $ 608,565 $ 787,220 $178,655
Other marketable securities and investments...... 46,408 46,408 --
---------- ---------- --------
Total non-current marketable securities
and other investments............................ $ 654,973 $ 833,628 $178,655
---------- ---------- --------
---------- ---------- --------
1992
Non-current marketable securities and other
investments:
Chevron Corporation common stock................. $1,158,067 $1,194,990 $ 36,923
Other marketable securities and investments...... 49,849 55,710 5,861
---------- ---------- --------
Total non-current marketable securities
and other investments............................ $1,207,916 $1,250,700 $ 42,784
---------- ---------- --------
---------- ---------- --------
</TABLE>
As of December 31, 1993 and 1992, Pennzoil beneficially owned 9,035,518
shares and 17,194,100 shares, respectively, of the common stock of Chevron
Corporation ("Chevron"). At March 4, 1994, the closing price for Chevron common
stock on the New York Stock Exchange was $88.25 per share. Realized gains on
Pennzoil's remaining investment in Chevron common stock could be limited as a
result of the issuance of Pennzoil's 6 1/2% Exchangeable Senior Debentures due
January 15, 2003 (the "6 1/2% Debentures") and 4 3/4% Exchangeable Senior
Debentures due October 1, 2003 (the "4 3/4% Debentures"), all of which are
exchangeable at the option of the holders thereof for shares of Chevron common
stock owned by Pennzoil. Reference is made to Note 3 for additional information.
In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the New York Stock Exchange for a price of $89.00 per share
before commissions ($88.38 per share net of commissions). The sale resulted in a
net realized gain of $137.0 million ($171.6 million before tax), or $3.25 per
share.
F-8
<PAGE> 47
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of the securities sold is based on the average cost of each
security held at the time of sale.
Other income effects from marketable securities and other investments are
discussed under the caption "Investment and Other Income, Net" below.
In May 1993, the Financial Accounting Standards Board ("FASB") issued a new
standard on accounting for certain investments in debt and equity securities.
This standard requires that, except for debt securities classified as
"held-to-maturity securities," investments in debt and equity securities must be
reported at fair value. As a result of the standard, Pennzoil's remaining
investment in Chevron common stock will be reported at fair value, with
unrealized gains or losses excluded from earnings and reported as a separate
component of shareholders' equity. Adoption of the standard by Pennzoil is
required effective January 1, 1994. Based on December 31, 1993 fair values,
adoption of the standard would increase shareholders' equity by approximately
$107 million.
Investment and Other Income, Net --
Other revenues, net of related expenses, are included in investment and
other income, net, and consist of the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest income.......................................... $ 11,002 $ 8,050 $ 22,547
Dividend income.......................................... 60,496 95,722 106,963
Realized gains on sales of marketable securities and
other investments...................................... 182,057 298 --
Gains on sales of assets................................. 35,222 3,198 1,631
Settlements and refunds.................................. 824 3,501 11,422
Other income............................................. 15,299 23,239 13,956
-------- -------- --------
$304,900 $134,008 $156,519
-------- -------- --------
-------- -------- --------
</TABLE>
Substantially all interest and dividend income is from marketable
securities and other cash investments.
Receivables --
Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $10.0 million in 1993 and $10.1 million
in 1992. Long-term receivables consist of notes receivable and are net of
allowances for doubtful accounts of $4.2 million in 1993 and $8.2 million in
1992.
At December 31, 1993 and 1992, current receivables included notes
receivable of $12.6 million and $13.0 million, respectively. Other assets
included long-term notes receivable of $44.7 million and $31.8 million at
December 31, 1993 and 1992, respectively.
In May 1993, the FASB issued a new standard on accounting by creditors for
impairment of loans. This standard requires certain impaired loans to be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Adoption of the standard by Pennzoil is required no later
than the first quarter of 1995, although earlier implementation is permitted.
Pennzoil currently expects to adopt the standard effective January 1, 1995.
Based on a preliminary review, Pennzoil does not expect that adoption of the
standard will have a material effect on its financial condition or results of
operations.
F-9
<PAGE> 48
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories --
A majority of inventories are reported at cost using the last-in, first-out
("LIFO") method, which is lower than market. Substantially all other inventories
are reported at cost using the first-in, first-out method. Inventories valued on
the LIFO method totaled $131.2 million at December 31, 1993 and $134.3 million
at December 31, 1992. The current cost of LIFO inventories was approximately
$178.8 million and $207.9 million at December 31, 1993 and 1992, respectively.
Oil and Gas Producing Activities and Depreciation, Depletion and
Amortization --
Pennzoil follows the successful efforts method of accounting for oil and
gas operations. Under the successful efforts method, lease acquisition costs are
capitalized. Significant unproved properties are reviewed periodically on a
property-by-property basis to determine if there has been impairment of the
carrying value, with any such impairment charged currently to exploration
expense. All other unproved properties are generally aggregated and a portion of
such costs estimated to be nonproductive, based on historical experience, is
amortized on an average holding period basis.
Exploratory drilling costs are capitalized pending determination of proved
reserves. If proved reserves are not discovered, the exploratory drilling costs
are expensed. Other exploration costs are also expensed. All development costs
are capitalized. Provision for depreciation, depletion and amortization is
determined on a field-by-field basis using the unit-of-production method.
Estimated costs of future dismantlement and abandonment of wells and production
platforms, net of salvage values, are accrued as part of depreciation, depletion
and amortization expense using the unit-of-production method; actual costs are
charged to accumulated depreciation, depletion and amortization. The carrying
amounts of proven properties are reviewed periodically and an impairment reserve
is provided as conditions warrant.
Pennzoil follows the sales method of accounting for natural gas imbalances.
Under the sales method, revenue is recognized on all production delivered by
Pennzoil to its purchasers, regardless of Pennzoil's ownership interest in the
respective property. At December 31, 1993, Pennzoil's gas imbalance reflects a
net underproduced position of 17 billion cubic feet of gas. The company expects
to recover this imbalance from its co-owners through future production or
alternative arrangements.
Sulphur properties are generally depreciated and depleted on the
unit-of-production method, except assets having an estimated life less than the
estimated life of the mineral deposits, which are depreciated on the
straight-line method.
All other properties are depreciated on straight-line or accelerated
methods in amounts calculated to allocate the cost of properties over their
estimated useful lives.
Environmental Expenditures --
Environmental expenditures are expensed or capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated.
Intangible Assets --
Substantially all intangible assets, included in other assets in the
accompanying consolidated balance sheet, relate to goodwill recognized in
business combinations accounted for as purchases. Goodwill included in other
assets in the accompanying consolidated balance sheet was $86.2 million at
December 31, 1993 and $82.3 million at December 31, 1992, net of accumulated
amortization of $17.2 million and $11.2 million, respectively. Goodwill is being
amortized on a straight-line basis over periods ranging from 20 to 40 years.
Amortization expense recorded during 1993 and 1992 was $8.1 million and $5.2
million, respectively.
F-10
<PAGE> 49
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash Flow Information --
For purposes of the consolidated statement of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances has been immaterial. Cash used in operating activities includes cash
payments for interest (net of amounts capitalized) of $183.6 million, $228.9
million and $246.8 million in 1993, 1992 and 1991, respectively. Interest
capitalized for 1993, 1992 and 1991 was $11.4 million, $8.7 million and $10.4
million, respectively. Income taxes paid, net of refunds, during 1993, 1992 and
1991 were $5.5 million, $2.2 million and $13.7 million, respectively.
Changes in operating assets and liabilities, net of effects from the
purchases of equity interests in certain businesses acquired, consist of the
following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Receivables.............................................. $(27,662) $(40,062) $ 12,607
Inventories.............................................. 3,263 14,285 5,078
Accounts payable and accrued liabilities................. (44,760) (5,775) (43,076)
Current federal income taxes payable..................... 115,163 (32,410) 7,498
Other assets and liabilities............................. (40,320) 11,169 (6,568)
-------- -------- --------
$ 5,684 $(52,793) $(24,461)
-------- -------- --------
-------- -------- --------
</TABLE>
Earnings Per Share --
Earnings per share are computed based on the weighted average shares of
common stock outstanding. The average shares used in earnings per share
computations for the years 1993, 1992 and 1991 were 42,187,739, 40,582,451 and
40,346,652, respectively.
Foreign Operations --
Consolidated income (loss) from continuing operations before income tax
includes losses from foreign operations of $17.3 million, $21.7 million and
$10.0 million in 1993, 1992 and 1991, respectively.
(2) INCOME TAXES --
Accounting for Income Taxes --
In December 1992, Pennzoil announced its decision to change its method of
accounting for income taxes by adopting the new requirements of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective as of January 1, 1992. Previous 1992 interim period results were
restated as a result of the adoption. Prior year financial statements have not
been restated to reflect the new accounting method. As a result of adopting SFAS
No. 109, Pennzoil recognized a cumulative, one-time benefit from the change in
accounting principle for periods prior to 1992 of $115.7 million, or $2.85 per
share, as of the first quarter of 1992. In addition to the cumulative effect,
income from continuing operations for the year ended December 31, 1992,
increased $3.4 million ($4.5 million before tax), or $.08 per share, associated
with adopting the new standard.
SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Prior to adoption of SFAS No. 109, deferred income taxes resulted from timing
differences in the recognition of revenue and expense for tax and financial
purposes.
F-11
<PAGE> 50
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Federal, State and Foreign --
Federal, state and foreign income tax expense (benefit) for continuing
operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993 1992 1991
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current
United States.......................................... $133,210 $ 5,562 $ 14,905
Foreign................................................ 710 797 5
State.................................................. 2,760 2,687 3,928
Deferred
United States.......................................... (80,947) (28,105) (39,319)
Foreign................................................ (236) (447) 421
State.................................................. 3,708 723 --
-------- -------- --------
$ 59,205 $(18,783) $(20,060)
-------- -------- --------
-------- -------- --------
</TABLE>
Reference is made to Note 3 for information regarding the tax benefit
applicable to the extraordinary loss on the early retirement of debt. In
addition, reference is made to Note 6 for information regarding the deferred tax
benefit applicable to the cumulative effect of the change in accounting for
postretirement benefit costs other than pensions.
Pennzoil's net deferred tax liability is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
------------ ------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Deferred tax liability........................................ $ 633,285 $ 760,753
Deferred tax asset............................................ (401,284) (467,692)
Valuation allowance........................................... 59,314 82,032
--------- ---------
Net deferred tax liability.......................... $ 291,315 $ 375,093
--------- ---------
--------- ---------
</TABLE>
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1992
--------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Investment in Chevron common stock............................ $ 212,998 $ 393,743
Property, plant and equipment................................. 318,464 316,048
Proceeds from issuance of exchangeable debentures
treated as option proceeds.................................. 40,953 --
Original issue discount on exchangeable debentures............ (39,387) --
Alternative minimum tax credit carryforward................... (195,048) (198,859)
Net operating loss carryforwards.............................. (58,779) (111,171)
Other, net.................................................... (47,200) (106,700)
Valuation allowance........................................... 59,314 82,032
--------- ---------
Net deferred tax liability.......................... $ 291,315 $ 375,093
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE> 51
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prior to adopting SFAS No. 109, the sources of timing differences resulting
from the recognition of revenue and expense for tax and financial reporting
purposes and the tax effect of each were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1991
-------------
(EXPRESSED IN
THOUSANDS)
<S> <C>
Intangible exploration and development costs deducted or capitalized and
amortized for tax purposes over amounts expensed or capitalized and amortized
for financial purposes........................................................ $ 6,502
Depreciation deducted for tax purposes over amounts recorded for financial
purposes...................................................................... 646
Bad debts deducted for tax purposes over amounts expensed for financial
purposes...................................................................... 706
Rents deducted for tax purposes over amounts expensed for financial purposes.... 596
Alternative minimum tax credit carryover........................................ (29,183)
Net operating loss carryover.................................................... (9,356)
Other, net...................................................................... (8,809)
--------
$(38,898)
--------
--------
</TABLE>
The principal items accounting for the difference in income taxes on income
from continuing operations computed at the federal statutory rate and as
recorded are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1993 1992 1991
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) at statutory rate.................... $ 76,804 $ (467) $ 6,813
Increases (reductions) resulting from:
Percentage depletion in excess of cost basis............ -- -- (5,080)
Dividends received deduction............................ (14,744) (22,782) (25,456)
State income taxes, net................................. 4,204 2,251 2,592
Taxes on foreign income in excess of statutory rate..... 308 231 281
Amortization of nondeductible goodwill.................. 1,258 1,242 901
Change in tax law....................................... 16,000 -- --
Reversal of valuation allowance......................... (25,500) -- --
Other, net.............................................. 875 742 (111)
-------- -------- --------
Income tax (benefit)...................................... $ 59,205 $(18,783) $(20,060)
-------- -------- --------
-------- -------- --------
</TABLE>
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted,
establishing a new 35% corporate income tax rate effective January 1, 1993. As a
result of the increase in the marginal income tax rate and other tax law
changes, Pennzoil recorded a one-time, non-cash charge of approximately $16
million, or $.38 per share, in the third quarter of 1993 to adjust its deferred
income tax liabilities and assets for the effect of the change in income tax
rates.
The tax liability resulting from the November 1993 sale of 8,158,582 shares
of Chevron common stock was reduced by $25.5 million as a result of the
utilization of a net operating loss carryforward (see Note 1). Realization of
the net operating loss carryforward resulted in the reversal of a valuation
allowance related to the deferred tax asset.
As of December 31, 1993, Pennzoil had a United States net operating loss
carryforward of approximately $133 million, which is available to reduce future
regular income taxes payable. Additionally, for purposes of determining
alternative minimum tax, an approximately $7 million net operating loss is
available to offset future alternative minimum taxable income. Utilization of
these regular and alternative minimum tax net operating losses, to the extent
generated in separate return years, is limited based on the separate taxable
F-13
<PAGE> 52
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income of the subsidiary, or its successor, generating the loss. If not used,
these carryovers will expire in the years 1998 to 2004. In addition, Pennzoil
has approximately $195 million of alternative minimum tax credits indefinitely
available to reduce future regular tax liability to the extent it exceeds the
related alternative minimum tax otherwise due. All net operating loss and credit
carryover amounts are subject to examination by the tax authorities.
Reference is made to Note 8 for information regarding a letter and
examination report received from the District Director of the Internal Revenue
Service ("IRS") in January 1994 that proposes a tax deficiency based on an audit
of Pennzoil's 1988 federal income tax return.
(3) DEBT --
Long-term debt outstanding was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1993 1992
--------- ---------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Debentures and notes
9% due 1993...................................................... $ -- $ 100,000
8 3/8% and 8 5/8% due 1996....................................... -- 24,827
9 1/8% due 1996.................................................. -- 100,000
9 5/8% due 1999.................................................. 200,000 200,000
8 3/4% and 9% due 2001........................................... -- 45,963
10 5/8% due 2001................................................. 150,000 150,000
6 1/2% due 2003.................................................. 402,500 --
4 3/4% due 2003.................................................. 500,000 --
10 1/4% due 2005................................................. 250,000 250,000
12 1/8% and 12 1/4% due 2007..................................... -- 80,105
10 1/8% due 2009................................................. 200,000 200,000
10% due 2011..................................................... -- 177,100
10 1/8% due 2011................................................. -- 150,000
9% due 2017...................................................... 38,500 100,000
Revolving credit facilities with banks............................. 195,000 279,806
Jiffy Lube
Notes............................................................ 1,402 23,287
Contingent notes................................................. 11,546 12,882
Mortgages........................................................ 18,772 24,526
Other secured debt............................................... 13,312 15,876
Other (including debenture premiums and discounts)................. 12,024 15,780
--------- ---------
Total long-term debt, including current maturities............... 1,993,056 1,950,152
Less amounts due within one year
Debentures, notes and other...................................... 152 110,556
Jiffy Lube....................................................... 19,416 27,789
--------- ---------
19,568 138,345
--------- ---------
Total long-term amount........................................... $1,973,488 $1,811,807
--------- ---------
--------- ---------
</TABLE>
In August 1993, Pennzoil entered into an amended and restated credit
facility with a group of banks that provides for up to $600.0 million of
unsecured revolving credit borrowings through August 19, 1994, with any
outstanding borrowings on such date being converted into a term credit facility
terminating on September 1, 1995. A facility fee of .15% per annum is payable on
the aggregate amount of the banks' commitments. This amended and restated credit
facility replaces and supersedes the previous revolving credit facilities of
Pennzoil and Pennzoil Exploration and Production Company ("PEPCO"), a wholly
owned subsidiary of Pennzoil.
F-14
<PAGE> 53
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Borrowings under the facility totaled $195.0 million at December 31, 1993. The
average interest rate applicable to amounts outstanding under this facility and
the previous revolving credit facilities of Pennzoil and PEPCO was 3.59% during
1993.
Prior to August 1993, PEPCO had a revolving credit facility with a group of
banks to provide for unsecured borrowings. A commitment fee of .20% per annum
was payable on the average daily unborrowed amount under the facility.
Outstanding borrowings under this facility totaled $72.1 million at December 31,
1992. The average interest rate applicable to amounts outstanding under this
facility was 4.10% during 1992.
Also prior to August 1993, Pennzoil had a $500.0 million revolving credit
facility with a group of banks to provide for unsecured revolving credit
borrowings. A commitment fee of .15% per annum was payable on the average daily
unborrowed amount under the facility. Outstanding borrowings under this facility
totaled $207.7 million at December 31, 1992. The average interest rate
applicable to amounts outstanding under this facility was 4.15% during 1992.
Pennzoil's Board of Directors has 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 $150.0 million to
$250.0 million. Borrowings under Pennzoil's commercial paper facilities totaled
$249.4 million and $147.3 million at December 31, 1993 and 1992, respectively,
and are included in notes payable in the accompanying consolidated balance
sheet. The average interest rates applicable to outstanding commercial paper
were 3.26% and 3.81% during 1993 and 1992, respectively.
Pennzoil has several short-term variable-rate credit arrangements with
certain banks. Pennzoil's Board of Directors has limited borrowings under these
credit arrangements to $200.0 million. Outstanding borrowings totaled $183.6
million and $192.1 million at December 31, 1993 and 1992, respectively, and are
included in notes payable in the accompanying consolidated balance sheet. The
average interest rates applicable to amounts outstanding under these
arrangements were 3.35% and 3.87% during 1993 and 1992, respectively. None of
the banks has any obligation to continue to extend credit after the maturities
of outstanding borrowings or to extend the maturities of any borrowings under
these credit arrangements.
In December 1992, Pennzoil called for redemption $272.9 million principal
amount of indebtedness (including $250.0 million of Pennzoil's 10 5/8%
debentures due 2018 and $22.9 million of Pennzoil's 10% debentures due 2011),
using proceeds from the disposition of Purolator Products Company ("Purolator"),
from the disposition of certain oil and gas properties and from cash contributed
by Chevron to Pennzoil Petroleum for the benefit of Pennzoil. The redemptions
were completed in February 1993. As of December 31, 1992, this indebtedness was
defeased by placing funds required for the redemption with the trustee for the
indebtedness. As a result, the funds deposited with the trustee for the
redemption of the debentures and the principal amount of the indebtedness are
not reflected in Pennzoil's consolidated balance sheet at December 31, 1992. The
premiums and related unamortized discount and debt issue costs relating to these
redemptions resulted in an extraordinary charge of $16.6 million ($25.2 million
before tax), or $.41 per share, in the fourth quarter of 1992.
In 1993, Pennzoil completed public offerings of $402.5 million of the
6 1/2% Debentures and $500.0 million of the 4 3/4% Debentures. The 6 1/2%
Debentures and the 4 3/4% Debentures are exchangeable at the option of the
holders thereof at any time prior to maturity, unless previously redeemed, for
shares of Chevron common stock owned by Pennzoil at exchange rates of 11.887
shares and 8.502 shares, respectively, per $1,000 principal amount of the 6 1/2%
Debentures and the 4 3/4% Debentures (the equivalent of $84 1/8 per share and
$117 5/8 per share, respectively), subject to adjustment in certain events. In
lieu of delivering certificates representing shares of Chevron common stock in
exchange for the 6 1/2% Debentures and the 4 3/4% Debentures, Pennzoil may, at
its option, pay to any holder surrendering the 6 1/2% Debentures and the 4 3/4%
Debentures an amount in cash equal to the market price of the shares for which
the 6 1/2% Debentures and the 4 3/4% Debentures are
F-15
<PAGE> 54
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchangeable. Pennzoil has deposited 9,035,518 shares of Chevron common stock
deliverable in exchange for the 6 1/2% Debentures and the 4 3/4% Debentures with
exchange agents.
Under the instruments governing the 6 1/2% Debentures and the 4 3/4%
Debentures, Pennzoil may not pledge, mortgage, hypothecate or grant a security
interest in, or permit any mortgage, pledge, security interest or other lien
upon, the shares of Chevron common stock deposited with exchange agents and
deliverable in exchange for the 6 1/2% Debentures and the 4 3/4% Debentures.
Pennzoil may at any time obtain from the exchange agents or otherwise authorize
or direct the exchange agents to release all or part of the 9,035,518 shares of
Chevron common stock deposited with the exchange agents. However, in the event
Pennzoil obtains or otherwise releases any shares of Chevron common stock
subject to exchange, each holder of a 6 1/2% Debenture or a 4 3/4% Debenture
will generally have the right, at such holder's option, to require Pennzoil to
repurchase all or a portion of such holder's debentures at a premium.
In March 1993, using proceeds from the sale of the 6 1/2% Debentures,
Pennzoil redeemed $223.4 million principal amount of indebtedness (including
$80.1 million of Pennzoil's 12 1/8% and 12 1/4% debentures due 2007, $100.0
million of Pennzoil's 9 1/8% notes due 1996 and $43.3 million of Pennzoil's 9%
debentures due 2001). The call premiums and related unamortized net premiums and
debt issue costs relating to the redemption of these series of indebtedness
resulted in a charge of $1.4 million, net of tax, or $.02 per share, for the
first quarter of 1993. Also with such proceeds, approximately $23.3 million of
additional indebtedness has been retired, repaid or repurchased in 1993 and
$100.0 million principal amount of Pennzoil's 9% notes was retired upon maturity
in May 1993.
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 funds used for these redemptions were obtained
from (i) the cash proceeds from the completed sale of a subsidiary holding
Pennzoil's Indonesian gold properties in January 1993, (ii) the cash proceeds
from the sale in March 1993 of common stock of Pogo Producing Company held by
Pennzoil and (iii) the cash payments received from Chevron from and as a result
of the net cash flows from operations of the oil and gas properties of Pennzoil
Petroleum through March 31, 1993. The premiums and related unamortized discount
and debt issue costs relating to these redemptions resulted in an extraordinary
charge of $4.7 million ($7.2 million before 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 redemptions were
completed in November 1993. The funds used for these redemptions were obtained
primarily from the net proceeds from the sale in September 1993 of 5,000,000
shares of Pennzoil common stock (see Note 7). The premiums and related
unamortized discount and debt issue costs relating to these redemptions resulted
in an extraordinary charge of $13.7 million ($21.1 million before tax), or $.33
per share, in the third quarter of 1993.
In October 1993, using $350.0 million of the proceeds from the sale of the
4 3/4% Debentures, Pennzoil reduced its borrowings outstanding under its
unsecured revolving credit facility. Also from such proceeds, Pennzoil redeemed
$24.0 million principal amount of indebtedness in November 1993 (including $21.3
million of Pennzoil's 8 3/8% and 8 5/8% debentures due 1996 and $2.7 million of
Pennzoil's 8 3/4% debentures due 2001). No significant gain or loss resulted
from these early retirements.
In May 1993, Jiffy Lube International, Inc. ("Jiffy Lube"), a wholly owned
subsidiary of Pennzoil, repurchased at face value $20.0 million of its unsecured
promissory notes which were originally issued in connection with Jiffy Lube's
debt restructuring in January 1990 (see Note 10). Also issued in connection with
Jiffy Lube's debt restructuring was a series of unsecured non-interest bearing
promissory notes maturing over
F-16
<PAGE> 55
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
seven years in the aggregate principal amount of approximately $15.1 million at
December 31, 1993 (with a present value of approximately $11.5 million at
December 31, 1993), the payment of which is contingent upon the future
profitability of Jiffy Lube. Jiffy Lube also has $18.8 million in outstanding
mortgages on certain real estate and buildings with interest rates ranging from
6.3% to 11.0% and maturing through 2012. The book value of the collateral
securing these mortgages was $19.7 million at December 31, 1993.
At December 31, 1993, amounts due within one year for Jiffy Lube include
$17.4 million of the long-term mortgage debt described above that is in default
as a result of the violation of certain covenants and cross-default provisions
applicable to such debt. As a result, the applicable lenders could declare these
obligations to be in default and exercise certain rights and remedies, including
accelerating the maturity of the obligations so that they become immediately due
and payable subject, in some cases, to certain notice periods and provisions
allowing the curing of the defaults. Although these obligations are in technical
default, Jiffy Lube has paid all principal and interest on such obligations when
due.
At December 31, 1993, sinking fund obligations and maturities of long-term
debt for the years ending December 31, 1994 to 1998 were $19.6 million, $200.6
million, $5.4 million, $6.0 million and $1.7 million, respectively. Such
maturities include $3.5 million, $3.5 million and $4.6 million for the years
ending December 31, 1995 to 1997, respectively, related to Jiffy Lube's
non-interest bearing promissory notes, the payment of which is contingent upon
the future profitability of Jiffy Lube. These maturities of long-term debt
include $17.4 million of Jiffy Lube's long-term debt in technical default
classified as due within one year as discussed above.
(4) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK --
Financial Instruments with Off-Balance-Sheet Risk --
Pennzoil is a party to various financial instruments with off-balance-sheet
risk as part of its normal course of business, including financial guarantees
and contractual commitments to extend financial guarantees, credit and other
assistance to customers, franchisees and other third parties. These financial
instruments involve, to varying degrees, elements of credit risk which are not
recognized in Pennzoil's consolidated balance sheet. In addition, in connection
with Pennzoil's disposition of Purolator, Pennzoil entered into an agreement
with certain banks to provide contingent credit support for a Purolator credit
facility and an agreement with a government agency with respect to guarantees of
benefits under certain of Purolator's employee benefit plans.
The financial guarantees primarily relate to debt and lease obligation
guarantees with expiration dates of up to twenty years issued to third parties
to guarantee the performance of customers and franchisees in the fast lube
industry. Commitments to extend credit are also provided to fast lube industry
participants to finance equipment purchases, working capital needs and, in some
cases, the acquisition of land and construction of improvements. Contractual
commitments to extend credit and other assistance are in effect as long as
certain conditions established in the respective contracts are met. Contractual
commitments to extend financial guarantees are conditioned on the occurrence of
specified events. The largest of these commitments is to provide a guarantee for
letters of credit issued by third parties to meet the reinsurance requirements
of Pennzoil's captive insurance subsidiary. This commitment has no stated
maturity and is expected to vary in amount from year to year to meet the
reinsurance requirements. Reserves established for reported and incurred but not
reported insurance losses in the amount of $32.3 million and $30.7 million have
been recognized in Pennzoil's consolidated balance sheet as of December 31, 1993
and 1992, respectively. The credit risk to Pennzoil is mitigated by the
insurance subsidiary's portfolio of high-quality short-term investments used to
collateralize the letter of credit. At December 31, 1993, the collateral was
valued at approximately 137% of the credit risk.
The credit support for the Purolator credit facility is contingent upon the
occurrence of an acceleration of the debt under the facility after an event of
default, but only if and to the extent Purolator has incurred certain
F-17
<PAGE> 56
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
environmental expenses not covered by an indemnification agreement pursuant to
which Pennzoil agreed to indemnify Purolator against necessary costs and
expenses of certain environmental remediation activities currently required by
the Environmental Protection Agency ("EPA") at specified Purolator sites (the
indemnification is limited to remediation required solely as a result of
contamination prior to the agreement) (see Note 8). In such event, Pennzoil
would be required to pay to the banks an amount equal to the amount expended by
Purolator for such unindemnified environmental expenses (in which case Purolator
would become liable to Pennzoil for any such amount). The maximum amount of any
such contingent payment is permanently reduced over time as the maximum amount
available under the Purolator credit facility declines. As of December 31, 1993,
the maximum amount of the contingent credit support was $23.1 million.
In connection with Pennzoil's disposition of Purolator in December 1992,
Pennzoil entered into an agreement with the Pension Benefit Guaranty Corporation
("PBGC"), pursuant to which Pennzoil agreed that, for up to five years, in the
event of the termination of any or all the employee benefit plans of Purolator
that are subject to Title IV of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the inability of the PBGC in good faith to
collect the amounts of any unfunded benefit liabilities under Purolator's plans
from Purolator or any person controlling Purolator, Pennzoil would guarantee up
to $7.0 million of such unfunded benefit liabilities.
Following are the amounts related to Pennzoil's financial guarantees and
contractual commitments to extend financial guarantees, credit and other
assistance as of December 31, 1993 and 1992.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNTS
---------------------
1993 1992
------- -------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Financial guarantees.................................................. $16,987 $24,005
Commitments to extend financial guarantees
Guarantee of letter of credit....................................... 2,318 8,295
Other guarantees.................................................... 20,708 13,104
Commitments to extend credit support, credit and other assistance
Contingent credit support........................................... 23,089 30,000
Credit and other assistance......................................... 2,160 2,885
------- -------
Total financial guarantees and commitments.......................... $65,262 $78,289
------- -------
------- -------
</TABLE>
Pennzoil's exposure to credit loss in the event of nonperformance by the
other parties to these financial instruments is represented by the contractual
or notional amounts. Decisions to extend financial guarantees and commitments
and the amount of remuneration and collateral required are based on management's
credit evaluation of the counterparties on a case-by-case basis. The collateral
held varies but may include accounts receivable, inventory, equipment, real
property, securities and personal assets. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Concentrations of Credit Risk --
Pennzoil extends credit to various companies in the oil and gas, motor oil
and automotive products, fast lube and sulphur industries in the normal course
of business. Within these industries, certain concentrations of credit risk
exist. These concentrations of credit risk may be similarly affected by changes
in economic or other conditions and may, accordingly, impact Pennzoil's overall
credit risk. However, management believes that consolidated receivables are well
diversified, thereby reducing potential credit risk to Pennzoil, and that
allowances for doubtful accounts are adequate to absorb estimated losses as of
December 31, 1993. Pennzoil's policies concerning collateral requirements and
the types of collateral obtained for on-balance-sheet financial
F-18
<PAGE> 57
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
instruments are the same as those described above under "Financial Instruments
with Off-Balance-Sheet Risk."
At December 31, 1993, receivables related to these group concentrations in
the oil and gas, motor oil and automotive products, fast lube and sulphur
industries were $182.8 million, $181.4 million, $36.9 million and $8.9 million,
respectively, compared with $140.5 million, $184.5 million, $32.3 million and
$20.3 million, respectively, at December 31, 1992.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS --
The carrying amounts of Pennzoil's short-term financial instruments,
including cash equivalents, current marketable securities and other investments,
trade accounts receivable, trade accounts payable and notes payable, approximate
their fair values based on the short maturities of those instruments and on
quoted market prices, where such prices are available.
The following table summarizes the carrying amounts and estimated fair
values of Pennzoil's other financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance Sheet Financial Instruments:
Notes receivable......................... $ 53,140 $ 53,703 $ 36,659 $ 40,750
Long-term investments.................... 668,626 847,281 1,215,654 1,258,438
Long-term debt........................... 1,993,056 2,182,765 1,950,152 2,075,209
Off-Balance-Sheet Financial Instruments:
Financial guarantees and commitments..... -- 11,512 -- 14,671
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument included above:
Notes Receivable --
The estimated fair value of notes receivable is based on discounting future
cash flows using estimated year-end interest rates at which similar loans have
been made to borrowers with similar credit ratings for the same remaining
maturities.
Long-Term Investments --
The estimated fair value of long-term investments is based on quoted market
prices at year end for those investments.
Long-Term Debt --
The estimated fair value of Pennzoil's long-term debt is based on quoted
market prices or, where such prices are not available, on estimated year-end
interest rates of debt with the same remaining maturities and credit quality.
Off-Balance-Sheet Financial Instruments --
The estimated fair value of certain financial guarantees written and
commitments to extend financial guarantees is based on the estimated cost to
Pennzoil to obtain third party letters of credit to relieve Pennzoil
F-19
<PAGE> 58
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of its obligations under such guarantees or, in the case of certain lease
guarantees related to Jiffy Lube franchisees, the present value of expected
future cash flows using a discount rate commensurate with the risks involved.
Reference is made to Note 4 for further information regarding off-balance-sheet
financial instruments.
(6) BENEFIT PLANS --
Retirement Plans --
Substantially all employees are covered by non-contributory retirement
plans which provide benefits based on the participants' years of service and
compensation or stated amounts for each year of service. Annual contributions to
the plans are made in accordance with the minimum funding provisions of ERISA
where applicable, but not in excess of the maximum amount that can be deducted
for federal income tax purposes.
Net periodic pension cost for 1993, 1992 and 1991 included the following
components:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year... $ 7,892 $ 7,208 $ 5,961
Interest cost on projected benefit obligations.... 9,802 8,913 8,086
Expected return on plan assets.................... (9,753) (9,325) (6,663)
Net amortization and deferral..................... 158 (456) 255
------- ------- -------
Net periodic pension cost............... $ 8,099 $ 6,340 $ 7,639
------- ------- -------
------- ------- -------
</TABLE>
Actual return on plans' assets was $2.6 million, $6.2 million and $30.4
million in 1993, 1992 and 1991, respectively.
Assumptions used were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Discount rates........................................ 7.50% 8.25% 8.50%
Weighted average rates of increase in compensation
levels.............................................. 6.40% 7.60% 7.60%
Expected long-term rate of return on assets........... 8.00% 8.00% 8.00%
</TABLE>
F-20
<PAGE> 59
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------------------------- --------------------------------
PLANS PLANS PLANS PLANS
WHERE WHERE WHERE WHERE
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED TOTAL ACCUMULATED EXCEED TOTAL
BENEFITS ASSETS PLANS BENEFITS ASSETS PLANS
------- -------- --------- -------- ----- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit
obligation........... $43,266 $ 71,525 $ 114,791 $ 80,345 $ 617 $ 80,962
------- -------- --------- -------- ----- --------
------- -------- --------- -------- ----- --------
Accumulated benefit
obligation........... $46,351 $ 87,825 $ 134,176 $ 95,305 $ 690 $ 95,995
------- -------- --------- -------- ----- --------
------- -------- --------- -------- ----- --------
Projected benefit
obligation........... $46,384 $104,697 $ 151,081 $118,908 $ 690 $119,598
Plan assets at fair
value................... 55,194 69,906 125,100 121,210 570 121,780
------- -------- --------- -------- ----- --------
Projected benefit
obligation (in excess
of) less than plan
assets.................. 8,810 (34,791) (25,981) 2,302 (120) 2,182
Unrecognized net
(gain) loss............. (5,725) 9,717 3,992 (11,373) (21) (11,394)
Prior service cost not
yet recognized in net
periodic pension cost... 5,382 14,309 19,691 7,920 53 7,973
Unrecognized net
obligation (asset)...... (1,865) 174 (1,691) (1,961) 66 (1,895)
Minimum liability
adjustment.............. -- (7,328) (7,328) -- (98) (98)
------- -------- --------- -------- ----- --------
Pension liability (asset)
recognized in the
Consolidated
Balance Sheet........... $ 6,602 $(17,919) $ (11,317) $ (3,112) $(120) $ (3,232)
------- -------- --------- -------- ----- --------
------- -------- --------- -------- ----- --------
</TABLE>
The plans' assets include equity securities, common trust funds and various
debt securities.
Unrecognized prior service cost is amortized on a straight-line basis over
a period equal to the average of the expected future service of active employees
expected to receive benefits under the respective plans.
Postretirement Health Care and Life Insurance Benefits --
Pennzoil sponsors several unfunded defined benefit postretirement plans
covering most salaried and hourly employees. The plans provide medical and life
insurance benefits and are, depending on the type of plan, either contributory
or non-contributory. The accounting for the health care plans anticipates future
cost-sharing changes that are consistent with Pennzoil's expressed intent to
increase, where possible, contributions from future retirees to a minimum of 30%
of the total annual cost. Furthermore, Pennzoil's future contributions for both
current and future retirees have been limited, where possible, to 200% of the
average 1992 benefit cost.
In December 1991, Pennzoil announced its decision to change its method of
accounting for postretirement benefit costs other than pensions by adopting the
new requirements of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective as of January 1, 1991. Previous 1991
F-21
<PAGE> 60
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interim period results were restated as a result of adopting the new standard.
Pennzoil recorded a charge of $49.0 million ($74.2 million before tax), or $1.21
per share, as of the first quarter of 1991 to reflect the cumulative effect of
the change in accounting principle for periods prior to 1991. The first quarter
charge included $11.4 million ($17.3 million before tax) related to the
cumulative effect of the change in accounting principle associated with
Purolator. In addition to the cumulative effect, Pennzoil's 1991 postretirement
health care and life insurance costs increased $1.7 million ($2.6 million before
tax), or $.04 per share, as a result of adopting the new standard.
Net periodic postretirement benefit cost for 1993, 1992 and 1991 included
the following components:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits attributed to service
during the period................................. $1,085 $ 895 $ 707
Interest cost on accumulated postretirement benefit
obligation........................................ 5,644 5,343 5,120
Amortization of unrecognized net losses............. 297 112 --
------ ------ ------
Net periodic postretirement benefit cost............ $7,026 $6,350 $5,827
------ ------ ------
------ ------ ------
</TABLE>
The following table sets forth the plans' combined status reconciled with
the amount included in the consolidated balance sheet at December 31, 1993 and
1992:
<TABLE>
<CAPTION>
1993 1992
------- -------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................ $59,163 $51,939
Fully eligible active plan participants............. 6,910 4,583
Other active plan participants...................... 11,972 11,310
------- -------
Total accumulated postretirement benefit obligation... 78,045 67,832
Unrecognized net loss from changes in assumptions..... (17,526) (9,265)
------- -------
Accrued postretirement benefit cost................... $60,519 $58,567
------- -------
------- -------
</TABLE>
For measurement purposes, an 11% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1994; the rate was assumed
to decrease gradually to 7% through the year 2001 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amount of the obligation and periodic cost reported. An increase in the
assumed health care cost trend rates by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1993 by $3.4
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $.3 million.
The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation as of December 31, 1993 and 1992 were 7.5% and
8.25%, respectively.
Contribution Plans --
Pennzoil has defined contribution plans covering substantially all
employees who have completed one year of service. Employee contributions of not
less than 1% to not more than 6% of each covered employee's compensation are
matched between 50% and 100% by Pennzoil. The cost of such company contributions
totaled $9.4 million in 1993, $9.1 million in 1992 and $8.1 million in 1991.
F-22
<PAGE> 61
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Postemployment Benefits --
In November 1992, the FASB issued a new standard on 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.
Adoption of the standard by Pennzoil is required effective January 1, 1994. The
standard does not represent a significant change from Pennzoil's current policy
of recognizing postemployment benefit costs. As such, adoption of the standard
will not have a material effect on Pennzoil's financial condition or results of
operations.
(7) CAPITAL STOCK AND STOCK OPTIONS --
Pennzoil's Restated Certificate of Incorporation authorizes the issuance of
up to 9,747,720 shares of preferred stock. None of these shares were issued or
outstanding at December 31, 1993.
Pennzoil's Restated Certificate of Incorporation authorizes the issuance of
up to 27,862,924 shares of preference common stock. None of these shares were
issued or outstanding at December 31, 1993. Dividend rights on any preference
common stock are junior to the rights of any preferred stock and senior to the
rights of Pennzoil's common stock.
In September 1993, Pennzoil completed the sale, pursuant to underwritten
public offerings, of 5,000,000 shares of its common stock at a price of $62.50
per share. As of December 31, 1993, 45,910,307 shares of Pennzoil common stock
were issued and outstanding.
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 redeemed an aggregate of
$292.5 million principal amount of Pennzoil's debentures (see Note 3). Pro forma
earnings per share for the year ended December 31, 1993, assuming the stock
offering and redemption of debentures had occurred at the beginning of 1993, was
$3.43 per share.
At December 31, 1993, Pennzoil had 2,694,418 shares of common stock
reserved for issuance upon the exercise of stock options and the maturity of
conditional stock awards.
At December 31, 1993, Pennzoil had nonqualified and incentive stock option
plans covering a total of 2,620,565 shares of common stock (compared to
2,673,848 shares at December 31, 1992), of which 605,140 shares were available
for granting of options. Options granted under the plans have a maximum term of
ten years and are exercisable under the terms of the respective option
agreements at the market price of the common stock at the date of grant, subject
to antidilution adjustments in certain circumstances. At December 31, 1993,
expiration dates for the outstanding options ranged from March 1994 to December
2003 and the average exercise price per share was $63.55. Payment of the
exercise price may be made in cash or in shares of common stock previously owned
by the optionee, valued at the then-current market value.
F-23
<PAGE> 62
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional information with respect to the stock option plans is as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE
UNDER OPTION RANGE PER SHARE
---------------- --------------------
<S> <C> <C>
Outstanding at December 31, 1992....................... 1,651,729 $29.3928 to $80.8125
Granted.............................................. 436,490 $49.6875 to $55.2500
Exercised............................................ 41,371 $29.3928 to $55.8750
Lapsed............................................... 31,423 $29.3928 to $80.3750
----------------
Outstanding at December 31, 1993....................... 2,015,425 $29.3928 to $80.8125
----------------
----------------
Exercisable at December 31, 1993....................... 1,184,927 $29.3928 to $80.8125
----------------
----------------
</TABLE>
In 1993, 24,150 units of common stock were granted to selected employees
under Pennzoil's conditional stock award programs. Awards under the programs are
made in the form of units which entitle the recipient to receive, at the end of
a specified period, subject to certain conditions of continued employment, a
number of shares equal to the number of units granted. At December 31, 1993,
units covering 73,853 shares were outstanding (compared to 50,033 shares at
December 31, 1992). In 1992, 24,200 shares of common stock were distributed to
selected employees upon maturity of awards granted under Pennzoil's conditional
stock award programs.
(8) COMMITMENTS AND CONTINGENCIES --
Tax Dispute --
In 1988, Pennzoil received $3.0 billion from Texaco Inc. ("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 obtained no tax basis in
the Chevron shares. Pennzoil's reporting position was based on its belief that,
under Section 1033 of the Internal Revenue Code, the $3.0 billion received from
Texaco was an amount realized as a result of the involuntary conversion of
property and that the Chevron shares were similar or related in service or use
to the property converted by Texaco. During 1990 and 1991, Pennzoil recalculated
its 1988 federal income tax liability to recognize approximately $800 million of
income, being the excess of the $3.0 billion received over the amount expended
to acquire Chevron shares. As a result of these adjustments, current taxes were
increased, and deferred taxes were decreased, by $120.4 million in 1990 and
$13.2 million in 1991. In addition, Pennzoil paid interest on such taxes of
$17.6 million during 1990 and $3.7 million in 1991.
In January 1994, Pennzoil received a letter and examination report from the
District Director of the IRS that proposes a tax deficiency based on an audit of
Pennzoil's 1988 federal income tax return. The examination report proposes two
principal adjustments with which Pennzoil disagrees.
The first adjustment challenges Pennzoil's position under Section 1033 of
the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion
cash payment received from Texaco in 1988 in settlement of certain litigation
was realized as a result of the involuntary conversion of property and (ii) the
shares of Chevron common stock purchased with $2.2 billion of the net Texaco
settlement proceeds were similar or related in service or use to the property
converted by Texaco. Although these issues have not been resolved, Pennzoil
F-24
<PAGE> 63
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
believes that its position is sound, and it intends to contest the proposed
adjustment in court unless an acceptable settlement is reached. The proposed tax
deficiency relating to this proposed adjustment is $550.9 million, net of
available offsets. Pennzoil estimates that the additional after-tax interest on
this proposed deficiency would be approximately $234.3 million as of December
31, 1993. If Pennzoil's position is not sustained by the courts, Pennzoil would
be required to pay the assessed taxes, plus the accrued interest, and Pennzoil's
tax basis in the shares of common stock of Chevron and Pennzoil Petroleum (see
Note 10) would be Pennzoil's cost. Pennzoil's consolidated financial statements
do not include an accrual for the interest that would be due in such event.
The second adjustment proposed by the IRS would permanently capitalize,
rather than allow Pennzoil to deduct, approximately $366 million incurred by
Pennzoil in 1988 and earlier years for litigation and related expenses in
connection with the Texaco settlement, even if it were determined that the
entire $3.0 billion is includable in Pennzoil's 1988 taxable income. Pennzoil
believes that this proposed adjustment is irrational and capricious and will not
be sustained in court. The proposed tax deficiency relating to the disallowance
of deductions is $124.6 million, and the estimated additional after-tax interest
on this proposed deficiency would be approximately $46.7 million as of December
31, 1993. If the deductions for legal and related expenses were ultimately
disallowed, Pennzoil would be required to pay the assessed taxes, plus the
accrued interest. Pennzoil's consolidated financial statements do not include an
accrual for the taxes that would be assessed as a result of the proposed
disallowance of deductions or the related interest that would be due in such
event.
Pennzoil has formally protested the IRS' proposed tax deficiency in writing
within the required 30-day time period. The issue has been forwarded to the IRS
Appeals Office, which is empowered to settle disputes with taxpayers, taking
into account the hazards of litigation. If Pennzoil and the IRS Appeals Office
are unable to reach a negotiated resolution of these tax issues, the IRS would
forward a letter requiring Pennzoil to pay the assessed taxes, plus the accrued
interest, within 90 days, unless Pennzoil files a petition with the United
States Tax Court. If Pennzoil were to choose to file suit in the Tax Court,
Pennzoil would not pay any taxes unless and until the Tax Court rendered a
judgment against Pennzoil, but interest would continue to accrue on any taxes
ultimately determined to be due. Alternatively, Pennzoil would be entitled to
choose to pay the assessed taxes, plus the accrued interest, and file a claim
for a refund in either the United States Court of Claims or the United States
District Court for the Southern District of Texas. Paying the assessed taxes
would halt the accrual of interest on any taxes finally determined to be owing
by Pennzoil. In such event, any refund to Pennzoil would include a refund by the
IRS of the prior interest paid by Pennzoil, as well as a payment by the IRS of
additional interest accrued on the assessed taxes previously paid by Pennzoil.
If litigation is necessary, a case of this kind would normally take several
years in the absence of a settlement, which could occur at any stage in the
process.
Pennzoil had cash and cash equivalents and current marketable securities
and other investments of $946.6 million at December 31, 1993 and approximately
$850 million at March 1, 1994. As a result of these available liquid assets and
Pennzoil's available credit facilities, Pennzoil believes that it has the
financial flexibility to deal with any eventuality that may occur in connection
with the dispute with the IRS, including the possibility of paying the taxes
assessed, plus the accrued interest, and suing for a refund if Pennzoil is not
able to resolve the disputed matters through discussions with the IRS.
Deferred income taxes originally resulted from the timing difference in the
recognition of the settlement income for tax and financial reporting purposes
under the deferred method of accounting for income taxes and not from the
accrual of a contingency reserve for taxes due in the event Pennzoil's tax
reporting position ultimately were determined to be incorrect. Under the
liability method of accounting for income taxes adopted by Pennzoil in December
1992, since the excess of the financial reporting basis over the tax basis of
Pennzoil's investment in Pennzoil Petroleum is not expected to result in a
future income tax liability, deferred income taxes attributable to the
15,750,000 shares of Chevron common stock exchanged for the stock of Pennzoil
F-25
<PAGE> 64
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Petroleum have been reflected as a reduction of the cost of Pennzoil's
investment in Pennzoil Petroleum. Deferred income taxes remain related to the
9,035,518 shares of Chevron common stock currently owned by Pennzoil (see Note
10).
Curtailment Litigation --
United Gas Pipe Line Company ("United"), a former subsidiary of Pennzoil,
curtailed deliveries of natural gas to its customers in accordance with
priorities contained in its tariffs during the 1970s and early 1980s. Several
lawsuits filed by industrial and power plant "direct sale" customers for damages
allegedly caused by curtailments were brought against United, and Pennzoil was
joined as a defendant in five of these suits. The only remaining suit against
United involving Pennzoil is an action filed in the United States District Court
for the Southern District of Mississippi on November 14, 1974 by Mississippi
Power Co. ("MPCo"), which alleges damages of approximately $44.7 million and
seeks to have such damages trebled pursuant to federal antitrust laws. In
related proceedings before the Federal Energy Regulatory Commission ("FERC"),
MPCo has introduced evidence indicating that its claimed damages (before
trebling) have increased to approximately $88.2 million. The judge in the MPCo
case has referred certain issues to the FERC and stayed all proceedings pending
action by the FERC. No action has been taken to remove the stay. Pennzoil
believes that it has no liability for any action it has taken or omitted to
take, that it can successfully defend itself in the action and that the final
outcome of the case will not have a material adverse effect on its financial
condition or results of operations.
Eaton v. Pennzoil Company --
In December 1992, two former employees of Pennzoil filed a purported class
action lawsuit in the United States District Court for the Southern District of
Texas, Galveston Division. The suit alleges that one of Pennzoil's deferred
compensation plans had been improperly administered because of the absence of an
adjustment under the plan for a significant event occurring in 1988 in
determining the value of awards under the plan maturing in 1988 and 1990. The
plaintiffs allege breach of contract, common law fraud and breach of fiduciary
duty and seek compensatory and consequential damages of $40.0 million and
punitive damages of $400.0 million. Pennzoil believes that the plan was
administered properly and the lawsuit is without merit. In October 1993, the
court granted Pennzoil's motion for summary judgment. The plaintiffs have
appealed. Pennzoil believes that the outcome of this suit will not have a
material adverse effect on its financial condition or results of operations.
Environmental Matters --
Pennzoil is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Such accruals
primarily include estimated costs associated with remediation. Pennzoil has not
used discounting in determining its accrued liabilities for environmental
remediation, and no claims for possible recovery from third party insurers or
other parties related to environmental costs have been recognized in Pennzoil's
consolidated financial statements. Pennzoil adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.
In connection with Pennzoil's disposition of Purolator, Pennzoil and
Purolator entered into an indemnification agreement pursuant to which Pennzoil
has agreed to reimburse Purolator for costs and expenses of certain
environmental remediation relating to a plant operated by Purolator in Elmira
Heights, New York, and certain environmental remediation, if any, relating to
one other site located near the Elmira facility and a
F-26
<PAGE> 65
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
landfill site located in Metamora, Michigan. The indemnification provided by
Pennzoil applies to all remediation required by Purolator under CERCLA that has
been identified at the Elmira facility in the EPA's September 1992 Record of
Decision with respect to the Elmira facility, but does not extend to certain
additional environmental expenditures relating to the Elmira facility or other
sites for which Purolator is or may be held responsible. Pennzoil had a reserve
of $16.3 million and a $17.7 million recorded with respect to its obligations
under its indemnification agreement with Purolator as of December 31, 1993 and
1992, respectively. Reference is made to Note 11 for additional information.
Certain of Pennzoil's subsidiaries are involved in matters in which it has
been alleged that such subsidiaries are potentially responsible parties ("PRPs")
under CERCLA or similar state legislation with respect to various waste disposal
areas owned or operated by third parties. In addition, certain of Pennzoil's
subsidiaries are involved in other environmental remediation activities,
including the removal, inspection and replacement, as necessary, of underground
storage tanks. As of December 31, 1993 and 1992, Pennzoil's consolidated balance
sheet included accrued liabilities for environmental remediation of $33.1 and
$34.2 million, respectively, which amounts include reserves with respect to
Pennzoil's obligations under its indemnification agreement with Purolator
referred to in the previous paragraph. Of these reserves, $4.8 million and $4.9
million is reflected on the consolidated balance sheet as other current
liabilities as of December 31, 1993 and 1992, respectively, and $28.3 million
and $29.3 million is reflected as other liabilities as of December 31, 1993 and
1992, respectively. Pennzoil does not currently believe there is a reasonable
possibility of incurring additional material amounts in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Pennzoil's current belief that its share of wastes at a
particular site is or will be less than the threshold deemed by the EPA or
recognized by the relevant group of PRPs as being de minimis (and as a result
Pennzoil's monetary exposure is not expected to be material).
FTC Matters --
The Federal Trade Commission ("FTC") has inquired as to Pennzoil's reliance
on the investment exemption of Section 7A(c)(9) and Rule 802.9 under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, in connection
with Pennzoil's investment in common stock of other entities. Pennzoil has
provided the requested information to the FTC and has cooperated with the FTC in
response to the inquiry.
Franchisee Litigation --
Certain current and former Jiffy Lube franchisees have brought suit against
Jiffy Lube to challenge various matters relating to the franchisor-franchisee
relationship. Certain of the suits have included allegations against Pennzoil
and/or Pennzoil Products Company ("PPC"), a wholly owned subsidiary of Pennzoil,
as well. These franchisee lawsuits generally contain allegations of, among other
things, certain misrepresentations by Jiffy Lube in connection with the
execution of franchise and licensing agreements, certain breaches of these
agreements by Jiffy Lube and/or certain breaches of fiduciary duty by Jiffy
Lube. In some cases, conflicts of interest or conspiracy between Jiffy Lube and
Pennzoil are also alleged. Pennzoil believes that the allegations in these
lawsuits stem primarily from previous uncertainties surrounding Jiffy Lube's
financial condition, financial difficulties experienced by certain franchisees
and franchisees' concerns relating to the adequacy of services provided by Jiffy
Lube prior to Pennzoil's initial acquisition of Jiffy Lube stock in January 1990
(see Note 10). Jiffy Lube, Pennzoil and/or PPC, as the case may be, have each
denied the material allegations against them and intend to defend these actions
vigorously. Pennzoil does not believe that the final outcome of these cases will
have a material adverse effect on its financial condition or results of
operations.
F-27
<PAGE> 66
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) LEASES --
As Lessee -- Pennzoil leases various assets and office space with lease
periods of 1 to 20 years. Additionally, Pennzoil's wholly owned subsidiary Jiffy
Lube leases sites and equipment which are subleased to franchisees or used in
the operation of automotive fast lubrication and fluid maintenance service
centers operated by Jiffy Lube. The typical lease period for the service centers
is 20 years with escalation clauses generally increasing the lease payments by
9% every third year, with some leases containing renewal options generally for
periods of five years. These leases, excluding leases for land that are
classified as operating leases, are accounted for as capital leases and are
capitalized using interest rates appropriate at the inception of each lease.
Certain operating and capital lease payments are contingent upon such
factors as the consumer price index or the prime interest rate with any future
changes reflected in income as accruable. The effects of these changes are not
considered material.
Total operating lease rental expenses for Pennzoil (exclusive of oil and
gas lease rentals) were $59.6 million, $56.2 million and $49.7 million for 1993,
1992 and 1991, respectively. Non-current capital lease obligations are
classified as other liabilities in the accompanying consolidated balance sheet.
Future minimum commitments under noncancellable leasing arrangements as of
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
AMOUNTS PAYABLE
AS LESSEE
------------------------
CAPITAL OPERATING
LEASES LEASES
-------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1994............................................................... $ 11,847 $ 53,871
1995............................................................... 11,853 46,756
1996............................................................... 11,930 40,065
1997............................................................... 12,186 34,834
1998............................................................... 12,482 34,124
Thereafter......................................................... 118,830 194,454
-------- --------
Net minimum lease payments......................................... $179,128 $404,104
--------
--------
Less interest...................................................... 94,424
--------
Present value of net minimum lease payments at December 31, 1993... $ 84,704
--------
--------
</TABLE>
Assets recorded under capital lease obligations of $65.3 million and $20.2
million at December 31, 1993 are classified as property, plant and equipment and
other assets, respectively, in the accompanying consolidated balance sheet.
As Lessor -- Pennzoil, through its wholly owned subsidiary Jiffy Lube, owns
or leases numerous service center sites which are leased or subleased to
franchisees. Buildings owned or leased that meet the criteria for direct
financing leases are carried at the gross investment in the lease less unearned
income. Unearned income is recognized in such a manner as to produce a constant
periodic rate of return on the net investment in the direct financing lease. Any
buildings leased or subleased that do not meet the criteria for a direct
financing lease and any land leased or subleased are accounted for as operating
leases. The typical lease period is 20 years and some leases contain renewal
options. The franchisee is responsible for the payment of property taxes,
insurance and maintenance costs related to the leased property. The net
investment in direct financing leases is classified as other assets in the
accompanying consolidated balance sheet.
F-28
<PAGE> 67
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payment receivables under noncancellable leasing
arrangements as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
AMOUNTS RECEIVABLE
AS LESSOR
-----------------------
DIRECT
FINANCING OPERATING
LEASES LEASES
------- --------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1994................................................................ $ 4,838 $ 9,048
1995................................................................ 4,899 8,429
1996................................................................ 4,953 8,383
1997................................................................ 5,050 8,221
1998................................................................ 5,119 7,796
Thereafter.......................................................... 49,593 58,804
------- --------
Net minimum lease payment receivables............................... 74,452 $100,681
--------
--------
Less unearned income................................................ 39,760
-------
Net investment in direct financing leases at December 31, 1993...... $34,692
-------
-------
</TABLE>
(10) ACQUISITIONS --
Acquisition of Pennzoil Petroleum --
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, which owns Gulf of
Mexico, Gulf Coast, Permian Basin and other domestic oil and gas producing
properties. The exchange of stock has been accounted for using the purchase
method of accounting, and Pennzoil Petroleum's results of operations subsequent
to October 30, 1992 have been included in Pennzoil's consolidated financial
statements. The fair market value of the 15,750,000 shares of Chevron common
stock exchanged for the capital stock of Pennzoil Petroleum approximated
Pennzoil's historical book value for such shares of $1.06 billion. Accordingly,
Pennzoil used the net book value of the Chevron shares exchanged for purposes of
purchase accounting.
Included in the assets of Pennzoil Petroleum at the time of the transfer to
Pennzoil was $57.4 million in cash contributed by Chevron to Pennzoil Petroleum
immediately prior to closing, representing the net cash flow from Pennzoil
Petroleum's operations during the four-month period between the "effective date"
and the closing date of the transaction, after reduction as a result of
nonrecurring closing adjustments of approximately $11 million. As a result of an
audit completed during 1993, Chevron contributed an additional $9.9 million in
cash to Pennzoil Petroleum, representing an adjustment to the initial $57.4
million cash contribution made by Chevron to Pennzoil Petroleum prior to
closing. This additional contribution from Chevron was accounted for as an
adjustment to the original purchase price of Pennzoil Petroleum.
The following unaudited pro forma information has been prepared assuming
that the acquisition of Pennzoil Petroleum had occurred at the beginning of the
periods presented. Permitted pro forma adjustments include only the effects of
events directly attributable to a transaction that are factually supportable and
expected to have a continuing impact. Pro forma adjustments reflecting
anticipated "efficiencies" in operations resulting from a transaction are, under
most circumstances, not permitted. As a result of the limitations imposed with
regard to the types of permitted pro forma adjustments, Pennzoil believes that
this
F-29
<PAGE> 68
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unaudited pro forma information is not indicative of future results of
operations, nor the results of historical operations had the acquisition of
Pennzoil Petroleum been consummated as of the assumed dates.
<TABLE>
<CAPTION>
1992 1991
--------- ---------
(UNAUDITED)
(EXPRESSED IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenues.................................................. $2,659,032 $2,698,027
---------- ----------
Income (loss) before extraordinary item and
cumulative effect....................................... $ 42,417 $ (26,511)
---------- ---------
Net income (loss)......................................... $ 141,508 $ (75,485)
---------- ---------
Earnings (loss) per share................................. $ 3.49 $ (1.87)
---------- ----------
Average shares outstanding................................ 40,582 40,347
---------- ----------
---------- ----------
</TABLE>
Acquisition of Jiffy Lube --
On January 8, 1990, Jiffy Lube, Pennzoil and Jiffy Lube's senior unsecured
creditors consummated a plan of debt restructuring for Jiffy Lube, which
resulted in the restructuring and reduction of Jiffy Lube's senior unsecured
debt and the acquisition by Pennzoil of 80% of the common stock of Jiffy Lube.
In connection with the Jiffy Lube debt restructuring plan, Pennzoil paid $28.5
million in cash to or on behalf of Jiffy Lube and exchanged Pennzoil's $15.0
million principal amount of Jiffy Lube's 12% Convertible Subordinated Debenture
(including accrued and unpaid interest) as consideration for the shares of Jiffy
Lube common stock acquired.
The acquisition was accounted for using the purchase method of accounting,
and the results of operations of Jiffy Lube have been included in Pennzoil's
consolidated statement of income subsequent to January 8, 1990.
On August 5, 1991, a newly formed Pennzoil subsidiary commenced a tender
offer to acquire all Jiffy Lube shares not already owned by Pennzoil at a price
of $6.00 per share, or approximately $9.3 million in the aggregate. Pursuant to
the tender offer, Pennzoil acquired additional Jiffy Lube common stock, as a
result of which Pennzoil held directly or indirectly in excess of 93% of the
outstanding Jiffy Lube common stock.
A merger between Jiffy Lube and the newly formed Pennzoil subsidiary became
effective as of October 17, 1991, pursuant to which each remaining Jiffy Lube
share not owned by Pennzoil was converted into the right to receive $6.00 in
cash. As a result of the merger, Jiffy Lube is now a wholly owned subsidiary of
Pennzoil.
(11) DISCONTINUED OPERATIONS --
Filtration Products Segment --
In early 1990, Pennzoil decided to sell or otherwise dispose of Purolator.
In connection with this decision, Pennzoil recorded a 1989 fourth quarter
write-down of $125.0 million to reflect the estimated loss to be incurred from
the then anticipated sale or other disposition of Purolator's filtration
products operations, including estimated future costs and operating results from
the segment until the date of disposition.
In August 1991, Pennzoil concluded that, because of Purolator's improved
performance, the intrinsic value of Purolator could be more effectively realized
by retaining Purolator. Accordingly, in the third quarter of 1991, Pennzoil
reclassified Purolator's net assets and results of operations for all periods as
part of continuing operations. As a result of Pennzoil's decision to retain
Purolator, the remaining reserve of $115.7 million for the estimated loss on the
disposition of Purolator originally established in the fourth quarter of 1989
was reversed. Concurrent with the reversal of the reserve, Pennzoil recorded a
provision of $108.0 million ($88.0 million after tax) to reflect losses due to
asset impairment and other identified liabilities
F-30
<PAGE> 69
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related to Purolator. The following is a summary of the write-downs and other
charges provided during the three months ended September 30, 1991 (in millions):
<TABLE>
<S> <C>
Write-down of goodwill.............................................. $ 48.0
Reserve for environmental costs..................................... 30.0
Adjustment to postretirement benefit liability established at
acquisition....................................................... 16.5
Other write-downs and charges....................................... 13.5
------
$108.0
------
------
</TABLE>
(a) Write-Down of Goodwill --
In connection with the August 1991 decision not to dispose of Purolator,
Pennzoil assessed the potential for loss recognition resulting from asset
impairment and concluded that a portion of Purolator's goodwill was permanently
impaired. Accordingly, a write-down of approximately $48.0 million was recorded.
(b) Reserve for Environmental Costs --
Purolator is involved in certain waste disposal areas in which it has been
alleged that it is a potentially responsible party under CERCLA or similar state
legislation. In connection therewith, charges totaling $30.0 million were
recorded to reflect a reserve for estimated cleanup and compliance costs.
(c) Adjustment to Postretirement Benefit Liability Established at Acquisition
- --
In connection with Pennzoil's 1988 acquisition of Purolator, a liability
was established in the purchase price allocation for vested postretirement
benefit obligations attributable to a specific group of Purolator retirees.
Based on revised actuarial estimates, Pennzoil concluded that the remaining
liability established for these retirees was understated and recorded a charge
against earnings of $16.5 million. As of December 31, 1991, the net assets of
discontinued operations have been reduced by a liability of $43.9 million
attributable to these vested postretirement benefit obligations.
(d) Other Write-Downs and Charges --
Write-downs of other individually non-significant assets of approximately
$10.0 million were recorded representing Pennzoil's estimate of the net
realizability of those investments. In addition, other charges of approximately
$3.5 million were recorded to reflect other identified liabilities.
Public Offerings --
In October 1992, as a result of Pennzoil's conclusion that disposal of
Purolator's filtration products operations would enhance Pennzoil's efforts to
focus on its strategic businesses and to reduce indebtedness, Purolator filed a
registration statement pursuant to which Pennzoil offered to the public all
shares of Purolator stock held by Pennzoil. Accordingly, Purolator's net assets
and results of operations for all periods have been reclassified as discontinued
operations for financial reporting purposes. In December 1992, Pennzoil sold in
initial public offerings all its shares of capital stock of Purolator. The total
amount received by Pennzoil, prior to the payment of expenses, from the net
proceeds of the offerings and the repayment of indebtedness by Purolator was
$206.0 million. Pennzoil also expects to receive a tax refund of approximately
$23 million as a result of the transaction. Pennzoil recorded a net gain on the
disposition of Purolator stock of $1.5 million ($20.0 million before tax loss),
or $.04 per share, in the fourth quarter of 1992.
In connection with Pennzoil's disposition of Purolator, Pennzoil and
Purolator entered into an indemnification agreement with respect to certain
environmental matters (see Note 8). In addition, Pennzoil entered into an
agreement with certain banks to provide contingent credit support for a
Purolator credit facility and an
F-31
<PAGE> 70
PENNZOIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement with a government agency with respect to guarantees of benefits under
certain of Purolator's employee benefit plans (see Note 4).
Income from discontinued operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1992 1991
-------- --------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Operating revenues................................... $402,856 $402,436
-------- --------
-------- --------
Income (loss) from operations before income taxes.... $ 17,999 $(96,964)
Income tax (benefit)................................. 7,791 (14,846)
-------- --------
Income (loss) from operations........................ 10,208 (82,118)
Gain on disposition.................................. 1,455 --
Income from operations previously offset against
reserve for estimated loss on disposition.......... -- (3,706)
Reversal of remaining reserve for estimated loss on
disposition........................................ -- 115,742
-------- --------
Income from discontinued operations.................. $ 11,663 $ 29,918
-------- --------
-------- --------
</TABLE>
(12) SEGMENT FINANCIAL INFORMATION --
Information with respect to revenues, operating income and other data by
industry segment is presented in Item 1, Business and Item 2, Properties of this
Annual Report on Form 10-K.
F-32
<PAGE> 71
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED
QUARTERLY RESULTS(1) --
<TABLE>
<CAPTION>
EARNINGS (LOSS)
INCOME PER SHARE(3)
(LOSS) ----------------
BEFORE BEFORE
EXTRAORDINARY EXTRAORDINARY
ITEMS ITEMS
AND NET AND NET
OPERATING CUMULATIVE INCOME CUMULATIVE INCOME
REVENUES INCOME(2) EFFECT (LOSS) EFFECT (LOSS)
---------- -------- -------- -------- ----- -----
1993 (EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
First Quarter.......... $ 650,541 $ 94,694 $ 21,525 $ 21,525 $ .53 $ .53
Second Quarter......... 685,177 113,997 34,239 29,515 .84 .72
Third Quarter.......... 655,867 103,934 12,036 (1,620) .29 (.04)
Fourth Quarter......... 790,782 151,916 92,436 92,436 2.01 2.01
---------- -------- -------- -------- ----- -----
$2,782,367 $464,541 $160,236 $141,856 $3.80 $3.36
---------- -------- -------- -------- ----- -----
---------- -------- -------- -------- ----- -----
1992
First Quarter.......... $ 547,856 $ 47,212 $(10,694) $105,009 $(.26) $2.59
Second Quarter......... 588,662 73,713 10,873 10,873 .27 .27
Third Quarter.......... 599,913 72,566 10,466 10,466 .26 .26
Fourth Quarter......... 620,250 94,868 18,428 1,816 .45 .04
---------- -------- -------- -------- ----- -----
$2,356,681 $288,359 $ 29,073 $128,164 $ .72 $3.16
---------- -------- -------- -------- ----- -----
---------- -------- -------- -------- ----- -----
</TABLE>
- ---------------
(1) Reference is made to Notes 1, 2, 3 and 10 of Notes to Consolidated Financial
Statements for information on items affecting quarterly results.
(2) Operating income is defined as net revenues less costs and operating
expenses.
(3) The total of the 1993 quarterly earnings (loss) per share amounts presented
does not equal the annual 1993 earnings per share amount primarily due to
the issuance of 5 million shares of Pennzoil's common stock during September
1993. Reference is made to Note 7 of Notes to Consolidated Financial
Statements for additional information.
OIL AND GAS INFORMATION
Estimated Quantities of Proved Oil and Gas Reserves
Presented on the following page are Pennzoil's estimated net proved oil and
gas reserves as of December 31, 1993, 1992 and 1991. Reserves in the United
States are located onshore in all the main producing states (except Alaska) and
offshore Alabama, California, Louisiana, Mississippi and Texas. Foreign reserves
are located in Canada.
F-33
<PAGE> 72
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
The estimates of proved oil and gas reserves have been prepared by Ryder
Scott Company Petroleum Engineers ("Ryder Scott") and are based on data supplied
by Pennzoil. The reports of Ryder Scott, which include a description of the
basis used in preparing the estimated reserves, are included as exhibits to
Pennzoil's Annual Reports on Form 10-K for the respective years. Oil includes
crude oil, condensate and natural gas liquids.
PROVED OIL RESERVES
(MILLIONS OF BARRELS)
<TABLE>
<CAPTION>
1993 1992 1991
----------------------- ----------------------- ---------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
----- --- ----- ----- --- ----- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves
Beginning of year................ 218 2 220 137 2 139 153 3 156
Revisions of previous estimates
-- economics................. (14) -- (14) 1 -- 1 (12) -- (12)
-- performance and other..... 7 -- 7 1 -- 1 4 -- 4
Extensions and discoveries..... 15 -- 15 8 -- 8 4 -- 4
Estimated production........... (24) -- (24) (15) -- (15) (12) (1) (13)
Purchases of minerals in
place(1)(2).................. 5 -- 5 93 -- 93 -- -- --
Sales of minerals in
place(2)..................... (8) -- (8) (7) -- (7) -- -- --
----- --- ----- ----- --- ----- ---- --- ----
End of year...................... 199 2 201 218 2 220 137 2 139
----- --- ----- ----- --- ----- ---- --- ----
----- --- ----- ----- --- ----- ---- --- ----
Proved developed reserves
Beginning of year................ 181 2 183 108 2 110 112 3 115
End of year...................... 162 2 164 181 2 183 108 2 110
</TABLE>
PROVED NATURAL GAS RESERVES
(BILLIONS OF CUBIC FEET)
<TABLE>
<CAPTION>
1993 1992 1991
----------------------- ----------------------- ---------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
----- --- ----- ----- --- ----- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves(2)
Beginning of year................. 1,617 35 1,652 892 34 926 892 35 927
Revisions of previous estimates
-- economics.................. (7) -- (7) 5 (2) 3 (7) -- (7)
-- performance and other...... 6 1 7 4 2 6 56 (1) 55
Extensions and discoveries...... 117 5 122 78 2 80 101 1 102
Estimated production............ (220) (3) (223) (161) (1) (162) (147) (1) (148)
Purchases of minerals in
place(1)(2)................... 91 -- 91 823 -- 823 -- -- --
Sales of minerals in place(2)... (151) -- (151) (24) -- (24) (3) -- (3)
----- --- ----- ----- --- ----- ---- --- ----
End of year......................... 1,453 38 1,491 1,617 35 1,652 892 34 926
----- --- ----- ----- --- ----- ---- --- ----
----- --- ----- ----- --- ----- ---- --- ----
Proved developed reserves(3)
Beginning of year................. 1,412 34 1,446 803 34 837 842 35 877
End of year....................... 1,306 35 1,341 1,412 34 1,446 803 34 837
</TABLE>
- ---------------
(1) Purchases of minerals in place for 1992 include proved developed and
undeveloped reserves attributable to Pennzoil Petroleum as of the date of
acquisition (October 30, 1992).
(2) Purchases and sales of minerals in place for 1993 include 5 million barrels
of oil and 91 billion cubic feet ("Bcf ") of natural gas and 4 million
barrels of oil and 93 Bcf of natural gas, respectively, associated with
asset swaps.
(3) United States natural gas reserves for 1993, 1992 and 1991 exclude 162 Bcf,
124 Bcf and 129 Bcf, respectively, of carbon dioxide gas for sale or use in
company operations.
F-34
<PAGE> 73
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing
Activities
The following table shows the aggregate capitalized costs related to oil
and gas producing activities and related accumulated depreciation, depletion and
amortization and valuation allowances.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1993 1992
------- -------
(EXPRESSED IN
MILLIONS)
<S> <C> <C>
Capitalized costs
Proved properties..................................................... $ 3,869 $ 4,123
Unproved properties................................................... 233 187
------- -------
4,102 4,310
Accumulated depreciation, depletion, amortization and valuation
allowances......................................................... (2,372) (2,558)
------- -------
$ 1,730 $ 1,752
------- -------
------- -------
</TABLE>
The following table shows costs incurred in oil and gas producing
activities (whether charged to expense or capitalized).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
1993 1992 1991
------------------------ ---------------------- ---------------------
UNITED UNITED UNITED
STATES FOREIGN(1) TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------ ---------- ----- ------ ------- ----- ------ ------- -----
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Costs incurred in oil and
gas producing activities
Property
acquisition(2)
Unproved............ $ 4 $110 $114 $ 12 $ 1 $ 13 $ 7 $ 1 $ 8
Proved.............. 2 -- 2 999 -- 999 3 -- 3
Exploration........... 97 7 104 23 2 25 67 14 81
Development........... 160 -- 160 67 5 72 101 1 102
---- ---- ---- ------ ---- ----- ---- ---- ----
$263 $117 $380 $1,101 $ 8 $1,109 $178 $ 16 $194
---- ---- ---- ------ ---- ------ ---- ---- ----
---- ---- ---- ------ ---- ------ ---- ---- ----
</TABLE>
- ---------------
(1) Costs incurred for unproved property acquisition include approximately $98
million related to the gas utilization project in Azerbaijan. Pennzoil has
signed a gas utilization agreement with the State Oil Company of the
Azerbaijan Republic ("SOCAR") that provides for recovery of Pennzoil's
costs incurred in connection with the gas utilization project by payment in
hard currency or oil or petroleum products or as a credit against a
signature bonus for the first exploration, exploitation and/or development
contract entered into between Pennzoil and SOCAR in Azerbaijan. Total costs
incurred during 1993 include $114 million related to Pennzoil's Azerbaijan
activities.
(2) Costs incurred for property acquisitions in 1992 include $1,009 million
attributable to the acquisition of Pennzoil Petroleum. See Note 10 of Notes
to Consolidated Financial Statements for additional information.
F-35
<PAGE> 74
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Results of Operations From Oil and Gas Producing Activities
This information is similar to the disclosures set forth in the "Industry
Segment Financial Information" set forth on pages 1 and 2 herein but differs in
several respects as to the level of detail, geographic presentation and income
taxes. Income taxes were determined by applying the applicable statutory rates
to pretax income with adjustment for tax credits and other allowances. Income
tax provisions involved certain allocations among geographic areas based on
management's assessment of the principal factors giving rise to the tax
obligation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1993 1992 1991
-------------------- -------------------- --------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------ ------- ----- ------ ------- ----- ------ ------- -----
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales
Outside customers............ $731 $ 11 $742 $424 $ 8 $432 $307 $ 10 $317
Other segments, at market.... 137 -- 137 137 -- 137 140 -- 140
---- ---- ---- ---- ---- ---- ---- ---- ----
868 11 879 561 8 569 447 10 457
---- ---- ---- ---- ---- ---- ---- ---- ----
Costs and expenses
Production costs
Operating expenses........ 218 3 221 134 2 136 119 3 122
Production, severance and
property taxes.......... 43 -- 43 29 -- 29 28 -- 28
Technical support and
other(1).................. 93 17 110 74 8 82 65 2 67
Exploration expenses,
including dry holes....... 69 2 71 9 3 12 34 13 47
Depreciation, depletion,
amortization and valuation
provisions................ 273 2 275 174 1 175 142 2 144
---- ---- ---- ---- ---- ---- ---- ---- ----
696 24 720 420 14 434 388 20 408
---- ---- ---- ---- ---- ---- ---- ---- ----
Pretax results of operations... 172 (13) 159 141 (6) 135 59 (10) 49
Income tax expense (benefit)... 60 (4) 56 47 (1) 46 16 (1) 15
---- ---- ---- ---- ---- ---- ---- ---- ----
Results of operations.......... $112 $ (9) $103 $ 94 $ (5) $ 89 $ 43 $ (9) $ 34
---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ----
</TABLE>
- ---------------
(1) Foreign technical support and other during 1993 includes approximately $7
million related to Pennzoil's Azerbaijan activities.
F-36
<PAGE> 75
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Standardized Measure)
The Standardized Measure is determined on a basis which presumes that
year-end economic and operating conditions will continue over the periods during
which year-end proved reserves would be produced. Neither the effects of future
inflation nor expected future changes in technology and operating practices have
been considered.
The Standardized Measure is determined as the excess of future cash inflows
from proved reserves less future costs of producing and developing the reserves,
future income taxes and a discount factor. Future cash inflows represent the
revenues that would be received from production of year-end proved reserve
quantities assuming the future production would be sold at year-end prices plus
any fixed and determinable future escalations (but not escalations based on
inflation) of natural gas prices provided by existing contracts. As a result of
the continued volatility in oil and natural gas markets, future prices received
from oil, condensate and natural gas sales may be higher or lower than current
levels.
Future production costs include the estimated expenditures related to
production of the proved reserves plus any production taxes without
consideration of inflation. Future development costs include the estimated costs
of drilling development wells and installation of production facilities, plus
the net costs associated with dismantlement and abandonment of wells and
production platforms, assuming year-end costs continue without inflation. Future
income taxes were determined by applying current legislated statutory rates to
the excess of (a) future cash inflows, less future production and development
costs, over (b) the tax basis in the properties involved plus existing net
operating loss carryforwards. Tax credits are considered in the computation of
future income tax expenses. The discount was determined by applying a discount
rate of 10% per year to the annual future net cash flows.
F-37
<PAGE> 76
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
The Standardized Measure does not purport to be an estimate of the fair
market value of Pennzoil's proved reserves. An estimate of fair market value
would also take into account, among other things, the expected recovery of
reserves in excess of proved reserves, anticipated changes in future prices and
costs and a discount factor more representative of the time value of money and
the risks inherent in producing oil and gas. In the opinion of Pennzoil's
management, the estimated fair value of Pennzoil's oil and gas properties is in
excess of the amounts set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1993 1992
-------------------------- --------------------------
UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------ ---- ------ ------ ---- ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Future cash inflows..................... $5,868 $ 84 $5,952 $6,998 $ 75 $7,073
Future production costs................. (1,971) (7) (1,978) (2,473) (11) (2,484)
Future development costs(1)............. (492) (2) (494) (559) (2) (561)
------ ---- ------ ------ ---- ------
Future net cash flows before income
taxes................................. 3,405 75 3,480 3,966 62 4,028
10% annual discount for estimated timing
of net cash flows before income
taxes................................. (1,192) (30) (1,222) (1,482) (27) (1,509)
------ ---- ------ ------ ---- ------
Present value of future net cash flows
before income taxes................... 2,213 45 2,258 2,484 35 2,519
Future income tax expense discounted at
10%(2)................................ (509) (26) (535) (554) (10) (564)
------ ---- ------ ------ ---- ------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves........... $1,704 $ 19 $1,723 $1,930 $ 25 $1,955
------ ---- ------ ------ ---- ------
------ ---- ------ ------ ---- ------
</TABLE>
- ---------------
(1) Includes future dismantlement and abandonment costs, net of salvage values.
(2) Future income taxes before discount were $896 million (U.S.) and $35 million
(foreign) and $1,004 million (U.S.) and $20 million (foreign) for 1993 and
1992, respectively.
F-38
<PAGE> 77
PENNZOIL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)
OIL AND GAS INFORMATION (CONTINUED)
Changes in the Standardized Measure
The following table sets forth the principal elements of the changes in the
Standardized Measure for the years presented. All amounts are reflected on a
discounted basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1993 1992 1991
------ ------ ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C>
Standardized measure -- beginning of period.................... $1,955 $1,124 $1,741
Revisions --
Net changes in prices, net of production costs............... (179) 134 (864)
Revisions of quantity estimates.............................. (33) 23 (2)
Changes in estimated future development costs................ (12) (10) 1
Accretion of discount........................................ 252 141 225
Changes in production rates (timing) and other............... (79) (72) (114)
------ ------ ------
Net Revisions........................................ (51) 216 (754)
------ ------ ------
Extensions, discoveries and improved recovery, net of future
production and development costs............................. 275 103 118
Sales and transfers, net of production costs................... (564) (373) (282)
Development costs incurred during the period that reduced
future development costs..................................... 147 51 83
Net change in estimated future income taxes.................... 29 (279) 220
Purchases of reserves in place................................. 162 1,157 --
Sales of reserves in place..................................... (230) (44) (2)
------ ------ ------
Standardized measure -- end of period.......................... $1,723 $1,955 $1,124
------ ------ ------
------ ------ ------
</TABLE>
SULPHUR INFORMATION
Reference is made to Item 1, Business and Item 2, Properties under the
caption "Sulphur -- Reserves, Production and Sales Information" for disclosures
relative to sulphur reserves, production and sales information.
F-39
<PAGE> 78
PENNZOIL COMPANY AND SUBSIDIARIES
SCHEDULE I -- MARKETABLE SECURITIES AND OTHER INVESTMENTS
AT DECEMBER 31, 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
NUMBER OF CARRIED
SHARES OR IN
PRINCIPAL MARKET BALANCE
DESCRIPTION(1) AMOUNT COST VALUE SHEET
------------- -------- ---- ------ -------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Current marketable securities and other
investments:
Domestic commercial paper, maturities from
91 to 197 days............................ $ 277,855 $277,855 $277,855 $277,855
Federal National Mortgage Association notes,
maturities from 190 to 199 days........... 298,035 298,035 298,035 298,035
Certificate of deposit, maturity of 195
days...................................... 10,001 10,001 10,001 10,001
Treasury bills, maturities from 164 to 183
days...................................... 98,417 98,417 98,417 98,417
---------- -------- -------- --------
Total current marketable securities and
other investments.................... $ 684,308 $684,308 $684,308 $684,308
---------- -------- -------- --------
---------- -------- -------- --------
Non-current marketable securities and other
investments:
Chevron Corporation common stock (see Notes
1 and 3 of Notes to Consolidated Financial
Statements)............................... 9,035,518 $608,565 $787,220 $608,565
Marketable securities and other
investments............................... $ 46,408 46,408 46,408 46,408
-------- -------- --------
Total non-current marketable securities
and other investments.................. $654,973 $833,628 $654,973
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------
(1) Maturities for the various securities and investments were as of the dates
of the original investments.
S-1
<PAGE> 79
PENNZOIL COMPANY AND SUBSIDIARIES
SCHEDULE V -- CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE RETIRE- BALANCE
BEGINNING ADDITIONS MENTS OTHER END OF
DESCRIPTION OF PERIOD AT COST OR SALES(1) CHANGES(2) PERIOD
----------- --------- --------- ----------- ---------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1993
Oil and Gas.................. $4,310,392 $ 360,496 $ 273,561 $ (295,146) $ 4,102,181
Motor Oil & Automotive
Products................... 776,536 71,535 8,419 (1,720) 837,932
Franchise Operations......... 136,539 21,701 4,386 1,023 154,877
Sulphur...................... 186,425 2,295 317 24 188,427
Other........................ 186,501 29,095 35,474 (592) 179,530
---------- ---------- ----------- ----------- -----------
$5,596,393 $ 485,122 $ 322,157 $ (296,411) $ 5,462,947
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
1992
Oil and Gas(3)............... $3,695,848 $1,103,212 $ 211,139 $ (277,529) $ 4,310,392
Motor Oil & Automotive
Products................... 766,639 35,841 9,514 (16,430) 776,536
Franchise Operations......... 94,605 25,810 2,081 18,205 136,539
Sulphur...................... 190,844 2,898 7,354 37 186,425
Other........................ 184,956 4,237 3,676 984 186,501
---------- ---------- ----------- ----------- -----------
$4,932,892 $1,171,998 $ 233,764 $ (274,733) $ 5,596,393
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
1991
Oil and Gas.................. $3,634,790 $ 177,905 $ 108,566 $ (8,281) $ 3,695,848
Motor Oil & Automotive
Products................... 746,684 32,260 29,935 17,630 766,639
Franchise Operations......... 106,217 4,939 4,397 (12,154) 94,605
Sulphur...................... 185,233 6,999 1,388 -- 190,844
Other........................ 170,619 7,891 730 7,176 184,956
---------- ---------- ----------- ----------- -----------
$4,843,543 $ 229,994 $ 145,016 $ 4,371 $ 4,932,892
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
- ---------------
(1) Retirements or Sales includes dry hole costs charged to exploration expense
of $4,256,000, $2,404,000 and $30,849,000 for 1993, 1992 and 1991,
respectively.
(2) During 1993, oil and gas property, plant and equipment has been reduced by
$278,044,000 attributable to certain asset swap transactions. See Schedule
VI for a corresponding reduction of oil and gas accumulated depreciation,
depletion and amortization.
(3) Additions to the oil and gas segment include $1,009,410,000 allocated to
the oil and gas properties attributable to the acquisition of Pennzoil
Petroleum in October 1992.
S-2
<PAGE> 80
PENNZOIL COMPANY AND SUBSIDIARIES
SCHEDULE VI -- CONSOLIDATED ACCUMULATED DEPRECIATION, DEPLETION,
AMORTIZATION AND VALUATION ALLOWANCES OF PROPERTY, PLANT
AND EQUIPMENT
===============================================================================
<TABLE>
<CAPTION>
DEDUCTIONS FROM RESERVES
ADDITIONS -----------------------------
------------------------- RETIREMENTS,
BALANCE CHARGED TO CHARGED RENEWALS BALANCE
BEGINNING COSTS AND TO OTHER AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES(1) ACCOUNTS REPLACEMENTS CHANGES(2) PERIOD
-----------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1993
Oil and Gas.............. $2,558,243 $322,373 $ 1,098 $231,437 $ 278,299 $ 2,371,978
Motor Oil & Automotive
Products............... 516,645 24,814 248 7,439 377 533,891
Franchise Operations..... 15,185 8,249 615 598 -- 23,451
Sulphur.................. 114,363 8,427 (34) 231 -- 122,525
Other.................... 79,907 5,969 2,059 999 278 86,658
---------- ---------- ---------- ------------ ------------ ------------
$3,284,343 $369,832 $ 3,986 $240,704 $ 278,954 $ 3,138,503
---------- ---------- ---------- ------------ ------------ ------------
---------- ---------- ---------- ------------ ------------ ------------
1992
Oil and Gas.............. $2,565,789 $177,983 $ (1,723) $183,128 $ 678 $ 2,558,243
Motor Oil & Automotive
Products............... 502,555 22,954 766 7,053 2,577 516,645
Franchise Operations..... 6,516 6,629 3,003 963 -- 15,185
Sulphur.................. 114,698 7,346 (418) 7,263 -- 114,363
Other.................... 76,952 6,214 144 3,403 -- 79,907
---------- ---------- ---------- ------------ ------------ ------------
$3,266,510 $221,126 $ 1,772 $201,810 $ 3,255 $ 3,284,343
---------- ---------- ---------- ------------ ------------ ------------
---------- ---------- ---------- ------------ ------------ ------------
1991
Oil and Gas.............. $2,505,629 $143,940 $ 1,073 $ 87,177 $ (2,324) $ 2,565,789
Motor Oil & Automotive
Products............... 502,809 26,638 1,664 27,442 1,114 502,555
Franchise Operations..... 7,563 4,486 (3,917) 1,616 -- 6,516
Sulphur.................. 104,757 12,522 (1,218) 1,363 -- 114,698
Other.................... 71,224 6,280 75 627 -- 76,952
---------- ---------- ---------- ------------ ------------ ------------
$3,191,982 $193,866 $ (2,323) $118,225 $ (1,210) $ 3,266,510
---------- ---------- ---------- ------------ ------------ ------------
---------- ---------- ---------- ------------ ------------ ------------
</TABLE>
- ---------------
(1) Additions charged to costs and expenses include impairments and
abandonments charged to exploration expense. Impairments and abandonments
for 1993, 1992 and 1991 were $46,884,000, $3,759,000 and $5,039,000,
respectively.
(2) During 1993, oil and gas accumulated depreciation, depletion and
amortization has been reduced by $278,044,000 attributable to certain asset
swap transactions. See Schedule V for a corresponding reduction of oil and
gas property, plant and equipment.
S-3
<PAGE> 81
PENNZOIL COMPANY AND SUBSIDIARIES
SCHEDULE IX -- SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
INTEREST MAXIMUM AVERAGE AVERAGE
RATE AMOUNT AMOUNT INTEREST
CATEGORY OF BALANCE AT OUTSTANDING OUTSTANDING RATE
AGGREGATE AT END END DURING DURING DURING
SHORT-TERM OF OF THE THE THE
BORROWINGS PERIOD PERIOD PERIOD PERIOD PERIOD(1)
- ---------------------------------------------------------------------------------------------------------
(DOLLARS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1993
Domestic bank borrowings --
money market lines(2)......... $183,610 3.46% $200,000 $148,713 3.35%
Commercial paper................ $249,421 3.56% $249,483 $165,598 3.26%
1992
Domestic bank borrowings --
money market lines(2)......... $192,080 4.09% $199,960 $166,483 3.87%
Commercial paper................ $147,266 4.12% $149,608 $126,677 3.81%
1991
Domestic bank borrowings --
money market lines(2)......... $156,106 5.38% $198,792 $155,992 6.07%
Commercial paper................ $134,850 5.15% $149,270 $104,749 5.93%
Euro-commercial paper........... $ -- -- $ 6,963 $ 1,129 6.23%
</TABLE>
- ---------------
(1) Represents the weighted average interest rate in effect while the
short-term borrowings were outstanding.
(2) None of the banks has any obligation to continue to extend credit after the
maturities of outstanding borrowings or to extend the maturities of any
borrowings under these credit arrangements.
S-4
<PAGE> 82
PENNZOIL COMPANY AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTARY CONSOLIDATED INCOME
STATEMENT INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1993 1992 1991
------ ------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Taxes, other than payroll and income tax
Production and severance tax........................... $28,720 $21,769 $20,383
Other.................................................. 38,053 31,026 32,606
------- ------- -------
$66,773 $52,795 $52,989
Maintenance and repairs..................................... $65,783 $69,782 $69,889
Advertising costs........................................... $96,516 $76,697 $67,664
</TABLE>
S-5
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<S> <C>
*3(a) -- Restated Certificate of Incorporation of Pennzoil Company, as amended
through July 27, 1984 (Pennzoil Company 10-K (1984), SEC File No.
1-5591, Exhibit 3(a)).
*3(b) -- Certificate of Retirement of Stock of Pennzoil Company dated March
26, 1985 (Pennzoil Company 10-K (1985), SEC File No. 1-5591, Exhibit
3(b)).
*3(c) -- Certificate of Amendment to the Restated Certificate of Incorporation
of Pennzoil Company dated April 25, 1985 (Pennzoil Company 10-K
(1985), SEC File No. 1-5591, Exhibit 3(c)).
*3(d) -- Certificate of Reduction in Number of Shares of Series of Pennzoil
Company dated June 10, 1986 (Pennzoil Company 10-K (1987), SEC File
No. 1-5591, Exhibit 3(e)).
*3(e) -- Certificate of Retirement of Stock of Pennzoil Company dated June 10,
1986 (Pennzoil Company 10-K (1987), SEC File No. 1-5591, Exhibit
3(f)).
*3(f) -- Certificate of Amendment to the Restated Certificate of Incorporation
of Pennzoil Company dated April 30, 1987 (Pennzoil Company 10-Q (1st
Quarter 1987), SEC File No. 1-5591, Exhibit 3(a)).
*3(g) -- Certificate of Designation, Preferences and Rights of Series A
Participating Preferred Stock of Pennzoil Company dated April 18,
1988 (Pennzoil Company 10-Q (1st Quarter 1988), SEC File No. 1-5591,
Exhibit 3(b)).
*3(h) -- Certification of Elimination of Designation of Pennzoil Company dated
November 20, 1991 (Pennzoil Company 10-K (1991), SEC File No. 1-5591,
Exhibit 3(h)).
*3(i) -- By-laws of Pennzoil Company, as amended through September 16, 1993
(Pennzoil Company 8-K (September 15, 1993), SEC File No. 1-5591,
Exhibit 4).
*4(a) -- Indenture dated as of February 15, 1986 (the "1986 Indenture")
between Pennzoil Company and Mellon Bank, N.A., Trustee (Pennzoil
Company 10-Q (2nd Quarter 1986), SEC File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of March 16, 1987 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 9% Debentures due April 1, 2017 (Pennzoil Company
10-Q (1st Quarter 1987), SEC File
No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of April 14, 1989 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 10 5/8% Debentures due June 1, 2001 (Pennzoil
Company 10-Q (1st Quarter 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(d) -- Officer's Certificate dated as of November 14, 1989 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/8% Debentures due November 15, 2009 and
9 5/8% Notes due November 15, 1999 (Pennzoil Company 10-K (1989), SEC
File No. 1-5591, Exhibit 4(n)).
*4(e) -- Officer's Certificate dated as of November 19, 1990 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/4% Debentures due November 1, 2005
(Pennzoil Company 10-K (1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(f) -- Instrument of Resignation, Appointment and Acceptance dated as of
April 1, 1991 among Pennzoil Company, Mellon Bank, N.A., as Retiring
Trustee, and Texas Commerce Bank National Association, as Successor
Trustee, under the 1986 Indenture (Pennzoil Company 10-K (1991), SEC
File No. 1-5591, Exhibit 4(p)).
*4(g) -- Indenture dated as of December 15, 1992 (the "1992 Indenture")
between Pennzoil Company and Texas Commerce Bank National
Association, Trustee (Pennzoil Company 10-K (1992), SEC File No.
1-5591, Exhibit 4(o)).
*4(h) -- First Supplemental Indenture dated as of January 13, 1993 to the 1992
Indenture (Pennzoil Company 10-K (1992), SEC File No. 1-5591, Exhibit
4(p)).
4(i) -- Second Supplemental Indenture dated as of October 12, 1993 to the
1992 Indenture.
</TABLE>
<PAGE> 84
<TABLE>
<S> <C>
Pennzoil Company agrees to furnish to the Commission upon request a copy
of any agreement defining the rights of holders of long-term debt of
Pennzoil Company and all its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed, under
which the total amount of securities authorized does not exceed 10%
of the total assets of Pennzoil Company and its subsidiaries on a
consolidated basis.
+*10(a) -- 1978 Stock Option Plan of Pennzoil Company, as amended (Registration
No. 2-67268, Exhibit 4(a)).
+*10(b) -- 1981 Stock Option Plan of Pennzoil Company (Registration No. 2-76935,
Exhibit 4(a)).
+*10(c) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(d) -- Pennzoil Company Salary Continuation Plan (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(e) -- Pennzoil Company Supplemental Disability Plan effective January 1,
1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591, Exhibit
5(y)).
+*10(f) -- Pennzoil Company Supplemental Life Insurance Plan effective January
1, 1978, as amended (Pennzoil Company 10-K (1980), SEC File No.
1-5591, Exhibit 10(g)).
+*10(g) -- Pennzoil Company Deferred Compensation Plan (Pennzoil Company 10-K
(1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(h) -- Specimen of Pennzoil Company Deferred Compensation Agreement
(Pennzoil Company 10-K (1982), SEC File No. 1-5591, Exhibit
10(j)(1)).
+*10(i) -- Specimen of Pennzoil Company agreements regarding certain benefits
payable in the event of a change in control (Pennzoil 10-Q (3rd
Quarter 1982), SEC File
No. 1-5591, Exhibit 28).
+*10(j) -- Pennzoil Company Section 415 Excess Benefit Agreements (Pennzoil
Company 10-Q (1st Quarter 1980), SEC File No. 1-5591, Exhibit 5).
+*10(k) -- Pennzoil Company Medical Expenses Reimbursement Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591,
Exhibit 5(v)).
+*10(l) -- Pennzoil Company 1985 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (4-25-85), SEC File No. 1-5591,
Exhibit B).
+*10(m) -- Pennzoil Company Executive Severance Plan (Pennzoil Company 10-K
(1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(n) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (4-26-90), SEC File No. 1-5591, Exhibit A).
+*10(o) -- Pennzoil Company 1990 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (4-26-90), SEC File No. 1-5591,
Exhibit B).
+*10(p) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (4-13-93), SEC File No. 1-5591, Exhibit A).
+*10(q) -- Pennzoil Company 1993 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (4-13-93), SEC File No. 1-5591,
Exhibit B).
11 -- Computation of Ratios of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Dividends for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989.
21 -- List of Subsidiaries of Pennzoil Company.
23(a) -- Consent of Arthur Andersen & Co.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
23(c) -- Consent of DeGolyer and MacNaughton.
24 -- Powers of Attorney.
27(a) -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers
as of December 31, 1993 relating to oil and gas reserves.
27(b) -- Letter Report of DeGolyer and MacNaughton on Certain Sulphur Reserves
as of January 1, 1994.
</TABLE>
- ---------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 4(i)
{Conformed Copy}
________________________________________________________________________________
PENNZOIL COMPANY
AND
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
As Trustee
_________________
SECOND SUPPLEMENTAL INDENTURE
Providing for
4 3/4% Exchangeable Senior Debentures Due October 1, 2003
Dated as of October 12, 1993
Supplementing Indenture dated as of December 15, 1992
_________________
________________________________________________________________________________
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated as of October 12, 1993 ("Second
Supplemental Indenture") between PENNZOIL COMPANY, a corporation organized and
existing under the laws of the State of Delaware (hereinafter called the
"Company"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking
association, incorporated and existing under the laws of the United States of
America, having its principal corporate trust office in the City of Houston,
Texas (hereinafter called the "Trustee").
WHEREAS, the Company has executed and delivered its Indenture dated as
of December 15, 1992 (hereinafter called the "Indenture"), to provide for the
issue of one or more series of debt securities of the Company; and
WHEREAS, Section 901 of the Indenture authorizes the Company and the
Trustee to enter into supplemental indentures to establish the form or terms of
securities of any series as permitted by sections 201 and 301 of the Indenture;
and
WHEREAS, to so provide for the establishment of such a series, the
Company has authorized the execution of this Second Supplemental Indenture to
the Indenture and has requested the Trustee to execute the Second Supplemental
Indenture; and
WHEREAS, all conditions and requirements necessary to make this Second
Supplemental Indenture a valid, binding and legal instrument have been done and
performed and the execution and delivery hereof have been in all respects duly
authorized, including the delivery to the Trustee of the Opinion of Counsel
referenced in Section 903 of the Indenture;
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH that the
Company and the Trustee hereby covenant, declare and agree as follows:
ARTICLE ONE
101. Second Series of Debentures
(a) There shall be a series of Securities (capitalized terms used
herein and not otherwise defined have the meanings given to such terms in the
Indenture) designated "4 3/4% Exchangeable Senior Debentures Due October 1,
2003" (herein sometimes referred to as "Debentures"), and the form thereof,
which shall be established by Board Resolution, shall contain suitable
provisions with respect to the matters hereinafter in this Section 101
specified. Debentures shall mature on and bear interest and be limited in
aggregate principal amount as to each maturity as set forth below:
-1-
<PAGE> 3
<TABLE>
<CAPTION>
Aggregate Interest
Principal Rate
Amount Maturity Per Annum
--------- -------- ---------
<S> <C> <C>
$500,000,000 October 1, 2003 4 3/4%
</TABLE>
Debentures shall be issued as Registered Securities in denominations of
U.S. $1,000 and as Bearer Securities in denominations of U.S. $5,000; interest
on Debentures shall be payable semiannually on April 1 and October 1 of each
year, commencing April 1, 1994. The Place of Payment with respect to the
Debentures maintained in accordance with (i) Section 1002(A) of the Indenture is
Texas Commerce Trust Company, 80 Broad Street, 4th Floor, New York, New York
10004, and Texas Commerce Bank National Association, 600 Travis Street, 8th
Floor, Houston, Texas 77002; (ii) Section 1002(B) of the Indenture is Chemical
Bank London, Chemical Bank House, 180 Strand, London WC2R 1EX, England and (iii)
Section 1002(C) of the Indenture is the Chemical Bank London, Chemical Bank
House, 180 Strand, London WC2R 1EX, England.
(b) The Debentures which are Bearer Securities will initially be issued
in the form of a single temporary global Debenture (the "Global Debenture") in
bearer form, without interest coupons or conversion rights, in the denomination
of U.S. $167,950,000, substantially in the form of Exhibit A hereto. The Global
Debenture shall be authenticated by the Trustee upon the same conditions, in
substantially the same manner and with the same effect as the definitive
Debentures. The Global Debenture shall be delivered to Morgan Guaranty Trust
Company of New York, London office, as Common Depositary (as defined in Section
304 of the Indenture) and operator of Euro-clear and CEDEL for credit to the
respective accounts of the purchasers (or to such other accounts as such
purchasers may have directed) with Euro-clear or CEDEL.
(c) For purposes of this Second Supplemental Indenture, "Exchange Date"
shall mean the last day of the 40-day period following October 12, 1993. The
International Managers shall, upon their determination of such date, so advise
the Trustee, the Company, Euro-clear and CEDEL in writing forthwith. Without
unnecessary delay, but in any event not later than the 10th day prior to the
Exchange Date, the Company will execute and deliver to Chemical Bank London
definitive Debentures which are Bearer Securities in the aggregate principal
amount of U.S. $167,950,000. All Debentures which are Bearer Securities so
issued and delivered will have coupons attached. The Global Debenture may be
exchanged for an equal aggregate principal amount of definitive Debentures that
are Bearer Securities only on or after the Exchange Date and only upon written
certification as provided in Section 304 of the Indenture.
(d) Notwithstanding Section 101 (c) hereof, a Person may at any time
exchange the portion of the Global Debenture beneficially owned by it for an
equal aggregate principal amount of definitive Debentures that are Registered
Securities of authorized denominations (which may be in temporary form if the
Company so elects).
-2-
<PAGE> 4
Upon any demand for exchange for Debentures that are Registered Securities in
accordance with this paragraph, the Company shall cause the Trustee to
authenticate and deliver the Debentures that are Registered Securities to the
Holder according to the instructions of the Holder and the Common Depositary
shall cause the Global Debenture to be endorsed in accordance with paragraph (f)
below. Any exchange as provided in this 101(d) shall be made free of charge to
the Holders and the beneficial owners of the definitive Debentures issued in
exchange, except that a person receiving definitive Debentures must bear the
cost of insurance, postage, transportation and the like in the event that such
person does not receive such Debentures in person at the offices of Euro-clear
or CEDEL.
(e) The delivery to the Trustee by Euro-clear or CEDEL of any written
statement referred to above may be relied upon by the Company and the Trustee as
conclusive evidence that a corresponding certification or certifications has or
have been delivered to Euro-clear or CEDEL, as the case may be, pursuant to the
terms of this Second Supplemental Indenture.
(f) Upon any such exchange of all or a portion of the Global Debenture
for a definitive Debenture or Debentures, the Global Debenture shall be endorsed
by or on behalf of the Trustee to reflect the reduction of its principal amount
by an amount equal to the aggregate principal amount of such definitive
Debenture or Debentures. Until so exchanged in full, the Global Debenture shall
in all respects be entitled to the same benefits under this Second Supplemental
Indenture as definitive Debentures authenticated and delivered hereunder, except
that no beneficial owner of a portion of such Global Debenture shall be entitled
to receive payments of interest on such portion of the Global Debenture
(although such interest shall continue to accrue on such Holder's behalf) or to
convert such portion of the Global Debenture into Exchange Property (as defined
in Section 219 hereof) pursuant to Article Two of this Second Supplemental
Indenture until such beneficial owner has exchanged its beneficial interest in
such portion of the Global Debenture for one or more definitive Debentures.
102. Exchange or Transfer.
Upon any exchange or transfer of Debentures, the Company may make a
charge therefor sufficient to reimburse it for any tax or taxes or other
governmental charge, as provided in Section 305 of the Indenture, but the
Company hereby waives any right to make a charge in addition thereto for any
exchange or transfer of Debentures.
103. Redemption.
(a) The Debentures shall be subject to redemption upon not less than 30
nor more than 60 days' prior notice as provided in Sections 107 and 1104 of the
Indenture at any time on or after October 1, 1998, in whole or from time to time
in part, at the option of the Company, at the following redemption prices
(expressed as a percentage of the
-3-
<PAGE> 5
principal amount at maturity) if redeemed during the 12-month period beginning
October 1 of the following years:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
1998 ....................... 102.375%
1999 ....................... 101.900%
2000 ....................... 101.420%
2001 ....................... 100.950%
2002 ....................... 100.475%
</TABLE>
in each case together with accrued interest to the redemption date, provided,
however, that installments of interest on Bearer Securities whose Stated
Maturity is on or prior to the Redemption Date shall be payable only at an
office or agency located outside the United States (except as otherwise provided
in Section 1002 of the Indenture) and, only upon presentation and surrender of
coupons for such interest; and provided, further, that installments of interest
on Registered Securities whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders of such Securities, registered as such at
the close of business on the relevant Regular Record Dates according to their
terms and the provisions of Section 307 of the Indenture.
(b) The Debentures may also be redeemed at the option of the Company,
in whole but not in part at any time, upon notice as described below, at a
redemption price equal to the principal amount thereof, together with accrued
and unpaid interest (including Additional Amounts) to the date fixed for
redemption (i) if the Company shall determine that as a result of any change in,
or amendment to, the laws (or any regulations or rulings promulgated thereunder)
of the United States or of any political subdivision or taxing authority thereof
or therein affecting taxation, or any change in official position regarding the
application, enforcement or interpretation of such laws, regulations or rulings
(including a holding by a court of competent jurisdiction), which change,
amendment, application, enforcement or interpretation becomes effective on or
after October 4, 1993, the Company must pay or would become obligated to pay
Additional Amounts in respect of the Debentures in accordance with the terms of
Section 106 hereof on the next succeeding Interest Payment Date, or (ii) any
action shall have been taken by a taxing authority (including but not limited to
a ruling or announcement of the Internal Revenue Service or other taxing
authority, whether or not officially published) or a court of competent
jurisdiction in the United States or any political subdivision or taxing
authority thereof or therein, including any of those actions specified in (i)
above (whether or not, in the case of an action taken by a taxing authority,
such action was taken or brought with respect to the Company) or any change,
amendment, application, enforcement or interpretation shall be officially
proposed, in any case on or after October 4, 1993, as a result of which there is
a substantial possibility that the Company will be obligated to pay Additional
Amounts and
-4-
<PAGE> 6
in either case described in clause (i) or (ii), such obligation to pay
Additional Amounts cannot be avoided by the use of reasonable measures available
to the Company; provided, however, that (i) no notice of redemption may be given
earlier than 90 days prior to the earliest date on which the Company would be
obligated to pay such Additional Amounts were a payment in respect of the
Debentures then due, and (ii) at the time such notice of redemption is given,
such obligation to pay such Additional Amounts remains in effect. Prior to the
publication of any notice of redemption of the Debentures pursuant to the
foregoing, the Company shall deliver to the Trustee an opinion of independent
tax counsel stating that the Company is entitled to effect such redemption,
together with a certificate setting forth such facts showing that the conditions
precedent to the right of the Company so to redeem have occurred.
(c) If the Company shall determine, based upon an opinion of
independent tax counsel, that any payment made outside the United States by the
Company or any of its paying agents of the full amount of the next scheduled
payment of either principal or interest due in respect of any Debenture that is
a Bearer Security or coupon appertaining thereto would, under any present or
future laws or regulations of the United States affecting taxation or otherwise,
be subject to any certification, information, documentation or other reporting
requirement of any kind the effect of which requirement is the disclosure to the
Company, any of its paying agents or any governmental authority of the
nationality, residence or identity (as distinguished from status as a United
States Alien (as defined in Section 219 hereof)) of a beneficial owner of such
Debenture that is a Bearer Security or coupon who is a United States Alien
(other than such a requirement which (i) would not be applicable to a payment if
made (A) directly to the beneficial owner or (B) to a custodian, nominee or
other agent of the beneficial owner, (ii) can be satisfied by such a custodian,
nominee or other agent certifying to the effect that such beneficial owner is a
United States Alien, provided, however, in each case referred to in clause
(i)(B) and (ii), payment by such custodian, nominee or agent to such beneficial
owner is not otherwise subject to any such requirements (other than a
requirement which is imposed on a custodian, nominee or other agent described in
clause (v) of this sentence), (iii) is applicable only to a collection or
payment by a custodian, nominee or other agent of the beneficial owner to or on
behalf of such beneficial owner, (iv) would not be applicable to such a payment
made by any other paying agent of the Company outside the United States, or (v)
is applicable to such a payment to or by a custodian, nominee or other agent of
the beneficial owner because such custodian, nominee or agent is a United States
person (within the meaning of the United States Internal Revenue Code of 1986,
as amended (the "Code")), a controlled foreign corporation for United States tax
purposes, a foreign person 50% or more of whose gross income for certain periods
is effectively connected with a United States trade or business, or otherwise
related to the United States), the Company shall redeem the Debentures which are
Bearer Securities (but not the Debentures which are Registered Securities), in
whole but not in part at any time, at a redemption price equal to the principal
amount thereof, together with accrued and unpaid interest and any Additional
Amounts with respect thereto, to the date fixed for redemption, less applicable
withholding taxes, such redemption to take place on such date (not later than
one year after the
-5-
<PAGE> 7
publication of notice of such determination) as the Company shall determine by
notice to the Trustee at least 60 days before the redemption date, unless
shorter notice is acceptable to the Trustee. The Company shall make such
determination as soon as practicable and give prompt notice thereof to the
Trustee and to the Holders in accordance with Section 1104 of the Indenture,
stating in that notice the effective date of such certification, information,
documentation or reporting requirements and the date on which the redemption
shall occur. Notwithstanding the foregoing, the Company shall not so redeem the
Debentures if, on the basis of any subsequent event, it is determined, in the
manner set forth above, 30 days or more prior to the date fixed for redemption,
that no such payment would be subject to any such requirement, in which case the
Company shall give prompt notice of such determination in accordance with
Section 107 of the Indenture, and any earlier redemption notice shall then be
deemed revoked and of no further effect.
(d) Notwithstanding the provisions of Section 103(c) hereof, if and so
long as each certification, information, documentation or other reporting
requirement referred to therein would be fully satisfied by payment of
withholding tax, backup withholding tax or similar charge, the Company may
elect, prior to publication of the notice of determination referred to in the
second sentence of Section 103(c), to have the provisions of this Section 103(d)
apply in lieu of the provisions of Section 103(c). In such event, the Company
will pay as Additional Amounts (regardless of clause (v) of Section 106 hereof)
such amounts as may be necessary so that every net payment made following the
effective date of such requirements outside the United States by the Company or
any of its paying agents of principal of, premium, if any, and interest on any
Debenture that is a Bearer Security or any coupon appertaining thereto to a
Holder who is a United States Alien (but without any requirement with regard to
the disclosure of the nationality, residence or identity of such Holder), after
deduction or withholding for or on account of such withholding tax, backup
withholding tax or similar charge (other than a withholding tax, backup
withholding tax or similar charge which would not be applicable in the
circumstances referred to in the second parenthetical clause of the first
sentence of Section 103(c) hereof), will not be less than the amount provided
for in such Debenture that is a Bearer Security or such coupon to be then due
and payable. In the event the Company elects to pay such Additional Amounts and
so long as it is obligated to pay the same, the Company will have the right, at
its sole option, at anytime thereafter, to redeem the Debentures which are
Bearer Securities (but not the Debentures which are Registered Securities), in
whole but not in part at any time, at a redemption price equal to the principal
amount thereof, together with accrued and unpaid interest to the date fixed for
redemption including any Additional Amounts required to be paid under Section
106 hereof. If the Company elects to pay Additional Amounts pursuant to this
Section 103(d) and the condition specified in the first sentence of this
paragraph should no longer be satisfied, then the Company shall promptly redeem
the Debentures which are Bearer Securities (but not the Debentures which are
Registered Securities) in whole but not in part.
(e) Notice of intention to redeem the Debentures in whole or in part
shall be given in accordance with Section 1104 of the Indenture.
-6-
<PAGE> 8
104. Sinking Fund.
The Debentures shall not be entitled to the benefits of any sinking fund
provisions.
105. Tax Matters.
In addition to the conditions set forth in Section 401 of the Indenture,
the right of the Company to satisfy the Indenture with respect to the Debentures
to the extent set forth in Section 401 of the Indenture shall be subject to the
condition that the Company has delivered to the Trustee an Opinion of Counsel
(as defined in the Indenture) that the satisfaction and discharge pursuant to
Section 401 of the Indenture will not cause the Holders of the Debentures to
recognize income, gain or loss for United States federal income tax purposes.
In addition to the conditions set forth in Section 403 of the Indenture,
the right of the Company to satisfy the Indenture with respect to the Debentures
to the extent set forth in Section 403 of the Indenture shall be subject to the
conditions that the Company shall have received from, or there shall have been
published by, the United States Internal Revenue Service a ruling to the effect
that the satisfaction and discharge to the extent set forth in Section 403 of
the Indenture will not cause the Holders of the Debentures to recognize income,
gain or loss for United States federal income tax purposes.
106. Additional Amounts.
The Company will, subject to certain limitations and exceptions
hereinafter set forth, pay to a Holder of any Debenture who is a United States
Alien as additional interest such Additional Amounts (as defined in the
Indenture) as may be necessary so that every net payment by the Company or any
of its paying agents of principal of, premium, if any, and interest on the
Debentures and any other amounts payable on the Debentures, after deduction or
withholding for or on account of any present or future tax, assessment or other
governmental charge imposed upon such Holder, or by reason of the making of such
payment, upon or as a result of such payment by the United States or any
political subdivision or taxing authority thereof or therein, will not be less
than the amount provided for in the Debentures to be then due and payable.
However, the Company shall not be required to make any payment of Additional
Amounts for or on account of any one or more of the following:
(i) any tax, assessment or other governmental charge which
would not have been so imposed but for (a) the existence of any
present or former connection between such Holder (or between a
fiduciary, settlor, beneficiary, member or shareholder of, or possessor
of a power over, such Holder, if such Holder is an estate, trust,
partnership or corporation) and the United States, including, without
limitation, such Holder (or such fiduciary, settlor, beneficiary,
member, shareholder
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<PAGE> 9
or possessor) being or having been a citizen or resident thereof
or treated as a resident thereof, or being or having been present
therein, or being or having been engaged in a trade or business therein
or having or having had a permanent establishment therein or (b) the
presentation of a Debenture or any coupon appertaining thereto for
payment on a date more than 10 days after the date on which such payment
became due and payable or the date on which payment thereof is duly
provided for, whichever occurs later;
(ii) any estate, inheritance, gift, sales, transfer, wealth,
personal property or any similar tax, assessment or other governmental
charge;
(iii) any tax, assessment or other governmental charge which
is payable otherwise than by deduction or withholding from payments of
principal of or interest on the Debentures;
(iv) any tax, assessment or other governmental charge imposed
by reason of such Holder's past or present status (a) as a personal
holding company or a foreign personal holding company with respect to
United States federal income taxation, (b) as a corporation which
accumulates earnings to avoid United States federal income tax,
(c) as a controlled foreign corporation for United States tax purposes
that is related to the Company through stock ownership, (d) as the
owner, actually or constructively, of 10 percent or more of the total
combined voting power of all classes of stock of the Company entitled to
vote, or (e) as a private foundation or other tax-exempt organization;
(v) any tax, assessment or other governmental charge imposed
by reason of such Holder's failure to comply with any certification,
identification or other reporting requirements concerning its
nationality, residence, identity or connection with the United States
if such compliance is required to establish entitlement to exemption
from such tax, assessment or other governmental charge; or
(vi) any tax, assessment or other governmental charge which
would not have been imposed but for the fact that a Debenture
constitutes a "United States real property interest," as defined
in Section 897(c)(1) of the Code with respect to the beneficial
owner of such a Debenture;
nor shall Additional Amounts be paid with respect to any payment of principal
of, premium, if any, or interest on a Debenture or any other amount payable with
respect to a Debenture to any United States Alien Holder who is a fiduciary or
partnership or other than the sole beneficial owner of any such payment to the
extent a beneficiary or settlor with respect to such fiduciary or a member of
such partnership or a beneficial owner would not have been entitled to the
Additional Amounts had such beneficiary, settlor, member or beneficial owner
been the Holder of the Debenture.
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<PAGE> 10
107. Issuance of Debentures.
Upon the delivery of this Second Supplemental Indenture, Debentures in
the aggregate principal amount of $500,000,000 shall be issued and be
Outstanding as provided in the Indenture.
ARTICLE TWO
201. Right of Exchange.
Subject to and upon compliance with the provisions of this Section 201,
at the option of the Holder thereof, beginning December 3, 1993, any Debenture
which is a Registered Security or any portion of the principal amount thereof
which is $1,000 or an integral multiple of $1,000, and any Debenture which is a
Bearer Security or any portion of the principal amount thereof which is $5,000
or an integral multiple of $5,000, may (unless the Company shall have elected,
pursuant to Section 216 hereof, to pay to the Holder an amount in cash equal to
the value of the Exchange Property, in which case the provisions of Section 216
hereof shall be followed), at any time on or before the close of business on
October 1, 2003, or in the case of Debentures or portions thereof called for
redemption in accordance with Section 1101 of the Indenture, on or before the
close of business on the Business Day next preceding the Redemption Date, be
exchanged for fully paid and nonassessable shares (calculated as to each
exchange to the nearest 1/10,000 of a share) of Chevron Common Stock (as defined
in Section 219 hereof) (or such other securities, property or cash as shall be
added to such Chevron Common Stock or as such Chevron Common Stock shall have
been changed into pursuant to this Article Two) at the Exchange Rate (as defined
below) hereinafter provided.
The rate at which shares of Chevron Common Stock shall be deliverable
upon exchange (herein called the "Exchange Rate") shall be initially 8.502
shares of Chevron Common Stock for each $1,000 principal amount of Debentures
exchanged. The Exchange Rate shall be subject to adjustment as provided in
Sections 204, 205, 211 and 215 hereof.
202. Method of Exchange.
In order to exercise the right of exchange, the Holder of any Debenture
that is a Registered Security to be exchanged shall surrender such Debenture to
the Domestic Exchange Agent (as defined in Section 219 hereof) for exchange by
delivering such Debenture to, or mailing such Debenture by registered mail,
postage prepaid, addressed to the Domestic Exchange Agent at the office or
agency of the Company, maintained for that purpose pursuant to Section 1002 of
the Indenture, accompanied in each case by written notice to the Company and the
Domestic Exchange Agent that the Holder elects to exchange such Debenture, or,
if less than the entire principal amount of such Debenture is to be exchanged,
the portion thereof to be exchanged.
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<PAGE> 11
In order to exercise the right of exchange, the Holder of any Debenture
that is a Bearer Security to be exchanged shall surrender such Debenture with
all unmatured coupons attached to the Foreign Exchange Agent (as defined in
Section 219 hereof) for exchange by delivering such Debenture to, or mailing
such Debenture by registered mail, postage prepaid, addressed to the Foreign
Exchange Agent at the office or agency of the Company, maintained for that
purpose pursuant to Section 1002 of the Indenture, accompanied in each case by
written notice to the Company and the Foreign Exchange Agent that the Holder
elects to exchange such Debenture, or, if less than the entire principal amount
of such Debenture is to be exchanged, the portion thereof to be exchanged.
The notices in the above two paragraphs shall also state the name or
names (with address) in which the certificate or certificates for shares of
Chevron Common Stock or, to the extent applicable, other Exchange Property which
shall be issuable on such exchange shall be issued. Debentures surrendered for
exchange shall be accompanied (if so required by the Company or the applicable
Exchange Agent) by proper assignments thereof to the Company.
If the Company does not elect to deliver cash in lieu of Chevron Common
Stock or other Exchange Property pursuant to Section 216 hereof, as promptly as
practicable after the proper surrender of such Debenture for exchange as
aforesaid (subject however to the following paragraph of this Section 202 and
Section 216 hereof) and in accordance with the procedures set forth in the
Exchange Agents Agreement (as defined in Section 219 hereof), the Company shall
or shall cause the applicable Exchange Agent to deliver to such Holder, or on
his written order a certificate or certificates for the number of whole shares
of Chevron Common Stock and/or any other Exchange Property deliverable upon
exchange of such Debenture (or specified portion thereof). In addition,
provision shall be made for any fraction of a share as provided in Section 203
hereof. Such exchange shall be deemed to have been effected immediately prior
to the close of business on the date on which such Debenture shall have been
properly surrendered for exchange as aforesaid, which shall be the date on which
such Debenture and notice and any such required payment and assignment shall be
received by an Exchange Agent, and at such time the rights of the Holder of such
Debenture as a Debentureholder shall cease and the Person or Persons in whose
name or names any certificate or certificates for shares of Chevron Common Stock
or other Exchange Property shall be deliverable upon such exchange shall, as
between such Person or Persons and the Company, be deemed to have become the
Holder or Holders of record of the shares or other property represented thereby.
Delivery of such certificate or certificates and of any check for any
cash or other Exchange Property may be delayed for a reasonable period of time
at the request of the Company in order to effectuate the calculations of the
adjustments pursuant to this Article Two, to obtain any certificate representing
securities to be delivered, to complete any reapportionment of the shares of
Chevron Common Stock or other Exchange Property apportioned thereto which is
required by this Article Two or to comply with any applicable
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<PAGE> 12
law. If, between the date an exchange under this Section 202 is deemed effected
and the date of delivery of the applicable security or securities, such security
or securities shall cease to have any or certain rights, or a record date or
effective date of a transaction to which Section 204, 205 or 211 hereof applies
shall occur, the Person entitled to receive such security or securities shall be
entitled only to receive such security or securities as so modified and any
dividends or proceeds received thereon on or after the date such exchange is
deemed effected and none of the Company, the Trustee and the Exchange Agents
shall be otherwise liable with respect to the modification of such security or
securities, from the date such exchange is deemed effected and the date of such
delivery.
Except as otherwise expressly provided in this Article Two, no payment
or adjustment shall be made upon any exchange on account of any interest accrued
on the Debentures surrendered for exchange or on account of any dividends on the
Chevron Common Stock or other Exchange Property delivered upon such exchange;
provided, however that interest accrued on any Debentures surrendered for
exchange on or after any Regular Record Date and before any Interest Payment
Date relating thereto shall be paid to, as applicable, the Holder of record as
of such record date.
A Holder will not receive any cash payment representing accrued original
issue discount for United States federal income tax purposes ("Tax OID") upon
any exchange. The delivery of the Exchange Property (or cash in lieu thereof)
to a Holder in exchange for a Holder's Debenture will be deemed to satisfy the
Company's obligation to pay the principal amount of the Debenture, including the
Tax OID attributable to the period from the date of issue to the date of such
exchange with respect to such Debenture. Thus, the accrued Tax OID is deemed to
be paid rather than cancelled, extinguished or forfeited.
In the case of any Debenture which is exchanged in part only, upon such
exchange the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Debenture or
Debentures of authorized denominations in principal amount equal to the
unexchanged portion of such Debenture.
203. Fractional Interests.
No fractional shares of Chevron Common Stock (or any form of fractional
interest in any other security or property which is part of the Exchange
Property) shall be delivered upon exchanges of Debentures. If more than one
Debenture shall be surrendered for exchange at one time by the same Holder, the
number of whole shares (or other integral units of such other securities or
property), which shall be delivered upon exchange shall be computed by the
Company on the basis of the aggregate principal amount of the Debentures (or
specified portions thereof to the extent permitted hereby) so surrendered.
Instead of any fractional share (or other fractional unit) which would otherwise
be deliverable upon exchange of any Debenture or Debentures (or specified
portions thereof), the applicable
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<PAGE> 13
Exchange Agent on behalf of the Company shall pay, on the date the exchange is
deemed to be effected, a cash adjustment in respect of such fractional interest
in an amount equal to the same fraction of the Market Price (as defined in
Section 219 hereof) per share of the Chevron Common Stock (or per unit of such
other security or property) on the Business Day next preceding the date the
exchange is deemed to be effected. The Company shall authorize the applicable
Exchange Agent to obtain the funds necessary or anticipated by the such Exchange
Agent to be necessary, for payment of such fractional interests by the sale of
shares of Chevron Common Stock (or other securities or property which are part
of the Exchange Property) held by such Exchange Agent, provided that after such
sale the number of shares of Chevron Common Stock (and of such other securities
or property) held by such Exchange Agent shall be sufficient to permit the
exchange of all Outstanding Debentures for Chevron Common Stock (and any other
Exchange Property), on the basis of the Exchange Rate then in effect, in
accordance with the provisions of this Article Two. The Company agrees to
furnish or cause to be furnished to the applicable Exchange Agent any additional
funds required to permit such cash payments with respect to fractional
interests.
204. Adjustment of Exchange Rate.
(a) In the event Chevron (as defined in Section 219 hereof) shall
(i) pay a dividend on Chevron Common Stock in shares of Chevron Common Stock,
(ii) subdivide the outstanding shares of Chevron Common Stock into a greater
number of shares of Chevron Common Stock, (iii) combine outstanding shares of
Chevron Common Stock into a smaller number of shares of Chevron Common Stock, or
(iv) issue, by reclassification of shares of Chevron Common Stock, any shares of
its common stock (which in any such case shall apply to the shares of Chevron
Common Stock held by the Exchange Agents under the Exchange Agreement), the
Exchange Rate in effect immediately prior thereto shall be proportionately
adjusted so that the Holder of any Debentures thereafter surrendered for
exchange shall be entitled (subject to Sections 215 and 216 hereof) to receive
the number and kind of shares of Chevron Common Stock which such Holder would
have owned or have been entitled to receive after the happening of any of the
events described above, had such Debentures been exchanged immediately prior to
the record date (or if there is no record date, the effective date) of such
event. Such adjustments shall be made whenever any of the events listed above
shall occur and shall become effective as of immediately after the close of
business on the record date in the case of a stock dividend and shall become
effective as of immediately after the close of business on the effective date in
the case of a subdivision or combination or reclassification. Any Holder
surrendering any Debentures for exchange after such record date or such
effective date, as the case may be, shall be entitled to receive shares of
Chevron Common Stock at the Exchange Rate as so adjusted pursuant to this
Section 204(a) (subject to Sections 215 and 216 hereof) and any other Exchange
Property apportioned thereto.
(b) Notwithstanding the foregoing provisions, no adjustment in the
Exchange Rate shall be required unless such adjustment would require an increase
or decrease in such Exchange Rate of more than 1%, provided, however, that any
adjustments
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<PAGE> 14
which by reason of this paragraph (b) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
(c) All calculations under this Section 204 shall be made to the
nearest 1/10,000 of a share.
(d) Whenever the Exchange Rate is adjusted as herein provided, the
Company shall determine the adjusted Exchange Rate in accordance with this
Section 204 and shall prepare an Officer's Certificate setting forth such
adjusted Exchange Rate and any cash or other property apportioned to the Chevron
Common Stock and showing in detail the facts upon which such adjustment is
based. Such certificate shall be conclusive evidence of the correctness of such
adjustment. Such certificate shall forthwith be filed with each Exchange Agent
and the Trustee, who may rely on such Officer's Certificate as conclusive
evidence of the correctness of the adjustment. A notice stating that the
Exchange Rate has been adjusted and setting forth the adjusted Exchange Rate and
any cash or other property apportioned to the Chevron Common Stock shall as soon
as practicable be mailed by or on behalf of the Company to the Holders of
Debentures that are Registered Securities at their last addresses as they shall
appear upon the Security Register and shall be published by the Company for
Holders of Debentures that are Bearer Securities in an Authorized Newspaper in
the city of New York and London or other capital city in Western Europe on a
Business Day at least twice within a 10-day period after such delivery of the
above Officer's Certificate to the Exchange Agent and the Trustee.
205. Exchange Agent Agreement
(a) Simultaneously with the execution and delivery of this
Indenture Supplement, the Company is entering into the Exchange Agreement with
Texas Commerce Bank National Association, as Domestic Exchange Agent, and the
London office of Chemical Bank, as Foreign Exchange Agent, pursuant to which the
Company is depositing with the Domestic Exchange Agent 2,823,089 shares of
Chevron Common Stock, and with the Foreign Exchange Agent or its agent 1,427,911
shares of Chevron Common Stock, which in the aggregate shall initially
constitute the Exchange Property. The Domestic Exchange Agent shall be the
exchange agent for the exchange of Registered Debentures for Chevron Common
Stock and other Exchange Property, if any, hereunder. The Foreign Exchange
Agent shall be the exchange agent for the exchange of Bearer Debentures for
Chevron Common Stock and other Exchange Property, if any, hereunder. The
Company shall deposit with the applicable Exchange Agent from time to time such
additional number of shares of Chevron Common Stock not already held by such
Exchange Agent as the Holders of all Outstanding Debentures shall from time to
time be entitled to receive from such Exchange Agent pursuant to this Article
Two upon exchange thereof.
(b) All cash received by each Exchange Agent as herein provided will
be invested upon written request of the Company by such Exchange Agent from time
to time as so requested by the Company pursuant to the Exchange Agent
Agreement. The
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<PAGE> 15
Company shall be entitled to all cash dividends paid on the Exchange Property
held by each Exchange Agent except to the extent that such dividends are paid
pursuant to a plan of liquidation or partial liquidation or a recapitalization
or restructuring or other extraordinary cash dividends, and to all interest
payments on any debt securities included in the Exchange Property which Holders
of Debentures may be entitled to receive on exchange hereunder; provided, that
if an Exchange Agent shall receive any such cash dividends or interest to which
the Company is entitled pursuant hereto, such Exchange Agent shall not be
required to transfer to the Company any such dividends or interest to which the
Company is entitled pursuant hereto until receipt of an Officers' Certificate to
the effect that the Company is entitled to such dividends or interest pursuant
hereto. The Company shall also be entitled to any interest or gain on
investments made by each Exchange Agent pursuant to Section 11 of the Exchange
Agreement, which shall be paid to the Company on demand as provided in the
Exchange Agreement. Any loss on such investments shall be for the account of
the Company and the amount thereof shall be reimbursed to the applicable
Exchange Agent by the Company. Each Exchange Agent shall hold and apply as
hereinafter provided all other dividends paid on the Exchange Property held by
such Exchange Agent under the Exchange Agreement.
(c) In case there shall be, at any time while any Debentures are
Outstanding, any distribution of cash, securities or other property on Exchange
Property (other than (i) cash dividends to which the Company is entitled and
interest paid on debt securities, as specified in paragraph (b) of this Section
205, (ii) dividends, subdivisions, combinations and reclassifications for which
an adjustment in the Exchange Rate is made pursuant to Section 204 hereof and
(iii) securities or other property received in a transaction to which Section
211 hereof applies) or in case there shall be granted with respect to any
Exchange Property, any transferable subscription rights, options, warrants or
other similar transferable rights, the Company shall, as soon as reasonably
practicable after its receipt thereof, notify each Exchange Agent of such
receipt and promptly, and in any event within five business days of the receipt
thereof, deposit with the appropriate Exchange Agent all such securities and
other property, including any transferable rights, pursuant to the Exchange
Agreement, and concurrently with such deposit, shall (except as provided in the
succeeding paragraph) instruct the applicable Exchange Agent to sell all
securities and other property so received by way of distribution and all rights
for cash so distributed in such manner as the Company shall instruct in writing
and shall apply the proceeds from the sale thereof as hereinafter provided. To
the extent that the Company shall, within 10 days of its notification to the
Exchange Agents of the Company's receipt of such cash, securities or other
property, including any transferrable rights, furnish an Exchange Agent with an
Opinion of Counsel to the effect that such distribution or grant or the sale of
the securities or other property received on such distribution or the rights
received by such grant is taxable to the Company or such Exchange Agent and an
Officers' Certificate as to the amount of federal, state and local tax payable
by the Company and such Exchange Agent as a result of such distribution or grant
and estimated to be payable as a result of such sale (computed by the Company at
the highest marginal tax rates applicable to such transaction or transactions),
such Exchange Agent shall pay to, or to the order of the Company, in the case
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<PAGE> 16
of taxes payable by the Company, or itself, in the case of taxes payable by it,
from the cash received in such distribution, if any, or cash apportioned to
Chevron Common Stock hereunder or from the net cash proceeds received from such
sale, the amount of such tax as so computed by the Company. In the case of
taxes estimated to be payable as a result of such sale, the Company shall
deliver an Officers' Certificate within 10 days after completion of such sale
stating the actual taxes payable as so computed and appropriate adjustment of
such payments shall thereupon be made. The remaining portion of such cash
received, if any, and net cash proceeds shall be apportioned equally among the
Exchange Property for which outstanding Debentures are exchangeable as of
immediately after the close of business on the record date for the distribution
or grant to which this paragraph (c) applies, or, if there is no such record
date, the effective date of such distribution or grant. Any Holder surrendering
any Debentures after such record date, or such effective date, as the case may
be, shall be entitled to receive, in addition to the Exchange Property for which
such Debentures are exchangeable and any cash theretofore apportioned hereunder,
the amount of cash so apportioned to such shares of Chevron Common Stock.
Notwithstanding the foregoing, however, in the event of any such
distribution of securities or other property, including transferable rights,
which is convertible, without payment of consideration, into Exchange Property,
and which right of conversion does not expire before the retirement of such
securities or other property, the Company shall, after any sale required for
payment of any taxes owed by the Company, or the applicable Exchange Agent, as
provided in the preceding paragraph, instruct such Exchange Agent to retain and
hold all such securities and other property as additional Exchange Property for
apportionment equally among other Exchange Property for which Debentures are
exchangeable as of immediately after the close of business on the record date
for the distribution or grant to which this Section 205 applies, or, if there is
no such record date, the effective date of such distribution or grant; provided,
however, that if the amount of cash deliverable to the holders of such
securities or other property, including transferable rights, for each unit of
such securities or other property upon the retirement thereof is less than the
average of the high and low reported public sales prices for each such unit for
the seven Business Days preceding the date 15 Business Days prior to the date of
their retirement, such Exchange Agent shall sell all such securities and other
property prior to the third Business Day prior to the date of their retirement
and, after the payment, from the net proceeds received from such sale by such
Exchange Agent, of any taxes incurred by such Exchange Agent or the Company in
connection with such sale, the remaining cash proceeds of such sale shall be
apportioned equally among the Exchange Property for which Outstanding Debentures
are exchangeable as of the Business Day following the day such sale is
concluded.
In the event that a distribution or grant of cash, securities or other
property on Exchange Property shall be effected as contemplated by the two
immediately preceding paragraphs, a notice stating that such distribution or
grant has occurred and setting forth the additional cash, securities or other
property on the Exchange Property shall as soon as practicable be mailed by or
on behalf of the Company to the Holders of Debentures that
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<PAGE> 17
are Registered Securities at their last addresses as they appear upon the
Security Register and shall be published by the Company for Holders of
Debentures that are Bearer Securities in an Authorized Newspaper in the cities
of New York and London or other capital city in Western Europe on a Business Day
at least twice within a 10-day period after such distribution or grant occurs.
In case there shall be, at any time while any Debentures are
outstanding, any distribution or grant to holders of Chevron Common Stock (or
other Exchange Property), including the Company (with respect to any Exchange
Property held by an Exchange Agent), of any nontransferable subscription rights,
options, warrants or other similar nontransferable rights that shall, by the
terms of such rights, permit the Company to distribute such rights to the
Holders of Debentures, then the Company and the Domestic Exchange Agent shall
cause such rights to be distributed to the Holders of record of Debentures that
are Registered Securities shown on the Security Register as of immediately after
the close of business on the record date (and if there is no record date, the
close of business on the effective date) for such distribution or grant, and the
Company shall make available to Holders of Debentures that are Bearer Securities
a notice published by the Company in an Authorized Newspaper in the city of New
York and London or other capital city in Western Europe, at least twice within a
10-day period after such distribution or grant, which notice shall state that
such rights will be delivered to such Holder upon such Holder furnishing of
proof satisfactory to the Company that such Holder is a Holder of Bearer
Securities, such notification to occur as soon as practicable after the close of
business on the record date (or if there is no record date, the close of
business on the effective date) for the distribution or grant; provided,
however, that if the Company shall furnish such Exchange Agent with an Opinion
of Counsel to the effect that such distribution or grant, or such distribution
by the Company or such Exchange Agent to Holders of Debentures, is taxable to
the Company or such Exchange Agent and an Officer's Certificate as to the amount
of federal, state and local tax payable by the Company and such Exchange Agent
as a result of such distribution or grant, such Exchange Agent shall to the
extent legally permissible sell for cash in such manner as the Company shall
instruct in writing such of the rights as shall be sufficient to provide to the
Company and such Exchange Agent a cash payment equal to the amount of taxes
payable by the Company and such Exchange Agent, respectively, arising from such
distribution or grant (as computed by the Company at the highest marginal tax
rates applicable to such transaction or transactions and any sale of such rights
or, if such sale is not permissible or the proceeds thereof are not sufficient,
such Exchange Agent shall cause an amount of cash held for exchange by such
Exchange Agent (if any) and, if such cash is not sufficient for the applicable
tax payments, an amount of Exchange Property, to be segregated for the benefit
of or delivered to the Company. The remaining Exchange Property held by such
Exchange Agent shall be proportionately adjusted so as to be apportioned equally
to the Debentures outstanding as of immediately after the close of business on
the record date for the distribution or grant to which this paragraph applies,
or, if there is no such record date, immediately after the close of business on
the effective date of such distribution or grant. Any Holder surrendering any
Debentures after such record
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<PAGE> 18
date, or such effective date, as the case may be, shall be entitled to receive
any Exchange Property apportioned thereto as so adjusted pursuant to this
paragraph.
(d) In the event of any reduction of the principal amount of
Debentures Outstanding (other than as a result of surrender for exchange for
Exchange Property pursuant to this Article Two), as evidenced by the delivery to
the Trustee by the Company of Debentures for cancellation, the Company shall be
entitled to the kind and amount of Exchange Property as shall at the time be in
excess of the kind and amount of Exchange Property which would be required for
the exchange of all Debentures then Outstanding for the Exchange Property on the
basis of the then applicable Exchange Rate and the other terms and provisions of
this Article Two and the Exchange Agents Agreement. Upon expiration of the
right to surrender Debentures for exchange pursuant to this Article Two and the
Exchange Agent Agreement and when all other obligations of the Company shall
have been satisfied under this Article Two and the Exchange Agents Agreement,
the Company's obligation to exchange Debentures for Exchange Property shall be
terminated.
(e) No Exchange Agent shall make any distribution of Exchange
Property to the Company prior to the receipt by such Exchange Agent from the
Company of an Officers' Certificate to the effect that no Event of Default
exists hereunder and no event or condition which with notice or lapse of time or
both would become such an Event of Default and which states in detail the basis
asserted by the Company for such distribution.
(f) The Company shall be entitled to any net income or gain
resulting from investments of cash made by such Exchange Agent pursuant to the
Exchange Agreement and shall reimburse such Exchange Agent for any losses
realized in respect of such investments.
(g) The Company shall have the full and unqualified right and power
to exercise any rights to vote, or to give consents or take any other action in
respect of, the Chevron Common Stock or any other securities included in the
Exchange Property at any time held by such Exchange Agent and the Exchange
Agents shall have no duty to exercise any such rights. The Company shall not be
liable to any Holder as a result of any vote, or failure to vote, consent or
failure to consent, or any other act or failure to act taken by the Company in
respect of the Chevron Common Stock or any other securities included in the
Exchange Property.
(h) The obligations, covenants and agreements contained in the
Exchange Agents Agreement shall not constitute obligations, covenants or
agreements contained in the Indenture, this Second Supplemental Indenture or any
of the Debentures and neither the failure by the Company to observe any
obligation, covenant or agreement contained in the Exchange Agent Agreement
(unless such obligation, covenant or agreement shall also be contained in this
Second Supplemental Indenture) nor the failure of the Exchange Agents to fulfill
any obligations, agreements or covenants set forth therein shall constitute
(with or without the giving of notice, the passage of time or both) an Event of
Default; provided,
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however, that nothing in this paragraph shall impair the right of a Holder to
receive the Exchange Property apportioned to such Holder's Debentures in
exchange for such Debentures in accordance with the terms and conditions of this
Article Two, and nothing in this paragraph shall impair the rights and remedies
of the Trustee and the Holders under Article Five of the Indenture with respect
to a failure by the Company to observe its express agreements and covenants to
cause the exchange of Debentures actually surrendered for exchange pursuant to
this Article Two for Exchange Property apportioned thereto in accordance with
the terms and conditions of this Article Two.
206. Company to Give Notice of Certain Events.
If at any time:
(a) Chevron shall declare a dividend (or any other distribution) on
the Chevron Common Stock which the Exchange Agents would be required to apply
for the benefit of the Holders of the Debentures in accordance with Section 205
hereof; or
(b) Chevron shall authorize the granting of subscription rights,
options, warrants or other similar rights to holders of Chevron Common Stock; or
(c) there shall occur any reclassification of Chevron Common Stock
(other than a subdivision or combination of outstanding shares of Chevron Common
Stock) or any consolidation or merger to which Chevron is a party and for which
approval of any stockholders of Chevron is required, or the sale or transfer of
all or substantially all of the assets of Chevron; or
(d) there shall occur the voluntary or involuntary dissolution,
liquidation or winding up of Chevron;
then the Company shall as promptly as practicable cause to be filed at each
office or agency maintained pursuant to Section 1002 of the Indenture, cause to
be mailed to the Holders of Registered Debentures at their last addresses as
they shall appear upon the Securities Register, and shall publish for Holders of
Bearer Securities in an Authorized Newspaper in the city of New York and London
or other capital city in Western Europe at least twice within a 10-day period
after such event, a notice stating (x) the date, if known by the Company, on
which a record is to be taken for the purpose of such dividend, distribution or
grant of rights, or, if a record is not to be taken, the date as of which the
holders of Chevron Common Stock of record to be entitled to such dividend or
distribution or grant of rights are to be determined, or (y) the date, if known
by the Company, on which such reclassification, merger, consolidation, sale,
transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Chevron
Common Stock of record shall be entitled to exchange their shares of Chevron
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
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<PAGE> 20
207. Covenants by the Company.
So long as any Debentures shall be Outstanding and exchangeable for
Chevron Common Stock or other Exchange Property pursuant to this Article Two,
the Company shall (i) preserve unimpaired the right of each Holder of
Debentures, upon exchange thereof, to receive shares of Chevron Common Stock or
other Exchange Property as such Holder shall from time to time be entitled to
receive in accordance with the provisions of this Article Two, and (ii) not
pledge, mortgage, hypothecate or grant a security interest in, or permit any
mortgage, pledge, security interest or other lien upon, the Exchange Property.
208. Transfer Taxes.
The Company will pay any and all taxes that may be payable in respect of
the transfer and delivery of shares of Chevron Common Stock (or other securities
included in the Exchange Property) pursuant hereto, other than income, capital
gains and similar taxes imposed on any Holder by reason of exchange of
Debentures for Exchange Property; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the delivery, upon an exchange of Debentures, of shares of Chevron
Common Stock (or other securities included in the Exchange Property) in a name
other than that in which the Debentures so exchanged were registered, and no
such transfer shall be made unless and until the Person requesting such transfer
has paid to the Company or the applicable Exchange Agent the amount of any such
tax, or has established to the satisfaction of the Company and such Exchange
Agent that such tax has been paid.
209. Fully Paid Shares.
The Company warrants and covenants that all shares of Chevron Common
Stock delivered upon the exchange of Debentures will be fully paid and
nonassessable and that each Holder of Debentures who receives shares of Chevron
Common Stock or other Exchange Property in exchange for his Debentures pursuant
to this Article Two will receive valid and marketable title to such Exchange
Property, free and clear of all claims, liens and encumbrances (other than those
that may be created or suffered to exist by such Holder). Except as provided in
Section 208 hereof, the Company will pay all taxes, liens and charges with
respect to the delivery of Exchange Property in exchange for Debentures
hereunder.
210. Cancellation of Debentures.
All Debentures delivered for exchange shall be delivered by the
applicable Exchange Agent to the Trustee and be cancelled by the Trustee, and
the Trustee shall dispose of the same as provided in Section 309 of the
Indenture.
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<PAGE> 21
211. Merger of Chevron.
In case of any consolidation or merger of Chevron with or into any other
Person that results in shares of Chevron Common Stock, as constituted prior to
the consummation of such transaction, being converted into other securities
and/or property (including cash), or in case of any sale or transfer of all or
substantially all of the assets of Chevron (if in connection with such sale or
transfer holders of Chevron Common Stock receive other securities and/or
property including cash, in exchange for their shares of Chevron Common Stock),
or of any voluntary or involuntary dissolution, liquidation or winding-up of
Chevron, the Company shall execute and deliver to the Trustee a supplemental
indenture, and to each Exchange Agent a supplement to the Exchange Agent
Agreement, each providing that the Holder of each Debenture then Outstanding
shall have the right thereafter (subject to Sections 215 and 216 hereof) to
exchange such Debenture (i) for the kind and amount of securities and other
property receivable upon such consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up by a holder of the number of shares of
Chevron Common Stock for which such Debenture was exchangeable immediately prior
to such consolidation, merger, sale, transfer, dissolution, liquidation or
winding up and (ii) the kind and amount of securities (other than Chevron Common
Stock) and other Exchange Property for which such Debenture was exchangeable
immediately prior to such consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Such supplemental indenture shall provide for
adjustments and rights to receive and retain dividends or their equivalents,
which shall be as nearly equivalent as may be practicable to the adjustments and
rights to receive and retain dividends or their equivalents provided for in this
Article Two. The above provisions of this Section 211 shall similarly apply to
any successive consolidation, merger, sale, transfers, dissolution, liquidation
or winding-up.
Notice of such supplemental indenture shall as soon as practicable be
filed with each Exchange Agent and mailed by or on behalf of the Company to the
Holders of Registered Debentures at their last addresses as they shall appear on
the Securities Register and published by the Company for Holders of Bearer
Securities in an Authorized Newspaper in the city of New York and London or
other capital city in Western Europe at least twice within a 10-day period after
such supplemental indenture is executed.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any such supplemental indenture
relating either to the kind or amount of shares of stock or securities or
property or cash receivable by the Debentureholders upon the exchange of their
Debentures as herein provided after any such consolidation, merger, sale,
transfer, dissolution, liquidation or winding up or to any adjustment to be made
with respect thereto.
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<PAGE> 22
212. Certain Tender or Exchange Offers for Exchange Property.
In the event of a tender offer or exchange offer for any class of
securities included within the Exchange Property (i) if the Company owns shares
of such class which are not subject to the Exchange Agreement, the Company will
cause each Exchange Agent to tender such shares of such class in the same
proportion that the Company tenders its securities in such class which are not
subject to the Exchange Agreement, and (ii) if the Company does not own
securities of a class which are subject to the Exchange Agreement, the Company
may, at its option and in its sole discretion, elect to cause either or both
Exchange Agents to tender all or any portion or none of such class of security
included within the Exchange Property held by such Exchange Agent or Exchange
Agents. The proceeds of the sale of any such Exchange Property pursuant to any
such tender or exchange offer will be held by each Exchange Agent for the
benefit of Holders as provided in this Second Supplemental Indenture.
213. Obligations of Trustee and Exchange Agents.
Subject to the provisions of Section 601 of the Indenture, neither the
Trustee nor either Exchange Agent shall at any time be under any duty or
responsibility to any Holder of Debentures to determine whether any facts exist
which may require any adjustment of the Exchange Rate, or with respect to the
nature or extent of any such adjustment when made, or with respect to the method
employed, or herein or in any supplemental indenture provided to be employed, in
making the same. Neither the Trustee nor the Exchange Agents shall be
accountable with respect to the validity or value (or the kind or amount) of any
Exchange Property which may at any time be issued or delivered upon the exchange
of any Debenture or the market conditions existing at the time of sale of any
Exchange Property; and neither the Trustee nor the Exchange Agents make any
representation with respect thereto. Neither the Trustee nor the Exchange
Agents shall be responsible for any failure of the Company to transfer or
deliver any Exchange Property or certificates or other evidence thereof to an
Exchange Agent as provided herein, or subject to the provisions of Section 601
of the Indenture and the obligations assumed under the Exchange Agreement, to
comply with any of the covenants of the Company contained in this Article Two.
214. Exchange Arrangements in Case of Redemption.
In connection with any redemption of Debentures, the Company may arrange
for the purchase and exchange of Exchange Property of all or any part of such
Debentures by an arrangement with one or more investment bankers or other
purchasers to purchase such Debentures by paying to the Holders thereof, or to
the Trustee in trust for such Holders, on or before the close of business on the
Business Day next preceding the Redemption Date, an amount not less than the
applicable Redemption Price of the Debentures to be purchased, plus interest
accrued to the Redemption Date. Notwithstanding anything to the contrary
contained in Article Eleven of the Indenture, the
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<PAGE> 23
obligation of the Company to pay the Redemption Price of such Debentures, plus
interest accrued to the Redemption Date, shall be satisfied and discharged to
the extent such amount is so paid by such purchasers. Any Debentures to be
purchased pursuant to such agreement which are not presented for redemption or
not duly surrendered for exchange by the Holders thereof shall be deemed
acquired by such purchasers from the Holders and surrendered by such purchasers
for exchange, all as of immediately prior to the close of business on the
Business Day next preceding the Redemption Date, subject to payment of the
above amount as aforesaid. Notwithstanding anything to the contrary contained
in this Article Two, in the event that any Debentures subject to such agreement
are surrendered for exchange (other than by the purchasers) by the close of
business on the Business Day next preceding the Redemption Date, the amounts so
paid to the Trustee in trust for the Holders of the Debentures so surrendered
for exchange shall be returned to such purchasers.
215. Tax Adjustments in Exchange Rate.
If an event shall occur which causes the Exchange Rate to be subject to
adjustment pursuant to Section 204 hereof, or a merger, consolidation or sale or
transfer of assets or of any voluntary or involuntary dissolution, liquidation
or winding up of Chevron shall occur requiring a supplemental indenture under
Section 211 hereof, and if, within ten days after the effective date of such
transaction, the Company shall furnish an Exchange Agent with an Opinion of
Counsel to the effect that such transaction is taxable to the Company or such
Exchange Agent and an Officers' Certificate as to the amount of federal, state
and local tax payable by the Company or such Exchange Agent as a result of such
transaction (computed by the Company at the marginal tax rate applicable to such
transaction), such Exchange Agent shall pay to, or to the order of, the Company,
in the case of taxes payable by the Company, or itself, in the case of taxes
payable by it, the cash held by it and apportioned or to be apportioned to the
Exchange Property for which Outstanding Debentures are exchangeable, up to the
amount of such taxes. In the event that the cash held by such Exchange Agent
and so apportioned or to be apportioned is insufficient to pay to the Company or
such Exchange Agent the amount of such taxes, such Exchange Agent shall, as soon
as reasonably practicable and to the extent legally permissible, sell in
accordance with written instructions received by the Company, or if no such
instructions are received, as determined by such Exchange Agent, such Exchange
Property (including any securities or other property included therein) as may be
necessary to pay, from the proceeds thereof after payment of any taxes by the
Company or such Exchange Agent on such sale, the amount of any such
insufficiency. Such Exchange Agent shall notify the Company and the Trustee of
any such sale and the Exchange Property sold. Following payment of all necessary
amounts to the Company or such Exchange Agent, such Exchange Property held by
the Exchange Agent and any cash apportioned thereto shall be proportionately
adjusted so as to be apportioned equally to the Debentures Outstanding as of
immediately after the close of business on the record date or the effective date
for the transaction to which this Section 215 applies (as shall be specified in
Section 204 or 211 hereof, whichever is applicable). Any Holder surrendering
any Debentures after such record date, or such
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<PAGE> 24
effective date, as the case may be, shall be entitled to receive the Exchange
Property and any cash apportioned thereto as so adjusted pursuant to this
paragraph. If this Section 215 shall apply to a transaction and the sale by the
Company of the consideration receivable therein shall not be legally permissible
and the amount of cash apportioned to the Exchange Property shall not be
sufficient to pay all taxes payable by the Company or an Exchange Agent which
arise from such transaction, the Company may direct such Exchange Agent to
segregate for the benefit of the Company or such Exchange Agent (as the case may
be) or deliver to the Company or such Exchange Agent (as the case may be) an
amount of Exchange Property theretofore held by such Exchange Agent for exchange
of Debentures having a Market Value equal to the unsatisfied portion of the tax
payable by the Company or such Exchange Agent (as the case may be) with respect
to such transaction including any tax payable upon the delivery or sale thereof
in order to satisfy the aforementioned tax, and such Exchange Property shall
thereafter be solely for the account of the Company or such Exchange Agent (as
the case may be) and Holders of Debentures shall have no rights thereto.
In the event that an Opinion of Counsel given pursuant to this Second
Supplemental Indenture concludes that whether taxes are payable by the Company
or an Exchange Agent is uncertain under the then state of the law or facts or
both, the Company shall have the option of requesting such Exchange Agent to
segregate the amount of funds that would be payable (or securities or other
property in lieu thereof), if such taxes were deemed payable, together with the
amount estimated in good faith to be the reasonable costs and expenses
(including attorneys' fees) of obtaining a determination as set forth below.
The Holders shall have no rights to such funds or securities or other property,
which shall be held by such Exchange Agent for the Company (or itself, as the
case may be), the Exchange Property and any cash apportioned thereto deliverable
upon exchange of Debentures pursuant to this Article Two shall be reapportioned
as though such segregated amounts had been paid to the Company or such Exchange
Agent for such taxes, and any Holder surrendering any Debenture after the record
or effective date of the applicable transaction giving rise to an adjustment
pursuant to this Section 215 shall be entitled to receive only such Exchange
Property and any cash apportioned thereto upon exchange of Debentures pursuant
to this Article Two as so reapportioned. The Company shall thereupon in good
faith seek an appropriate determination from the appropriate agencies and, if
judged necessary by the Company in good faith, from appropriate courts, as to
whether taxes are so payable. If an appropriate determination is made that such
taxes are so payable, then such Exchange Agent shall immediately pay the funds
or deliver the securities or other property so segregated to the Company (or, if
taxes are payable by such Exchange Agent, retain such funds or securities or
other property for itself), and if an appropriate determination is made that
such taxes are not payable or an amount of tax is payable which is less than the
amount of funds or property so segregated, then such Exchange Agent, after
paying to the Company (or itself, as the case may be) out of such funds or
securities or other property the reasonable expenses and costs (including
attorneys' fees) of obtaining such determination (and any taxes so payable),
shall apportion such remaining funds or securities or other property which had
been so segregated among the
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<PAGE> 25
Exchange Property and cash apportioned thereto as of immediately after the close
of business on the record date or the effective date of such transaction giving
rise to an adjustment pursuant to Section 204 or 211 hereof, whichever is
applicable. If any Debenture has been exchanged on or after such record date or
such effective date, as the case may be, and before a determination is made that
no taxes are payable or an amount of tax is payable which is less than the
amount of funds or securities or other property so segregated, the Company to
the extent not previously delivered, shall deliver such Exchange Property and
any cash apportioned thereto as reapportioned following such determination, to
the person to which and in the manner in which the other proceeds of the
exchange of such Debenture were delivered.
216. Cash Equivalent.
Notwithstanding any other provisions in this Article Two, in lieu of
delivering certificates representing shares of Chevron Common Stock or other
Exchange Property in exchange for Debentures surrendered in accordance with
Section 202 hereof, the Company may, at the Company's option, pay to the Holder
surrendering such Debentures an amount in cash equal to the value of the
Exchange Property for which such Debentures are exchangeable (based on the
Market Price on the date of receipt by the Company of the notice of exchange
delivered by such Holder pursuant to Section 202 hereof). Prior to so directing
an Exchange Agent to make any such cash payment, the Company shall deposit with
such Exchange Agent the cash so payable.
217. Repurchase Rights.
In the event that the Company obtains or otherwise releases any
Chevron Common Stock or other Exchange Property in any manner otherwise than as
contemplated by Section 218 hereof, each Holder will have the right
("Repurchase Right"), at such Holder's option, to require the Company to
repurchase all of such Holder's Debentures, or a portion thereof which is
$1,000 or any integral multiple thereof, in the manner and at the price
described below.
Promptly (and in any event within 10 days) after the Company has
obtained or released any Chevron Common Stock or any other Exchange Property in
any manner otherwise than as contemplated by Section 218 hereof, the Domestic
Exchange Agent will mail to all Holders of record of the Registered Debentures
a notice thereof and the Repurchase Right arising as a result thereof (a
"Repurchase Notice") and the Foreign Exchange Agent will cause a copy of the
Repurchase Notice to be published in an Authorized Newspaper in the city of New
York and London or other capital city in Western Europe at least twice within a
10-day period after the mailing of such Repurchase Notice by the Domestic
Exchange Agent. To exercise the Repurchase Right, a Holder of Debentures that
are Registered Securities must deliver on or before the fifteenth day after the
date of the Repurchase Notice irrevocable written notice to the Domestic
Exchange Agent of the Holder's exercise of such right, together with the
Registered Debentures with
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<PAGE> 26
respect to which the right is being exercised, duly endorsed for transfer. To
exercise a Repurchase Right, a Holder of Debentures that are Bearer Securities
must deliver on or before the fifteenth day after the date of the exercise of
such right irrevocable written notice to the Foreign Exchange Agent of the
Holder's exercise of such right, together with the Debentures with respect to
which the right is being exercised.
On the date ("Repurchase Date") that is 30 days after the date of the
Repurchase Notice, the Company will be required to repurchase all Debentures in
respect of which the Repurchase Right has been exercised at the following
price: (i) if the date on which Pennzoil's obtaining or release of Exchange
Property in a manner not contemplated by Section 218 hereof first occurs (the
"Triggering Date") is before October 1, 1998, the product of (a) 120% and (b)
the greater of the principal amount of such Debentures (plus accrued and unpaid
interest, if any, to the Repurchase Date) and the Market Price of the Exchange
Property deliverable in exchange for such Debentures on the Triggering Date (or
if such date is not a Business Day, on the next succeeding Business Day); and
(ii) if the Triggering Date occurs on or after October 1, 1998, the greater of
(a) the redemption price specified in Section 103 hereof on the Triggering Date
and (b) the Market Price of the Exchange Property deliverable in exchange for
such Debentures on the Triggering Date (or if such date is not a Business Day,
on the next succeeding Business Day).
The obligation of the Company to deliver Exchange Property (or cash
in lieu thereof) in exchange for Debentures shall survive and continue to apply
in full force and effect following and notwithstanding the occurrence of any
event triggering a Repurchase Right. Failure by the Company to exchange
Debentures in accordance with this Second Supplemental Indenture or to
repurchase Debentures upon valid exercise of a Repurchase Right will constitute
an Event of Default with respect to the Debentures pursuant to Section 501(7)
of the Indenture, and Holders of Debentures will have the remedies provided for
in the Indenture, including acceleration of the indebtedness evidenced by the
Debentures, in the event of any such failure.
If an offer is made to repurchase Debentures in connection with a
Repurchase Right, the Company will comply with all tender offer rules,
including but not limited to Sections 13(e) and 14(e) under the Exchange Act
and Rules 13e-1 and 14e-1 thereunder, to the extent applicable to such offer.
218. Withdrawals of Exchange Property. The Company shall be entitled,
out of the Exchange Property held by an Exchange Agent, to such kind and
quantity of Exchange Property and such amount of any cash (the investments
contemplated by Section 205 hereof being deemed for these purposes to be cash
and to be valued at their outstanding principal balance) and other Exchange
Property as shall be in excess of the quantity of Exchange Property held by
such Exchange Agent that would be deliverable by such Exchange Agent upon the
exchange of all Debentures then outstanding, and such excess shall be held by
such Exchange Agent for the account of the Company and, upon delivery of the
Officers' Certificate provided for in the following sentence, released to the
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<PAGE> 27
Company upon demand. Upon demand of any withdrawal of Exchange Property from
an Exchange Agent, the Company shall deliver to the Trustee an Officers'
Certificate (and a copy thereof to the applicable Exchange Agent) which shall
state (i) the principal amount of Debentures then outstanding and the kind and
amount of Exchange Property required for delivery to the Holders thereof upon
exchange, (ii) that the withdrawal of the kind and amount of Exchange Property
referred to in such demand is permitted by the provisions of this Second
Supplemental Indenture and (iii) that the Exchange Property so to be withdrawn
would not be deliverable upon exchange of all Debentures then outstanding. In
delivering such certificate, the Company may rely on information furnished to
it by such Exchange Agent as to the kind and amount of Exchange Property held
by it and the kind and amount thereof previously delivered to Holders of
Debentures.
219. Certain Definitions. All terms used but not defined in this
Second Supplemental Indenture that are defined in the Indenture shall have the
meanings specified in the Indenture unless the context otherwise requires. As
used in this Second Supplemental Indenture, the following terms shall have the
following meanings:
"Chevron" means Chevron Corporation, a Delaware corporation.
"Chevron Common Stock" means the common stock of Chevron of the class
authorized and designated as common stock, par value $3.00 per share, as such
common stock may be changed or reclassified from time to time.
"Domestic Exchange Agent" means Texas Commerce Bank National
Association, Domestic Exchange Agent under the Exchange Agent Agreement, until
a successor Domestic Exchange Agent shall have become such pursuant to the
provisions of Section 16 of the Exchange Agents Agreement, and thereafter
"Domestic Exchange Agent" shall mean such successor Domestic Exchange Agent
thereunder and from time to time any subsequent successor pursuant to such
provisions.
"Exchange Agent" shall mean either the Domestic Exchange Agent or
Foreign Exchange Agent, as the context requires, and "Exchange Agents" shall
mean, collectively, the Domestic Exchange Agent and the Foreign Exchange Agent.
"Exchange Agents Agreement" means the Exchange Agents Agreement
entered into pursuant to the provisions of Section 205 hereof, as the same may
be supplemented and amended from time to time.
"Exchange Property" means initially the aggregate of the 2,823,089
shares of Chevron Common Stock delivered to the Domestic Exchange Agent by the
Company and the 1,427,911 shares of Chevron Common Stock delivered to the
Foreign Exchange Agent or its agent by the Company, in each case pursuant to
the Exchange Agreement simultaneously with the execution and delivery of this
Second Supplemental Indenture, and thereafter means the securities, cash and
other property, if any, which at the time are
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<PAGE> 28
deliverable upon surrender of the Debentures for exchange in accordance with
Article Two of this Second Supplemental Indenture.
"Foreign Exchange Agent" means the London office of Chemical Bank,
Foreign Exchange Agent under the Exchange Agents Agreement, until a successor
Foreign Exchange Agent shall have become such pursuant to the provisions of
Section 16 of the Exchange Agents Agreement, and thereafter "Foreign Exchange
Agent" shall mean such successor Foreign Exchange Agent thereunder and from
time to time any subsequent successor pursuant to such provisions.
"Market Price" means, when used with respect to any security as of
any date, (i) if such security is not then listed or admitted to trading on any
national securities exchange registered under the Securities Exchange Act of
1934, the average of the high bid and low asked prices in the over-the-counter
market on such date as reported by the National Association of Securities
Dealers Automated Quotation System or (ii) if such security is then listed or
admitted to trading on any such national securities exchange, the last reported
sales price regular way on such date or, in case no such reported sale takes
place on such date, the average of the reported closing bid and asked prices
regular way on such date, in each case on the principal national securities
exchange on which such security is then listed or admitted to trading, or (iii)
if such prices are not available on such date, the market value of such
security on such date determined in such manner as shall be satisfactory to the
Exchange Agents, which shall be entitled to rely for such purposes on the
advice of any firm of investment bankers or security dealers having familiarity
with such security. "Market Price" means, when used with respect to any
property (other than any security) as of any date, the market value of such
property on such date determined in such manner as shall be satisfactory to the
Exchange Agents, which shall be entitled to rely for such purposes on the
advice of any firm of investment bankers having familiarity with such property.
"United States Alien" means any person who, for United States federal
income tax purposes, is as to the United States (i) a foreign corporation, (ii)
a foreign partnership one or more of the members of which is, as to the United
States, a foreign corporation, a nonresident alien individual or a nonresident
alien fiduciary of a foreign estate or trust, (iii) a nonresident alien
individual or (iv) a nonresident alien fiduciary of a foreign estate or trust.
ARTICLE THREE
301. Acceptance of Trust.
The Trustee accepts the trust hereby created and agrees to perform
the same upon the terms and conditions herein and in the Indenture set forth.
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<PAGE> 29
302. Trustee Not Responsible for Validity, Due Execution or
Recitals.
The Trustee shall not be responsible in any manner whatsoever for or
in respect of the validity or sufficiency of this Second Supplemental Indenture
or the due execution thereof by the Company or for or in respect of the
recitals herein contained, all such recitals being made by the Company solely.
303. Counterparts.
This Second Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all of which together
shall constitute but one and the same instrument.
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<PAGE> 30
IN WITNESS WHEREOF, PENNZOIL COMPANY, party hereto of the first part,
has caused its corporate name to be hereunto affixed, and this instrument to be
signed and sealed by a Group Vice President, for and on its behalf, in the City
of New York, New York and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, party
hereto of the second part, has caused its corporate name to be hereunto
affixed, and this instrument to be signed and sealed by a Vice President, for
and on its behalf, in the City of New York, all as of the 12th day of October,
1993.
PENNZOIL COMPANY
{Corporate Seal}
By /s/ DAVID P. ALDERSON, II
David P. Alderson, II
Group Vice President - Finance
and Treasurer
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, As Trustee
{Corporate Seal}
By /s/ SUSAN L. NEEDHAM
Susan L. Needham
Vice President and Trust Officer
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<PAGE> 31
STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared David P. Alderson, II, Group Vice President of Pennzoil
Company, known to me to be the person whose name is subscribed to the foregoing
instrument, and acknowledged to me that he executed the same for the purposes
therein expressed, in the capacity therein set forth and as the act and deed of
said association.
GIVEN UNDER MY HAND AND SEAL of office, this the 12th day of October,
1993.
/s/ JUDITH B. SPENCER
Notary Public
State of Texas
{NOTARIAL SEAL} Commission Expires April 10, 1997
STATE OF NEW YORK )
)
COUNTY OF NEW YORK )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Susan L. Needham, Vice President of Texas Commerce Bank
National Association, known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he executed the same for
the purposes therein expressed, in the capacity therein set forth and as the
act and deed of said association.
GIVEN UNDER MY HAND AND SEAL of office, this the 12th day of October,
1993.
/s/ PATRICIA DELLA PERUTA
Notary Public
State of New York
{NOTARIAL SEAL} No. 4970039
Qualified in Richmond County
Certificate Filed in New York County
Commission Expires July 30, 1994
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<PAGE> 1
EXHIBIT 11
PENNZOIL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from continuing operations....... $160,236 $ 17,410 $ 40,098 $ 93,768 $235,497
-------- -------- -------- -------- --------
Income taxes (benefit)
Federal and foreign................... 52,737 (22,193) (23,988) 6,006 108,324
State................................. 6,468 3,410 3,928 1,917 5,998
-------- -------- -------- -------- --------
Total income taxes
(benefit)................... 59,205 (18,783) (20,060) 7,923 114,322
Interest charges........................ 199,410 243,351 260,069 247,107 156,125
-------- -------- -------- -------- --------
Income before income taxes and interest
charges............................... $418,851 $241,978 $280,107 $348,798 $505,944
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Fixed charges........................... $210,830 $252,082 $270,516 $261,740 $176,788
Preferred dividends(1).................. -- -- -- -- 23,307
-------- -------- -------- -------- --------
Combined fixed charges and preferred
dividends............................. $210,830 $252,082 $270,516 $261,740 $200,095
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of earnings to fixed charges...... 1.99 -- 1.04 1.33 2.86
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Amount by which fixed charges exceed
earnings.............................. $ -- $ 10,104 $ -- $ -- $ --
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of earnings to combined fixed
charges and preferred dividends....... 1.99 -- 1.04 1.33 2.53
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Amount by which combined fixed charges
and preferred dividends exceed
earnings.............................. $ -- $ 10,104 $ -- $ -- $ --
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
DETAIL OF INTEREST AND FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest charges per Consolidated
Statement of Income which includes
amortization of debt discount, expense
and premium........................... $190,968 $233,360 $253,943 $244,194 $148,756
Add portion of rental expense
representative of interest
factor(2)............................. 19,862 18,722 16,573 14,987 9,767
Add interest charges of affiliate on
supported debt........................ -- -- -- 2,559 18,265
-------- -------- -------- -------- --------
Total fixed charges........... 210,830 252,082 270,516 261,740 176,788
Less interest capitalized per
Consolidated Statement of Income...... 11,420 8,731 10,447 13,321 11,298
Less outside investors' portion of
interest charges of affiliate on
supported debt........................ -- -- -- 1,312 9,365
-------- -------- -------- -------- --------
Total interest charges........ $199,410 $243,351 $260,069 $247,107 $156,125
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ---------------
(1) Preferred dividends are dividends on shares of Pennzoil's Preference Common
Stock that were outstanding during 1989 and through February 1990 and with
respect to which dividends were declared and accrued in 1989.
(2) Interest factor based on management's estimates and approximates one-third
of rental expense.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF PENNZOIL COMPANY
(AS OF DECEMBER 31, 1993)
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF OF
VOTING VOTING
SECURITIES SECURITIES
OWNED OWNED
BY BY
PENNZOIL IMMEDIATE
COMPANY PARENT
----- -----
<S> <C> <C>
Duval Sales International, S.A. (Belgium).............................. 100%
Jiffy Lube International, Inc. (Nevada)................................ 100%
American Oil Change Corporation (Delaware)........................ 100%
Heritage Merchandising Co., Inc. (Virginia)....................... 100%
Jiffy Lube Capital Corporation (Delaware)......................... 100%
Jiffy Lube International of Maryland, Inc. (Maryland)............. 100%
Pennzoil Exploration and Production Company (Delaware)................. 100%
Cachuma Gas Processing Company (Delaware)......................... 100%
Capitan Oil Pipeline Company (Delaware)........................... 100%
Pennzoil Gas Marketing Company (Delaware)......................... 100%
Pennzoil International Company (Delaware)......................... 100%
Pennzoil Caspian Corporation (British Virgin Islands)........ 100%
Pennzoil Papua New Guinea, Inc. (Delaware)................... 100%
Pennzoil Siberia Corporation (British Virgin Islands)........ 100%
Pennzoil Petroleums Ltd. (Delaware)............................... 100%
Sisquoc Gas Pipeline Company (Delaware)........................... 100%
Pennzoil Petroleum Company (Delaware).................................. 100%
Pennzoil Petroleum Pipeline Company (Delaware).................... 100%
Pennzoil Products Company (Nevada)..................................... 100%
Atlas Processing Company (Delaware)............................... 100%
Pennzoil Overseas B.V. (Netherlands).............................. 100%
Americol B.V. (Netherlands).................................. 100%
Pennzoil Deutschland GmbH Mineralolvertrieb (Germany)........ 100%
Pennzoil Espanola S.A. (Spain)............................... 50%
Pennzoil Products Australia Company (Nevada)...................... 100%
Sisma, Inc. (Nevada).............................................. 100%
The Eureka Pipe Line Company (West Virginia)...................... 100%
UMW Pennzoil Distributors SDN. BHD. (Malaysia).................... 50%
Richland Development Corporation (Nevada).............................. 100%
Duval Corporation of Indonesia (Delaware)......................... 100%
Inco Real Estate Company (Nevada)................................. 100%
Savannah Company Limited (Bermuda)................................ 100%
Vermejo Park Corporation (Delaware)............................... 100%
Vermejo Minerals Corporation (Delaware)...................... 100%
</TABLE>
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 4, 1994, included herein, into Pennzoil Company's
previously filed Registration Statements on Form S-8 Nos. 2-67268, 2-76935,
2-95869, 33-24261, 33-40192, 33-51473 and 33-63384 and on Form S-3 Nos. 33-50029
and 33-50953.
ARTHUR ANDERSEN & CO.
Houston, Texas
March 11, 1994
<PAGE> 1
{LOGO} RYDER SCOTT COMPANY
PETROLEUM ENGINEERS FAX (713) 651-0849
1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002-5218 TELEPHONE (713) 651-9191
Exhibit 23(b)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference in Pennzoil
Company's previously filed Registration Statements on Form S-8 Nos. 2-67268,
2-76935, 2-95869, 33-24261, 33-40192, 33-51473, and on Form S-3 Nos. 33-50029
and 33-50953 of our summary report dated February 15, 1994 included as Exhibit
27(a) to this Annual Report on Form 10-K and the data extracted from our
reports and the references to our firm appearing in "Item 1. Business and Item
2. Properties" under the captions "Oil and Gas - Oil and Gas Reserves" and " -
Exploration, Development and Production Activities", in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption "Oil and Gas" and in "Supplemental Financial and Statistical
Information - Unaudited - Oil and Gas Information" in such Annual Report on
Form 10-K.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Ryder Scott Company
Petroleum Engineers
Houston, Texas
March 8, 1994
DENVER OFFICE 600 SEVENTEENTH SUITE 900N DENVER, COLORADO 80202-5401
TELEPHONE (303) 623-9147 FAX (303) 623-4258
<PAGE> 1
EXHIBIT 23(c)
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
March 4, 1994
Pennzoil Sulphur Company
Pennzoil Place
P. O. Box 2967
Houston, Texas 77252-2967
Gentlemen:
We hereby consent to the use of our letter report dated February 4,
1994, addressed to Pennzoil Sulphur Company, which details estimates of sulphur
reserves as of January 1, 1994, and its incorporation as an Exhibit in Pennzoil
Company's Annual Report on Form 10-K for the year ended December 31, 1993,
filed under the Securities and Exchange Act of 1934. We also consent to the
references to our firm appearing in "Item 1. Business and Item 2. Properties"
under the caption "Sulphur - Reserves, Production and Sales Information" of
such Annual Report on Form 10-K, and to the incorporation of our letter report
by reference in Pennzoil Company's previously filed Registration Statements on
Form S-8 nos. 2-67268, 2-76935, 2-95869, 33-24261, 33-40192, 33-51473, and
33-63384 and on Form S-3 No. 33-50029 and 33-50953.
Very truly yours,
/s/ DEGOLYER AND MACNAUGHTON
DeGolyer and MacNaughton
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
24th day of January, 1994.
/s/ HOWARD H. BAKER, JR.
Howard H. Baker, Jr.
<PAGE> 2
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ DOUGLAS J. BOURNE
Douglas J. Bourne
<PAGE> 3
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
24th day of January, 1994.
/s/ W. J. BOVAIRD
W. J. Bovaird
<PAGE> 4
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ W. L. LYONS BROWN, JR.
W. L. Lyons Brown, Jr.
<PAGE> 5
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
21st day of January, 1994.
/s/ ALLEN H. CARRUTH
Allen H. Carruth
<PAGE> 6
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ ERNEST H. COCKRELL
Ernest H. Cockrell
<PAGE> 7
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
24th day of January, 1994.
/s/ HARRY H. CULLEN
Harry H. Cullen
<PAGE> 8
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
27th day of January, 1994.
/s/ ALFONSO FANJUL
Alfonso Fanjul
<PAGE> 9
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
24th day of January, 1994.
/s/ C. W. FLINT, JR.
C. W. Flint, Jr.
<PAGE> 10
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ BAINE P. KERR
Baine P. Kerr
<PAGE> 11
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
20th day of January, 1994.
/s/ CHARLES BERDON LAWRENCE
Charles Berdon Lawrence
<PAGE> 12
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ J. HUGH LIEDTKE
J. Hugh Liedtke
<PAGE> 13
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ BRENT SCOWCROFT
Brent Scowcroft
<PAGE> 14
POWER OF ATTORNEY
WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1993, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
28th day of January, 1994.
/s/ CYRIL WAGNER, JR.
Cyril Wagner, Jr.
<PAGE> 1
EXHIBIT 27(a)
{LOGO}
RYDER SCOTT COMPANY FAX (713) 651-0849
PETROLEUM ENGINEERS
1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002-5218 TELEPHONE (713) 651-9191
February 15, 1994
Pennzoil Company
Post Office Box 2967
Houston, Texas 77001
Gentlemen:
At your request we have prepared an estimate of the reserves,
future production, and income attributable to certain leasehold and royalty
interests of Pennzoil Company including Pennzoil Exploration and Production
Company, Pennzoil Petroleums, Ltd., Pennzoil Products Company, Pennzoil Company
(formerly Proven Properties, Inc.), and Pennzoil Petroleum Company
(collectively referred to herein as the Company) as of December 31, 1993. In
accordance with the requirements of FASB 69, our estimates of the Company's net
proved reserves as of December 31, 1990, 1991, 1992, and 1993, as contained in
this report and our previous reports, are presented in attached Table No. 1
together with a tabulation of the components of the differences in the
estimates as of such dates. The Company's reserves in the United States are
located in all the main producing states (except Alaska), and in state and
federal waters offshore Alabama, California, Louisiana, and Texas. The
Company's foreign reserves are located in Canada.
The estimated reserve volumes and future income amounts
presented in this report are related to hydrocarbon prices. December 1993
hydrocarbon prices were used in the preparation of this report as required by
Securities and Exchange Commission (SEC) and Financial Accounting Standards
Bulletin No. 69 (FASB 69) guidelines; however, actual future prices may vary
significantly from December 1993 prices. Therefore, volumes of reserves
actually recovered and amounts of income actually received may differ
significantly from the estimated quantities presented in this report. Our
estimates of the proved net reserves attributable to the interests of the
Company as of December 31, 1993 are shown below:
<TABLE>
<CAPTION>
Proved Net Reserves
As of December 31, 1993
-----------------------
Liquid, Barrels Gas, MMCF
--------------- ---------
<S> <C> <C>
Developed and Undeveloped
United States 198,941,545 1,452,733
Foreign 2,005,819 38,540
----------- ---------
Total Worldwide 200,947,364 1,491,273
Developed
United States 162,295,322 1,305,615
Foreign 1,876,064 34,821
----------- ---------
Total Worldwide 164,171,386 1,340,433
</TABLE>
The "Liquid" reserves shown above are comprised of crude oil,
condensate, and natural gas liquids. Natural gas liquids comprise 16 percent of
the Company's developed liquid reserves and 15 percent of the Company's
developed and undeveloped liquid reserves. All hydrocarbon liquid reserves are
expressed in standard 42 gallon barrels. All gas volumes are hydrocarbon sales
gas expressed in MMCF at the pressure and temperature bases of the area where
the gas reserves are
DENVER OFFICE: 600 SEVENTEENTH SUITE 900N DENVER, COLORADO 80202-5401
TELEPHONE (303) 623-9147 FAX (303) 623-4528
<PAGE> 2
Pennzoil Company
February 15, 1994
Page 2
located. Our estimates of hydrocarbon sales gas reserves as of December 31,
1993 do not include 161,674 MMCF of carbon dioxide which is also sales gas.
Revenues from carbon dioxide sales are included in our estimates of future cash
inflows as of December 31, 1993. In addition, the Company owns 106,596 long
tons of sulfur reserves as of December 31, 1993 which are not shown above;
however, the revenue from these sulfur reserves is included in the cash inflow
data in this report.
The proved reserves presented in this report comply with the
SEC's Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent
Commission Staff Accounting Bulletins, and are based on the following
definitions and criteria:
Proved reserves of crude oil, condensate, natural gas, and
natural gas liquids are estimated quantities that geological and
engineering data demonstrate with reasonable certainty to be
recoverable in the future from known reservoirs under existing
conditions. Reservoirs are considered proved if economic
producibility is supported by actual production or formation tests. In
certain instances, proved reserves are assigned on the basis of a
combination of core analysis and electrical and other type logs which
indicate the reservoirs are analogous to reservoirs in the same field
which are producing or have demonstrated the ability to produce on a
formation test. The area of a reservoir considered proved includes (1)
that portion delineated by drilling and defined by fluid contacts, if
any, and (2) the adjoining portions not yet drilled that can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir. Proved reserves are
estimates of hydrocarbons to be recovered from a given date forward.
They may be revised as hydrocarbons are produced and additional data
become available. Proved natural gas reserves are comprised of
non-associated, associated, and dissolved gas. An appropriate
reduction in gas reserves has been made for the expected removal of
natural gas liquids, for lease and plant fuel, and the exclusion of
non-hydrocarbon gases if they occur in significant quantities and are
removed prior to sale. Reserves that can be produced economically
through the application of improved recovery techniques are included
in the proved classification when these qualifications are met: (1)
successful testing by a pilot project or the operation of an installed
program in the reservoir provides support for the engineering analysis
on which the project or program was based, and (2) it is reasonably
certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or
otherwise increasing ultimate recovery from a reservoir, including (1)
pressure maintenance, (2) cycling, and (3) secondary recovery in its
original sense. Improved recovery also includes the enhanced recovery
methods of thermal, chemical flooding, and the use of miscible and
immiscible displacement fluids. Estimates of proved reserves do not
include crude oil, natural gas, or natural gas liquids being held in
underground storage. Depending on the status of development, these
proved reserves are further subdivided into:
(i) "developed reserves" which are those proved reserves
reasonably expected to be recovered through existing wells
with existing equipment and operating methods, including (a)
"developed producing reserves" which are those proved
developed reserves reasonably expected to be produced from
existing completion intervals now open for production in
existing wells, and (b) "developed non-producing reserves"
which are those proved developed reserves which exist behind
the casing of existing wells which are reasonably expected to
be produced through these wells in the predictable future
where the cost of making such hydrocarbons available for
production should be relatively small compared to the cost of
a new well; and
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
<PAGE> 3
Pennzoil Company
February 15, 1994
Page 3
(ii) "undeveloped reserves" which are those proved reserves
reasonably expected to be recovered from new wells on
undrilled acreage, from existing wells where a relatively
large expenditure is required, and from acreage for which an
application of fluid injection or other improved recovery
technique is contemplated where the technique has been proved
effective by actual tests in the area in the same reservoir.
Reserves from undrilled acreage are limited to those drilling
units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other
undrilled units are included only where it can be demonstrated
with reasonable certainty that there is continuity of
production from the existing productive formation.
Because of the direct relationship between volumes of proved
undeveloped reserves and development plans, we include in the proved
undeveloped category only reserves assigned to undeveloped locations that we
have been assured will definitely be drilled and reserves assigned to the
undeveloped portions of secondary or tertiary projects which we have been
assured will definitely be developed.
The Company has interests in certain tracts which have
substantial additional hydrocarbon quantities which cannot be classified as
proved and consequently are not included herein. The Company has active
exploratory and development drilling programs which may result in the
reclassification of significant additional volumes to the proved category.
In accordance with the requirements of FASB 69, our estimates
of future cash inflows, future costs, and future net cash inflows before income
tax as of December 31, 1993 from this report and as of December 31, 1992 from
our previous report are presented below.
<TABLE>
<CAPTION>
Total Worldwide
As of December 31(1)
--------------------
1993 1992
---- ----
<S> <C> <C>
Future Cash Inflows $5,952,316,500 $7,073,155,380
Future Costs
Production $1,978,446,786 $2,483,556,646
Development 493,541,577 561,184,991
-------------- --------------
Total Costs $2,471,988,363 $3,044,741,637
Future Net Cash Inflows
Before Income Tax $3,480,328,137 $4,028,413,743
Present Value at 10%
Before Income Tax $2,257,766,836 $2,519,180,115
</TABLE>
Our estimates as of December 31, 1993 and 1992 of future cash
inflows, future costs, future net cash inflows before income tax, and present
value at 10 percent before income tax are shown individually for total
worldwide, total United States (onshore and offshore), and foreign areas in
Table No. 2 which is attached.
(1) The cash inflow data for December 31, 1993 include revenues from
161,674 net MMCF of carbon dioxide reserves which have a future net
cash inflow before income tax of $40,598,126 and present value at 10
percent before income tax of $14,445,148. The cash inflow data for
December 31, 1992 include revenues from 124,298 net MMCF of carbon
dioxide reserves which have a future net cash inflow before income tax
of $28,350,303 and present value at 10 percent before income tax of
$12,227,707.
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
<PAGE> 4
Pennzoil Company
February 15, 1994
Page 4
The future cash inflows are gross revenues before any
deductions and include the British Columbia Cost of Service Allowance for
certain Canadian properties. The production costs were based on current data
and include production taxes in the United States, certain foreign taxes where
applicable, ad valorem taxes, and certain other items such as transportation
and processing costs, and the Alberta Royalty Tax Credit where applicable, in
addition to the operating costs directly applicable to the individual leases or
wells. The development costs were based on current data and include
dismantlement and abandonment costs net of salvage for properties where such
costs are relatively significant.
The Company furnished us with gas prices in effect at December
31, 1993 and with its forecasts of future gas prices which take into account
SEC guidelines, current market prices, contract prices, and fixed and
determinable price escalations where applicable. In accordance with SEC
guidelines, the future gas prices used in this report make no allowances for
future gas price increases which may occur as a result of inflation nor do they
account for seasonal variations in gas prices which may cause future yearly
average gas prices to be somewhat different than December gas prices. For gas
sold under contract, the contract gas price including fixed and determinable
escalations exclusive of inflation adjustments, was used until the contract
expires and then was adjusted to the current market price for the area and held
at this adjusted price to depletion of the reserves.
The Company furnished us with liquid prices in effect at
December 31, 1993 and these prices were held constant to depletion of the
properties. In accordance with SEC guidelines, changes in liquid prices
subsequent to December 31, 1993 were not considered in this report.
The Alberta Royalty Tax Credit and the British Columbia Cost
of Service Allowance were applied in our estimates of future net income from
the Company's properties in Canada.
Operating costs for the leases and wells in this report were
based on the operating expense reports of the Company and include only those
costs directly applicable to the leases or wells. When applicable, the
operating costs include a portion of general and administrative costs allocated
directly to the leases and wells under terms of operating agreements.
Development costs were furnished to us by the Company and are based on
authorizations for expenditure for the proposed work or actual costs for
similar projects. The current operating and development costs were held
constant throughout the life of the properties. For properties located onshore,
this study did not consider the salvage value of the lease equipment or the
abandonment cost since both are relatively insignificant and tend to offset
each other. The estimated net cost of abandonment after salvage was included
for offshore properties where abandonment costs net of salvage are significant.
The estimates of the offshore net abandonment costs furnished by the Company
were accepted without independent verification. No deduction was made for
indirect costs such as general administration and overhead expenses, loan
repayments, interest expenses, and exploration and development prepayments. The
Company supplied data on accumulated gas production imbalances which were taken
into account in our estimates of future production and income.
The estimates of reserves presented herein are based upon a
detailed study of the properties in which the Company owns an interest;
however, we have not made any field examination of the properties. No
consideration was given in this report to potential environmental liabilities
which may exist nor were any costs included for potential liability to restore
and clean up damages, if any, caused by past operating practices. The Company
has informed us that they have furnished us all of the accounts, records,
geological and engineering data and reports, and other data required for this
investigation. The ownership interests, prices, and other factual data
furnished by the Company were
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
<PAGE> 5
Pennzoil Company
February 15, 1994
Page 5
accepted without independent verification. The estimates presented in this
report are based on data available through December 1993.
The reserves included in this report are estimates only and
should not be construed as being exact quantities. They may or may not be
actually recovered, and if recovered, the revenues therefrom and the actual
costs related thereto could be more or less than the estimated amounts.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
In general, we estimate that future gas production rates will
continue to be the same as the average rate for the latest available 12 months
of actual production until such time that the well or wells are incapable of
producing at this rate. The well or wells were then projected to decline at
their decreasing delivery capacity rate. Our general policy on estimates of
future gas production rates is adjusted when necessary to reflect actual gas
market conditions in specific cases. The future production rates from wells now
on production may be more or less than estimated because of changes in market
demand or allowables set by regulatory bodies. Wells or locations which are not
currently producing may start producing earlier or later than anticipated in
our estimates of their future production rates.
While it may reasonably be anticipated that the future prices
received for the sale of production and the operating costs and other costs
relating to such production may also increase or decrease from existing levels,
such changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
Neither we nor any of our employees have any interest in the
subject properties and neither the employment to make this study nor the
compensation is contingent on our estimates of reserves and future cash inflows
for the subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ RAYMOND V. CRUCE
Raymond V. Cruce, P.E.
Chairman and CEO
RVC/sw
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
<PAGE> 6
TABLE NO. 1
PENNZOIL COMPANY
Proved Net Reserve Data
<TABLE>
<CAPTION>
United States
Total Onshore Foreign
Total Worldwide and Offshore Canada
-------------------------- --------------------- --------------------
1993 1992 1991 1993 1992 1991 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Proved Liquid(1) Reserves,
Millions of Barrels
Developed and Undeveloped
Beginning of Year 220.2 139.0 155.6 218.0 136.8 153.1 2.2 2.2 2.5
Revisions(2) -7.3 2.3 -8.2 -7.3 2.0 -8.1 Neg 0.3 -0.1
Extensions and Discoveries 15.5 7.5 3.7 15.4 7.5 3.6 0.1 Neg 0.1
Improved Recovery 0.0 0.0 0.1 0.0 0 0.1 0 0 0
Estimated Production -24.3 -14.6 -12.3 -24.0 -14.3 -12.0 -0.3 -0.3 -0.3
Purchase of Reserves In-Place(4) 5.2 92.5 0.1 5.2 92.5 0.1 0 0 0
Sales of Reserves In-Place -8.4 -6.5 Neg -8.4 -6.5 Neg Neg 0 0
------- ------- ----- ------- ------- ----- ---- ---- ----
End of Year 200.9 220.2 139.0 198.9 218.0 136.8 2.0 2.2 2.2
Developed
Beginning of Year 182.5 110.3 115.0 180.3 108.1 112.4 2.2 2.2 2.6
End of Year 164.2 182.5 110.3 162.3 180.3 108.1 1.9 2.2 2.2
Net Proved Gas(3) Reserves,
Billions of Cubic Feet
Developed and Undeveloped
Beginning of Year 1,652 926 927 1,617 892 892 35 34 35
Revisions 0 9 48 -1 9 49 1 Neg -1
Extensions and Discoveries 122 80 102 117 78 101 5 2 1
Improved Recovery 0 0 Neg 0 0 Neg 0 0 0
Estimated Production -223 -162 -148 -220 -161 -147 -3 -1 -1
Purchase of Reserves In-Place(4) 91 823 Neg 91 823 Neg 0 0 Neg
Sales of Reserves In-Place -151 -24 -3 -151 -24 -3 0 0 0
------- ------- ----- ------- ------- ----- ---- ---- ----
End of Year 1,491 1,652 926 1,453 1,617 892 38 35 34
Developed
Beginning of Year 1,446 837 877 1,412 803 842 34 34 35
End of Year 1,341 1,446 837 1,306 1,412 803 35 34 34
</TABLE>
(1) Liquid reserves shown above are comprised of crude oil, condensate,
and natural gas liquids.
(2) Revisions in 1993 include a reduction of 13.7 million barrels and 7
billion cubic feet which is the results of depressed oil and
condensate prices on December 31, 1993.
(3) Excludes carbon dioxide reserve and production data.
(4) Purchase of reserves in place in 1992 for Worldwide and United States
includes 91.9 million barrels, 800 billion cubic feet, and 57,248 long
tons of sulfur attributable to Pennzoil Petroleum Company at October
30, 1992.
<PAGE> 7
TABLE NO. 2
PENNZOIL COMPANY
Cash Inflow and Cost Data(1)
(Millions of U.S. Dollars)
<TABLE>
<CAPTION>
United States
Total Worldwide Onshore and Offshore Canada
As of December 31 As of December 31 As of December 31
------------------------ ------------------------- -----------------
1993 1992 1993 1992 1993 1992
------- ------- ------- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Future Cash Inflows(2) $5,952 $7,073 $5,868 $6,998 $84 $75
Future Costs
Production(3) -$1,978 -$2,484 -$1,971 -$2,473 -$7 -$11
Development(4) -494 -561 -492 -559 -2 -2
Total Costs -$2,472 -$3,045 -$2,463 -$3,032 -$9 -$13
Future Cash Inflows
Before Income Tax $3,480 $4,028 $3,405 $3,966 $75 $62
Present Value @ 10%
Before Income Tax $2,258 $2,519 $2,213 $2,484 $45 $35
</TABLE>
- ---------------
(1) Data for 1993 and 1992 include cash inflows and costs attributable to
carbon dioxide reserves located in the United States. The 1993 carbon
dioxide reserves account for $40.6 million of cash inflows before
income tax and $14.4 million of present value at 10% before income
tax. The 1992 carbon dioxide reserves account for $28.4 million of
future cash inflows before income tax and $12.2 million of present
value at 10% before income tax.
(2) Gross revenues are before any deductions. Gross revenues include
British Columbia Producer Cost of Service Allowance.
(3) Includes production taxes in the U.S.A., certain foreign taxes where
applicable, ad valorem taxes, certain other items such as
transportation and processing charges, and Alberta Royalty Tax Credit
where applicable.
(4) Includes future dismantlement and abandonment costs net of salvage for
offshore properties where such costs are relatively significant.
<PAGE> 1
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
LETTER REPORT
ON
CERTAIN SULPHUR RESERVES
OWNED BY
PENNZOIL SULPHUR COMPANY
AS OF
JANUARY 1, 1994
<PAGE> 2
DEGOLYER AND MACNAUGHTON
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
February 4, 1994
Pennzoil Sulphur Company
Pennzoil Place
P. O. Box 2967
Houston, Texas 77252-2967
Gentlemen:
Pursuant to your request, we have prepared estimates, as of January 1,
1994, of the sulphur reserves of certain properties owned by Pennzoil Sulphur
Company, hereinafter referred to as the "Company." The properties considered
herein consist of producing interests in the Culberson Unit of the Company's
Culberson sulphur mine in Culberson County, Texas. The Company is a division of
the Pennzoil Company, hereinafter referred to as "Pennzoil."
Measured reserves in this report are expressed as gross reserves and
reserves net to the Company after deducting royalty and any other interests
owned by others.
Information used in the preparation of this report was obtained from
the Company's files, from Pennzoil, from technical literature, and from our
files. In our preparation of this report we have relied, without independent
verification, upon information furnished by the Company and Pennzoil with
respect to properties owned by the Company, production from such properties,
agreements relating to current and future operations and sale of production,
and various other information and data that were accepted as represented. A
field examination of the sulphur properties was last made in December 1992.
The sulphur quantities estimated in this report are classified as
follows:
Resource - A concentration of naturally occurring solid, liquid, or
gaseous materials in or on the Earth's crust in such form and amount
that economic extraction of a commodity from the concentration is
currently
<PAGE> 3
DEGOLYER AND MACNAUGHTON
or potentially feasible. Identified resources include economic,
marginally economic, and subeconomic components that can be subdivided
into measured, indicated, and inferred categories to reflect varying
degrees of geologic certainty.
Reserves - That portion of the identified resource that could be
economically and legally extracted or produced at the time of
determination. The term reserves need not signify that extraction
facilities are in place and operative. Reserves include only
recoverable materials.
Measured - Quantity is computed from dimensions revealed in outcrops,
trenches, workings, or drill holes; grade and(or) quality are computed
from the results of detailed sampling. The sites for inspection,
sampling, and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth, and mineral
content of the resource are well established.
Estimates of sulphur reserves should be regarded only as estimates
that may change as further production history and additional information become
available. Not only are such reserve estimates based on that information which
is currently available, but such estimates are also subject to the
uncertainties inherent in the application of judgmental factors in interpreting
such information.
Sulphur reserves estimated in this report are expressed in 2,240-pound
long tons. These estimates are based on assay and thickness data obtained from
more than 1,600 core holes. Based on these data, volumes of net equivalent
solid sulphur were calculated using manual and computer methods. Sulphur
volumes for the Culberson mine properties represent those areas having 2 or
more net equivalent feet of solid sulphur. A density factor of 2,500 long tons
per acre-foot was used in converting volumes to weights. Sulphur is recovered
through the Frasch mining process.
The Broaddus Tract reserves, which have been included in earlier
reports, were depleted during 1992. For the Culberson Unit properties,
recoverable sulphur was estimated at 80 percent of the original unit deposit
volume for the main producing horizon and at 75 percent for the small,
nonproducing deep horizon.
The Culberson mine commenced production in September 1969, and during
1993 the Culberson Unit produced 655,178 long tons of sulphur.
