Fitch Affs Pennzoil-Quaker State's Sr Nts `BBB-' Rtg Outlook Neg

    NEW YORK--April 6, 2001--Fitch affirms Pennzoil-Quaker State Company's (Pennzoil) senior unsecured debt at `BBB-' and changes its Rating Outlook to Negative from Stable. The negative rating outlook reflects the company's weak operating performance during 2000 as well as the effects from the delay in completing asset sales.
    During 2000, Pennzoil's operating performance was negatively impacted by a sharp increase in crude and base oil prices, the company's primary raw material components. While Pennzoil was able to pass along these increased costs to consumers, there was a lag between the incurrance of higher costs by the company and implementation of higher prices for the consumer. As a result, the company's operating earnings and cash flow were negatively impacted. In addition, Fitch had expected certain asset sales in Pennzoil's base oil and specialty chemical segment to be completed during 2000 with the proceeds used to repay debt, however some of these transactions were delayed until 2001. As a result, Pennzoil's credit profile weakened with leverage, measured by total debt to EBITDA, increasing to 5.1 times (x), and EBITDA coverage of interest declining to 2.6x.
    The change to rating outlook negative reflects the weakened operating performance and the risk that the company will not be able to reduce debt and improve operating results to levels consistent with the current rating category. In 2001, Fitch expects remaining asset sales to be completed during the first half of the year, with the proceeds used for debt reduction, and operating performance to improve as crude prices decline and as lower margin businesses are fully divested. Thus credit measures should improve significantly from year-end 2000 levels. Nevertheless, lower than expected improvements in the company's credit profile could result in a rating review.
    The rating continues to reflect Pennzoil-Quaker State's leading market positions in motor oil and automotive consumer products, significant fast oil change operations, and geographic diversity of sales. The rating also considers the company's appetite for debt financed acquisitions, although no acquisitions are expected for 2001.