Fitch Lwrs Pennzoil-Quaker State Sr To `BB+'; Rtg Outlk Stble

    NEW YORK--June 27, 2001--Fitch lowers Pennzoil-Quaker State Company's (Pennzoil) senior unsecured debt rating to 'BB+' from 'BBB-' following the company's announcement that it has lowered its guidance for 2001 recurring earnings from continuing operations. This rating action affects about $850 million of the company's debt. The Rating Outlook is Stable. Fitch also withdraws its commercial paper rating as the program has been discontinued.
    During 2000, Pennzoil's operating and financial performance was negatively impacted by lower volumes in the company's lubricant and consumer products segments. This is due to a sharp increase in crude and base oil prices, the company's primary raw material components, as well as higher gasoline prices which has lead to fewer miles driven and less frequent oil changes. In 2001 volume levels had been expected to remain flat, however, continued high base oil prices, leading to the sixth price increase in July 2001, and high gasoline prices, which reduces miles driven, are expected to result in volumes that will be 6% lower than the previous year, negatively impacting revenues and earnings.
    Fitch recognizes that Pennzoil is taking steps to reduce its cost base and improve cash flow generation by accelerating its restructuring program and reducing its dividend. In addition, the company plans to reduce its debt levels by about $200 million in 2001 primarily funded by proceeds from asset sales. Despite these actions, Fitch expects the fall off in volume and weakened operating performance will result in slower than previously expected improvement in the company's credit profile. For the latest twelve months ended March 31, 2001, leverage, measured by total debt to EBITDA, was 4.7 times (x) and EBITDA coverage of interest was 2.8x.
    Pennzoil's $450 million unsecured revolving bank credit facility is due on Dec. 13, 2001, with any borrowings on that date converted into a one-year term facility, and its $150 million 8.65% senior unsecured notes are due in 2002. Fitch expects the company to renew its facilities and refinance the notes. Fitch will continue to monitor the company's operating performance and its refinancing progress.
    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.