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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED APRIL 30, 1996
REGISTRATION NUMBER 33-85930
----------------
TRANSAMERICAN REFINING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0229632
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 EAST NORTH BELT
SUITE 320
HOUSTON, TEXAS 77032
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(713) 986-8811
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
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 .
The number of shares of common stock of the registrant outstanding on June
14, 1996 is 30,000,000.
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TRANSAMERICAN REFINING CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet as of April 30, 1996 and January 31, 1996.... 2
Condensed Statement of Operations for the three months ended April
30, 1996 and 1995................................................... 3
Condensed Statement of Cash Flows for the three months ended April
30, 1996 and 1995................................................... 4
Notes to Condensed Financial Statements.............................. 5-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 13-16
PART II.
OTHER INFORMATION
Item 3. Legal Proceedings................................................ 17
Item 5. Other Information................................................ 17-19
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures............................................................... 20
Index to Exhibits
1
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
APRIL 30, JANUARY 31,
1996 1996
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 135 $ 2,779
Long-term debt proceeds held in collateral account... 12,075 14,840
Accounts receivable.................................. 9 121
Receivable from affiliates........................... 327 118
Inventories.......................................... 26,216 37,231
Other................................................ 2,506 5,479
--------- ---------
Total current assets............................... 41,268 60,568
--------- ---------
Property and equipment................................. 478,302 430,858
Less accumulated depreciation and amortization......... 11,897 10,244
--------- ---------
Net property and equipment......................... 466,405 420,614
--------- ---------
Long-term debt proceeds held in collateral account..... 4,946 9,565
Other assets, net...................................... 27,225 27,576
--------- ---------
$ 539,844 $ 518,323
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................... $ 15,964 $ 23,552
Payable to affiliates................................ 1,895 2,957
Accrued liabilities.................................. 10,218 14,560
Product financing arrangements....................... 26,184 37,206
--------- ---------
Total current liabilities.......................... 54,261 78,275
--------- ---------
Payable to affiliates.................................. 5,874 3,799
Long-term debt......................................... 328,225 316,538
Investment in TransTexas............................... 32,030 46,586
Other liabilities...................................... 901 1,168
Commitments and contingencies (Note 6)................. -- --
Stockholder's equity:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 30,000,000 shares...... 300 300
Additional paid-in capital........................... 248,513 248,513
Accumulated deficit.................................. (130,260) (176,856)
--------- ---------
Total stockholder's equity......................... 118,553 71,957
--------- ---------
$ 539,844 $ 518,323
========= =========
See accompanying notes to condensed financial statements.
2
TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
----------------------
1996 1995
---------- ----------
Revenues:
Product sales........................................ $ 10,857 $ 558
---------- ----------
Costs and expenses:
Costs of products sold............................... 13,380 1,086
Operations and maintenance........................... 3,056 (274)
Depreciation and amortization........................ 1,804 1,376
General and administrative........................... 2,103 1,081
Taxes other than income taxes........................ 399 1,041
---------- ----------
Total costs and expenses........................... 20,742 4,310
---------- ----------
Operating loss..................................... (9,885) (3,752)
---------- ----------
Other income (expense):
Interest income...................................... 143 1,919
Interest expense, net................................ (1,088) (4,633)
Equity in earnings (loss) of TransTexas.............. 1,001 (842)
Gain on sale of TransTexas stock..................... 56,162 --
Other................................................ 263 (3,043)
---------- ----------
Total other income (expense)....................... 56,481 (6,599)
---------- ----------
Net income (loss).................................. $ 46,596 $ (10,351)
========== ==========
Net income (loss) per share............................ $ 1.55 $ (0.35)
========== ==========
Weighted average number of shares outstanding.......... 30,000,000 30,000,000
========== ==========
See accompanying notes to condensed financial statements.
3
TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS
ENDED APRIL 30,
------------------
1996 1995
-------- --------
Operating activities:
Net income (loss)......................................... $ 46,596 $(10,351)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization............................ 1,805 1,563
Litigation............................................... -- 4,500
Amortization of discount on long-term debt............... -- 7,063
Amortization of debt issue costs......................... -- 940
Equity in (earnings) loss of TransTexas.................. (1,001) 842
Gain on sale of TransTexas stock......................... (56,162) --
Changes in assets and liabilities:
Accounts receivable..................................... (97) (4,184)
Inventories............................................. (7) (16,720)
Prepayments and other................................... 2,973 (580)
Accounts payable........................................ 2,712 (13,406)
Payable to affiliates................................... (1,062) 246
Accrued liabilities..................................... (4,364) (7,405)
Other assets............................................ (606) (1,668)
Other liabilities....................................... -- (576)
-------- --------
Net cash used by operating activities.................. (9,213) (39,736)
-------- --------
Investing activities:
Capital expenditures...................................... (45,252) (26,995)
-------- --------
Financing activities:
Issuance of long-term debt and warrants................... -- 300,750
Net proceeds from sale of TransTexas stock................ 42,607 --
Long-term debt proceeds held in collateral account........ (26,549) (174,742)
Withdrawals from collateral account....................... 33,933 --
Advances from TransAmerican............................... 4,000 (1,979)
Payment of advances to TransAmerican...................... (1,925) (40,000)
Debt issue costs.......................................... -- (16,733)
Principal payments on capital lease obligations........... (245) (61)
-------- --------
Net cash provided by financing activities.............. 51,821 67,235
-------- --------
Increase (decrease) in cash and cash equivalents....... (2,644) 504
Beginning cash and cash equivalents........................ 2,779 46
-------- --------
Ending cash and cash equivalents........................... $ 135 $ 550
======== ========
Noncash financing and investing activities:
Accounts payable for property and equipment............... $(10,300) $ (6,406)
Product financing arrangements............................ (11,022) --
Interest accretion on notes and discount notes capitalized
in property and equipment................................ 11,687 --
See accompanying notes to condensed financial statements.
4
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made which are necessary to fairly state the
financial position of the Company as of April 30, 1996 and the results of its
operations and cash flows for the interim periods ended April 30, 1996 and
1995. The results of operations for interim periods should not be regarded as
necessarily indicative of results that may be expected for the entire year.
The financial information presented herein should be read in conjunction with
the financial statements and notes included in the Company's annual report on
Form 10-K for the transition period ended January 31, 1996. The year-end
condensed balance sheet was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles. Unless otherwise noted, the term "Company" refers to TransAmerican
Refining Corporation. Certain reclassifications have been made in the prior
year's financial statements to conform to the current year's presentation.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
As of February 1, 1996, the Company adopted the requirements of SFAS No. 121.
Based on the Company's estimate of future cash flows, management believes
there have been no events or changes in circumstances that would require the
recognition of an impairment loss. However, due to the inherent uncertainties
in constructing and operating a large scale refinery, there can be no
assurance that the Company will ultimately recover the cost of the refinery.
2. ORGANIZATION
In 1994, TransAmerican Natural Gas Corporation ("TransAmerican") formed
TransAmerican Energy Corporation ("TEC"), a limited-purpose holding company,
to hold certain shares of common stock of TransTexas Gas Corporation
("TransTexas") and all of the Company's capital stock. In February 1995, in
connection with a public offering of debt securities by the Company (the "TARC
Notes"), TransAmerican transferred 55 million shares (74.3% of outstanding
shares) of TransTexas' common stock to TEC. TEC then transferred 15 million of
the shares (20.3% of the total outstanding) to the Company. In March 1996, the
Company sold 4.55 million shares of TransTexas common stock (6.2% of the total
outstanding) in a public offering, for proceeds of $42.6 million,
approximately $26.6 million of the proceeds thereof were deposited in the cash
collateral account. The 50.45 million shares of TransTexas common stock held
by TEC and the Company are currently pledged as collateral for the TARC Notes.
3. CAPITAL IMPROVEMENT PROGRAM AND ADDITIONAL FINANCING REQUIREMENTS
The Company is currently engaged in an expansion and modification of its
refinery (the "Capital Improvement Program"). The current budget for the
Capital Improvement Program calls for total expenditures of $434 million. The
Company estimates that expenditures of between $146 million and $151 million
in addition to the current budget will be required to complete the Capital
Improvement Program. A significant portion of the additional expenditures will
relate to the Delayed Coking Unit, the FCC Unit and the offsite facilities. In
connection with the issuance of the TARC Notes, $173 million of the proceeds
thereof were deposited into a cash collateral account, designated for use in
the Capital Improvement Program. In March 1996, the Company sold 4.55 million
shares of TransTexas common stock and $26.6 million of the proceeds thereof
were deposited in the cash collateral account.
As of April 30, 1996, expenditures on the Capital Improvement Program funded
or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Approximately $17 million remained in the cash
collateral account as of April 30, 1996. Giving effect to current estimates,
additional funding
5
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
of $374 million to $379 million will be required to complete the Capital
Improvement Program, of which approximately $41 million is anticipated to be
funded by the South Louisiana Port Commission ("Port Commission" ) tax exempt
bonds. Additional funds necessary to complete the Capital Improvement Program
may be provided from (i) the sale of additional shares of TransTexas common
stock held by the Company, (ii) the sale of common stock of the Company, (iii)
equity investments in the Company (including the sale of preferred stock of the
Company to TEC, funded by the sale of TransTexas common stock held by TEC),
(iv) capital contributions by TransAmerican, or (v) other sources of financing,
the access to which could require the consent of the holders of the TARC Notes.
The Company has entered into preliminary discussions with potential third party
investors, including strategic equity investors, financial investors and
foreign producers of crude oil. Sales of shares of TransTexas common stock may
result in deconsolidation of TransTexas from the consolidated group for federal
income tax purposes. There is no assurance that sufficient funds will be
available from these sources on a timely basis or upon terms acceptable to the
Company or TransAmerican. If this financing is not available when needed or if
significant engineering problems, work stoppages or cost overruns occur, the
Company likely will not be able to complete and test Phase I of the Capital
Improvement Program by February 15, 1997. Even if required financing is
obtained on a timely basis, completion by February 15, 1997 will still prove
very difficult if personnel shortages prevent full staffing during peak
construction periods. The Company has identified and is considering certain
steps to minimize the impact of potential construction worker shortages,
including the retention of field supervisors, direct hiring of field
supervisors and field labor by the Company's major contractors, adding a second
shift, and modularization of certain construction items. There can be no
assurance that these steps will prove successful; however, the Company believes
that implementation of these steps will adequately address staffing concerns.
Under the Indenture, the failure of the Company to complete and test Phase I by
February 15, 1997 (subject to extension to August 15, 1997 if certain financial
coverage ratios are met) would constitute an event of default at such date.
The Company and the Port Commission have reached an agreement in principle
which would allow the issuance of approximately $75 million in Port Commission
tax exempt bonds, the proceeds of which may be used to construct tank storage
facilities, docks and air and waste water treatment facilities. A portion of
the air and waste water treatment facility is included in the Capital
Improvement Program at an estimated cost of $41 million. The issuance of the
tax exempt bonds could provide an alternate source of financing for the
construction of such facilities. The Port Commission would own the facilities
built with the proceeds of the bonds, and the Company would operate the
facilities pursuant to a long-term (30-year) lease. There can be no assurance
that the issuance of the tax-exempt bonds, which may require the consent of the
holders of the TARC Notes, will occur.
The Company has incurred losses and negative cash flows from operating
activities as a result of limited refining operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
and losses on refined product sales due to financing costs and low margins.
Based on recent refining margins and projected levels of operations, such
negative cash flows are likely to continue. In order to operate the refinery,
the Company must raise debt or equity capital in addition to the funds required
to complete the Capital Improvement Program. There is no assurance that
additional capital will be available. Without this additional capital being
available when needed, there is substantial doubt about the Company's continued
existence. If the Company (i) does not complete the Capital Improvement Program
timely, (ii) incurs significant cost overruns, (iii) does not ultimately
achieve profitable operations, or (iv) ceases to continue operations, the
Company's investment in the refinery may not be recovered. The financial
statements do not include any adjustments as a result of such uncertainties.
6
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
4. INVENTORIES
The major components of inventories are as follows (in thousands of
dollars):
APRIL
30, JANUARY 31,
1996 1996
------- -----------
Refinery feedstocks and blendstocks................... $ 13 $ 628
Intermediate and refined products..................... 19 1,294
Purchase commitments--refinery feedstocks and
blendstocks.......................................... 21,639 3,767
Purchase commitments--intermediate and refined
products............................................. 4,545 31,542
------- -------
$26,216 $37,231
======= =======
5. INVESTMENT IN TRANSTEXAS
The Company uses the equity method to account for its investment in
TransTexas and initially recorded this investment at TransAmerican's
historical basis. The equity in earnings or (loss) of TransTexas reflects the
Company's 20.3% interest in TransTexas until the Company's sale of 4.55
million shares of TransTexas stock in March 1996 which decreased the Company's
interest in TransTexas to 14.1%. Summarized income statement information of
TransTexas is as follows (in thousands of dollars):
THREE MONTHS
ENDED APRIL 30,
---------------
1996 1995
------- -------
Revenues................................................ $88,196 $72,828
Operating costs and expenses............................ 62,398 59,896
------- -------
Operating income...................................... 25,798 12,932
Other expense........................................... 21,152 14,857
------- -------
Net income (loss) before income taxes................. 4,646 (1,925)
Income taxes.......................................... 1,626 1,919
------- -------
Net income (loss)..................................... $ 3,020 $(3,844)
======= =======
Net income (loss) per share........................... $ 0.04 $ (0.05)
======= =======
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The following is a description of the legal proceedings of the Company.
U.S. Customs Service. On August 20, 1991, the U.S. Customs Service filed
suit against TransAmerican in the Bankruptcy Court. The Bankruptcy Court
entered a judgment against TransAmerican. TransAmerican appealed to the U.S.
District Court for the Southern District of Texas. On August 29, 1995, the
U.S. District Court ruled in favor of the U.S. Customs Service and upheld the
Bankruptcy Court determination. TransAmerican anticipates that it will have to
pay approximately $540,000 which includes interest.
NLRB Proceeding. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union filed unfair labor practices charges against the Company
with the New Orleans Regional Office of the National Labor Relations Board
("NLRB"). The charge alleges that the Company refused to reinstate 22 former
employees because of their union membership. The NLRB has not taken any
action.
7
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
EEOC. On August 31, 1995, the Equal Employment Opportunity Commission
("EEOC") initiated a systematic investigation into the Company's and Southeast
Louisiana Contractors of Norco, Inc.'s ("Southeast Contractors") employment
practices. The EEOC is investigating whether the Company is discriminating on
the basis of sex and race. The Company intends to vigorously defend this
allegation.
General. The Company is also a named defendant in other ordinary course,
routine litigation incidental to its business. While the outcome of these
other lawsuits cannot be predicted with certainty, the Company does not expect
these matters to have a material adverse effect on its financial position,
results of operations or cash flow. At April 30, 1996, the possible range of
estimated losses related to all of the aforementioned claims, other than the
EEOC claim, which the Company could not reasonably estimate and in addition to
the estimates accrued by the Company, is $0 to $2 million.
Environmental Matters
Compliance Matters. The Company is subject to federal, state, and local
laws, regulations, and ordinances ("Pollution Control Laws"), that regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. The Company believes that
it is in substantial compliance with applicable Pollution Control Laws.
However, changes in Pollution Control Laws, as well as increasingly strict
enforcement of existing Pollution Control Laws, will require the Company to
make capital expenditures in order to comply with such laws and regulations.
To ensure continuing compliance, the Company has made environmental compliance
and permitting issues an integral part of its refinery's start-up plans and
has budgeted for such capital expenditures in the Capital Improvement Program.
However, there is no assurance that the Company will remain in compliance with
environmental regulations.
The Company uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes, that are or may
be deemed hazardous substances or wastes. In the past, the refinery has been
the subject of certain environmental enforcement actions, and has incurred
certain fines, as a result of certain of the Company's operations. The Company
also was previously subject to enforcement proceedings relating to its prior
production of leaded gasoline and air emissions. The Company believes that,
with minor exception, all of these past matters were resolved prior to or in
connection with the resolution of the bankruptcy proceedings of its
predecessor in interest, TransAmerican, or are no longer applicable to the
Company's operations. As a result, the Company believes that such matters will
not have a material adverse effect on the Company's future results of
operations, cash flows or financial position.
Pending Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean
Air Act, regulate benzene emissions from numerous industries, including
petroleum refineries. The Benzene Waste NESHAPS require all existing, new,
modified, or reconstructed sources to reduce benzene emissions to a level that
will provide an ample margin of safety to protect public health. The Company
will be required to comply with the Benzene Waste NESHAPS as its refinery
operations start up. At this time, the Company cannot estimate the costs of
such compliance. Although the Company does not believe that such costs will be
material, there can be no assurance that such costs will not have a material
adverse effect on its financial position.
As a result of the Environmental Protection Agency's ("EPA") adoption on
August 18, 1995 of Hazardous Organic NESHAPS regulations for refineries under
the Clean Air Act, the Company may be required to spend additional funds in
order to comply with these regulations that could have a material adverse
effect on the Company. The Clean Air Act requires the EPA to set "Maximum
Achievable Control Technology" standards
8
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
for all categories of major sources of hazardous air pollutants by November
15, 2000. As of the present time, the EPA has promulgated standards for the
chemical manufacturing industry; similar standards are expected to be set by
both the EPA and the Louisiana Department of Environmental Quality for the
petroleum refining industry. The Company cannot estimate at this time what the
effect may be of any such regulations on the refinery.
The EPA promulgated federal regulations pursuant to the Clean Air Act to
control fuels and fuel additives (the "Gasoline Standards") that could have a
material adverse effect on the Company. Under these regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in
which the EPA has mandated or approved its use. Reformulated gasoline must
contain a minimum amount of oxygen, have a lower vapor pressure, and have
reduced benzene and aromatics compared to the average 1990 gasoline. The
number and extent of the areas subject to reformulated gasoline standards may
increase in the future if the applicable laws and regulations become more
stringent or other areas become subject to the existing program. Conventional
gasoline may be used in all other domestic markets; however, a refiner's post-
1994 average conventional gasoline must not be more polluting than it was in
1990. With limited exceptions, to determine its compliance as of January 1,
1995, a refinery must compare its post-1994 and 1990 average values of
controlled fuel parameters and emissions. The Gasoline Standards recognize
that many gasoline refiners may not be able to develop an individual 1990
baseline for a number of reasons, including, for example, lack of adequate
data, the absence or limited scope of operations in 1990. Under such
circumstances, the refiner must use a statutory baseline reflecting the 1990
industry average. The EPA has authority, upon a showing of extenuating
circumstances by a refiner, to grant an individual adjusted baseline or other
appropriate regulatory relief to that refiner.
The Company filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which the Company relied in
its petition include the fact that the refinery was not in operation in 1990
(and thus there is no 1990 average for purposes of the necessary comparison)
and the fact that the start-up of the refinery is to occur on a phased-in
basis. The EPA has denied the Company's request for an individual baseline
adjustment, and the Company cannot predict at this time when or whether the
EPA will grant the Company other appropriate regulatory relief. In
correspondence to the Company, the EPA has expressed willingness to consider
whether different standards should apply to refineries that are now commencing
operations. If the EPA fails to grant appropriate regulatory relief, the
Company will be restricted in the amount of gasoline it will be able to sell
domestically or will incur additional gasoline blending costs until the
Capital Improvement Program is completed. Upon completion of the Capital
Improvement Program, the Company believes that it will be able to produce
conventional gasoline and, to a limited extent, reformulated gasoline that
meets the Gasoline Standards. There can be no assurance that any action taken
by the EPA will not have a material adverse effect on the Company's future
results of operations, cash flows or financial position.
Cleanup Matters. The Company also is subject to federal, state, and local
laws, regulations, and ordinances that impose liability for the costs of
cleaning up, and certain damages resulting from, past spills, disposals, or
other releases of hazardous substances ("Hazardous Substance Cleanup Laws").
Over the past several years, the Company has been, and to a limited extent
continues to be, engaged in environmental cleanup or remedial work relating to
or arising out of operations or activities at the refinery. In addition, the
Company has been engaged in upgrading its solid waste facilities, including
the closure of several waste management units. Similar to numerous other
industrial sites in the state, the refinery has been listed by the Louisiana
Department of Environmental Quality on the Federal Comprehensive Environmental
Response, Compensation and Liability Information System, as a result of the
Company's prior waste management activities (as discussed below).
In 1991, the EPA performed a refinery facility assessment ("RFA") at the
refinery pursuant to the Federal Resource Conservation and Recovery Act
("RCRA") and issued a report of its RFA investigation. The EPA has
9
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
not made a formal request of the Company to implement any corrective actions
based on the investigations; however, the Company has voluntarily initiated
remedial actions at some of the solid waste management units and other areas
of concern. The Company is unable to predict what effect any further
investigation or remediation required by the EPA will have on the Company's
financial position. As part of the facility assessment, in March 1993 the
Company submitted a "Closure Equivalency Demonstration" for the former sludge
drying beds at the refinery. The EPA has not yet made a determination
regarding the Company's submission or issued any further requests relating to
this matter. The Company believes that the sludge drying beds were properly
closed in 1985 in accordance with applicable law and should not require
further remediation as a result of the EPA's pending review. However, there
can be no assurance that the EPA will not require further work in this regard.
The Company is unable to estimate what the costs, if any, will be if the EPA
does require further remediation or closure activities.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of
contamination from hazardous substances at four Superfund sites (i.e. sites on
the National Priorities List ("NPL")) to which it has been alleged that the
Company, or its predecessors, sent hazardous substances in the past. CERCLA
requires cleanup of sites from which there has been a "release" or threatened
release of "hazardous substances" (as such terms are defined under CERCLA).
CERCLA requires the EPA to include sites needing long-term study and cleanup
on the NPL based on their potential effect on public health or the
environment. CERCLA authorizes the EPA to take any necessary response actions
at NPL sites and, in certain circumstances, to order PRPs liable for the
release to take such actions. PRPs are broadly defined under CERCLA to include
past and present owners and operators of a site, as well as generators and
transporters of wastes to a site from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning
up a site from other responsible parties. Thus, if one party is required to
clean up an entire site, that party can seek contribution or recovery of such
costs from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.
The Company's liability at one of the four Superfund sites at which it has
been named a PRP has been settled for a nominal amount, and the Company
expects to incur no further liability in this matter. With respect to the
remaining three sites, the Company's liability for each such matter has not
been finally determined, and the Company anticipates that it may incur costs
related to the cleanup (and possibly including additional costs arising in
connection with any recovery action brought pursuant to such matters) at each
such site. After a review of the data available to the Company regarding the
basis of the Company's alleged liability at each site, and based on various
factors, which depend on the circumstances of the particular Superfund site
(including, for example, the relationship of the Company to each such site,
the volume of wastes the Company is alleged to have contributed to each such
site in comparison to other PRPs without giving effect to the ability of any
other PRPs to contribute to or pay for any liabilities incurred, and the range
of likely cleanup costs at each such site) the Company does not believe its
ultimate liabilities will be significant; however, it is not possible to
determine the ultimate environmental liabilities, if any, that may arise from
the matters discussed above.
Purchase Commitments
The Company has various purchase commitments for materials, supplies and
services incidental to the ordinary course of business and for the Capital
Improvement Program. As of April 30, 1996, the Company had
10
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
commitments for refinery construction and maintenance of approximately $64
million. The Company acts as general contractor and can generally cancel or
postpone capital projects.
Price Management Activities
The Company enters into futures contracts, options on futures, and swap
agreements and forward sales agreements with the intent to protect against a
portion of the price risk associated with price declines from holding
inventory of feedstocks and refined products or fixed price purchase
commitments. For the three months ended April 30, 1996, the Company indirectly
entered into price management activities through the third party processing
agreement discussed below.
Financing Arrangements and Processing Agreement
The Company enters into financing arrangements to maintain an available
supply of feedstocks. Typically, the Company enters into an agreement with a
third party to acquire a cargo of feedstock that is scheduled for delivery to
the Company's refinery. The Company pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for
the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and the Company commits to purchase,
at a later date, the cargo at an agreed price plus commission and costs. The
Company also places margin deposits with the third party to permit the third
party to hedge its price risk. The Company purchases these cargos in
quantities sufficient to maintain expected operations and is obligated to
purchase all of the cargos delivered pursuant to these arrangements. In the
event the refinery is not operating, these cargos may be sold on the spot
market. These arrangements are accounted for as product financing arrangements
and accordingly the inventory and related obligations are recognized on the
Company's balance sheet. During the three months ended April 30, 1996,
approximately 0.4 million barrels of feedstocks with a cost of $8 million were
sold by a third party on the spot market prior to delivery to the Company
without a material gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. Under the
terms of the agreement, the processing fee earned by the Company is based on
the margin earned by the third party, if any, after deducting all of its
related costs such as feedstock acquisition, hedging, transportation,
processing and inspections plus a commission for each barrel processed. This
agreement provides for the Company to process a total of approximately 1.1
million barrels of feedstocks. For the three months ended April 30, 1996, the
Company incurred a loss of approximately $1.9 million related to the
processing agreement, primarily as a result of price management decisions. In
April 1996, the Company entered into a similar processing agreement with
another third party to process feedstocks. Recently, the Company has agreed to
process approximately 4.3 million barrels of feedstocks under this agreement.
7. LITIGATION SETTLEMENTS
Terry/Penrod. TransAmerican and a group of TransAmerican's former bank
lenders are parties to a consolidated suit filed December 6, 1991, in the
United States District Court for the Southern District of Texas, Houston
Division. Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling
Corporation, Terry Oilfield Supply Co., Inc., and Terry Resources, Inc.
("Terry") sued TransAmerican for approximately $50 million in actual damages
and punitive damages of not less than five times actual damages. The
plaintiffs claimed that TransAmerican breached two third-party drilling
agreements and are seeking, among other things, a portion of the assets
TransAmerican received in a settlement during 1990 of litigation with El Paso
Natural Gas Company ("El Paso"). A judgment was entered against TransAmerican,
TransTexas and related parties. This matter was subsequently settled with no
resulting liability to the Company.
11
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Frito-Lay. On June 24, 1993, Frito-Lay, Inc. ("Frito-Lay") filed suit
against TransAmerican and the Company in the Supreme Court of the State of New
York, County of New York, alleging that TransAmerican and the Company failed
to make indemnification payments to Frito-Lay in the amounts and at the times
required under the tax benefit transfer sale-leaseback agreements executed by
TransAmerican and Frito-Lay in November and December 1981 relating to
equipment located at the refinery. The Company assumed the obligations of
TransAmerican under these sale-leaseback agreements when the refinery was
transferred to the Company in 1987. Frito-Lay sought actual damages of not
less than $7 million. In the transfer of certain of TransAmerican's oil and
gas properties and exploration, production and transportation operations to
TransTexas, TransTexas assumed certain liabilities for this matter subject to
certain indemnifications. On December 13, 1995, the suit was settled and
dismissed with prejudice. The liabilities will be allocated among the Company,
TransTexas and TransAmerican in accordance with the Tax Allocation Agreement
and other relevant documents.
8. TRANSACTIONS WITH AFFILIATES
The Company purchases natural gas from TransTexas on an interruptible basis.
The total cost of natural gas purchased for the three months ended April 30,
1996 and 1995 was approximately $0.3 million and $0.1 million, respectively.
The payable to TransTexas for natural gas purchased totaled approximately $0.3
million and $0.1 million at April 30, 1996 and January 31, 1996, respectively.
Southeast Contractors, a subsidiary of TransAmerican, provides construction
personnel to the Company in connection with the Capital Improvement Program.
These construction workers are temporary employees, and the number and
composition of the workforce will vary throughout the Capital Improvement
Program. Southeast Contractors charges the Company for the direct costs it
incurs (which consist solely of employee payroll and benefits) plus
administrative costs and fees; such administrative costs and fees charged to
the Company are $1.2 million per year. Total labor costs paid to Southeast
Contractors for the three months ended April 30, 1996 and 1995 were $0.9
million and $1.8 million, respectively, of which $0.9 million and $2.3 million
were payable April 30, 1996 and January 31, 1996, respectively. No labor costs
were paid to Southeast Contractors in prior years.
TransAmerican and its affiliates have provided the Company with
substantially all of its corporate services requirements, including insurance,
legal, accounting and treasury functions pursuant to the Services Agreement.
During the three months ended April 30, 1996 and 1995, TransAmerican and
TransTexas charged the Company approximately $0.1 million and $0.1 million,
respectively, to cover its costs of providing these services, which management
believes to be reasonable based on the limited services provided. The Company
expects its general and administrative expenses to increase significantly when
the refinery commences more complex operations. In addition, third party
charges incurred by TransAmerican and its affiliates have been charged
directly or allocated to the Company on usage or other methods that management
believes are reasonable. All significant transactions with affiliates to the
extent unpaid are recorded in the "Payable to Affiliates" account.
During 1995, TransAmerican acquired an office building which it renovated
and subsequently sold to TransTexas in February 1996. In February 1996,
TransAmerican advanced $4 million of the proceeds from this sale to the
Company for working capital. The Company leases office space from TransTexas
on terms and conditions permitted by the Indenture.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
General
The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues were primarily from tank
rentals and its expenses were comprised of maintenance and repairs, tank
rentals, general and administrative expenses and property taxes. The Company
commenced partial operations at the refinery in March 1994 and has operated
the refinery intermittently since then. The Company does not consider its
historical results to be indicative of future results.
The Company's results of operations are dependent on the operating status of
its refinery equipment, which determines the types of feedstocks processed and
refined product yields. The results are also affected by the unit costs of
purchased feedstocks and the unit prices of refined products, which can vary
significantly. The Capital Improvement Program is designed to significantly
change the Company's throughput capacity, the feedstocks processed, and
refined product yields.
Three Months Ended April 30, 1996, Compared with the Three Months Ended April
30, 1995
Total revenues for the three months ended April 30, 1996 increased $10.3
million to $10.9 million from $0.6 million for the same period in 1995,
primarily as a result of increased sales volume.
Costs of products sold for the three months ended April 30, 1996 increased
$12.3 million to $13.4 million from $1.1 million for the same period in 1995,
primarily as a result of increased sales volume and a loss of approximately
$1.9 million related to a processing agreement.
Operations and maintenance expense for the three months ended April 30, 1996
increased $3.3 million to $3.0 million from $(0.3) million for the same period
in 1995, primarily due to an increase in the number of days the vacuum unit
was operating.
Depreciation and amortization expense for the three months ended April 30,
1996 increased $0.4 million to $1.8 million from $1.4 million for the same
period in 1995, primarily due to the placing in service of certain terminal
facilities and tankage equipment.
General and administrative expense for three months ended April 30, 1996
increased $1.0 million to $2.1 million from $1.1 million for the same period
in 1995, primarily due to increases in wages, outside services and
professional fees.
Taxes other than income taxes for the three months ended April 30, 1996
decreased $0.6 million to $0.4 million from $1.0 million for the same period
in 1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.
Interest income for the three months ended April 30, 1996 decreased $1.8
million as compared to the same period in 1995 primarily due to interest
earned in 1995 on the initial $173 million long-term debt proceeds held in the
Collateral Account. Interest expense for the three months ended April 30, 1996
decreased $3.5 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the three months ended April 30, 1996,
the Company capitalized approximately $16.6 million of interest related to
property and equipment additions at the Company's refinery.
13
The equity in earnings (loss) of TransTexas for the three months ended April
30, 1996, reflects the Company's 20.3% equity interest in TransTexas until the
Company's sale of 4.55 million shares of TransTexas stock in March 1996 which
decreased the Company's interest in TransTexas to 14.1%.
Other expense for the three months ended April 30, 1995 was $3.0 million
which was primarily a result of trading losses on futures contracts.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the issuance of the TARC Notes, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. The current budget for the Capital
Improvement Program calls for total expenditures of $434 million; however, the
Company estimates that expenditures of approximately $146 million to $151
million in addition to the current budget will be required to complete the
Capital Improvement Program. The foregoing estimates, as well as other
estimates and projections herein, are subject to substantial revision upon the
occurrence of future events, such as unavailability of, or delays in,
financing, engineering problems, work stoppages and cost overruns over which
the Company may not have any control.
As of April 30, 1996, expenditures on the Capital Improvement Program funded
by or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Approximately $17 million remained in the cash
collateral account as of April 30, 1996. The Company sold 4.55 million shares
of TransTexas common stock in March 1996, and deposited approximately $26.6
million of the proceeds of such sale into the cash collateral account in
accordance with the requirements of the Indenture. Giving effect to current
estimates, additional funding of $374 million to $379 million will be required
to complete the Capital Improvement Program, of which approximately $41
million is anticipated to be funded by the Port Commission tax exempt bonds.
As of April 30, 1996, the Company had commitments for refinery construction
and maintenance of approximately $64 million. Additional funds necessary to
complete the Capital Improvement Program may be provided from (i) the sale of
additional shares of TransTexas common stock held by the Company, (ii) the
sale of common stock of the Company, (iii) equity investments in the Company
(including the sale of preferred stock of the Company to TEC, funded by the
sale of TransTexas common stock held by TEC), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the TARC Notes. The Company has entered
into preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. There is no assurance that sufficient funds will be available from these
sources on a timely basis or upon terms acceptable to the Company and
TransAmerican. If this financing is not available or if significant
engineering problems, work stoppages or cost overruns occur, the Company
likely will not be able to complete and test Phase I of the Capital
Improvement Program by February 15, 1997. Even if required financing is
obtained on a timely basis, completion by February 15, 1997 will still prove
very difficult if personnel shortages prevent full staffing during peak
construction periods. The Company has identified and is considering certain
steps to minimize the impact of potential construction worker shortages,
including the retention of field supervisors, direct hiring of field
supervisors and field labor by the Company's major contractors, adding a
second shift, and modularization of certain construction items. There can be
no assurance that these steps will prove successful; however, the Company
believes that implementation of these steps will adequately address staffing
concerns. Under the Indenture, the failure of the Company to complete and test
Phase I by February 15, 1997 (subject to extension to August 15, 1997 if
certain financial coverage ratios are met) would constitute an event of
default at such date.
The Company and the Port Commission have reached an agreement in principle
which would allow for the issuance of approximately $75 million in Port
Commission tax exempt bonds, the proceeds of which may be used to construct
tank storage facilities, docks and air and waste water treatment facilities.
The air and waste water treatment facility are included in the Capital
Improvement Program at an estimated cost of $41 million. The issuance of the
tax exempt bonds could provide an alternate source of financing for the
construction of such facilities. The Port Commission would own the facilities
built with the proceeds of the bonds, and the Company would operate the
facilities pursuant to a long-term (30-year) lease. There can be no assurance
that the issuance of the tax-exempt bonds, which may require the consent of
the holders of the TARC Notes, will occur.
14
The Company has incurred losses and negative cash flow from operations as a
result of limited refining operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to financing costs and low margins. Based on recent
refining margins, recent projected levels of operations and debt service
requirements, such negative cash flows are likely to continue. In order to
operate the refinery and service its debt, the Company must raise additional
debt or equity capital in addition to the funds required to complete the
Capital Improvement Program. TransAmerican, TEC or the Company may sell
securities to raise funds for additional working capital. There is no
assurance that additional capital will be available.
Without additional funding on a timely basis to complete Phase I of the
Capital Improvement Program and to provide working capital for operations and
debt service, there is substantial doubt about the Company's continued
existence. If the Company (i) does not complete the Capital Improvement
Program timely, (ii) incurs significant cost overruns, (iii) does not
ultimately achieve profitable operations, or (iv) ceases to continue
operations, the Company's investment in the refinery may not be recovered. The
financial statements do not include any adjustments for such uncertainties.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax
purposes could result in the acceleration of payment of a substantial amount
of federal income taxes by TransAmerican. Each member of a consolidated group
filing a consolidated federal income tax return is severally liable for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that TransAmerican will have the ability to satisfy the above
tax obligation at the time due and, therefore, the Company or other members
may be required to pay the tax. A decision by TEC or the Company to sell
TransTexas shares could result in deconsolidation of TransTexas for tax
purposes. Such sales may be necessary to raise funds required to complete the
Capital Improvement Program. The tax liability to TransAmerican at April 30,
1996 that would result from deconsolidation is estimated to be approximately
$40 million.
The Company enters into financing arrangements to maintain an available
supply of feedstocks. Typically, the Company enters into an agreement with a
third party to acquire a cargo of feedstock scheduled for delivery to the
Company's refinery. The Company pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for
the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and the Company commits to purchase,
at a later date, the cargo at an agreed price plus commission and costs. The
Company also places margin deposits with the third party to permit the third
party to hedge its price risk. The Company purchases these cargos in
quantities sufficient to maintain expected operations and is obligated to
purchase all of the cargos delivered pursuant to these arrangements. In the
event the refinery is not operating, these cargos may be sold on the spot
market. During the three months ended April 30, 1996, approximately 0.4
million barrels of feedstocks with a cost of $8 million were sold by a third
party on the spot market prior to delivery to the Company without a material
gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. Under the
terms of the agreement, the processing fee earned by the Company is based on
the margin earned by the third party, if any, after deducting all of its
related costs such as feedstock acquisition, hedging, transportation,
processing and inspections plus a commission for each barrel processed. This
agreement provides for the Company to process a total of approximately 1.1
million barrels of feedstock. For the three months ended April 30, 1996, the
Company incurred a loss of approximately $1.9 million related to the
processing agreement, primarily as a result of price management decisions. In
April 1996, the Company entered into a similar processing agreement with
another third party to process feedstocks. Recently, the Company has agreed to
process approximately 4.3 million barrels of feedstocks under this agreement.
Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years the Company does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on the
Company's future results of operations, cash flows or financial
15
condition. The Company also has contingent liabilities with respect to
litigation matters as more fully described in Note 6 of Notes to Condensed
Financial Statements.
On December 13, 1995, litigation with Frito-Lay, Inc. was settled. The
Company intends to pay $2.5 million to Frito-Lay, Inc. during fiscal year 1997
in accordance with the Tax Allocation Agreement and other relevant documents.
As of April 30, 1996, the Company has paid approximately $0.7 million of this
obligation.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. Words such as "anticipates," "expects,"
"believes" and "likely" indicate forward-looking statements. The Company's
management believes that its current views and expectations are based on
reasonable assumptions; however, there are significant risks and uncertainties
that could significantly affect expected results. Factors that could cause
actual results to differ materially from those in the forward-looking
statements include the Company's success in raising additional capital to
complete the Capital Improvement Program (as defined below) as scheduled,
engineering problems, work stoppages, cost overruns, fluctuations in the
commodity prices for petroleum and refined products, casualty losses,
conditions in the capital markets and competition.
16
PART II--OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
See Notes 6 and 7 to the condensed financial statements for a discussion of
the Company's legal proceedings.
ITEM 5. OTHER INFORMATION
CAPITAL IMPROVEMENT PROGRAM
The Capital Improvement Program ("CIP"), designed to increase the capacity
and complexity of the refinery, is currently scheduled to be completed and
tested by February 1997 for Phase I and February 1998 for Phase II. The most
significant projects include: (i) completion of a delayed coking unit to
process vacuum tower bottoms into lighter petroleum products, (ii)
reactivation and revamp of a fluid catalytic cracking unit to increase
gasoline production capacity, (iii) upgrading and expanding existing
hydrotreating and desulfurization units to increase sour crude processing
capacity and (iv) reactivation and expansion of the MTBE unit. In addition,
the Company plans to expand, modify, and add other processing units, tankage,
and offsite facilities as part of the CIP. The CIP includes expenditures
necessary to ensure that the refinery is in compliance with certain existing
air and water discharge regulations and that gasoline produced will comply
with federal standards. The Company has engaged a number of specialty
consultants and engineering and construction firms to assist the Company in
completing the individual projects that comprise the CIP. Each of these firms
was selected because of its specialized expertise in a particular process or
unit integral to the CIP.
The following table sets forth, as of April 30, 1996, the Company's capital
budget for, and expenditures on the Capital Improvement Program (in millions
of dollars):
CAPITAL
BUDGET EXPENDITURES
------- ------------
PHASE I:
Delayed Coking Unit................................. $ 38 $ 53
Naphtha Pretreater.................................. 7 4
No. 2 Reformer...................................... 6 1
VGO HDS Unit........................................ 25 5
FCC Unit............................................ 75 33
FCC Upgrades........................................ 11 7
Alkylation Unit..................................... 20 9
MTBE Unit........................................... 2 --
Sulfur Recovery Units/Amine System.................. 26 19
Additional Tank Storage Capacity.................... 21 10
Offsite Facilities.................................. 22 18
Other............................................... 8 4
Engineering and Administrative...................... 8 12
Contingencies....................................... 40* 8
----- ----
Total Phase I...................................... 309 183
----- ----
PHASE II:
Light Naphtha Isomerization Unit.................... 5 2
VGO HDS Unit........................................ 31 2
Sulfur Recovery Units/Amine System.................. 17 --
Offsite Facilities.................................. 18 --
MTBE Unit Expansion................................. 33 --
Other............................................... 2 --
Engineering and Administrative...................... 3 --
Contingencies....................................... 16* 2
----- ----
Total Phase II..................................... 125 6
----- ----
Total Capital Improvement Program.................. $ 434 $189
===== ====
17
- - --------
* To the extent that expenditures exceed the approved capital budget for a
unit or units, the contingencies portion of the budget will be allocated to
specific units. As of April 30, 1996, approximately $19 million of the
contingencies have been allocated for expenditures on the Delayed Coking
Unit and Engineering and Administrative. The foregoing estimates, as well as
other estimates and projections herein, are subject to substantial revision
upon the occurrence of future events, such as unavailability of, or delays
in financing, engineering problems, work stoppages and cost overruns over
which the Company may not have any control.
The Company estimates that expenditures of between $146 million and $151
million in addition to the current budget of $434 million will be required to
complete the Capital Improvement Program. As of April 30, 1996, expenditures
on the Capital Improvement Program funded by or approved for reimbursement
from the cash collateral account totaled approximately $189 million.
Approximately $17 million remained in the cash collateral account as of April
30, 1996. Giving effect to current estimates, additional funding of $374
million to $379 million will be required to complete the Capital Improvement
Program of which approximately $41 million is anticipated to be funded by the
Port Commission tax exempt bonds. As of April 30, 1996, the Company had
commitments for refinery construction and maintenance of approximately $64
million. Additional funds necessary to complete the Capital Improvement
Program may be provided from (i) the sale of additional shares of TransTexas
common stock held by the Company, (ii) the sale of common stock of the
Company, (iii) equity investments in the Company (including the sale of
preferred stock of the Company to TEC, funded by the sale of TransTexas common
stock held by TEC), (iv) capital contributions by TransAmerican, or (v) other
sources of financing, the access to which could require the consent of the
holders of the TARC Notes. The Company has entered into preliminary
discussions with potential third party investors, including strategic equity
investors, financial investors and foreign producers of crude oil. There is no
assurance that sufficient funds will be available from these sources on a
timely basis or upon terms acceptable to the Company and TransAmerican. If
this financing is not available when needed or if significant engineering
problems, work stoppages or cost overruns occur, the Company may not be able
to complete and test Phase I of the Capital Improvement Program by February
15, 1997. Even if required financing is obtained on a timely basis, completion
by February 15, 1997 will still prove very difficult if personnel shortages
prevent full staffing during peak construction periods. The Company has
identified and is considering certain steps to minimize the impact of
potential construction worker shortages, including the retention of field
supervisors, direct hiring of field supervisors and field labor by the
Company's major contractors, adding a second shift, and modularization of
certain construction items. There can be no assurance that these steps will
prove successful; however, the Company believes that implementation of these
steps will adequately address staffing concerns. Under the Indenture, the
failure of the Company to complete and test Phase I by February 15, 1997
(subject to extension to August 15, 1997 if certain financial coverage ratios
are met) would constitute an event of default at such date.
The Company and the Port Commission have reached an agreement in principle
which would allow for the issuance of approximately $75 million in Port
Commission tax exempt bonds, the proceeds of which may be used to construct
tank storage facilities, docks and air and waste water treatment facilities.
The air and waste water treatment facilities are included in the Capital
Improvement Program at an estimated cost of $41 million. The issuance of the
tax exempt bonds could provide an alternate source of financing for the
construction of such facilities. The Port Commission would own the facilities
built with the proceeds of the bonds, and the Company would operate the
facilities pursuant to a long-term (30-year) lease. There can be no assurance
that the issuance of the tax-exempt bonds, which may require the consent of
the holders of the TARC Notes, will occur.
The Company plans to complete the CIP in two phases as described below:
Phase I
Phase I is expected to be completed and tested in February 1997 subject to
timely availability of financing (see "Liquidity and Capital Resources").
Phase I will involve completion or reactivation of a delayed coking unit, a
naphtha pretreater, a catalytic reformer, a vacuum gas oil
hydrodesulfurization unit, a fluid catalytic cracking unit, an alkylation
plant, an MTBE unit and sulfur recovery facilities. The Company anticipates
that following completion of Phase I, it will be processing low-cost, sour
crude oil in combination with sweet crude
18
oil and atmospheric tower bottoms. Products from this phase are expected to
include all the products produced prior to Phase I plus conventional gasoline
and petroleum coke. The Company must raise additional capital to complete
Phase I.
Phase II
Phase II is expected to be completed and tested in February 1998 subject to
timely availability of financing (see "Liquidity and Capital Resources"). In
Phase II of the Capital Improvement Program, the Company will expand
hydrodesulfurization capacity, add a naphtha isomerization unit and add sulfur
recovery facilities. The Company anticipates that, following completion of
Phase II, it will process 200,000 BPD of heavy, sour crude oil. The Company
must raise additional capital to complete Phase II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--Processing Agreement dated April 22, 1996 between the Company and
10.1 Glencore Ltd.
27 --Financial Data Schedule
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the three months ended
April 30, 1996.
FINANCIAL
ITEM STATEMENTS
DATE OF REPORT REPORTED FILED
-------------- -------- ----------
February 5, 1996 Item 8 None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSAMERICAN REFINING CORPORATION
(Registrant)
/s/ John R. Stanley
By:__________________________________
John R. Stanley, Chief Executive
Officer
/s/ Jeffrey H. Siegel
----------------------------------
Jeffrey H. Siegel, Chief
Financial Officer
(Principal Financial Officer and
Accounting Officer)
June 14, 1996
20
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
--Processing Agreement dated April 22, 1996 between the Company and
10.1 Glencore Ltd.
27 --Financial Data Schedule
21