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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 THE QUARTERLY PERIOD ENDED APRIL 30, 2001
----------
COMMISSION FILE NUMBER 0-30475
TRANSTEXAS GAS CORPORATION
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032-2949
Registrant's telephone number, including area code: (281) 987-8600
DELAWARE 76-0401023
(State of incorporation) (I.R.S. Employer
Identification No.)
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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 whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares of common stock of the registrant outstanding on June
14, 2001 was 1,250,251, consisting of 1,002,751 shares of Class A Common Stock
and 247,500 shares of Class B Common Stock.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
PAGE
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements:
Report of Independent Accountants............................................................ 2
Condensed Consolidated Balance Sheet as of April 30, 2001 and January 31, 2001............... 3
Condensed Consolidated Statement of Operations for the Three Months Ended
April 30, 2001 and 2000................................................................... 4
Condensed Consolidated Statement of Cash Flows for the Three Months Ended
April 30, 2001 and 2000................................................................... 5
Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 21
Item 6. Exhibits and Reports on Form 8-K................................................................ 21
Signature.................................................................................................. 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation (the "Company") as of April 30, 2001 and the related
condensed consolidated statements of operations and of cash flows for the three
months ended April 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
January 31, 2001, and the related consolidated statements of operations, of
stockholders' equity (deficit), and of cash flows for the year then ended (not
presented herein); and in our report dated April 25, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of January 31, 2001, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
June 13, 2001
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
APRIL 30, JANUARY 31,
2001 2001
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 19,530 $ 20,715
Accounts receivable ........................................................... 26,987 42,533
Receivable from affiliates .................................................... 7 21
Inventories ................................................................... 1,844 1,476
Other ......................................................................... 2,142 2,521
--------- ---------
Total current assets ..................................................... 50,510 67,266
--------- ---------
Property and equipment ........................................................... 452,855 413,811
Less accumulated depreciation, depletion and amortization ........................ 101,809 81,483
--------- ---------
Net property and equipment - based on the full cost method of accounting for
gas and oil properties of which $82,505 and $81,381 was excluded from
amortization at April 30, 2001 and January 31, 2001, respectively ........... 351,046 332,328
--------- ---------
Other assets ..................................................................... 2,681 2,649
--------- ---------
$ 404,237 $ 402,243
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......................................... $ 3,554 $ 4,269
Accounts payable .............................................................. 17,817 9,255
Accrued liabilities ........................................................... 19,713 33,153
--------- ---------
Total current liabilities ................................................ 41,084 46,677
--------- ---------
Long-term debt, net of current maturities ........................................ 266,474 281,271
Production payments, net of current portion ...................................... 28,590 12,732
Deferred income taxes ............................................................ 12,342 9,984
Other liabilities ................................................................ 7,799 8,011
Redeemable preferred stock ....................................................... 35,363 25,722
Commitments and contingencies (Note 6) ........................................... -- --
Stockholders' equity:
Common stock, $0.01 par value, 100,247,500 shares authorized at April 30,
2001 and 1,250,251 shares issued and outstanding at April 30, 2001 and
January 31, 2001 ............................................................ 12 12
Additional paid-in capital .................................................... 25,013 25,013
Accumulated deficit ........................................................... (12,440) (7,179)
--------- ---------
Total stockholders' equity ............................................... 12,585 17,846
--------- ---------
$ 404,237 $ 402,243
========= =========
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
----------------------------
2001 2000
----------- -----------
Revenues:
Gas, condensate and natural gas liquids ............... $ 47,070 $ 38,032
Other ................................................. 347 577
----------- -----------
Total revenues .................................. 47,417 38,609
----------- -----------
Costs and expenses:
Operating ............................................. 4,889 3,334
Depreciation, depletion and amortization .............. 20,333 21,429
General and administrative ............................ 5,391 5,412
Taxes other than income taxes ......................... 1,846 1,485
----------- -----------
Total costs and expenses ........................ 32,459 31,660
----------- -----------
Operating income ................................ 14,958 6,949
----------- -----------
Other income (expense):
Interest income ....................................... 292 173
Interest expense, net ................................. (8,512) (9,354)
----------- -----------
Total other expense ............................. (8,220) (9,181)
----------- -----------
Income (loss) before income taxes ............... 6,738 (2,232)
Income taxes - deferred .................................. 2,358 --
----------- -----------
Net income (loss) ............................... $ 4,380 $ (2,232)
=========== ===========
Accretion of preferred stock ............................. $ 9,641 $ 4,920
=========== ===========
Net loss available to common stockholders ................ $ (5,261) $ (7,152)
=========== ===========
Basic and diluted net loss per share ..................... $ (4.21) $ (5.72)
=========== ===========
Weighted average number of shares outstanding for basic
and diluted net loss per share ........................ 1,250,251 1,250,251
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
----------------------
2001 2000
-------- --------
Operating activities:
Net income (loss) .......................................................... $ 4,380 $ (2,232)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation, depletion and amortization ................................ 20,333 21,429
Accretion of discount on long-term debt ................................. 81 3,503
Amortization of debt issue costs ........................................ 124 17
Deferred income taxes ................................................... 2,358 --
Changes in assets and liabilities:
Accounts receivable ................................................... 15,546 (13,625)
Receivable from affiliates ............................................ 14 8
Inventories ........................................................... (368) 455
Other current assets .................................................. 379 (919)
Accounts payable ...................................................... 8,562 (4,235)
Accrued liabilities ................................................... (13,049) 6,422
Other assets .......................................................... (4) (171)
Other liabilities ..................................................... (212) (25,052)
-------- --------
Net cash provided (used) by operating activities ................... 38,144 (14,400)
-------- --------
Investing activities:
Capital expenditures ....................................................... (38,980) (22,072)
Proceeds from the sale of assets ........................................... 2 581
-------- --------
Net cash used by investing activities .............................. (38,978) (21,491)
-------- --------
Financing activities:
Issuance of production payments ............................................ 19,800 4,500
Principal payments on production payments .................................. (4,333) (4,604)
Issuance of long-term debt ................................................. 29 32,500
Principal payments on long-term debt ....................................... (1,364) (12,142)
Revolving credit agreement, net ............................................ (14,287) 4,456
Debt issue costs ........................................................... (196) (1,955)
-------- --------
Net cash provided (used) by financing activities ................... (351) 22,755
-------- --------
Decrease in cash and cash equivalents .............................. (1,185) (13,136)
Beginning cash and cash equivalents ........................................... 20,715 18,288
-------- --------
Ending cash and cash equivalents .............................................. $ 19,530 $ 5,152
======== ========
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas" or the "Company")
as of April 30, 2001 and the results of its operations and cash flows for the
interim periods ended April 30, 2001 and 2000. The condensed consolidated
balance sheet as of January 31, 2001 was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. 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 consolidated financial statements and notes included in
TransTexas' annual report on Form 10-K for the year ended January 31, 2001.
Unless otherwise noted, the terms "TransTexas" and the "Company" refer to
TransTexas Gas Corporation and its subsidiaries, including Galveston Bay
Processing Corporation and Galveston Bay Pipeline Company.
Change in Accounting Principle and Comprehensive Income
Effective February 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which was amended by Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." These pronouncements establish accounting and
reporting standards for derivative instruments and for hedging activities, which
generally require recognition of all derivatives as either assets or liabilities
in the balance sheet at their fair value. The accounting for changes in fair
value depends on the intended use of the derivative and its resulting
designation. The Company recorded a cumulative effect charge to comprehensive
income of approximately $1.3 million to recognize the fair value of its
liability under the Company's derivative instruments. During the three months
ended April 30, 2001, changes in the prevailing commodity prices for oil and
natural gas reduced the Company's liability under its derivative instruments to
zero, which resulted in an adjustment to comprehensive income. A summary of the
Company's comprehensive income and accumulated other comprehensive income for
the period ended April 30, 2001 is as follows (in thousands of dollars):
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME
------------- -------------
Balance at January 31, 2001 ..................................... $ --
Net income for the three months ended April 30, 2001 ............ $ 4,380
Cumulative effect of adopting SFAS 133 .......................... (1,282) (1,282)
Change in the fair value of hedge agreements .................... 138 138
Reclassification adjustments for hedge agreement settlements .... 1,144 1,144
--------- ---------
$ 4,380 $ --
========= =========
Reclassifications
Certain prior period results have been reclassified to conform to the
current presentation.
Reorganization
On April 19, 1999 (the "Petition Date"), TransTexas filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. This filing
did not include the Company's subsidiaries, including Galveston Bay Processing
Corporation and Galveston Bay Pipeline Company. As a result of the Chapter 11
filing, the Company was prohibited from paying, and creditors were prohibited
from attempting to collect, claims or debts arising prior to the bankruptcy. The
United States Bankruptcy Court for the Southern District of Texas, Corpus
Christi Division (the "Bankruptcy Court") confirmed the Company's Second
Amended, Modified and Restated Plan of Reorganization dated January 25, 2000
(the "Plan") on February 7, 2000. The Effective Date of the Plan is March 17,
2000.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
2. LIQUIDITY
In order to maintain or increase proved oil and gas reserves, TransTexas is
required to make substantial capital expenditures for the exploration and
development of natural gas and oil reserves in the normal course of business.
TransTexas remains highly leveraged and a substantial portion of its cash
flow will be required for debt service. In addition, cash flow from operations
is dependent on the level of gas and oil prices, which are historically
volatile. Management plans to fund its 2002 debt service requirements and
capital expenditures with cash flows from existing producing properties, certain
identified relatively low risk exploratory prospects to be drilled and completed
during the remainder of fiscal 2002 and additional production payment financing.
Should these drilling prospects not be productive or should oil and gas prices
decline for a prolonged period, absent other sources of capital, the Company
would substantially reduce its capital expenditures, which would limit its
ability to maintain or increase production and in turn meet its debt service
requirements. Asset sales and financings are restricted under the terms of
TransTexas' debt documents and Series A Senior Preferred Stock (the "Senior
Preferred Stock").
3. CREDIT AGREEMENT AND PRODUCTION PAYMENTS
Credit Agreement
On the Effective Date, the Company and GMAC Commercial Credit LLC ("GMACC")
entered into a Third Amended and Restated Accounts Receivable Management and
Security Agreement, dated as of March 15, 2000 (the "Accounts Receivable
Facility"). The Accounts Receivable Facility is a revolving credit facility
secured by accounts receivable and inventory. The maximum loan amount under the
facility is $20 million, against which the Company may from time to time,
subject to the conditions of the Accounts Receivable Facility, borrow, repay and
reborrow. Advances under the facility bear interest monthly in arrears at a rate
per annum equal to the higher of (i) the prime commercial lending rate of The
Bank of New York plus 1/2 of 1%, and (ii) the Federal Funds Rate plus 1%. As of
April 30, 2001, the outstanding principal balance under the Accounts Receivable
Facility was $3.7 million with availability for additional advances of
approximately $12.4 million and will be due on March 14, 2005.
Production Payments
In March 2000, TransTexas entered into a production payment drilling
program agreement with two unaffiliated third parties in the form of a term
overriding royalty interest carved out of and burdening certain properties
("Subject Interests"). The Company has the right to offer additional interests
to the production payment parties at a negotiated purchase price, up to an
aggregate maximum amount of $52 million. The production payment calls for the
repayment of the primary sum plus an amount equivalent to a 15% annual interest
rate on the unpaid portion of such primary sum. In February 2001, the Company
closed a Fourth Supplement to the production payment whereby the Company
received $19.8 million in exchange for additional properties being made subject
to the production payment. As of April 30, 2001, the aggregate purchase price of
all interests purchased pursuant to this production payment drilling program was
$46.8 million and the outstanding balance of the production payment was $30.3
million, of which $1.7 million attributable to produced volumes is included in
accrued liabilities. The Oil and Gas Revolving Credit Term Loan Agreement (the
"Oil and Gas Facility") entered into by the Company, as borrower, Galveston Bay
Processing Corporation and Galveston Bay Pipeline Company, as Guarantors, and
with GMACC, as a Lender and as Agent, places certain restrictions on the amount
that may be outstanding under the production payment.
4. HEDGE AGREEMENTS
Pursuant to the terms of the Company's production payment agreement entered
into in March 2000, the production payment purchasers entered into the following
hedge arrangements with respect to a portion of the natural gas and condensate
production associated therewith and which effectively hedged a portion of the
Company's production:
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONTRACT PRICE
----------------------------
TOTAL COLLAR
VOLUMES IN ----------------------------
PERIOD MMBTUS/BBLS FLOOR CEILING
- - ------ ----------- ---------- --------------
Natural gas:
February 2001 - March 2001 ........................ 737,500 $ 2.35 $ 3.95
Condensate:
February 2001 - March 2001 ........................ 59,000 18.50 29.25
Under these contracts, the counterparty was required to make payment to the
production payment purchaser if the settlement price (based on New York
Merchantile Exchange prices) for the period was below the floor, and the
production payment purchaser was required to make payment to the counterparty if
the settlement price for any period was above the ceiling price. For the three
months ended April 30, 2001, the Company recognized hedging losses of $1.6
million under these contracts. The Company has been advised that the production
payment purchasers are examining the possibility of entering into additional
hedging arrangements in connection with the production payment agreement.
In November 2000, the Company entered into the following commodity price
hedging arrangement with respect to a portion of the Company's natural gas
production.
CONTRACT PRICE
----------------------------
TOTAL COLLAR
VOLUMES IN ----------------------------
PERIOD MMBTUS/BBLS FLOOR CEILING
- - ------ ----------- ---------- --------------
Natural gas:
February 2001 -- November 2001.................... 6,060,000 $ 3.50 $ 6.00
Under terms of this collar transaction, the counterparty is required to
make payment to the Company if the settlement price (based on a published
industry index of natural gas prices at Houston Ship Channel) for any settlement
period is below the floor price for such transaction and the Company is required
to make payment to the counterparty if the settlement price for any settlement
period is above the ceiling price for such transaction. This hedging arrangement
is supported by a letter of credit for drawings by the counterparty of up to
$6.5 million. For the three months ended April 30, 2001, the Company recognized
hedging losses of $0.2 million under this contract. At April 30, 2001, the
Company estimated that this contract had no value.
Because substantially all of its long-term obligations at April 30, 2001
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($3.7 million
outstanding at April 30, 2001) are subject to a rate of interest that fluctuates
based on short-term interest rates. The Company had no open interest rate hedge
positions at April 30, 2001.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash financing activities
(in thousands of dollars):
THREE MONTHS ENDED
APRIL 30,
-------------------
2001 2000
------- -------
Financing activities:
Accretion of preferred stock .......................... $ 9,641 $ 4,920
======= =======
Cancellation of old common stock ...................... $ -- $ 740
======= =======
Issuance of new common stock .......................... $ -- $ 12
======= =======
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
TransTexas is a party to various claims and routine litigation arising in
the normal course of its business. Any obligations of the Company in respect of
such claims and litigation arising out of activities prior to the Petition Date
were discharged or otherwise disposed of pursuant to the Plan. Recovery of these
obligations, if any, will be limited to any collateral held by the claimant
and/or such claimant's pro rata share of amounts available to pay general
unsecured claims.
Palmyra Minerals. The suit concerns the claims of several royalty owners,
Palmyra Minerals Ltd., et al., under several oil and gas leases held by
TransTexas. Plaintiffs allege that TransTexas underpaid royalties due the
plaintiffs under the leases back to the date of first production from the
involved wells. Plaintiffs claim approximately $2.8 million, including alleged
underpayments and interest thereon. Plaintiffs assert entitlement to recovery
under various theories including breach of contract, violation of Section
91.401, et seq., of the Texas Natural Resources Code, breach of the implied and
express duty to market, negligence per se, and constructive trust. The
plaintiffs asserted identical claims in TransTexas' bankruptcy proceeding. The
claims have been consolidated with the adversary proceeding. This matter was
tried in the Bankruptcy Court on February 13 and 14, 2001. No decision has yet
been rendered. The Bankruptcy Court requested that post-trial briefs that are
currently scheduled to be filed on June 15, 2001. A related issue presented to
the Bankruptcy Court was whether the discharge afforded by the confirmation of
TransTexas' plan of reorganization would preclude termination of such leases. An
adverse judgment in this consolidated action could result in termination of
these leasehold interests should TransTexas fail to pay the amount of the
judgment.
Environmental Matters
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. Certain aspects of TransTexas' operations may not be in
compliance with applicable environmental laws and regulations, and such
noncompliance may give rise to compliance costs and administrative penalties. It
is not anticipated that TransTexas will be required in the near future to expend
amounts that are material to the financial condition or operations of TransTexas
by reason of environmental laws and regulations, but because such laws and
regulations are frequently changed and, as a result, may impose increasingly
strict requirements, TransTexas is unable to predict the ultimate cost of
complying with such laws and regulations.
Potential Tax Liabilities
Part of the debt refinancing of TransAmerican Natural Gas Corporation
("TransAmerican") in 1993 involved the cancellation of approximately $65.9
million of accrued interest and of a contingent liability for interest of $102
million owed by TransAmerican. TransAmerican has taken the federal tax position
that the entire amount of this debt cancellation is excluded from its income
under the cancellation of indebtedness provision (the "COD Exclusion") of the
Internal Revenue Code of 1986, as amended (the "Tax Code"), and has reduced its
tax attributes (including its net operating loss and credit carryforwards) as a
consequence of the COD Exclusion. No federal tax opinion was rendered with
respect to this transaction, however, and TransAmerican has not obtained a
ruling from the Internal Revenue Service ("IRS") regarding this transaction.
TransTexas believes that there is substantial legal authority to support the
position that the COD Exclusion applies to the cancellation of TransAmerican's
indebtedness. However, due to factual and legal uncertainties, there can be no
assurance that the IRS will not challenge this position, or that any such
challenge would not be upheld. Prior to the Effective Date, TransTexas filed a
consolidated tax return with TransAmerican. Income taxes were due from or
payable to TransAmerican in accordance with a tax allocation agreement, as
amended, between TransTexas, TNGC Holdings Corporation, TransAmerican and
TransAmerican's other subsidiaries (the "Tax Allocation Agreement"). Under the
Tax Allocation Agreement, TransTexas has agreed to pay an amount equal to any
federal tax liability (which would be
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
approximately $25.4 million) attributable to the inapplicability of the COD
Exclusion. Any such tax would be offset in future years by alternative minimum
tax credits and retained loss and credit carryforwards to the extent recoverable
from TransAmerican.
As a former member of the affiliated group for tax purposes (the "TNGC
Consolidated Group") which included TNGC Holdings Corporation ("TNGC"), the sole
stockholder of TransAmerican, TransAmerican, TransAmerican Energy Corporation,
TransTexas and TransAmerican Refining Corporation, TransTexas will be severally
liable for any tax liability resulting from any transaction of the TNGC
Consolidated Group that occurred during any taxable year of the TNGC
Consolidated Group during which TransTexas was a member, including the
above-described transaction. The IRS has commenced an audit of the consolidated
federal income tax returns of the TNGC Consolidated Group for its taxable years
ended July 31, 1994 and July 31, 1995. The Company has not been advised by the
IRS as to whether any tax deficiencies will be proposed by the IRS as a result
of its review.
TransTexas expects that a significant portion of its net operating loss
carryovers ("NOLs") will be eliminated and the use of those NOLs that are not
eliminated will be severely restricted as a consequence of the Plan. In
addition, certain other tax attributes of TransTexas may under certain
circumstances be eliminated or reduced as a consequence of the Plan. The
potential elimination or reduction of NOLs and such other tax attributes may
substantially increase the amount of tax payable by TransTexas.
Gas Delivery Commitments
TransTexas has entered into contracts with Tejas Ship Channel LLC for
transportation of its production from the Eagle Bay field to the Winnie
facilities at a fixed negotiated rate. Under these contracts, the Company is
committed to deliver up to 75% of the initial 100,000 MMBtu per day of natural
gas and associated condensate.
The Company also entered into a contract with Centana Intrastate Pipeline
Company for transportation of natural gas on a firm and interruptible basis from
the Winnie facility to natural gas liquids recovery facilities located in the
Beaumont/Port Arthur, Texas area, and residue gas from these facilities to
various distribution points. Under the agreement, the Company is committed to
deliver up to a maximum of 56,250 Mcf of natural gas and 19,500 MMBtu of residue
gas per day. Transportation fees for natural gas and residue gas are based on
fixed negotiated rates.
7. PREFERRED STOCK DIVIDENDS
On January 31, 2001, the Board of Directors of the Company authorized the
payment of quarterly dividends to the holders of the Company's Preferred Stock
of record on March 1, 2001. The quarterly dividends were paid in-kind on March
15, 2001 in additional shares of Preferred Stock of the same class at an annual
rate of $0.20 per share for each share of Series A Senior Preferred Stock and at
an annual rate of $0.10 per share for each of Series A Junior Preferred Stock in
accordance with the Certificate of Designation for Series A Senior Preferred
Stock and the Certificate of Designation for Series A Junior Preferred Stock,
respectively. Fractional shares were not issued but were settled in cash.
8. SUPPLEMENTAL GUARANTOR INFORMATION
Galveston Bay Pipeline Company and Galveston Bay Processing Corporation are
guarantors of the 15% Senior Secured Notes due 2005 (the "Notes") and the Oil
and Gas Facility. Separate financial statements of the Guarantors are not
considered to be material to holders of the Notes and GMACC. The following
condensed consolidating financial statements present supplemental information of
the Guarantors as of and for the three months ended April 30, 2001.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 19,129 $ 67 $ 334 $ -- $ 19,530
Accounts receivable, net .......................... 26,482 -- 505 -- 26,987
Receivables from affiliates ....................... 13,001 -- -- (12,994) 7
Inventories ....................................... 1,844 -- -- -- 1,844
Other current assets .............................. 1,956 184 2 -- 2,142
--------- --------- --------- --------- ---------
Total current assets .......................... 62,412 251 841 (12,994) 50,510
--------- --------- --------- --------- ---------
Property and equipment ............................ 439,905 2,048 10,902 -- 452,855
Less accumulated depreciation, depletion and
amortization ..................................... 99,093 382 2,334 -- 101,809
--------- --------- --------- --------- ---------
Net property and equipment .................... 340,812 1,666 8,568 -- 351,046
--------- --------- --------- --------- ---------
Other assets ...................................... 2,683 -- -- (2) 2,681
--------- --------- --------- --------- ---------
$ 405,907 $ 1,917 $ 9,409 $ (12,996) $ 404,237
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .............. $ 3,486 $ -- $ 68 $ -- $ 3,554
Accounts payable .................................. 17,565 6 246 -- 17,817
Accrued liabilities ............................... 19,683 -- 30 -- 19,713
--------- --------- --------- --------- ---------
Total current liabilities ..................... 40,734 6 344 -- 41,084
--------- --------- --------- --------- ---------
Payable to affiliates ................................ -- 1,518 11,476 (12,994) --
Long-term debt, net of current maturities ............ 265,449 825 200 -- 266,474
Production payments, net of current portion .......... 28,590 -- -- -- 28,590
Deferred income taxes ................................ 12,342 -- -- -- 12,342
Other liabilities .................................... 7,799 -- -- -- 7,799
Redeemable preferred stock ........................... 35,363 -- -- -- 35,363
Stockholders' equity (deficit):
Common stock ...................................... 12 -- -- -- 12
Additional paid-in capital ........................ 25,013 1 1 (2) 25,013
Accumulated deficit ............................... (9,395) (433) (2,612) -- (12,440)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) .......... 15,630 (432) (2,611) (2) 12,585
--------- --------- --------- --------- ---------
$ 405,907 $ 1,917 $ 9,409 $ (12,996) $ 404,237
========= ========= ========= ========= =========
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 19,902 $ 39 $ 774 $ -- $ 20,715
Accounts receivable ............................... 42,127 -- 406 -- 42,533
Receivables from affiliates ....................... 11,660 -- -- (11,639) 21
Inventories ....................................... 1,476 -- -- -- 1,476
Other ............................................. 2,486 -- 35 -- 2,521
--------- --------- --------- --------- ---------
Total current assets .......................... 77,651 39 1,215 (11,639) 67,266
--------- --------- --------- --------- ---------
Property and equipment ............................... 401,290 1,917 10,604 -- 413,811
Less accumulated depreciation, depletion and
amortization ...................................... 79,181 314 1,988 -- 81,483
--------- --------- --------- --------- ---------
Net property and equipment .................... 322,109 1,603 8,616 -- 332,328
--------- --------- --------- --------- ---------
Other assets ......................................... 2,651 -- -- (2) 2,649
--------- --------- --------- --------- ---------
$ 402,411 $ 1,642 $ 9,831 $ (11,641) $ 402,243
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .............. $ 3,641 $ 14 $ 614 $ -- $ 4,269
Accounts payable .................................. 9,070 27 158 -- 9,255
Accrued liabilities ............................... 33,145 -- 8 -- 33,153
--------- --------- --------- --------- ---------
Total current liabilities ..................... 45,856 41 780 -- 46,677
--------- --------- --------- --------- ---------
Payable to affiliates ................................ -- 1,114 10,525 (11,639) --
Long-term debt, net of current maturities ............ 280,240 828 203 -- 281,271
Production payments, net of current portion .......... 12,732 -- -- -- 12,732
Deferred income taxes ................................ 9,984 -- -- -- 9,984
Other liabilities .................................... 8,011 -- -- -- 8,011
Redeemable preferred stock ........................... 25,722 -- -- -- 25,722
Stockholders' equity (deficit):
Common stock ...................................... 12 -- -- -- 12
Additional paid-in capital ........................ 25,013 1 1 (2) 25,013
Accumulated deficit ............................... (5,159) (342) (1,678) -- (7,179)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ...... 19,866 (341) (1,677) (2) 17,846
--------- --------- --------- --------- ---------
$ 402,411 $ 1,642 $ 9,831 $ (11,641) $ 402,243
========= ========= ========= ========= =========
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ........... $ 47,070 $ -- $ -- $ -- $ 47,070
Other ............................................. 51 52 1,177 (933) 347
--------- --------- --------- --------- ---------
Total revenues .................................. 47,121 52 1,177 (933) 47,417
--------- --------- --------- --------- ---------
Costs and expenses:
Operating ......................................... 4,487 1 1,334 (933) 4,889
Depreciation, depletion and amortization .......... 19,919 68 346 -- 20,333
General and administrative ........................ 5,391 (1) 1 -- 5,391
Taxes other than income taxes ..................... 1,811 -- 35 -- 1,846
--------- --------- --------- --------- ---------
Total costs and expenses ........................ 31,608 68 1,716 (933) 32,459
--------- --------- --------- --------- ---------
Operating income (loss) ......................... 15,513 (16) (539) -- 14,958
--------- --------- --------- --------- ---------
Other income (expense):
Interest income ................................... 290 -- 2 -- 292
Interest expense, net ............................. (8,040) (75) (397) -- (8,512)
--------- --------- --------- --------- ---------
Total other expense ............................. (7,750) (75) (395) -- (8,220)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............... 7,763 (91) (934) -- 6,738
Income taxes -- deferred ............................. 2,358 -- -- -- 2,358
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 5,405 $ (91) $ (934) $ -- $ 4,380
========= ========= ========= ========= =========
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ........... $ 38,032 $ -- $ -- $ -- $ 38,032
Other ............................................. 36 215 2,116 (1,790) 577
--------- --------- --------- --------- ---------
Total revenues .................................. 38,068 215 2,116 (1,790) 38,609
--------- --------- --------- --------- ---------
Costs and expenses:
Operating ......................................... 3,970 1 1,153 (1,790) 3,334
Depreciation, depletion and amortization .......... 20,742 77 610 -- 21,429
General and administrative ........................ 5,184 123 105 -- 5,412
Taxes other than income taxes ..................... 1,438 17 30 -- 1,485
--------- --------- --------- --------- ---------
Total costs and expenses ........................ 31,334 218 1,898 (1,790) 31,660
--------- --------- --------- --------- ---------
Operating income (loss) ......................... 6,734 (3) 218 -- 6,949
--------- --------- --------- --------- ---------
Other income (expense):
Interest income ................................... 173 -- -- -- 173
Interest expense, net ............................. (9,098) (161) (95) -- (9,354)
--------- --------- --------- --------- ---------
Total other expense ............................. (8,925) (161) (95) -- (9,181)
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ (2,191) $ (164) $ 123 $ -- $ (2,232)
========= ========= ========= ========= =========
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Operating activities:
Net income (loss) ................................. $ 5,405 $ (91) $ (934) $ -- $ 4,380
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization ........ 19,919 68 346 -- 20,333
Accretion of discount on long-term debt ......... 50 10 21 -- 81
Amortization of debt issue costs ................ 124 -- -- -- 124
Deferred income taxes ........................... 2,358 -- -- -- 2,358
Changes in assets and liabilities:
Accounts receivable ........................... 15,645 -- (99) -- 15,546
Receivable from affiliates .................... (1,341) -- -- 1,355 14
Inventories ................................... (368) -- -- -- (368)
Other current assets .......................... 530 (184) 33 -- 379
Accounts payable .............................. 8,495 (21) 88 -- 8,562
Accrued liabilities ........................... (13,071) -- 22 -- (13,049)
Transactions with affiliates, net ............. -- 404 951 (1,355) --
Other assets .................................. (4) -- -- -- (4)
Other liabilities ............................. (212) -- -- -- (212)
--------- --------- --------- --------- ---------
Net cash provided by
operating activities ....................... 37,530 186 428 -- 38,144
--------- --------- --------- --------- ---------
Investing activities:
Capital expenditures .............................. (38,551) (131) (298) -- (38,980)
Proceeds from the sale of assets .................. 2 -- -- -- 2
--------- --------- --------- --------- ---------
Net cash used by investing activities ....... (38,549) (131) (298) -- (38,978)
--------- --------- --------- --------- ---------
Financing activities:
Issuance of production payments ................... 19,800 -- -- -- 19,800
Principal payments on production payments ......... (4,333) -- -- -- (4,333)
Issuance of long-term debt ........................ -- -- 29 -- 29
Principal payments on long-term debt .............. (738) (27) (599) -- (1,364)
Revolving credit agreement, net ................... (14,287) -- -- -- (14,287)
Debt issue costs .................................. (196) -- -- -- (196)
--------- --------- --------- --------- ---------
Net cash provided (used) by
financing activities ....................... 246 (27) (570) -- (351)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents ........................... (773) 28 (440) -- (1,185)
Beginning cash and cash equivalents .................. 19,902 39 774 -- 20,715
--------- --------- --------- --------- ---------
Ending cash and cash equivalents ..................... $ 19,129 $ 67 $ 334 $ -- $ 19,530
========= ========= ========= ========= =========
15
17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Operating activities:
Net income (loss) ................................. $ (2,191) $ (164) $ 123 $ -- $ (2,232)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation, depletion and amortization ...... 20,742 77 610 -- 21,429
Accretion of discount on long-term debt ....... 3,442 24 37 -- 3,503
Amortization of debt issue costs .............. 17 -- -- -- 17
Changes in assets and liabilities:
Accounts receivable ........................... (13,906) 110 171 -- (13,625)
Receivable from affiliates .................... 1,154 -- -- (1,146) 8
Inventories ................................... 455 -- -- -- 455
Other current assets .......................... (935) -- 16 -- (919)
Accounts payable .............................. (4,248) (3) 16 -- (4,235)
Accrued liabilities ........................... 6,392 2 28 -- 6,422
Transactions with affiliates, net ............. -- (327) (819) 1,146 --
Other assets .................................. (171) -- -- -- (171)
Other liabilities ............................. (25,052) -- -- -- (25,052)
--------- --------- --------- --------- ---------
Net cash provided (used) by
operating activities ........................ (14,301) (281) 182 -- (14,400)
--------- --------- --------- --------- ---------
Investing activities:
Capital expenditures .............................. (21,889) (166) (17) -- (22,072)
Proceeds from the sale of assets .................. 45 536 -- -- 581
--------- --------- --------- --------- ---------
Net cash provided (used) by
investing activities ........................ (21,844) 370 (17) -- (21,491)
--------- --------- --------- --------- ---------
Financing activities:
Issuance of production payments ................... 4,500 -- -- -- 4,500
Principal payments on production payments ......... (4,604) -- -- -- (4,604)
Issuance of long-term debt ........................ 32,500 -- -- -- 32,500
Principal payments on long-term debt .............. (11,884) (39) (219) -- (12,142)
Revolving credit agreement, net ................... 4,456 -- -- -- 4,456
Debt issue costs .................................. (1,955) -- -- -- (1,955)
--------- --------- --------- --------- ---------
Net cash provided (used) by
financing activities ........................ 23,013 (39) (219) -- 22,755
--------- --------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents ............................ (13,132) 50 (54) -- (13,136)
Beginning cash and cash equivalents .................. 17,851 44 393 -- 18,288
--------- --------- --------- --------- ---------
Ending cash and cash equivalents ..................... $ 4,719 $ 94 $ 339 $ -- $ 5,152
========= ========= ========= ========= =========
16
18
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
consolidated financial statements and notes thereto of TransTexas included
elsewhere in this report.
RESULTS OF OPERATIONS
General
TransTexas' results of operations are dependent upon natural gas production
volumes and unit prices from sales of natural gas, condensate and natural gas
liquids ("NGLs"). The profitability of TransTexas also depends on its ability to
minimize finding and lifting costs and maintain its reserve base while
maximizing production.
TransTexas' operating data for the three months ended April 30, 2001 and
2000 are as follows:
THREE MONTHS ENDED
APRIL 30,
------------------
2001 2000
------- -------
Sales volumes:
Gas (Bcf) .......................................................... 5.8 7.0
NGLs (MMgal) ....................................................... 12.6 12.8
Condensate (MBbls) ................................................. 301 448
Average prices:
Gas (dry) (per Mcf) ................................................ $ 5.95 $ 2.78
NGLs (per gallon) .................................................. .49 .45
Condensate and oil (per Bbl) ....................................... 27.80 28.35
Number of gross wells drilled ........................................... 4 3
Percentage of wells completed ........................................... 100% 33%
A summary of TransTexas' operating expenses is set forth below (in millions
of dollars):
THREE MONTHS ENDED
APRIL 30,
------------------
2001 2000
------- -------
Operating costs and expenses:
Lease .............................................................. $ 2.3 $ 1.4
Pipeline and gathering ............................................. 2.6 1.9
------- -------
4.9 3.3
Taxes other than income taxes (severance, property and other taxes) ..... 1.8 1.5
------- -------
$ 6.7 $ 4.8
======= =======
TransTexas' average depletion rates have been as follows:
THREE MONTHS ENDED
APRIL 30,
--------------------
2001 2000
------- -------
Depletion rates (per Mcfe) .............................................. $ 2.63 $ 2.17
======= =======
Three Months Ended April 30, 2001 Compared with the Three Months Ended
April 30, 2000
Gas, condensate and NGL revenues for the three months ended April 30, 2001
increased $9.0 million from the prior period, due primarily to higher prices for
natural gas that were partially offset by lower sales volumes and hedging
losses. The average monthly prices received per Mcf of gas ranged from $5.36 to
$6.73 in the three months ended April 30, 2001, compared to a range of $2.64 to
$3.01 in the prior period.
Lease operating expenses for the three months ended April 30, 2001
increased $0.9 million from the prior period due primarily to a general increase
in the cost for all categories of these expenses. Pipeline and gathering
expenses
17
19
increased $0.7 million from the prior period due primarily to the increased cost
of natural gas used in operations. Depreciation, depletion and amortization
expense for the three months ended April 30, 2001 decreased $1.1 million due to
lower natural gas and condensate sales volumes that were offset by a $0.46 per
Mcfe increase in the depletion rate. Taxes other than income taxes increased by
$0.3 million over the prior period due primarily to an increase in property
taxes. Interest expense for the three months ended April 30, 2001 decreased by
$0.8 million from the prior period due primarily to an overall decrease in the
amount of outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. This filing did not include the
Company's subsidiaries including Galveston Bay Processing Corporation and
Galveston Bay Pipeline Company. As a result of the Chapter 11 filing, the
Company was prohibited from paying, and creditors were prohibited from
attempting to collect, claims or debts arising prior to bankruptcy. The United
States Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division confirmed the Company's Second Amended, Modified and Restated Plan of
Reorganization dated January 25, 2000 (the "Plan") on February 7, 2000. The
Effective Date of the Plan is March 17, 2000.
On the Effective Date, the Company and GMAC Commercial Credit LLC ("GMACC")
entered into a Third Amended and Restated Accounts Receivable Management and
Security Agreement, dated as of March 15, 2000 (the "Accounts Receivable
Facility"). The Accounts Receivable Facility is a revolving credit facility
secured by accounts receivable and inventory. The maximum loan amount under the
facility is $20 million, against which the Company may from time to time,
subject to the conditions of the Accounts Receivable Facility, borrow, repay and
reborrow. Advances under the facility bear interest monthly in arrears at a rate
per annum equal to the higher of (i) the prime commercial lending rate of The
Bank of New York plus 1/2 of 1%, and (ii) the Federal Funds Rate plus 1%. As of
April 30, 2001, the outstanding principal balance under the Accounts Receivable
Facility was $3.7 million, with availability for additional advances of
approximately $12.4 million and will be due on March 14, 2005.
In March 2000, TransTexas entered into a production payment drilling
program agreement with two unaffiliated third parties in the form of a term
overriding royalty interest carved out of and burdening certain properties
("Subject Interests"). The Company has the right to offer additional interests
to the production payment parties at a negotiated purchase price, up to an
aggregate maximum amount of $52 million. The production payment calls for the
repayment of the primary sum plus an amount equivalent to a 15% annual interest
rate on the unpaid portion of such primary sum. In February 2001, the Company
closed a Fourth Supplement to the production payment whereby the Company
received $19.8 million in exchange for additional properties being made subject
to the production payment. As of April 30, 2001, the aggregate purchase price of
all interests purchased pursuant to this production payment drilling program was
$46.8 million and the outstanding balance of the production payment was $30.3
million, of which $1.7 million attributable to produced volumes is included in
accrued liabilities. The Oil and Gas Revolving Credit Term Loan Agreement (the
"Oil and Gas Facility") entered into by the Company, as borrower, Galveston Bay
Processing Corporation and Galveston Bay Pipeline Company, as Guarantors, and
with GMACC, as a Lender and as Agent, places certain restrictions on the amount
that may be outstanding under the production payment.
TransTexas is highly leveraged and has significant cash requirements for
debt service and significant charges for Preferred Stock dividends to net income
available for common stockholders.
In order to maintain or increase proved oil and gas reserves, TransTexas
must continue to make substantial capital expenditures for the exploration and
development of its natural gas and oil prospects. For the three months ended
April 30, 2001, total capital expenditures incurred were $39 million, including
$5 million for nonproducing leases and seismic, $32 million for drilling and
development and $2 million for gas gathering and other equipment. Capital
expenditures for fiscal 2002 are estimated to be approximately $114 million.
Management plans to fund TransTexas 2002 debt service requirements and capital
expenditures with cash flows from existing producing properties, certain
identified relatively low risk exploratory prospects to be drilled and completed
during fiscal 2002 and additional production payment financing. Should
TransTexas' drilling prospects not be productive or should oil and gas prices
decline for a prolonged period, absent other sources of capital, the Company
would substantially reduce its capital expenditures, which would limit its
ability to maintain or increase production and in turn meet its debt service
requirements. Asset sales and financings are restricted under the terms of
TransTexas' debt documents and Series A Senior Preferred Stock (the "Senior
Preferred Stock").
18
20
The unaffiliated third-party owner of the pipeline that is used to
transport the Company's production from the Eagle Bay field shut-in that
pipeline from May 1-15, 2001. This shut-in period was mandated by regulatory
agencies responsible for the Galveston Bay marine area and resulted in a
permanent adjustment in the pipeline's depth. The Company estimates that its
second quarter total revenues will be reduced by approximately $7 million and
its cash flow from operating activities will be proportionately reduced due to
the modifications to this pipeline.
Potential Tax Liabilities
Part of the debt refinancing of TransAmerican Natural Gas Corporation
("TransAmerican") in 1993 involved the cancellation of approximately $65.9
million of accrued interest and of a contingent liability for interest of $102
million owed by TransAmerican. TransAmerican has taken the federal tax position
that the entire amount of this debt cancellation is excluded from its income
under the cancellation of indebtedness provision (the "COD Exclusion") of the
Internal Revenue Code of 1986, as amended (the "Tax Code"), and has reduced its
tax attributes (including its net operating loss and credit carryforwards) as a
consequence of the COD Exclusion. No federal tax opinion was rendered with
respect to this transaction, however, and TransAmerican has not obtained a
ruling from the Internal Revenue Service ("IRS") regarding this transaction.
TransTexas believes that there is substantial legal authority to support the
position that the COD Exclusion applies to the cancellation of TransAmerican's
indebtedness. However, due to factual and legal uncertainties, there can be no
assurance that the IRS will not challenge this position, or that any such
challenge would not be upheld. Prior to the Effective Date, TransTexas filed a
consolidated tax return with TransAmerican. Income taxes were due from or
payable to TransAmerican in accordance with a tax allocation agreement, as
amended, between TransTexas, TNGC Holdings Corporation, TransAmerican and
TransAmerican's other subsidiaries (the "Tax Allocation Agreement"). Under the
Tax Allocation Agreement, TransTexas has agreed to pay an amount equal to any
federal tax liability (which would be approximately $25.4 million) attributable
to the inapplicability of the COD Exclusion. Any such tax would be offset in
future years by alternative minimum tax credits and retained loss and credit
carryforwards to the extent recoverable from TransAmerican.
As a former member of the affiliated group for tax purposes (the "TNGC
Consolidated Group") which included TNGC Holdings Corporation ("TNGC"), the sole
stockholder of TransAmerican, TransAmerican, TransAmerican Energy Corporation,
TransTexas and TransAmerican Refining Corporation, TransTexas will be severally
liable for any tax liability resulting from any transaction of the TNGC
Consolidated Group that occurred during any taxable year of the TNGC
Consolidated Group during which TransTexas was a member, including the
above-described transaction. The IRS has commenced an audit of the consolidated
federal income tax returns of the TNGC Consolidated Group for its taxable years
ended July 31, 1994 and July 31, 1995. The Company has not been advised by the
IRS as to whether any tax deficiencies will be proposed by the IRS as a result
of its review.
TransTexas expects that a significant portion of its net operating loss
carryovers ("NOLs") will be eliminated and the use of those NOLs that are not
eliminated will be severely restricted as a consequence of the Plan. In
addition, certain other tax attributes of TransTexas may under certain
circumstances be eliminated or reduced as a consequence of the Plan. The
potential elimination or reduction of NOLs and such other tax attributes may
substantially increase the amount of tax payable by TransTexas.
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. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes 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 fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, competition and the ultimate
resolution of litigation.
19
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from adverse changes in prices for
natural gas, condensate and oil and interest rates as discussed below.
The Company's revenues, profitability, access to capital and future rate of
growth are substantially dependent upon the prevailing prices of natural gas,
condensate and oil. These prices are subject to wide fluctuations in response to
relatively minor changes in supply and demand and a variety of additional
factors beyond the Company's control. From time to time, the Company has
utilized hedging transactions with respect to a portion of its gas and oil
production to achieve a more predictable cash flow, as well as to reduce
exposure to price fluctuations. While hedging limits the downside risk of
adverse price movements, it may also limit future revenues from favorable price
movements. Because gains or losses associated with hedging transactions are
included in gas and oil revenues when the hedged volumes are delivered, such
gains and losses are generally offset by similar changes in the realized prices
of commodities.
Pursuant to the terms of the Company's production payment agreement entered
into in March 2000, the production payment purchasers entered into the following
hedge arrangements with respect to a portion of the natural gas and condensate
production associated therewith and which effectively hedge a portion of the
Company's production:
CONTRACT PRICE
-------------------
TOTAL COLLAR
VOLUMES IN -------------------
PERIOD MMBTUS/BBLS FLOOR CEILING
- - ----- ----------- ------- -------
Natural gas:
February 2001 -- March 2001 ...... 737,500 $ 2.35 $ 3.95
Condensate:
February 2001 -- March 2001 ...... 59,000 18.50 29.25
Under these contracts, the counterparty was required to make payment to the
production payment purchaser if the settlement price (based on New York
Merchantile Exchange prices) for the period was below the floor, and the
production payment purchaser was required to make payment to the counterparty if
the settlement price for any period was above the ceiling price. For the three
months ended April 30, 2001, the Company recognized losses of $1.6 million under
these contracts. The Company has been advised that the production payment
purchasers are examining the possibility of entering into additional hedging
arrangements in connection with the production payment agreement.
In November 2000, the Company entered into the following commodity price
hedging arrangement with respect to a portion of the Company's natural gas
production.
CONTRACT PRICE
-------------------
TOTAL COLLAR
VOLUMES IN -------------------
PERIOD MMBTUS/BBLS FLOOR CEILING
- - ----- ----------- ------- -------
Natural gas:
February 2001 -- November 2001 ..... 6,060,000 $ 3.50 $ 6.00
Under terms of this collar transaction, the counterparty is required to
make payment to the Company if the settlement price (based on a published
industry index of natural gas prices at Houston Ship Channel) for any settlement
period is below the floor price for such transaction and the Company is required
to make payment to the counterparty if the settlement price for any settlement
period is above the ceiling price for such transaction. This hedging arrangement
is supported by a letter of credit for drawings by the counterparty of up to
$6.5 million. For the three months ended April 30, 2001, the Company recognized
hedging losses of $0.2 million under this contract. At April 30, 2001, the
Company estimated that this contract had no value.
Because substantially all of its long-term obligations at April 30, 2001
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($3.7 million
outstanding at April 30, 2001) are subject to a rate of interest that fluctuates
based on short-term interest rates. The Company had no open interest rate hedge
positions at April 30, 2001.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the condensed consolidated financial statements for a
discussion of TransTexas' legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 -- Employment Agreement dated March 5, 2001 between TransTexas and
Arnold Brackenridge.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended
April 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTEXAS GAS CORPORATION
By: /s/ ED DONAHUE
------------------------------------------
Ed Donahue
Vice President and Chief Financial Officer
June 14, 2001
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- - ------- -----------
10.1 -- Employment Agreement dated March 5, 2001 between TransTexas and
Arnold Brackenridge.