1
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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 JULY 31, 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
September 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
<Table>
<Caption>
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements:
Report of Independent Accountants..................................................... 2
Condensed Consolidated Balance Sheet as of July 31, 2001 and January 31, 2001......... 3
Condensed Consolidated Statement of Operations for the Three and Six Months Ended
July 31, 2001 and 2000............................................................. 4
Condensed Consolidated Statement of Cash Flows for the Six Months Ended
July 31, 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............................................................................ 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders...................................... 25
Item 6. Exhibits and Reports on Form 8-K......................................................... 25
Signature........................................................................................... 26
</Table>
1
3
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 July 31, 2001, and the related
condensed consolidated statements of operations for the three and six month
periods ended July 31, 2001 and 2000 and the consolidated statement of cash
flows for the six months ended July 31, 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
September 14, 2001
2
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
JULY 31, JANUARY 31,
2001 2001
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 6,326 $ 20,715
Accounts receivable .............................................. 20,840 42,533
Receivable from affiliates ....................................... 13 21
Inventories ...................................................... 1,779 1,476
Other ............................................................ 1,685 2,521
---------- -----------
Total current assets ........................................ 30,643 67,266
---------- -----------
Property and equipment .............................................. 509,906 413,811
Less accumulated depreciation, depletion and amortization ........... 179,382 81,483
---------- -----------
Net property and equipment - based on the full cost method of
accounting for gas and oil properties of which $87,002 and
$81,381 was excluded from amortization at July 31, 2001
and January 31, 2001, respectively ............................. 330,524 332,328
---------- -----------
Other assets ........................................................ 2,509 2,649
---------- -----------
$ 363,676 $ 402,243
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ............................. $ 3,186 $ 4,269
Accounts payable ................................................. 24,676 9,255
Accrued liabilities .............................................. 27,286 33,153
---------- -----------
Total current liabilities ................................... 55,148 46,677
---------- -----------
Long-term debt, net of current maturities ........................... 268,400 281,271
Production payments, net of current portion ......................... 40,604 12,732
Deferred income taxes ............................................... -- 9,984
Other liabilities ................................................... 7,586 8,011
Redeemable preferred stock .......................................... 46,224 25,722
Commitments and contingencies (Note 6) .............................. -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value, 100,247,500 shares
authorized at July 31, 2001 and 1,250,251 shares issued
and outstanding at July 31, 2001 and January 31, 2001 .......... 12 12
Additional paid-in capital ....................................... 25,013 25,013
Accumulated deficit .............................................. (79,707) (7,179)
Accumulated other comprehensive income ........................... 396 --
---------- -----------
Total stockholders' equity (deficit) ........................ (54,286) 17,846
---------- -----------
$ 363,676 $ 402,243
========== ===========
</Table>
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)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ................. $ 29,837 $ 43,625 $ 76,907 $ 81,657
Other ................................................... 125 615 472 1,192
------------ ------------ ------------ ------------
Total revenues ........................................ 29,962 44,240 77,379 82,849
------------ ------------ ------------ ------------
Costs and expenses:
Operating ............................................... 6,277 5,810 11,166 9,144
Depreciation, depletion and amortization ................ 20,749 18,499 41,082 39,928
General and administrative .............................. 5,037 4,565 10,428 9,977
Taxes other than income taxes ........................... 1,652 2,160 3,498 3,645
Impairment of gas and oil properties .................... 56,827 -- 56,827 --
------------ ------------ ------------ ------------
Total costs and expenses .............................. 90,542 31,034 123,001 62,694
------------ ------------ ------------ ------------
Operating income (loss) ............................... (60,580) 13,206 (45,622) 20,155
------------ ------------ ------------ ------------
Other income (expense):
Interest income ......................................... 146 147 438 320
Interest expense, net ................................... (8,314) (8,529) (16,826) (17,883)
------------ ------------ ------------ ------------
Total other expense ................................... (8,168) (8,382) (16,388) (17,563)
------------ ------------ ------------ ------------
Income (loss) before income taxes ..................... (68,748) 4,824 (62,010) 2,592
Income tax expense (benefit) - deferred .................... (12,342) 907 (9,984) 907
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (56,406) $ 3,917 $ (52,026) $ 1,685
============ ============ ============ ============
Accretion of preferred stock ............................... $ 10,861 $ 10,201 $ 20,502 $ 15,121
============ ============ ============ ============
Net loss available to common stockholders ............. $ (67,267) $ (6,284) $ (72,528) $ (13,436)
============ ============ ============ ============
Basic and diluted net loss per share ....................... $ (53.80) $ (5.03) $ (58.01) $ (10.75)
============ ============ ============ ============
Weighted average number of shares outstanding for basic
and diluted net loss per share .......................... 1,250,251 1,250,251 1,250,251 1,250,251
============ ============ ============ ============
</Table>
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)
<Table>
<Caption>
SIX MONTHS ENDED
JULY 31,
------------------------
2001 2000
---------- ----------
Operating activities:
Net income (loss) ..................................................... $ (52,026) $ 1,685
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization ........................... 41,082 39,928
Impairment of gas and oil properties ............................... 56,827 --
Accretion of discount on long-term debt ............................ (15) 3,591
Amortization of debt issue costs ................................... 246 111
Deferred income taxes .............................................. (9,984) 907
Changes in assets and liabilities:
Accounts receivable .............................................. 21,693 (16,807)
Receivable from affiliates ....................................... 8 (9)
Inventories ...................................................... (303) 384
Other current assets ............................................. 1,232 (1,942)
Accounts payable ................................................. 15,421 (3,700)
Accrued liabilities .............................................. (4,491) 17,096
Other assets ..................................................... -- (169)
Other liabilities ................................................ (425) (25,264)
---------- ----------
Net cash provided by operating activities ..................... 69,265 15,811
---------- ----------
Investing activities:
Capital expenditures .................................................. (95,993) (47,378)
Proceeds from the sale of assets ...................................... 2 582
---------- ----------
Net cash used by investing activities ......................... (95,991) (46,796)
---------- ----------
Financing activities:
Issuance of production payments ....................................... 34,800 12,500
Principal payments on production payments ............................. (8,304) (16,723)
Issuance of long-term debt ............................................ -- 32,500
Principal payments on long-term debt .................................. (2,169) (13,379)
Revolving credit agreement, net ....................................... (11,794) 7,949
Debt issue costs ...................................................... (196) (2,379)
---------- ----------
Net cash provided by financing activities ..................... 12,337 20,468
---------- ----------
Decrease in cash and cash equivalents ......................... (14,389) (10,517)
Beginning cash and cash equivalents ...................................... 20,715 18,288
---------- ----------
Ending cash and cash equivalents ......................................... $ 6,326 $ 7,771
========== ==========
</Table>
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 July 31, 2001 and the results of its operations and cash flows for the
interim periods ended July 31, 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 upon the adoption of SFAS
133. During the six months ended July 31, 2001, decreases in the prevailing
commodity prices for oil and natural gas have reduced the fair value of the
Company's liability under its derivative instruments, which resulted in an
adjustment to comprehensive income. A summary of the Company's comprehensive
income and accumulated other comprehensive loss for the period ended July 31,
2001 is as follows (in thousands of dollars):
<Table>
<Caption>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
LOSS INCOME
------------- -------------
Balance at January 31, 2001.......................................... $ --
Net loss for the six months ended July 31, 2001...................... $ (52,026)
Cumulative effect of adopting SFAS 133............................... (1,282) (1,282)
Change in the fair value of hedge agreements......................... 534 534
Reclassification adjustments for hedge agreement settlements......... 1,144 1,144
------------- -------------
$ (51,630) $ 396
============= =============
</Table>
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, additional production payment financing and
sales of certain assets. 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%.
In July 2001, GMACC agreed to make advances of $3.0 million in excess of a
predetermined formula ("Overadvances") used to calculate the amount that the
Company can borrow under the Accounts Receivable Facility. The Company utilized
the Overadvances in August 2001. These Overadvances will be repaid in monthly
installments of $1.0 million beginning September 2001. As of July 31, 2001, the
outstanding principal balance under the Accounts Receivable Facility was $6.2
million with availability for additional advances of approximately $5.2 million.
The Accounts Receivable Facility terminates 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. 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. In July 2001, the Company closed a
Fifth Supplement to the production payment whereby the Company received $15.0
million. In September 2001, the Company closed a Sixth and Seventh Supplement to
the production payment whereby the Company received $15.0 million. As of July
31, 2001, the aggregate purchase price of all interests purchased pursuant to
this production payment drilling program was $61.8 million and the outstanding
balance of the production payment was $41.3 million, of which $0.7 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. Certain of these restrictions were waived by the
required lenders in connection with the Sixth and Seventh Supplements to the
production payment.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
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:
<Table>
<Caption>
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
</Table>
Under these contracts, the counterparty was required to make payment to
the production payment purchaser if the settlement price (based on New York
Mercantile 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 six
months ended July 31, 2001, the Company recognized losses of $1.6 million under
these contracts.
In July and September 2001, the production payment purchasers entered into
the following hedging arrangements (settlement price based on a published
industry index of natural gas prices at Houston Ship Channel) with respect to a
portion of the Company's natural gas production:
<Table>
<Caption>
CONTRACT PRICE
-----------------
TOTAL COLLAR
VOLUMES IN -----------------
PERIOD MMBtus FLOOR CEILING
------ ----------- ------- -------
Natural gas:
August 2001 - July 2002........................ 2,555,000 $ 3.30 $ 3.95
November 2001 - March 2002..................... 1,510,000 2.85 3.30
April 2002 - October 2002...................... 1,070,000 2.85 3.35
</Table>
At July 31, 2001, the Company estimated that these contracts had no fair
value.
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:
<Table>
<Caption>
CONTRACT PRICE
-----------------
TOTAL COLLAR
VOLUMES IN -----------------
PERIOD MMBtus FLOOR CEILING
------ ----------- ------- -------
Natural gas:
February 2001 - November 2001.................. 6,060,000 $ 3.50 $ 6.00
</Table>
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 six months ended July 31, 2001, the Company recognized a
nominal hedging gain under this contract. At July 31, 2001, the Company
estimated that this contract had a value of approximately $0.4 million.
Because substantially all of its long-term obligations at July 31, 2001
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($6.2 million
outstanding at July
8
10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
31, 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 July
31, 2001.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash financing
activities (in thousands of dollars):
<Table>
<Caption>
SIX MONTHS ENDED
JULY 31,
-----------------------------
2001 2000
------------ ------------
Financing activities:
Accretion of preferred stock .................... $ 20,502 $ 15,121
============ ============
Cancellation of old common stock................. $ -- $ 740
============ ============
Issuance of new common stock..................... $ -- $ 12
============ ============
</Table>
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 alleged that TransTexas underpaid royalties due the
plaintiffs under the leases back to the date of first production from the
involved wells. Plaintiffs originally claimed approximately $2.8 million,
including alleged underpayments and interest thereon. Plaintiffs asserted
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 were 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. Post-trial briefs were
filed on September 12, 2001. The claims of all but one of the plaintiffs
have been settled. The sole remaining claim is for approximately $300,000.
TransTexas has paid the maximum potential recovery by the remaining plaintiff
into the registry of the Bankruptcy Court.
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.
9
11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
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 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.
10
12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
7. PREFERRED STOCK DIVIDENDS
On May 30, 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 June 1, 2001. The quarterly dividends were paid in-kind on June 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. IMPAIRMENT OF GAS AND OIL PROPERTIES
TransTexas uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, net capitalized costs of gas
and oil properties are limited to the lower of unamortized cost or the cost
center ceiling. As of July 31, 2001, TransTexas' net capitalized costs of gas
and oil properties exceeded the cost center ceiling resulting in a non-cash
pre-tax loss of approximately $56.8 million for the three and six months ended
July 31, 2001.
9. 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 and six-month periods ended July 31,
2001.
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 5,967 $ 63 $ 296 $ -- $ 6,326
Accounts receivable, net ............................ 20,487 -- 353 -- 20,840
Receivables from affiliates ......................... 14,652 -- -- (14,639) 13
Inventories ......................................... 1,779 -- -- -- 1,779
Other current assets ................................ 1,495 184 6 -- 1,685
---------- --------- ---------- ------------ ------------
Total current assets ............................ 44,380 247 655 (14,639) 30,643
---------- --------- ---------- ------------ ------------
Property and equipment ................................. 496,163 2,225 11,518 -- 509,906
Less accumulated depreciation, depletion and
amortization ......................................... 176,222 450 2,710 -- 179,382
---------- --------- ---------- ------------ ------------
Net property and equipment ...................... 319,941 1,775 8,808 -- 330,524
---------- --------- ---------- ------------ ------------
Other assets ........................................... 2,511 -- -- (2) 2,509
---------- --------- ---------- ------------ ------------
$ 366,832 $ 2,022 $ 9,463 $ (14,641) $ 363,676
========== ========= ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ................. $ 3,116 $ -- $ 70 $ -- $ 3,186
Accounts payable ..................................... 24,280 48 348 -- 24,676
Accrued liabilities .................................. 27,233 -- 53 -- 27,286
---------- --------- ---------- ------------ ------------
Total current liabilities ....................... 54,629 48 471 -- 55,148
---------- --------- ---------- ------------ ------------
Payable to affiliates .................................. -- 1,663 12,976 (14,639) --
Long-term debt, net of current maturities .............. 267,415 803 182 -- 268,400
Production payments, net of current portion ............ 40,604 -- -- -- 40,604
Other liabilities ...................................... 7,586 -- -- -- 7,586
Redeemable preferred stock ............................. 46,224 -- -- -- 46,224
Stockholders' equity (deficit):
Common stock ......................................... 12 -- -- -- 12
Additional paid-in capital ........................... 25,013 1 1 (2) 25,013
Accumulated deficit .................................. (75,047) (493) (4,167) -- (79,707)
Accumulated other comprehensive income ............... 396 -- -- -- 396
---------- --------- ---------- ------------ ------------
Total stockholders' equity (deficit) ............ (49,626) (492) (4,166) (2) (54,286)
---------- --------- ---------- ------------ ------------
$ 366,832 $ 2,022 $ 9,463 $ (14,641) $ 363,676
========== ========= ========== ============ ============
</Table>
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
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
========== ========= ========== ============ ============
</Table>
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ............ $ 29,837 $ -- $ -- $ -- $ 29,837
Other .............................................. 17 89 430 (411) 125
---------- --------- ---------- ------------ ------------
Total revenues ................................... 29,854 89 430 (411) 29,962
---------- --------- ---------- ------------ ------------
Costs and expenses:
Operating .......................................... 5,515 3 1,170 (411) 6,277
Depreciation, depletion and amortization ........... 20,305 68 376 -- 20,749
General and administrative ......................... 5,004 1 32 -- 5,037
Taxes other than income taxes ...................... 1,627 1 24 -- 1,652
Impairment of gas and oil properties ............... 56,827 -- -- -- 56,827
---------- --------- ---------- ------------ ------------
Total costs and expenses ......................... 89,278 73 1,602 (411) 90,542
---------- --------- ---------- ------------ ------------
Operating income (loss) .......................... (59,424) 16 (1,172) -- (60,580)
---------- --------- ---------- ------------ ------------
Other income (expense):
Interest income .................................... 144 -- 2 -- 146
Interest expense, net .............................. (7,853) (76) (385) -- (8,314)
---------- --------- ---------- ------------ ------------
Total other expense .............................. (7,709) (76) (383) -- (8,168)
---------- --------- ---------- ------------ ------------
Loss before income taxes ......................... (67,133) (60) (1,555) -- (68,748)
Income tax benefit - deferred ......................... (12,342) -- -- -- (12,342)
---------- --------- ---------- ------------ ------------
Net loss ......................................... $ (54,791) $ (60) $ (1,555) $ -- $ (56,406)
========== ========= ========== ============ ============
</Table>
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ............ $ 43,625 $ -- $ -- $ -- $ 43,625
Other .............................................. 162 153 1,770 (1,470) 615
---------- --------- ---------- ------------ ------------
Total revenues ................................... 43,787 153 1,770 (1,470) 44,240
---------- --------- ---------- ------------ ------------
Costs and expenses:
Operating .......................................... 6,359 30 891 (1,470) 5,810
Depreciation depletion and amortization ............ 17,936 75 488 -- 18,499
General and administrative ......................... 4,456 -- 109 -- 4,565
Taxes other than income taxes ...................... 2,124 3 33 -- 2,160
---------- --------- ---------- ------------ ------------
Total costs and expenses ......................... 30,875 108 1,521 (1,470) 31,034
---------- --------- ---------- ------------ ------------
Operating income ................................. 12,912 45 249 -- 13,206
---------- --------- ---------- ------------ ------------
Other income expense:
Interest income .................................... 147 -- -- -- 147
Interest expense net ............................... (8,425) (43) (61) -- (8,529)
---------- --------- ---------- ------------ ------------
Total other expense .............................. (8,278) (43) (61) -- (8,382)
---------- --------- ---------- ------------ ------------
Income before income taxes ....................... 4,634 2 188 -- 4,824
Income taxes - deferred ............................... 907 -- -- -- 907
---------- --------- ---------- ------------ ------------
Net income ....................................... $ 3,727 $ 2 $ 188 $ -- $ 3,917
========== ========= ========== ============ ============
</Table>
15
17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ............ $ 76,907 $ -- $ -- $ -- $ 76,907
Other .............................................. 68 141 1,607 (1,344) 472
---------- --------- ---------- ------------ ------------
Total revenues ................................... 76,975 141 1,607 (1,344) 77,379
---------- --------- ---------- ------------ ------------
Costs and expenses:
Operating .......................................... 10,002 4 2,504 (1,344) 11,166
Depreciation, depletion and amortization ........... 40,224 136 722 -- 41,082
General and administrative ......................... 10,395 -- 33 -- 10,428
Taxes other than income taxes ...................... 3,438 1 59 -- 3,498
Impairment of gas and oil properties ............... 56,827 -- -- -- 56,827
---------- --------- ---------- ------------ ------------
Total costs and expenses ......................... 120,886 141 3,318 (1,344) 123,001
---------- --------- ---------- ------------ ------------
Operating loss ................................... (43,911) -- (1,711) -- (45,622)
---------- --------- ---------- ------------ ------------
Other income (expense):
Interest income .................................... 434 -- 4 -- 438
Interest expense, net .............................. (15,893) (151) (782) -- (16,826)
---------- --------- ---------- ------------ ------------
Total other expense .............................. (15,459) (151) (778) -- (16,388)
---------- --------- ---------- ------------ ------------
Loss before income taxes ......................... (59,370) (151) (2,489) -- (62,010)
Income tax benefit - deferred ......................... (9,984) -- -- -- (9,984)
---------- --------- ---------- ------------ ------------
Net loss ......................................... $ (49,386) $ (151) $ (2,489) $ -- $ (52,026)
========== ========= ========== ============ ============
</Table>
16
18
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ............ $ 81,657 $ -- $ -- $ -- $ 81,657
Other .............................................. 198 368 3,886 (3,260) 1,192
---------- --------- ---------- ------------ ------------
Total revenues ................................... 81,855 368 3,886 (3,260) 82,849
---------- --------- ---------- ------------ ------------
Costs and expenses:
Operating .......................................... 10,329 31 2,044 (3,260) 9,144
Depreciation, depletion and amortization ........... 38,678 152 1,098 -- 39,928
General and administrative ......................... 9,640 123 214 -- 9,977
Taxes other than income taxes ...................... 3,562 20 63 -- 3,645
---------- --------- ---------- ------------ ------------
Total costs and expenses ......................... 62,209 326 3,419 (3,260) 62,694
---------- --------- ---------- ------------ ------------
Operating income ................................. 19,646 42 467 -- 20,155
---------- --------- ---------- ------------ ------------
Other income (expense):
Interest income .................................... 320 -- -- -- 320
Interest expense, net .............................. (17,523) (204) (156) -- (17,883)
---------- --------- ---------- ------------ ------------
Total other expense .............................. (17,203) (204) (156) -- (17,563)
---------- --------- ---------- ------------ ------------
Income (loss) before income taxes ................ 2,443 (162) 311 -- 2,592
Income taxes - deferred ............................... 907 -- -- -- 907
---------- --------- ---------- ------------ ------------
Net income (loss) ................................ $ 1,536 $ (162) $ 311 $ -- $ 1,685
========== ========= ========== ============ ============
</Table>
17
19
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Operating activities:
Net loss ........................................... $ (49,386) $ (151) $ (2,489) $ -- $ (52,026)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation, depletion and amortization ......... 40,224 136 722 -- 41,082
Impairment of gas and oil properties ............. 56,827 -- -- -- 56,827
Accretion of discount on long-term debt .......... (64) 20 29 -- (15)
Amortization of debt issue costs ................. 246 -- -- -- 246
Deferred income taxes ............................ (9,984) -- -- -- (9,984)
Changes in assets and liabilities:
Accounts receivable ............................ 21,640 -- 53 -- 21,693
Receivable from affiliates ..................... (2,992) -- -- 3,000 8
Inventories .................................... (303) -- -- -- (303)
Other current assets ........................... 1,387 (184) 29 -- 1,232
Accounts payable ............................... 15,210 21 190 -- 15,421
Accrued liabilities ............................ (4,536) -- 45 -- (4,491)
Transactions with affiliates, net .............. -- 549 2,451 (3,000) --
Other liabilities .............................. (425) -- -- -- (425)
---------- --------- ---------- ------------ ------------
Net cash provided by
operating activities ........................ 67,844 391 1,030 -- 69,265
---------- --------- ---------- ------------ ------------
Investing activities:
Capital expenditures ............................... (94,800) (308) (885) -- (95,993)
Proceeds from the sale of assets ................... 2 -- -- -- 2
---------- --------- ---------- ------------ ------------
Net cash used by
investing activities ....................... (94,798) (308) (885) -- (95,991)
---------- --------- ---------- ------------ ------------
Financing activities:
Issuance of production payments .................... 34,800 -- -- -- 34,800
Principal payments on production payments .......... (8,304) -- -- -- (8,304)
Principal payments on long-term debt ............... (1,487) (59) (623) -- (2,169)
Revolving credit agreement, net .................... (11,794) -- -- -- (11,794)
Debt issue costs ................................... (196) -- -- -- (196)
---------- --------- ---------- ------------ ------------
Net cash provided (used) by
financing activities ........................ 13,019 (59) (623) -- 12,337
---------- --------- ---------- ------------ ------------
Increase (decrease) in cash and
cash equivalents ............................ (13,935) 24 (478) -- (14,389)
Beginning cash and cash equivalents ................... 19,902 39 774 -- 20,715
---------- --------- ---------- ------------ ------------
Ending cash and cash equivalents ...................... $ 5,967 $ 63 $ 296 $ -- $ 6,326
========== ========= ========== ============ ============
</Table>
18
20
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- --------- ---------- ------------ ------------
Operating activities:
Net income (loss) .................................. $ 1,536 $ (162) $ 311 $ -- $ 1,685
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation, depletion and amortization ........ 38,678 152 1,098 -- 39,928
Accretion of discount on long-term debt ......... 3,455 38 98 -- 3,591
Amortization of debt issue costs ................ 111 -- -- -- 111
Deferred income taxes ........................... 907 -- -- -- 907
Changes in assets and liabilities:
Accounts receivable ........................... (16,808) 110 (109) -- (16,807)
Receivable from affiliates .................... 1,100 -- -- (1,109) (9)
Inventories ................................... 384 -- -- -- 384
Other current assets .......................... (1,956) -- 14 -- (1,942)
Accounts payable .............................. (3,691) 26 (35) -- (3,700)
Accrued liabilities ........................... 17,034 5 57 -- 17,096
Transactions with affiliates, net ............. -- (259) (850) 1,109 --
Other assets .................................. (164) (5) -- -- (169)
Other liabilities ............................. (25,264) -- -- -- (25,264)
---------- --------- ---------- ------------ ------------
Net cash provided (used) by
operating activities ....................... 15,322 (95) 584 -- 15,811
---------- --------- ---------- ------------ ------------
Investing activities:
Capital expenditures ............................... (46,824) (299) (255) -- (47,378)
Proceeds from the sale of assets ................... 46 536 -- -- 582
---------- --------- ---------- ------------ ------------
Net cash provided (used) by
investing activities ....................... (46,778) 237 (255) -- (46,796)
---------- --------- ---------- ------------ ------------
Financing activities:
Issuance of production payments .................... 12,500 -- -- -- 12,500
Principal payments on production payments .......... (16,723) -- -- -- (16,723)
Issuance of long-term debt ......................... 32,500 -- -- -- 32,500
Principal payments on long-term debt ............... (12,620) (145) (614) -- (13,379)
Revolving credit agreement, net .................... 7,949 -- -- -- 7,949
Debt issue costs ................................... (2,379) -- -- -- (2,379)
---------- --------- ---------- ------------ ------------
Net cash provided (used) by
financing activities ....................... 21,227 (145) (614) -- 20,468
---------- --------- ---------- ------------ ------------
Decrease in cash and cash equivalents ....... (10,229) (3) (285) -- (10,517)
Beginning cash and cash equivalents ................... 17,851 44 393 -- 18,288
---------- --------- ---------- ------------ ------------
Ending cash and cash equivalents ...................... $ 7,622 $ 41 $ 108 $ -- $ 7,771
========== ========= ========== ============ ============
</Table>
19
21
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 and six months ended July 31,
2001 and 2000 are as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales volumes:
Gas (Bcf) ................................ 5.5 6.7 11.3 13.7
NGLs (MMgal) ............................. 4.2 18.3 16.8 31.1
Condensate (MBbls) ....................... 235 392 536 840
Average prices:
Gas (dry) (per Mcf) ...................... $ 4.04 $ 4.11 $ 5.02 $ 3.43
NGLs (per gallon) ........................ .37 .34 .45 .38
Condensate (per Bbl) ..................... 26.16 29.50 27.10 28.89
Number of gross wells drilled ................. 6 5 10 8
Percentage of wells completed ................. 100% 80% 100% 63%
</Table>
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Operating costs and expenses:
Lease...................................... $ 4.0 $ 3.8 $ 6.3 $ 5.2
Pipeline and gathering..................... 2.3 2.0 4.9 3.9
------------ ------------ ------------ ------------
6.3 5.8 11.2 9.1
Taxes other than income taxes
(severance, property and other taxes)..... 1.7 2.1 3.5 3.6
------------ ------------ ------------ ------------
$ 8.0 $ 7.9 $ 14.7 $ 12.7
============ ============ ============ ============
</Table>
TransTexas' average depletion rates have been as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Depletion rates (per Mcfe)...................... $ 2.92 $ 2.06 $ 2.77 $ 2.12
============ ============ ============ ============
</Table>
Three Months Ended July 31, 2001 Compared with the Three Months Ended July
31, 2000
Gas, condensate and NGL revenues for the three months ended July 31, 2001
decreased $13.8 million from the prior period, due primarily to lower sales
volumes for all products. A portion of the lower sales volumes was caused by the
unaffiliated third-party owner of the pipeline used to transport the Company's
production from the Eagle Bay field shutting-in that pipeline for modifications
from April 29 through May 19, 2001 and difficulties encountered in resuming full
production. This shut-in period was mandated by regulatory agencies responsible
for the Galveston Bay marine area. The average monthly prices
20
22
received per Mcf of gas ranged from $3.44 to $5.22 in the three months ended
July 31, 2001, compared to a range of $3.25 to $4.54 in the prior period.
Lease operating expenses for the three months ended July 31, 2001
increased $0.2 million from the prior period due primarily to an increase in
workover expenses. Pipeline and gathering expenses increased $0.3 million from
the prior period due primarily to increased labor costs. Depreciation, depletion
and amortization expense for the three months ended July 31, 2001 increased $2.3
million due to a $0.86 per Mcfe increase in the depletion rate. General and
administrative expenses increased $0.5 million primarily as a result of
increased personnel and related costs and professional fees. Taxes other than
income taxes decreased by $0.4 million over the prior period due primarily to
lower severance and production taxes. Interest expense for the three months
ended July 31, 2001 decreased by $0.2 million from the prior period due
primarily to a decrease in the amount of interest associated with reorganization
debt. The impairment loss relates to a write-down of $56.8 million of
TransTexas' net capitalized costs of gas and oil properties to the cost center
ceiling in accordance with the full cost method of accounting. The cost center
ceiling at July 31, 2001 decreased from that at April 30 and January 31, 2001
primarily due to a decrease in prices for natural gas and condensate.
Six Months Ended July 31, 2001 Compared With the Six Months Ended July 31,
2000
Gas, condensate and NGL revenues for the six months ended July 31, 2001
decreased $4.8 million from the prior period, due primarily to lower sales
volumes. A portion of the lower sales volumes was caused by the unaffiliated
third-party owner of the pipeline used to transport the Company's production
from the Eagle Bay field shutting-in that pipeline for modifications from April
29 through May 19, 2001 and difficulties encountered in resuming full
production. This shut-in period was mandated by regulatory agencies responsible
for the Galveston Bay marine area. The average monthly prices received per Mcf
of gas ranged from $3.44 to $6.73 in the six months ended July 31, 2001,
compared to a range of $2.64 to $4.54 in the prior period.
Lease operating expenses for the six months ended July 31, 2001 increased
$1.1 million from the prior period due primarily to an increase in workover
expenses and labor costs. Pipeline and gathering expenses increased $1.0 million
from the prior period due primarily to higher labor costs and the increased cost
of natural gas used in operations. Depreciation, depletion and amortization
expense for the six months ended July 31, 2001 increased $1.2 million due to a
$0.65 per Mcfe increase in the depletion rate. General and administrative
expenses increased $0.5 million primarily as a result of increased personnel and
related costs and professional fees. Interest expense for the six months ended
July 31, 2001 decreased by $1.1 million from the prior period due primarily to a
decrease in the amount of interest associated with reorganization debt. The
impairment loss relates to a write-down of $56.8 million of TransTexas' net
capitalized costs of gas and oil properties to the cost center ceiling in
accordance with the full cost method of accounting. The cost center ceiling at
July 31, 2001 decreased from that at April 30 and January 31, 2001 primarily due
to a decrease in prices for natural gas and condensate.
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%.
In July 2001, GMACC agreed to make advances of $3.0 million in excess of a
predetermined formula ("Overadvances") used to calculate the amount that the
Company can borrow under the Accounts Receivable Facility. The Company utilized
the Overadvances in August 2001.
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These Overadvances will be repaid in monthly installments of $1.0 million
beginning September 2001. As of July 31, 2001, the outstanding principal balance
under the Accounts Receivable Facility was $6.2 million with availability for
additional advances of approximately $5.2 million. The Accounts Receivable
Facility terminates 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. 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. In July 2001, the Company closed a
Fifth Supplement to the production payment whereby the Company received $15.0
million. In September 2001, the Company closed a Sixth and Seventh Supplement to
the production payment whereby the Company received $15.0 million. As of July
31, 2001, the aggregate purchase price of all interests purchased pursuant to
this production payment drilling program was $61.8 million and the outstanding
balance of the production payment was $41.3 million, of which $0.7 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. Certain of these restrictions were waived by the
required lenders in connection with the Sixth and Seventh Supplements to 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 six months ended July
31, 2001, total capital expenditures incurred were $96 million, including $6
million for nonproducing leases and seismic, $6 million for capitalized
interest, $78 million for drilling and development and $6 million for gas
gathering and other equipment. Capital expenditures for fiscal 2002 are
estimated to be approximately $130 million, including approximately $13 million
of capitalized interest. 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, additional production payment
financing and sales of certain assets. 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").
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.
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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 1995. The Company has not been advised by the IRS as to
whether any tax deficiencies will be proposed by the IRS as 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.
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:
<Table>
<Caption>
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
</Table>
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Under these contracts, the counterparty was required to make payment to
the production payment purchaser if the settlement price (based on New York
Mercantile 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 six
months ended July 31, 2001, the Company recognized losses of $1.6 million under
these contracts.
In July and September 2001, the production payment purchasers entered
into the following hedging arrangements (settlement price based on a published
industry index of natural gas prices at Houston Ship Channel) with respect to a
portion of the Company's natural gas production:
<Table>
<Caption>
CONTRACT PRICE
-----------------
TOTAL COLLAR
VOLUMES IN -----------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ------- -------
Natural gas:
August 2001 - July 2002...................... 2,555,000 $ 3.30 $ 3.95
November 2001 - March 2002................... 1,510,000 2.85 3.30
April 2002 - October 2002.................... 1,070,000 2.85 3.35
</Table>
At July 31, 2001, the Company estimated that these contracts had no fair
value.
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:
<Table>
<Caption>
CONTRACT PRICE
-----------------
TOTAL COLLAR
VOLUMES IN -----------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ------- -------
Natural gas:
February 2001 - November 2001............... 6,060,000 $ 3.50 $ 6.00
</Table>
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 six months ended July 31, 2001, the Company recognized a
nominal hedging gain under this contract. At July 31, 2001, the Company
estimated that this contract had value of approximately $0.4 million.
Because substantially all of its long-term obligations at July 31, 2001
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($6.2 million
outstanding at July 31, 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 July 31, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on June 27, 2001. The matters voted
on included:
1. The election of two persons to serve as Class I directors of the
Company for a three-year term. Votes representing shares of Series A
Senior Preferred Stock were cast (or shares were not voted) on this
proposal as follows:
<Table>
<Caption>
For Withheld Not Voted
------------ ---------- -------------
Ted E. Davis 162,937,857 33,408 107,424,540
Walter S. Piontek 162,937,857 33,408 107,424,540
</Table>
2. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants for fiscal year 2002. Votes representing shares
of all classes of stock were cast (or shares were not voted) on this
proposal as follows:
<Table>
<Caption>
For Withheld Abstained Not Voted
------------ ---------- ------------- -------------
182,587,841 22,368 5,855 111,896,664
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<Table>
<Caption>
Exhibit
Number Description
------- -----------
10.1 - Amendment No. 1 to Oil and Gas Revolving Credit and Term Loan
Agreement dated September 7, 2001 among GMAC Commercial Credit
LLC, as Lender and Agent, TransTexas as Borrower, and Galveston
Bay Processing Corporation and Galveston Bay Pipeline Company,
as Guarantors.
10.2 - Fifth Supplement to Purchase Agreement, dated July 9, 2001.
10.3 - Fifth Supplement to Production Payment Conveyance, dated
July 9, 2001.
10.4 - Sixth Supplement to Purchase Agreement, dated September 10,
2001.
10.5 - Sixth Supplement to Production Payment Conveyance, dated
September 10, 2001.
10.6 - Seventh Supplement to Purchase Agreement, dated September 10,
2001.
10.7 - Seventh Supplement to Production Payment Conveyance, dated
September 10, 2001.
</Table>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended
July 31, 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
September 14, 2001
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EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Description
------- -----------
10.1 - Amendment No. 1 to Oil and Gas Revolving Credit and Term Loan
Agreement dated September 7, 2001 among GMAC Commercial Credit
LLC, as Lender and Agent, TransTexas as Borrower, and Galveston
Bay Processing Corporation and Galveston Bay Pipeline Company,
as Guarantors.
10.2 - Fifth Supplement to Purchase Agreement, dated July 9, 2001.
10.3 - Fifth Supplement to Production Payment Conveyance, dated
July 9, 2001.
10.4 - Sixth Supplement to Purchase Agreement, dated September 10,
2001.
10.5 - Sixth Supplement to Production Payment Conveyance, dated
September 10, 2001.
10.6 - Seventh Supplement to Purchase Agreement, dated September 10,
2001.
10.7 - Seventh Supplement to Production Payment Conveyance, dated
September 10, 2001.
</Table>