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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 OCTOBER 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.)
----------
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
December 17, 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 October 31, 2001 and January 31, 2001............... 3
Condensed Consolidated Statement of Operations for the Three and Nine Months Ended
October 31, 2001 and 2000................................................................... 4
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended
October 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 6. Exhibits and Reports on Form 8-K.................................................................. 25
Signature.................................................................................................... 26
</Table>
1
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 October 31, 2001, and the
related condensed consolidated statements of operations for the three and nine
month periods ended October 31, 2001 and 2000 and the consolidated statement of
cash flows for the nine months ended October 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
December 13, 2001
2
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
OCTOBER 31, JANUARY 31,
2001 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 23,561 $ 20,715
Accounts receivable ............................................... 25,290 42,533
Receivable from affiliates ........................................ 17 21
Inventories ....................................................... 1,545 1,476
Other ............................................................. 1,666 2,521
------------ ------------
Total current assets ......................................... 52,079 67,266
------------ ------------
Property and equipment ............................................... 486,331 413,811
Less accumulated depreciation, depletion and amortization ............ 245,780 81,483
------------ ------------
Net property and equipment - based on the full cost method of
accounting for gas and oil properties of which $53,852 and
$81,381 was excluded from amortization at October 31, 2001
and January 31, 2001, respectively .............................. 240,551 332,328
------------ ------------
Other assets ......................................................... 2,480 2,649
------------ ------------
$ 295,110 $ 402,243
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt .............................. $ 2,368 $ 4,269
Accounts payable .................................................. 10,715 9,255
Accrued liabilities ............................................... 23,759 33,153
------------ ------------
Total current liabilities .................................... 36,842 46,677
------------ ------------
Long-term debt, net of current maturities ............................ 266,929 281,271
Production payments, net of current portion .......................... 45,409 12,732
Deferred income taxes ................................................ -- 9,984
Other liabilities .................................................... 6,764 8,011
Redeemable preferred stock ........................................... 58,431 25,722
Commitments and contingencies (Note 6) ............................... -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value, 100,247,500 shares
authorized at October 31, 2001 and 1,250,251 shares issued
and outstanding at October 31, 2001 and January 31, 2001 ........ 12 12
Additional paid-in capital ........................................ 25,013 25,013
Accumulated deficit ............................................... (144,445) (7,179)
Accumulated other comprehensive income ............................ 155 --
------------ ------------
Total stockholders' equity (deficit) ......................... (119,265) 17,846
------------ ------------
$ 295,110 $ 402,243
============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
3
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ..................... $ 32,108 $ 49,528 $ 109,015 $ 131,185
Other ....................................................... 265 554 737 1,746
------------ ------------ ------------ ------------
Total revenues ........................................ 32,373 50,082 109,752 132,931
------------ ------------ ------------ ------------
Costs and expenses:
Operating ................................................... 4,304 5,161 15,470 14,305
Depreciation, depletion and amortization .................... 27,481 20,139 68,563 60,067
General and administrative .................................. 4,559 4,108 14,987 14,085
Taxes other than income taxes ............................... 685 1,630 4,183 5,275
Impairment of gas and oil properties ........................ 38,919 -- 95,746 --
------------ ------------ ------------ ------------
Total costs and expenses .............................. 75,948 31,038 198,949 93,732
------------ ------------ ------------ ------------
Operating income (loss) ............................... (43,575) 19,044 (89,197) 39,199
------------ ------------ ------------ ------------
Other income (expense):
Interest income ............................................. 48 113 486 433
Interest expense, net ....................................... (9,004) (8,522) (25,830) (26,405)
------------ ------------ ------------ ------------
Total other expense ................................... (8,956) (8,409) (25,344) (25,972)
------------ ------------ ------------ ------------
Income (loss) before income taxes ..................... (52,531) 10,635 (114,541) 13,227
Income tax expense (benefit) - deferred ........................ -- 3,723 (9,984) 4,630
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (52,531) $ 6,912 $ (104,557) $ 8,597
============ ============ ============ ============
Accretion of preferred stock ................................... $ 12,207 $ 3,549 $ 32,709 $ 18,670
============ ============ ============ ============
Net income (loss) available to common stockholders .... $ (64,738) $ 3,363 $ (137,266) $ (10,073)
============ ============ ============ ============
Basic and diluted net income (loss) per share .................. $ (51.78) $ 2.69 $ (109.79) $ (8.06)
============ ============ ============ ============
Weighted average number of shares outstanding for basic
and diluted net income (loss) per share ..................... 1,250,251 1,250,251 1,250,251 1,250,251
============ ============ ============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
4
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
OCTOBER 31,
------------------------------
2001 2000
------------ ------------
Operating activities:
Net income (loss) ..................................................... $ (104,557) $ 8,597
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization ........................... 68,563 60,067
Impairment of gas and oil properties ............................... 95,746 --
Accretion of discount on long-term debt ............................ 62 3,693
Amortization of debt issue costs ................................... 377 239
Deferred income taxes .............................................. (9,984) 4,630
Changes in assets and liabilities:
Accounts receivable .............................................. 17,243 (17,039)
Receivable from affiliates ....................................... 4 40
Inventories ...................................................... (69) 65
Other current assets ............................................. 1,010 (2,958)
Accounts payable ................................................. 1,460 (6,420)
Accrued liabilities .............................................. (12,309) 12,704
Other assets ..................................................... (35) (213)
Other liabilities ................................................ (1,247) (25,918)
------------ ------------
Net cash provided by operating activities ..................... 56,264 37,487
------------ ------------
Investing activities:
Capital expenditures .................................................. (122,066) (72,489)
Proceeds from the sale of assets ...................................... 49,722 6,632
------------ ------------
Net cash used by investing activities ......................... (72,344) (65,857)
------------ ------------
Financing activities:
Issuance of production payments ....................................... 49,800 22,500
Principal payments on production payments ............................. (14,208) (29,867)
Issuance of long-term debt ............................................ 2,134 32,500
Principal payments on long-term debt .................................. (5,924) (14,824)
Revolving credit agreement, net ....................................... (12,566) 7,936
Proceeds from short-swing sale ........................................ -- 25
Debt issue costs ...................................................... (310) (2,467)
------------ ------------
Net cash provided by financing activities ..................... 18,926 15,803
------------ ------------
Increase (decrease) in cash and cash equivalents .............. 2,846 (12,567)
Beginning cash and cash equivalents ...................................... 20,715 18,288
------------ ------------
Ending cash and cash equivalents ......................................... $ 23,561 $ 5,721
============ ============
</Table>
See accompanying notes to condensed consolidated financial statements.
5
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 October 31, 2001 and the results of its operations and cash flows for the
interim periods ended October 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 nine months ended October 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 October 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 nine months ended October 31, 2001 ............ $ (104,557)
Cumulative effect of adopting SFAS 133 ......................... (1,282) (1,282)
Change in the fair value of hedge agreements ................... 293 293
Reclassification adjustments for hedge agreement settlements ... 1,144 1,144
------------ ------------
$ (104,402) $ 155
============ ============
</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.
6
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30, 2001. SFAS 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
SFAS 142 requires that goodwill as well as other intangible assets no
longer be amortized to earnings, but instead be reviewed annually for
impairment. SFAS 141 and SFAS 142 do not apply to the Company unless it enters
into a future business combination.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
The Company is evaluating the impact of SFAS 143 that will be effective for the
Company in February 2003.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 requires that one accounting model
be used for long-lived assets to be disposed of by sale and broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company is evaluating the impact of SFAS 144 that will be
effective for the Company in February 2002.
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 TransTexas' remaining 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 cash on hand.
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.
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 and repaid $2.0 million of the Overadvances in
October 2001. As of October 31, 2001, the outstanding principal
7
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
balance under the Accounts Receivable Facility was $5.4 million with no
availability for additional advances. 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 October
31, 2001, the aggregate purchase price of all interests purchased pursuant to
this production payment drilling program was $76.8 million and the outstanding
balance of the production payment was $50.4 million, of which $5.0 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.
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 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. 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 nine months ended October 31, 2001 and 2000, the Company recognized
losses of $1.6 million and $3.1 million, respectively, under these contracts. At
October 31, 2001, the hedging arrangements described above have expired.
In July and September 2001, the production payment purchasers entered into
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. At October 31, 2001, the Company had the
following hedging arrangements:
<Table>
<Caption>
CONTRACT PRICE
-------------------------
TOTAL COLLAR
VOLUMES IN -------------------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ---------- ----------
Natural gas:
November 2001 - July 2002 ............... 1,911,000 $ 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>
For the nine months ended October 31, 2001, the Company recognized gains
of $0.5 million under these contracts. At October 31, 2001, the Company
estimated that these contracts had nominal value.
8
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In November 2000, the Company entered into a commodity price hedging
arrangement with respect to a portion of the Company's natural gas production.
At October 31, 2001, the Company had the following hedging arrangement:
<Table>
<Caption>
CONTRACT PRICE
-------------------------
TOTAL COLLAR
VOLUMES IN -------------------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ---------- ----------
Natural gas:
November 2001 ........................... 600,000 $ 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. For the nine months
ended October 31, 2001, the Company recognized gains of $1.9 million under this
contract. At October 31, 2001, the Company estimated that this contract had a
value of approximately $0.2 million.
Because substantially all of its long-term obligations at October 31, 2001
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($5.4 million
outstanding at October 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 October 31, 2001.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash financing activities
(in thousands of dollars):
<Table>
<Caption>
NINE MONTHS ENDED
OCTOBER 31,
-------------------------
2001 2000
---------- ----------
Financing activities:
Accretion of preferred stock ............ $ 32,709 $ 18,670
========== ==========
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.
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
9
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 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.
Drilling Rig Commitment
During February 2001, TransTexas entered into a one-year contract with an
independent contractor for utilization of a drilling rig capable of drilling
wells to a depth of approximately 18,500 feet. TransTexas is utilizing this rig
to drill wells in the Galveston Bay area. As of October 31, 2001, the balance
remaining to be paid under this contract, which commenced in May 2001, was
approximately $4.5 million.
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.
10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 August 29, 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 September 1, 2001. The quarterly dividends were paid in-kind on
September 17, 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 share 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. GAS AND OIL PROPERTIES
In October 2001, TransTexas sold its interest in the Bob West field in
Zapata County, Texas for a sales price of $56.5 million, exclusive of closing
costs. Net proceeds of $49.7 million received from this sale were reflected as a
reduction of TransTexas' capitalized costs of its 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 October 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 $38.9 million and $95.7 million for the three and
nine month periods, respectively.
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 nine-month periods ended October 31,
2001.
11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 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 .......................... $ 23,042 $ 45 $ 474 $ -- $ 23,561
Accounts receivable, net ........................... 25,128 -- 162 -- 25,290
Receivables from affiliates ........................ 15,510 -- -- (15,493) 17
Inventories ........................................ 1,545 -- -- -- 1,545
Other current assets ............................... 1,470 188 8 -- 1,666
---------- ---------- ---------- ---------- ----------
Total current assets ........................... 66,695 233 644 (15,493) 52,079
---------- ---------- ---------- ---------- ----------
Property and equipment ................................ 472,518 2,256 11,557 -- 486,331
Less accumulated depreciation, depletion and
amortization ........................................ 241,951 554 3,275 -- 245,780
---------- ---------- ---------- ---------- ----------
Net property and equipment ..................... 230,567 1,702 8,282 -- 240,551
---------- ---------- ---------- ---------- ----------
Other assets .......................................... 2,482 -- -- (2) 2,480
---------- ---------- ---------- ---------- ----------
$ 299,744 $ 1,935 $ 8,926 $ (15,495) $ 295,110
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ............... $ 2,293 $ 2 $ 73 $ -- $ 2,368
Accounts payable ................................... 10,520 12 183 -- 10,715
Accrued liabilities ................................ 23,683 -- 76 -- 23,759
---------- ---------- ---------- ---------- ----------
Total current liabilities ...................... 36,496 14 332 -- 36,842
---------- ---------- ---------- ---------- ----------
Payable to affiliates ................................. -- 1,918 13,575 (15,493) --
Long-term debt, net of current maturities ............. 266,124 643 162 -- 266,929
Production payments, net of current portion ........... 45,409 -- -- -- 45,409
Other liabilities ..................................... 6,764 -- -- -- 6,764
Redeemable preferred stock ............................ 58,431 -- -- -- 58,431
Stockholders' equity (deficit):
Common stock ....................................... 12 -- -- -- 12
Additional paid-in capital ......................... 25,013 1 1 (2) 25,013
Accumulated deficit ................................ (138,660) (641) (5,144) -- (144,445)
Accumulated other comprehensive income ............. 155 -- -- -- 155
---------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficit) ........... (113,480) (640) (5,143) (2) (119,265)
---------- ---------- ---------- ---------- ----------
$ 299,744 $ 1,935 $ 8,926 $ (15,495) $ 295,110
========== ========== ========== ========== ==========
</Table>
12
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
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED OCTOBER 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 ....... $ 32,108 $ -- $ -- $ -- $ 32,108
Other ......................................... 31 39 938 (743) 265
---------- ---------- ---------- ---------- ----------
Total revenues .............................. 32,139 39 938 (743) 32,373
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating ..................................... 4,116 2 929 (743) 4,304
Depreciation, depletion and amortization ...... 26,812 104 565 -- 27,481
General and administrative .................... 4,532 10 17 -- 4,559
Taxes other than income taxes ................. 663 -- 22 -- 685
Impairment of gas and oil properties .......... 38,919 -- -- -- 38,919
---------- ---------- ---------- ---------- ----------
Total costs and expenses .................... 75,042 116 1,533 (743) 75,948
---------- ---------- ---------- ---------- ----------
Operating loss .............................. (42,903) (77) (595) -- (43,575)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income ............................... 46 -- 2 -- 48
Interest expense, net ......................... (8,549) (71) (384) -- (9,004)
---------- ---------- ---------- ---------- ----------
Total other expense ......................... (8,503) (71) (382) -- (8,956)
---------- ---------- ---------- ---------- ----------
Net loss .................................... $ (51,406) $ (148) $ (977) $ -- $ (52,531)
========== ========== ========== ========== ==========
</Table>
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED OCTOBER 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 ... $ 49,528 $ -- $ -- $ -- $ 49,528
Other ..................................... 188 145 1,575 (1,354) 554
---------- ---------- ---------- ---------- ----------
Total revenues .......................... 49,716 145 1,575 (1,354) 50,082
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating ................................. 5,432 (3) 1,086 (1,354) 5,161
Depreciation depletion and amortization ... 19,558 88 493 -- 20,139
General and administrative ................ 3,968 5 135 -- 4,108
Taxes other than income taxes ............. 1,598 4 28 -- 1,630
---------- ---------- ---------- ---------- ----------
Total costs and expenses ................ 30,556 94 1,742 (1,354) 31,038
---------- ---------- ---------- ---------- ----------
Operating income (loss) ................. 19,160 51 (167) -- 19,044
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income ........................... 113 -- -- -- 113
Interest expense net ...................... (8,432) (41) (49) -- (8,522)
---------- ---------- ---------- ---------- ----------
Total other expense ..................... (8,319) (41) (49) -- (8,409)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ....... 10,841 10 (216) -- 10,635
Income taxes - deferred ...................... 3,723 -- -- -- 3,723
---------- ---------- ---------- ---------- ----------
Net income (loss) ....................... $ 7,118 $ 10 $ (216) $ -- $ 6,912
========== ========== ========== ========== ==========
</Table>
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 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 ..... $ 109,015 $ -- $ -- $ -- $ 109,015
Other ....................................... 99 180 2,545 (2,087) 737
---------- ---------- ---------- ---------- ----------
Total revenues ............................ 109,114 180 2,545 (2,087) 109,752
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating ................................... 14,118 6 3,433 (2,087) 15,470
Depreciation, depletion and amortization .... 67,036 240 1,287 -- 68,563
General and administrative .................. 14,927 10 50 -- 14,987
Taxes other than income taxes ............... 4,101 1 81 -- 4,183
Impairment of gas and oil properties ........ 95,746 -- -- -- 95,746
---------- ---------- ---------- ---------- ----------
Total costs and expenses .................. 195,928 257 4,851 (2,087) 198,949
---------- ---------- ---------- ---------- ----------
Operating loss ............................ (86,814) (77) (2,306) -- (89,197)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income ............................. 480 -- 6 -- 486
Interest expense, net ....................... (24,442) (222) (1,166) -- (25,830)
---------- ---------- ---------- ---------- ----------
Total other expense ....................... (23,962) (222) (1,160) -- (25,344)
---------- ---------- ---------- ---------- ----------
Loss before income taxes .................. (110,776) (299) (3,466) -- (114,541)
Income tax benefit - deferred .................. (9,984) -- -- -- (9,984)
---------- ---------- ---------- ---------- ----------
Net loss .................................. $ (100,792) $ (299) $ (3,466) $ -- $ (104,557)
========== ========== ========== ========== ==========
</Table>
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 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 ....... $ 131,185 $ -- $ -- $ -- $ 131,185
Other ......................................... 386 513 5,461 (4,614) 1,746
---------- ---------- ---------- ---------- ----------
Total revenues .............................. 131,571 513 5,461 (4,614) 132,931
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating ..................................... 15,761 28 3,130 (4,614) 14,305
Depreciation depletion and amortization ....... 58,236 240 1,591 -- 60,067
General and administrative .................... 13,608 128 349 -- 14,085
Taxes other than income taxes ................. 5,160 24 91 -- 5,275
---------- ---------- ---------- ---------- ----------
Total costs and expenses .................... 92,765 420 5,161 (4,614) 93,732
---------- ---------- ---------- ---------- ----------
Operating income ............................ 38,806 93 300 -- 39,199
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income ............................... 433 -- -- -- 433
Interest expense net .......................... (25,955) (245) (205) -- (26,405)
---------- ---------- ---------- ---------- ----------
Total other expense ......................... (25,522) (245) (205) -- (25,972)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ........... 13,284 (152) 95 -- 13,227
Income taxes - deferred .......................... 4,630 -- -- -- 4,630
---------- ---------- ---------- ---------- ----------
Net income (loss) ........................... $ 8,654 $ (152) $ 95 $ -- $ 8,597
========== ========== ========== ========== ==========
</Table>
17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2001
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- ---------- ---------- ------------ ------------
Operating activities:
Net loss ...................................... $ (100,792) $ (299) $ (3,466) $ -- $ (104,557)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and amortization .... 67,036 240 1,287 -- 68,563
Impairment of gas and oil properties ........ 95,746 -- -- -- 95,746
Accretion of discount on long-term debt ..... (4) 29 37 -- 62
Amortization of debt issue costs ............ 377 -- -- -- 377
Deferred income taxes ....................... (9,984) -- -- -- (9,984)
Changes in assets and liabilities:
Accounts receivable ....................... 16,999 -- 244 -- 17,243
Receivable from affiliates ................ (3,850) -- -- 3,854 4
Inventories ............................... (69) -- -- -- (69)
Other current assets ...................... 1,171 (188) 27 -- 1,010
Accounts payable .......................... 1,450 (15) 25 -- 1,460
Accrued liabilities ....................... (12,377) -- 68 -- (12,309)
Transactions with affiliates, net ......... -- 804 3,050 (3,854) --
Other assets .............................. (35) -- -- -- (35)
Other liabilities ......................... (1,247) -- -- -- (1,247)
---------- ---------- ---------- ---------- ------------
Net cash provided by
operating activities ................... 54,421 571 1,272 -- 56,264
---------- ---------- ---------- ---------- ------------
Investing activities:
Capital expenditures .......................... (120,803) (339) (924) -- (122,066)
Proceeds from the sale of assets .............. 49,722 -- -- -- 49,722
---------- ---------- ---------- ---------- ------------
Net cash used by
investing activities ................... (71,081) (339) (924) -- (72,344)
---------- ---------- ---------- ---------- ------------
Financing activities:
Issuance of production payments ............... 49,800 -- -- -- 49,800
Principal payments on production payments ..... (14,208) -- -- -- (14,208)
Issuance of long-term debt .................... 2,134 -- -- -- 2,134
Principal payments on long-term debt .......... (5,050) (226) (648) -- (5,924)
Revolving credit agreement, net ............... (12,566) -- -- -- (12,566)
Debt issue costs .............................. (310) -- -- -- (310)
---------- ---------- ---------- ---------- -----------
Net cash provided (used) by
financing activities ................... 19,800 (226) (648) -- 18,926
---------- ---------- ---------- ---------- -----------
Increase (decrease) in cash and
cash equivalents ....................... 3,140 6 (300) -- 2,846
Beginning cash and cash equivalents .............. 19,902 39 774 -- 20,715
---------- ---------- ---------- ---------- -----------
Ending cash and cash equivalents ................. $ 23,042 $ 45 $ 474 $ -- $ 23,561
========== ========== ========== ========== ===========
</Table>
18
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<Table>
<Caption>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
---------- ---------- ---------- ------------ ------------
Operating activities:
Net income (loss) .................................. $ 8,654 $ (152) $ 95 $ -- $ 8,597
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization ........ 58,236 240 1,591 -- 60,067
Accretion of discount on long-term debt ......... 3,496 52 145 -- 3,693
Amortization of debt issue costs ................ 239 -- -- -- 239
Deferred income taxes ........................... 4,630 -- -- -- 4,630
Changes in assets and liabilities:
Accounts receivable ........................... (17,062) 110 (87) -- (17,039)
Receivable from affiliates .................... 774 -- -- (734) 40
Inventories ................................... 65 -- -- -- 65
Other current assets .......................... (2,885) (23) (50) -- (2,958)
Accounts payable .............................. (6,510) 48 42 -- (6,420)
Accrued liabilities ........................... 12,612 7 85 -- 12,704
Transactions with affiliates, net ............. -- (16) (718) 734 --
Other assets .................................. (213) -- -- -- (213)
Other liabilities ............................. (25,918) -- -- -- (25,918)
---------- ---------- ---------- ---------- ----------
Net cash provided by
operating activities ....................... 36,118 266 1,103 -- 37,487
---------- ---------- ---------- ---------- ----------
Investing activities:
Capital expenditures ............................... (71,510) (585) (394) -- (72,489)
Proceeds from the sale of assets ................... 6,096 536 -- -- 6,632
---------- ---------- ---------- ---------- ----------
Net cash used by
investing activities ....................... (65,414) (49) (394) -- (65,857)
---------- ---------- ---------- ---------- ----------
Financing activities:
Issuance of production payments .................... 22,500 -- -- -- 22,500
Principal payments on production payments .......... (29,867) -- -- -- (29,867)
Issuance of long-term debt ......................... 32,500 -- -- -- 32,500
Principal payments on long-term debt ............... (13,578) (237) (1,009) -- (14,824)
Revolving credit agreement, net .................... 7,936 -- -- -- 7,936
Proceeds from short-swing sale ..................... 25 -- -- -- 25
Debt issue costs ................................... (2,467) -- -- -- (2,467)
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by
financing activities ....................... 17,049 (237) (1,009) -- 15,803
---------- ---------- ---------- ---------- ----------
Decrease in cash and cash equivalents ....... (12,247) (20) (300) -- (12,567)
Beginning cash and cash equivalents ................... 17,851 44 393 -- 18,288
---------- ---------- ---------- ---------- ----------
Ending cash and cash equivalents ...................... $ 5,604 $ 24 $ 93 $ -- $ 5,721
========== ========== ========== ========== ==========
</Table>
19
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 nine months ended October 31,
2001 and 2000 are as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ---------
Sales volumes:
Gas (Bcf) ................................... 6.6 6.6 17.9 20.3
NGLs (MMgal) ................................ 10.2 10.3 28.0 41.4
Condensate (MBbls) .......................... 356 385 879 1,225
Average prices:
Gas (dry) (per Mcf) ......................... $ 2.75 $ 4.81 $ 4.18 $ 3.88
NGLs (per gallon) ........................... .33 .74 .41 .47
Condensate (per Bbl) ........................ 24.53 32.51 26.06 30.03
Number of gross wells drilled .................... 4 4 15 12
Percentage of wells completed .................... 75% 50% 87% 58%
</Table>
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating costs and expenses:
Lease ....................................... $ 2.4 $ 3.1 $ 8.7 $ 8.3
Pipeline and gathering ...................... 1.9 2.1 6.8 6.0
---------- ---------- ---------- ----------
4.3 5.2 15.5 14.3
Taxes other than income taxes
(severance, property and other taxes) ...... 0.7 1.7 4.2 5.3
---------- ---------- ---------- ----------
$ 5.0 $ 6.9 $ 19.7 $ 19.6
========== ========== ========== ==========
</Table>
TransTexas' average depletion rates have been as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Depletion rates (per Mcfe) ....................... $ 3.18 $ 2.22 $ 2.92 $ 2.15
========== ========== ========== ==========
</Table>
Three Months Ended October 31, 2001 Compared with the Three Months Ended
October 31, 2000
Gas, condensate and NGL revenues for the three months ended October 31,
2001 decreased $17.4 million from the prior period, due primarily to lower
prices for all products. The average monthly prices received per Mcf of gas
ranged from $2.04 to $3.49 in the three months ended October 31, 2001, compared
to a range of $4.12 to $5.53 in the prior period.
Lease operating expenses for the three months ended October 31, 2001
decreased $0.7 million from the prior period due primarily to a decrease in
workover expenses. Pipeline and gathering expenses decreased $0.2 million from
the prior period due primarily to the lower cost of natural gas used in
operations and lower rental expense. Depreciation, depletion
20
and amortization expense for the three months ended October 31, 2001 increased
$7.3 million due to a $0.96 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 $1.0 million over the prior period due primarily to
lower severance and production taxes. Interest expense for the three months
ended October 31, 2001 increased by $0.5 million from the prior period due
primarily to higher balances on production payments and lower capitalized
interest. The impairment loss relates to a write-down of $38.9 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 October 31, 2001 decreased from that at July 31, 2001 primarily due
to a decrease in prices for natural gas and condensate and a decrease in proved
reserves due to the sale of the Bob West field.
Nine Months Ended October 31, 2001 Compared With the Nine Months Ended
October 31, 2000
Gas, condensate and NGL revenues for the nine months ended October 31,
2001 decreased $22.2 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 $2.04 to $6.73 in the nine months ended October 31, 2001,
compared to a range of $2.64 to $5.53 in the prior period.
Lease operating expenses for the nine months ended October 31, 2001
increased $0.4 million from the prior period due primarily to an increase in
labor costs. Pipeline and gathering expenses increased $0.8 million from the
prior period due primarily to higher labor costs and higher repair and
maintenance costs. Depreciation, depletion and amortization expense for the nine
months ended October 31, 2001 increased $8.5 million due to a $0.77 per Mcfe
increase in the depletion rate. General and administrative expenses increased
$0.9 million primarily as a result of increased personnel and related costs and
professional fees. Taxes other than income taxes decreased by $1.1 million over
the prior period due primarily to lower severance and production taxes. Interest
expense for the nine months ended October 31, 2001 decreased by $0.6 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 $95.7 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 October 31, 2001 decreased from that at
January 31, 2001 primarily due to a decrease in prices for natural gas and
condensate and a decrease in proved reserves due to the sale of the Bob West
field.
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 and repaid $2.0 million of the overadvances in
October 2001. As of October 31, 2001, the outstanding principal balance under
the Accounts Receivable Facility was $5.4 million with no availability for
additional advances. The Accounts Receivable Facility terminates on March 14,
2005.
21
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 October
31, 2001, the aggregate purchase price of all interests purchased pursuant to
this production payment drilling program was $76.8 million and the outstanding
balance of the production payment was $50.4 million, of which $5.0 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 nine months ended
October 31, 2001, total capital expenditures incurred were $122 million,
including $9 million for nonproducing leases and seismic, $9 million for
capitalized interest, $97 million for drilling and development and $7 million
for gas gathering and other equipment. Capital expenditures for the fourth
quarter of fiscal 2002 are estimated to be approximately $15 million. Management
plans to fund TransTexas' fiscal fourth quarter 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 cash on hand. TransTexas anticipates capital
expenditures of $50 million for fiscal 2003 and estimates that these capital
expenditures will be funded by cash flows from operating activities and
borrowings under the production payment drilling program. 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.
In October 2001, TransTexas sold its interest in the Bob West field in
Zapata County, Texas for a sales price of $56.5 million, exclusive of closing
costs.
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.
22
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 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. 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 nine months ended October 31, 2001 and 2000, the Company recognized
losses of $1.6 million and $3.1 million, respectively, under these contracts. At
October 31, 2001, the hedging arrangements described above have expired.
In July and September 2001, the production payment purchasers entered into
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. At October 31, 2001, the Company had the
following hedging arrangements:
23
<Table>
<Caption>
CONTRACT PRICE
------------------------
TOTAL COLLAR
VOLUMES IN ------------------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ---------- ----------
Natural gas:
November 2001 - July 2002 ............... 1,911,000 $ 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>
For the nine months ended October 31, 2001, the Company recognized gains
of $0.5 million under these contracts. At October 31, 2001, the Company
estimated that these contracts had nominal value.
In November 2000, the Company entered into a commodity price hedging
arrangement with respect to a portion of the Company's natural gas production.
At October 31, 2001, the Company had the following hedging arrangement:
<Table>
<Caption>
CONTRACT PRICE
------------------------
TOTAL COLLAR
VOLUMES IN ------------------------
PERIOD MMBtus FLOOR CEILING
------ ---------- ---------- ----------
Natural gas:
November 2001 ........................... 600,000 $ 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. For the nine months
ended October 31, 2001, the Company recognized gains of $1.9 million under this
contract. At October 31, 2001, the Company estimated that this contract had a
value of approximately $0.2 million.
Because substantially all of its long-term obligations at October 31, 2001
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility ($5.4 million
outstanding at October 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 October 31, 2001.
24
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:
None
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended October 31, 2001.
25
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
December 17, 2001
26