1
================================================================================
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, 1996
Commission File Number 1-12204
-------------------------------
TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 EAST NORTH BELT
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(713) 987-8600
(Registrant's telephone number, including area code)
-------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
------- -------
The number of shares of common stock of the registrant outstanding on
September 16, 1996 was 74,000,000.
================================================================================
2
TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
Page
----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 2
Condensed Consolidated Balance Sheet as of July 31, 1996 and January 31, 1996 3
Condensed Consolidated Statement of Operations for the three and six months ended
July 31, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows for the six months ended
July 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 20-28
PART II.
OTHER INFORMATION
Item 1 and Item 5 29
Item 6 37
Signature 38
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 as of July 31, 1996, the related condensed
consolidated statement of operations for the three and six months ended July
31, 1996 and 1995 and cash flows for the six months ended July 31, 1996 and
1995. 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 financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1996, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended (not presented herein); and in our report dated
April 29, 1996, 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, 1996, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Coopers & Lybrand L.L.P.
Houston, Texas
September 16, 1996
2
4
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars, except share amounts)
(Unaudited)
July 31, January 31,
1996 1996
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 41,763 $ 11,248
Interest reserve account 46,000 46,000
Accounts receivable 39,212 36,251
Receivable from affiliates 4,433 3,697
Inventories 16,999 11,421
Other current assets (Note 3) 34,960 50,821
----------- ----------
Total current assets 183,367 159,438
----------- ----------
Property and equipment 2,082,693 2,008,068
Less accumulated depreciation, depletion and amortization 1,358,408 1,292,728
----------- ----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $145,135 and
$136,360 was excluded from amortization at July 31, 1996
and January 31, 1996, respectively. 724,285 715,340
----------- ----------
Due from affiliates (Note 10) 22,765 11,653
Other assets, net 14,197 37,203
----------- ----------
$ 944,614 $ 923,634
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 4,439 $ 1,335
Accounts payable 23,505 39,745
Accrued liabilities 82,209 74,756
----------- ----------
Total current liabilities 110,153 115,836
----------- ----------
Long-term debt, less current maturities 7,393 2,541
Due to affiliates 12,093 --
Production payment -- 31,036
Senior secured notes 800,000 800,000
Revolving credit agreement 7,948 20,365
Deferred revenue 75,384 32,850
Deferred income taxes 29,012 40,256
Other liabilities 16,974 35,190
Commitments and contingencies (Note 2) -- --
Stockholders' deficit:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 74,000,000 shares 740 740
Capital deficit (129,524) (107,040)
Retained earnings (accumulated deficit) 26,441 (48,140)
----------- ----------
(102,343) (154,440)
Less: Advances to affiliates (12,000) --
----------- ----------
Total stockholders' deficit (114,343) (154,440)
----------- ----------
$ 944,614 $ 923,634
=========== ==========
See accompanying notes to condensed consolidated financial statements.
3
5
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars, except share amounts)
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ------------ ----------- -----------
Revenues:
Gas, condensate and natural gas liquids $ 77,899 $ 68,441 $ 157,701 $ 132,323
Transportation 8,675 8,736 16,870 17,626
Gains on sale of assets -- -- 7,762 --
Other 158 177 357 233
----------- ------------ ----------- -----------
Total revenues 86,732 77,354 182,690 150,182
----------- ------------ ----------- -----------
Costs and expenses:
Operating 25,048 21,208 52,486 40,667
Depreciation, depletion and amortization 31,446 28,747 61,545 59,619
General and administrative 12,350 13,666 19,789 19,340
Taxes other than income taxes 7,192 3,859 12,376 7,750
Litigation settlement (96,000) -- (96,000) --
----------- ------------ ----------- -----------
Total costs and expenses (19,964) 67,480 50,196 127,376
----------- ------------ ----------- -----------
Operating income 106,696 9,874 132,494 22,806
----------- ------------ ----------- -----------
Other income (expense):
Interest income 790 1,332 1,924 1,799
Interest expense, net (29,763) (23,213) (52,049) (38,537)
----------- ------------ ----------- -----------
Total other income (expense) (28,973) (21,881) (50,125) (36,738)
----------- ------------ ----------- -----------
Income (loss) before income taxes 77,723 (12,007) 82,369 (13,932)
Income taxes (benefit) 6,162 (4,203) 7,788 (2,284)
----------- ------------ ----------- -----------
Income (loss) before extraordinary item 71,561 (7,804) 74,581 (11,648)
Extraordinary item - loss on early extinguishment of debt,
net of tax -- (56,637) -- (56,637)
----------- ------------ ----------- -----------
Net income (loss) $ 71,561 $ (64,441) $ 74,581 $ (68,285)
=========== ============ =========== ===========
Net income (loss) per share:
Income (loss) before extraordinary item $ 0.97 $ (0.10) $ 1.01 $ (0.15)
Extraordinary item -- (0.77) -- (0.77)
----------- ------------ ----------- -----------
$ 0.97 $ (0.87) $ 1.01 $ (0.92)
=========== ============ =========== ===========
Weighted average number of shares outstanding 74,000,000 74,000,000 74,000,000 74,000,000
=========== ============ =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
6
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Six Months Ended
July 31,
-------------------------------
1996 1995
------------ ------------
Operating activities:
Net income (loss) $ 74,581 $ (68,285)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary item -- 56,637
Depreciation, depletion and amortization 61,545 59,619
Amortization of debt issue costs 6,999 2,263
Gains on sale of assets (7,762) --
Deferred income taxes (11,244) 6,679
Proceeds from volumetric production payments 58,621 --
Amortization of deferred revenue (16,087) --
Changes in assets and liabilities:
Accounts receivable (2,961) 7,256
Receivable from affiliates (736) 108
Inventories (5,578) (44)
Other current assets 19,039 (3,009)
Accounts payable (1,260) (17,827)
Accrued liabilities (3,637) (17,577)
Due from affiliates (11,519) (12,252)
Other assets (2,221) (679)
Other liabilities (16,452) 7,091
----------- ----------
Net cash provided by operating activities 141,328 19,980
----------- ----------
Investing activities:
Capital expenditures (129,767) (162,914)
Proceeds from sales of assets 69,971 --
Advances to affiliates (9,500) --
Deposits to interest reserve account (46,000) (44,722)
Withdrawals from interest reserve account 46,000 --
Production payment by affiliate -- 3,547
----------- -----------
Net cash used by investing activities (69,296) (204,089)
----------- -----------
Financing activities:
Issuance of dollar-denominated production payment -- 49,500
Repayments of dollar-denominated production payment (32,800) (7,866)
Issuance of long-term debt 25,000 10,000
Principal payments on long-term debt (17,044) (20,000)
Issuance of senior secured notes -- 800,000
Retirement of senior secured notes -- (542,500)
Debt issue costs (4,256) (14,458)
Revolving credit agreement, net (12,417) (8,701)
----------- -----------
Net cash provided (used) by financing activities (41,517) 265,975
----------- -----------
Increase in cash and cash equivalents 30,515 81,866
Beginning cash and cash equivalents 11,248 819
----------- -----------
Ending cash and cash equivalents $ 41,763 $ 82,685
=========== ===========
Noncash operating and investing activities:
Accounts payable for property and equipment $ (14,980) $ --
See accompanying notes to condensed consolidated financial statements.
5
7
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, which are, in the opinion
of management, necessary for a fair presentation of the results for the interim
periods. Certain reclassifications have been made to the prior year period to
conform to the current period presentation. Unless the context indicates
otherwise, the term "Company" refers to TransTexas Gas Corporation and its
wholly-owned subsidiaries, TransTexas Transmission Corporation ("TTC") and
TransTexas Exploration Corporation ("TTEX"). The Company is indirectly a
subsidiary of TransAmerican Natural Gas Corporation ("TransAmerican"). Interim
results of operations are not necessarily indicative of the results that may be
expected for the year ending January 31, 1997. The financial information
presented herein should be read in conjunction with the consolidated financial
statements and notes included in the Company's Transition Report on Form 10-K
for the transition period ended January 31, 1996.
LIQUIDITY
A primary source of funds to meet the Company's debt service and
capital requirements is net cash flow provided by operating activities, which
is extremely sensitive to the prices the Company receives for its natural gas.
The Company has entered into hedge agreements to reduce its exposure to price
risk in the spot market for natural gas. However, a substantial portion of the
Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development,
lease acquisitions, pipeline and other equipment additions. Since July 31,
1995, the Company has utilized asset sales and various financings, in addition
to cash flow from operating activities, to meet its working capital
requirements. The Company anticipates that it will utilize additional financing
or sales of assets, as allowed by the indenture governing the Company's senior
secured notes (the "Indenture"), to fund planned levels of operations through
January 1997. No assurance, however, can be given that the Company's cash flow
from operating activities will be sufficient to meet planned capital
expenditures, contingent liabilities, and debt service in the future.
On July 2, 1996, the Company consummated the sale, effective as of May
1, 1996, of producing properties in Zapata County, Texas for consideration of
approximately $62 million. On June 17, and August 13, 1996, the Company
consummated the sales, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million and $21.5 million, respectively. The purchase price for each of
the properties discussed above was or is subject to adjustment for gas sales
between the effective date and the closing date. The Company retained or will
retain the proceeds of all such gas sales.
The Company has engaged an investment banking firm to assist in the
potential sale or sale-leaseback of all or a portion of the Company's pipeline
system. The Company has also engaged an investment banking firm to assist in
the sale of its interest in the Lodgepole area. On August 29, 1996, the
Company announced that it has engaged two investment banking firms to assist in
the sale of the Company's remaining Lobo Trend producing properties in Webb and
Zapata counties, Texas, and associated undeveloped acreage. If such sale is
consummated, the Company intends to use the proceeds, along with proceeds from
any sales of its pipeline system and Lodgepole area properties, for general
corporate purposes and a possible repurchase of the Notes.
On June 28, 1996, the Company consummated a settlement of litigation
pursuant to which the Company and another plaintiff received approximately $125
million. The Company's share of the settlement proceeds was $96 million.
6
8
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
RECENTLY ISSUED PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The Company's pipeline assets are within the scope of SFAS No.
121. The Company adopted the requirements of SFAS No. 121, as of February 1,
1996. Based on the Company's estimates as of July 31, 1996, there have been no
events or circumstances that require the recognition of an impairment loss.
Gas and oil properties accounted for under the full cost method continue to be
subject to a ceiling test limitation on capitalized costs specified by
Securities and Exchange Commission regulations.
2. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As part of the transfer of the natural gas exploration, production and
transmission businesses of TransAmerican to the Company (the "Transfer"), the
Company has succeeded to the potential liability, if any, of TransAmerican and
certain subsidiaries in connection with the lawsuits described below. The
Company has assumed liability for the proceeding described in Note 8 under
"Ginther/Warren" and liability for other litigation up to $15 million plus the
difference, if any, between $10 million and the costs (if less than $10
million) incurred to resolve the disputed claims. Pursuant to an agreement
among the Company, TransAmerican and certain of its subsidiaries, as amended
(the "Transfer Agreement"), TransAmerican has agreed to indemnify the Company
against all losses incurred by the Company in excess of $25 million in
connection with (a) disputed claims in TransAmerican's bankruptcy and (b)
other litigation assumed by the Company and other agreements related to
TransAmerican's plan of reorganization (other than settlements and judgments
paid from escrowed cash established in connection with TransAmerican's plan of
reorganization). Effective with the settlement of the Terry/Penrod litigation
described in Note 8, TransAmerican will be required to indemnify the Company
for all future losses incurred in connection with litigation or bankruptcy
claims assumed in the Transfer. Any indemnification payments received from
TransAmerican for which the Company is the primary obligor will be considered a
contribution of capital. There can be no assurance that TransAmerican will
have the financial ability to meet all of its indemnification obligations.
FINKELSTEIN. On April 15, 1990, H.S. Finkelstein filed suit against
TransAmerican in the 49th Judicial District Court, Zapata County, Texas,
alleging that TransAmerican failed to pay royalties and improperly marketed oil
and gas produced from certain leases. On September 27, 1994, the plaintiff
added the Company as an additional defendant. On January 6, 1995, a judgment
against TransAmerican and the Company was entered for approximately $18 million
in damages, interest and attorneys' fees. The Company and TransAmerican posted
a supersedeas bond and appealed the judgment to the Fourth Court of Appeals, San
Antonio, Texas. The Fourth Court of Appeals affirmed the judgment on April 3,
1996. The Company and TransAmerican filed a motion for rehearing. On August 14,
1996, the Fourth Court of Appeals reversed the trial court judgment and rendered
judgment in favor of TransAmerican and the Company. On August 29, 1996, the
plaintiff filed a motion for stay and a motion for rehearing with the court.
On April 22, 1991, the plaintiff filed a separate suit against
TransAmerican and various affiliates in the 49th Judicial District Court,
Zapata County, Texas, alleging an improper calculation of overriding royalties
allegedly owed to the plaintiff and seeking damages in an unspecified amount.
On November 18, 1993, the
7
9
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
plaintiff added the Company as an additional defendant. The parties have
agreed to binding arbitration in this matter, which is set for January 6, 1997.
COASTAL. On October 28, 1991, Coastal filed an action against
TransAmerican that was consolidated in the 49th Judicial District Court, Webb
County, Texas, alleging breach of contract and tortious interference related to
two gas sales contracts and a transportation agreement, seeking unspecified
actual and punitive damages and injunctive relief. On April 22, 1994, the
court entered a judgment adverse to TransAmerican and the Company requiring
them to pay $1.3 million plus $0.7 million in attorney's fees to Coastal. On
May 29, 1996, the Court of Appeals affirmed the judgments. TransAmerican and
the Company continue to appeal this judgment. Coastal has abstracted the
judgment in Webb and Zapata Counties. While this matter is being judicially
resolved, the Company is continuing to furnish gas to Coastal.
ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican and John R. Stanley in the 215th Judicial District Court of
Harris County, Texas, claiming that TransAmerican failed to account to Alameda
for a share of the proceeds TransAmerican received in a settlement during 1990
of litigation with El Paso Natural Gas Company ("El Paso") and that
TransAmerican has been unjustly enriched by its failure to share these proceeds
with Alameda. The court granted Mr. Stanley's motion for summary judgment. On
September 20, 1995, the jury rendered a verdict in favor of TransAmerican.
Alameda has appealed to the Fourteenth Court of Appeals.
ASPEN. TransAmerican brought suit, in the 215th Judicial District Court,
Harris County, Texas, on September 29, 1993, against Aspen Services, Inc.
("Aspen"), seeking an audit and accounting of drilling costs that Aspen had
charged while providing drilling services to TransAmerican. The parties'
drilling agreement provided, among other things, that Aspen would receive
payment for its drilling-related costs from the production and sale of gas from
the wells that were drilled, and that the revenues that TransAmerican would
otherwise receive from the wells would be reduced by the amounts received by
Aspen. Aspen, under provisions of the parties' drilling agreement, requested
that TransAmerican's audit be made subject to arbitration, and the court agreed.
While the audit was in progress, Aspen asserted additional costs that it
contended should be added to the production payment account. One category of
such costs, relating to overhead expenses, amounted to approximately $2.6
million. On July 31, 1996, the arbitrators issued a decision in which they
rejected all of Aspen's overhead charges, and accepted and rejected various
charges contested by TransAmerican with the net result of a credit in
TransAmerican's favor of approximately $80,000. Aspen also filed, in the court
proceeding, on July 19, 1995, a counterclaim and third party claim against
TransAmerican, the Company, and affiliated entities, asserting, among other
things, that these entities failed to make certain payments and market gas from
these wells. Aspen is seeking damages in an unspecified amount, as well as
certain equitable claims. The Company and its affiliates are vigorously
contesting this claim. The parties' drilling contract was not transferred to
the Company in the Transfer. The properties relating to the drilling contract,
however, were transferred to the Company. TransAmerican is entitled to any
settlement or damages awarded to it in this matter.
KATHRYN M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred to
the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in the La Perla Ranch
leases, are entitled to receive a portion of the settlement proceeds received
by TransAmerican from El Paso. On April 16, 1996, the Zimmerman Group and the
Curran Trust intervened, making the same claims as the Mosbacher children.
TransAmerican filed its motion for summary judgment. Plaintiffs also filed
a motion for partial summary judgment based on the Finkelstein case. On August
2, 1996, the court denied TransAmerican's motion and plaintiff's motion. Trial
is set for January 27, 1997.
8
10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
MCNAMARA. On June 28, 1996, the Company consummated a settlement of
litigation with Tennessee Gas Pipeline Company ("Tennessee") that was filed on
October 14, 1993 in the 244th Judicial District Court of Ector County, Texas
("Tennessee lawsuit") pursuant to which the Company and another Plaintiff (ICA
Energy, Inc.) received approximately $125 million from Tennessee. The
Company's share of the settlement proceeds was $96 million. On July 2, 1996,
John McNamara, Jr. et al. ("The Hubberd Trusts") filed a new suit against the
Company in the 241st District Court of Webb County, Texas asserting that the
Company had breached its duties to The Hubberd Trusts under certain oil and gas
leases and that the Company owed The Hubberd Trusts 25% of the gross settlement
proceeds, or approximately $31.25 million. However, in August of 1995, The
Hubberd Trusts had already intervened in the Tennessee lawsuit wherein The
Hubberd Trusts asserted the exact same claims as those asserted in the 241st
District Court proceeding. Accordingly, the Company has already denied any
liability to The Hubberd Trusts and counterclaimed that The Hubberd Trusts are
not due any portion of the settlement proceeds received in the Tennessee
lawsuit. On July 5, 1996, the Company filed a plea-in-abatement requesting
that the 241st District Court proceeding be dismissed based upon the dominant
jurisdiction that already existed in the Tennessee lawsuit. On July 15, 1996,
the Court in the Tennessee lawsuit issued a temporary injunction granting the
Company's request that The Hubberd Trusts be prevented and enjoined from
pursuing their claims relating to the Tennessee settlement proceeds in the
241st District Court. The Hubberd Trusts have filed their notice of appeal to
this temporary injunction.
BRIONES. In an arbitration proceeding, Jesus Briones, a lessor, claimed
that one of the Company's wells on adjacent lands had been draining natural gas
from a portion of his acreage leased to the Company on which no well had been
drilled. On October 31, 1995, the Arbitrator decided that drainage had
occurred. On June 3, 1996, the Arbitrator issued a letter indicating that
drainage damages would be awarded to Briones in the amount of approximately
$1.4 million. The Arbitrator entered his award of damages on June 27, 1996.
On July 3, 1996, the Company filed a petition in the 49th Judicial District,
Zapata County, Texas, to vacate the Arbitrator's award.
FROST. On November 10, 1994, Frost National Bank filed suit against the
Company in the 111th Judicial District Court, Webb County, Texas, seeking a
declaratory judgment determination that the Company failed to properly and
accurately calculate royalties under a lease. Plaintiff has demanded $10
million plus interest. This litigation is in the discovery stage.
GENERAL. The Company is also a named defendant in other ordinary course,
routine litigation incidental to its business. Although the outcome of these
other lawsuits cannot be predicted with certainty, the Company does not expect
these matters to have a material adverse effect on its financial position. At
July 31, 1996, the possible range of estimated losses related to all of the
claims described in this Note 2 in addition to the estimates accrued by the
Company is $0 to $62 million. The resolution in any reporting period of one or
more of these matters in a manner adverse to the Company could have a material
impact on the Company's results of operations and cash flows for that period.
Litigation expense, including legal fees, totaled approximately $6 million and
$8 million for the quarters ended July 31, 1996 and 1995, respectively and
approximately $7 million and $9 million for the six months ended July 31, 1996
and 1995, respectively. The Company has delivered letters of credit and placed
into escrow cash, which letters of credit and cash total approximately $21.1
million, to be applied to certain of the litigation claims described above.
ENVIRONMENTAL MATTERS
The Company's 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
9
11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
into the environment. Permits are required for various of the Company's
operations, and these permits are subject to revocation, modification, and
renewal by issuing authorities. The Company also is subject to federal, state,
and local laws and regulations that impose liability for the cleanup or
remediation of property that 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. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material to the financial condition or operations of the Company 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, the Company is unable to predict the ultimate cost of complying
with such laws and regulations.
10
12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
GAS SALES COMMITMENTS
In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for future
sales under the amended contract. In consideration, TransAmerican agreed to
pay the buyer approximately $0.4 million per month through June 1997. This
commitment was assumed by the Company.
The Company and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which the Company
will deliver 100,000 MMBtu of natural gas per day through August 1997. The
selling price for this gas is determined by certain industry averages as
defined in the contract.
The Company and MidCon Texas Pipeline Corp. entered into a long-term gas
purchase contract on January 10, 1996, under which the Company is required to
deliver a total of 100,000 MMBtu per day to four specified delivery points for
a period of five years. The purchase price is determined by an industry index
less $0.09 per MMBtu. Deliveries commenced September 1, 1996.
PRODUCTION PAYMENTS
On February 28, 1995, the Company sold to TCW Portfolio No. 1555
Sub-Custody Partnership, L.P. ("TCW"), a term royalty in the form of a
dollar-denominated production payment in certain of the Company's properties
for proceeds of $49.5 million, less closing costs of approximately $2 million.
This production payment was terminated in May 1996 with a portion of the
proceeds of the volumetric production payment described below.
In January 1996, the Company sold to an unaffiliated third party a term
royalty interest in the form of a volumetric production payment on certain of
its producing properties. For net proceeds of approximately $33 million, the
Company conveyed to the third party a royalty on approximately 29 Bcf of
natural gas, which amount can increase if certain minimum monthly volumes are
not delivered to the production payment interest. In February 1996, the
Company and the third party amended this purchase agreement to include an
additional 14 Bcf which were sold to the third party for a purchase price of
approximately $16 million.
In May 1996, the Company sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production payment on certain
of the Company's producing properties. For net proceeds of approximately $43
million, the Company conveyed to the third party a royalty on approximately 37
Bcf of natural gas, which amount can increase if certain minimum monthly
volumes are not delivered to the production payment interest. The Company used
approximately $25 million of these net proceeds to terminate the
dollar-denominated production payment described above.
In September 1996, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar- denominated production payment in certain of
the Company's properties for proceeds of $13.5 million. The production payment
calls for the repayment of the primary sum plus an amount equivalent to a 16.0%
annual interest rate on the unpaid portion of such primary sum.
LETTER OF CREDIT
In January 1996, the Company entered into a reimbursement agreement with
an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of the Company in a legal proceeding. Prior to this transaction, the
supersedeas
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
bond had been collateralized by other letters of credit. These letters of
credit were collateralized by $20 million in cash, which was released to the
Company. If there is a draw under the letter of credit, the Company is
required to reimburse the third party within 60 days. The Company has agreed
to issue up to 8.6 million shares of common stock of the Company to the third
party if this contingent obligation to such third party becomes fixed and
remains unpaid for 60 days. The Company does not believe that this contingency
will occur. If the obligation becomes fixed, and alternative sources of
capital are not available, the Company could elect to sell shares of the
Company's common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party.
POSSIBLE FEDERAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt 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 provisions of the Internal Revenue Code of 1986, as amended ("COD
Exclusion"). TransAmerican expects that its tax attributes (including its net
operating loss and credit carryforwards) will be substantially reduced as a
consequence of the COD Exclusion. Although the Company believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness, due to factual and
legal uncertainties there can be no assurance that the IRS will not challenge
this position, or that the Company's position would be upheld. Under an
agreement between the Company, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement") the Company 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. Pursuant to
the Tax Allocation Agreement, 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.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control
(as such term is defined in the Indenture), each holder of the Notes will have
the right to require the Company to repurchase such holder's Notes at 101% of
the principal amount thereof plus accrued and unpaid interest. A Change of
Control would be deemed to occur under the Indenture in the case of certain
changes or other events in respect of the ownership or control of the Company,
including any circumstance pursuant to which any person or group, other than
John R. Stanley and his wholly-owned subsidiaries or the trustee under the
indenture governing $440 million aggregate principal amount of mortgage notes
(the "TARC Notes") of TransAmerican Refining Corporation ("TARC"), is or
becomes the beneficial owner of more than 50% of the total voting power of the
Company's then outstanding voting stock, unless the Notes have an investment
grade rating for the period of 120 days thereafter. The term "person," as used
in the definition of Change of Control, means a natural person, company,
government or political subdivision, agency or instrumentality of a government
and also includes a "group," which is defined as two or more persons acting as
a partnership, limited partnership or other group. In addition, certain
changes or other events in respect of the ownership or control of the Company
that do not constitute a Change of Control under the Indenture may result in a
"change of control" of the Company under the terms of the Company's credit
facility (the "BNY Facility") and certain equipment financing. Such an
occurrence could create an obligation for the Company to repay such other
indebtedness. At July 31, 1996, the Company had approximately $16.5 million of
indebtedness (excluding the Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under the Indenture or a
"change of control" under the terms of other outstanding
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
indebtedness, there can be no assurance that the Company will have sufficient
funds to satisfy any such payment obligations.
TARC owns and operates a large petroleum refinery in the Gulf Coast region
along the Mississippi River, approximately 20 miles from New Orleans,
Louisiana. TARC's refinery was shut down in January 1983 and is currently
partially operational. TARC is engaged in a two-phase capital improvement
program designed to reactivate the refinery and increase its complexity. In
February 1995, TARC issued the TARC Notes that were initially collateralized
by, among other things, 55 million shares of the Company's common stock (the
"Common Stock"). In March 1996, TARC sold 4.55 million shares of Common Stock
to provide additional financing for the capital improvement program. TARC's
Quarterly Report on Form 10-Q for the three months ended April 30, 1996,
indicates that TARC will require substantial additional financing over the
course of the remaining construction period to complete the capital improvement
program. TARC has advised the Company that if this financing is not available
on a timely basis, or if significant engineering problems, work stoppages, cost
overruns or delays occur, TARC likely will not be able to complete the first
phase of the capital improvement program by February 15, 1997. TARC has
further advised the Company that, if required financing is obtained on a timely
basis, completion by February 15, 1997 will still prove very difficult.
Under the indenture governing the TARC Notes, the failure of TARC to complete
the first phase of its capital improvement program by February 15, 1997
(subject to extension to August 15, 1997 if certain financial coverage ratios
are met) would constitute an event of default at such date. Any such event of
default could result in the sale, following the occurrence of such event of
default, of some or all of the remaining 50.45 million shares of Common Stock
pledged to collateralize the TARC Notes. A foreclosure on such shares would
constitute a "change of control" of the Company under the BNY Facility and
certain equipment financing, which may create an obligation for the Company to
repay amounts outstanding thereunder, but would not constitute a Change of
Control under the Indenture. A sale of such shares following a foreclosure
could result in a Change of Control under the Indenture.
The Company has significant contingent liabilities, including
liabilities with respect to litigation matters as described above,
indemnification obligations relating to certain tax benefit transfer
sale-leaseback transactions and other obligations assumed in the Transfer. In
addition, a change of control or other event that results in deconsolidation of
the Company and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. These matters,
individually and in the aggregate, amount to significant potential liability
which, if adjudicated in a manner adverse to the Company in one reporting
period, could have a material adverse effect on the Company's cash flow or
operations for that period. Although the outcome of these contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, the Company does not expect these matters to have a material adverse
effect on its financial position.
3. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
July 31, January 31,
1996 1996
---------- -----------
Prepayments:
Trade $ 4,053 $ 2,394
Drilling 1,316 2,070
Insurance 2,069 1,430
Properties held for sale -- 6,000
Restricted cash -- 7,368
Settlement values of commodity price swap agreements 27,215 31,317
Other 307 242
----------- -----------
$ 34,960 $ 50,821
=========== ===========
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
4. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands
of dollars):
July 31, January 31,
1996 1996
---------- ------------
Royalties $ 11,732 $ 9,793
Taxes other than income taxes 10,771 2,733
Accrued interest 11,756 11,756
Payroll 4,469 4,832
Litigation settlements 694 7,053
Settlement values of commodity price swap agreements 27,215 31,317
Insurance 3,238 1,248
Property sales price adjustment 6,935 --
Other 5,399 6,024
--------- ----------
$ 82,209 $ 74,756
========= ==========
5. SUMMARY FINANCIAL INFORMATION
The following summary financial information of TTC reflects its financial
position as of July 31, 1996 and January 31, 1996 and its results of operations
for the three and six months ended July 31, 1996 and 1995 (in thousands of
dollars):
July 31, January 31,
1996 1996
----------- ----------
ASSETS
Total current assets $ 9,622 $ 811
Property and equipment, net 75,737 70,273
Other assets 3 3
---------- ----------
$ 85,362 $ 71,087
========== ==========
LIABILITIES AND EQUITY
Total current liabilities $ 7,207 $ 6,191
Total noncurrent liabilities 29,393 21,016
Total equity 48,762 43,880
---------- ----------
$ 85,362 $ 71,087
========== ==========
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
-------------------- ----------------------
1996 1995 1996 1995
--------- -------- --------- ----------
Revenues $ 22,448 $ 22,098 $ 53,601 $ 44,808
Operating expenses 22,111 18,730 46,090 36,711
--------- -------- --------- ---------
Operating income 337 3,368 7,511 8,097
Other income (expense) -- -- -- (47)
--------- -------- --------- ---------
Income before income taxes 337 3,368 7,511 8,050
Income taxes 118 1,179 2,629 2,818
--------- -------- --------- ---------
Net income $ 219 $ 2,189 $ 4,882 $ 5,232
========= ======== ========= =========
Operating expenses for the three and six months ended July 31, 1996
increased by approximately $3.4 million and $9.4 million, respectively, from
the comparable prior year periods primarily due to increases in the spot market
price of natural gas, which resulted in increases in natural gas liquids
("NGLs") and compressor fuel costs. Included in revenues for the six months
ended July 31, 1996 is a gain of approximately $7.5 million on the sale of the
Company's interest in the MidCon Texas pipeline and net gains on the
disposition of other equipment.
TTC conducts significant intercompany activities with TransTexas Gas
Corporation and TransAmerican. Included in the results of operations of TTC
are the following transactions with affiliates (in thousands of dollars).
Three Months Ended Six Months Ended
July 31, July 31,
---------------------- ----------------------
1996 1995 1996 1995
---------- --------- --------- ----------
Revenues $ 6,711 $ 8,282 $ 13,297 $ 16,812
Operating costs and expenses 16,556 13,787 34,705 27,484
Affiliated operating costs and expenses for the three months ended July
31, 1996 and 1995 include the cost of natural gas purchased from TransTexas Gas
Corporation of approximately $11 million and $9 million, respectively.
Nonaffiliated revenues include the sales of natural gas liquids and condensate
extracted from this purchased gas totaling $13 million for each of the
respective periods.
Affiliated operating costs and expenses for the six months ended July 31,
1996 and 1995 include the cost of natural gas purchased from TransTexas Gas
Corporation of approximately $23 million and $19 million, respectively.
Nonaffiliated revenues for the respective periods include the sales of natural
gas liquids and condensate extracted from this purchased gas of $27 million and
$26 million.
6. INCOME TAXES
Total income tax expense (benefit) differs from amounts computed by
applying the statutory federal income tax rate to income (loss) before income
taxes. The items accounting for this difference are as follows (in thousands
of dollars):
15
17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
------------------------ ----------------------
1996 1995 1996 1995
--------- --------- --------- ----------
Federal income tax (benefit) at the statutory
rate $ 27,203 $(24,547) $ 28,829 $ (25,221)
Increase (decrease) in tax resulting from:
Tight sands credit (7,437) 7,842 (7,437) 7,842
Valuation allowance (13,604) 13,604 (13,604) 13,604
Other -- (2,593) -- --
--------- -------- -------- ---------
$ 6,162 $ (5,694) $ 7,788 $ (3,775)
========= ======== ======== =========
Total income tax expense for the three and six months ended July 31, 1995
includes the tax benefit of the
extraordinary item of $1,491. Due to taxable income related to litigation
settlements and asset sales, the Company's valuation allowance was reversed in
the quarter ended July 31, 1996. The Company's current tax portion payable to
TransAmerican totaled approximately $12 million at July 31, 1996.
DECONSOLIDATION
TransAmerican Energy Corporation ("TEC") and TARC, both subsidiaries of
TransAmerican, currently own approximately 54% and 14%, respectively, of the
outstanding common stock of the Company. These shares are pledged as
collateral for TARC's outstanding debt securities. TransDakota Oil Corporation
("TDOC"), another subsidiary of TransAmerican, owns 5% of the outstanding
common stock of the Company, which is pledged as collateral for TDOC's debt
securities. TDOC intends to transfer such stock to TransAmerican in September
1996, in connection with the repayment of such debt securities. TransAmerican
intends to transfer such stock to TransAmerican Exploration Corporation
("TAEC"), a wholly-owned subsidiary of TransAmerican. TAEC intends to pledge
such stock as collateral for debt securities to be issued by TAEC.
Under certain circumstances, TransAmerican, TAEC, TDOC, TEC or TARC may
sell or otherwise dispose of shares of common stock of the Company. If,
as a result of any sale or other disposition of the Company's common stock,
the direct and indirect ownership of the Company by TransAmerican is less than
80% (measured by voting power and value), the Company will no longer be a
member of TransAmerican's consolidated group for federal tax purposes (the
"TransAmerican Consolidated Group") and, with certain exceptions, will no
longer be obligated under the terms and conditions of, or entitled to the
benefits of, the Tax Allocation Agreement ("Deconsolidation"). Further, if
TEC or TARC sells or otherwise transfers any stock of TARC, or issues any
options, warrants or other similar rights relating to such stock, outside of
the TransAmerican Consolidated Group, then a Deconsolidation of both TARC and
the Company from the TransAmerican Consolidated Group would occur. For the
taxable year during which Deconsolidation of the Company occurs, which would
also be the final year that the Company is a member of the TransAmerican
Consolidated Group, TransAmerican would recognize a previously deferred gain of
approximately $266.3 million associated with the Transfer and would be required
to pay federal income tax on this gain (the tax is estimated to be between $29
million and $56 million if Deconsolidation occurs in fiscal 1997 and between
$24 million and $45 million if Deconsolidation occurs in fiscal 1998). This
analysis is based on the Company's position that the gain from the Transfer,
which occurred in 1993, was deferred under the consolidated return regulations.
The deferred gain generally is being included in TransAmerican's taxable income
in a manner that corresponds (as to timing and amount) with the realization by
the Company of (and, thus, will be offset by) the tax benefits (i.e.,
additional depreciation, depletion and amortization on, or reduced gain or
increased loss from a sale of, the transferred assets) arising from the
additional basis. If, under the terms of the TARC Notes, it was reasonably
certain when the TARC Notes were issued that a sufficient amount of the
Company's stock would be disposed in the future to cause a Deconsolidation of
the Company from the TransAmerican Consolidated Group, it is possible that the
Deconsolidation of the
16
18
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Company would be treated as occurring as of the date the TARC Notes were
issued. However, TARC has advised the Company that it believes that when the
TARC Notes were issued it was not reasonably certain that a Deconsolidation of
the Company would occur in the future. Under the Tax Allocation Agreement, the
Company is required to pay TransAmerican each year an amount equal to the
lesser of (i) the reduction in taxes paid by the Company for such year as a
result of any increase in the tax basis of assets acquired by the Company from
TransAmerican that is attributable to the Transfer and (ii) the increase in
taxes paid by TransAmerican for such year and all prior years attributable to
gain recognized by TransAmerican in connection with the contribution of assets
by TransAmerican to the Company (less certain amounts paid by the Company for
all prior years). The Company estimates that if Deconsolidation occurs in
fiscal 1997 or 1998, the amount reimbursed to TransAmerican would be between
$15 million and $26 million and between $4 million and $7 million,
respectively. The remaining amount of the tax relating to the gain would be
paid to TransAmerican over the lives of the assets transferred. However, the
Company could be liable for additional taxes pursuant to the Tax Allocation
Agreement and the several liability provisions of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
the Company are used by other members of the TransAmerican Consolidated Group,
then the Company is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent the Company has taxable
income, remains a member of the TransAmerican Consolidated Group, and the other
group members have the ability to pay such taxes. If TransAmerican, TAEC, TEC,
TARC or TDOC transfers shares of the Company (or transfers options or other
rights to acquire such shares) and, as a result of such transfer,
Deconsolidation of the Company occurs, the Company would not thereafter
receive any benefit pursuant to the Tax Allocation Agreement for net operating
losses of the Company used by other members of the TransAmerican Consolidated
Group prior to the Deconsolidation of the Company.
Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the Internal Revenue Service (the "IRS") for
the consolidated federal income tax liability of the consolidated group. There
can be no assurance that TransAmerican will have the ability to satisfy the
above tax obligation at the time due and, therefore, the Company, TARC or TEC
may be required to pay the tax.
Under the Tax Allocation Agreement, the Company will be required to pay
any Texas franchise tax (which is estimated not to exceed $10.6 million) which
may be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
7. HEDGING AGREEMENTS
Beginning in April 1995, the Company entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either the
Company or the counterparty thereto is required to make a payment to the other
at the end of each month (the "Settlement Date"). The payments will equal the
product of a notional quantity ("Base Quantity") of natural gas and the
difference between a specified fixed price ("Fixed Price") and a market price
("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for the Company to make
payments to the counterparty to the extent that the Floating Price exceeds the
Fixed Price, and for the counterparty to make payments to the Company to the
extent that the Floating Price is less than the Fixed Price. For the three and
six months ended July 31, 1996, the Company incurred net settlement losses
pursuant to the Hedge Agreements totaling approximately $5.8 million and
17
19
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
$15.4 million, respectively. As of July 31, 1996, the Company has Hedge
Agreements with Settlement Dates ranging from August 1996 through April 1997
involving total Base Quantities for all monthly periods of approximately 54.6
TBtu of natural gas. Fixed Prices for these agreements range from $1.70 to
$1.72 per MMBtu ($1.76 to $1.78 per Mcf). Floating Prices may not exceed a
maximum (the "Maximum Floating Price") of $2.20 per MMBtu ($2.28 per Mcf). At
July 31, 1996, the estimated cost to settle these Hedge Agreements would have
been approximately $24.1 million. These agreements are accounted for as hedges
and accordingly, any gains or losses are deferred and recognized in the month
the physical volumes are delivered. At July 31, 1996, the Company maintained
$11.1 million in margin accounts related to the Hedge Agreements. The Company
may be required to post additional cash margin whenever the daily natural gas
futures prices as reported on the NYMEX, for each of the months in which the
swap agreements are in place, exceed the Fixed Price. The maximum margin call
under each Hedge Agreement will never exceed the product of the Base Quantity
for the remaining months under such Hedge Agreement multiplied by the
difference between the Maximum Floating Price and the Fixed Price.
In June 1996, the Company entered into a Master Swap Agreement (the
"Master Swap Agreement") with one of its swap counterparties, which replaced a
previously existing master agreement governing the swaps between the two
parties. The Company's obligations under the Master Swap Agreement are
collateralized by a mortgage on a substantial portion of the Company's
producing properties. In accordance with the Indenture, the lien created by
the mortgage collateralizes obligations up to a maximum of $80.8 million (10%
of the SEC PV10 of the Company's most recent reserve report). As contemplated
by the Indenture, the Trustee under the Indenture has subordinated the lien
collateralizing the Notes outstanding thereunder to the lien collateralizing
the Company's obligations under the Master Swap Agreement. The maximum amount
of obligations of the Company that could be collateralized by the mortgage,
based on the swaps in place under the Master Swap Agreement as of September
10, 1996, is approximately $7.5 million. Subject to compliance with certain
collateral coverage tests, the Company is not required to provide additional
cash margin for any swaps now or hereafter subject to the Master Swap
Agreement.
8. LITIGATION SETTLEMENTS
TERRY/PENROD. TransAmerican and a group of TransAmerican's former bank
lenders (the "Bank Group") were parties to a consolidated suit filed December
6, 1991, in the United States District Court for the Southern District of
Texas, Houston Division, relating to the interpretation of two third-party
drilling agreements. Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling
Corporation, Terry Oilfield Supply Co., Inc. and Terry Resources, Inc.
("Terry") sued TransAmerican for approximately $50 million in actual damages
and punitive damages of not less than five times actual damages. On April 5,
1996, the court entered a final judgment against TransAmerican, the Company and
several of their affiliates, in the amount of approximately $43 million, plus
interest. On April 18, 1996, the court entered a separate judgment against the
same parties for Terry's attorneys' fees of $2 million. In May 1996, the
Company paid Terry approximately $19 million and caused escrowed funds held for
the benefit of the Bank Group of approximately $22 million to be paid to Terry.
Upon payment of the settlement amount, Terry released the judgments, released
all liens and reassigned to the Company a production payment in certain
properties. Terry dismissed an unrelated administrative proceeding upon payment
of the settlement amount described above.
GINTHER/WARREN. Wilbur L. Ginther and Howard C. Warren conveyed a portion
of a lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas Supreme
Court upheld a judgment in favor of Messrs. Ginther and Warren against
18
20
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Taub's interest in the lease. The lower court judgment had awarded a portion
of the lease to Messrs. Ginther and Warren because Taub's attorney had
defrauded Messrs. Ginther and Warren with respect to their interest in the
lease. On November 26, 1986, the estates of Messrs. Ginther and Warren filed
an adversary proceeding in the United States Bankruptcy Court for the Southern
District of Texas, Houston Division (the "Bankruptcy Court") against
TransAmerican seeking damages and claiming that TransAmerican had constructive
notice of their disputes but continued to pay royalties and proceeds of
production to Taub. TransAmerican filed an interpleader action in the
Bankruptcy Court and deposited the disputed funds accruing from and after
November 1984 into the registry of the court. On September 30, 1993, the
Bankruptcy Court entered a judgment against TransAmerican in the amount of $6.3
million plus post judgment interest. On September 15, 1995, the U.S. District
Court for the Southern District of Texas entered an order reversing an award of
interest to Taub and affirming the final judgment in all other respects. The
Company appealed the judgment to the Fifth Circuit Court of Appeals. On July
2, 1996, the Company and the estates of Messrs. Ginther and Warren entered into
a settlement pursuant to which such estates received $3.5 million and a
promissory note for $2.8 million. The promissory note is payable in 36 equal
monthly installments commencing August 1, 1996, and bears no interest unless an
installment payment is not made. In addition, the Company transferred to such
estates an additional overriding royalty interest in a portion of the lease and
agreed to drill additional wells on the lease. In conjunction with the
settlement, the estates of Messrs. Ginther and Warren agreed to farm out to the
Company an additional working interest in the lease.
9. CREDIT AGREEMENTS
The Company and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement, as of October
31, 1995, for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of the Company and is
guaranteed by John R. Stanley. The amounts that may be advanced to the Company
under this line of credit are based on a percentage of the Company's natural
gas receivables from unaffiliated third parties. The amount outstanding under
the line of credit as of July 31, 1996 was $7.9 million. Based upon
foreseeable accounts receivable levels, the Company estimates the maximum
amount available at any one time under this facility for fiscal 1997 will be
approximately $26 million.
Under the terms of this agreement, the Company's net loss (including any
extraordinary losses) may not exceed $5 million for each fiscal quarter ending
after January 31, 1996 ($10 million for each six-month period). This line of
credit is also subject to certain other covenants which relate to, among other
things, the maintenance of certain financial ratios.
In May 1996, the Company entered into a Note Purchase Agreement pursuant
to which the Company issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes, which bore interest
at 13 1/3% per annum, were paid in full in July 1996. The notes were
guaranteed on a senior secured basis by TransAmerican.
10. TRANSACTIONS WITH AFFILIATES
In February 1996, the Company purchased the building for its corporate
headquarters from TransAmerican for $4 million.
In December 1994, the Company entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $1.3
million and $7.8 million, respectively, for the three months
19
21
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
ended July 31, 1996 and 1995 and $11.7 million and $10.4 million, respectively
for the six months ended July 31, 1996 and 1995. The receivable from
TransAmerican for natural gas sales totaled $11.7 million at July 31, 1996.
Pursuant to this agreement, interest accrues on all unpaid balances at a rate
of prime plus 2% per annum.
The Company sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.8 million and $1.2 million, respectively, for the three months ended July
31, 1996 and 1995 and $1.5 million and $1.3 million, respectively, for the six
months ended July 31, 1996 and 1995. The receivable from TARC for natural gas
sales totaled approximately $1.4 million at July 31, 1996.
As of January 1996, the Company and TTEX entered into a Drilling Program,
as defined in the Indenture. Pursuant to the Program, TTEX received a portion
of revenues, in the form of a production payment, from certain of the Company's
wells. The production payment was transferred in consideration of a note
payable in the amount of $23.6 million issued by TTEX. In July 1996, TTEX
transferred this production payment to the Company in the form of a dividend,
and the Company forgave the $13.2 million remaining balance of the note
payable.
In July 1996, TTEX loaned $9.5 million to TransAmerican pursuant to the
terms of a $25 million promissory note due July 31, 1998 that bears interest,
payable quarterly, at 15% per annum. TTEX has made further advances pursuant
to the note, subject to the same terms. The amount outstanding under this
promissory note totaled approximately $24 million at September 10, 1996. The
Company believes that the advances by TTEX to TransAmerican reduce the risk of
tax deconsolidation (and potential tax liability of the Company) that could be
caused by the sale of TransTexas shares by TransAmerican or its affiliates.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified the Company for substantially all of the Company's liability in
connection with the settlement of the Terry/Penrod litigation (See Note 8). In
order to facilitate the settlement, the Company advanced to TransAmerican
$16.4 million of the settlement in exchange for a note receivable. In
connection with the litigation settlement, the Company received from Terry the
reversionary interest in certain producing properties. The Company and
TransAmerican had intended that such interests would revert to TransAmerican
under the Transfer Agreement. The Company retained such interests in partial
satisfaction of TransAmerican's indemnity obligations. The Company's
receivable from TransAmerican related to this settlement totaled approximately
$7 million at July 31, 1996.
In September 1996, the Company intends to purchase from TDOC for
approximately $20 million certain oil and gas leasehold interests located in
the Lodgepole area in North Dakota. The Company believes that the combination
of its interests in the Lodgepole area with the interests of TransDakota Oil
Company will produce a more marketable property package.
The Company provides accounting and legal services to TARC, TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement (the "Services Agreement"). The Company provides general commercial
legal services and certain accounting services (including payroll, tax, and
treasury services) to TARC and TEC for a fee of $26,000 per month. At
TransAmerican's request, the Company, at its election, may provide drilling and
workover services. The receivable from TransAmerican for drilling, workover
and administrative services totaled approximately $12 million at July 31, 1996.
The Company made such advances in anticipation of production from wells
drilled by TransAmerican providing a source of repayment of such advances. In
such regard, the Company anticipates obtaining a $11.5 million dollar-
denominated production payment, bearing interest at 17% per annum, burdening
certain oil and gas interests owned by TransAmerican. At July 31, 1996, $12
million of remaining related-party receivables has been recorded as a contra-
stockholder equity account due to uncertainties regarding the terms and
payment schedule for such receivables.
20
22
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 the Company
included elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
NGLs. The profitability of the Company also depends on the volume of natural
gas it gathers and transports, its ability to minimize finding and lifting
costs and maintaining its reserve base while maximizing production.
The Company's operating data for the three and six months ended July 31,
1996 and 1995, is as follows:
Three Months Ended Six Months Ended
July 31, July 31,
---------------------- -----------------------
1996 1995 1996 1995
--------- --------- ---------- ---------
Sales volumes:
Gas (Bcf) (1) 38.1 35.3 74.3 71.0
NGLs (Mmgal) 41.1 51.7 89.3 104.0
Condensate (Mbbls) 116 109 280 284
Average prices:
Gas (dry) (per Mcf) (2) $ 1.95 $ 1.47 $ 1.99 $ 1.39
NGLs (per gallon) .31 .25 .31 .25
Condensate (per Bbl) 19.62 20.63 19.86 18.44
Number of gross wells drilled 13 13 58 31
Percentage of wells completed 38% 69% 74% 77%
- -------------------------
(1) Sales volumes for the three and six months ended July 31, 1996 include 8.1
Bcf and 14.0 Bcf, respectively, delivered pursuant to a volumetric
production payment.
(2) Average price for the three and six months ended July 31, 1996 includes
amounts delivered under volumetric production payments. The average gas
price for the Company's undedicated production for these periods was $2.18
per Mcf and $2.17 per Mcf, respectively. Gas prices do not include the
effect of hedging agreements.
A summary of the Company's operating expenses is set forth below (in millions
of dollars):
Three Months Ended Six Months Ended
July 31, July 31,
----------------------- ----------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Operating costs and expenses:
Lease $ 6.3 $ 5.4 $ 13.0 $ 9.4
Pipeline 8.1 6.1 16.3 11.4
Natural gas liquids 10.7 9.7 23.2 19.9
--------- ---------- --------- ----------
25.1 21.2 52.5 40.7
Taxes other than income taxes (1) 7.2 3.8 12.4 7.7
--------- ---------- --------- ----------
Total $ 32.3 $ 25.0 $ 64.9 $ 48.4
- ----------------------------- ========= ========== ========= ==========
(1) Taxes other than income taxes include severance, property, and other
taxes.
21
23
The Company's average depletion rates have been as follows:
Three Months Ended Six Months Ended
July 31, July 31,
----------------------- ----------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Depletion rates (per Mcfe) $ .94 $ .78 $ .92 $ .77
The Company's Consolidated EBITDA, as defined in the Indenture, which
consists of the Company's earnings before consolidated fixed charges (including
capitalized interest and the interest component of rent expense totaling
approximately $4.1 million and $0.1 million for the quarters ended July 31,
1996 and 1995, respectively, and $8.0 million and $1.1 million, respectively,
for the six months ended July 31, 1996 and 1995), income taxes, depreciation,
depletion, and amortization are set forth below (in millions of dollars):
Three Months Ended Six Months Ended
July 31, July 31,
----------------------- ----------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Consolidated EBITDA $ 143.1 $ 40.1 $ 204.0 $ 85.4
THREE MONTHS ENDED JULY 31, 1996, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1995
Gas, condensate and NGLs revenues for the three months ended July 31,
1996 increased by $9.5 million from the comparable period of the prior year,
due primarily to increases in gas and NGL sales prices and gas sales volumes,
offset in part by decreased NGL sales volumes. The average monthly prices
received per Mcf of gas, excluding amounts dedicated to volumetric production
payments, ranged from $2.04 to $2.37 in the three months ended July 31, 1996,
compared to a range of $1.35 to $1.51 in the same period in the prior year.
The increase in gas sales volumes is due primarily to increased production from
the Company's new development areas, offset in part by the normal decline in
natural gas production from the Company's producing properties in the Lobo
Trend along with the sales of certain of the Company's producing properties.
The producing properties sold by the Company accounted for approximately 3.9
Bcfe of the Company's net production for the quarter ended July 31, 1996. As
of July 31, 1996, the Company had a total of 861 producing wells compared to
947 at July 31, 1995. NGL sales volumes decreased as a result of decreases
in the volumes of natural gas processed. Transportation revenues remained at
essentially the same levels as the prior year quarter as decreases in the
Company's volumes transported were offset by volumes attributable to volumetric
production payments and the sale of certain of the Company's producing
properties. The Company currently transports a portion of its production from
the Bob West and Bob West North development areas through a third-party
pipeline.
Lease operating expenses for the quarter ended July 31, 1996 increased by
$0.9 million over the comparable prior year period primarily due to the
initiation of a program to increase flow rates on certain of the Company's
wells through increases in workovers and the installation of leased wellhead
compressors. Pipeline operating expenses increased by $2.0 million due
primarily to increases in compressor fuel costs and chemicals used in the
operation of the Company's amine plants. NGLs cost increased by $1.0 million
from the first quarter in the prior year due to the increase in the cost of
natural gas processed. Depreciation, depletion and amortization expense for
the three months ended July 31, 1996 increased by $2.7 million due to a $0.16
increase in the depletion rate, offset by a decrease in the Company's
undedicated natural gas production. General and administrative expenses
decreased by $1.3 million in the three months ended July 31, 1996, due
primarily to a litigation accrual of $7.0 million in the prior year quarter,
offset in part by a litigation accrual of $5.0 million in the current year
quarter, increases in wages and benefits and outside services. Taxes other
than income taxes increased by $3.3 million over the prior year quarter due
primarily
22
24
to an increase in severance taxes, including an accrual of $1.5 million as a
result of a severance tax audit adjustment.
Interest income for the three months ended July 31, 1996 decreased by
approximately $0.5 million over the comparable prior year period due to
increased cash balances in the prior year quarter resulting from the issuance
of the Notes in June 1995. Interest expense increased by $6.6 million over the
same period of the prior year primarily as a result of interest accrued on the
Notes, offset in part by the capitalization of approximately $3.8 million of
interest in connection with the acquisition of certain of the Company's gas and
oil properties.
SIX MONTHS ENDED JULY 31, 1996, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1995
Gas, condensate and NGL revenues for the six months ended July 31, 1996
increased by $25.4 million from the comparable period of the prior year, due
primarily to increases in gas, condensate and NGL sales prices and gas sales
volumes, offset in part by decreases in NGL sales volumes. The average monthly
prices received per Mcf of gas, excluding amounts dedicated to volumetric
production payments, ranged from $2.02 to $2.45 in the six months ended July
31, 1996, compared to a range of $1.29 to $1.52 in the same period in the prior
year. The increase in gas sales volumes is due primarily to increased
production from the Company's new development areas, offset in part by the
normal decline in natural gas production from the Company's Lobo Trend wells
and the sale of a portion of the Company's producing properties in the Lobo
Trend. NGLs sales volumes decreased as a result of decreases in the
volumes of natural gas processed. Transportation revenues decreased by $0.7
million for the six months ended July 31, 1996, due primarily to decreases in
volumes transported.
Lease operating expenses in the six months ended July 31, 1996 increased
by $3.6 million from the prior year period due primarily to increases in
repairs and maintenance and workover expense attributable to the increase in
the number of producing wells prior to the sale of certain of the Company's
producing properties and the initiation in the first quarter of the current
fiscal year of a program to increase flow rates on certain of the Company's
wells through increased workovers and the installation of leased wellhead
compressors. Pipeline operating expenses increased by $4.9 million due
primarily to increases in compressor fuel costs and chemicals used in the
operation of the Company's amine plants. NGLs cost increased by $3.3 million
from the comparable period in the prior year due to increases in the cost of
natural gas used in NGL processing, offset by a decrease in volumes of natural
gas processed. Depreciation, depletion and amortization expense for the six
months ended July 31, 1996 increased by $1.9 million due to a $0.15 increase in
the depletion rate offset by the decrease in the Company's undedicated natural
gas production. General and administrative expenses increased by $0.5 million
in the six months ended July 31, 1996, due primarily to increases in wages and
benefits. Taxes other than income taxes increased by $4.6 million over the
comparable prior year period due primarily to an increase in severance taxes,
including an accrual of $1.5 million as a result of a severance tax audit
adjustment.
Interest income for the six months ended July 31, 1996 increased by
approximately $0.1 million over the comparable period of the prior year due to
increased average cash balances. Interest expense increased by $13.5 million
primarily as a result of interest accrued on the Notes and the amortization of
debt issue costs, offset in part by the capitalization of approximately $7.5
million of interest in connection with the acquisition of the Company's
unevaluated gas and oil properties.
Cash flow from operating activities for the six months ended July 31, 1996
increased by approximately $121.3 million from the prior-year period due
primarily to cash received in the settlement of take-or-pay litigation and
proceeds from the sale of volumetric production payments.
Cash used in investing activities decreased by $134.8 million due to
decreases in lease acquisitions, along with proceeds from the sale of certain
of the Company's producing properties, offset in part by advances to affiliates.
Cash flow from financing activities decreased by approximately $307.5
million due primarily to the issuance of the Notes in June 1995.
23
25
LIQUIDITY AND CAPITAL RESOURCES
A primary source of funds to meet the Company's capital and debt service
requirements is net cash flow provided by operating activities, which is
dependent on the prices the Company receives for the volumes of natural gas the
Company produces. The Company has entered into hedge agreements to reduce a
portion of its exposure to natural gas prices. See Note 7 of Notes to
Condensed Consolidated Financial Statements included elsewhere herein.
The Company makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. The Company has
financed these expenditures primarily with cash from operations, public
offerings of debt and equity securities, the sale of production payments and
other financings. For the six months ended July 31, 1996, total capital
expenditures were $122 million, including $10 million for lease acquisitions,
$96 million for drilling and development and $16 million for the Company's gas
gathering and pipeline system and other equipment. Pursuant to the Indenture,
if the Company's Working Capital, as defined in the Indenture, is less than $20
million at the end of any fiscal quarter, the Company's Capital Expenditures,
as defined, for the next succeeding fiscal quarter may not exceed 90% of the
Company's Consolidated EBITDA for such prior fiscal quarter minus the Company's
Consolidated Fixed Charges for such prior fiscal quarter (the "Capital
Expenditure Limit"). The Company's Working Capital at April 30, 1996 was less
than $20 million. As a result, the Company's Capital Expenditures for the
quarter ended July 31, 1996 could not exceed the Capital Expenditure Limit of
$31.3 million. The Company's Capital Expenditures for the quarter ended July
31, 1996 totaled $30.1 million. The Company believes that this restriction did
not have a material effect on developmental drilling for the quarter. The
Company's Working Capital at July 31, 1996 was $27.2 million.
The Company anticipates total capital expenditures of approximately $245
million and $210 million in fiscal 1997 and fiscal 1998, respectively, subject
to Indenture requirements and available cash flow, of which approximately $200
million and $175 million, respectively, will be used for drilling and
development, and $25 million and $20 million, respectively, for the Company's
gas gathering and pipeline system (including pipeline expansion into the La
Grulla development area), and other equipment and seismic acquisition. The
Company anticipates expenditures of approximately $20 million in both fiscal
years for lease acquisitions. If revenues decrease, certain contingent
obligations of the Company become fixed or the Company's level of capital
expenditures is limited by the Indenture, the Company may not have sufficient
funds for, or may be restricted in maintaining the level of, capital
expenditures necessary to replace its reserves or to maintain production at
current levels and, as a result, production may decrease over time. Although
cash from operating activities for the six months ended July 31, 1996 has
increased due to sales of volumetric production payments and litigation
settlements, net cash provided by operating activities declined over the three
and one-half years ended January 31, 1996. No assurance can be given that the
Company's cash flow from operating activities will be sufficient to meet planned
capital expenditures, contingent liabilities and debt service in the future.
Since July 31, 1995, the Company has utilized asset sales and various
financings, in addition to cash flow from operating activities, to meet its
working capital requirements. The Company anticipates that it will utilize
additional financing or sales of assets, as allowed by the Indenture, to fund
planned levels of operations and to meet its obligations, including its
obligations under the Indenture, through January 1997.
In January 1996, the Company entered into a reimbursement agreement with
an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of the Company in a legal proceeding. Prior to this transaction, the
supersedeas bond had been collateralized by other letters of credit. These
letters of credit were collateralized by $20 million in cash, which was
released to the Company. If there is a draw under the letter of credit, the
Company is required to reimburse the third party within 60 days.
In January and February 1996, the Company completed both a financing and a
sale-leaseback transaction, each in the amount of $3 million, related to its
operating equipment. Both the financing, which has an interest rate of 9% per
annum, and the sale-leaseback transaction, which has a monthly lease payment
of approximately $56,400, have a 36-month term. In February 1996, the
Company completed an additional financing collateralized by its operating
equipment in the amount of $10 million at an interest rate of 12% per annum and
a 36-month term.
24
26
In January 1996, the Company sold to an unaffiliated third party a term
overriding royalty interest in the form of a production payment carved out of
its interests in certain of its producing properties. For net proceeds of
approximately $33 million, the Company conveyed to the third party a term
overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional net
proceeds of approximately $16 million, the Company supplemented the production
payment to subject a percentage of its interests in certain additional
producing properties to the production payment and to include additional
volumes of approximately 14 Bcf of natural gas within the base volume subject
to the production payment.
In March 1996, the Company sold its 41.67% interest in the 76-mile,
24-inch MidCon Texas pipeline, which runs from the Company's Thompsonville
compressor station to Agua Dulce, for $7.5 million. The Company believes that
its existing transportation capacity in this area is adequate for the Company's
production and does not anticipate any material constraints on the
transportation of its natural gas as a result of this sale.
In May 1996, the Company sold to two unaffiliated third parties a
volumetric production payment for net proceeds of approximately $43 million.
The Company conveyed to the third parties a term overriding royalty equivalent
to a base volume of approximately 37 Bcf of natural gas, subject to certain
increases in the base volume and in the percentage interest dedicated if
certain minimum performance and delivery requirements are not met. Concurrently
with the closing of that transaction, the Company and one of the unaffiliated
third parties terminated, prior to the expiration of its stated term, a
dollar-denominated term overriding royalty interest previously sold by the
Company to that unaffiliated third party for a payment by the Company of
approximately $25 million. As a result of such termination, the remaining base
volume from the previously sold overriding royalty interest was conveyed to the
Company.
In May 1996, the Company entered into a Note Purchase Agreement pursuant
to which the Company issued notes in the aggregate principal amount of $15.75
million for aggregate proceeds of $15 million. The notes, which bore interest
at 13 1/3% per annum, were paid in full in July 1996. The notes were
guaranteed on a senior secured basis by TransAmerican.
In June 1996, the Company entered into an agreement with one of its swap
counter parties as a result of which the Company, subject to compliance with
certain collateral coverage tests, will not be required to make cash margin
deposits with respect to the swaps covered by such agreement. See Note 7 to
the accompanying Condensed Consolidated Financial Statements.
In September 1996, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar- denominated production payment in certain of
the Company's properties for proceeds of $13.5 million. The production payment
calls for the repayment of the primary sum plus an amount equivalent to a 16.0%
annual interest rate on the unpaid portion of such primary sum.
In September 1996, the Company entered into an agreement with an
unaffiliated third party for the reimbursement of certain drilling costs with
respect to wells drilled by the Company. Pursuant to the agreement, upon the
approval of the third party of a recently drilled or currently drilling well
for inclusion in the program, the third party will commit to the reimbursement
of all or a portion of the cost of such well, up to an aggregate maximum for
all such wells of $16.5 million. The program wells will be subject to a
dollar-denominated production payment equal to the principal amount of such
reimbursed costs, plus an amount equivalent to a 17.5% annual interest rate on
the unpaid portion of such principal amount.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified the Company for substantially all of the Company's liability in
connection with the settlement of the Terry/Penrod litigation (see Note 8 to the
accompanying Condensed Consolidated Financial Statements). In order to
facilitate the settlement, the Company advanced to TransAmerican $16.4 million
of the settlement in exchange for a note receivable. In connection with the
litigation settlement, the Company received from Terry the reversionary interest
in certain producing properties. The Company and TransAmerican had intended that
25
27
such interests would revert to TransAmerican under the Transfer Agreement.
The Company retained such interests in partial satisfaction of TransAmerican's
indemnity obligations.
In February 1996, the Company purchased the building for its corporate
headquarters from TransAmerican for $4 million.
In December 1994, the Company entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $1.3
million and $7.8 million, respectively, for the three months ended
July 31, 1996 and 1995 and $11.7 million and $10.4 million, respectively
for the six months ended July 31, 1996 and 1995. The receivable from
TransAmerican for natural gas sales totaled $11.7 million at July 31, 1996.
Pursuant to this agreement, interest accrues on all unpaid balances at a rate
of prime plus 2% per annum.
The Company sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.8 million and $1.2 million, respectively, for the three months ended July
31, 1996 and 1995 and $1.5 million and $1.3 million, respectively, for the six
months ended July 31, 1996 and 1995. The receivable from TARC for natural gas
sales totaled approximately $1.4 million at July 31, 1996.
As of January 1996, the Company and TTEX entered into a Drilling Program,
as defined in the Indenture. Pursuant to the Program, TTEX received a portion
of revenues, in the form of a production payment, from certain of the Company's
wells. The production payment was transferred in consideration of a note
payable in the amount of $23.6 million issued by TTEX. In July 1996, TTEX
transferred this production payment to the Company in the form of a dividend,
and the Company forgave the $13.2 million remaining balance of the note
payable.
In July 1996, TTEX loaned $9.5 million to TransAmerican pursuant to the
terms of a $25 million promissory note due July 31, 1998 that bears interest,
payable quarterly, at 15% per annum. TTEX has made further advances pursuant
to the note, subject to the same terms. The amount outstanding under this
promissory note totaled approximately $24 million at September 10, 1996. The
Company believes that the advances by TTEX to TransAmerican reduce the risk of
tax deconsolidation (and potential tax liability of the Company) that could be
caused by the sale of TransTexas shares by TransAmerican or its affiliates.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified the Company for substantially all of the Company's liability in
connection with the settlement of the Terry/Penrod litigation (See Note 8). In
order to facilitate the settlement, the Company advanced to TransAmerican
$16.4 million of the settlement in exchange for a note receivable. In
connection with the litigation settlement, the Company received from Terry the
reversionary interest in certain producing properties. The Company and
TransAmerican had intended that such interests would revert to TransAmerican
under the Transfer Agreement. The Company retained such interests in partial
satisfaction of TransAmerican's indemnity obligations. The Company's
receivable from TransAmerican related to this settlement totaled approximately
$7 million at July 31, 1996.
In September 1996, the Company intends to purchase from TDOC for
approximately $20 million certain oil and gas leasehold interests located in
the Lodgepole area in North Dakota. The Company believes that the combination
of its interests in the Lodgepole area with the interests of TransDakota Oil
Company will produce a more marketable property package.
The Company provides accounting and legal services to TARC, TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement (the "Services Agreement"). The Company provides general commercial
legal services and certain accounting services (including payroll, tax, and
treasury services) to TARC and TEC for a fee of $26,000 per month. At
TransAmerican's request, the Company, at its election, may provide drilling and
workover services. The receivable from TransAmerican for drilling, workover
and administrative services totaled approximately $12 million at July 31, 1996.
The Company made such advances in anticipation of production from wells
drilled by TransAmerican providing a source of repayment of such advances. In
such regard, the Company anticipates obtaining a $11.5 million
dollar-denominated production payment, bearing interest at 17% per annum,
burdening certain oil and gas interests owned by TransAmerican. At July 31,
1996, $12 million of remaining related-party receivables has been recorded as a
contra-stockholder equity account due to uncertainties regarding the terms and
payment schedule for such receivables.
On July 2, 1996, the Company consummated the sale, effective as of May 1,
1996, of producing properties in Zapata County, Texas for consideration of
approximately $62 million. On June 17, and August 13, 1996, the Company
consummated the sales, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million and $21.5 million, respectively. The purchase price for each of
the properties discussed above was or is subject to adjustment for gas sales
between the effective date and the closing date. The Company retained or will
retain the proceeds of all such gas sales.
The Company has engaged an investment banking firm to assist in the
potential sale or sale-leaseback of all or a portion of the Company's pipeline
system The Company has also engaged an investment banking firm to assist in
the sale of its interest in the Lodgepole area. On August 29, 1996, the
Company announced that it has engaged two investment banking firms to assist in
the sale of the Company's remaining Lobo Trend producing properties in Webb and
Zapata counties, Texas, and associated undeveloped acreage. If such a sale is
consummated, the Company intends to use the proceeds, along with proceeds from
any sales of its pipeline system and Lodgepole area properties, for general
corporate purposes and a possible repurchase of the Notes.
The Company currently has a $40 million credit facility with BNY Financial
Corporation (the "BNY Facility") pursuant to which it may borrow funds based on
the amount of its accounts receivable. At July 31, 1996, the outstanding
balance under the BNY Facility was $7.9 million. The Company does not
anticipate that it will be able to borrow more than $26 million under the BNY
Facility during fiscal 1997, based on the expected amount of its accounts
receivable. The BNY Facility requires the Company to maintain certain
financial ratios and includes certain covenants. Under the terms of the BNY
Facility, the Company's net loss (including any extraordinary losses) may not
exceed $5 million for each fiscal quarter ending after January 31, 1996 ($10
million for each six-month period).
Pursuant to the Indenture, the Company maintains an account (the "Interest
Reserve Account") from which funds may only be disbursed in accordance with the
terms of a Cash Collateral and Disbursement Agreement (the "Disbursement
Agreement"). The Company has deposited into the Interest Reserve Account funds
sufficient to pay the aggregate amount of the next ensuing interest payment due
in respect of the Notes. Funds in the Interest Reserve Account may be
invested, at the direction of the Company (except as provided below), only in
cash and Cash Equivalents as defined in the Disbursement Agreement, and any
interest income thereon will be added to the balance of the Interest Reserve
Account. The Company must maintain a balance (the "Requisite Balance") in the
Interest Reserve Account at least equal to the amount necessary to satisfy the
Company's obligation to pay interest in respect of all then outstanding Notes
on the next Interest Payment Date; provided, however, that if, pursuant to the
Disbursement Agreement, any funds in the Interest Reserve Account are applied
to the payment of interest on the Notes, the Company shall not be obligated to
maintain the Requisite Balance during the period of 60 days immediately
following the Interest Payment Date in respect of which such payment was made.
The Company may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date
(as defined), any or all of the funds in the Interest Reserve Account. The
Disbursement Agreement provides that if the Company fails to pay an installment
of interest on the Notes on any Interest Payment Date, then all investments in
the Interest Reserve Account will be immediately liquidated and all funds in
the Interest Reserve Account will be deposited with the Indenture Trustee. If
the Company has not paid such installment of interest within five days after
such Interest Payment Date, or if the Company so instructs the Indenture
Trustee, the Indenture Trustee will apply such deposited funds to the payment
of interest on the Notes. The Disbursement Agreement provides that funds may
be disbursed from the Interest Reserve Account and released to the Company only
to the extent that the balance thereof exceeds the Requisite Balance.
26
28
DECONSOLIDATION FOR FEDERAL INCOME TAX PURPOSES
Under certain circumstances, TransAmerican, TAEC, TDOC, TEC or TARC may
sell or otherwise dispose of shares of common stock of the Company. If, as a
result of any sale or other disposition of the Company's common stock, the
direct and indirect ownership of the Company by TransAmerican is less than 80%
(measured by voting power and value), the Company will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the "TransAmerican
Consolidated Group") and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement ("Deconsolidation"). Further, if TEC or TARC sells or
otherwise transfers any stock of TARC, or issues any options, warrants or other
similar rights relating to such stock, outside of the TransAmerican Consolidated
Group, then a Deconsolidation of both TARC and the Company from the
TransAmerican Consolidated Group would occur. For the taxable year during which
Deconsolidation of the Company occurs, which would also be the final year that
the Company is a member of the TransAmerican Consolidated Group, TransAmerican
would recognize a previously deferred gain of approximately $266.3 million
associated with the Transfer and would be required to pay federal income tax on
this gain (the tax is estimated to be between $29 million and $56 million if
Deconsolidation occurs in fiscal 1997 and between $24 million and $45 million if
Deconsolidation occurs in fiscal 1998). This analysis is based on the Company's
position that the gain from the Transfer, which occurred in 1993, was deferred
under the consolidated return regulations. The deferred gain generally is being
included in TransAmerican's taxable income in a manner that corresponds (as to
timing and amount) with the realization by the Company of (and, thus, will be
offset by) the tax benefits (i.e., additional depreciation, depletion and
amortization on, or reduced gain or increased loss from a sale of, the
transferred assets) arising from the additional basis. If, under the terms of
the TARC Notes, it was reasonably certain when the TARC Notes were issued that a
sufficient amount of the Company's stock would be disposed in the future to
cause a Deconsolidation of the Company from the TransAmerican Consolidated
Group, it is possible that the Deconsolidation of the Company would be treated
as occurring as of the date the TARC Notes were issued. However, TARC has
advised the Company that it believes that when the TARC Notes were issued it was
not reasonably certain that a Deconsolidation of the Company would occur in the
future. Under the Tax Allocation Agreement, the Company is required to pay
TransAmerican each year an amount equal to the lesser of (i) the reduction in
taxes paid by the Company for such year as a result of any increase in the tax
basis of assets acquired by the Company from TransAmerican that is attributable
to the Transfer and (ii) the increase in taxes paid by TransAmerican for such
year and all prior years attributable to gain recognized by TransAmerican in
connection with the contribution of assets by TransAmerican to the Company (less
certain amounts paid by the Company for all prior years). The Company estimates
that if Deconsolidation occurs in fiscal 1997 or 1998, the amount reimbursed to
TransAmerican would be between $15 million and $26 million and between $4
million and $7 million, respectively. The remaining amount of the tax relating
to the gain would be paid over the lives of the assets transferred. However,
the Company could be liable for additional taxes pursuant to the Tax Allocation
Agreement and the several liability provisions of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
the Company are used by other members of the TransAmerican Consolidated Group,
then the Company is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent the Company has taxable
income, remains a member of the TransAmerican Consolidated Group, and the other
group members have the ability to pay such taxes. If TransAmerican, TAEC, TEC,
TARC or TDOC transfers shares of the Company (or transfers options or other
rights to acquire such shares) and, as a result of such transfer,
Deconsolidation of the Company occurs, the Company would not thereafter receive
any benefit pursuant to the Tax Allocation Agreement for net operating losses of
the Company used by other members of the TransAmerican Consolidated Group prior
to the Deconsolidation of the Company.
Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the Internal Revenue Service (the "IRS") for
the consolidated federal income tax liability of the consolidated group. There
can be no assurance that TransAmerican will have the ability to satisfy the
above tax obligation at the time due and, therefore, the Company, TARC or TEC
may be required to pay the tax.
Under the Tax Allocation Agreement, the Company will be required to pay
any Texas franchise tax (which is estimated not to exceed $10.6 million) which
may be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
27
29
CONTINGENT LIABILITIES
The Company has significant contingent liabilities, including liabilities
with respect to litigation matters, indemnification obligations relating to
certain tax benefit transfer sale-leaseback transactions, and other obligations
assumed in the Transfer. These matters, individually and in the aggregate,
amount to significant potential liability which, if adjudicated in a manner
adverse to the Company in one reporting period, could have a material adverse
effect on the Company's cash flow or operations for that period. Although the
outcome of these lawsuits cannot be predicted with certainty, the Company does
not expect these matters to have a material adverse effect on its financial
position. The Company has delivered letters of credit and placed into escrow
cash, which letters of credit and cash total approximately $21.1 million, to be
applied to certain potential litigation claims.
POTENTIAL EFFECTS OF CHANGE OF CONTROL
Capitalized words in the following discussion have the meanings as defined
in the Indenture.
The Indenture provides that, upon the occurrence of a Change of Control,
each holder of the Notes will have the right to require the Company to
repurchase such holder's Notes at 101% of the principal amount thereof plus
accrued and unpaid interest. As used in the Indenture, "Change of Control"
means (i) any sale, transfer, or other conveyance, whether direct or indirect,
of all or substantially all of the assets of the Company, on a consolidated
basis, to any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable), other
than to or among the Company's Wholly Owned Subsidiaries or the trustee under
the Indenture, whether in a single transaction or a series of related
transactions, unless, immediately after such transaction, John R. Stanley has,
directly or indirectly, in the aggregate, sole beneficial ownership of more
than 50%, on a fully diluted basis, of the total voting power entitled to vote
in the election of directors, managers, or trustees of the transferee, (ii) the
liquidation or dissolution of the Company, or (iii) any transaction, event or
circumstance pursuant to which any "person" or "group" (as such terms are used
for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), other than John R. Stanley and his Wholly Owned Subsidiaries or
the trustee under the Indenture, is or becomes the "beneficial owner" (as that
term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not
applicable, except that a person shall be deemed to be the "beneficial owner"
of all shares that any such person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the Company's then
outstanding Voting Stock, unless, at the time of the occurrence of an event
specified in clauses (i), (ii) or (iii), the Notes, issued under the Indenture
have an Investment Grade Rating provided, however, that if, at any time within
120 days after such occurrence, the Notes cease having an Investment Grade
Rating, such event would constitute a "Change of Control." The term "person,"
as used in the definition of Change of Control, means a natural person,
company, government or political subdivision, agency or instrumentality of a
government and also includes a "group," which is defined as two or more persons
acting as a partnership, limited partnership or other group. In addition,
certain changes or other events in respect of the ownership or control of the
Company that do not constitute a Change of Control under the Indenture may
result in a "change of control" of the Company under the terms of the BNY
Facility and certain equipment financing. Such an occurrence could create an
obligation for the Company to repay such other indebtedness. At July 31, 1996,
the Company had approximately $16.5 million of indebtedness (excluding the
Notes) subject to such right of repayment or repurchase. In the event of a
Change of Control under the Indenture or a "change of control" under the terms
of other outstanding indebtedness, there can be no assurance that the Company
will have sufficient funds to satisfy any such payment obligations.
TARC owns and operates a large petroleum refinery in the Gulf Coast region
along the Mississippi River, approximately 20 miles from New Orleans,
Louisiana. TARC's refinery was shut down in January 1983 and is currently
partially operational. TARC is engaged in a two-phase capital improvement
program designed to reactivate the refinery and increase its complexity. In
February 1995, TARC issued
28
30
the TARC Notes that were initially collateralized by, among other things, 55
million shares of the Company's common stock (the "Common Stock"). In March
1996, TARC sold 4.55 million shares of Common Stock to provide additional
financing for the capital improvement program. TARC's Quarterly Report on Form
10-Q for the three months ended April 30, 1996, indicates that TARC will
require substantial additional financing over the course of the remaining
construction period to complete the capital improvement program. TARC has
advised the Company that if this financing is not available on a timely basis,
or if significant engineering problems, cost overruns or delays occur, TARC
likely will not be able to complete the first phase of the capital improvement
program by February 15, 1997. TARC has further advised the Company that, if
required financing is obtained on a timely basis, completion by February 15,
1997 will still prove very difficult. Under the indenture governing the TARC
Notes, the failure of TARC to complete the first phase of its capital
improvement program by February 15, 1997 (subject to extension to August 15,
1997 if certain financial coverage ratios are met) would constitute an event of
default at such date. Any such event of default could result in the sale,
following the occurrence of such event of default, of some or all of the
remaining 50.45 million shares of Common Stock pledged to collateralize the
TARC Notes. A foreclosure on such shares would constitute a "change of
control" of the Company under the BNY Facility and certain equipment financing,
which may create an obligation for the Company to repay amounts outstanding
thereunder. A sale of such shares following a foreclosure could result in a
Change of Control under the Indenture. See "Item 5 - TARC Financial
Information".
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. Words such as "anticipates," "expects,"
"believes" and "likely" indicate forward-looking statements. The Company's
management believes 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 the Company's success in discovering,
developing and producing reserves, conditions in the equity and capital
markets, the ultimate resolution of litigation, and competition.
29
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 2 and 8 to the condensed consolidated financial statements for a
discussion of the Company's legal proceedings.
ITEM 5. OTHER INFORMATION
TARC FINANCIAL INFORMATION
The information relating to TARC which is set forth below is included
because a default by TARC on certain of its obligations could, under certain
circumstances, result in a change of control of the Company that could require
the Company to repay or repurchase the Notes.
TARC is subject to the informational requirements of the Exchange Act and,
in accordance therewith, files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission. TARC is a
separate legal entity that does not control, and is not controlled by, the
Company. The Company and TARC have separate operations and are separately
managed, although two of the Company's directors and its Chief Executive
Officer also hold the same positions with TARC. The Company has no control
over the content or presentation of TARC's financial or operating information.
The following information has been excerpted directly from TARC's filings
under the Exchange Act. The Company makes no representations as to, and
disclaims any responsibility for, the accuracy, adequacy or completeness of
such information, which should be read in conjunction with other publicly
available information filed by TARC with the Commission.
For purposes only of the information which follows under this caption
"TARC Financial Information," the term "Company" refers to TARC,
cross-references are to the relevant sections of the TARC filing from which the
information is excerpted, and other capitalized terms have the meanings
attributed to such terms in the TARC filing from which the information is
excerpted.
30
32
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(In thousands of dollars, except share amounts)
(Unaudited)
April 30, January 31,
1996 1996
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 135 $ 2,779
Long-term debt proceeds held in collateral account 12,075 14,840
Accounts receivable 9 121
Receivable from affiliates 327 118
Inventories 26,216 37,231
Other 2,506 5,479
----------- ----------
Total current assets 41,268 60,568
----------- ----------
Property and equipment 478,302 430,858
Less accumulated depreciation and amortization 11,897 10,244
----------- ----------
Net property and equipment 466,405 420,614
----------- ----------
Long-term debt proceeds held in collateral account 4,946 9,565
Other assets, net 27,225 27,576
----------- ----------
$ 539,844 $ 518,323
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 15,964 $ 23,552
Payable to affiliates 1,895 2,957
Accrued liabilities 10,218 14,560
Product financing arrangements 26,184 37,206
----------- ----------
Total current liabilities 54,261 78,275
----------- ----------
Payable to affiliates 5,874 3,799
Long-term debt 328,225 316,538
Investment in TransTexas 31,798 46,586
Other 901 1,168
Commitments and contingencies (Note 6) -- --
Stockholder's equity:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 30,000,000 shares 300 300
Additional paid-in capital 248,513 248,513
Accumulated deficit (130,028) (176,856)
----------- ----------
Total stockholder's equity 118,785 71,957
----------- ----------
$ 539,844 $ 518,323
=========== ==========
See accompanying notes to condensed financial statements.
31
33
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(In thousands of dollars, except share amounts)
(Unaudited)
Three Months Ended
April 30,
--------------------------
1996 1995
---------- -----------
Revenues:
Product sales $ 10,857 $ 558
--------- ----------
Costs and expenses:
Costs of products sold 13,380 1,086
Operations and maintenance 3,056 (274)
Depreciation and amortization 1,804 1,376
General and administrative 2,103 1,081
Taxes other than income taxes 399 1,041
--------- ----------
Total costs and expenses 20,742 4,310
--------- ----------
Operating loss (9,885) (3,752)
--------- ----------
Other income (expense):
Interest income 143 1,919
Interest expense, net (1,088) (4,633)
Equity in earnings (loss) of TransTexas 1,001 (842)
Gain on sale of TransTexas stock 56,162 --
Other 263 (3,043)
--------- ----------
Total other income (expense) 56,481 (6,599)
--------- ----------
Net income (loss) $ 46,596 $ (10,351)
========= ==========
Net income (loss) per share $ 1.55 $ (0.35)
========= ==========
Weighted average number of
shares outstanding 30,000,000 30,000,000
========== ==========
See accompanying notes to condensed financial statements.
32
34
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Three Months Ended
April 30,
--------------------------
1996 1995
----------- ----------
Operating activities:
Net income (loss) $ 46,596 $ (10,351)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 1,805 1,563
Litigation -- 4,500
Amortization of discount on long-term debt -- 7,063
Amortization of debt issue costs -- 940
Equity in (earnings) loss of TransTexas (1,001) 842
Gain on sale of TransTexas stock (56,162) --
Changes in assets and liabilities:
Accounts receivable (97) (4,184)
Inventories (7) (16,720)
Prepayments and other 2,973 (580)
Accounts payable 2,712 (13,406)
Payable to affiliates (1,062) 246
Accrued liabilities (4,364) (7,405)
Other assets (606) (1,668)
Other liabilities -- (576)
------------ ----------
Net cash used by operating activities (9,213) (39,736)
----------- ----------
Investing activities:
Capital expenditures (45,252) (26,995)
----------- ----------
Financing activities:
Issuance of long-term debt and warrants -- 300,750
Net proceeds from sale of TransTexas stock 42,607 --
Long-term debt proceeds held in collateral account (26,549) (174,742)
Withdrawals from collateral account 33,933 --
Advances from TransAmerican 4,000 (1,979)
Payment of advances to TransAmerican (1,925) (40,000)
Debt issue costs -- (16,733)
Principal payments on capital lease obligations (245) (61)
----------- ----------
Net cash provided by financing activities 51,821 67,235
----------- ----------
Increase (decrease) in cash and cash equivalents (2,644) 504
Beginning cash and cash equivalents 2,779 46
----------- ----------
Ending cash and cash equivalents $ 135 $ 550
=========== ==========
Noncash financing and investing activities:
Accounts payable for property and equipment $ (10,300) $ (6,406)
Product financing arrangements (11,022) --
Interest accretion on notes and discount notes capitalized
in property and equipment 11,687 --
See accompanying notes to condensed financial statements.
33
35
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues were primarily from tank
rentals and its expenses were comprised of maintenance and repairs, tank
rentals, general and administrative expenses and property taxes. The Company
commenced partial operations at the refinery in March 1994 and has operated the
refinery intermittently since then. The Company does not consider its
historical results to be indicative of future results.
The Company's results of operations are dependent on the operating status
of its refinery equipment, which determines the types of feedstocks processed
and refined product yields. The results are also affected by the unit costs of
purchased feedstocks and the unit prices of refined products, which can vary
significantly. The Capital Improvement Program is designed to significantly
change the Company's throughput capacity, the feedstocks processed, and refined
product yields.
THREE MONTHS ENDED APRIL 30, 1996, COMPARED WITH THE THREE MONTHS ENDED APRIL
30, 1995
Total revenues for the three months ended April 30, 1996 increased $10.3
million to $10.9 million from $0.6 million for the same period in 1995,
primarily as a result of increased sales volume.
Costs of products sold for the three months ended April 30, 1996 increased
$12.3 million to $13.4 million from $1.1 million for the same period in 1995,
primarily as a result of increased sales volume and a loss of approximately
$1.9 million related to a processing agreement..
Operations and maintenance expense for the three months ended April 30,
1996 increased $3.3 million to $3.0 million from $(0.3) million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expense for the three months ended April 30,
1996 increased $0.4 million to $1.8 million from $1.4 million for the same
period in 1995, primarily due to the placing in service of certain terminal
facilities and tankage equipment.
General and administrative expense for three months ended April 30, 1996
increased $1.0 million to $2.1 million from $1.1 million for the same period in
1995, primarily due to increases in wages, outside services and professional
fees.
Taxes other than income taxes for the three months ended April 30, 1996
decreased $0.6 million to $0.4 million from $1.0 million for the same period in
1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.
Interest income for the three months ended April 30, 1996 decreased $1.8
million as compared to the same period in 1995 primarily due to interest earned
in 1995 on the initial $173 million long-term debt proceeds held in the
Collateral Account. Interest expense for the three months ended April 30, 1996
decreased $3.5 million, primarily due to a larger
34
36
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
portion of interest capitalized in 1996 versus 1995. During the three months
ended April 30, 1996, the Company capitalized approximately $16.6 million of
interest related to property and equipment additions at the Company's refinery.
The equity in earnings (loss) of TransTexas for the three months ended
April 30, 1996, reflects the Company's 20.3% equity interest in TransTexas
until the Company's sale of 4.55 million shares of TransTexas stock in March
1996 which decreased the Company's interest in TransTexas to 14.1%.
Other expense for the three months ended April 30, 1995 was $3.0 million
which was primarily a result of trading losses on futures contracts.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the issuance of the TARC Notes, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. The current budget for the Capital
Improvement Program calls for total expenditures of $434 million; however, the
Company estimates that expenditures of approximately $146 million to $151
million in addition to the current budget will be required to complete the
Capital Improvement Program. The foregoing estimates, as well as other
estimates and projections herein, are subject to substantial revision upon the
occurrence of future events, such as unavailability of, or delays in,
financing, engineering problems, work stoppages and cost overruns over which
the Company may not have any control.
As of April 30, 1996, expenditures on the Capital Improvement Program
funded by or approved for reimbursement from the cash collateral account
totaled approximately $189 million. Approximately $17 million remained in the
cash collateral account as of April 30, 1996. The Company sold 4.55 million
shares of TransTexas common stock in March 1996, and deposited approximately
$26.6 million of the proceeds of such sale into the cash collateral account in
accordance with the requirements of the Indenture. Giving effect to current
estimates, additional funding of $374 million to $379 million will be required
to complete the Capital Improvement Program, of which approximately $41 million
is anticipated to be funded by the Port Commission tax exempt bonds. As of
April 30, 1996, the Company had commitments for refinery construction and
maintenance of approximately $64 million. Additional funds necessary to
complete the Capital Improvement Program may be provided from (i) the sale of
additional shares of TransTexas common stock held by the Company, (ii) the sale
of common stock of the Company, (iii) equity investments in the Company
(including the sale of preferred stock of the Company to TEC, funded by the
sale of TransTexas common stock held by TEC), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the TARC Notes. The Company has entered
into preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. There is no assurance that sufficient funds will be available from these
sources on a timely basis or upon terms acceptable to the Company and
TransAmerican. If this financing is not available or if significant
engineering problems, work stoppages or cost overruns occur, the Company likely
will not be able to complete and test Phase I of the Capital Improvement
Program by February 15, 1997. Even if required financing is obtained on a
timely basis, completion by February 15, 1997 will still prove very difficult
if personnel shortages prevent full staffing during peak construction periods.
The Company has identified and is considering certain steps to minimize the
impact of potential construction worker shortages, including the retention of
field supervisors, direct hiring of field supervisors and field labor by the
Company's major contractors, adding a second shift, and modularization of
certain construction items. There can be no assurance that these steps will
prove successful; however, the Company believes that implementation of these
steps will adequately address staffing concerns. Under the Indenture, the
failure of the Company to complete and test Phase I by February 15, 1997
(subject to extension to August 15, 1997 if certain financial coverage ratios
are met) would constitute an event of default at such date.
The Company and the Port Commission have reached an agreement in
principle which would allow for the issuance of approximately $75 million in
Port Commission tax exempt bonds, the proceeds of which may be used to
construct tank storage facilities, docks and air and waste water treatment
facilities. The air and waste water treatment facility are
35
37
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
included in the Capital Improvement Program at an estimated cost of $41
million. The issuance of the tax exempt bonds could provide an alternate
source of financing for the construction of such facilities. The Port
Commission would own the facilities built with the proceeds of the bonds, and
the Company would operate the facilities pursuant to a long- term (30-year)
lease. There can be no assurance that the issuance of the tax-exempt bonds,
which may require the consent of the holders of the TARC Notes, will occur.
The Company has incurred losses and negative cash flow from operations as
a result of limited refining operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to financing costs and low margins. Based on recent
refining margins, recent projected levels of operations and debt service
requirements, such negative cash flows are likely to continue. In order to
operate the refinery and service its debt, the Company must raise additional
debt or equity capital in addition to the funds required to complete the
Capital Improvement Program. TransAmerican, TEC or the Company may sell
securities to raise funds for additional working capital. There is no
assurance that additional capital will be available.
Without additional funding on a timely basis to complete Phase I of the
Capital Improvement Program and to provide working capital for operations and
debt service, there is substantial doubt about the Company's continued
existence. If the Company (i) does not complete the Capital Improvement
Program timely, (ii) incurs significant cost overruns, (iii) does not
ultimately achieve profitable operations, or (iv) ceases to continue
operations, the Company's investment in the refinery may not be recovered. The
financial statements do not include any adjustments for such uncertainties.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax purposes
could result in the acceleration of payment of a substantial amount of federal
income taxes by TransAmerican. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable for the consolidated
federal income tax liability of the consolidated group. There can be no
assurance that TransAmerican will have the ability to satisfy the above tax
obligation at the time due and, therefore, the Company or other members may be
required to pay the tax. A decision by TEC or the Company to sell TransTexas
shares could result in deconsolidation of TransTexas for tax purposes. Such
sales may be necessary to raise funds required to complete the Capital
Improvement Program. The tax liability to TransAmerican at April 30, 1996 that
would result from deconsolidation is estimated to be approximately $40 million.
The Company enters into financing arrangements to maintain an available
supply of feedstocks. Typically, the Company enters into an agreement with a
third party to acquire a cargo of feedstock scheduled for delivery to the
Company's refinery. The Company pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for
the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and the Company commits to purchase,
at a later date, the cargo at an agreed price plus commission and costs. The
Company also places margin deposits with the third party to permit the third
party to hedge its price risk. The Company purchases these cargos in
quantities sufficient to maintain expected operations and is obligated to
purchase all of the cargos delivered pursuant to these arrangements. In the
event the refinery is not operating, these cargos may be sold on the spot
market. During the three months ended April 30, 1996, approximately 0.4
million barrels of feedstocks with a cost of $8 million were sold by a third
party on the spot market prior to delivery to the Company without a material
gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a
third party for the processing of various feedstocks at the refinery. Under
the terms of the agreement, the processing fee earned by the Company is based
on the margin earned by the third party, if any, after deducting all of its
related costs such as feedstock acquisition, hedging, transportation,
processing and inspections plus a commission for each barrel processed. This
agreement provides for the Company to process a total of approximately 1.1
million barrels of feedstock. For the three months ended April 30, 1996, the
Company incurred a loss of approximately $1.9 million related to the processing
agreement primarily as a result of price management decisions. In April 1996,
the Company entered into a similar processing agreement
36
38
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE THREE MONTHS
ENDED APRIL 30, 1996 (AS USED HEREIN, THE TERM COMPANY REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE
THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM
WHICH THE INFORMATION IS EXCERPTED.)
with another third party to process feedstocks. Recently, the Company has
agreed to process approximately 4.3 million barrels of feedstocks under this
agreement.
Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years the Company does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on the
Company's future results of operations, cash flows or financial condition. The
Company also has contingent liabilities with respect to litigation matters as
more fully described in Note 6 of Notes to Condensed Financial Statements.
On December 13, 1995, litigation with Frito-Lay, Inc. was settled. The
Company intends to pay $2.5 million to Frito-Lay, Inc. during fiscal year 1997
in accordance with the Tax Allocation Agreement and other relevant documents.
As of April 30, 1996, the Company has paid approximately $0.7 million of this
obligation.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. Words such as "anticipates," "expects,"
"believes" and "likely" indicate forward-looking statements. The Company's
management believes that its current views and expectations are based on
reasonable assumptions; however, there are significant risks and uncertainties
that could significantly affect expected results. Factors that could cause
actual results to differ materially from those in the forward-looking
statements include the Company's success in raising additional capital to
complete the Capital Improvement Program (as defined below) as scheduled,
engineering problems, work stoppages, cost overruns, fluctuations in the
commodity prices for petroleum and refined products, casualty losses,
conditions in the capital markets and competition.
37
39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 -- Financial Data Schedule.
(B) REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the three months ended July
31, 1996.
Financial
Item Statements
Date of Report Reported Filed
-------------- -------- ----------
June 17, 1996 Item 5 None
38
40
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 duly authorized officer and principal financial and accounting
officer.
TRANSTEXAS GAS CORPORATION
(Registrant)
By: /s/ Edwin B. Donahue
----------------------------------
Edwin B. Donahue, Vice President
and Chief Financial Officer
September 16, 1996
39
41
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 Financial Data Schedule