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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
Commission File Number 1-12204
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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)
(281) 987-8600
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock of the registrant outstanding on
December 16, 1996 was 74,000,000.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
Page
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 2
Condensed Consolidated Balance Sheet as of October 31, 1996 and January 31, 1996 3
Condensed Consolidated Statement of Operations for the three and nine months ended
October 31, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows for the nine months ended
October 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 21-30
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 40
Signature 41
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of October 31, 1996, the related condensed
consolidated statements of operations for the three and nine months ended
October 31, 1996 and 1995 and cash flows for the nine months ended October 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
December 16, 1996
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars, except share amounts)
(Unaudited)
October 31, January 31,
1996 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 19,644 $ 11,248
Interest reserve account 46,000 46,000
Accounts receivable 46,010 36,251
Receivable from affiliates -- 3,697
Inventories 12,038 11,421
Other current assets (Note 3) 27,346 50,821
----------- ----------
Total current assets 151,038 159,438
----------- ----------
Property and equipment 2,145,369 2,008,068
Less accumulated depreciation, depletion and amortization 1,391,547 1,292,728
----------- ----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $139,732 and
$136,360 was excluded from amortization at October 31, 1996
and January 31, 1996, respectively. 753,822 715,340
----------- ----------
Due from affiliates (Note 11) 26,086 11,653
Other assets, net 12,661 37,203
----------- ----------
$ 943,607 $ 923,634
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 4,775 $ 1,335
Accounts payable 19,567 39,745
Accrued liabilities (Note 4) 57,172 74,756
----------- ----------
Total current liabilities 81,514 115,836
----------- ----------
Long-term debt, less current maturities 6,754 2,541
Due to affiliates 10,183 --
Production payments 15,355 31,036
Senior secured notes 800,000 800,000
Revolving credit agreement 14,831 20,365
Deferred revenue 64,401 32,850
Deferred income taxes 26,014 40,256
Other liabilities (Note 5) 77,211 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) 13,128 (48,140)
----------- ----------
(115,656) (154,440)
Less advances to affiliates (37,000) --
----------- ----------
Total stockholders' deficit (152,656) (154,440)
----------- ----------
$ 943,607 $ 923,634
=========== ==========
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands of dollars, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues:
Gas, condensate and natural gas liquids $ 70,993 $ 58,124 $ 228,694 $ 190,447
Transportation 8,928 8,151 25,798 25,777
Gains on sale of assets 80 -- 7,842 --
Other 103 61 460 294
----------- ----------- ----------- -----------
Total revenues 80,104 66,336 262,794 216,518
----------- ----------- ----------- -----------
Costs and expenses:
Operating 25,819 18,968 78,305 59,635
Depreciation, depletion and amortization 30,811 26,658 92,356 86,277
General and administrative 15,535 5,379 35,324 24,719
Taxes other than income taxes 2,081 2,738 14,457 10,488
Litigation settlement -- (18,300) (96,000) (18,300)
----------- ----------- ----------- -----------
Total costs and expenses 74,246 35,443 124,442 162,819
----------- ----------- ----------- -----------
Operating income 5,858 30,893 138,352 53,699
----------- ----------- ----------- -----------
Other income (expense):
Interest income 1,020 1,726 2,944 3,525
Interest expense, net (21,333) (21,090) (73,382) (59,627)
----------- ----------- ----------- -----------
Total other income (expense) (20,313) (19,364) (70,438) (56,102)
----------- ----------- ----------- -----------
Income (loss) before income taxes (14,455) 11,529 67,914 (2,403)
Income taxes (benefit) (5,059) -- 2,729 (2,284)
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (9,396) 11,529 65,185 (119)
Extraordinary item - loss on early extinguishment
of debt, net of tax -- -- -- (56,637)
----------- ----------- ----------- -----------
Net income (loss) $ (9,396) $ 11,529 $ 65,185 $ (56,756)
=========== =========== =========== ===========
Net income (loss) per share:
Income (loss) before extraordinary item $ (0.13) $ 0.16 $ 0.88 $ --
Extraordinary item -- -- -- (0.77)
----------- ----------- ----------- -----------
$ (0.13) $ 0.16 $ 0.88 $ (0.77)
=========== =========== =========== ===========
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.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended
October 31,
------------------------------
1996 1995
----------- -----------
Operating activities:
Net income (loss) $ 65,185 $ (56,756)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary item -- 56,637
Depreciation, depletion and amortization 92,356 86,277
Amortization of debt issue costs 7,654 2,903
Gains on sale of assets (7,842) (424)
Gain on litigation settlement -- (18,300)
Deferred income taxes (14,242) 6,679
Proceeds from volumetric production payments 58,621 --
Amortization of deferred revenue (27,070) --
Changes in assets and liabilities:
Accounts receivable ( 9,759) (936)
Receivable from affiliates 697 (921)
Inventories (617) (2,201)
Other current assets 2,837 (12,341)
Accounts payable 2,225 (15,817)
Accrued liabilities 27,058 (12,441)
Due from affiliates (23,500) (15,231)
Other assets (1,312) (674)
Other liabilities (9,464) 7,126
----------- -----------
Net cash provided by operating activities 162,827 23,580
----------- -----------
Investing activities:
Capital expenditures (201,630) (226,707)
Proceeds from sales of assets 91,559 9,475
Advances to affiliates (24,750) (4,700)
Repayment of advances by affiliates -- 4,700
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 (134,821) (258,407)
----------- -----------
Financing activities:
Issuance of dollar-denominated production payments 16,903 49,500
Repayments of dollar-denominated production payments (34,348) (12,018)
Issuance of long-term debt 25,480 10,000
Principal payments on long-term debt (17,827) (20,036)
Issuance of senior secured notes -- 800,000
Retirement of senior secured notes -- (542,500)
Debt issue costs (4,284) (14,916)
Revolving credit agreement, net (5,534) (8,701)
----------- -----------
Net cash provided (used) by financing activities (19,610) 261,329
----------- -----------
Increase in cash and cash equivalents 8,396 26,502
Beginning cash and cash equivalents 11,248 819
----------- -----------
Ending cash and cash equivalents $ 19,644 $ 27,321
=========== ===========
Noncash operating and investing activities:
Change in accounts payable and other liabilities for
property equipment $ (4,903) $ --
See accompanying notes to condensed consolidated financial statements.
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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 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. 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 (the "Indenture") governing the Company's 11 1/2%
Senior Secured Notes due 2002 (the "Notes") 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 subject to adjustment for gas sales between
the effective date and the closing date. The Company retained the proceeds of
all such gas sales.
The Company has engaged investment banking firms to assist in the
following potential transactions: (i) the sale or sale-leaseback of all or a
portion of the Company's pipeline system; (ii) the sale of its interest in the
Lodgepole prospect in North Dakota; and (iii) the sale of the Company's
remaining Lobo Trend producing properties in Webb and Zapata Counties, Texas,
and associated undeveloped acreage. If any such transactions are consummated,
the Company intends to use the proceeds 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.
In December 1996, the Company issued $189 million in face amount of
13 1/4% Series A Senior Subordinated Notes due 2003 ("Subordinated Notes") to
unaffiliated third parties. The Subordinated Notes were sold with original issue
discount at a price equal to 52.6166% of the principal amount shown on the face
thereof, for gross proceeds of approximately $99.45 million. The Subordinated
Notes accrete at a rate of 13 1/4% compounded semi-annually. At such time as
the Notes are rated "B1" or better by Moody's Investors Service, Inc. and "BB"
or better by Standard & Poor's Corporation, Inc., or when the Notes are paid in
full , the Subordinated Notes will be exchanged for notes bearing interest at a
rate of 13 1/4% per annum,
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
payable semi-annually on December 31 and June 30. In addition, the holders of
the Subordinated Notes will have the right to exchange their notes for notes to
be registered under the Securities Act of 1933, as amended. Proceeds from the
issuance of the Subordinated Notes will be used for working capital and general
corporate purposes.
As more fully described in Note 2 under the caption "Potential
Effects of a Change of Control," an event of default under the indenture
covering the notes issued by TransAmerican Refining Corporation ("TARC") could
adversely affect the Company's liquidity.
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 October 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 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). TransAmerican is 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 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
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 October 9,
1996, the court denied Finkelstein's rehearing request and the case will now
proceed to the Supreme Court of Texas.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 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, The Coastal Corporation ("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 attorneys' fees to Coastal. On May 29, 1996, the Court of Appeals
affirmed the judgment. TransAmerican and the Company have appealed to the
Supreme Court of Texas. 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 234th Judicial District Court, Harris
County, Texas, claiming that TransAmerican failed to account to Alameda for a
share of the proceeds TransAmerican received in a 1990 settlement of litigation
with El Paso Natural Gas Company ("El Paso"), and that TransAmerican has
been unjustly enriched by its failure to share such 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 appealed
to the Fourteenth Court of Appeals, which has set the appeal for oral argument
on December 18, 1996.
ASPEN. TransAmerican brought suit 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.
This suit is pending in the 215th Judicial District Court, Harris County,
Texas. 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. On July 19, 1995, Aspen filed 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 properly market the 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.
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, Ector County, Texas
("Tennessee lawsuit") pursuant to which the Company and another plaintiff
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, 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.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Trial began in Ector County, Texas on December 3, 1996 and is currently
underway.
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 Court, Zapata County, Texas, to vacate the Arbitrator's
award. Briones also filed its petition to confirm the Arbitrator's award. On
September 30, 1996, the court consolidated the petitions into one suit.
Discovery is proceeding and a hearing will be held on January 17, 1997
regarding any pending motions for summary judgment filed by the parties.
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. The plaintiff has demanded $10
million plus interest. This litigation is in the discovery stage and trial is
set for May 19, 1997.
BENTSEN. On August 13, 1990, Calvin R. Bentsen, et al. filed suit
against TransAmerican and Mr. Stanley in the 139th Judicial District Court,
Hidalgo County, Texas, seeking a portion of the El Paso settlement proceeds,
and an accounting of monies allegedly owed to them, claiming that TransAmerican
produced gas that belonged to them without their knowledge and that
TransAmerican entered into an oral agreement with them which entitled them to
receive a portion of the El Paso settlement proceeds. TransAmerican intends to
vigorously defend this claim. This case has been reset for trial to begin on
January 27, 1997.
FARIAS. On February 15, 1996, Celita Suzana Farias filed a wrongful
death action in the 93rd District Court, Hidalgo County, Texas, against the
Company and one of its contractors for fatal injuries suffered by the
plaintiff's husband at the Yzaguirre Heirs #3 Well on February 13, 1996. The
plaintiff alleges the defendants operated a crane in such a manner that they
were negligent and grossly negligent. The plaintiff seeks unspecified damages.
On March 7, 1996, the mother of the deceased Company employee filed a petition
in intervention also alleging negligence, gross negligence and malice and
seeking unspecified damages. This litigation is in the discovery stage.
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
certain leases, are entitled to receive a portion of the settlement proceeds
received by TransAmerican from El Paso. On April 16, 1996, additional
nonparticipating royalty interest owners intervened, making the same claims as
the plaintiffs. In June 1996, TransAmerican filed its motion for summary
judgment. Plaintiffs also filed a motion for partial summary judgment. On
August 2, 1996, the court denied TransAmerican's motion and plaintiffs' motion.
The plaintiffs and intervenors agreed on November 15, 1996 to dismiss their
claims without prejudice.
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 October 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 $59 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 $8 million and $1 million for the quarters ended October 31, 1996
and 1995, respectively, and approximately $15 million and $10 million for the
nine
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
months ended October 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 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.
GAS SALES COMMITMENTS
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 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 $49.5 million, less closing
costs of approximately $2 million. This production payment was paid in full 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 overriding 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. At October 31, 1996, approximately 28 Bcf
of natural gas remained subject to this production payment.
In May 1996, the Company sold to an unaffiliated third party an
additional term overriding 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. At
October 31, 1996, approximately 29 Bcf of natural gas remained subject to this
production payment.
10
12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
In September 1996, the Company sold to an unaffiliated third party a
term overriding royalty in the form of a dollar-denominated production payment
in certain of the Company's properties for net 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 a drilling program
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
are 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.
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. 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"). 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 Internal Revenue Service (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 investment tax
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 TARC's $440 million aggregate principal amount of
mortgage notes ("TARC Notes") 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
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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
October 31, 1996, the Company had approximately $22.9 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 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
has advised the Company as follows: TARC will require substantial additional
financing over the course of the remaining construction period to complete the
Capital Improvement Program. Completion schedules and the amount of additional
expenditures required will depend upon, among other factors, the structure and
timing of additional financing. TARC is currently negotiating with potential
third-party investors to provide for additional funding, including strategic
equity investors, financial investors and foreign producers of crude oil.
Primarily because additional financing was not available on a timely
basis, TARC management believes that TARC will not be able to complete Phase I
of the Capital Improvement Program by February 15, 1997. Under the indenture
governing the TARC Notes (the "TARC Indenture") the failure of TARC to complete
and test Phase I by February 15, 1997 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.
TARC anticipates that, prior to February 15, 1997, it will solicit the approval
of the holders of the TARC Notes with respect to any elements of a proposed
financing that otherwise would be limited by the terms of the TARC Indenture, as
well as to a revised budget and an extension of the required completion date for
Phase I. There can be no assurance that current negotiations will result in
additional financing for the Capital Improvement Program, that other financing
will be available, or that the requisite approval of the TARC noteholders can be
obtained.
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
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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):
October 31, January 31,
1996 1996
----------- -----------
Prepayments:
Trade $ 5,125 $ 2,394
Drilling 897 2,070
Insurance 2,488 1,430
Properties held for sale -- 6,000
Restricted cash -- 7,368
Unrealized loss on commodity price swap agreements 18,677 31,317
Other 159 242
----------- -----------
$ 27,346 $ 50,821
=========== ===========
4. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in
thousands of dollars):
October 31, January 31,
1996 1996
----------- -----------
Royalties $ 20,203 $ 9,793
Taxes other than income taxes 8,679 2,733
Accrued interest -- 11,756
Payroll 6,031 4,832
Litigation settlements 715 7,053
Settlement values of commodity price swap agreements 18,677 31,317
Insurance 2,465 1,248
Other 402 6,024
----------- -----------
$ 57,172 $ 74,756
=========== ===========
5. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
October 31, January 31,
1996 1996
----------- -----------
Litigation accrual $ 21,373 $ 12,171
Litigation settlement 1,477 --
Short-term obligations expected
to be refinanced:
Litigation settlement -- 14,747
Accrued capital expenditures 17,500 5,443
Accrued interest 35,749 --
Current portion of dollar-denominated production payment -- 1,765
Other 1,112 1,064
----------- -----------
$ 77,211 $ 35,190
=========== ===========
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
In February 1996, the Company completed a financing in the amount of $10
million at an interest rate of 12% per annum and a 36-month term,
collateralized by certain operating equipment. In February 1996, the Company
also amended a purchase agreement with an unaffiliated third party related to a
volumetric production payment to include an additional 14 Bcf which were sold
to the third party for a purchase price of approximately $16 million. Proceeds
from these transactions, net of current maturities, were used to pay all of the
obligations listed above under the caption "Short- term obligations expected to
be refinanced" at January 31, 1996.
In December 1996, the Company issued $189 million in face amount of
13 1/4% Series A Senior Subordinated Notes due 2003 ("Subordinated Notes") to
unaffiliated third parties. The Subordinated Notes were sold with original
issue discount at a price equal to 52.6166% of the principal amount shown on
the face thereof, for gross proceeds of approximately $99.45 million. The
Subordinated Notes accrete at a rate of 13 1/4% compounded semi-annually. At
such time as the Notes are rated "B1" or better by Moody's Investors Service,
Inc. and "BB" or better by Standard & Poor's Corporation, Inc., or when the
Notes are paid in full, the Subordinated Notes will be exchanged for notes
bearing interest at a rate of 13 1/4% per annum, payable semi-annually on
December 31 and June 30. In addition, the holders of the Subordinated Notes
will have the right to exchange their notes for notes to be registered under
the Securities Act of 1933, as amended. A portion of the proceeds from the
issuance of the Subordinated Notes will be used to pay all of the obligations
listed above under the caption "Short-term obligations expected to be
refinanced" at October 31, 1996.
6. SUMMARY FINANCIAL INFORMATION
The following summary financial information of TTC reflects its
financial position as of October 31, 1996 and January 31, 1996 and its results
of operations for the three and nine months ended October 31, 1996 and 1995 (in
thousands of dollars):
October 31, January 31,
1996 1996
----------- ----------
ASSETS
Total current assets $ 12,310 $ 811
Property and equipment, net 80,389 70,273
Other assets 4 3
---------- ----------
$ 92,703 $ 71,087
========== ==========
LIABILITIES AND EQUITY
Total current liabilities $ 4,557 $ 6,191
Total noncurrent liabilities 37,700 21,016
Total equity 50,446 43,880
---------- ----------
$ 92,703 $ 71,087
========== ==========
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- ---------------------
1996 1995 1996 1995
--------- -------- --------- ---------
Revenues $ 24,545 $ 18,083 $ 78,146 $ 62,891
Operating expenses 21,950 16,129 68,040 52,840
--------- -------- --------- ---------
Operating income 2,595 1,954 10,106 10,051
Other income (expense) (5) -- (5) (47)
--------- --------- -------- ---------
Income before income taxes 2,590 1,954 10,101 10,004
Income taxes 906 684 3,535 3,502
---------- --------- --------- ---------
Net income $ 1,684 $ 1,270 $ 6,566 $ 6,502
========= ======== ========= =========
Included in revenues for the nine months ended October 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.
Operating expenses for the three and nine months ended October 31, 1996
increased by approximately $5.8 million and $15.2 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.
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 Nine Months Ended
October 31, October 31,
--------------------- ---------------------
1996 1995 1996 1995
--------- -------- --------- ---------
Revenues $ 5,830 $ 7,610 $ 19,127 $ 24,422
Operating costs and expenses 17,016 11,055 51,721 38,539
Affiliated operating costs and expenses for the three months ended
October 31, 1996 and 1995 include the cost of natural gas purchased from
TransTexas Gas Corporation of approximately $10 million and $7 million,
respectively. Nonaffiliated revenues include the sales of natural gas liquids
and condensate extracted from this purchased gas totaling $15 million and $10
million for the respective periods.
Affiliated operating costs and expenses for the nine months ended
October 31, 1996 and 1995 include the cost of natural gas purchased from
TransTexas Gas Corporation of approximately $33 million and $26 million,
respectively. Nonaffiliated revenues for the respective periods include the
sales of natural gas liquids and condensate extracted from this purchased gas
of $42 million and $36 million.
7. 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 Nine Months Ended
October 31, October 31,
----------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- ---------
Federal income tax (benefit) at the statutory
rate $ (5,059) $ 4,035 $ 23,770 $ (21,186)
Increase (decrease) in tax resulting from:
Tight sands credit -- -- (7,437) 7,842
Valuation allowance -- (4,035) (13,604) 9,569
-------- -------- -------- ---------
$ (5,059) $ -- $ 2,729 $ (3,775)
======== ======== ======== =========
Total income tax expense for the nine months ended October 31, 1995
includes a tax benefit of $1,491 related to an extraordinary item. Due to
taxable income related to litigation settlements and asset sales, all of the
Company's valuation allowance was reversed in the quarter ended July 31, 1996.
The Company's current tax liability payable to TransAmerican totaled
approximately $10 million at October 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. TransAmerican Exploration
Corporation ("TEXC"), another subsidiary of TransAmerican, owns 5% of the
outstanding common stock of the Company, which is pledged as collateral for
TEXC's debt securities.
Under certain circumstances, TransAmerican, TEXC, 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"). Such sales may be necessary to raise
funds necessary to complete TARC's capital improvement program. 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 the remaining portion of 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 liability 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 created by the Transfer. 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
16
18
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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. Under the terms
of the Tax Allocation Agreement, the remaining amount of the tax relating to
the gain would be paid to TransAmerican over the remaining 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,
TEC, TARC or TEXC 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 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.
8. 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
nine months ended October 31, 1996, the Company incurred net settlement losses
pursuant to the Hedge Agreements totaling approximately $5.4 million and $23.9
million, respectively. As of October 31, 1996, the Company had Hedge
Agreements with Settlement Dates ranging from November 1996 through April 1997
involving total Base Quantities aggregating approximately 36.4 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 October 31,
1996, the estimated cost to settle these Hedge Agreements would have been
approximately $15.4 million. These agreements are accounted for as hedges and
accordingly, any
17
19
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
gains or losses are deferred and recognized in the month the physical volumes
are delivered. At October 31, 1996, the Company maintained $7.2 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 of the creation
of the mortgage). 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 December 9, 1996, is approximately $9.1 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.
9. 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
(See Note 11). 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 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.
18
20
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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.
10. CREDIT AGREEMENTS
The Company and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement ("BNY Facility"),
as of October 31, 1995, for a $40 million line of credit. The BNY Facility was
subsequently amended in December 1996. 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 October 31, 1996 was $14.8 million. The Company expects that it will
maintain or increase this level of borrowings under the Agreement for the next
twelve months.
Under the terms of the BNY Facility, as amended, the Company's net loss
(including any extraordinary losses) may not exceed $10 million for each
six-month period ending on the last day of any fiscal quarter ending after
January 31, 1996. 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.
11. 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 $7.8
million for the three months ended October 31, 1995 and $11.7 million and $10.4
million, respectively for the nine months ended October 31, 1996 and 1995.
TransAmerican did not purchase any gas from the Company for the three months
ended October 31, 1996. The receivable from TransAmerican for natural gas sales
totaled approximately $12 million at October 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
$0.7 million and $1.0 million, respectively, for the three months ended
October 31, 1996 and 1995 and $2.2 million and $2.3 million, respectively, for
the nine months ended October 31, 1996 and 1995. The receivable from TARC for
natural gas sales totaled approximately $2.1 million at October 31, 1996.
19
21
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
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 $25 million at October 31, 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 shares of the Company's common stock by TransAmerican or
its affiliates. TransAmerican did not make its scheduled October 31, 1996
interest payment.
Pursuant to the terms of the Transfer Agreement, TransAmerican is
obligated to indemnify the Company for all future losses incurred in connection
with litigation or bankruptcy claims assumed in the Transfer. In order to
facilitate the settlement of the Terry/Penrod litigation in May 1996, the
Company advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable (see Note 9). In connection with this
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;
however, the Company retained such interests in partial satisfaction of
TransAmerican's indemnity obligations.
In September 1996, the Company purchased from TransDakota Oil
Corporation ("TDOC"), a subsidiary of TransAmerican, certain oil and gas
leasehold interests located in the Lodgepole area in North Dakota for
approximately $20 million. The Company believes that the combination of these
interests, together with the Company's other interests in the Lodgepole area,
will produce a more marketable property package. The purchase price was $3.9
million greater than TDOC's basis in the properties. The properties have been
recorded in the Company's financial statements at carryover basis and the $3.9
million has been classified as a reduction of retained earnings.
The Company provides accounting and legal services to TARC and 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 $19 million at October 31,
1996.
In September 1996, the Company and TransAmerican entered into an
agreement pursuant to which the Company obtained an $11.5 million
dollar-denominated production payment, subsequently increased to $19 million,
bearing interest at 17% per annum, burdening certain oil and gas interests
owned by TransAmerican as a source of repayment for certain of the receivables
from TransAmerican discussed above. At October 31, 1996, $37 million of
remaining related-party receivables has been recorded as a contra-stockholder
equity account due to uncertainties regarding the repayment terms 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 nine months ended
October 31, 1996 and 1995, is as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Sales volumes:
Gas (Bcf) (1) 38.1 32.5 112.4 103.5
NGLs (MMgal) 39.3 32.9 128.6 136.9
Condensate (MBbls) 120 125 400 409
Average prices:
Gas (dry) (per Mcf) (2) $ 1.62 $ 1.44 $ 1.87 $ 1.40
NGLs (per gallon) .38 .29 .33 .26
Condensate (per Bbl) 22.07 16.82 20.47 17.71
Number of gross wells drilled 34 26 111 68
Percentage of wells completed 79% 73% 73% 60%
______________________
(1) Sales volumes for the three and nine months ended October 31, 1996 include
9.5 Bcf and 23.5 Bcf, respectively, delivered pursuant to a volumetric
production payment.
(2) Average price for the three and nine months ended October 31, 1996
includes amounts delivered under volumetric production payments. The
average gas price for the Company's undedicated production for these
periods was $1.87 per Mcf and $2.05 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 Nine Months Ended
October 31, October 31,
----------------------- ----------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Operating costs and expenses:
Lease $ 7.2 $ 5.7 $ 20.2 $ 15.0
Pipeline 8.9 6.1 25.2 17.5
Natural gas liquids 9.7 7.2 32.9 27.1
--------- ---------- --------- ----------
25.8 19.0 78.3 59.6
Taxes other than income taxes (1) 2.1 2.7 14.4 10.5
--------- ---------- --------- ----------
Total $ 27.9 $ 21.7 $ 92.7 $ 70.1
========= ========== ========= ==========
- -----------------------------
(1) Taxes other than income taxes include severance, property, and other
taxes.
21
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The Company's average depletion rates have been as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------- ----------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Depletion rates (per Mcfe) $ .94 $ .74 $ .93 $ .76
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 $4.2 million and $4.4 million for the quarters ended October 31,
1996 and 1995, respectively, and $12.2 million and $5.5 million, respectively,
for the nine months ended October 31, 1996 and 1995), income taxes,
depreciation, depletion, and amortization are set forth below (in millions of
dollars):
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------- ----------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Consolidated EBITDA $ 41.8 $ 63.6 $ 245.8 $ 149.0
THREE MONTHS ENDED OCTOBER 31, 1996, COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1995
Gas, condensate and NGLs revenues for the three months ended October
31, 1996 increased by $12.9 million from the comparable prior year quarter, due
primarily to increases in gas, condensate and NGL sales prices and gas and NGL
sales volumes. The average monthly prices received per Mcf of gas, excluding
amounts dedicated to volumetric production payments, ranged from $1.70 to $1.99
in the three months ended October 31, 1996, compared to a range of $1.33 to
$1.57 in the same period in the prior year. The increase in gas sales volumes
is due primarily to increased production from the Company's Bob West North
development area, 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 Lobo Trend properties. As of October 31,
1996, the Company had a total of 832 producing wells compared to 951 at
October 31, 1995. NGL sales volumes increased as a result of increases in the
volumes of natural gas processed. Transportation revenues increased by $0.8
million over the prior year quarter due to increases in volumes transported
through the Company's pipeline system. 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 October 31, 1996
increased by $1.5 million over the comparable prior year period primarily due
to 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. This program
included the installation of leased wellhead compressors and additional
workover projects. Pipeline operating expenses increased by $2.8 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 $2.5 million
from the comparable quarter in the prior year due to increases in the cost and
volumes of natural gas processed. Depreciation, depletion and amortization
expense for the three months ended October 31, 1996 increased by $4.2 million
due to a $0.20 increase in the depletion rate, offset in part by a decrease in
the Company's undedicated natural gas production. General and administrative
expenses increased by $10.1 million in the three months ended October 31, 1996,
due primarily to increases in litigation accruals, wages and benefits and
outside services. Taxes other than income taxes decreased by $0.6 million from
the prior year quarter due primarily to a reduction in ad valorem taxes, offset
in part by an increase in severance taxes. The gain on litigation settlement
of $18.3 million in the prior year period represents the value of properties
received in a litigation settlement.
Interest income for the three months ended October 31, 1996 decreased
by approximately $0.7 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 $0.2 million over the
same period of the prior year primarily as a result of
22
24
a decrease in the amount of interest capitalized in connection with the
acquisition of certain of the Company's gas and oil properties, offset in part
by interest accrued on the Company's dollar-denominated production payment in
the prior year quarter.
NINE MONTHS ENDED OCTOBER 31, 1996, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1995
Gas, condensate and NGL revenues for the nine months ended October 31,
1996 increased by $38.2 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 $1.70 to $2.45 in the nine months
ended October 31, 1996, compared to a range of $1.29 to $1.57 in the same period
in the prior year. The increase in gas sales volumes is due primarily to
increased production from the Company's Bob West North development area, 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 Lobo Trend properties.
NGLs sales volumes decreased as a result of decreases in the volumes of
natural gas processed. Transportation revenues remained at prior year levels
as increases in gas sales volumes from the Company's Bob West North
development areas transported through the Company's pipeline system were offset
by the declines in production from the Company's Lobo Trend wells.
Lease operating expenses in the nine months ended October 31, 1996
increased by $5.2 million from the prior year period due primarily to increases
in repairs and maintenance and workover expense attributable to an increase in
the number of producing wells prior to the sale of certain of the Company's
Lobo Trend 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. This program included the installation of leased wellhead compressors
and additional workover projects. Pipeline operating expenses increased by
$7.7 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
$5.8 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 nine months ended October 31, 1996 increased by $6.1 million due to a $0.17
increase in the depletion rate, offset in part by the decrease in the Company's
undedicated natural gas production. General and administrative expenses
increased by $10.6 million in the nine months ended October 31, 1996, due
primarily to increases in litigation accruals and wages and benefits. Taxes
other than income taxes increased by $3.9 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, offset
in part by a reduction of ad valorem taxes.
Interest income for the nine months ended October 31, 1996 decreased
by approximately $0.6 million from the comparable period of the prior year due
to higher average cash balances in the prior year period resulting from the
issuance of the Notes in June 1995. Interest expense increased by $13.8
million primarily as a result of interest accrued on the Notes, offset in part
by an increase of $6.5 million of interest capitalized in connection with the
acquisition of the Company's unevaluated gas and oil properties.
Cash flow from operating activities for the nine months ended October
31, 1996 increased by approximately $139.2 million from the prior-year period
due primarily to cash received in the settlement of take-or-pay litigation in
the second quarter of the current fiscal year and proceeds from the sale of
volumetric production payments.
Cash used in investing activities decreased by $123.6 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 $280.9
million from the comparable prior year period 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 fluctuations in natural gas prices. See Note 8 of
Notes to Condensed Consolidated Financial Statements included elsewhere in this
report.
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, asset sales and other financings. For the nine months ended October
31, 1996, total capital expenditures were $206 million, including $16 million
for lease acquisitions, $165 million for drilling and development and $25
million for the Company's gas gathering and pipeline system and other
equipment.
The Company anticipates total capital expenditures of approximately
$275 million and $235 million in fiscal 1997 and fiscal 1998, respectively,
subject to Indenture requirements and available cash flow, of which
approximately $230 million and $195 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. Under the Indenture and BNY Facility, the Company is required to limit
its capital expenditures in a fiscal quarter if its Working Capital (as
defined) at the end of the preceding quarter is less than $20 million.
Although cash from operating activities for the nine months ended
October 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. In addition to cash flow from operating activities, the Company
has utilized asset sales and various financings 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. 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.
In January 1996, the Company sold to an unaffiliated third party a
term overriding royalty interest in the form of a volumetric 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. At October 31, 1996, approximately 28 Bcf of
natural gas remained subject to this production payment.
24
26
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. At October 31, 1996, approximately 29 Bcf of natural gas remained
subject to this production payment.
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
8 to the Condensed Consolidated Financial Statements included elsewhere in this
report.
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 a drilling program
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
are 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.
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 $7.8
million for the three months ended October 31, 1995 and $11.7 million and $10.4
million, respectively for the nine months ended October 31, 1996 and 1995.
TransAmerican did not purchase any gas from the Company for the three months
ended October 31, 1996. The receivable from TransAmerican for natural gas sales
totaled approximately $12 million at October 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
$0.7 million and $1.0 million, respectively, for the three months ended
October 31, 1996 and 1995 and $2.2 million and $2.3 million, respectively, for
the nine months ended October 31, 1996 and 1995. The receivable from TARC for
natural gas sales totaled approximately $2.1 million at October 31, 1996.
25
27
As of January 1996, the Company and TTEX entered into a drilling
program agreement. Pursuant to the agreement, 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 $25 million at October 31, 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.
TransAmerican did not make its October 31, 1996 scheduled interest payment.
Pursuant to the terms of the Transfer Agreement, TransAmerican is
obligated to indemnify the Company for all future losses incurred in connection
with litigation or bankruptcy claims assumed in the Transfer. In order to
facilitate the settlement of the Terry/Penrod litigation in May 1996, the
Company advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. In connection with this 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; however, the
Company retained such interests in partial satisfaction of TransAmerican's
indemnity obligations.
In September 1996, the Company purchased from TDOC, a subsidiary of
TransAmerican, certain oil and gas leasehold interests located in the Lodgepole
area in North Dakota for approximately $20 million. The Company believes that
the combination of these interests, together with the Company's other interests
in the Lodgepole area, will produce a more marketable property package. The
purchase price was $3.9 million greater than TDOC's basis in the properties.
The properties have been recorded in the Company's financial statements at
carryover basis and the $3.9 million has been classified as a reduction of
retained earnings.
The Company provides accounting and legal services to TARC and TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to 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 $19 million at October 31, 1996.
In September 1996, the Company and TransAmerican entered into an
agreement pursuant to which the Company obtained an $11.5 million
dollar-denominated production payment, subsequently increased to $19 million,
bearing interest at 17% per annum, burdening certain oil and gas interests
owned by TransAmerican as a source of repayment for certain of the receivables
from TransAmerican discussed above. At October 31, 1996, $37 million of
remaining related-party receivables has been recorded as a contra-stockholder
equity account due to uncertainties regarding the repayment terms 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 subject to adjustment for gas sales between
the effective date and the closing date. The Company retained the proceeds of
all such gas sales.
The Company has engaged investment banking firms to assist in the
following potential transactions: (i) the sale or sale-leaseback of all or a
portion of the Company's pipeline system; (ii) the sale of its interest in the
Lodgepole prospect in North Dakota; and (iii) the sale of the Company's
remaining Lobo Trend producing properties in Webb and Zapata Counties, Texas,
and associated undeveloped acreage. If any such transactions are consummated,
the Company intends to use the proceeds for general corporate purposes and a
possible repurchase of the Notes.
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28
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 October 31, 1996, the
outstanding balance under the BNY Facility was $14.8 million. The BNY Facility
requires the Company to maintain certain financial ratios and includes certain
covenants. Under the terms of the BNY Facility, as amended, the Company's net
loss (including any extraordinary losses) may not exceed $10 million for each
six-month period ending on the last day of any fiscal quarter ending after
January 31, 1996.
In December 1996, the Company issued $189 million in face amount of
13 1/4% Series A Senior Subordinated Notes due 2003 ("Subordinated Notes") to
unaffiliated third parties. The Subordinated Notes were sold with original issue
discount at a price equal to 52.6166% of the principal amount shown on the face
thereof, for gross proceeds of approximately $99.45 million. The Subordinated
Notes accrete at a rate of 13 1/4% compounded semi-annually. At such time as
the Notes are rated "B1" or better by Moody's Investors Service, Inc. and "BB"
or better by Standard & Poor's Corporation, Inc., or when the Notes are paid in
full, the Subordinated Notes will be exchanged for notes bearing interest at a
rate of 13 1/4% per annum, payable semi-annually on December 31 and June 30. In
addition, the holders of the Subordinated Notes will have the right to exchange
their notes for notes to be registered under the Securities Act of 1933, as
amended. Proceeds from the issuance of the Subordinated Notes will be used for
working capital and general corporate purposes.
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.
DECONSOLIDATION FOR FEDERAL INCOME TAX PURPOSES
Under certain circumstances, TransAmerican, TEXC, 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"). Such sales may be necessary to raise
funds required to complete TARC's capital improvement program. 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 liability is based on the
Company's position that the
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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, TEXC, TEC,
or TARC 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 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.
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
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30
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 October 31,
1996, the Company had approximately $22.9 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 ("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 has advised the Company as follows: TARC will require
substantial additional financing over the course of the remaining construction
period to complete the Capital Improvement Program. Completion schedules and
the amount of additional expenditures required will depend upon, among other
factors, the structure and timing of additional financing. TARC is currently
negotiating with potential third-party investors to provide for additional
funding, including strategic equity investors, financial investors and foreign
producers of crude oil.
Primarily because additional financing was not available on a timely
basis, TARC management believes that TARC will not be able to complete Phase I
of the Capital Improvement Program by February 15, 1997. Under the TARC
Indenture, the failure of TARC to complete and test Phase I by February 15, 1997
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". TARC anticipates that, prior to February 15, 1997, it will solicit
the approval of the holders of the TARC Notes with respect to any elements of a
proposed financing that otherwise would be limited by the terms of the TARC
Indenture, as well as to a revised budget and an extension of the required
completion date for Phase I. There can be no assurance that current
negotiations will result in additional financing for the Capital Improvement
Program, that additional financing will be available, or that the requisite
approval of the TARC noteholders can be obtained.
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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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 2 and 9 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 Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission (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.
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33
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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)
JULY 31, JANUARY 31,
1996 1996
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 472 $ 2,779
Long-term debt proceeds held in collateral account . . . . . . . . . . 404 14,840
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 109 121
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . 677 118
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,026 37,231
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,618 5,479
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 15,306 60,568
---------- -----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 513,960 430,858
Less accumulated depreciation and amortization . . . . . . . . . . . . . 13,561 10,244
---------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . 500,399 420,614
---------- -----------
Long-term debt proceeds held in collateral account . . . . . . . . . . . -- 9,565
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,612 27,576
---------- -----------
$ 541,317 $ 518,323
========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,818 $ 23,552
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . 3,341 2,957
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 14,882 14,560
Product financing arrangements . . . . . . . . . . . . . . . . . . . . 12,922 37,206
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 50,963 78,275
---------- -----------
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 13,505 3,799
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,065 316,538
Investment in TransTexas . . . . . . . . . . . . . . . . . . . . . . . . 21,940 46,586
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 843 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 . . . . . . . . . . . . . . . . . . . . . . . . . (134,812) (176,856)
---------- -----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . 114,001 71,957
---------- -----------
$ 541,317 $ 518,323
========== ===========
See accompanying notes to condensed financial statements.
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34
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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 SIX MONTHS ENDED
JULY 31, JULY 31,
-------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
Revenues:
Product sales . . . . . . . . . . . . . . . . $ -- $ 68,435 $ 10,857 $ 68,993
Tank rentals . . . . . . . . . . . . . . . . -- 1 -- 1
---------- ---------- ---------- -----------
Total revenues . . . . . . . . . . . . . . -- 68,436 10,857 68,994
---------- ---------- ---------- -----------
Costs and expenses:
Costs of products sold . . . . . . . . . . . 921 74,139 12,441 75,225
Processing arrangements, net . . . . . . . . 1,459 -- 3,319 --
Operations and maintenance . . . . . . . . 3,544 4,846 6,600 4,572
Depreciation and amortization . . . . . . . . 1,816 1,773 3,620 3,149
General and administrative . . . . . . . . . 3,558 4,091 5,661 5,172
Taxes other than income taxes . . . . . . . . 2,479 1,041 2,878 2,082
---------- ---------- ---------- -----------
Total costs and expenses . . . . . . . . . 13,777 85,890 34,519 90,200
---------- ---------- ---------- -----------
Operating loss . . . . . . . . . . . . . . (13,777) (17,454) (23,662) (21,206)
---------- ---------- ---------- -----------
Other income (expense):
Interest income . . . . . . . . . . . . . . . 54 2,168 197 4,087
Interest expense, net . . . . . . . . . . . . (984) (7,871) (2,072) (12,504)
Equity in earnings (loss) of TransTexas . . . 10,090 (1,586) 11,091 (2,428)
Gain on sale of TransTexas stock . . . . . . -- -- 56,162 --
Other . . . . . . . . . . . . . . . . . . 65 5,404 328 2,361
----------- ---------- ---------- -----------
Total other income (expense) . . . . . . . 9,225 (1,885) 65,706 (8,484)
----------- ---------- ---------- -----------
Income (loss) before extraordinary item . . (4,552) (19,339) 42,044 (29,690)
Extraordinary item:
Equity in extraordinary loss of TransTexas . -- (11,497) -- (11,497)
----------- ---------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . $ (4,552) $ (30,836) $ 42,044 $ (41,187)
========== ========== ========== ===========
Net income (loss) per share:
Income (loss) before extraordinary item . . $ (0.15) $ (0.64) $ 1.40 $ (0.99)
Extraordinary item . . . . . . . . . . . . . -- (0.38) -- (0.38)
---------- ---------- ----------- -----------
Net income (loss) per share . . . . . . . . $ (0.15) $ (1.02) $ 1.40 $ (1.37)
========== ========== ========== ===========
Weighted average number of shares outstanding . 30,000,000 30,000,000 30,000,000 30,000,000
========== ========== ========== ============
See accompanying notes to condensed financial statements.
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35
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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)
SIX MONTHS ENDED
JULY 31,
---------------------
1996 1995
--------- ---------
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,044 $ (41,187)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 3,620 3,149
Amortization of discount on long-term debt . . . . . . . . . . . . . . . . . . . 40 7,673
Amortization of debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . 3 552
Equity in (earnings) loss of TransTexas . . . . . . . . . . . . . . . . . . . . . (11,091) 13,925
Gain on sale of TransTexas stock . . . . . . . . . . . . . . . . . . . . . . . . (56,162) --
Inventory writedown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921 1,265
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (547) (2,331)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (11,312)
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,860 (7,023)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186) (2,585)
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 (449)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 2,246
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (2,688)
--------- ---------
Net cash used by operating activities . . . . . . . . . . . . . . . . . . . (16,542) (38,765)
--------- ---------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,587) (55,068)
--------- ---------
Financing activities:
Issuance of long-term debt and warrants . . . . . . . . . . . . . . . . . . . . . . -- 300,750
Net proceeds from sale of TransTexas stock . . . . . . . . . . . . . . . . . . . . . 42,607 --
Long-term debt and stock sale proceeds held in collateral account . . . . . . . . . (26,549) (173,000)
Withdrawals from collateral account . . . . . . . . . . . . . . . . . . . . . . . . 50,550 32,143
Advances from TransAmerican . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,656 635
Payment of advances to TransAmerican . . . . . . . . . . . . . . . . . . . . . . . . (1,925) (40,000)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (20,479)
Principal payments on capital lease obligations . . . . . . . . . . . . . . . . . . (517) (157)
--------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . 75,822 99,892
--------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . (2,307) 6,059
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 2,779 46
--------- ---------
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 472 $ 6,105
========= =========
Noncash financing and investing activities:
Accounts payable for property and equipment . . . . . . . . . . . . . . . . . . . . $ (3,547) $ 3,491
Product financing arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,283) 27,671
Interest accretion on notes and discount notes capitalized in property and equipment 23,487 9,840
Contribution of TransTexas stock . . . . . . . . . . . . . . . . . . . . . . . . . . -- 37,176
Forgiveness of advances from TransAmerican . . . . . . . . . . . . . . . . . . . . . -- 71,170
See accompanying notes to condensed financial statements.
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36
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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
vacuum unit intermittently since then. The Company's decision to commence or
suspend operations is based on the availability of financing, current operating
margins and the need to tie-in units as they are completed. 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 JULY 31, 1996, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1995
There were no total revenues for the three months ended July 31, 1996 due
to processing all of the refinery throughput for third parties pursuant to
processing agreements. For the same period in 1995, revenues were $68.4
million.
Costs of products sold for the three months ended July 31, 1996 consisted
of inventory writedowns. Costs of products sold declined to $0.9 million from
$74.1 million for the same period in 1995, primarily as a result of operating
under processing agreements with third parties whereby the Company had no
ownership of feedstocks.
Operations and maintenance expense for the three months ended July 31,
1996 decreased to $3.5 million from $4.9 million for the same period in 1995,
primarily due to decreases in salaries and tank rental charges.
Taxes other than income taxes for the three months ended July 31, 1996
increased $1.4 million to $2.5 million from $1.1 million for the same period in
1995, primarily due to increased property tax expense.
Interest income for the three months ended July 31, 1996 decreased $2.1
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 July 31, 1996
decreased $6.9 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the three months ended July 31, 1996,
the Company capitalized approximately $16.7 million of interest related to
property and equipment additions at the Company's refinery compared to $8.8
million for the three months ended July 31, 1995.
The equity in earnings (loss) of TransTexas for the three months ended
July 31, 1996, reflects the Company's 14.1% equity interest in TransTexas. The
Company's interest in TransTexas decreased from 20.3% as a result of the
Company's sale of 4.55 million shares of TransTexas stock in March 1996.
35
37
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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.)
Other income for the three months ended July 31, 1995 was $5.4 million
which was primarily a result of trading gains on futures contracts.
SIX MONTHS ENDED JULY 31, 1996, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1995
Total revenues for the six months ended July 31, 1996 decreased $58.1
million to $10.9 million from $69.0 million for the same period in 1995,
primarily as a result of processing the majority of refinery throughput for
third parties under processing agreements.
Costs of products sold for the six months ended July 31, 1996 decreased to
$12.4 million from $75.2 million for the same period in 1995, primarily as a
result of the Company's processing agreement with third parties under
processing agreements.
Operations and maintenance expense for the six months ended July 31, 1996
increased $2.0 million to $6.6 million from $4.6 million for the same period in
1995, primarily due to an increase in fuel costs and salaries.
Taxes other than income taxes for the six months ended July 31, 1996
increased $0.8 million to $2.9 million from $2.1 million for the same period in
1995 primarily due to increased property tax expense.
Interest income for the six months ended July 31, 1996 decreased $3.9
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 six months ended July 31, 1996
decreased $10.4 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the six months ended July 31, 1996,
the Company capitalized approximately $33.3 million of interest related to
property and equipment additions at the Company's refinery.
The equity in earnings (loss) of TransTexas for the six months ended July
31, 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 income for the six months ended July 31, 1995 was $2.4 million which
was primarily a result of trading gains 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, personnel shortages and cost
overruns over which the Company may not have any control.
As of July 31, 1996, expenditures on the Capital Improvement Program
funded by or approved for reimbursement from the cash collateral account
totaled approximately $205 million. Approximately $0.4 million remained in
the cash collateral account as of July 31, 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
July 31, 1996, the Company had commitments for refinery construction and
maintenance of approximately $56.2 million. Additional funds necessary to
complete the
36
38
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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.)
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 or loans 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 or
TransAmerican. If this financing is not available in the near future or if
significant engineering problems, work stoppages, personnel shortages 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. If required
financing is obtained on a timely basis, completion by February 15, 1997 will
still prove very difficult. The Company has identified and is considering
certain steps to optimize construction completion, including the retention of
field supervisors, direct hiring of field supervisors and field labor by the
Company's major contractors, adding additional shifts, and modularization and
outsourcing of certain construction items. Under the Indenture, the failure
of the Company to complete and test Phase I by February 15, 1997 would
constitute an Event of Default at such date. Such date, however, may be
extended, without an Event of Default to May 15, 1997 or further extended to
August 15, 1997 if the Company's fixed charge coverage ratio is 1.25 to 1 for
the three month periods ended December 31, 1996 and March 31, 1997,
respectively. The Company is actively pursuing transactions that could allow
it to meet the requisite ratio.
As of July 1996, the Company had expended the $173 million placed in the
collateral account from the issuance of the TARC Notes as well as the majority
of the proceeds from the March 1996 sale of TransTexas common stock. In May
1996, in anticipation of the limited availability of collateral account funds,
the Company began scaling back expenditures on the Capital Improvement Program
so that remaining funds were expended only on those critical path items
necessary to complete and test refinery units by the dates specified in the
Indenture. In July 1996, the Company executed a promissory note to
TransAmerican for up to $25 million. As of July 31, 1996, the Company had
drawn $2.5 million against the note. Also in July 1996, TransAmerican advanced
$4.3 million to the Company. This advance has now been included as borrowings
under the note. At August 31, 1996, the Company had $19.9 million outstanding
under the note. The note bears interest at 15% per annum, with quarterly
interest payments beginning in October 1996 and with the principal due in July
1998. These and additional borrowings will be utilized by the Company to fund
the critical path items mentioned above, as well as working capital needs,
pending additional financing from other sources. There can be no assurance
that such borrowings will provide sufficient interim funds to keep the Capital
Improvement Program on schedule even if additional financing is eventually
obtained.
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. A portion of these facilities was 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.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
As of February 1, 1996, the Company adopted the requirements of SFAS No. 121.
The Company currently believes, based on estimates of refining margins and
current estimates for costs of the Capital Improvement Program, defined below,
that future undiscounted cash flows will be sufficient to recover the cost of
the refinery over its estimated useful life. Management believes there have
been no events or changes in circumstances that would require the recognition
of an impairment loss. However, due to the inherent uncertainties in
constructing and operating a large scale refinery and the uncertainty regarding
the Company's ability to complete the Capital Improvement Program (see Note 3),
there can be no assurance that the Company will ultimately recover the cost of
the refinery.
37
39
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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.)
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 and processing agreements 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 unless the Company is successful in its pursuit of fixed fee crude
processing transactions. 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 necessary additional funding for the
refinery expansion and working capital can be obtained or that profitable
operations will be ultimately achieved. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. 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. TransAmerican's tax liability which could result from
deconsolidation is estimated to be approximately $35 million at July 31, 1996.
The Company as a member of the consolidated group is severally liable for this
liability. To the extent TransAmerican is unable to fund the entire liability,
the Company may be required to pay a portion of this tax. The Company is
unable to determine its share, if any, of the liability which would result from
deconsolidation because (i) it is uncertain whether deconsolidation will occur
and (ii) if deconsolidation should occur, it is uncertain whether the Company
would be required to fund any portion of the tax liability under the joint and
several provisions.
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 six months ended July 31, 1996, approximately 1.1 million
barrels of feedstocks with a cost of $23 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 six months ended July 31, 1996, the
Company incurred a loss of approximately $1.9 million related to this
processing agreement primarily as a result of price management decisions.
38
40
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE
QUARTER ENDED JULY 31, 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.)
In April 1996, the Company entered into a similar processing agreement
with another third party to process feedstocks. As of July 31, 1996, the
Company had completed processing approximately 4.3 million barrels of
feedstocks and is storing approximately 1.1 million barrels of intermediate and
refined products under this agreement. Upon sale of these barrels, the Company
and the third party will complete a settlement of the agreement. As of July
31, 1996, the Company recorded a loss of approximately $1.4 million related to
this processing agreement primarily as a result of price management decisions.
In July and September 1996, the Company entered into processing agreements
with a third party to process approximately 0.5 million barrels of feedstocks
for a fixed price per barrel. Under the terms of the agreement, the Company is
responsible for only certain quantity and quality yields.
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 July 31, 1996, the Company has paid approximately $2.1 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 scheduled, engineering problems,
work stoppages, cost overruns, personnel shortages, fluctuations in the
commodity prices for petroleum and refined products, casualty losses,
conditions in the capital markets and competition.
39
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
4.1 -- Pledge and Security Agreement dated as of September 19, 1996,
between TransAmerican Exploration Corporation and Fleet
National Bank.
4.2 -- Registration Rights Agreement dated as of September 19, 1996,
by and among TransTexas Gas Corporation, TransAmerican Natural
Gas Corporation, TransAmerican Exploration Corporation and Fleet National Bank.
10.1 -- Employment Agreement between the Company and Richard Bianchi
dated August 12, 1996.
10.2 -- Employment Agreement between the Company and Arnold
Brackenridge dated August 12, 1996.
15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 -- Financial Data Schedule.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
October 31, 1996.
40
42
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
December 16, 1996
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43
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
4.1 -- Pledge and Security Agreement dated as of September 19, 1996,
between TransAmerican Exploration Corporation and Fleet
National Bank.
4.2 -- Registration Rights Agreement dated as of September 19, 1996,
by and among TransTexas Gas Corporation, TransAmerican Natural
Gas Corporation, TransAmerican Exploration Corporation and Fleet National Bank.
10.1 -- Employment Agreement between the Company and Richard Bianchi
dated August 12, 1996.
10.2 -- Employment Agreement between the Company and Arnold
Brackenridge dated August 12, 1996.
15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 -- Financial Data Schedule.