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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 Quarterly Period Ended October 31,1996
Registration Number 33-85930
________________
TRANSAMERICAN REFINING CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0229632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 EAST NORTH BELT
SUITE 320
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 986-8811
(Registrant's telephone number, including area code)
________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares of common stock of the registrant outstanding on
December 16, 1996 is 30,000,000.
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TRANSAMERICAN REFINING CORPORATION
TABLE OF CONTENTS
Page
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheet as of October 31, 1996 and January 31, 1996 . . 2
Condensed Statement of Operations for the three and nine months
ended October 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . 3
Condensed Statement of Cash Flows for the nine months ended
October 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . 4
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 14
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 20
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1996 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 334 $ 2,779
Long-term debt proceeds held in collateral account . . . . . . . . . . 8 14,840
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 38 121
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . 430 118
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 37,231
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 5,479
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 1,261 60,568
----------- -----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 541,476 430,858
Less accumulated depreciation and amortization . . . . . . . . . . . . . 15,129 10,244
----------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . 526,347 420,614
----------- -----------
Long-term debt proceeds held in collateral account . . . . . . . . . . . -- 9,565
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,649 27,576
----------- -----------
$ 552,257 $ 518,323
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,703 $ 23,552
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . 3,896 2,957
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 11,047 14,560
Product financing arrangements . . . . . . . . . . . . . . . . . . . . -- 37,206
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 38,646 78,275
---------- -----------
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 37,659 3,799
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352,814 316,538
Investment in TransTexas . . . . . . . . . . . . . . . . . . . . . . . . 23,265 46,586
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 719 1,168
Commitments and contingencies (Note 7) . . . . . . . . . . . . . . . . . -- --
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 . . . . . . . . . . . . . . . . . . . . . . . . . (149,659) (176,856)
---------- -----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . 99,154 71,957
---------- -----------
$ 552,257 $ 518,323
========== ===========
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED 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:
Product sales . . . . . . . . . . . . . . . . $ -- $ 74,811 $ 10,857 $ 143,804
---------- ---------- ---------- -----------
Total revenues . . . . . . . . . . . . -- 74,811 10,857 143,804
---------- ---------- ---------- -----------
Costs and expenses:
Costs of products sold . . . . . . . . . . . -- 75,824 12,441 151,049
Processing arrangements, net . . . . . . . . 5,232 -- 8,551 --
Operations and maintenance . . . . . . . . 2,989 4,533 9,589 9,105
Depreciation and amortization . . . . . . . . 1,691 1,584 5,311 4,733
General and administrative . . . . . . . . . 1,733 4,014 7,394 9,186
Taxes other than income taxes . . . . . . . . 905 1,103 3,783 3,185
---------- ---------- ---------- -----------
Total costs and expenses . . . . . . 12,550 87,058 47,069 177,258
---------- ---------- ---------- -----------
Operating loss . . . . . . . . . . . . (12,550) (12,247) (36,212) (33,454)
---------- ---------- ---------- ----------
Other income (expense):
Interest income . . . . . . . . . . . . . . . 5 1,546 202 5,633
Interest expense . . . . . . . . . . . . . . (18,671) (15,673) (54,081) (43,517)
Interest capitalized . . . . . . . . . . . . 17,676 10,828 51,014 26,168
Equity in earnings (loss) of TransTexas . . . (1,325) (1,373) 9,766 (3,801)
Gain on sale of TransTexas stock . . . . . . -- -- 56,162 --
Other . . . . . . . . . . . . . . . . . . 18 35 346 2,397
---------- ---------- ---------- ----------
Total other income (expense) . . . . . . . (2,297) (4,637) 63,409 (13,120)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item . . (14,847) (16,884) 27,197 (46,574)
Extraordinary item:
Equity in extraordinary loss of TransTexas . -- -- -- (11,497)
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . $ (14,847) $ (16,884) $ 27,197 $ (58,071)
========== =========== ========== ===========
Net income (loss) per share:
Income (loss) before extraordinary item . . $ (0.49) $ (0.56) $ 0.91 $ (1.55)
Extraordinary item . . . . . . . . . . . . . -- -- -- (0.39)
---------- ---------- ---------- ----------
Net income (loss) per share . . . . . . . . $ (0.49) $ (0.56) $ 0.91 $ (1.94)
========== ========== ========== ===========
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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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
-----------------------
1996 1995
---------- ----------
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,197 $ (58,071)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 5,311 4,733
Amortization of discount on long-term debt . . . . . . . . . . . . . . . . 83 10,857
Amortization of debt issue costs . . . . . . . . . . . . . . . . . . . . . 6 777
Equity in (earnings) loss of TransTexas . . . . . . . . . . . . . . . . . . (9,766) 15,298
Gain on sale of TransTexas stock . . . . . . . . . . . . . . . . . . . . . (56,162) --
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 415
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . (312) --
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (14,064)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,106 (6,739)
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 939 946
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,173) 6,290
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,114 3,097
---------- ---------
Net cash used by operating activities . . . . . . . . . . . . . . . . . (25,574) (36,461)
---------- ---------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (76,949) (110,189)
---------- ---------
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 . . . . . . . . . . . . . . . . . . . . . 50,949 87,051
Advances from TransAmerican . . . . . . . . . . . . . . . . . . . . . . . . . 35,785 5,335
Payment of advances to TransAmerican . . . . . . . . . . . . . . . . . . . . . (1,925) (44,700)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (20,479)
Principal payments on capital lease obligations . . . . . . . . . . . . . . . (789) (871)
---------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . 100,078 154,086
---------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . (2,445) 7,436
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 2,779 46
---------- ---------
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 334 $ 7,482
========== =========
Noncash financing and investing activities:
Accounts payable for property and equipment . . . . . . . . . . . . . . . . . $ (4,955) $ 1,079
Product financing arrangements . . . . . . . . . . . . . . . . . . . . . . . . (37,206) 7,900
Interest accretion on notes and discount notes capitalized in
property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,193 18,495
Contribution of TransTexas stock . . . . . . . . . . . . . . . . . . . . . . . -- 37,176
Forgiveness of advances from TransAmerican, contributed to capital . . . . . . -- 71,170
Capital lease obligations incurred for property and equipment . . . . . . . . -- 2,678
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made which are necessary to fairly state the
financial position of the Company as of October 31, 1996 and the results of its
operations and cash flows for the interim periods ended October 31, 1996 and
1995. The results of operations for interim periods should not be regarded as
necessarily indicative of results that may be expected for the entire year. The
financial information presented herein should be read in conjunction with the
financial statements and notes included in the Company's transition report on
Form 10-K for the period ended January 31, 1996. The period-end condensed
balance sheet was derived from audited financial statements but does not include
all disclosures required by generally accepted accounting principles. Unless
otherwise noted, the term "Company" refers to TransAmerican Refining Corporation
and all other defined terms used herein are as defined in the Company's
transition report on Form 10-K for the period ended January 31, 1996. Certain
reclassifications have been made in the prior period's financial statements to
conform to the current period's presentation.
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 as well as the costs of related
identifiable intangible assets. 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 estimating future refining
margins, 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.
2. ORGANIZATION
In 1994, TransAmerican Natural Gas Corporation ("TransAmerican") formed
TransAmerican Energy Corporation ("TEC"), a limited-purpose holding company, to
hold certain shares of common stock of TransTexas Gas Corporation ("TransTexas")
and all of the Company's capital stock. In February 1995, in connection with a
public offering of debt securities by the Company (the "TARC Notes"),
TransAmerican transferred 55 million shares (74.3% of outstanding shares) of
TransTexas' common stock to TEC. TEC then transferred 15 million of the shares
(20.3% of the total outstanding) to the Company. In March 1996, the Company sold
4.55 million shares of TransTexas common stock (6.2% of the total outstanding)
in a public offering, for proceeds of $42.6 million. Approximately $26.6 million
from this sale were deposited in the cash collateral account described below.
The 50.45 million shares of TransTexas common stock held by TEC and the Company
are currently pledged as collateral for the TARC Notes.
3. CAPITAL IMPROVEMENT PROGRAM AND ADDITIONAL FINANCING REQUIREMENTS
The Company is currently engaged in an expansion and modification of its
refinery (the "Capital Improvement Program"). The current budget for the
Capital Improvement Program calls for total expenditures of $434 million. The
Company estimates that expenditures in addition to the current budget will be
required to complete the Capital Improvement Program. A significant portion of
the additional expenditures will relate to the Delayed Coking Unit, the fluid
catalytic cracking unit ("FCC Unit") and the offsite facilities. In connection
with the issuance of the TARC Notes in February 1995, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. In March 1996, the Company sold 4.55
million shares of TransTexas common stock and $26.6 million of the proceeds
thereof were deposited in the cash collateral account.
As of October 31, 1996, expenditures on the Capital Improvement Program
funded by or approved for
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
reimbursement from the cash collateral account totaled approximately $206
million. The Company will require substantial additional financing in excess of
the current budget 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. The Company 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 funding was not available to the Company on a
timely basis, management believes that the Company 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 "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. If an Event of Default occurs and is continuing, either
the Indenture Trustee or the Holders of 25% in aggregate principal amount of the
TARC Notes then outstanding may declare all principal of the TARC Notes and
accrued interest thereon to be due and payable immediately. Prior to the
declaration of acceleration of the maturity of the TARC Notes, the Holders of a
majority in aggregate principal amount of the TARC Notes at the time outstanding
may waive on behalf of all the Holders any default, except a default in the
payment of principal, of premium, if any, or interest on any TARC Note not yet
cured, or a default with respect to any covenant or provision that cannot be
modified or amended without the consent of the Holder of each outstanding TARC
Note affected.
The Company anticipates that, prior to February 15, 1997, it will solicit
the Holders' approval with respect to any elements of a proposed financing that
otherwise would be limited by the terms of the 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 Holders can be obtained.
The Company has incurred losses and negative cash flows from operating
activities 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 arrangements. Such losses
are due to financing costs, low margins and price management activities. Based
on recent refining margins, projected levels of operations and debt service
requirements, such negative cash flows from operations are likely to continue.
Primarily as a result of these factors and accounts payable related to the
Capital Improvement Program, the Company had negative working capital of $37.4
million at October 31, 1996. In order to operate the refinery and service its
debt, the Company must raise debt or equity capital in addition to the funds
required to complete the Capital Improvement Program. There is no assurance that
additional financing for the Capital Improvement Program, additional working
capital, or any necessary approval from the Holders will 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 in a timely
manner, (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 as a result of the above uncertainties.
4. CASH COLLATERAL ACCOUNT
Pursuant to a cash collateral and disbursement agreement (the
"Disbursement Agreement") among the Indenture Trustee, First Union National
Bank, as disbursement agent (the "Disbursement Agent"), and Baker & O'Brien,
Inc., as construction supervisor (the "Construction Supervisor"), $173 million
of the net proceeds from the sale of the TARC Notes pursuant to the 1995
Offering was placed in an account (the "Collateral Account") to be held and
invested by the Disbursement Agent until needed from time to time to fund the
Capital Improvement Program. In addition, the Company is required to deposit
the first $50 million of proceeds from a Revolving Credit Facility in the
Collateral Account if the Company obtains such facility. The Disbursement Agent
invests the assets of the Collateral Account in Cash, Cash Equivalents and
Marketable Securities. Interest income, if any, earned on the invested proceeds
will be added to the balance of the Collateral Account. The Disbursement Agent
disburses funds from the Collateral Account only upon
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
satisfaction of the disbursement conditions set forth in the Disbursement
Agreement. All funds in the Collateral Account are pledged as security for the
repayment of the TARC Notes.
The Disbursement Agent makes disbursements out of the Collateral Account
in accordance with a budget prepared by the Company and approved by the
Construction Supervisor. The budget consists of an itemized schedule setting
forth on a line item basis the additional expenditures estimated to be incurred
in connection with the Capital Improvement Program, the total cost of which may
not exceed $434 million, subject to certain exceptions. The Company estimates
that expenditures in addition to the current budget will be required to
complete the Capital Improvement Program. See "Capital Improvement Program"
under Item 5 of this report. The Company may amend the budget only with the
approval of the Construction Supervisor. The Construction Supervisor will
approve an amended budget if it satisfies all of the requirements of the
original budget or certain other conditions are satisfied. If the Capital
Improvement Program runs over budget, the Disbursement Agreement gives priority
to expenditures for Phase I of the Capital Improvement Program (see Note 3).
Under the Disbursement Agreement, the Construction Supervisor is
responsible for review and approval of the Company's plans, specifications and
budget for the Capital Improvement Program. The Construction Supervisor is
required to perform weekly inspections of the Company's refinery and to advise
the Disbursement Agent and the Indenture Trustee on the progress of the Capital
Improvement Program. In addition, the Construction Supervisor is required to
review each request by the Company for a disbursement from the Collateral
Account to pay for the Capital Improvement Program. No disbursements may be
made from the Collateral Account to fund the Capital Improvement Program unless
the Construction Supervisor determines (i) that the disbursement has been
requested to pay for expenses that are in accordance with the plans and
specifications approved by the Construction Supervisor, (ii) that the expense
for which a disbursement has been requested does not exceed the amount for such
item as set forth in the budget approved by the Construction Supervisor, and
(iii) that transactions for which a disbursement has been requested were made
on an arm's length basis, as represented by the Company.
5. INVENTORIES
The major components of inventories are as follows (in thousands of
dollars):
October 31, January 31,
1996 1996
----------- -----------
Refinery feedstocks and blendstocks . . . . . . . . . . . . . . . $ 7 $ 628
Intermediate and refined products . . . . . . . . . . . . . . . . 16 1,294
Purchase commitments - refinery feedstocks and blendstocks . . . . -- 3,767
Purchase commitments - intermediate and refined products . . . . . -- 31,542
---------- ----------
$ 23 $ 37,231
========== ==========
6. INVESTMENT IN TRANSTEXAS
The Company uses the equity method to account for its investment in
TransTexas and initially recorded this investment at TransAmerican's historical
basis. The equity in earnings or (loss) of TransTexas reflects the Company's
20.3% interest in TransTexas until March 1996, when the Company's interest in
TransTexas decreased to 14.1% as a result of its sale of 4.55 million shares of
TransTexas stock. The Company continues to record its pro rata share of income
or losses using the equity method due to the common control of TransTexas and
the Company by TransAmerican and TEC. The equity in extraordinary loss of
TransTexas for the nine months ended October 31, 1995, represents the Company's
equity in a charge by TransTexas for the early retirement of $500 million of its
10 1/2% Senior Secured Notes due 2000 from the proceeds of the issuance by
TransTexas in June 1995 of $800 million in 11 1/2% Senior Secured Notes due
2002.
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9
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Summarized income statement information of TransTexas is as follows (in
thousands of dollars):
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- ---------------------
1996 1995 1996 1995
-------- --------- ---------- ---------
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 80,104 $ 66,336 $ 262,794 $ 216,518
Operating costs and expenses . . . . . . . . . . . . . 74,246 35,443 124,442 162,819
-------- --------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . 5,858 30,893 138,352 53,699
Other expense . . . . . . . . . . . . . . . . . . . . (20,313) (19,364) 70,438 56,102
-------- --------- ---------- ---------
Income (loss) before income taxes . . . . . . . . . (14,455) 11,529 67,914 (2,403)
Income taxes . . . . . . . . . . . . . . . . . . . . . (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)
========= ========== ========== =========
7. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
NLRB PROCEEDING. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union ("OCAW") filed unfair labor practices charges against the
Company with the New Orleans Regional Office of the National Labor Relations
Board ("NLRB"). These charges allege that the Company refused to reinstate 22
former employees because of their union membership. The NLRB refused to issue a
complaint and the OCAW appealed the decision to the NLRB General Counsel. The
decision of the NLRB was upheld in November 1996.
EEOC. On August 31, 1995, the Equal Employment Opportunity Commission
("EEOC") filed a Commissioner's charge alleging that the Company and Southeast
Louisiana Contractors of Norco, Inc. ("Southeast Contractors") discriminated on
the basis of sex and race in their hiring and promotion decisions. The EEOC is
conducting an investigation of this matter. The Company intends to vigorously
defend this charge.
GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit
against the Company in the U.S. District Court, Eastern District of Louisiana,
alleging breach of an operating agreement to pay GATX $122,500 per month during
1996. The Company settled this litigation in November 1996.
SHELL OIL. On September 27, 1996, Shell Oil Company filed a third party
suit against the Company in the U.S. District Court, Eastern District of
Louisiana for contribution and/or indemnity relating to alleged contamination
of the waters and water bottoms of Bayou Trepagnier. The Company intends to
vigorously defend this claim.
RINEHEART. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against
eighty-four individuals and corporations, including the Company, in the U.S.
District Court, Middle District of Louisiana alleging negligent and improper
storage, handling, treatment, and disposal of hazardous materials from 1976 to
the present at two sites in Iberville Parish, Louisiana. The suit claims
damages for physical, mental, and property damage in the communities of Bayou
Sorrel, Bayou Pigeon and Indian Village. The Company intends to vigorously
defend this claim.
GENERAL. The Company is also a named defendant in other ordinary course,
routine litigation incidental to its business. While 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, results of
operations or cash flow.
8
10
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
ENVIRONMENTAL MATTERS
COMPLIANCE MATTERS. The Company is subject to federal, state, and local
laws, regulations, and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. The Company believes that it
is in substantial compliance with applicable Pollution Control Laws. However,
newly enacted Pollution Control Laws, as well as increasingly strict
enforcement of existing Pollution Control Laws, will require the Company to
make capital expenditures in order to comply with such laws and regulations. To
ensure continuing compliance, the Company has made environmental compliance and
permitting issues an integral part of its refinery's start-up plans and has
budgeted for such capital expenditures in the Capital Improvement Program.
However, there is no assurance that the Company will remain in compliance with
environmental regulations.
The Company uses (and in the past has used) certain materials, and
generates (and in the past has generated) certain substances or wastes, that
are or may be deemed hazardous substances or wastes. In the past, the refinery
has been the subject of certain environmental enforcement actions, and has
incurred certain fines, as a result of certain of the Company's operations. The
Company also was previously subject to enforcement proceedings relating to its
prior production of leaded gasoline and air emissions. The Company believes
that, with minor exception, all of these past matters were resolved prior to or
in connection with the resolution of the bankruptcy proceedings of its
predecessor in interest, TransAmerican, or are no longer applicable to the
Company's operations. As a result, the Company believes that such matters will
not have a material adverse effect on the Company's future results of
operations, cash flow or financial position.
PENDING REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National
Emission Standards for Hazardous Air Pollutants for Benzene Waste Operations
(the "Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the
Clean Air Act, regulate benzene emissions from numerous industries, including
petroleum refineries. The Benzene Waste NESHAPS require all existing, new,
modified, or reconstructed sources to reduce benzene emissions to a level that
will provide an ample margin of safety to protect public health. The Company
will be required to comply with the Benzene Waste NESHAPS as its refinery
operations start up. At this time, the Company cannot estimate the costs of
such compliance. Although the Company does not believe that such costs will be
material, there can be no assurance that such costs will not have a material
adverse effect on its financial position, results of operations or cash flow.
In addition, the anticipated promulgation of Hazardous Organic NESHAPS
regulations for refineries under the Clean Air Act could have a material
adverse effect on the Company. The Clean Air Act requires the EPA to set
"Maximum Achievable Control Technology" ("MACT") standards for all categories
of major sources of hazardous air pollutants by November 15, 2000. The EPA
promulgated its "Final Rule for National Emission Standards for Hazardous Air
Pollutants; Petroleum Refineries" on August 18, 1995. This rule sets MACT
standards for the petroleum refining industry. The Company cannot estimate at
this time what the effect may be of the EPA regulations on the refinery. The
Louisiana Department of Environmental Quality (the "LDEQ") has set applicable
MACT standards. The Company believes that it is in compliance with the Louisiana
MACT standards and has incorporated the standards into its Prevention of
Significant Deterioration permit.
The EPA promulgated federal regulations pursuant to the Clean Air Act to
control fuels and fuel additives (the "Gasoline Standards") that could have a
material adverse effect on the Company. Under these regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced benzene
and aromatics compared to the average 1990 gasoline. The number and extent of
the areas subject to reformulated gasoline standards may increase in the future
if the applicable laws and regulations become more stringent or other areas
become subject to the existing program. Conventional gasoline may be used in
all other domestic markets; however, a refiner's post-1994 average conventional
gasoline must not be more polluting than it was in 1990. With limited
exceptions, to determine its compliance as of January 1, 1995, a refiner must
compare its post-1994 and 1990 average values of controlled fuel parameters and
emissions. The Gasoline Standards recognize that many gasoline refiners may not
be able to develop an individual 1990 baseline for a number of reasons,
including, for example, lack of adequate
9
11
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
data or the absence or limited scope of operations in 1990. Under such
circumstances, the refiner must use a statutory baseline reflecting the 1990
industry average. The EPA has authority, upon a showing of extenuating
circumstances by a refiner, to grant an individual adjusted baseline or other
appropriate regulatory relief to that refiner.
The Company filed a petition with the EPA requesting an individual
baseline adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which the Company relied in
its petition include the fact that the refinery was not in operation in 1990
(and thus there is no 1990 average for purposes of the necessary comparison)
and the fact that the start-up of the refinery is to occur on a phased-in
basis. The EPA has denied the Company's request for an individual baseline
adjustment and other regulatory relief. The Company will continue to pursue
regulatory relief with the EPA. If the EPA fails to grant appropriate
regulatory relief, the Company will be restricted in the amount of gasoline it
will be able to sell domestically or will incur additional gasoline blending
costs until the Capital Improvement Program is completed. Upon completion of
the Capital Improvement Program, the Company believes that it will be able to
produce conventional gasoline and, to a limited extent, reformulated gasoline
that meets the Gasoline Standards. There can be no assurance that any action
taken by the EPA will not have a material adverse effect on the Company's
future results of operations, cash flows or financial position.
CLEANUP MATTERS. The Company also is subject to federal, state, and local
laws, regulations, and ordinances that impose liability for the costs of clean
up, and certain damages resulting from, past spills, disposals, or other
releases of hazardous substances ("Hazardous Substance Cleanup Laws"). Over the
past several years, the Company has been, and to a limited extent continues to
be, engaged in environmental cleanup or remedial work relating to or arising
out of operations or activities at the refinery. In addition, the Company has
been engaged in upgrading its solid waste facilities, including the closure of
several waste management units. Similar to numerous other industrial sites in
the state, the refinery has been listed by the LDEQ on the Federal
Comprehensive Environmental Response, Compensation and Liability Information
System, as a result of the Company's prior waste management activities (as
discussed below).
In 1991, the EPA performed a facility assessment at the Company's refinery
pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. In July 1996, the EPA and the LDEQ agreed that the LDEQ
would serve as the lead agency. The Company, under a voluntary initiative
approved by the LDEQ, is completing closure of three areas identified in the
EPA's assessment. The Company is unable to predict what the results of the LDEQ
investigations will be, or the effect that any further investigation or
remediation that would be required by the LDEQ will have on the Company's
financial position, results of operations or cash flow. As part of the facility
assessment, in March 1993 the Company submitted a "Closure Equivalency
Demonstration" for the former sludge drying beds at the refinery. The LDEQ has
not yet made a determination regarding the Company's submission or issued any
further requests relating to this matter. The Company believes that the sludge
drying beds were properly closed in 1985 in accordance with applicable law and
should not require further remediation as a result of the LDEQ's pending review.
However, there can be no assurance that the LDEQ will not require further work
in this regard. The Company is unable to estimate what the costs, if any, will
be if the LDEQ does require further remediation or closure activities.
Certain former employees have alleged that the Company's predecessor
improperly disposed of catalyst containing hazardous substances at the site of
the Company's visbreaker. These former employees have further alleged that
certain permits for the refinery were obtained as a result of political
contributions made by the Company. As a result of these allegations, the EPA
and the LDEQ commenced an investigation of the refinery. The Company has denied
each of these allegations and believes that they are wholly without merit. In
the early 1980s, the Company's predecessor disposed of catalyst with the
approval of the applicable Louisiana authorities at off-site and on-site
locations; however, no catalyst was disposed of in the vicinity of the
visbreaker. The Company's records confirm that the State of Louisiana was aware
of and approved the Company's disposal of catalyst, and that the catalyst was
not hazardous under any applicable legal standards. The LDEQ has concluded its
investigation without citing any violations by the Company. The Company also
has independently investigated the allegations. Analysis of soil borings taken
from the site of the visbreaker by three independent laboratories found no
evidence of catalyst or other alleged toxic substances in the samples taken.
All permits
10
12
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
that have been applied for and obtained by the Company for its operations have
been in accordance with all applicable laws and regulations. The Company does
not expect to incur any liability in connection with these allegations.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at four Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that the Company, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA
to include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRPs liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.
The Company's liability at one of the four Superfund sites at which it has
been named a PRP was settled in 1990 for a nominal amount, and the Company
expects to incur no further liability in this matter. At a second Superfund
site, the EPA invited the Company to enter into negotiations, the Company
attended a scheduled settlement meeting, and negotiations are continuing. With
respect to the remaining two sites, the Company's liability for each such
matter has not been determined, and the Company anticipates that it may incur
costs related to the cleanup (and possibly including additional costs arising
in connection with any recovery action brought pursuant to such matters) at
each such site. After a review of the data available to the Company regarding
the basis of the Company's alleged liability at each site, and based on various
factors, which depend on the circumstances of the particular Superfund site
(including, for example, the relationship of the Company to each such site, the
volume of wastes the Company is alleged to have contributed to each such site
in comparison to other PRPs without giving effect to the ability of any other
PRPs to contribute to or pay for any liabilities incurred, and the range of
likely cleanup costs at each such site) the Company does not believe its
ultimate liabilities will be significant; however, it is not possible to
determine the ultimate environmental liabilities, if any, that may arise from
the matters discussed above.
PURCHASE COMMITMENTS
The Company has various purchase commitments for materials, supplies and
services incidental to the ordinary course of business and for the Capital
Improvement Program. As of October 31, 1996, the Company had commitments for
refinery construction and maintenance of approximately $52.4 million. The
Company acts as general contractor and can generally cancel or postpone capital
projects.
PRICE MANAGEMENT ACTIVITIES
The Company enters into futures contracts, options on futures, swap
agreements and forward sales agreements with the intent to protect against a
portion of the price risk associated with price declines from holding inventory
of feedstocks and refined products or fixed price purchase commitments. For the
nine months ended October 31, 1996, the Company indirectly entered into price
management activities through the third party processing agreement discussed
below.
11
13
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
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 that is 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. These arrangements are
accounted for as product financing arrangements and accordingly the inventory
and related obligations are recognized on the Company's balance sheet. In the
event the refinery is not operating, these cargos may be sold on the spot
market. During the nine months ended October 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 provided for the Company to process a total of approximately 1.1
million barrels of the third party's feedstock. For the nine months ended
October 31, 1996, the Company incurred a loss of approximately $2.6 million
related to this processing agreement primarily as a result of low margins and
price management activities.
In April 1996, the Company entered into a similar processing agreement with
another third party to process feedstocks. As of October 31, 1996, the Company
had completed processing approximately 5.1 million barrels of feedstocks and is
storing approximately 0.3 million barrels of intermediate and refined products
under this agreement. Also, during the quarter ended October 31, 1996, the
Company entered into a processing agreement with this third party to process
approximately 0.6 million barrels of the third party's feedstocks for a fixed
price per barrel. Under the terms of this fixed price agreement, the Company met
all quantity and quality yields earning the full price per barrel. As of October
31, 1996, the Company recorded a net loss of approximately $5.9 million related
to these processing arrangements primarily as a result of low margins and price
management activities.
8. TRANSACTIONS WITH AFFILIATES
The Company purchases natural gas from TransTexas on an interruptible
basis. The total cost of natural gas purchased for the nine months ended
October 31, 1996 and 1995 was approximately $2.2 million and $2.3 million,
respectively. The payable to TransTexas for natural gas purchased totaled
approximately $2.1 million and $0.1 million at October 31, 1996 and January 31,
1996, respectively.
Southeast Contractors, a subsidiary of TransAmerican, provides
construction personnel to the Company in connection with the Capital
Improvement Program. These construction workers are temporary employees, and
the number and composition of the workforce will vary throughout the Capital
Improvement Program. Southeast Contractors charges the Company for the direct
costs it incurs (which consist solely of employee payroll and benefits) plus
administrative costs and fees of $1.2 million per year. Total labor costs
charged by Southeast Contractors for the nine months ended October 31, 1996 and
1995 were $13.5 million and $14.9 million, respectively, of which $1.1 million
and $0.6 million were payable at October 31, 1996 and January 31, 1996,
respectively.
TransAmerican and its affiliates have provided the Company with
substantially all of its corporate services requirements, including insurance,
legal, accounting and treasury functions pursuant to a Services Agreement.
During the nine months ended October 31, 1996 and 1995, respectively,
TransAmerican and TransTexas charged the Company approximately $0.2 million, to
cover their costs of providing these services, which management believes to be
reasonable based on the limited services provided. The Company expects its
general and administrative expenses to increase significantly when the refinery
commences more complex operations. In addition, third party charges incurred by
12
14
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
TransAmerican and its affiliates have been charged directly or allocated to the
Company on usage or other methods that management believes are reasonable. All
significant transactions with affiliates to the extent unpaid are recorded in
the "Payable to Affiliates" account. The Company leases office space from
TransTexas on terms and conditions permitted by the Indenture.
In July 1996, the Company executed a promissory note to TransAmerican for
up to $25 million. The note bears interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, and matures on July 31, 1998. As of
October 31, 1996, the entire $25 million was outstanding under the note. On
November 1, 1996, the Company executed an additional $25 million promissory note
to TransAmerican which bears interest at 15% per annum, payable quarterly
beginning December 31, 1996, and which matures on September 30, 1998. At
November 30, 1996, the Company had approximately $34.1 million outstanding under
these notes. The Company has not made the scheduled interest payment provided
for in the first note. There is no assurance that TransAmerican will be able to
fund the additional amounts allowed under these notes.
13
15
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 composed 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.
As more fully described in "Liquidity and Capital Resources," management
does not believe that the Company will be able to complete Phase I of the
Capital Improvement Program by February 15, 1997. 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.
THREE MONTHS ENDED OCTOBER 31, 1996, COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1995
There were no revenues for the three months ended October 31, 1996.
There were no costs of products sold for the three months ended October
31, 1996. Costs of products sold of $75.8 million for the same period in 1995
was primarily a result of processing feedstocks for third parties pursuant to
processing arrangements.
Losses from processing arrangements, which are discussed below in
"Liquidity and Capital Resources," of $5.2 million for the three months ended
October 31, 1996 were primarily due to low margins and price management
activities.
Operations and maintenance expense for the three months ended October 31,
1996 decreased to $3.9 million from $4.5 million for the same period in 1995,
primarily due to decreases in salaries and refinery fuel costs.
Taxes other than income taxes for the three months ended October 31, 1996
decreased to $0.9 million from $1.1 million for the same period in 1995,
primarily due to decreased franchise tax expense.
General and administrative expenses decreased to $1.7 million for the
three months ended October 31, 1996 from $4.0 million for the same period in
1995, primarily due to decreased litigation expense.
Interest income for the three months ended October 31, 1996 decreased $1.5
million as compared to the same period in 1995 primarily due to interest earned
in 1995 on a higher balance held in the Collateral Account. Interest expense,
net for the three months ended October 31, 1996 decreased $3.9 million,
primarily due to a larger portion of interest capitalized in 1996 versus 1995.
During the three months ended October 31, 1996, the Company capitalized
approximately $17.7 million of interest related to property and equipment
additions at the Company's refinery compared to $10.8 million for the three
months ended October 31, 1995.
The equity in loss of TransTexas for the three months ended October 31,
1996 of $1.3 million reflects the Company's 14.1% equity interest in
TransTexas.
14
16
NINE MONTHS ENDED OCTOBER 31, 1996, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1995
Total revenues for the nine months ended October 31, 1996 decreased to
$10.9 million from $143.8 million for the same period in 1995, due to
processing of feedstocks in the prior period for third parties.
Costs of products sold for the nine months ended October 31, 1996
decreased to $12.4 million from $151.0 million for the same period in 1995,
due to processing of feedstocks for third parties in the prior period.
Losses from processing arrangements, which are discussed below in
"Liquidity and Capital Resources," for the nine months ended October 31, 1996
of $8.5 million were primarily due to low margins and price management
activities.
Operations and maintenance expense for the nine months ended October 31,
1996 increased to $9.6 million from $9.1 million for the same period in 1995,
primarily due to an increase in fuel costs during the first six months of
fiscal year 1997 and contract labor costs.
Taxes other than income taxes for the nine months ended October 31, 1996
increased to $3.8 million from $3.2 million for the same period in 1995,
primarily due to increased property tax expense.
General and administrative expenses for the nine months ended October 31,
1996 decreased to $7.4 million from $9.2 million for the same period in 1995,
primarily due to decreased litigation expense.
Interest income for the nine months ended October 31, 1996 decreased $5.4
million as compared to the same period in 1995 primarily due to interest earned
in 1995 on a higher balance held in the Collateral Account. Interest expense,
net for the nine months ended October 31, 1996 decreased $14.3 million,
primarily due to a larger portion of interest capitalized in 1996 versus 1995.
During the nine months ended October 31, 1996, the Company capitalized
approximately $51.0 million of interest related to property and equipment
additions at the Company's refinery, compared to $26.1 million for the nine
months ended October 31, 1995.
The equity in earnings of TransTexas for the nine months ended October 31,
1996 of $9.8 million 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 nine months ended October 31, 1995 was $2.4 million
which was primarily a result of trading gains on futures contracts.
LIQUIDITY AND CAPITAL RESOURCES
The current budget for the Capital Improvement Program calls for total
expenditures of $434 million. As of October 31, 1996, expenditures on the
Capital Improvement Program funded by or approved for reimbursement from the
cash collateral account totaled approximately $206 million. The Company will
require substantial additional financing in excess of the current budget 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. The Company 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 funding was not available to the Company on a
timely basis, management believes that the Company will not be able to complete
Phase I of the Capital Improvement Program by February 15, 1997. 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. If an Event of
Default occurs and is continuing, either the Indenture Trustee or the Holders of
25% in aggregate principal amount of the Notes then outstanding may declare all
principal of the TARC Notes and accrued interest thereon to be due and payable
immediately. Prior to the declaration of acceleration of the maturity of the
TARC Notes, the Holders of a majority in aggregate principal amount of the TARC
Notes at the time outstanding may waive on behalf of all the Holders any
default, except a default in the payment of principal, of premium, if any, or
interest on any TARC Note not yet cured, or a default with respect to any
covenant or provision that cannot be modified or amended without the consent of
the Holder of each outstanding TARC Note affected.
15
17
The Company anticipates that, prior to February 15, 1997, it will solicit
the Holders' approval with respect to any elements of a proposed financing that
otherwise would be limited by the terms of the 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 Holders can be obtained.
As of October 1996, the Company had expended the $173 million placed in
the collateral account from the issuance of the TARC Notes in February 1995 as
well as 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. The note bears interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, and matures on July 31, 1998. As of
October 31, 1996, the entire $25 million was outstanding under the note. On
November 1, 1996, the Company executed an additional $25 million promissory
note to TransAmerican which bears interest at 15% per annum, payable quarterly
beginning December 31, 1996, and which matures on September 30, 1998. At
November 30, 1996, the Company had approximately $34.1 million outstanding
under these notes. The Company has not made the scheduled interest payment
provided for in the first note. These and additional borrowings are being
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 TransAmerican will make additional advances to
the Company.
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 that future
undiscounted cash flows will be sufficient to recover the cost of the refinery
over its estimated useful life as well as the costs of related identifiable
intangible assets. 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 estimating future refining margins, in
constructing and operating a large scale refinery and the uncertainty regarding
the Company's ability to complete the Capital Improvement Program there can be
no assurance that the Company will ultimately recover the cost of the refinery.
See Note 3 to the condensed financial statements included elsewhere in this
report.
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 arrangements. Such losses are due to
financing costs, low margins and price management activities. Based on recent
refining margins, recent projected levels of operations and debt service
requirements, such negative cash flows from operations are likely to continue.
Primarily as a result of these factors and accounts payable related to the
Capital Improvement Program, the Company had negative working capital of $37.4
million at October 31, 1996. In order to operate the refinery and service its
debt, the Company must raise debt or equity capital in addition to the funds
required to complete the Capital Improvement Program. There is no assurance that
additional financing for the Capital Improvement Program, additional working
capital, or any necessary approval from the Holders will 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 the above 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 that could result from
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deconsolidation is estimated to be approximately $35 million at October 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 liability 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 nine months
ended October 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 the
third party's feedstock. For the nine months ended October 31, 1996, the Company
incurred a loss of approximately $2.6 million related to this processing
agreement primarily as a result of low margins and price management activities.
In April 1996, the Company entered into a similar processing agreement with
another third party to process feedstocks. As of October 31, 1996, the Company
had completed processing approximately 5.1 million barrels of feedstocks and is
storing approximately 0.3 million barrels of intermediate and refined products
under this agreement. Also, during the quarter ended October 31, 1996, the
Company entered into a processing agreement with this third party to process
approximately 0.6 million barrels of the third party's feedstocks for a fixed
price per barrel. Under the terms of this fixed price agreement, the Company
met all quantity and quality yields earning the full price per barrel. As of
October 31, 1996, the Company recorded a net loss of approximately $5.9 million
related to these processing arrangements primarily as a result of low margins
and price management activities.
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 7 of Notes to Condensed Financial Statements
included elsewhere in this report.
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, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the condensed financial statements for a discussion of the
Company's legal proceedings.
ITEM 5. OTHER INFORMATION
CAPITAL IMPROVEMENT PROGRAM
The Capital Improvement Program ("CIP") is designed to increase the
capacity and complexity of the refinery. The most significant projects include:
(i) completion of a delayed coking unit to process vacuum tower bottoms into
lighter petroleum products, (ii) reactivation and revamping of a FCC Unit to
increase gasoline production capacity, (iii) upgrading and expanding existing
hydrotreating and desulfurization units to increase sour crude processing
capacity and (iv) reactivation of the MTBE unit. In addition, the Company plans
to expand, modify, and add other processing units, tankage, and offsite
facilities as part of the CIP. The CIP includes expenditures necessary to
ensure that the refinery is in compliance with certain existing air and water
discharge regulations. The Company has engaged a number of specialty
consultants and engineering and construction firms to assist the Company in
completing the individual projects that comprise the CIP. Each of these firms
was selected because of its specialized expertise in a particular process or
unit integral to the CIP.
The following table sets forth, as of October 31, 1996, the Company's
capital budget for, and expenditures on the CIP (in millions of dollars):
CAPITAL
BUDGET EXPENDITURES
------ ------------
PHASE I:
Delayed Coking Unit $ 38 $ 55
Naphtha Pretreater 7 4
No. 2 Reformer 6 1
VGO HDS Unit 25 5
FCC Unit 75 36
FCC Upgrades 11 7
Alkylation Unit 20 9
MTBE Unit 2 --
Sulfur Recovery Units/Amine System 26 22
Additional Tank Storage Capacity 21 10
Offsite Facilities 22 24
Other 8 3
Engineering and Administrative 8 15
Contingencies 40* 9
------- ------
Total Phase I 309 200
------- ------
PHASE II:
Light Naphtha Isomerization Unit 5 3
No. 2 Fuel Oil HDS Unit 31 2
Sulfur Recovery Units/Amine System 17 --
Offsite Facilities 18 --
MTBE Unit Expansion 33** --
Other 2 --
Engineering and Administrative 3 --
Contingencies 16* 1
------- ------
Total Phase II 125 6
------- ------
Total Capital Improvement Program $ 434 $ 206
======= ======
- -------------------------
* To the extent that expenditures exceed the approved capital budget for a
unit or units, the contingencies portion of the budget will be allocated to
specific units. As of October 31, 1996, approximately $25 million of the
contingencies budget has been allocated for expenditures on the Delayed
Coking Unit, Engineering and Administrative and Offsite Facilities. These
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.
** The Company intends to reallocate these expenditures to other budgeted items
in accordance with the Disbursement Agreement.
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As of October 31, 1996, expenditures on the CIP funded by or approved for
reimbursement from the cash collateral account totaled approximately $206
million. The Company will require substantial additional financing in excess of
the current budget 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. The Company 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 funding was not available to the Company on a
timely basis, management believes that the Company will not be able to complete
Phase I of the Capital Improvement Program by February 15, 1997. 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. If an Event of
Default occurs and is continuing, either the Indenture Trustee or the Holders of
25% in aggregate principal amount of the TARC Notes then outstanding may declare
all principal of the TARC Notes and accrued interest thereon to be due and
payable immediately. Prior to the declaration of acceleration of the maturity of
the TARC Notes, the Holders of a majority in aggregate principal amount of the
TARC Notes at the time outstanding may waive on behalf of all the Holders any
default, except a default in the payment of principal, of premium, if any, or
interest on any TARC Note not yet cured, or a default with respect to any
covenant or provision that cannot be modified or amended without the consent of
the Holder of each outstanding TARC Note affected.
The Company anticipates that, prior to February 15, 1997, it will solicit
the Holders' approval with respect to any elements of a proposed financing that
otherwise would be limited by the terms of the 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 Holders can be obtained.
As of October 1996, the Company had expended the $173 million placed in the
collateral account from the issuance of the TARC Notes in February 1995 as well
as 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. The note bears an interest rate of 15% per annum, payable
quarterly beginning October 31, 1996, and matures on July 31, 1998. As of
October 31, 1996, the entire $25 million was outstanding under the note. On
November 1, 1996, the Company executed an additional $25 million promissory
note to TransAmerican which bears interest at 15% per annum, payable quarterly
beginning December 31, 1996, and which matures on September 30, 1998. At
November 30, 1996, the Company had approximately $34.1 million outstanding
under these notes. These and additional borrowings are being utilized by the
Company to fund the critical path items mentioned above, as well as working
capital needs, pending additional financing from other sources.
As noted above, the Company must raise additional capital over the current
budget to complete the CIP. Completion schedules and the amount of additional
expenditures required will depend upon, among other factors, the structure and
timing of additional financing. The current plan and budget for the CIP calls
for completion in two phases as described below.
PHASE I
Phase I will involve completion or reactivation of a delayed coking unit,
a naphtha pretreater, a catalytic reformer, a vacuum gas oil
hydrodesulfurization unit, a fluid catalytic cracking unit, an alkylation
plant, an MTBE unit and sulfur recovery facilities. The Company anticipates
that following completion of Phase I, it will be processing low- cost, sour
crude oil in combination with sweet crude oil and atmospheric tower bottoms.
Products from this phase are expected to include all the products produced
prior to Phase I (naphtha, kerosene, No. 2 fuel oil, atmospheric gas oil,
atmospheric tower bottoms and vacuum gas oil) plus conventional gasoline and
petroleum coke. The Company must raise additional capital to complete Phase I.
PHASE II
In Phase II of the Capital Improvement Program, the Company will expand
hydrodesulfurization capacity, add a naphtha isomerization unit and add sulfur
recovery facilities. Current plans do not include expansion of the MTBE Unit.
The Company anticipates that, following completion of Phase II, it will process
200,000 BPD of heavy, sour crude oil.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSAMERICAN REFINING CORPORATION
(Registrant)
By: /S/ JOHN R. STANLEY
-------------------------------
John R. Stanley,
Chief Executive Officer
December 16, 1996
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
27.1 - Financial Data Schedule