1
Prospectus Supplement filed pursuant
to Rule 424(b)(3), under the
Securities Act of 1933, as amended,
relating to Prospectus dated
August 9, 1996, filed as part of
Post-Effective Amendment No. 5 to
Form S-1 of TransAmerican Refining
Corporation and TransAmerican
Energy Corporation, Registration
No. 33-85930
================================================================================
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.
================================================================================
2
TRANSAMERICAN REFINING CORPORATION
TABLE OF CONTENTS
Page
----
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
1
3
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.
2
4
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.
3
5
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.
4
6
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
5
7
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
6
8
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.
7
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
16
18
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.
17
19
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.
18
20
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.
19
21
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.
20
22
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
21
23
================================================================================
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
Registration Number 33-85930
---------------------------
TRANSAMERICAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0441642
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 EAST NORTH BELT
SUITE 200
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 986-8822
(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 was 9,000.
================================================================================
24
TRANSAMERICAN ENERGY CORPORATION
TABLE OF CONTENTS
PAGE
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of October 31, 1996 and January 31, 1996 . . . . . . . . 2
Condensed Consolidated Statement of Operations for the three and nine months ended
October 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statement of Cash Flows for the nine months ended
October 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 25
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1
25
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSAMERICAN ENERGY 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 $ 19,983 $ 14,114
Interest reserve account - TransTexas 46,000 46,000
Long-term debt proceeds held in collateral account - TARC 8 14,840
Accounts receivable 46,048 36,372
Receivable from affiliates 430 3,000
Inventories 12,061 48,652
Other current assets (Note 4) 27,774 56,300
---------- ----------
Total current assets 152,304 219,278
---------- ----------
Property and equipment 2,686,845 2,438,926
Less accumulated depreciation, depletion and amortization 1,406,676 1,302,972
---------- ----------
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 1,280,169 1,135,954
---------- ----------
Long-term debt proceeds held in collateral account - TARC -- 9,565
Due from affiliates 23,947 26,846
Other assets, net 37,312 64,779
---------- ----------
$1,493,732 $1,456,422
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 4,775 $ 1,335
Accounts payable 43,280 63,302
Payable to affiliate 1,757 2,260
Product financing arrangements -- 37,206
Accrued liabilities 68,219 89,316
---------- ----------
Total current liabilities 118,031 193,419
---------- ----------
Due to affiliates 48,173 18,992
Long-term debt, less current maturities 1,159,568 1,119,079
Revolving credit agreement 14,831 20,365
Production payments 15,355 31,036
Deferred revenue 64,401 32,850
Deferred income taxes 26,014 40,256
Other liabilities 77,930 36,358
Redeemable preferred stock $0.01 par value, 10,000 shares authorized;
Series A - 1,000 shares issued and outstanding 96 96
Commitments and contingencies (Note 3) -- --
Stockholder's deficit:
Common stock, $0.01 par value, 100,000 shares authorized;
9,000 shares issued and outstanding -- --
Additional paid-in capital 138,962 175,019
Accumulated deficit (132,629) (211,048)
---------- ----------
6,333 (36,029)
Less advances to affiliates (37,000) --
---------- ----------
Total stockholder's deficit (30,667) (36,029)
---------- ----------
$1,493,732 $1,456,422
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
26
TRANSAMERICAN ENERGY 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 $ 70,287 $ 57,095 $226,532 $ 188,117
Transportation 8,928 8,151 25,798 25,777
Product sales -- 74,811 10,857 143,803
Gain on asset sales 80 -- 7,842 --
Other 103 161 460 395
-------- -------- -------- ---------
Total revenues 79,398 140,218 271,489 358,092
-------- -------- -------- ---------
Costs and expenses:
Operating 33,334 99,316 106,724 218,479
Depreciation, depletion and amortization 32,502 27,558 97,667 90,326
General and administrative 17,335 10,180 42,998 34,735
Taxes other than income taxes 2,985 2,738 18,240 12,570
Litigation settlement -- (18,300) (96,000) (18,300)
-------- -------- -------- ---------
Total costs and expenses 86,156 121,492 169,629 337,810
-------- -------- -------- ---------
Operating income (loss) (6,758) 18,726 101,860 20,282
-------- -------- -------- ---------
Other income (expense):
Interest income 1,025 3,272 3,146 9,154
Interest expense, net (22,328) (25,935) (76,449) (76,945)
Gain on sale of TransTexas stock -- -- 56,162 --
Other 18 (65) 346 2,270
-------- -------- -------- ---------
Total other income (expense) (21,285) (22,728) (16,795) (65,521)
-------- -------- -------- ---------
Income (loss) before income taxes (28,043) (4,002) 85,065 (45,239)
Income tax expense (benefit) (5,059) -- 2,729 (2,284)
-------- -------- -------- ---------
Income (loss) before extraordinary item (22,984) (4,002) 82,336 (42,955)
Extraordinary item - loss on early extinguishment of debt -
TransTexas, net of tax -- -- -- (56,637)
-------- -------- -------- ---------
Net income (loss) $(22,984) $ (4,002) $ 82,336 $ (99,592)
======== ======== ======== =========
Net income (loss) per common share:
Income (loss) before extraordinary item $ (2,554) $ (445) $ 9,148 $ (5,141)
Extraordinary item -- -- -- (6,779)
-------- -------- -------- ---------
$ (2,554) $ (445) $ 9,148 $ (11,920)
======== ======== ======== =========
Weighted average number of shares outstanding 9,000 9,000 9,000 8,355
======== ======== ======== =========
See accompanying notes to condensed consolidated financial statements.
3
27
TRANSAMERICAN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31
-----------------------------
1996 1995
--------- -----------
Operating activities:
Net income (loss) $ 82,336 $ (99,592)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Extraordinary item -- 56,637
Depreciation, depletion and amortization 97,667 91,011
Amortization of discount on long-term debt 83 10,857
Amortization of debt issue costs 7,660 3,680
Gain on litigation settlement -- (18,300)
Gain on sales of assets (7,842) (424)
Deferred income taxes (14,242) 6,679
Gain on sale of TransTexas stock (56,162) --
Inventory writedown -- 1,265
Proceeds from volumetric production payments 58,621 --
Amortization of deferred revenue (27,070) --
Changes in assets and liabilities:
Accounts receivable (9,676) (521)
Receivables from affiliate (312) --
Inventories (617) (9,630)
Other current assets 2,837 (14,287)
Accounts payable 7,336 (18,029)
Accrued liabilities 23,885 (12,551)
Payable to affiliates (21,652) (15,484)
Other assets (3,802) (3,370)
Other liabilities (9,464) 8,255
--------- ---------
Net cash provided (used) by operating activities 137,190 (13,804)
--------- ---------
Investing activities:
Capital expenditures (278,579) (336,896)
Proceeds from sales of assets 91,559 9,475
Deposits to interest reserve account (46,000) (44,722)
Withdrawals from interest reserve account 46,000 --
Advances to TransAmerican from TransTexas (24,750) --
Production payment from affiliate -- 3,547
--------- ---------
Net cash used by investing activities (211,770) (368,596)
--------- ---------
Financing activities:
Issuance of long-term debt and warrants 25,480 310,750
Principal payments on long-term debt (17,827) (20,036)
Long-term debt proceeds held in collateral account (26,549) (173,000)
Withdrawals from collateral account 50,949 87,051
Issuance of Senior Secured Notes -- 800,000
Retirement of Senior Secured Notes -- (542,500)
Issuance of redeemable preferred stock -- 96
Issuance of dollar-denominated production payment 16,903 49,500
Repayments of production payment (34,348) (12,018)
Net proceeds from sale of TransTexas stock 42,607 --
Principal payments on capital lease obligations (789) --
Revolving credit agreement, net (5,534) (8,701)
Dividend payment on preferred stock (19) --
Advances from TransAmerican and affiliates to TARC 35,785 5,335
Repayment of advances from TransAmerican to TARC (1,925) (44,700)
Debt issue costs (4,284) (35,395)
--------- ---------
Net cash provided by financing activities 80,449 416,382
--------- ---------
Increase in cash and cash equivalents 5,869 33,982
Beginning cash and cash equivalents 14,114 866
--------- ---------
Ending cash and cash equivalents $ 19,983 $ 34,848
========= =========
See accompanying notes to condensed consolidated financial statements.
4
28
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
ORGANIZATION
TransAmerican Energy Corporation (the "Company") was formed on July 12,
1994 to hold 55 million shares of common stock (74.3% of outstanding shares) of
TransTexas Gas Corporation ("TransTexas") and all of the outstanding capital
stock of TransAmerican Refining Corporation ("TARC"). TransAmerican Natural Gas
Corporation ("TransAmerican") contributed 55 million shares of TransTexas
common stock and all of the capital stock of TARC to the Company in connection
with the public offering of TARC's senior secured notes (the "TARC Notes"). The
Company then contributed 15 million of these shares (20.3% of the total
outstanding) of TransTexas common stock to TARC. In March 1996, TARC sold 4.55
million shares (6.2% of the total outstanding) of TransTexas common stock in
public offerings. The condensed consolidated financial statements include the
financial statements of TransTexas and TARC on a wholly-owned basis. Once
TransTexas is in a positive equity position, 19.8% of the results of its
operations will be allocated to nonaffiliates. Capitalized terms used herein
are as defined in the respective Transition Reports on Form 10-K of TransTexas,
TARC and the Company for the period ended January 31, 1996.
The respective bond indenture agreements of TransTexas and TARC each
contain substantial restrictions which essentially prevent the Company from
using the assets of one entity to satisfy the liabilities of the other and
substantially limit transactions between affiliates. Accordingly, the
condensed consolidated financial statements should be read in conjunction with
the separate condensed financial statements of TransTexas and TARC filed on
their respective quarterly reports on Form 10-Q for the three months ended
October 31, 1996.
Below is selected financial information for each consolidated entity
(in millions of dollars):
October 31, 1996
-------------------------------------------------------------
Consolidation
Balance Sheet Data TARC TransTexas Entries Consolidated
------------------ ---- ---------- ------------- ------------
Working capital $ (37.4) $ 69.5 $ 2.2 $ 34.3
Total assets 552.3 943.6 (2.2) 1,493.7
Long-term debt 352.8 826.4 -- 1,179.2
Long-term payable to affiliates (1) 37.7 10.2 0.3 48.2
Stockholder's equity (deficit) (2) 99.2 (152.7) 22.8 (30.7)
Nine Months Ended October 31, 1996
------------------------------------------------------------
Consolidation
Operations Data TARC TransTexas Entries Consolidated
--------------- ---- ---------- ------------ ------------
Revenues $ 10.9 $ 262.8 $ (2.2) $ 271.5
Operating income (loss) (36.2) 138.4 (0.3) 101.9
Net income 27.2 65.2 (10.1) 82.3
Cash Flow Data
--------------
Operating activities $ (25.6) $ 162.8 $ -- $ 137.2
Investing activities (77.0) (134.8) -- (211.8)
Financing activities 100.0 (19.6) -- 80.4
(1) Excludes deferred taxes of TransTexas for $26.0 million payable to
TransAmerican.
(2) Includes $37.0 million of advances by TransTexas to affiliates classified
as a component of equity.
5
29
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
INTERIM FINANCIAL INFORMATION
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. 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
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 TransTexas' debt service and capital
requirements is net cash flow provided by operating activities, which is
extremely sensitive to the prices TransTexas receives for its natural gas.
TransTexas has entered into hedge agreements to reduce its exposure to price
risk in the spot market for natural gas. However, a substantial portion of
TransTexas' 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. TransTexas has
utilized asset sales and various financings, in addition to cash flow from
operating activities, to meet its working capital requirements. TransTexas
anticipates that it will utilize additional financing or sales of assets as
allowed by the indenture (the "TransTexas Indenture") governing TransTexas'
11 1/2% Senior Secured Notes due 2002 (the "TransTexas Notes"), to fund planned
levels of operations through January 1997. No assurance, however, can be given
that TransTexas' cash flow from operating activities and other sources of cash
will be sufficient to meet planned capital expenditures, contingent
liabilities, and debt service in the future.
On July 2, 1996, TransTexas 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, TransTexas
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. TransTexas retained the proceeds of
all such gas sales.
TransTexas has engaged investment banking firms to assist in the
following potential transactions: (i) the sale or sale-leaseback of all or a
portion of TransTexas' pipeline system; (ii) the sale of its interest in the
Lodgepole prospect in North Dakota; and (iii) the sale of TransTexas' remaining
Lobo Trend producing properties in Webb and Zapata Counties, Texas, and
associated undeveloped acreage. If any such transactions are consummated,
TransTexas intends to use the proceeds for general corporate purposes and a
possible repurchase of the TransTexas Notes.
On June 28, 1996, TransTexas consummated a settlement of litigation
pursuant to which TransTexas and another plaintiff received approximately $125
million. TransTexas' share of the settlement proceeds was $96 million.
In December 1996, TransTexas 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 TransTexas 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 TransTexas 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
6
30
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 3 under the caption "Potential Effects
of a Change of Control," an event of default under the indenture covering the
Notes TARC (the "TARC Indenture") could adversely affect TransTexas' liquidity.
TARC 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. TARC
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, TARC 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 reimbursement from the cash collateral account
totaled approximately $206 million. TARC 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. 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 funding was not available to TARC on a
timely basis, 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. 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.
TARC 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 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 Holders can be obtained.
TARC 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 are likely to continue. Primarily as a
result of these factors and accounts payable related to the Capital Improvement
Program, TARC had negative working capital of $37.4 million at October 31,
1996. In order to operate the refinery and service its debt, TARC 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 TARC's ability to continue as a going concern. If TARC (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, TARC's investment in the
refinery may not be recovered. The financial statements do not include any
adjustments as a result of these uncertainties.
2. 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, TARC is required to deposit the
first $50 million of proceeds from a Revolving Credit Facility in the
Collateral Account if TARC obtains such facility. The Disbursement Agent
invests the assets of the Collateral
7
31
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 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 TARC 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. TARC 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. TARC 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.
Under the Disbursement Agreement, the Construction Supervisor is
responsible for review and approval of TARC's plans, specifications and budget
for the Capital Improvement Program. The Construction Supervisor is required
to perform weekly inspections of TARC'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 TARC 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 TARC.
8
32
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As part of the transfer of the natural gas exploration, production and
transmission businesses of TransAmerican to TransTexas (the "Transfer"),
TransTexas has succeeded to the potential liability, if any, of TransAmerican
and certain subsidiaries in connection with the lawsuits described below.
TransTexas 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 TransTexas, TransAmerican and certain of its subsidiaries, as amended
(the "Transfer Agreement"), TransAmerican has agreed to indemnify TransTexas
against all losses incurred by TransTexas in excess of $25 million in
connection with (a) disputed claims in TransAmerican's bankruptcy and (b) other
litigation assumed by TransTexas 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 TransTexas for all
future losses incurred in connection with litigation or bankruptcy claims
assumed in the Transfer. Any indemnification payments received from
TransAmerican for which TransTexas 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 TransTexas as an additional defendant. On January 6, 1995, a judgment
against TransAmerican and TransTexas was entered for approximately $18 million
in damages, interest and attorneys' fees. TransTexas 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. TransTexas 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 TransTexas. 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.
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 TransTexas 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 TransTexas 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 TransTexas 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, TransTexas 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
9
33
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
("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. The
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, TransTexas, 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. TransTexas and its affiliates are
vigorously contesting this claim.
McNamara. On June 28, 1996, TransTexas consummated a settlement of
litigation with Tennessee Gas Pipeline Company ("Tennessee") that was filed on
October 14, 1993, in the 244th Judicial Court, Ector County, Texas ("Tennessee
lawsuit") pursuant to which TransTexas and another plaintiff received
approximately $125 million from Tennessee. TransTexas' 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 TransTexas in the 241st District
Court, Webb County, Texas asserting that TransTexas had breached its duties to
The Hubberd Trusts under certain oil and gas leases and that TransTexas owed
the Hubberd Trusts 25% of the gross settlement proceeds, or approximately
$31.25 million. 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 a TransTexas well on adjacent lands had been draining natural gas
from a portion of his acreage leased to TransTexas 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, TransTexas 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
TransTexas in the 111th Judicial District Court, Webb County, Texas seeking a
declaratory judgment determination that TransTexas 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.
10
34
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Farias. On February 15, 1996, Celita Suzana Farias filed a wrongful
death action in the 93rd District Court of Hidalgo County, Texas, against
TransTexas 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 TransTexas 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.
EEOC. On August 31, 1995, the Equal Employment Opportunity Commission
("EEOC") filed a Commissioner's charge alleging that TARC 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. TARC intends to vigorously defend
this charge.
NLRB Proceeding. On July 13, 1994, the Oil, Chemical and Atomic
Workers International Union ("OCAW") filed unfair labor practices charges
against TARC with the New Orleans Regional Office of the National Labor
Relations Board ("NLRB"). These charges allege that TARC 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.
Shell Oil. On September 27, 1996, Shell Oil Company filed a third
party suit against TARC in the U.S. District Court, Eastern District of
Louisiana for contribution and/or indemnity relating to alleged contamination
of the waters and waterbottoms of Bayou Trepagnier. TARC 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 TARC, 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. TARC intends to vigorously defend this
claim.
General. TransTexas and TARC are also named defendants in other
ordinary course, routine litigation incidental to their businesses. 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. At October 31, 1996, the possible range of estimated
losses related to all of the aforementioned claims in addition to the estimates
accrued by TransTexas and TARC is $0 to $59 million. The resolution in any
reporting period of one or more of these matters in a manner adverse to TARC or
TransTexas could have a material adverse impact on the Company's results of
operations or cash flows for that period.
11
35
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
ENVIRONMENTAL MATTERS
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. It is not anticipated that TransTexas will be
required in the near future to expend amounts that are material to the
financial condition or operations of TransTexas by reason of environmental laws
and regulations, but because such laws and regulations are frequently changed,
and as a result may impose increasingly strict requirements, TransTexas is
unable to predict the ultimate cost of complying with such laws and
regulations.
Compliance Matters. TARC 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. TARC 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 TARC to make capital expenditures
in order to comply with such laws and regulations. To ensure continuing
compliance, TARC 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 TARC will remain in compliance with environmental regulations.
TARC 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 TARC's operations. TARC also was previously
subject to enforcement proceedings relating to its prior production of leaded
gasoline and air emissions. TARC 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 TARC's operations. As a result, TARC believes that
such matters will not have a material adverse effect on TARC'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. TARC will be
required to comply with the Benzene Waste NESHAPS as its refinery operations
start up. At this time, TARC cannot estimate the costs of such compliance.
Although TARC 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 TARC. 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. TARC cannot estimate at this time what the
effect may be of the EPA regulations on the refinery. The
12
36
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Louisiana Department of Environmental Quality ("LDEQ") has set applicable MACT
standards. TARC 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 TARC. 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 data, 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.
TARC 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 TARC 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 TARC's request for an individual baseline adjustment and other
regulatory relief. TARC will continue to pursue regulatory relief with the
EPA. If the EPA fails to grant appropriate regulatory relief, TARC 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, TARC
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 TARC's future results of operations, cash flows or financial
position.
Cleanup Matters. TARC also is subject to federal, state, and local
laws, regulations, and ordinances that impose liability for the costs of
cleaning up, and certain damages resulting from, past spills, disposals, or
other releases of hazardous substances ("Hazardous Substance Cleanup Laws").
Over the past several years, TARC 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, TARC 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 TARC's prior waste management activities (as discussed
below).
In 1991, the EPA performed a refinery facility assessment at TARC'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. TARC, under a voluntary
initiative approved by the LDEQ, is completing closure of three areas
identified in the EPA's assessment. TARC 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
TARC's financial
13
37
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
position, results of operations or cash flow. As part of the facility
assessment, in March 1993 TARC submitted a "Closure Equivalency Demonstration"
for the former sludge drying beds at the refinery. The LDEQ has not yet made a
determination regarding TARC's submission or issued any further requests
relating to this matter. TARC 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. TARC 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 TARC's predecessor
improperly disposed of catalyst containing hazardous substances at the site of
TARC's visbreaker. These former employees have further alleged that certain
permits for the refinery were obtained as a result of political contributions
made by TARC. As a result of these allegations, the EPA and the LDEQ commenced
an investigation of the refinery. TARC has denied each of these allegations
and believes that they are wholly without merit. In the early 1980s, TARC'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. TARC's records confirm that the
State of Louisiana was aware of and approved TARC'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 TARC.
TARC 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 that have been applied for and obtained by TARC for its
operations have been in accordance with all applicable laws and regulations.
TARC does not expect to incur any liability in connection with these
allegations.
TARC 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 TARC, 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.
TARC'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 TARC expects to
incur no further liability in this matter. At a second Superfund site, the EPA
invited TARC to enter into negotiations, TARC attended a scheduled settlement
meeting, and negotiations are continuing. With respect to the remaining two
sites, TARC's liability for each such matter has not been finally determined,
and TARC anticipates that it may incur costs related to the cleanup (and
possibly including additional costs
14
38
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
arising in connection with any recovery action brought pursuant to such
matters) at each such site. After a review of the data available to TARC
regarding the basis of TARC'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 TARC to each such site, the
volume of wastes TARC 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) TARC 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
TARC 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, TARC had commitments for refinery
construction and maintenance of approximately $52.4 million. TARC acts as
general contractor and can generally cancel or postpone capital projects.
PRICE MANAGEMENT ACTIVITIES
TARC 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, TARC indirectly
entered into price management activities through the third party processing
agreement discussed below.
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
TARC enters into financing arrangements to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock that is scheduled for delivery to TARC's
refinery. TARC 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 TARC commits to purchase, at a later date, the cargo at an
agreed price plus commission and costs. TARC also places margin deposits with
the third party to permit the third party to hedge its price risk. TARC
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 TARC'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 TARC without a material gain or loss to TARC.
In March 1996, TARC 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 TARC 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 TARC to process approximately 1.1 million barrels of the third
party's feedstock. For the nine months ended October 31, 1996, TARC incurred a
loss of approximately $2.6 million related to this processing agreement
primarily as a result of low margins and price management activities.
15
39
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
In April 1996, TARC entered into a similar processing agreement with
another third party to process feedstocks. As of October 31, 1996, TARC had
completed processing approximately 5.1 million barrels of the 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, TARC entered into processing an 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, TARC
met all quantity and quality yields earning the full price per barrel. As of
October 31, 1996, TARC 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.
GAS SALES COMMITMENTS
TransTexas and MidCon Texas Pipeline Corp. entered into a long-term
gas purchase contract on January 10, 1996, under which TransTexas 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
In February 1995, TransTexas sold to an unaffiliated third party a
term royalty in the form of a dollar-denominated production payment
in certain of TransTexas' 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, TransTexas 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, TransTexas 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, TransTexas 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, TransTexas sold to an unaffiliated third party an
additional term overriding royalty interest in the form of a volumetric
production payment on certain of TransTexas' producing properties. For net
proceeds of approximately $43 million, TransTexas 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. TransTexas 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.
In September 1996, TransTexas sold to an unaffiliated third party a
term royalty in the form of a dollar-denominated production payment in certain
of TransTexas' 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, TransTexas entered into a drilling program
agreement with an unaffiliated third party for the reimbursement of certain
drilling costs with respect to wells drilled by TransTexas. 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
16
40
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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.
HEDGING AGREEMENTS
Beginning in April 1995, TransTexas 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
TransTexas 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 TransTexas 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 TransTexas to the
extent that the Floating Price is less than the Fixed Price. For the three and
nine months ended October 31, 1996, TransTexas incurred net settlement losses
pursuant to the Hedge Agreements totaling approximately $5.4 million and $23.9
million, respectively. As of October 31, 1996, TransTexas has 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 ("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 gains or losses are deferred and recognized in the month the physical
volumes are delivered. At October 31, 1996, TransTexas maintained $7.2 million
in margin accounts related to the Hedge Agreements. TransTexas 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, TransTexas 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. TransTexas' obligations under the Master Swap Agreement are
collateralized by a mortgage on a substantial portion of TransTexas' producing
properties. In accordance with the TransTexas Indenture, the lien created by
the mortgage collateralizes obligations up to a maximum of $80.8 million (10%
of the SEC PV10 of TransTexas' most recent reserve report as of the creation of
the mortgage). As contemplated by the TransTexas Indenture, the Trustee under
the TransTexas Indenture has subordinated the lien collateralizing the
TransTexas Notes outstanding thereunder to the lien collateralizing TransTexas'
obligations under the Master Swap Agreement. The maximum amount of obligations
of TransTexas 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, TransTexas is not subject to provide additional cash margin for
any swaps now or hereafter subject to the Master Swap Agreement.
LETTER OF CREDIT
In January 1996, TransTexas 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
17
41
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
of TransTexas in a legal proceeding. If there is a draw under the letter of
credit, TransTexas is required to reimburse the third party within 60 days.
TransTexas has agreed to issue up to 8.6 million shares of common stock of
TransTexas to the third party if this contingent obligation to such third party
becomes fixed and remains unpaid for 60 days. TransTexas does not believe that
this contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, TransTexas could elect to sell shares of
TransTexas' 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 TransTexas 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 TransTexas' position would be
upheld. Under an agreement between TransTexas, TARC, TransAmerican and certain
of TransAmerican's subsidiaries (the "Tax Allocation Agreement"), TransTexas
has agreed to pay an amount equal to any federal tax liability (which would be
approximately $25.4 million) attributable to the inapplicability of the COD
Exclusion. 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 TransTexas Indenture provides that, upon the occurrence of a
Change of Control (as such term is defined in the TransTexas Indenture), each
holder of the TransTexas Notes will have the right to require TransTexas to
repurchase such holder's TransTexas Notes at 101% of the principal amount
thereof plus accrued and unpaid interest. A Change of Control would be deemed
to occur under the TransTexas Indenture in the case of certain changes or other
events in respect of the ownership or control of TransTexas, 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 TARC Indenture is
or becomes the beneficial owner of more than 50% of the total voting power of
TransTexas' then outstanding voting stock, unless the TransTexas Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also includes a "group," which is defined as two or more
persons acting as a partnership, limited partnership or other group. In
addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the
TransTexas Indenture may result in a "change of control" of TransTexas under
the terms of TransTexas' credit facility (the "BNY Facility") and certain
equipment financing. Such an occurrence could create an obligation for
TransTexas to repay such other indebtedness. At October 31, 1996, TransTexas
had approximately $22.9 million of indebtedness (excluding the TransTexas
Notes) subject to such right of repayment or repurchase. In the event of a
Change of Control under the TransTexas Indenture or a "change of control" under
the terms of other outstanding indebtedness, there can be no assurance that
TransTexas will have sufficient funds to satisfy any such payment obligations.
In February 1995, TARC issued the TARC Notes that were initially
collateralized by, among other things, 55 million shares of TransTexas' common
stock. In March 1996, TARC sold 4.55 million shares of TransTexas common
stock to provide additional financing for the Capital Improvement Program.
TARC will require substantial additional financing over the course of the
remaining construction period to complete the Capital Improvement Program.
18
42
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 TransTexas
common stock pledged to collateralize the TARC Notes. A foreclosure on such
shares would constitute a "change of control" of TransTexas under the BNY
Facility and certain equipment financing, which may create an obligation for
TransTexas to repay amounts outstanding thereunder, but would not constitute a
Change of Control under the TransTexas Indenture. A sale of such shares
following a foreclosure could result in a Change of Control under the
TransTexas 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.
4. INVENTORIES AND OTHER CURRENT ASSETS
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
Tubular goods and other 12,038 11,421
----------- -----------
$ 12,061 $ 48,652
=========== ===========
19
43
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 2,865 2,457
Margin 51 4,452
Properties held for sale -- 6,000
Restricted cash -- 7,368
Unrealized loss on commodity price swap agreements 18,677 31,317
Other 159 242
----------- -----------
$ 27,774 $ 56,300
=========== ===========
5. 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 11,679 3,054
Accrued interest 3,483 19,365
Payroll 6,748 6,153
Litigation settlements 1,492 9,553
Settlement values of commodity price swap agreements 18,677 31,317
Insurance 2,845 1,628
Maintenance turnarounds 1,719 1,145
Other 1,373 7,308
--------- --------
$ 68,219 $ 89,316
========= ========
6. 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 - TransTexas:
Litigation settlement -- 14,747
20
44
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Accrued capital expenditures 17,500 5,443
Accrued interest 35,749 --
Current portion of dollar-denominated production payment -- 1,765
Capital lease obligations 719 1,168
Other 1,112 1,064
----------- --------
$ 77,930 $ 36,358
=========== ========
In February 1996, TransTexas 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, TransTexas
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, TransTexas issued $189 million in face amount of
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 TransTexas 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 TransTexas 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.
7. SUMMARY FINANCIAL INFORMATION
The following summary financial information of TransTexas Transmission
Corporation ("TTC"), a wholly-owned subsidiary of TransTexas, 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
=========== ========
21
45
TRANSAMERICAN ENERGY 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 costs and 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
======== ========== ========== =========
Revenues for the nine months ended October 31, 1996 include a gain of
approximately $7.5 million on the sale of TransTexas' 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.
8. 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):
22
46
TRANSAMERICAN ENERGY 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 expense (benefit)
at the statutory rate $ (8,940) $ (7,106) $ 30,648 $ (41,883)
Increase (decrease) in tax resulting from:
Tight sands credit -- -- (7,437) 7,842
Net operating losses (utilized) not utilizable 4,756 7,106 (19,607) 30,266
--------- --------- --------- ----------
$ (4,184) $ -- $ 3,604 $ (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
TransTexas' valuation allowance was reversed in the quarter ended July 31,
1996. TransTexas' current tax liability payable to TransAmerican totaled
approximately $10 million at October 31, 1996.
DECONSOLIDATION
The Company and TARC currently own approximately 54% and 14%,
respectively, of the outstanding common stock of TransTexas. These shares are
pledged as collateral for the TARC Notes. TransAmerican Exploration Corporation
("TEXC"), another subsidiary of TransAmerican, owns 5% of the outstanding common
stock of TransTexas, which is pledged as collateral for TEXC's debt securities.
Under certain circumstances, TransAmerican, TEXC, TARC or the Company
may sell or otherwise dispose of shares of common stock of TransTexas. If, as
a result of any sale or other disposition of TransTexas' common stock, the
direct and indirect ownership of TransTexas by TransAmerican is less than 80%
(measured by voting power and value), TransTexas 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 the
Company 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
TransTexas from the TransAmerican Consolidated Group would occur. For the
taxable year during which Deconsolidation of TransTexas occurs, which would also
be the final year that TransTexas is a member of the TransAmerican Consolidated
Group, TransAmerican would recognize a previously deferred gain of approximately
$266.3 million associated with the Transfer and would be required to pay
federal income tax on this gain (the tax is estimated to be between $29 million
and $56 million if Deconsolidation occurs in fiscal 1997 and between $24 million
and $45 million if Deconsolidation occurs in fiscal 1998). This analysis is
based on TransTexas' 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 TransTexas 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 TransTexas' stock would be disposed in the future to
cause a Deconsolidation of TransTexas from the TransAmerican Consolidated Group,
it is possible that the Deconsolidation of TransTexas 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 TransTexas would occur in the
future. Under the
23
47
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Tax Allocation Agreement, TransTexas is required to pay TransAmerican each year
an amount equal to the lesser of (i) the reduction in taxes paid by TransTexas
for such year as a result of any increase in the tax basis of assets acquired
by TransTexas 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 TransTexas (less certain amounts
paid by TransTexas for all prior years). TransTexas estimates that if
Deconsolidation occurs in fiscal 1997 or 1998, the amount reimbursed to
TransAmerican would be between $15 million and $26 million and between $4
million and $7 million, respectively. The remaining amount of the tax relating
to the gain would be paid to TransAmerican over the lives of the assets
transferred. However, TransTexas 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 TransTexas are used by other members of the TransAmerican Consolidated
Group, then TransTexas is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent TransTexas has taxable
income, remains a member of the TransAmerican Consolidated Group, and the other
group members have the ability to pay such taxes. If TEXC, TARC, TransAmerican
or the Company transfers shares of TransTexas (or transfers options or other
rights to acquire such shares) and, as a result of such transfer,
Deconsolidation of TransTexas occurs, TransTexas would not thereafter receive
any benefit pursuant to the Tax Allocation Agreement for net operating losses
of TransTexas used by other members of the TransAmerican Consolidated Group
prior to the Deconsolidation of TransTexas.
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, TransTexas, TARC or the Company may be required to pay
the tax.
Under the Tax Allocation Agreement, TransTexas 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.
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
Nine Months Ended
October 31,
-------------------------
1996 1995
---------- -----------
Accounts payable for property and equipment $ (9,858) $ 1,079
========== ===========
Contribution of TransTexas stock to TARC $ -- $ 37,176
========== ===========
Interest accretion on TARC Notes capitalized
in property and equipment $ 36,193 $ 18,495
========== ===========
Capital lease obligations incurred for property
and equipment $ -- $ 2,678
========== ===========
Product financing arrangements $ (37,206) $ 7,900
========== ===========
Forgiveness of advances from TransAmerican $ -- $ 71,170
========== ===========
24
48
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
10. 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 12). 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. 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.
GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit
against TARC 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. TARC settled this litigation in November 1996.
25
49
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
11. CREDIT AGREEMENTS
TransTexas and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement (the "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 TransTexas and is
guaranteed by John R. Stanley. The amounts which may be advanced to TransTexas
under this line of credit are based on a percentage of TransTexas' natural gas
receivables from unaffiliated third parties. The amount outstanding under the
line of credit as of October 31, 1996 was $14.8 million. TransTexas expects
that it will maintain or increase this level of borrowing under the Agreement
for the next twelve months.
Under the terms of the BNY Facility, as amended, TransTexas' 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, TransTexas entered into a Note Purchase Agreement
pursuant to which TransTexas 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.
12. TRANSACTIONS WITH AFFILIATES
During 1995, TransAmerican acquired an office building which it
renovated and subsequently sold to TransTexas in February 1996. TransAmerican
advanced $4 million of the proceeds from this sale to TARC for working
capital, a portion of which has been repaid. TARC leases office space from
TransTexas on terms and conditions permitted by the TARC Indenture.
Southeast Contractors, a subsidiary of TransAmerican, provides
construction personnel to TARC 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 TARC 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 approximately $1.1
million and $0.6 million were payable at October 31, 1996 and January 31, 1996,
respectively.
In December 1994, TransTexas 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 TransTexas during the three months
ended October 31, 1996. TransTexas' 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.
26
50
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
As of January 1996, TransTexas and TransTexas Exploration Corporation,
a wholly-owned subsidiary of TransTexas ("TTEX"), entered into a Drilling
Program, as defined in the TransTexas Indenture. Pursuant to the Program, TTEX
received a portion of revenues, in the form of a production payment, from
certain of TransTexas' 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 TransTexas in the
form of a dividend, and TransTexas 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.
TransAmerican has not made its October 31, 1996 interest payment. TransTexas
believes that the advances by TTEX to TransAmerican reduce the risk of tax
deconsolidation (and potential tax liability of TransTexas) that could be
caused by the sale of TransTexas shares by TransAmerican or its affiliates.
Pursuant to the terms of the Transfer Agreement, TransAmerican is
obligated to indemnify TransTexas for 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,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. In connection with this settlement,
TransTexas received from Terry the reversionary interest in certain producing
properties. TransTexas and TransAmerican had intended that such interests
would revert to TransAmerican under the Transfer Agreement; however, TransTexas
retained such interests in partial satisfaction of TransAmerican's indemnity
obligations.
In July 1996, TARC 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, TARC 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, TARC had approximately $34.1 million outstanding under these
notes. TARC 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.
In September 1996, TransTexas 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. TransTexas believes that the combination of these
interests, together with TransTexas' 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.
TransTexas provides accounting and legal services to TARC and the
Company, and drilling and workover, administrative and procurement, accounting,
legal, lease operating, and gas marketing services to TransAmerican pursuant to
a Services Agreement. TransTexas provides general commercial legal services
and certain accounting services (including payroll, tax, and treasury services)
to TARC and the Company for a fee of $26,000 per month. At TransAmerican's
request, TransTexas, at its election, may provide drilling and workover
services. TransTexas' receivable from TransAmerican for drilling, workover and
administrative services totaled approximately $19 million at October 31, 1996.
27
51
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
In September 1996, TransTexas and TransAmerican entered into an
agreement pursuant to which TransTexas 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 TransTexas'
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.
28
52
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The consolidated financial statements of TEC reflect the results of
operations of TEC's wholly and majority owned subsidiaries, TARC and
TransTexas. TransTexas conducts its operations through two industry segments:
exploration and production ("E&P"), and gas transportation ("Transportation").
The E&P segment explores for, develops, produces and markets natural gas,
condensate and natural gas liquids. The Transportation segment engages in
intrastate natural gas transportation and marketing. TARC's single business
segment is refining and storage operations ("Refining"). As described in Note
1 to the condensed consolidated financial statements, transactions between
TransTexas and TARC are significantly restricted. 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.
E&P AND TRANSPORTATION
RESULTS OF OPERATIONS
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
NGLs. The profitability of TransTexas 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.
TransTexas' 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 TransTexas' 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.
29
53
A summary of TransTexas' 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.
TransTexas' 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
TransTexas' Consolidated EBITDA, as defined in the TransTexas
Indenture, which consists of TransTexas' 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 TransTexas' Bob West North
development area, offset in part by the normal decline in natural gas
production from TransTexas' producing properties in the Lobo Trend along with
the sales of certain of TransTexas' Lobo Trend properties. As of October 31,
1996, TransTexas 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
30
54
through TransTexas' pipeline system. TransTexas 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 TransTexas' 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
TransTexas' 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
TransTexas' 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 TransTexas Notes in June 1995. Interest expense increased by $0.2
million over the same period of the prior year primarily as a result of
a decrease in the amount of interest capitalized in connection with the
acquisition of certain of TransTexas' gas and oil properties, offset in part by
interest accrued on TransTexas' 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, partly offset 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 TransTexas' Bob West North development area,
offset in part by the normal decline in natural gas production from TransTexas'
Lobo Trend wells and the sale of a portion of TransTexas' 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 TransTexas' Bob West North
development area transported through TransTexas' pipeline system were offset by
the declines in production from TransTexas' 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 the increase in
the number of producing wells prior to the sale of certain of TransTexas' 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 TransTexas' 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 TransTexas' 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 TransTexas'
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,
31
55
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 increased
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 TransTexas Notes in June 1995. Interest expense increased by
$13.8 million primarily as a result of interest accrued on the TransTexas
Notes, offset in part by an increase of $6.5 million of interest capitalized in
connection with the acquisition of TransTexas' 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 TransTexas' 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 TransTexas Notes in June 1995.
LIQUIDITY AND CAPITAL RESOURCES
A primary source of funds to meet TransTexas' capital and debt service
requirements is net cash flow provided by operating activities, which is
dependent on the prices TransTexas receives for the volumes of natural gas it
produces. TransTexas has entered into hedge agreements to reduce a portion of
its exposure to fluctuations in natural gas prices. See Note 2 of Notes to the
Condensed Consolidated Financial Statements included elsewhere in this report.
TransTexas makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. TransTexas has
financed these expenditures primarily with cash from operations, public
offerings of debt and equity securities, the sale of production payments and
other financings. For the 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 TransTexas' gas
gathering and pipeline system and other equipment.
TransTexas anticipates total capital expenditures of approximately
$275 million and $235 million in fiscal 1997 and fiscal 1998, respectively,
subject to TransTexas 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
TransTexas' gas gathering and pipeline system (including pipeline expansion
into the La Grulla development area), and other equipment and seismic
acquisition. TransTexas anticipates expenditures of approximately $20 million
in both fiscal years for lease acquisitions. If revenues decrease, certain
contingent obligations of TransTexas become fixed or TransTexas' level of
capital expenditures is limited by the TransTexas Indenture, TransTexas 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 TransTexas Indenture and BNY Facility, TransTexas 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 TransTexas' 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, TransTexas
has utilized asset sales and various financings to meet its working capital
requirements. TransTexas anticipates that it will utilize additional financing
or sales of assets,
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as allowed by the TransTexas Indenture, to fund planned levels of operations
and to meet its obligations, including its obligations under the TransTexas
Indenture, through January 1997.
In January 1996, TransTexas 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 TransTexas in a legal proceeding. If there is a draw under the
letter of credit, TransTexas is required to reimburse the third party within 60
days.
In January and February 1996, TransTexas 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,
TransTexas 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, TransTexas 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, TransTexas 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, TransTexas 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.
In March 1996, TransTexas sold its 41.67% interest in the 76-mile,
24-inch MidCon Texas pipeline, which runs from TransTexas' Thompsonville
compressor station to Agua Dulce, for $7.5 million. TransTexas believes that
its existing transportation capacity in this area is adequate for TransTexas'
production and does not anticipate any material constraints on the
transportation of its natural gas as a result of this sale.
In May 1996, TransTexas sold to two unaffiliated third parties a
volumetric production payment for net proceeds of approximately $43 million.
TransTexas 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, TransTexas 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
TransTexas to that unaffiliated third party for a payment by TransTexas of
approximately $25 million. As a result of such termination, the remaining base
volume from the previously sold overriding royalty interest was conveyed to
TransTexas. At October 31, 1996, approximately 29 Bcf of natural gas remained
subject to this production payment.
In May 1996, TransTexas entered into a Note Purchase Agreement
pursuant to which TransTexas 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, TransTexas entered into an agreement with one of its
swap counter parties as a result of which TransTexas, 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
2 to the Condensed Consolidated Financial Statements included elsewhere in this
report.
In September 1996, TransTexas sold to an unaffiliated third party a
term royalty in the form of a dollar-denominated production payment in certain
of TransTexas' properties for proceeds of $13.5 million. The production
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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, TransTexas entered into a drilling program
agreement with an unaffiliated third party for the reimbursement of certain
drilling costs with respect to wells drilled by TransTexas. 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.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified TransTexas for substantially all of TransTexas' liability in
connection with the settlement of the Terry/Penrod litigation in May 1996. In
order to facilitate the settlement, TransTexas advanced to TransAmerican $16.4
million of the settlement amount in exchange for a note receivable. In
connection with this settlement, TransTexas received from Terry the
reversionary interest in certain producing properties. TransTexas and
TransAmerican had intended that such interests would revert to TransAmerican
under the Transfer Agreement; however, TransTexas retained such interests in
partial satisfaction of TransAmerican's indemnity obligations.
During 1995, TransAmerican acquired an office building which it
renovated and subsequently sold to TransTexas for $4 million in February 1996.
TransAmerican advanced $4 million of the proceeds from this sale to TARC for
working capital, a portion of which has been repaid. TARC leases office space
from TransTexas on terms and conditions permitted by the TARC Indenture.
In December 1994, TransTexas 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 TransTexas for the three months
ended October 31, 1996. TransTexas' 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.
As of January 1996, TransTexas 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 TransTexas'
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 TransTexas in the form of a dividend,
and TransTexas 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.
TransAmerican has not made the October 31, 1996 interest payment. TransTexas
believes that the advances by TTEX to TransAmerican reduce the risk of tax
deconsolidation (and potential tax liability of TransTexas) that could be
caused by the sale of TransTexas shares by TransAmerican or its affiliates.
In September 1996, TransTexas 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. TransTexas believes
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that the combination of these interests, together with TransTexas' 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 TransTexas' financial
statements at carryover basis and the $3.9 million has been classified as a
reduction of retained earnings.
TransTexas provides accounting and legal services to TARC and the
Company and drilling and workover, administrative and procurement, accounting,
legal, lease operating, and gas marketing services to TransAmerican pursuant to
a Services Agreement. TransTexas provides general commercial legal services
and certain accounting services (including payroll, tax, and treasury services)
to TARC and the Company for a fee of $26,000 per month. At TransAmerican's
request, TransTexas, at its election, may provide drilling and workover
services. TransTexas' receivable from TransAmerican for drilling, workover and
administrative services totaled approximately $19 million at October 31, 1996.
In September 1996, TransTexas and TransAmerican entered into an
agreement pursuant to which TransTexas 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, TransTexas 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, TransTexas
consummated the sales, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million and $21.5 million, respectively. The purchase price for each of
the properties discussed above was or is subject to adjustment for gas sales
between the effective date and the closing date. TransTexas retained the
proceeds of all such gas sales.
TransTexas has engaged investment banking firms to assist in the
following potential transactions: (i) the sale or sale-leaseback of all or a
portion of TransTexas' pipeline system; (ii) the sale of its interest in the
Lodgepole prospect in North Dakota; and (iii) the sale of TransTexas' remaining
Lobo Trend producing properties in Webb and Zapata Counties, Texas, and
associated undeveloped acreage. If any such transactions are consummated,
TransTexas intends to use the proceeds for general corporate purposes and a
possible repurchase of the TransTexas Notes.
TransTexas 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 TransTexas to maintain certain financial ratios and includes certain
covenants. Under the terms of the BNY Facility, as amended, TransTexas' 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, TransTexas 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 TransTexas 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 TransTexas 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. The proceeds from the
issuance of the Subordinated Notes will be used for working capital and general
corporate purposes.
Pursuant to the TransTexas Indenture, TransTexas 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"). TransTexas 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 TransTexas Notes. Funds in the Interest
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Reserve Account may be invested, at the direction of TransTexas (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. TransTexas must maintain a balance
(the "Requisite Balance") in the Interest Reserve Account at least equal to the
amount necessary to satisfy TransTexas' obligation to pay interest in respect
of all then outstanding TransTexas Notes on the next Interest Payment Date (as
defined); 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 TransTexas Notes, TransTexas 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.
TransTexas may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement provides that if TransTexas fails to pay an installment of interest
on the TransTexas 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
TransTexas has not paid such installment of interest within five days after
such Interest Payment Date, or if TransTexas so instructs the Indenture
Trustee, the Indenture Trustee will apply such deposited funds to the payment
of interest on the TransTexas Notes. The Disbursement Agreement provides that
funds may be disbursed from the Interest Reserve Account and released to
TransTexas only to the extent that the balance thereof exceeds the Requisite
Balance.
DECONSOLIDATION FOR FEDERAL INCOME TAX PURPOSES
Under certain circumstances, TransAmerican, TEXC, the Company or TARC
may sell or otherwise dispose of shares of common stock of TransTexas. If, as
a result of any sale or other disposition of TransTexas' common stock, the
direct and indirect ownership of TransTexas by TransAmerican is less than 80%
(measured by voting power and value), TransTexas 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 the Company 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 TransTexas from the TransAmerican Consolidated Group would occur. For
the taxable year during which Deconsolidation of TransTexas occurs, which would
also be the final year that TransTexas 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 TransTexas' 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 TransTexas 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 TransTexas'
stock would be disposed in the future to cause a Deconsolidation of TransTexas
from the TransAmerican Consolidated Group, it is possible that the
Deconsolidation of TransTexas 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 TransTexas would occur in the future. Under the Tax
Allocation Agreement, TransTexas is required to pay TransAmerican each year an
amount equal to the lesser of (i) the reduction in taxes paid by TransTexas for
such year as a result of any increase in the tax basis of assets acquired by
TransTexas 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 TransTexas (less certain amounts
paid by TransTexas for all prior years). TransTexas 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,
TransTexas could
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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 TransTexas are used by other members of the TransAmerican Consolidated
Group, then TransTexas is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent TransTexas 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, the
Company, TARC or TEXC transfers shares of TransTexas (or transfers options or
other rights to acquire such shares) and, as a result of such transfer,
Deconsolidation of TransTexas occurs, TransTexas would not thereafter receive
any benefit pursuant to the Tax Allocation Agreement for net operating losses
of TransTexas used by other members of the TransAmerican Consolidated Group
prior to the Deconsolidation of TransTexas.
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, TransTexas, TARC or the Company may be required to
pay the tax.
Under the Tax Allocation Agreement, TransTexas 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
TransTexas 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 TransTexas in one reporting period, could have a material
adverse effect on TransTexas' cash flow or operations for that period.
Although the outcome of these lawsuits cannot be predicted with certainty,
TransTexas does not expect these matters to have a material adverse effect on
its financial position. TransTexas 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 TransTexas Indenture.
The TransTexas Indenture provides that, upon the occurrence of a
Change of Control, each holder of the TransTexas Notes will have the right to
require TransTexas to repurchase such holder's TransTexas Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. As used in the
TransTexas 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 TransTexas, 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 TransTexas'
Wholly Owned Subsidiaries or the trustee under the TransTexas 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 TransTexas, 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 TransTexas 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 TransTexas' then
outstanding Voting Stock, unless, at the time of the occurrence of an event
specified in
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clauses (i), (ii) or (iii), the TransTexas Notes, issued under the TransTexas
Indenture have an Investment Grade Rating provided, however, that if, at any
time within 120 days after such occurrence, the TransTexas 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 TransTexas that do not constitute a Change of Control
under the TransTexas Indenture may result in a "change of control" of
TransTexas under the terms of the BNY Facility and certain equipment financing.
Such an occurrence could create an obligation for TransTexas to repay such
other indebtedness. At October 31, 1996, TransTexas had approximately $22.9
million of indebtedness (excluding the TransTexas Notes) subject to such right
of repayment or repurchase. In the event of a Change of Control under the
TransTexas Indenture or a "change of control" under the terms of other
outstanding indebtedness, there can be no assurance that TransTexas will have
sufficient funds to satisfy any such payment obligations.
In February 1995, TARC issued the TARC Notes that were initially
collateralized by, among other things, 55 million shares of TransTexas' 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 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 TransTexas under the BNY Facility and certain equipment
financing, which may create an obligation for TransTexas to repay amounts
outstanding thereunder. A sale of such shares following a foreclosure could
result in a Change of Control under the TransTexas 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 additional financing will
be available, or that the requisite approval of the TARC noteholders can be
obtained.
REFINING
RESULTS OF OPERATIONS
TARC's refinery was inoperative from January 1983 through February
1994. During this period, TARC'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. TARC commenced partial
operations at the refinery in March 1994 and has operated the vacuum unit
intermittently since then. TARC'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. TARC does not consider its
historical results to be indicative of future results.
TARC'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 TARC's throughput capacity, the feedstocks processed, and refined
product yields.
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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, TARC capitalized
approximately $17.7 million of interest related to property and equipment
additions at TARC'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 TARC's 14.1% equity interest in TransTexas.
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 for third parties in the prior period.
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.
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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 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, TARC capitalized
approximately $51.0 million of interest related to property and equipment
additions at TARC'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 TARC's 20.3% equity interest in
TransTexas until TARC's sale of 4.55 million shares of TransTexas stock in
March 1996 which decreased TARC'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. TARC 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. 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 funding was not available to the Company
on a timely basis, management of TARC 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. 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.
TARC 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 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 Holders can be obtained.
As of October 1996, TARC 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, TARC 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
TARC Indenture.
In July 1996, TARC 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, TARC 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, TARC had
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approximately $34.1 million outstanding under these notes. TARC has not made
the scheduled interest payment provided for in the first note. These and
additional borrowings are being utilized by TARC 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 TARC.
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, TARC adopted the requirements of SFAS No. 121.
TARC 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 TARC's ability to complete the Capital Improvement
Program, there can be no assurance that TARC will ultimately recover the cost
of the refinery.
TARC 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 Plan, TARC had negative working capital of $37.4 million at
October 31, 1996. In order to operate the refinery and service its debt, TARC
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 TARC's ability to continue as a going concern. If TARC (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, TARC's investment in the refinery may not be
recovered. The consolidated financial statements do not include any
adjustments for these uncertainties.
Additionally, the Company has pledged its entire ownership interest of
the common stock of TransTexas as collateral for the TARC Notes. In the event
TARC does not continue as a going concern, it is likely that the Company will
lose its entire investment in TransTexas. Therefore, if the Company is unable
to recover its investment in TARC and loses its investment in TransTexas, there
is substantial doubt in the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
A change of control or other event that results in deconsolidation of
TARC 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, TARC or other members may be
required to pay the tax. A decision by the Company or TARC 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
deconsolidation is estimated to be approximately $35 million at October 31,
1996. TARC, as a member of the consolidated group, is severally liable for
this liability. To the extent TransAmerican is unable to fund the entire
liability, TARC may be required to pay a portion of this tax. TARC 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 TARC would be
required to fund any portion of the tax liability under the joint and several
liability provisions.
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TARC enters into financing arrangements to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock scheduled for delivery to TARC's
refinery. TARC 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 TARC commits to purchase, at a later date, the cargo at an
agreed price plus commission and costs. TARC also places margin deposits with
the third party to permit the third party to hedge its price risk. TARC
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 TARC without a
material gain or loss to TARC.
In March 1996, TARC 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 TARC 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 TARC to process a total of approximately 1.1 million barrels of
the third party's feedstock. For the nine months ended October 31, 1996, TARC
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, TARC entered into a similar processing agreement with
another third party to process feedstocks. As of October 31, 1996, TARC 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, TARC
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, TARC met all
quantity and quality yields earning the full price per barrel. As of October
31, 1996, TARC 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, TARC 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
TARC's future results of operations, cash flows or financial condition. TARC
also has contingent liabilities with respect to litigation matters as more
fully described in Note 2 of Notes to Condensed Consolidated 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 TARC's success in raising additional capital to complete the
Capital Improvement Program as scheduled, engineering problems, work stoppages,
personnel shortages, cost overruns, fluctuations in the commodity prices for
petroleum and refined products, casualty losses, conditions in the capital
markets and competition. Additional factors affecting TransTexas include
fluctuations in the commodity prices for natural gas, crude oil, condensate and
natural gas liquids, the extent of TransTexas' success in discovering,
developing and producing reserves, conditions in the equity and capital
markets, the ultimate resolution of litigation and competition.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 2 and 8 to the condensed consolidated financial statements for
a discussion of the Company's legal proceedings.
ITEM 5. OTHER INFORMATION
TARC'S CAPITAL IMPROVEMENT PROGRAM
TARC's 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
fluid catalytic cracking unit ("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, TARC 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. TARC has
engaged a number of specialty consultants and engineering and construction
firms to assist TARC 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, TARC's capital
budget for, and expenditures on TARC's 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 have 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 TARC may not have any control.
** TARC 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. TARC 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. 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 funding was not available to TARC 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. 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.
TARC 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 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 Holders can be obtained.
As of October 1996, TARC 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, TARC 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
TARC Indenture.
In July 1996, TARC 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, TARC 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, TARC had approximately $34.1 million outstanding under these
notes. These and additional borrowings are being utilized by TARC to fund the
critical path items mentioned above, as well as working capital needs, pending
additional financing from other sources.
As noted above, TARC 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. TARC 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 (naptha, kerosene, no. 2 fuel oil, atmospheric gas oil,
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atmospheric tower bottoms and vacuum gas oil) plus conventional gasoline and
petroleum coke. TARC must raise additional capital to complete Phase I.
Phase II. In Phase II of the Capital Improvement Program, TARC will
expand hydrodesulfurization capacity, add a naphtha isomerization unit and add
sulfur recovery facilities. Current plans do not include expansion of the MTBE
Unit. TARC anticipates that, following completion of Phase II, it will process
200,000 BPD of heavy, sour crude oil.
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 ENERGY CORPORATION
(Registrant)
By: /S/ JOHN R. STANLEY
----------------------------------------
John R. Stanley, Chief Executive Officer
December 16, 1996
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