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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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 NORTH SAM HOUSTON PARKWAY EAST
SUITE 200
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 986-8822
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of common stock of the registrant outstanding on April
30, 1997, was 9,000.
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TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 35
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 80
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 81
Item 11. Executive Compensation...................................... 82
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 83
Item 13. Certain Relationships and Related Transactions.............. 83
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 84
Signatures.................................................. 91
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PART I
ITEM 1. BUSINESS
TransAmerican Energy Corporation (the "Company") is a limited-purpose
holding company formed in 1994 to hold certain shares of common stock of
TransTexas Gas Corporation (together with its subsidiaries, "TransTexas") and
all of the outstanding capital stock of TransAmerican Refining Corporation
("TARC"). The Company, TransTexas and TARC are all direct or indirect
subsidiaries of TransAmerican Natural Gas Corporation ("TransAmerican"). The
Company is engaged in the exploration for and the development, production and
transportation of natural gas through operations conducted by TransTexas and is
engaged in the refining and storage of crude oil and petroleum products through
operations conducted by TARC.
See Note 14 of Notes to the Consolidated Financial Statements included
elsewhere herein for business segment information regarding the Company.
The address of the Company's principal executive office is 1300 North Sam
Houston Parkway East, Suite 200, Houston, Texas 77032, and its telephone number
at that address is (281) 986-8822.
BACKGROUND
Founded in 1958 by John R. Stanley with a single gas station, TransAmerican
grew rapidly and by the mid-1970s had developed a chain of over 200 independent
gasoline stations in New England and New York. In the early 1970s, TransAmerican
sought to vertically integrate its retail gasoline operations by purchasing a
refinery in Louisiana. During this period, TransAmerican also entered the
exploration and production business by acquiring certain oil and gas properties
in South Texas.
In 1974, TransAmerican also began construction of a $140 million ammonia
plant intended to use natural gas from its South Texas drilling operations as
feedstock. Primarily as a result of a collapse in ammonia prices, TransAmerican
was unable to obtain sufficient financing to complete construction of the plant.
Unable to meet its obligations, TransAmerican and its affiliates filed a
voluntary bankruptcy petition in October 1975. TransAmerican began operating
pursuant to a confirmed plan of reorganization in May 1980.
In 1979, TransAmerican began an expansion and modernization program at the
refinery. However, in January 1983, before completion of the construction
program and after expenditures of $900 million, financial difficulties prevented
TransAmerican from completing certain units of the refinery and forced a
shutdown of operations. As a result, TransAmerican filed a voluntary bankruptcy
petition. TransAmerican emerged from bankruptcy in October 1987. As a condition
of the bankruptcy plan, TransAmerican formed TARC as a wholly owned subsidiary
and transferred its refinery assets to TARC. From 1983 to August 1993,
TransAmerican and TARC spent approximately $125 million on maintenance and
capital expenditures at the refinery.
In February 1995, TARC issued $340 million aggregate principal amount of
18 1/2% Guaranteed First Mortgage Discount Notes due 2002 and $100 million
aggregate principal amount of 16 1/2% Guaranteed First Mortgage Notes due 2002
(together with the First Mortgage Discount Notes, the "TARC Notes"). The net
proceeds from this offering were used to fund the expansion and upgrading of
TARC's refinery, for working capital requirements, including construction costs
incurred prior to the offering and repayment of intercompany debt to
TransAmerican.
The TARC Notes are unconditionally guaranteed on a senior secured basis
(the "Guarantee") by TEC. The Guarantee and the TARC Notes are currently
collateralized by TEC's only assets, which consist of 100% of the outstanding
capital stock of TARC and 40 million shares of common stock (54% of the
currently outstanding capital stock) of TransTexas held by TEC. In addition,
5.45 million shares of common stock (7.4% of the currently outstanding capital
stock) of TransTexas held by TARC are pledged to collateralize the TARC Notes
and the Guarantee. Under certain circumstances, shares of TransTexas common
stock pledged to collateralize the Guarantee may be released from such pledge.
If required to honor the Guarantee, TEC has no current ability to do so without
selling its shares of capital stock of TransTexas or TARC.
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On August 24, 1993, TransAmerican and its subsidiaries transferred
substantially all of their natural gas exploration, production and transmission
businesses to TransTexas (the "Transfer") pursuant to an agreement among
TransAmerican, TransTexas and John R. Stanley (the "Transfer Agreement").
Simultaneously with the Transfer, TransTexas issued $500 million principal
amount of its 10 1/2% Senior Secured Notes due 2000 (the "Prior Notes"). With
the proceeds from the sale of the Prior Notes, TransTexas paid $349.9 million of
TransAmerican's indebtedness, including all of the allowed claims then
outstanding under TransAmerican's plan of reorganization. In March 1994,
TransTexas completed an initial public offering of 5 million shares of its
common stock. In October 1994, TransAmerican sold to the public 5.25 million
shares of TransTexas's common stock. In February 1995, in connection with a
public offering of debt securities by TARC, TransAmerican transferred 55 million
shares of TransTexas's common stock (74.3% of the total then outstanding) to
TEC. TEC then transferred 15 million of these shares (20.3% of the total then
outstanding) to TARC. In March 1996, TARC sold to the public 4.55 million shares
of TransTexas's common stock (6.2% of the total shares outstanding) to provide
additional financing for TARC's capital improvement program. An aggregate of
50.45 million shares of TransTexas's common stock (68.2% of the total shares
outstanding) held by TEC and TARC are currently pledged as collateral for TARC's
debt securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
On June 20, 1995, TransTexas completed a public offering of $800 million
principal amount of 11 1/2% Senior Secured Notes due 2002 (the "TransTexas
Notes"). TransTexas used a portion of the net proceeds from the sale of the
TransTexas Notes to retire or defease the entire $500 million principal amount
of the Prior Notes. For further information, see Note 2 of Notes to Consolidated
Financial Statements included elsewhere herein.
TransTexas is engaged in exclusive negotiations to sell all of the stock of
TransTexas Transmission Corporation ("TTC"), its subsidiary that owns
substantially all of TransTexas' Lobo Trend (defined below) producing properties
and related pipeline transmission system, for an estimated sales price of
approximately $1.1 billion (the "Lobo Sale"). As of February 1, 1997,
TransTexas' Lobo Trend producing properties to be owned by TTC at the time of
the Lobo Sale had proved reserves of 550 Bcfe. As of February 1, 1997, after
giving effect to the Lobo Sale, TransTexas' lease acreage would have
approximated 545,000 gross (395,000 net) acres, with net proved reserves of 404
Bcfe and net daily production of approximately 230 MMcfd of natural gas and
3,250 BPD of condensate and crude oil. For the quarter ended January 31, 1997,
such operations generated approximately $52 million of TransTexas' total EBITDA
of $89 million. TransTexas intends to use the proceeds from the Lobo Sale for
general corporate purposes, which may include a recapitalization of TransTexas.
There can be no assurance that the Lobo Sale will be consummated or, if
consummated, will be upon the terms described herein.
BUSINESS OF TRANSTEXAS
TransTexas is engaged in the exploration for and development and production
of natural gas, primarily in South Texas. TransTexas also owns and operates a
system of approximately 1,100 miles of gathering and transmission pipelines and
performs most of its own well site preparation, drilling, workover, completion,
pipeline and production services. TransTexas' business strategy is to utilize
its extensive experience gained from over 20 years of drilling and operating
wells in South Texas, to continue to find, develop and produce reserves at a low
cost. TransTexas' average net production for the year ended January 31, 1997 was
420 MMcfd, for a total net production of 153.6 Bcf of natural gas. During fiscal
1997, TransTexas drilled 151 wells and intends to drill approximately 130 wells
in fiscal 1998. As of February 1, 1997, TransTexas owned 769,594 gross (603,062
net) acres of mineral interests, with proved reserves of 954 Bcfe.
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EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of TransTexas consist of
geological evaluation of current and prospective leased properties, the
acquisition of mineral leases or other interests in prospects and the
development and operation of leased properties for the production and sale of
natural gas, condensate and crude oil. TransTexas operates substantially all of
its producing properties. Drilling activities are performed by TransTexas and,
when necessary, by independent drilling contractors.
To maintain its reserve base and production, TransTexas must locate and
acquire new gas and condensate reserves to replace those being depleted by
production. Without successful drilling and exploration or acquisition
activities, TransTexas' reserves and production will decline appreciably. In
particular, TransTexas' principal producing properties are characterized by a
high initial production rate, followed by a steep decline in production
resulting in an average half-life per well of less than two years and an
economic life of ten years. TransTexas' business strategy is to add reserves by
pursuing an active drilling program on its existing undeveloped properties and
on properties that it may acquire in the future. There can be no assurance that
production from new wells will be sufficient to replace production from existing
wells.
As of April 30, 1997, TransTexas was drilling 24 gross (21 net) wells and
intends to drill a total of approximately 130 wells during fiscal 1998.
TransTexas drilled, or participated in the drilling of, the following numbers of
wells during the periods indicated:
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, -------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
Exploratory Wells:
Productive(1)....................... 36 33 12 11 13 13 4 4
Non-Productive...................... 45 41 13 12 7 6 1 1
% Productive........................ 44% 45% 48% 48% 65% 68% 80% 80%
Development Wells:
Productive(1)....................... 67 66 36 36 63 63 112 112
Non-Productive...................... 3 3 4 4 15 15 23 23
% Productive........................ 96% 96% 90% 90% 81% 81% 83% 83%
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(1) Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connection. Wells that are completed
in more than one producing zone are counted as one well. As of January 31,
1997, TransTexas had a total of 855 productive wells, 24 of which had
multiple completions.
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Net Production, Unit Prices, and Costs
The following table sets forth information with respect to net production
and average unit prices and costs for the periods indicated:
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
--------------- --------------- ---------------
1997 1996 1996 1995 1995 1994
------ ------ ------ ------ ------ ------
Production:
Gas (Bcf)(1)......................... 153.6 137.9 66.8 76.9 147.9 130.9
NGLs (MMgals)........................ 174.2 169.2 65.3 121.3 225.3 164.0
Condensate and oil (MBbls)........... 604 543 258 354 638 650
Average sales prices:
Gas (dry) (per Mcf)(2)............... $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96
NGLs (per gallon).................... .36 .27 .30 .27 .26 .27
Condensate and oil (per Bbl)......... 21.54 17.76 17.39 16.50 17.22 15.13
Average lifting cost per Mcfe(3)....... .29 .23 .23 .21 .21 .24
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(1) Net gas production volumes for the year ended January 31, 1997, include 32.0
Bcf delivered to third parties under volumetric production payments.
(2) Average price calculations for the year ended January 31, 1997, include
prices for amounts delivered to third parties under volumetric production
payments. The average gas price for TransTexas' undedicated production for
this period was $2.39 per Mcf. Gas prices do not include the effect of
hedging.
(3) Condensate and oil are converted to a common unit of measure ("Mcfe" or
thousand cubic feet of gas equivalent) on the basis of six Mcf of natural
gas to one barrel of condensate or oil. The components of production costs
may vary substantially among wells depending on the methods of recovery
employed and other factors. The calculation of average lifting cost per Mcfe
for the year ended January 31, 1997 gives effect to volumes delivered to
third parties under volumetric production payments.
Drilling Services
TransTexas performs substantially all of its own drilling and oil field
services through its drilling services division. These activities include
drilling, oil and natural gas well workover and completion services as well as a
variety of other support services required for the exploration and production of
natural gas. As of March 31, 1997, TransTexas owned 22 land drilling rigs, nine
workover rigs and two fracture stimulation fleets. Complementary drilling,
completion and workover service equipment includes a ready-mix concrete plant,
twin cementing trucks, a coiled tubing unit, a snubbing unit, electric line and
logging units, slickline units, tag units, and an extensive fleet of
construction, inspection and other rolling stock.
Activity in the contract drilling industry and related oil services
businesses has shown significant improvement over the last three years due to
the increased worldwide demand for oil and natural gas. TransTexas intends to
consider alternatives to maximize stockholder value with respect to the drilling
services division including options such as a spinoff, a sale to a third party,
a merger or another business combination.
DEVELOPMENT ACTIVITY AND RECENT DISCOVERIES
Lobo Trend. At January 31, 1997, TransTexas held approximately 234,000
gross (217,000 net) acres in the Lower Wilcox Lobo Trend, located in Webb and
Zapata Counties, Texas ("Lobo Trend"). TransTexas has developed approximately
29% of its net Lobo Trend acreage. As of January 31, 1997, TransTexas owned a
100% working interest in substantially all of its lease acreage in the Lobo
Trend. TransTexas is the operator of substantially all of its Lobo Trend
properties. At January 31, 1997, TransTexas had interests in approximately 754
producing wells in the Lobo Trend.
Bob West North. In late 1994, TransTexas made a natural gas discovery in
the Bob West North area of southern Zapata County, Texas. Since the discovery,
TransTexas has drilled 46 wells and completed 44 wells
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in the area. TransTexas' mineral interests in Bob West North consist of a 98%
working interest in 15,800 gross (14,400 net) acres and a 90% net profits
interest in 660 gross acres. By the end of fiscal 1997, TransTexas' net daily
natural gas production from the Bob West North area surpassed that of the Lobo
Trend. On January 31, 1997, TransTexas was drilling two wells in Bob West North,
was in the process of completing two wells and had daily gross natural gas
production of 261 MMcfd (186 MMcfd net). For the twelve months ended January 31,
1997, TransTexas produced 45.7 Bcf (32.6 Bcf net) from the Bob West North area.
Recent drilling results indicate the potential for a new productive fault block
of the structure that previously had not been drilled.
Lodgepole, North Dakota. TransTexas is participating in the exploration and
development of the Lodgepole area of Stark and Dunn Counties, North Dakota. In
late 1996, TransTexas announced the discovery of a Lodgepole carbonate reef oil
field in Dickinson, North Dakota with the Heart River #1, which flow tested at a
daily rate of 6,836 BPD. TransTexas has conducted or participated in a series of
3-D seismic surveys covering more than 270 square miles in order to develop its
drilling locations and evaluate acreage holdings. Based upon such 3-D seismic
information, TransTexas has selected additional drilling locations in the
producing reef and further seismic anomalies. TransTexas holds an average
working interest of 80% in approximately 198,800 gross (98,400 net) acres in the
Lodgepole. As of January 31, 1997, TransTexas was drilling one well, completing
one well, and had drilled a total of seven wells in the Lodgepole, two of which
had been completed and were producing at a combined gross daily production rate
of 4,016 BPD. Since January 31, 1997, TransTexas has drilled and completed one
additional well in the Lodgepole. Effective March 1997, all producing wells in
the field were restricted to a State-mandated daily rate of approximately 1,000
BPD per well.
Austin Chalk. The Austin Chalk formation, lying in an area from South Texas
to East Louisiana, exhibits geological characteristics requiring the drilling of
horizontal wells for production of natural gas. In 1996, TransTexas began the
implementation of a strategy consisting of the evaluation of electric logs and
production characteristics of existing vertically drilled wells. TransTexas
selects areas where the thickness and resistivity of prospective pay is
sufficient to economically justify the acquisition of mineral lease acreage and
the drilling of horizontal development wells. As of January 31, 1997, TransTexas
had drilled and completed one such horizontal well in Walker County, Texas that
flow tested at a gross rate of 5.7 MMcfd (4.6 MMcfd net). TransTexas is drilling
a second well, and a pipeline connection is currently under construction. As of
January 31, 1997, TransTexas held a 100% working interest in approximately
30,200 gross (29,900 net) acres in the Austin Chalk in Walker, Angelina, Polk
and Tyler Counties, Texas and Point Coupee Parish, Louisiana.
Fandango South. TransTexas is developing an additional natural gas
discovery located in the Lower Wilcox sands in Jim Hogg County, Texas known as
the Fandango South area. As of January 31, 1997, TransTexas had drilled and
completed one well in Fandango South, which was producing at a gross rate of 32
MMcfd (24.6 MMcfd net), and was drilling an additional well in the area that it
intends to complete. As of January 31, 1997, TransTexas held a 100% working
interest in approximately 4,600 acres in Fandango South.
Wharton County. In 1995, TransTexas entered into an agreement with a
privately held concern to jointly develop the mineral interests in Frio and
Miocene sands in Wharton County, Texas. TransTexas is not the operator of this
interest but interprets data from a dedicated 3-D seismic program to select
drilling locations in which prior production has not depleted the shallow
reservoirs. As of January 31, 1997, 47 wells had been drilled in shallow
formations of the area, 22 of which had been completed and were producing at a
combined gross rate of 13.6 MMcfd (8.4 MMcfd net). TransTexas also acquired
lease acreage covering deep mineral rights of the Wilcox formation in Wharton
County. TransTexas is currently drilling a well to test the potential of deeper
formations. Preliminary electric log interpretation indicates 40 feet of
potential pay in the Middle Wilcox formation. As of January 31, 1997, TransTexas
held a 75% working interest in the shallow mineral rights in approximately
43,200 gross (34,300 net) acres in Wharton County and a 100% working interest in
the deep mineral rights in approximately 1,800 gross (1,700 net) acres.
La Grulla. TransTexas holds a working interest in excess of 80% in
approximately 105,000 gross (84,000 net) acres in the La Grulla area of Starr
County, Texas. As of January 31, 1997, TransTexas had combined
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daily gross natural gas production of 9.4 MMcfd (6.0 MMcfd net) from a total of
28 wells drilled in La Grulla of which 14 had been completed.
Other Areas. TransTexas has also made discoveries of natural gas and oil in
other prospects that, as of January 31, 1997, have undergone less development
drilling, but which management believes could add material reserves and
production.
TransTexas owns approximately 7,000 gross (2,900 net) acres in a
development area in Wayne County, Mississippi, in which it has drilled and
completed an initial well. As of January 31, 1997, TransTexas was completing a
second well and drilling a third well. The discovery well, The Foote Estate #1,
has flow tested at a daily gross production rate of 12.4 MMcfd (7.0 MMcfd net)
and 440 BPD (247 BPD net) of condensate and is being recompleted.
TransTexas holds an 89% working interest in approximately 38,600 gross
acres (35,600 net acres) in the Cuba Libre area of Webb County, Texas. As of
January 31, 1997, TransTexas had daily gross natural gas production of 5.9 MMcfd
(3.6 MMcfd net) from a total of 19 wells drilled in Cuba Libre, of which 9 had
been completed by TransTexas.
SECTION 29 TAX CREDIT
Significant federal tax incentives are available under Section 29 of the
Internal Revenue Code of 1986, as amended (the "Code"), for the production and
sale of certain qualified fuels from nonconventional sources, including natural
gas produced from tight sand formations. These federal tax incentives (the
"Section 29 Tax Credit") apply to tight sand gas produced and sold to an
unrelated party before January 1, 2003, from wells drilled after November 4,
1990, and before January 1, 1993. The Section 29 Tax Credit is approximately
$0.52 per MMBtu of natural gas produced from tight sand formations. The amount
of the Section 29 Tax Credit is not adjusted for inflation although it could be
reduced if the average reference price of domestic crude oil rises
substantially. As of February 1, 1997, TransTexas had remaining developed
reserves of approximately 27.6 Bcf that TransTexas believes qualify for the
Section 29 Tax Credit. TransTexas currently benefits on a separate taxpayer
basis from the Section 29 Tax Credits to the extent that it has taxable income.
The State of Texas exempts from severance taxes tight sand gas produced and
sold from September 1991 through August 2001, from wells drilled after May 24,
1989, and before September 1, 1996. The majority of TransTexas' reserves from
wells drilled in the Lobo Trend after May 24, 1989 qualify for this exemption.
In addition, the State of Texas recently adopted a bill extending this severance
tax exemption to tight sand gas produced from wells drilled after August 31,
1996 and before September 1, 2002. Tight sand gas produced from such wells is
entitled to a reduction in severance taxes for the first 120 months beginning on
the first day of production or until the cumulative value of the tax reduction
equals 50% of the drilling and completion costs incurred for the well.
PIPELINE AND TRANSMISSION OPERATIONS
TransTexas owns and operates approximately 1,100 miles of intrastate gas
gathering and mainline transmission pipeline systems (the "Pipeline System") in
South Texas. The Pipeline System provides direct access to several major
intrastate and interstate pipeline systems with major sales points at Laredo,
Thompsonville, Alice and Agua Dulce, Texas. All of the interstate pipelines to
which the Pipeline System is connected are "open access" systems of FERC's Order
636, requiring nondiscriminatory transportation of natural gas by third parties.
The Pipeline System includes gathering systems that connect TransTexas'
producing wells to its compression stations and transmission pipelines. The
Pipeline System includes eleven compression stations providing combined mainline
compression of approximately 78,100 horsepower and five dehydration plants with
daily aggregate capacities of 900 MMcfd.
TransTexas' high-Btu mainline system consists of a 27.5-mile, 30-inch line
(550 MMcfd capacity) from Vaquillas to Hebbronville; a 55-mile, 20-inch line
(320 MMcfd capacity) from TransTexas' Laredo dehydration station to
Hebbronville; and a 9-mile, 16-inch line from Mirando to Vaquillas. All the
high-Btu
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gas converges on a 40-mile, 30-inch line (630 MMcfd capacity) from Hebbronville
to the Exxon King Ranch gas processing plant. This system transports TransTexas'
production gathered from its northern properties in Webb and Zapata Counties.
TransTexas' low-Btu mainline system consists of a 25-mile, 20-inch line
(300 MMcfd capacity) from its Jennings compressor station to the Thompsonville
compressor station; a 21-mile, 30-inch pipeline from Thompsonville to
Hebbronville; and a 50-mile, 20-inch pipeline (320 MMcfd capacity) from
Hebbronville to Agua Dulce. This system transports TransTexas' production from
its southern properties in Zapata County to the sales points at Agua Dulce.
On March 27, 1996, TransTexas completed the sale of its 41.67% interest in
the 76-mile, 24-inch Midcon Texas pipeline that runs from TransTexas'
Thompsonville compressor station to Agua Dulce. This 41.67% interest represented
a capacity right to transport 125 MMcfd.
As part of the Lobo Sale, TransTexas would divest the majority of its
pipeline assets. However, TransTexas expects to enter into transportation
contracts with the buyer of TTC that will permit TransTexas to transport
substantially all of its natural gas production from South Texas during the
three years following the Lobo Sale. TransTexas will retain ownership of its
pipeline systems in the Bob West North and Fandango South fields. TransTexas
believes that there is currently adequate pipeline transportation capacity for
TransTexas' hydrocarbon production in all of its operating areas. TransTexas
intends to build additional pipeline capacity as future needs require. However,
there can be no assurance that TransTexas will have funds available to build
additional pipeline capacity.
Volume and Throughput
The delivery capacity of the Pipeline System is currently 900 MMcfd. For
the fiscal year ended January 31, 1997, 66% (389 MMcfd) of the natural gas
transported by the Pipeline System was from TransTexas' production; the
remaining 34% (196 MMcfd) was from third parties in the South Texas area.
Virtually all of TransTexas' significant third-party transportation arrangements
are on an interruptible basis with the exception of a transportation contract
with The Coastal Corporation (together with its subsidiaries, "Coastal"). The
agreement with Coastal provides for transportation rights of up to 38,700 MMBtu
per day and terminates on July 1, 1999. TransTexas charges Coastal a
transportation fee of $0.05 per MMBtu for deliveries in or near Agua Dulce. If
TransTexas arranges for deliveries in the vicinity of Houston the charge is
$0.13 per MMBtu.
During the last three fiscal years, transportation fees charged for natural
gas production of third parties have ranged from $0.05 to $0.17 per Mcf. For the
fiscal year ended January 31, 1997, the average fee charged by TTC for
transportation of natural gas production of third parties and TransAmerican was
$0.14 per Mcf, while natural gas transportation, gathering, dehydration and
compression charges with respect to TransTexas' production have been $0.17 per
Mcf.
TransTexas and MidCon Texas Pipeline Corp. ("MidCon") entered into a firm
transportation agreement on January 10, 1996, under which MidCon is required for
a period of five years to transport up to 150,000 MMBtu per day from four
specified receipt points to the proposed pipeline interconnection between
MidCon's pipeline and TransTexas' pipeline at Thompsonville. The minimum
transportation fee is equal to 50,000 MMBtu times $0.03 times the number of days
in the month, and TransTexas is required to pay the minimum fee for a total of
91.25 TBtu during the five-year period.
In connection with the conveyance by TransTexas of certain production
payment interests, TransTexas and an unaffiliated third party entered into a
transportation agreement in January and May 1996, under which TransTexas will
transport all gas produced under such production payment to TransTexas' Agua
Dulce hub for the term of the production payment at no more than $0.17 per Mcf.
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The table below reflects the amounts of TransTexas' natural gas production
and third parties' and TransAmerican's natural gas production transported by the
Pipeline System for the periods indicated:
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
------------------------- ------------------------- ---------------------------------------
1997 1996 1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(BCF) % (BCF) % (BCF) % (BCF) % (BCF) % (BCF) % (BCF) %
----- --- ----- --- ----- --- ----- --- ----- --- ----- --- ----- ---
TransTexas..................... 142.4 66 179.9 87 84.6 86 104.0 90 199.3 89 179.0 90 168.1 92
Third Parties and
TransAmerican................ 71.8 34 27.2 13 13.6 14 11.7 10 25.3 11 19.2 10 14.7 8
----- --- ----- --- ----- --- ----- --- ----- --- ----- --- ----- ---
Total volume............... 214.2 100 207.1 100 98.2 100 115.7 100 224.6 100 198.2 100 182.8 100
===== === ===== === ===== === ===== === ===== === ===== === ===== ===
Natural Gas Processing
TransTexas is currently processing natural gas at the Exxon King Ranch
plant located in Kleberg County, Texas, pursuant to a contract that terminates
in May 1997. TransTexas is currently negotiating a new contract with Exxon.
There is no assurance that this contract can be renewed on the same terms and
conditions.
TransTexas' average daily production of natural gas liquids and the average
price received by TransTexas from the sale of its NGLs was approximately 0.5
million gallons and $0.36 per gallon, respectively, for the fiscal year ended
January 31, 1997. TransTexas' NGLs are sold to Exxon pursuant to the processing
contract described above.
NATURAL GAS MARKETING
TransTexas sells its natural gas on the spot market on an interruptible
basis or pursuant to long-term contracts at market prices. TransTexas currently
delivers gas to between 25 and 30 customers each month.
TransTexas has two gas supply agreements with Coastal, both of which expire
on June 15, 1997. Under the first agreement, TransTexas is currently required to
make available for delivery and sale to Coastal 50 MMcf per day and Coastal is
obligated to purchase a minimum quantity of an average of 40 MMcf per day. Under
a second agreement with Coastal, Coastal has the right, but not the obligation,
to purchase up to an additional 40 MMcf per day from TransTexas. The purchase
price for the gas each month is determined by an averaging mechanism of two
indices. The purchase price under the second agreement is subject to a further
price adjustment of $0.12 per MMBtu.
TransTexas and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994, under which TransTexas
will deliver 100,000 MMBtu per day through August 1997. The selling price for
this gas is determined by certain industry averages as defined in the contract.
TransTexas and MidCon 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 on September 1, 1996. As part of this agreement,
TransTexas built a 24-inch pipeline for MidCon that spans approximately 68 miles
from the Bob West North field to MidCon's 30-inch pipeline in Webb County,
Texas. The agreement provides for TransTexas to earn a 50% interest in a 28-mile
segment of the new pipeline after 10 years.
Three purchasers accounted for a total of 44% of the consolidated net gas,
condensate, NGLs and transportation revenues of TransTexas for the year ended
January 31, 1997. TransTexas believes that the loss of any single purchaser
would not have a material adverse effect on TransTexas due to the availability
of other purchasers for TransTexas' production at comparable prices.
HEDGING
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
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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, up to a maximum ("Maximum Floating 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 year ended January 31, 1997,
TransTexas has made net settlement payments totaling approximately $37 million
to the counterparty pursuant to the Hedge Agreements. As of January 31, 1997,
TransTexas has Hedge Agreements with Settlement Dates ranging from February 1997
through April 1997 involving total Base Quantities for all monthly periods
aggregating approximately 20.4 TBtu of natural gas. Fixed Prices for these
agreements range from $1.70 to $1.78 per MMBtu ($1.76 to $1.84 per Mcf) up to
Maximum Floating Prices ranging from $2.00 to $2.20 per MMBtu ($2.07 to $2.28
per Mcf). In addition, one agreement has a Fixed Price of $2.48 per MMBtu ($2.57
per Mcf) with no Maximum Floating Price. Under the terms of this agreement, the
counterparty advanced $5 million to TransTexas. At January 31, 1997, the
estimated cost to settle all of the Hedge Agreements would have been
approximately $13 million. These agreements are accounted for as hedges and,
accordingly, any gains or losses are deferred and recognized in the respective
months as physical volumes are sold. At January 31, 1997, TransTexas maintained
$1.0 million in a margin account related to the Hedge Agreements.
COMPETITION
TransTexas encounters intense competition from major oil and gas companies
and independent operators in the acquisition of desirable undeveloped natural
gas leases and in the sale of natural gas. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than TransTexas' and which, in many instances, have
been engaged in the energy business for a much longer time than TransTexas.
The primary bases for competition in the natural gas and oil exploration
and production businesses are the costs involved in the finding and development
of such resources combined with commodity sales prices and market access.
TransTexas places considerable emphasis upon the expertise of its exploration
personnel and believes that its strategy of seeking undeveloped acreage with
exploration and production potential allows it to leverage this expertise into
low finding and development costs. TransTexas believes that its proven abilities
in finding and developing natural gas and oil reserves enable it to compete
effectively. TransTexas uses its expertise in South Texas, its financial
resources and its ability to quickly evaluate and execute acreage acquisition
transactions to compete with other oil and gas companies in the acquisition of
prospective acreage in its areas of operation.
GOVERNMENTAL REGULATION
TransTexas' gas exploration, production and related operations are subject
to extensive rules and regulations promulgated by federal and state agencies.
Failure to comply with such rules and regulations can result in substantial
penalties. The regulatory burden on the gas industry increases TransTexas' cost
of doing business and affects its profitability. Because such rules and
regulations are frequently amended or reinterpreted, TransTexas is unable to
predict the future cost or impact of complying with such laws.
The State of Texas (through the Texas Railroad Commission) and many other
states, including North Dakota, require permits for drilling operations,
drilling bonds and reports concerning operations, and impose other requirements
related to the exploration and production of gas. Such states also have statutes
or regulations addressing conservation matters, including provisions for the
unitization or pooling of gas properties, the establishment of maximum rates of
production from oil or gas wells and the regulation of spacing, plugging and
abandonment of such wells. The statutes and regulations of the State of Texas
limit the rate at which gas can be produced from TransTexas' properties.
However, these statutes and regulations have
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not materially impacted TransTexas' results of operations; however, there can be
no assurance that such statutes and regulations will not affect TransTexas'
operating results in the future.
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") since 1985 that affect the economics of
natural gas production, transportation and sales. In addition, the FERC
continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry, most notably
interstate natural gas transmission companies, that remain subject to the FERC's
jurisdiction. These initiatives may also affect the intrastate transportation of
gas under certain circumstances. The stated purpose of many of these regulatory
changes is to promote competition among the various sectors of the gas industry.
The ultimate impact on TransTexas of these complex and overlapping rules and
regulations, many of which are repeatedly subjected to judicial challenge and
interpretation, cannot be predicted.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters affecting TransTexas, see Note 15
of Notes to Consolidated Financial Statements included elsewhere herein.
EMPLOYEES
As of April 1, 1997, TransTexas had approximately 2,600 employees,
including approximately 2,100 field employees related to its natural gas
exploration, production, transmission and service businesses. TransTexas will
employ additional personnel as required by its operations and may engage the
services of independent geological, engineering, land and other consultants from
time to time. None of TransTexas' employees are parties to a collective
bargaining agreement.
BUSINESS OF TARC
TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
refining margins by converting low-cost, heavy, sour crude oils into high-value,
light petroleum products including primarily gasoline and heating oil.
In February 1995, TARC began a construction and expansion program designed
to reactivate the refinery and increase its complexity (the "Capital Improvement
Program"). From February 1995 through March 1997, TARC spent approximately $238
million on the Capital Improvement Program, procured a majority of the equipment
required and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary to complete this
project.
Primarily because additional financing was not available, TARC was unable
to meet the construction completion timetable for the Capital Improvement
Program as required under the TARC Notes Indenture. In February 1997, TARC
solicited and received from the holders of the TARC Notes consents to certain
waivers under and amendments to the TARC Notes Indenture. Pursuant to this
consent solicitation, the holders of the TARC Notes waived, until July 15, 1997,
the default under the TARC Notes Indenture which would have occurred on February
15, 1997 as a result of TARC's failure to meet the required completion
timetable. The waiver of this default will cease to be effective on July 15,
1997. Unless the default has been further waived, or the Company completes a
recapitalization that satisfies the holders of the TARC Notes, such holders
would then be entitled to pursue remedies available under the TARC Notes
Indenture, including acceleration of the maturity of the TARC Notes.
TARC must obtain substantial additional financing to fund any additional
expansion or modification of the refinery. It is likely that the scope,
completion schedule and other aspects of the Capital Improvement Program will be
modified in connection with obtaining additional financing. The scope,
completion schedule, amount of additional expenditure required and other aspects
of additional expansion and modification of the refinery will depend upon, among
other factors, the availability and timing of such financing. TEC and its
operating subsidiaries are considering various financing alternatives, including
a recapitalization of TEC,
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TARC and TransTexas. The Company expects that these recapitalizations can be
completed by July 15, 1997. However, there can be no assurance that TARC will
obtain the required additional financing.
CURRENT OPERATIONS
In March 1994, TARC commenced partial operations at the refinery with the
start up of the No. 2 Vacuum Unit and has operated this unit intermittently
since then based on operating margins. In addition, modifications and tie-ins to
the No. 2 Crude Unit have been completed. Although both units are operational,
TARC is not currently operating these units due to the low level of operating
margins obtainable for these units on a stand-alone basis.
TARC believes that the No. 2 Vacuum Unit has a capacity in excess of
200,000 BPD. TARC reactivated the No. 2 Vacuum Unit in March 1994. When the No.
2 Crude Unit is placed into operation, the No. 2 Vacuum Unit will process
bottoms from the No. 2 Crude Unit into vacuum gas oil ("VGO") and, with the
addition of cutterstocks, into No. 6 residual fuel oil. The No. 2 Crude Unit was
designed to process heavy, sour crude oil and, prior to the 1983 shutdown,
demonstrated a capacity of 175,000 BPD.
Subsequent to year end, TARC entered into a commitment to purchase 0.6
million barrels of feedstock at $24.68 per barrel plus interest at 8.25%,
demurrage, bank fees and other related costs. Based on a market value of
approximately $18.15 per barrel at April 29, 1997, the loss on the feedstock is
estimated to range between $4 and $5 million.
CAPITAL IMPROVEMENT PROGRAM
The Capital Improvement Program is designed to increase the capacity and
complexity of the refinery. From February 1995 through March 1997, TARC spent
approximately $238 million on the Capital Improvement Program, procured a
majority of the essential equipment required and completed substantially all of
the process design engineering and a substantial portion of the remaining
engineering necessary to complete the project. Substantial additional
expenditures are necessary to complete the Capital Improvement Program. TARC
must obtain additional financing to fund any additional expansion or
modification of the refinery. TEC and its operating subsidiaries are considering
various financing alternatives, including a recapitalization of TEC, TARC and
TransTexas. TARC expects that these financing alternatives will provide the
funds necessary to complete construction and expansion of the refinery. However,
there can be no assurance that TARC will obtain additional financing.
The expansion and modification of the refinery is expected to include the
following significant projects: (i) conversion of the visbreaker unit into a
delayed coking unit to process vacuum tower bottoms into lighter petroleum
products, (ii) modernization and upgrade of a fluid catalytic cracking unit to
increase gasoline production capacity and allow the direct processing of low
cost atmospheric residual feedstocks, and (iii) upgrading and expanding
hydrotreating, alkylation and sulfur recovery units to increase sour crude
processing capacity. The Capital Improvement Program includes expenditures which
TARC believes are necessary to ensure that the refinery is in compliance with
certain existing air and water discharge regulations and that gasoline produced
will comply with federal standards. It is likely that the scope, completion
schedule and other aspects of the Capital Improvement Program will be modified
in connection with obtaining additional financing for the refinery. The scope,
completion schedule, amount of additional expenditures required and other
aspects of additional expansion and modification of the refinery will depend
upon, among other factors, the availability and timing of such financing.
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
TARC historically has entered into financing arrangements in order to
maintain an available supply of feedstocks. Typically, TARC enters into an
agreement with a third party to acquire a cargo of feedstock which 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
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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 year ended January 31, 1997, 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. For the year ended January 31, 1997,
TARC processed approximately 1.1 million barrels of feedstock pursuant to this
agreement. 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 January 31, 1997, TARC had
completed processing approximately 6.4 million barrels of feedstocks and is
storing approximately 1.0 million barrels of intermediate and refined products
under this agreement. TARC also entered into a processing agreement with this
third party to process approximately 0.8 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. For the year ended January 31, 1997, TARC recorded a net loss of
approximately $4.5 million related to these processing arrangements primarily as
a result of low margins and price management activities.
PRICE MANAGEMENT ACTIVITIES
In order to mitigate the commodity price risks associated with the refining
business, TARC has previously entered, and may in the future enter, into futures
contracts, options on futures, swap agreements and forward sale agreements
commensurate with its inventory levels and feedstock requirements and as
permitted under the TARC Notes Indenture. If TARC believes it can capitalize on
favorable market conditions, it will attempt to utilize the futures market to
fix a portion of its crude oil costs and refined products values. This hedging
strategy is designed to retain the value of a portion of its work-in-process
inventory.
CRUDE OIL AND FEEDSTOCK SUPPLY
TARC purchases feedstocks on the spot market but has no long-term supply
contracts. TARC believes that it will have access to adequate supplies of the
crude oil it intends to process. Upon completion of the expansion and
modification program, TARC expects to purchase heavy, sour crude oils produced
in countries such as Venezuela and Mexico. TARC also expects to be able to take
advantage of anticipated increases in production of sour crude oil from the Gulf
of Mexico or the Persian Gulf.
The refinery has a variety of supply channels. The Mississippi River
permits delivery of feedstocks from both barge and ocean-going vessels. TARC has
its own ship dock and barge dock. The ship dock can accommodate 100,000
deadweight ton ("dwt") tankers that draw less than 45 feet of water, or larger
vessels that have been partially offloaded and draw less than 45 feet of water.
The barge dock provides access to smaller cargos of intermediate feedstocks such
as vacuum gas oils or atmospheric residuals. An adjacent storage terminal has
four ship docks to which TARC has access for loading or unloading of feedstocks.
TARC has executed a letter agreement for the exclusive use of one of these docks
on a long-term basis for shipping petroleum coke and other refinery products.
Additionally, TARC is connected to a Shell Oil Company crude pipeline that
provides access to Louisiana Offshore Oil Port's 24-inch pipeline network,
thereby permitting TARC to receive large quantities of foreign crude oil. This
pipeline also provides access to domestic crudes.
TARC has no crude oil reserves and is not engaged in the exploration for
crude oil and plans to obtain all its crude oil requirements from unaffiliated
sources. TARC believes that it will be able to obtain adequate supplies of crude
oil and feedstocks at generally competitive prices for the foreseeable future.
Crude oil prices are affected by a variety of factors beyond the control of
TARC. The principal factors currently influencing
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prices include the pricing and production policies of members of the
Organization of Petroleum Exporting Countries, the availability to world markets
of production from Kuwait, Iraq and Russia and the worldwide and domestic demand
for oil and refined products. Oil pricing will continue to be unpredictable and
greatly influenced by governmental and political forces.
PRODUCT DISTRIBUTION
TARC previously sold its refined products pursuant to a processing
agreement with a third party, but currently has no long-term sales contracts.
Major market areas for TARC's refined products will include the Gulf Coast
region, the Mississippi River Valley and the East Coast of the United States as
well as foreign markets. TARC's refined products will be transported by
pipeline, train, ocean-going vessel and truck. TARC's refinery is connected,
through third-party pipelines, to two major Gulf Coast common carrier pipelines,
the Colonial and the Plantation, which will permit transportation of the
refinery's products to East Coast markets. TARC is also connected to several
pipelines designed to transfer refined products to a nearby refinery operated by
Shell Oil Company. Railroad lines serve the refinery and adjacent industries.
TARC's barge and ship docks, together with an adjacent terminal facility,
provide access to the Mississippi River and the intracoastal waterway.
FOREIGN TRADE ZONE
The refinery is approved for purposes of processing foreign crude to
operate as a foreign trade zone. This allows the refinery to realize the
benefits of processing foreign crude and exporting the products duty free or
deferring the duty on products sold domestically.
INSURANCE
TARC maintains insurance in accordance with customary industry practices to
cover some, but not all risks. TARC currently maintains property insurance for
the refinery in an amount and with deductibles that management believes will
allow TARC to survive damage to the refinery. TARC plans to increase insurance
coverage amounts from time to time as it completes certain portions of the
expansion and modification program.
SEASONALITY
TARC anticipates that its operations will be subject to significant
fluctuations in seasonal demand. In TARC's markets, demand for gasoline is
typically higher during the first and second quarters of TARC's fiscal year.
During winter months, demand for heating oil increases. The refinery is
designed, upon completion of the expansion and modification program, to change
its product yields to take advantage of seasonal demands.
FLUCTUATION IN PRICES
Factors that are beyond the control of TARC may cause the cost of crude oil
purchased by TARC and the price of refined products sold by TARC to fluctuate
widely. Although prices of crude oil and refined petroleum products generally
move in the same direction, prices of refined products often do not respond
immediately to changes in crude oil costs. An increase in market prices for
crude oil or a decrease in market prices for refined products could have an
adverse impact on TARC's earnings and cash flow.
COMPETITION
The industry in which TARC operates is highly competitive. TARC primarily
competes with refiners in the Gulf Coast region, many of which are owned by
large, integrated oil companies which, because of their more diverse operations,
stronger capitalizations or crude oil supply arrangements are better able than
TARC to withstand volatile industry conditions, including shortages or excesses
of crude oil or refined products or intense price competition. The principal
competitive factors affecting TARC's refining operations are the quality,
quantity and delivered costs of crude oil and other refinery feedstocks,
refinery processing efficiency, mix of refined products, refined product prices
and the cost of delivering refined products to markets.
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Competition also exists between the petroleum refining industry and other
industries supplying energy and fuel to industrial, commercial and individual
consumers.
EMPLOYEES
As of April 1, 1997, TARC had approximately 150 employees and will employ
additional personnel as required by its operations and may engage the services
of engineering and other consultants from time to time. Currently, none of
TARC's employees is a party to a collective bargaining agreement. The Equal
Employment Opportunity Commission ("EEOC") has initiated an investigation into
the employment practices of TARC and Southeast Contractors (as defined),
alleging discriminatory hiring and promotion practices. See Note 15 to the Notes
to Financial Statements included elsewhere herein.
Since July 1994, Southeast Louisiana Contractors of Norco, Inc. ("Southeast
Contractors"), a subsidiary of TransAmerican, has provided construction
personnel to TARC in connection with TARC's expansion and modification program.
Southeast Contractors will provide construction personnel to TARC as required to
expand and modify the refinery. These construction workers are temporary
employees, and the number and composition of the workforce will vary throughout
the reactivation at the refinery during the expansion and modification program.
Southeast Contractors charges TARC for the direct costs it incurs, which consist
solely of employee payroll and benefits plus administrative costs and fees; such
administrative costs and fees charged to TARC are $1.2 million per year.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters affecting TARC, see Note 15 of
Notes to Financial Statements included elsewhere herein.
OTHER GOVERNMENTAL REGULATIONS
TARC must also comply with federal and state laws and regulations
promulgated by the Department of Transportation for the movement of volatile and
flammable materials, the U.S. Coast Guard for marine operations and oil spill
prevention and the Occupational Safety and Health Administration ("OSHA") for
worker and job site safety. To comply with OSHA regulations, TARC must conduct
extensive Process Safety Management and Hazardous Operations reviews prior to
placing units into service.
ITEM 2. PROPERTIES
ACREAGE
The following table sets forth TransTexas' total developed and undeveloped
acreage and productive wells at January 31, 1997:
DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)(2)
--------- ----------- -----------
Gross............................................ 82,228 687,366 855
Net.............................................. 74,907 528,155 840
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(1) Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connection. Wells that are completed
in more than one producing zone are counted as one well. As of January 31,
1997, TransTexas had interests in a total of 855 productive wells, 24 of
which had multiple completions.
(2) Two of the productive wells (gross and net) are oil wells.
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RESERVES
The following table sets forth certain information with respect to
TransTexas' proved reserves and the present value (discounted at 10%) of
estimated future net revenues before income taxes, as estimated by Netherland,
Sewell & Associates, Inc. ("Netherland, Sewell"), TransTexas' independent
petroleum engineers, as of the dates indicated. For additional information
regarding TransTexas' proved reserves at February 1, 1997, see Note 17 of Notes
to Consolidated Financial Statements included elsewhere herein.
FEBRUARY 1, AUGUST 1,
------------------------ ----------------------
1997 1996 1995 1994
---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Proved Developed Reserves:
Gas (MMcf)(1)............................ 381,527 425,317 476,582 442,157
Condensate and oil (MBbls)............... 2,388 880 1,073 1,109
Estimated future net revenues(2)......... $ 951,435 $ 572,882 $ 457,982 $514,567
Present value of estimated future net
revenues discounted at 10%(2)......... $ 683,282 $ 416,205 $ 351,428 $405,414
Proved Undeveloped Reserves:
Gas (MMcf)............................... 538,191 713,810 646,063 275,210
Condensate and oil (MBbls)............... 3,350 2,023 1,976 826
Estimated future net revenues(2)......... $1,133,754 $ 686,423 $ 355,502 $216,613
Present value of estimated future net
revenues discounted at 10%(2)......... $ 765,786 $ 391,857 $ 196,218 $138,973
Total Proved Reserves:
Gas (MMcf)(1)............................ 919,718 1,139,127 1,122,645 717,367
Condensate and oil (MBbls)............... 5,738 2,903 3,049 1,935
Estimated future net revenues(2)......... $2,085,189 $1,259,305 $ 813,484 $731,180
Present value of estimated future net
revenues discounted at 10%(2)......... $1,449,068 $ 808,062 $ 547,646 $544,387
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(1) Excludes approximately 47 Bcf and 43 Bcf as of February 1, 1997 and 1996,
respectively, attributable to volumetric production payments.
(2) Before income taxes.
In accordance with applicable guidelines of the Securities and Exchange
Commission, the estimates of TransTexas' proved reserves and future net revenues
therefrom set forth herein are made using gas, condensate and oil sales prices
in effect as of the date of such reserve estimates and are held constant
throughout the life of the properties (except for fixed and determinable price
escalations as provided by contract). Estimated quantities of proved reserves
and future net revenues therefrom are affected by changes in gas, condensate and
oil prices. Prices have fluctuated widely in recent years. TransTexas has
entered into hedging transactions to mitigate a portion of such natural gas
price volatility. As of February 1, 1997 and 1996 and August 1, 1995 and 1994,
the sales prices used for purposes of estimating TransTexas' proved reserves and
the future net revenues from those reserves were $3.17, $1.95, $1.37, and $1.62
per Mcf of gas, respectively, and $23.99, $18.34, $16.27 and $17.62 per Bbl of
condensate and crude oil, respectively.
Proved reserves are the estimated quantities of natural gas, condensate and
oil that geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that can
be expected to be recovered through existing wells with existing equipment and
operating methods. The estimation of reserves requires substantial judgment on
the part of petroleum engineers, resulting in imprecise determinations,
particularly with respect to recent discoveries. The accuracy of any reserve
estimate depends on the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing, and production after
the date of the estimate may result in revisions of the estimate. Accordingly,
estimates of reserves are often materially different from the quantities of
natural gas and
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condensate that are ultimately recovered, and these estimates will change as
future production and development information becomes available. The reserve
data represent estimates only and should not be construed as being exact.
The present value of estimated future net revenues relating to proved
reserves are presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." In computing these data, assumptions and estimates have been used,
and TransTexas cautions against viewing this information as a forecast of future
economic conditions. The future net revenues are determined by using estimated
quantities of proved reserves and the periods in which they are expected to be
developed and produced based on economic conditions at the date of the
estimates. The estimated future production is based on prices in effect at the
date of the estimates, except where fixed and determinable price escalations are
provided by contract. The resulting estimated future gross revenues are reduced
by estimated future costs to develop and produce the proved reserves based on
cost levels in effect at the date of the estimates, but not for debt service,
income taxes and general and administrative expenses (except to the extent such
general and administrative expenses constitute overhead costs incurred at the
district or field level that are allowed under joint operating agreements). The
present value of proved reserves set forth herein should not be construed as the
current market value of the estimated proved reserves attributable to
TransTexas' properties.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, TransTexas performs only a
preliminary title investigation before leasing undeveloped properties.
Accordingly, working interest percentages set forth above for undeveloped
properties are preliminary. However, a title opinion is obtained before the
commencement of drilling operations and any material defects in title are
remedied prior to the time actual drilling of a well on the lease is commenced.
TransTexas believes that it has satisfactory title to developed properties in
accordance with standards generally accepted in the oil and gas industry.
TransTexas' properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens
which TransTexas believes do not materially interfere with the use of or affect
the value of such properties. In addition, several litigants against TransTexas
have filed claims that affect certain of TransTexas' properties. TransTexas does
not expect these claims to interfere with the use of, or affect the value of,
its properties in any material way.
REFINERY
TARC owns the approximately 215-acre site on which the refinery is located.
TARC also has available, through ownership, lease agreement or other appropriate
arrangements, the use of storage tanks, loading racks and other related
facilities at the refinery site. TARC leases office space in Houston, Texas from
TransTexas.
TITLE INSURANCE
TARC's title insurance policy to insure against certain claims made against
title to the refinery parcel site currently consists of a $440 million lender's
title insurance policy for the benefit of the trustee under the TARC Notes
Indenture. The title insurance policy has been reinsured through various title
insurance companies in the United States. The ability to successfully recover
under the policies is dependent on the creditworthiness of the title company and
its reinsurers at the time of the claim and any defenses that the title insurers
and its reinsurers may have. There can be no assurance that the amount of title
insurance will be sufficient to cover any losses incurred by TARC or the trustee
under the TARC Notes Indenture as a result of a title defect impairing the
ability to use the refinery site or that the title insurers will be able to
fulfill their financial obligations under the title insurance policy. The title
policy contains customary exceptions to coverage, including taxes not yet due
and payable, riparian rights and numerous servitudes, rights of way, rights of
access and other encroachments in favor of utilities, railroads, pipelines and
adjacent refineries and tank farms, as well as exceptions for (i) government
claims with respect to, and public rights to use, TARC's property located
between the Mississippi River and the road upon which pipe racks and TARC's
docking facilities are located, (ii) a right of first refusal in favor of an
adjacent landowner with respect to a certain
16
19
portion of property which, in the event exercised, may require TARC to relocate
at its expense certain pipelines that connect various refinery parcels, (iii)
tax benefits that have been conveyed to certain tax lessors, (iv) the priority
of liens that may be filed by materialmen and mechanics in connection with the
expansion and modification program, and (v) certain rights of creditors pursuant
to Federal or state bankruptcy and insolvency laws, which rights may affect the
enforceability of the mortgage securing the TARC Notes.
ITEM 3. LEGAL PROCEEDINGS
See Notes 15 and 16 of Notes to Consolidated Financial Statements included
elsewhere herein for information concerning legal proceedings. The liability for
lawsuits, which includes liabilities TransTexas assumed from TransAmerican,
could individually and in the aggregate amount to significant potential
liability, if adjudicated in a manner adverse to TransTexas in one reporting
period, and could have a material adverse effect on the Company's results of
operations and cash flows for that period. Although the outcome of the matters
described cannot be predicted with certainty, the Company believes that the
matters will not have a material adverse effect on its financial position.
TransTexas also assumed liability for other ordinary course, routine litigation
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1996 and January 1997, the Company's common and preferred
stockholders reelected John R. Blinn, Donald B. Henderson, James V. Langston,
Thomas B. McDade, John R. Stanley and Kim Emerson Morris to serve as directors
of the Company for an additional year. All 9,000 shares of common stock and 850
shares of preferred stock were voted for the reelection of Messrs. Blinn,
Henderson, Langston, McDade and Stanley, and 850 shares of preferred stock were
voted for the reelection of Ms. Morris. This election of directors was conducted
by written consent in lieu of a meeting.
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20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
On January 30, 1996, the Company changed its fiscal year end for financial
reporting purposes to January 31, from July 31. The following table sets forth
selected financial data of the Company and its predecessor as of and for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
1995 and each of the four years ended January 31, 1995. This data has been
derived from the financial statements of TEC and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto. The financial data
for fiscal years ended July 31, 1992 and 1993 represent the results of
operations and financial position of the Company prior to the reactivation of
the refinery. During these periods, TARC had only maintenance expenses and lease
income for storage facilities. The data for the year ended July 31, 1994
reflects the limited operations of the refinery since March 1994 and expenses
related to reactivation of portions of the refinery. Subsequent to March 1994,
TARC has operated the No. 2 Vacuum Unit intermittently.
The indentures 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 consolidated financial statements should be
read in conjunction with the separate financial statements of TransTexas and
TARC filed in their respective Annual Reports on Form 10-K for the fiscal year
ended January 31, 1997.
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21
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
-------------------- ------------------- ------------------------------------------
1997 1996 1996 1995 1995 1994 1993 1992
-------- --------- -------- -------- --------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Gas, condensate and NGL
revenues........................ $360,740 $ 254,275 $123,253 $142,070 $ 273,092 $300,210 $294,753 $227,208
Refining revenues................. 10,857 176,229 107,237 71,035 140,027 174,143 -- --
Transportation revenues........... 34,423 33,518 15,892 19,161 36,787 33,240 30,816 30,749
Other revenues.................... 8,153 835 601 603 837 3,192 5,425 3,402
-------- --------- -------- -------- --------- -------- -------- --------
414,173 464,857 246,983 232,869 450,743 510,785 330,994 261,359
Operating costs and expenses...... 154,313 291,825 162,830 133,336 262,331 285,766 113,220 87,109
Depreciation, depletion, &
amortization.................... 139,678 126,821 64,053 73,051 135,819 116,447 95,016 96,523
General and administrative
expenses........................ 57,500 45,768 21,213 21,037 45,592 44,807 34,954 34,912
Net interest expense.............. 95,922 89,615 44,151 29,086 74,214 50,131 2,457 1,724
Income taxes and other............ (99,717) (23,106) (18,487) (247) (4,866) 7,231 11,103 3,587
Extraordinary loss, net of
taxes........................... -- 56,637 -- -- 56,637 -- --
-------- --------- -------- -------- --------- -------- -------- --------
Net income (loss)(1).............. $ 66,477 $(122,703) $(26,777) $(23,394) $(118,984) $ 6,403 $ 74,244 $ 37,504
======== ========= ======== ======== ========= ======== ======== ========
Net income (loss) per share:(2)
Income (loss) before
extraordinary item............ $ 7,384 $ (7,341) $ (2,975) $ (13,901)
Extraordinary item.............. -- (6,293) -- (12,628)
-------- --------- -------- ---------
Net income (loss)............... $ 7,384 $ (13,634) $ (2,975) $ (26,529)
======== ========= ======== =========
OPERATING DATA OF TRANSTEXAS:
Sales volumes:
Gas (average daily) (Mmcfd)..... 419.6 376.8 363.4 417.7 405.2 358.8 326.8 350.8
Gas (Bcf)....................... 153.6 137.9 66.9 76.9 147.9 130.9 119.3 128.4
NGLs (Mmgal).................... 174.2 169.2 65.3 121.3 225.3 164.0 183.8 165.9
Condensate and oil (Mbbls)...... 604.0 543.0 259.0 354.0 638.0 650.0 617.0 498.0
Total production (Bcfe)........... 157.2 141.1 68.4 79.0 151.7 134.8 123.0 131.4
Average prices:
Gas (dry) (per Mcf)............. $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96 $ 1.98 $ 1.36
NGLs (per gallon)............... 0.36 0.27 0.30 0.27 0.26 0.27 0.30 0.29
Condensate and oil (per Bbl).... 21.54 17.76 17.39 16.50 17.22 15.13 18.65 19.52
Average lifting costs (per
Mcfe)......................... 0.29 0.23 0.23 0.21 0.21 0.24 0.22 0.19
Proved reserves (net) (end of
period):
Gas (Bcf)....................... 919.7 1,139.1 1,139.1 943.4 1,122.6 717.4 695.0 686.2
Condensate and oil (Mbbls)........ 5,738 2,903 2,903 2,637 3,049 1,935 1,968 2,171
Number of gross wells drilled..... 151 102 65 60 97 140 103 71
Percentage of wells drilled
completed....................... 68% 75% 74% 78% 77% 83% 85% 82%
JANUARY 31, JULY 31,
---------------------------------- -------------------------------------------
1997 1996 1995 1995 1994 1993 1992
---------- ---------- -------- ---------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficit)(3)............. $ (333,226) $ 25,859 $(92,258) $ 112,998 $(25,702) $(58,443) $(36,244)
Total assets............................. 1,613,735 1,456,422 823,726 1,325,656 758,664 431,141 377,421
Total long-term debt..................... 1,308,254 1,140,779 510,000 1,094,963 500,000 8,270 3,246
Stockholder's equity (deficit)........... (47,009) (35,933) (8,133) (9,156) 15,262 230,418 198,957
- ---------------
(1) Income (loss) is prior to preferred stock dividends of $19,000 for the year
ended January 31, 1997.
(2) Per share data for years prior to July 31, 1995 is omitted because the
Company's predecessor was not a separate entity with its own capital
structure.
(3) For all periods prior to the Transfer, working capital excludes all cash and
accounts receivable because those assets were not transferred to TransTexas
in the Transfer. Working capital at January 31, 1997, January 31, 1996 and
July 31, 1995 includes $46.0 million, $46.0 million and $44.7 million,
respectively, in a restricted interest reserve account pursuant to the
indenture governing the TransTexas Notes.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TEC conducts its operations through its operating subsidiaries in two
segments of the energy industry: exploration and production of natural gas and
transportation, and petroleum refining. Until March 1994, the exploration,
production and transportation operations of TransTexas constituted substantially
all of the operations of the Company.
Financial Data by Entity
The indentures 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 consolidated financial statements should be
read in conjunction with the separate financial statements of TransTexas and
TARC filed on their respective Forms 10-K for the fiscal year ended January 31,
1997.
JANUARY 31, 1997 JANUARY 31, 1996
--------------------- --------------------
TARC TRANSTEXAS TARC TRANSTEXAS
------- ---------- ------ ----------
Balance Sheet Data
Working capital (deficit)................................. $(407.0) $ 71.6 $(17.7) $ 43.6
Total assets.............................................. 564.2 1,053.2 518.3 938.8
Total long-term debt...................................... 412.3 941.9 368.1 824.2
Stockholders' equity (deficit)............................ 81.4 (150.8) 72.0 (154.4)
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------------------ ------------------------------------------
1997 1996 1996 1995
------------------- -------------------- -------------------- -------------------
TARC TRANSTEXAS TARC TRANSTEXAS TARC TRANSTEXAS TARC TRANSTEXAS
------ ---------- ------- ---------- ------- ---------- ------ ----------
Operations Data
Revenues........................ $10.9 $ 406.3 $ 176.2 $ 290.9 $ 107.2 $ 140.7 $71.6 $ 162.5
Operating costs and expenses.... 46.8 137.0 200.5 94.0 118.6 45.6 83.7 50.9
Depreciation, depletion and
amortization.................. 7.2 132.4 6.3 120.6 3.2 60.9 2.7 70.3
General and administrative...... 11.9 45.6 12.6 33.0 7.4 13.7 8.4 12.6
Litigation settlement........... -- 96.0 -- 18.3 -- 18.3 -- --
------ ------- ------- ------- ------- ------- ------ -------
Operating income (loss)......... (55.0) 187.3 (43.2) 61.6 (22.0) 38.8 (23.2) 28.7
Net interest expense............ 4.7 91.5 18.5 77.1 3.7 40.4 -- 29.1
------ ------- ------- ------- ------- ------- ------ -------
Net income (loss)............... 9.4 95.8 (55.8) (69.1) (26.1) (0.8) (23.2) (0.2)
Cash Flow Data
Operating....................... (28.7) 221.1 (42.0) 72.2 (3.0) 52.2 (11.5) 74.3
Investing....................... (44.0) (272.9) (174.6) (340.8) (119.6) (136.7) (52.3) (105.3)
Financing....................... 70.5 64.1 219.3 279.0 119.2 13.1 63.8 18.2
YEAR ENDED JULY 31,
---------------------------------------------
1995 1994
--------------------- --------------------
TARC TRANSTEXAS TARC TRANSTEXAS
------- ---------- ------ ----------
Operations Data
Revenues.................................................. $ 140.6 $ 312.7 $177.2 $ 335.9
Operating costs and expenses.............................. 165.6 99.3 184.6 103.5
Depreciation, depletion and amortization.................. 5.9 130.0 2.6 113.9
General and administrative................................ 13.6 31.9 4.5 40.3
Operating income (loss)................................... (44.4) 51.5 (14.5) 79.3
Net interest expense...................................... 8.4 65.8 -- 50.2
Net income (loss)......................................... (64.3) (68.5) (17.4) 23.8
Cash Flow Data
Operating................................................. (50.4) 94.3 (11.1) 136.2
Investing................................................. (107.4) (309.4) (57.2) (237.8)
Financing................................................. 163.8 284.2 68.3 484.6
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E & P AND TRANSPORTATION
TransTexas has historically conducted 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.
TransTexas' results of operations are dependent upon natural gas production
volumes and unit prices from sales of natural gas, condensate, crude oil and
natural gas liquids ("NGLs"). The profitability of TransTexas also depends on
the volume of natural gas it gathers and transports and its ability to minimize
finding and lifting costs and maintain its reserve base while maximizing
production.
TransTexas' operating data for the years ended January 31, 1997 and 1996,
the six months ended January 31, 1996 and 1995 and the years ended July 31, 1995
and 1994 are as follows:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
--------------- ----------------- ---------------
1997 1996 1996 1995 1995 1994
------ ------ ------- ------- ------ ------
Sales volumes:
Gas (Bcf)....................... 153.6 137.9 66.9 76.9 147.9 130.9
NGLs (MMgals)................... 174.2 169.2 65.3 121.3 225.3 164.0
Condensate and oil (MBbls)...... 604 543 259 354 638 650
Average prices:
Gas (dry) (per Mcf)............. $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96
NGLs (per gallon)............... .36 .27 .30 .27 .26 .27
Condensate and oil (per Bbl).... 21.54 17.76 17.39 16.50 17.22 15.13
Number of gross wells drilled..... 151 102 65 60 97 140
Percentage of wells completed..... 68% 75% 75% 78% 77% 83%
TransTexas uses the full-cost method of accounting for exploration and
development costs. Under the full-cost method, the cost for successful, as well
as unsuccessful, exploration and development activities is capitalized and
amortized on a unit-of-production basis over the life of the remaining proved
reserves. A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
-------------- ------------- --------------
1997 1996 1996 1995 1995 1994
------ ----- ----- ----- ----- ------
Operating costs and expenses:
Lease.................................... $ 27.5 $18.7 $ 9.4 $10.3 $19.6 $ 19.8
Pipeline................................. 37.2 24.4 13.0 9.8 21.2 25.5
Natural gas liquids...................... 49.3 35.5 15.6 24.5 44.4 44.8
Well service............................. .4 .2 .1 -- .1 .1
------ ----- ----- ----- ----- ------
114.4 78.8 38.1 44.6 85.3 90.2
Taxes other than income taxes(1)........... 22.6 15.2 7.5 6.3 14.0 13.2
------ ----- ----- ----- ----- ------
Total............................ $137.0 $94.0 $45.6 $50.9 $99.3 $103.4
====== ===== ===== ===== ===== ======
- ---------------
(1) Taxes other than income taxes include severance, property, and other taxes.
TransTexas' average depletion rates have been as follows:
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
----------- ----------- -----------
1997 1996 1996 1995 1995 1994
---- ---- ---- ---- ---- ----
Depletion rates (per Mcfe)......................... $.96 $.79 $.82 $.84 $.81 $.80
==== ==== ==== ==== ==== ====
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Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996
Gas, condensate and NGL revenues for the year ended January 31, 1997,
increased by $106.5 million from the year ended January 31, 1996, primarily due
to higher prices for, and increased volumes of, natural gas, condensate, oil and
NGLs, primarily in the fourth quarter. The average monthly prices received for
natural gas, excluding amounts delivered to third parties under volumetric
production payments, ranged from $1.71 to $3.74 per Mcf during the year ended
January 31, 1997, compared to prices ranging from $1.29 to $1.95 per Mcf in the
year ended January 31, 1996. The increase in natural gas sales volumes resulted
primarily from 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 approximately 207 Bcfe of
TransTexas' reserves in the Lobo Trend. NGLs sales volumes increased as a result
of increases in the volumes of natural gas processed. Transportation revenues
increased by $0.9 million for the year ended January 31, 1997, primarily due to
increased volumes of natural gas transported.
Lease operating expenses for the year ended January 31, 1997 increased by
$8.8 million from the prior year primarily due to increases in repairs and
maintenance and workover expenses attributable to an 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 fiscal 1997 of a program
to increase flow rates on certain wells. This program included the installation
of leased wellhead compressors and additional workover projects. Pipeline
operating expenses increased by $12.8 million primarily due to increases in
compressor fuel costs, compressor rentals, chemicals used in the operation of
TransTexas' amine plants and volumetric losses. NGLs cost increased by $13.8
million from the year ended January 31, 1996 due to increases in the cost of
natural gas used in NGL processing. Depreciation, depletion and amortization
expense for the year ended January 31, 1997 increased by $11.9 million due to a
$0.17 increase in the depletion rate, offset in part by a decrease in
TransTexas' undedicated natural gas production. The depletion rate increased for
the year ended January 31, 1997 primarily due to higher costs associated with
TransTexas' expanded exploration activities. General and administrative expenses
increased by $12.6 million in the year ended January 31, 1997, primarily due to
increases in litigation accruals and wages and benefits. Taxes other than income
taxes increased by $7.3 million over the prior year due primarily to an increase
in severance taxes, including an accrual of $2.7 million as a result of a
severance tax audit adjustment, offset in part by a reduction in ad valorem
taxes.
Interest income for the year ended January 31, 1997 increased by
approximately $0.8 million from the prior year due to higher average cash
balances in fiscal 1997. Interest expense increased by $15.1 million primarily
as a result of interest incurred on the Trans Texas Notes and the amortization
of related debt issue costs, offset in part by an increase of $7.6 million of
interest capitalized in connection with the acquisition of Trans Texas'
unevaluated gas and oil properties.
Litigation settlements for the year ended January 31, 1997 increased by
$77.7 million as a result of the settlement with Tennessee Gas Pipeline Company
of which TransTexas' share of the proceeds was $96 million.
Income tax expense for the year ended January 31, 1997 was $12.5 million
compared to income tax benefit of $4.2 million for the year ended January 31,
1996. Income tax expense for the year ended January 31, 1997 is net of a
decrease in a valuation allowance of $13.6 million relating to the utilization
of net operating loss carryforwards and tight sands credits of $7.4 million.
Income tax benefit for the year ended January 31, 1996 is net of a valuation
allowance of $13.6 million relating to net operating loss carryforwards and an
adjustment relating to tight sands credits of $7.8 million.
Cash flow from operating activities for the year ended January 31, 1997
increased by approximately $148.9 million from the prior year primarily due to
increased net income, the settlement of take-or-pay litigation in the second
quarter of fiscal 1997 and proceeds from the sale of volumetric production
payments.
Cash used in investing activities decreased by $67.9 million due to the
sale of approximately 207 Bcfe of TransTexas's reserves, offset in part by
advances to an affiliate and increased capital spending. Capital expenditures
for fiscal 1997 included $47.7 million for purchases of oil and gas properties
from TransAmerican.
22
25
Cash flow from financing activities decreased by approximately $214.9
million from the prior year due primarily to the issuance of the TransTexas
Notes in June 1995, offset in part by the issuance of Subordinated Notes in
fiscal 1997.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Gas, condensate and NGL revenues for the six months ended January 31, 1996
decreased by $18.6 million from the comparable period of the prior year, due
primarily to decreases in gas, condensate and NGL sales volumes, partly offset
by increases in gas, condensate and NGL prices. The decrease in gas sales
volumes reflects the normal decline in natural gas production from TransTexas'
Lobo Trend wells, offset in part by production from TransTexas' new development
areas. The average monthly prices received per Mcf of gas ranged from $1.33 to
$1.95 in the six months ended January 31, 1996, compared to a range of $1.32 to
$1.52 in the same period in the prior year. NGL sales volumes decreased
primarily due to the decrease in the volumes of natural gas processed.
Transportation revenues decreased by $3.3 million for the six months ended
January 31, 1996, due primarily to decreases in volumes transported.
Lease operating expenses in the six months ended January 31, 1996 decreased
by $0.9 million from the prior year period as increases in repairs and
maintenance expense attributable to the increase in the number of producing
wells were offset by a decrease in workover expense due to fewer workovers
performed. Pipeline operating expenses increased by $3.2 million, primarily due
to increases in repairs and maintenance expenses, compressor fuel costs, and
pipeline loss. Also contributing to the increase in pipeline operating expenses
were costs incurred by TransTexas to remove carbon dioxide from natural gas
produced from certain of TransTexas' new development areas. NGL cost decreased
by $8.9 million from the comparable period in the prior year due to the decrease
in volumes of natural gas processed. Depreciation, depletion and amortization
expense for the six months ended January 31, 1996 decreased by $9.4 million, due
to the decrease in natural gas production and a $0.02 decrease in the depletion
rate. General and administrative expenses increased by $1.1 million in the six
months ended January 31, 1996, due primarily to costs associated with the
relocation of TransTexas' corporate offices, offset in part by decreases in
consulting and professional fees. The gain on litigation settlement of $18.3
million represents the value of properties received in a litigation settlement.
Interest income for the six months ended January 31, 1996 increased by
approximately $2 million over the comparable period of the prior year due to
increased cash balances resulting from the issuance of the TransTexas Notes.
Interest expense increased by $13.4 million, primarily as a result of interest
accrued on the TransTexas Notes and a dollar-denominated production payment,
offset in part by the capitalization of approximately $7.4 million of interest
in connection with the acquisition of TransTexas' unevaluated gas and oil
properties.
Cash flow from operating activities for the six months ended January 31,
1996 decreased by approximately $21.2 million from the prior-year period due
primarily to decreased production, offset in part by net proceeds of $32.9
million from the sale of a volumetric production payment.
Cash used in investing activities increased by $31.4 million due to
increases in lease acquisitions and drilling activity, and the purchase and
installation of three amine plants to treat gas produced from certain of
TransTexas' new discovery areas. These increases were offset by cash proceeds
from the sale of a portion of TransTexas' Lodgepole properties and a
sale-leaseback of drilling equipment.
Cash flow from financing activities decreased by approximately $5.2 million
due primarily to repayments of TransTexas' dollar-denominated production
payment, offset in part by increases in long-term borrowings.
Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994
Gas, condensate and NGL revenues decreased by $26.9 million, due primarily
to the decline in prices for natural gas, offset in part by increases in NGL and
natural gas production. The average monthly prices received per Mcf of gas
ranged from a low of $1.29 to a high of $1.52 in the year ended July 31, 1995,
compared to a low of $1.71 to a high of $2.21 in fiscal 1994. The increase in
gas sales volumes was due to a net increase in producing wells to 947 at July
31, 1995 from 865 at July 31, 1994. NGL production increased due
23
26
to increased volumes of TransTexas' natural gas processed at the Exxon King
Ranch Plant. Transportation revenues for the year ended July 31, 1995 increased
by $3.5 million compared to 1994 due primarily to increases in volumes
transported.
Lease operating expenses decreased by $0.2 million, primarily as a result
of a decrease in operating materials and supplies expense. The decrease in NGL
cost of $0.4 million reflects the decrease in the cost of natural gas used in
NGL processing, offset in part by increased NGL production. Pipeline operating
expenses decreased by $4.3 million as increases in repair and maintenance
expenses associated with higher volumes transported were offset by a decrease in
compressor fuel costs. Depreciation, depletion and amortization expenses
increased by $16.1 million in the year ended July 31, 1995 over the prior year
due to the increase in natural gas production and a $.01 increase in the
depletion rate. General and administrative expenses decreased by $8.4 million
compared to the prior year due primarily to a $6.0 million decrease in
litigation accruals and a corresponding reduction in legal fees. Litigation
accruals totaled $7.0 million in the year ended July 31, 1995 compared to $13.0
million in 1994.
Interest expense for the year ended July 31, 1995 increased by $16.8
million over the prior year as a result of the increase in principal amount and
interest rate on the TransTexas Notes as compared to the Prior Notes, along with
interest accrued on TransTexas' production payment, short-term borrowings and
certain litigation settlements.
Income tax benefit for the year ended July 31, 1995 is net of a valuation
allowance of $13.6 million relating to net operating loss carryforwards and an
adjustment relating to tight sands credits of $7.8 million. Income tax expense
for the year ended July 31, 1994 includes $5.8 million of tax benefits that
became available as a result of a change in tax status of TransAmerican's
consolidated group to an integrated oil company.
TransTexas recorded an extraordinary loss of approximately $56.6 million,
net of taxes, on the retirement of the Prior Notes. This loss consists of $40.0
million in premium and consent fees paid to the holders of the Prior Notes, $2.5
million in underwriting fees and expenses and the recognition of approximately
$15.6 million of unamortized deferred financing costs, less a related income tax
benefit of approximately $1.5 million.
Capital expenditures for the year ended July 31, 1995 increased by $37.2
million to $278.5 million from $241.3 million for the prior year, due primarily
to an increase in lease acquisitions, offset in part by the completion of a
major pipeline expansion project in July 1994.
Liquidity and Capital Resources
TransTexas historically has financed its capital expenditures, debt service
and working capital requirements with cash from operations, public and private
offerings of debt and equity securities, the sale of production payments, asset
sales, its accounts receivable revolving credit facilities and other financings.
Cash flow from operations is sensitive to the prices TransTexas receives for its
natural gas. TransTexas from time to time enters into commodity price swap
agreements to reduce its exposure to price risk in the spot market for natural
gas. See Note 15 of Notes to Consolidated Financial Statements included
elsewhere in this report. A substantial portion of its production, however, will
remain subject to price risk. Proceeds from natural gas sales are received at
approximately the same time that production related burdens, such as royalties,
production taxes and drilling program obligations are payable.
TransTexas is engaged in exclusive negotiations to sell all of the stock of
TTC, its subsidiary that owns substantially all of TransTexas' Lobo Trend
producing properties and related pipeline transmission system, for an estimated
sales price of approximately $1.1 billion. In addition, TransTexas has engaged
an investment banking firm to assist in the sale of its interest in the
Lodgepole prospect in North Dakota. TransTexas intends to use the proceeds from
these transactions for general corporate purposes, which may include a
recapitalization of TransTexas. There can be no assurance that the Lobo Sale
will be consummated or, if consummated, will be upon the terms described herein.
TransTexas makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. For the fiscal year
ended January 31, 1997, TransTexas' total capital expenditures were
24
27
$359 million, including $74 million for lease acquisitions, $228 million for
drilling and development and $57 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. TransTexas
anticipates that cash on hand and cash flow from operations will fund
approximately $160 million of capital expenditures during fiscal 1998.
TransTexas may supplement these capital resources with proceeds from asset sales
and other financings in order to fund additional capital expenditures. There is
no assurance that additional funds can be obtained from these sources. Subject
to availability of cash, however, TransTexas plans total capital expenditures of
approximately $220 million in fiscal 1998, of which approximately $180 million
would be used for drilling and development, $20 million for TransTexas's gas
gathering and pipeline systems and other equipment and seismic acquisitions, and
$20 million for lease acquisitions. If the Lobo Sale or a recapitalization is
consummated, the capital expenditure budget will change. If capital expenditures
are higher than anticipated, cash flow from operations is lower than
anticipated, additional asset sales or financings are not completed or certain
contingent obligations of TransTexas become fixed, TransTexas may not have
sufficient funds for capital expenditures necessary to replace its reserves or
to maintain production at current levels and, as a result, production may
decrease over time. Although cash from operating activities for the fiscal year
ended January 31, 1997 has increased, primarily due to sales of volumetric
production payments and a litigation settlement, net cash provided by operating
activities declined over the three years ended January 31, 1996.
In December 1996, TransTexas issued $189 million in face amount of its
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 for a period of five
years. Thereafter, the Subordinated Notes will pay cash interest at the same
rate. The holders of the Subordinated Notes have the right to exchange their
notes for notes to be registered under the Securities Act of 1933, as amended
("Securities Act"). Proceeds from the issuance of the Subordinated Notes were
used for working capital and general corporate purposes.
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 January 31, 1997, the outstanding
balance under the BNY Facility was $26.3 million. Based on anticipated accounts
receivable levels, TransTexas estimates average amounts available under the
facility will not exceed $26 million. Amounts available under and other terms of
the facility may change if the Lobo Sale is consummated.
TransTexas finances a portion of its working capital requirements and
capital expenditures by entering into installment notes collateralized by
certain equipment. These notes bear interest at rates ranging from 9.43% to 13%
per annum and mature at various dates through 2001.
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. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days.
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 January 31, 1997, approximately 23 Bcf of natural gas
remained subject to this production payment.
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
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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. At January 31, 1997, approximately 24 Bcf of natural
gas remained subject to the May 1996 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%
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 primary sum of such reimbursed
costs, plus an amount equivalent to a 17.5% annual interest rate on the unpaid
portion of such primary sum. In April 1997, all amounts due were paid in full.
In April 1997, TransTexas sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of
TransTexas's properties for proceeds of approximately $20 million. The
production payment calls for the repayment of the primary sum plus an amount
equivalent to a 16% annual interest rate on the unpaid portion of such primary
sum.
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.
Contingent Liabilities
TransTexas has significant contingent liabilities, including liabilities
with respect to litigation matters 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 million, to be applied to
certain potential litigation claims.
Pursuant to the proposed terms of the Lobo Sale, TransTexas would be
required to indemnify the buyer for certain liabilities related to the assets
owned by TTC. Although TransTexas does not anticipate that it will incur any
material indemnity liability, no assurance can be given that TransTexas will
have sufficient funds to satisfy any such indemnity obligation or that any
payment thereof will not have a material adverse effect on its ability to fund
its debt service, capital expenditure and working capital requirements.
Deconsolidation for Federal Income Tax Purposes
Under certain circumstances, TransAmerican, TransAmerican Exploration
Corporation ("TEXC"), TEC 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 or otherwise, the aggregate ownership of TransTexas by
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TransAmerican and certain of its affiliates (the "TNGC Consolidated Group") is
less than 80% (measured by voting power and value), TransTexas will no longer be
a member of the TNGC Consolidated Group for federal income tax purposes and,
with certain exceptions, will no longer be obligated under the terms and
conditions of, or entitled to the benefits of, a tax allocation agreement (the
"Tax Allocation Agreement") among members of the TNGC Consolidated Group
("Deconsolidation"). Such sales may be necessary to raise funds required to
complete TARC's Capital Improvement Program. Further, if TEC or TARC sells or
otherwise transfers any stock of TARC, or issues any options, warrants or other
similar rights relating to such stock, outside of the TNGC Consolidated Group,
which when aggregated with warrants outstanding to purchase shares of common
stock of TARC (the "TARC Warrants") represents more than 20% of the voting power
or equity value of TARC, then a Deconsolidation of both TARC and TransTexas from
the TNGC Consolidated Group would occur. An event that results in the
Deconsolidation of TARC or TransTexas from the TNGC Consolidated Group for
federal income tax purposes could result in the acceleration of payment of a
substantial amount of income taxes by TransAmerican. The tax liability to
TransAmerican that would result from Deconsolidation is estimated to be
approximately $15 million at January 31, 1997.
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, TransTexas, TARC or TEC 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.
Potential Effects of Change of Control
Capitalized words in the following discussion have the meanings as defined
in the Indenture.
The TransTexas Indenture provides that, upon the occurrence of a Change of
Control, each holder of the TransTexas Senior Notes will have the right to
require TransTexas to repurchase such holder's TransTexas Senior Notes at 101%
of the principal amount thereof plus accrued and unpaid interest. As used in the
Indenture, "Change of Control" means (i) any sale, transfer, or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of 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 Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
applicable), other than to or among TransTexas' Wholly Owned Subsidiaries or the
trustee under the Indenture, whether in a single transaction or a series of
related transactions, unless, immediately after such transaction, John R.
Stanley has, directly or indirectly, in the aggregate, sole beneficial ownership
of more than 50%, on a fully diluted basis, of the total voting power entitled
to vote in the election of directors, managers, or trustees of the transferee,
(ii) the liquidation or dissolution of 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 clauses (I), (ii) or (iii), the 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 Senior 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.
The holders of the Subordinated Notes would also have a right to require the
Company to repurchase such
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securities upon the occurrence of a Change of Control. 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 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 January 31, 1997, TransTexas had
approximately $34.7 million of indebtedness (excluding the Notes and the
Subordinated 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.
TARC owns a large petroleum refinery in the Gulf Coast region along the
Mississippi River, approximately 20 miles from New Orleans, Louisiana. In
February 1995, TARC commenced the Capital Improvement Program. Between February
1995 and March 1997, TARC spent $238 million on the Capital Improvement Program,
procured a majority of the equipment required and completed substantially all of
the process design engineering and a substantial portion of the remaining
engineering necessary to complete this project. As of January 31, 1997, the TARC
Notes are collateralized by, among other things, an aggregate of 50.45 million
shares of TransTexas' common stock (the "Common Stock").
Primarily because additional financing was not available to TARC on a
timely basis, TARC was unable to meet the construction completion timetable for
the Capital Improvement Program as required under the TARC Notes Indenture. The
holders of the TARC Notes have waived, until July 15, 1997, the default under
the TARC Notes Indenture which would have occurred on February 15, 1997 as a
result of TARC's failure to meet the required completion timetable. The waiver
of this default will cease to be effective on July 15, 1997. Unless the default
has been further waived or TARC completes a recapitalization that satisfies the
holders of the TARC Notes, such holders would then be entitled to pursue
remedies available under the TARC Notes Indenture, including acceleration of the
maturity of the TARC Notes. 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 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 also result in a Change of Control
under the TransTexas Indenture.
Inflation and Changes in Prices
TransTexas' results of operations and the value of its gas properties are
highly dependent upon the prices TransTexas receives for its natural gas.
Substantially all of TransTexas' sales of natural gas are made in the spot
market, or pursuant to contracts based on spot market prices, and pursuant to
long-term, fixed-price contracts. Accordingly, the prices received by TransTexas
for its natural gas production are dependent upon numerous factors beyond the
control of TransTexas, including the level of consumer product demand, the North
American supply of natural gas, government regulations and taxes, the price and
availability of alternative fuels, the level of foreign imports of oil and
natural gas and the overall economic environment. Demand for natural gas is
seasonal, with demand typically higher during the summer and winter, and lower
during spring and fall, with concomitant changes in price. Although certain of
TransTexas' costs and expenses are affected by the level of inflation, inflation
has not had a significant effect on TransTexas' results of operations during the
year ended January 31, 1997.
Any significant decline in current prices for natural gas could have a
material adverse effect on TransTexas' financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Based on
current levels of production and certain hedge agreements, TransTexas estimates
that a $0.10 per MMBtu change in average gas prices received would change annual
operating income by approximately $12 million.
REFINING
TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals and
its expenses consisted of maintenance and repairs, tank
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rentals, general and administrative expenses and property taxes. TARC commenced
partial operations at the refinery in March 1994 and has operated the No. 2
Vacuum Unit intermittently since that time. TARC could operate the No. 2 Crude
Unit and/or the No. 2 Vacuum Unit if market conditions become favorable. 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
certain units within its refinery, 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.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets to be Disposed Of ("SFAS 121"). 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 expansion
and modification of the refinery, 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. Management believes that the book value of the
refinery is in excess of its current estimated fair market value. See Note 5 to
Financial Statements.
Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996
Total revenues for the year ended January 31, 1997 decreased to $10.9
million from $176.2 million for the same period in 1996, due primarily to a
significant drop in the processing of purchased feedstocks for sale to third
parties compared to the prior year.
Cost of products sold for the year ended January 31, 1997 decreased to
$11.5 million from $185.3 million for the same period in 1996, due primarily to
a significant drop in the purchase of feedstocks for processing compared to the
prior year.
Losses from processing arrangements of $7.1 million, discussed below in
"Liquidity and Capital Resources," for the year ended January 31, 1997, were
primarily due to price management activities.
Operations and maintenance expense for the year ended January 31, 1997
increased to $23.9 million from $12.5 million for the same period in 1996,
primarily due to a write-off of approximately $6.5 million for assets included
in construction work in process that will not be used in the overall Capital
Improvement Program, an increase in fuel costs during the first six months of
fiscal 1997, and higher contract labor costs.
Depreciation and amortization expense for the year ended January 31, 1997
increased $0.9 million to $7.2 million from $6.3 million for the same period in
1996, primarily due to the reclassification of construction work in process to
depreciable assets during 1997.
Taxes other than income taxes for the year ended January 31, 1997 increased
to $4.2 million from $2.7 million for the same period in 1996, primarily due to
increased property tax expense.
General and administrative expense for the year ended January 31, 1997
decreased to $11.8 million from $12.6 million for the same period in 1996,
primarily due to decreased litigation expense.
Interest income for the year ended January 31, 1997 decreased by $6.1
million as compared to the same period in 1996, primarily due to interest earned
in 1996 on a higher balance held in the Collateral Account. Interest expense,
net, for the year ended January 31, 1997 decreased $13.8 million, primarily due
to a larger portion of interest capitalized as well as a reduction of product
financing costs in 1997 versus 1996 due to lower
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volumes of feedstock purchases. During the year ended January 31, 1997, TARC
capitalized approximately $68.8 million of interest related to construction
activities at TARC's refinery, compared to $41.5 million for the year ended
January 31, 1996.
The equity in income of TransTexas for the year ended January 31, 1997 of
$12.3 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 and its 14.1%
interest thereafter. This compares to $2.6 million equity in loss of TransTexas
for the year ended January 31, 1996. The increase is a result of higher gas
prices and a favorable litigation settlement at TransTexas.
Other income for the year ended January 31, 1997 was $56.5 million, which
was primarily a result of the $56.2 million gain on the sale of 4.55 million
shares of TransTexas stock in March 1996. Other income for the year ended
January 31, 1996 was $2.1 million, primarily resulting from trading gains on
futures contracts.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Total revenues for the six months ended January 31, 1996 increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.
Cost of products sold for the six months ended January 31, 1996 increased
$36.2 million to $110.1 million from $73.9 million for the same period in 1995,
primarily due to an increase in the volume of products sold, partially offset by
a decrease in the average price of feedstocks purchased.
Operations and maintenance expenses for the six months ended January 31,
1996 increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expenses for the six months ended January 31,
1996 increased $0.5 million to $3.2 million from $2.7 million for the same
period in 1995, primarily due to the transfer of certain terminal facilities and
tankage equipment from construction in progress to depreciable assets during the
1996 period.
General and administrative expenses for the six months ended January 31,
1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a $2.5 million reduction in litigation
accruals, partially offset by an increase in payroll of $1.1 million arising
from operations support requirements.
Taxes other than income taxes for the six months ended January 31, 1996
decreased $1.4 million to $0.7 million from $2.1 million for the same period in
1995, primarily due to lower property tax expense for the six months ended
January 31, 1996.
Interest income for the six month period ended January 31, 1996, increased
$2.3 million compared to the same period in 1995 due primarily to interest
earned on long-term debt proceeds held in the Collateral Account. Interest
expense for the six month period ended January 31, 1996, increased $28.6 million
due to interest accrued on long-term debt issued in February 1995, amortization
of debt issue costs and financing costs associated with product purchases.
During the six months ended January 31, 1996, TARC capitalized $26.2 million of
interest related to property and equipment associated with the Capital
Improvement Program.
Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994
Total revenues for the year ended July 31, 1995, decreased $36.6 million to
$140.6 million from $177.2 million in the same period in 1994, primarily due to
a decrease in the volume of products sold which was partially offset by an
increase in the average price of products sold.
Cost of products sold for the year ended July 31, 1995, decreased $19.8
million to $149.1 million from $168.9 million for the same period in 1994,
primarily as a result of a decrease in volume of products sold,
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partially offset by an increase in the average price of feedstocks purchased,
and a contract cancellation loss of approximately $3.8 million.
Operations and maintenance expense for the year ended July 31, 1995,
increased $0.2 million to $12.3 million from $12.1 million for the same period
in 1994, primarily as a result of an increase in the number of days the No. 2
vacuum unit was operating.
Depreciation and amortization expense for the year ended July 31, 1995,
increased $3.3 million to $5.9 million from $2.6 million for the same period in
1994, primarily as a result of increased depreciation expense being recorded for
refinery assets which were taken out of discontinued operations during 1994.
General and administrative expenses for the year ended July 31, 1995,
increased $9.1 million to $13.6 million from $4.5 million in the same period in
1994, primarily as a result of a litigation accrual of $4.5 million and
increases in legal and consulting fees and insurance costs as a result of
expanded refinery operations.
Taxes other than income taxes for the year ended July 31, 1995, increased
$0.5 million to $4.2 million from $3.7 million for the same period in 1994,
primarily as a result of an increase in property taxes assessed.
Interest income for the year ended July 31, 1995, increased $4.1 million
compared to the same period in 1994 due primarily to interest earned on
long-term debt proceeds held in the Collateral Account. Interest expense for the
year ended July 31, 1995, increased $31.3 million due to interest accrued on
long-term debt issued during 1995, amortization of debt issue costs and
financing costs associated with product purchases. During the year ended July
31, 1995, TARC capitalized $18.9 million of interest related to property and
equipment associated with TARC's Capital Improvement Program.
Other income for the year ended July 31, 1995, was $2.5 million compared to
other expense of $2.9 million for the same period in 1994 primarily as a result
of trading gains on futures contracts in 1995.
For the year ended July 31, 1995, the loss before an extraordinary item
increased $35.5 million over the same period in 1994, primarily due to interest
associated with TARC's long-term debt and amortization of debt issue costs.
In February 1995, TransAmerican contributed 55 million shares of TransTexas
common stock to the Company and the Company then contributed 15 million of these
shares of TransTexas common stock to TARC. The equity in loss of TransTexas for
the year ended July 31, 1995, reflects TARC's 20.3% equity interest in
TransTexas' loss before an extraordinary item from the date of acquisition. The
equity in extraordinary loss of TransTexas represents TARC's equity in a charge
recorded by TransTexas in the fourth quarter 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.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the issuance of the TARC Notes in February 1995,
proceeds of $173 million were deposited into a cash collateral account,
designated for use in the Capital Improvement Program. TARC sold 4.55 million
shares of TransTexas common stock in March 1996, and deposited approximately
$26.6 million in proceeds into the cash collateral account in accordance with
the requirements of the TARC Notes Indenture. As of January 31, 1997, TARC had
expended all amounts deposited in the cash collateral account. As of January 31,
1997, TARC had commitments for refinery construction and maintenance of
approximately $53.0 million.
In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes are secured by
a pledge of 5 million shares of TransTexas common stock, which were released
from the lien securing the TARC Notes. Proceeds from the issuance of these notes
have been or will be used for construction at the refinery and general corporate
purposes.
Primarily because additional funding was not available, TARC was unable to
meet the construction completion timetable for the Capital Improvement Program
as required under the TARC Notes Indenture. In
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February 1997, TARC solicited and received from the holders of the TARC Notes
consents to certain waivers under and amendments to the TARC Notes Indenture.
Pursuant to this consent solicitation, the holders of the TARC Notes waived,
until July 15, 1997, the default under the TARC Notes Indenture which would have
occurred on February 15, 1997 as a result of TARC's failure to meet the required
completion timetable. The waiver of this default will cease to be effective on
July 15, 1997. Unless the default has been further waived or the Company
completes a recapitalization that satisfies the holders of the TARC Notes, such
holders would then be entitled to pursue remedies available under the TARC Notes
Indenture, including acceleration of the maturity of the TARC Notes.
TARC must obtain substantial additional financing to fund any additional
expansion or modification of the refinery. It is likely that the scope,
completion schedule and other aspects of the Capital Improvement Program will be
modified in connection with obtaining additional financing. The scope,
completion schedule, amount of additional expenditures required and other
aspects of additional expansion and modification of the refinery will depend
upon, among other factors, the availability and timing of such financing. TEC
and its operating subsidiaries are considering various financing alternatives,
including a recapitalization of TEC, TARC and TransTexas. The Company expects
that these recapitalizations can be completed by July 15, 1997. However, there
can be no assurance that TARC will obtain the required additional financing.
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. In addition, the TARC Notes
are classified as a current liability as of January 31, 1997. Primarily as a
result of these factors and accounts payable related to the Capital Improvement
Program, TARC had negative working capital of $407.0 million at January 31,
1997. In order to operate the refinery at expected levels after completion of
expansion and modification of the refinery, TARC will require additional working
capital and ultimately must achieve profitable operations.
TARC is not currently operating the completed units of the refinery because
market conditions make limited operations uneconomic. If market conditions
become favorable, TARC could resume limited processing operations. TARC,
however, anticipates that in the near term and until additional operating units
come on line, its capital needs will be limited to expenditures for the
expansion and modification of the refinery, and for general and administrative
and refinery maintenance costs.
If TARC (i) does not obtain additional financing, (ii) does not complete a
recapitalization that satisfies the holders of the TARC Notes, or (iii) does not
complete construction of a refinery capable of profitable operations, TARC's
investment in the refinery may not be recovered. Without additional funding to
complete expansion and modification of the refinery, and to provide working
capital for operations and debt service, there is substantial doubt about TARC's
continuation as a going concern. The financial statements do not include any
adjustments for such uncertainties.
Under certain circumstances, TransAmerican, TEXC, TARC or TEC 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 aggregate
ownership of TransTexas by members of the TNGC Consolidated Group is less than
80% (measured by voting power and value), TransTexas will no longer be a member
of 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 among TransAmerican and certain of its
affiliates, including TEC, TARC and TransTexas. Further, if TEC or TARC sells or
otherwise transfers any stock of TARC, or issues any options, warrants or other
similar rights relating to such stock, outside of the TransAmerican Consolidated
Group, which when aggregated with the outstanding TARC Warrants represents more
than 20% of the voting power or equity value of TARC, then a Deconsolidation of
both TARC and TransTexas from the TNGC Consolidated Group would occur. An event
that results in Deconsolidation of TARC or TransTexas from the TNGC Consolidated
Group for federal income tax purposes could result in the acceleration of
payment of a substantial amount of federal income taxes by TransAmerican. The
tax liability to TransAmerican which would result from Deconsolidation is
estimated to be approximately $15 million at January 31, 1997. Each member of a
consolidated group filing a consolidated federal income tax return is
32
35
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 of the group may be required to pay the tax.
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
January 31, 1997, 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 (together with the
first promissory note, the "TransAmerican Notes"). At January 31, 1997, TARC had
approximately $44.4 million outstanding under both of these notes. TransAmerican
has waived any defaults arising from TARC's failure to make the scheduled
interest payments provided for in these notes. In February 1997, the November
1996 promissory note was replaced with a $50 million note bearing interest at an
annual rate of 15% and which matures on July 31, 2002. Interest payments are due
quarterly commencing on April 30, 1997. The debt represented by the new note is
subordinate in right of payment to the TARC Notes. As of April 25, 1997,
approximately $31.4 million had been advanced under the new note. These and
additional borrowings have been used by TARC to fund construction at the
refinery, as well as working capital needs, pending additional financing from
other sources. There can be no assurance that TransAmerican will make additional
advances to TARC.
TARC enters into financing arrangements in order to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock which 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. In the
event the refinery is not operating, these cargos may be sold on the spot
market. During the year ended January 31, 1997, 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. For the year ended January 31, 1997,
TARC processed approximately 1.1 million barrels of feedstock pursuant to this
agreement. 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 January 31, 1997, TARC had
completed processing approximately 6.4 million barrels of feedstocks and is
storing approximately 1.0 million barrels of intermediate and refined products
under this agreement. TARC also entered into a processing agreement with this
third party to process approximately 0.8 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. For the year ended January 31, 1997, TARC recorded a net loss of
approximately $4.5 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 anticipated in connection with the expansion and
modification of the refinery. TARC does not expect to incur any additional
significant expenses for environmental compliance during fiscal 1998 or fiscal
1999 other than those budgeted for 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
33
36
operations, cash flows or financial condition. TARC also has contingent
liabilities with respect to litigation matters as more fully described in Note
15 of Notes to Financial Statements.
INFLATION AND CHANGES IN PRICES
TARC's revenues and feedstock costs have been, and will continue to be,
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on refined
product prices and refining margins, which are subject to significant seasonal,
cyclical and other fluctuations that are beyond TARC's control.
From time to time, TARC enters into futures contracts, options on futures,
swap agreements and forward sale agreements for crude and refined products
intended to protect against a portion of the price risk associated with price
declines from holding inventory of feedstocks and refined products, or for fixed
price purchase commitments. TARC's policy is not to enter into fixed price or
other purchase commitments in excess of anticipated processing requirements.
TARC believes that these current and anticipated futures transactions do not and
will not constitute speculative trading as specified under and prohibited by the
TARC Notes Indenture.
RECENTLY ISSUED PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") and
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). These statements will be adopted by TARC
effective January 31, 1998. SFAS 128 simplifies the computation of earnings per
share by replacing primary and fully diluted presentations with the new basic
and diluted disclosures. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. TARC has not determined the
impact of these pronouncements on its financial statements.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. TARC does
not believe the effect of adoption of SOP 96-1 in 1998 will have a material
impact on TARC's financial position, results of operations or cash flows.
Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Annual Report on Form 10-K regarding the
Company's financial position, business strategy, and plans and objectives of
management for future operations, including, but not limited to words such as
"anticipates," "expects," "estimates," "believes," "intends," "projects" and
"likely" indicate forward-looking statements. The Company's management believes
its current views and expectations are based on reasonable assumptions; however,
there are significant risks and uncertainties that could significantly affect
expected results. Factors that could cause actual results to differ materially
from those in the forward-looking statements include fluctuations in the
commodity prices for natural gas, crude oil, condensate, natural gas liquids,
petroleum and refined products, the extent of TransTexas' success in
discovering, developing and producing reserves, TARC's success in raising
additional capital to complete expansion and modification of the refinery,
engineering problems, work stoppages, cost overruns, personnel or materials
shortages, casualty losses, conditions in the equity and capital markets, the
ultimate resolution of litigation, and competition.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of TransTexas. The
reserve data included herein represent only estimates prepared by Netherland,
Sewell & Associates, Inc. ("Netherland Sewell"). Gas reserve assessment is a
subjective process of estimating the recovery from underground accumulations of
gas that cannot be measured in an exact way, and estimates by other persons
might differ materially from those of Netherland Sewell. Certain
34
37
events, including production, acquisitions and future drilling and development
could result in increases or decreases in estimated quantities of proved
reserves. In addition, estimates of TransTexas' future net revenues from proved
reserves and the present value thereof are based on certain assumptions
regarding future natural gas prices, production levels, production and ad
valorem taxes and operating and development costs that may not prove to be
correct over time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
35
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Accountants........................... 37
Financial Statements:
Consolidated Balance Sheet................................ 38
Consolidated Statement of Operations...................... 39
Consolidated Statement of Stockholder's Deficit........... 40
Consolidated Statement of Cash Flows...................... 41
Notes to Consolidated Financial Statements................ 42
36
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransAmerican Energy Corporation:
We have audited the accompanying consolidated balance sheet of
TransAmerican Energy Corporation (and predecessor) as of January 31, 1997 and
1996 and the related consolidated statements of operations, stockholder's
deficit and cash flows for the year ended January 31, 1997, the six months ended
January 31, 1996 and each of the two years ended July 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TransAmerican Energy Corporation (and predecessor) as of January 31, 1997 and
1996, and the results of its operations and its cash flows for the year ended
January 31, 1997, the six months ended January 31, 1996 and each of the two
years in the period ended July 31, 1995, in conformity with generally accepted
accounting principles.
As described in Note 2, the accompanying consolidated financial statements
have been prepared assuming that the Company and its wholly-owned subsidiary,
TransAmerican Refining Corporation ("TARC"), will continue as going concerns.
TARC is required to obtain additional funds to amend or refinance the TARC
Notes, expand its refinery and to fund its ongoing working capital requirements.
There is no assurance that the TARC Notes can be amended or refinanced or that
the necessary additional funding for the refinery expansion and working capital
requirements can 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. Additionally, the Company has pledged its ownership
interest in TransTexas Gas Corporation ("TransTexas") as collateral on TARC's
Discount Mortgage Notes and Mortgage Notes. In the event TARC does not obtain
the necessary additional funding, the Company may not be able to recover its
investment in TARC and lose its ownership interest in TransTexas. Therefore,
there is substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not contain any adjustments
that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 1, 1997
37
40
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
ASSETS
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
Current assets:
Cash and cash equivalents................................. $ 24,179 $ 14,114
Interest reserve account -- TransTexas.................... 46,000 46,000
Long-term debt proceeds held in collateral
account -- TARC........................................ -- 14,840
Accounts receivable....................................... 78,660 36,372
Receivable from affiliates................................ -- 3,000
Inventories............................................... 12,481 48,652
Other current assets...................................... 25,638 56,300
---------- ----------
Total current assets.............................. 186,958 219,278
---------- ----------
Property and equipment...................................... 2,836,696 2,438,926
Less accumulated depreciation, depletion and amortization... 1,451,417 1,302,972
---------- ----------
Net property and equipment -- based on the full cost
method of accounting for gas and oil properties of
which $158,973 and $136,360 at January 31, 1997 and
1996, respectively, were excluded from amortization... 1,385,279 1,135,954
---------- ----------
Long-term debt proceeds held in collateral account --TARC... -- 9,565
Due from affiliates......................................... -- 26,846
Other assets, net........................................... 41,498 64,779
---------- ----------
$1,613,735 $1,456,422
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt...................... $ 5,787 $ 1,335
Accounts payable.......................................... 48,202 63,302
Payable to affiliate...................................... 1,604 2,260
Product financing arrangements............................ -- 37,206
Accrued liabilities....................................... 98,861 89,316
Long-term debt............................................ 365,730 --
---------- ----------
Total current liabilities......................... 520,184 193,419
---------- ----------
Due to affiliates........................................... 26,295 18,992
Notes payable to affiliate.................................. 46,589 --
Production payment.......................................... 11,931 31,036
Long-term debt, less current maturities..................... 910,469 1,119,079
Revolving credit agreement.................................. 26,268 20,365
Deferred revenue............................................ 54,554 32,850
Deferred income taxes....................................... 31,367 40,256
Other liabilities........................................... 32,991 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 15)..................... -- --
Stockholder's deficit:
Common stock, $0.01 par value, 100,000 shares authorized;
9,000 shares issued and outstanding.................... -- --
Additional paid-in capital................................ 158,535 175,019
Accumulated deficit....................................... (148,508) (211,048)
---------- ----------
10,027 (36,029)
Advances to affiliates.................................... (57,036) --
---------- ----------
Total stockholder's deficit....................... (47,009) (36,029)
---------- ----------
$1,613,735 $1,456,422
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
38
41
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
---------------------- ---------------------- --------------------
1997 1996 1996 1995 1995 1994
-------- ----------- -------- ----------- --------- --------
(UNAUDITED) (UNAUDITED)
Revenues:
Gas, condensate and natural
gas liquids................ $360,740 $ 254,275 $123,253 $ 142,070 $ 273,092 $300,210
Transportation................ 34,423 33,518 15,892 19,161 36,787 33,240
Product sales................. 10,857 176,229 107,237 71,035 140,027 174,143
Gain on the sale of assets.... 7,856 474 474 -- -- --
Tank rentals.................. -- 1 -- 551 552 3,035
Other......................... 297 360 127 52 285 247
-------- ----------- -------- ----------- --------- --------
Total revenues........ 414,173 464,857 246,983 232,869 450,743 510,785
-------- ----------- -------- ----------- --------- --------
Costs and expenses:
Operating..................... 154,313 273,860 154,697 124,960 244,123 268,862
Depreciation, depletion and
amortization............... 139,678 126,821 64,053 73,051 135,819 116,447
General and administrative.... 57,500 45,768 21,213 21,037 45,592 44,807
Taxes other than income
taxes...................... 26,772 17,965 8,133 8,376 18,208 16,904
Litigation settlements........ (96,000) (18,300) (18,300) -- -- (1,000)
-------- ----------- -------- ----------- --------- --------
Total costs and
expenses............ 282,263 446,114 229,796 227,424 443,742 446,020
-------- ----------- -------- ----------- --------- --------
Operating income.............. 131,910 18,743 17,187 5,445 7,001 64,765
-------- ----------- -------- ----------- --------- --------
Other income (expense):
Interest income............... 5,748 11,079 5,197 916 6,798 1,553
Interest expense.............. (170,510) (100,694) (49,684) (30,002) (81,012) (51,684)
Interest capitalized.......... 68,840 -- -- --
Other, net.................... 42,980 2,106 (229) 116 2,451 (2,851)
-------- ----------- -------- ----------- --------- --------
Total other income
(expense)........... (52,942) (87,509) (44,380) (28,970) (71,763) (52,982)
-------- ----------- -------- ----------- --------- --------
Income (loss) before income
taxes...................... 78,968 (68,766) (27,193) (23,525) (64,762) 11,783
Income tax expense (benefit).... 12,491 (2,700) (416) (131) (2,415) (5,380)
-------- ----------- -------- ----------- --------- --------
Income (loss) before
extraordinary item......... 66,477 (66,066) (26,777) (23,394) (62,347) 6,403
Extraordinary item -- loss on
early extinguishment of debt-
TransTexas, net of tax (Note
3)............................ -- (56,637) -- -- (56,637) --
-------- ----------- -------- ----------- --------- --------
Net income (loss)
before preferred
stock dividend...... $ 66,477 $ (122,703) $(26,777) $ (23,394) $(118,984) $ 6,403
======== =========== ======== =========== ========= ========
Series A preferred stock
dividend...................... $ 19 $ -- $ -- $ -- $ -- $ --
======== =========== ======== =========== ========= ========
Net income (loss) available for
common stockholder............ $ 66,458 $ (122,703) $(26,777) $(118,984)
======== =========== ======== =========
Net income (loss) per common
share:
Income (loss) before
extraordinary item......... $ 7,384 $ (7,341) $ (2,975) $ (13,901)
Extraordinary item............ -- (6,293) -- (12,628)
-------- ----------- -------- ---------
$ 7,384 $ 13,634 $ (2,975) $ (26,529)
======== =========== ======== =========
Weighted average number of
shares outstanding............ 9,000 9,000 9,000 4,485
======== =========== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
39
42
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
RETAINED
ADDITIONAL EARNINGS TOTAL
PAID-IN CAPITAL (ACCUMULATED ADVANCES STOCKHOLDER'S
SHARES AMOUNT (CAPITAL DEFICIT) DEFICIT) TO AFFILIATES EQUITY (DEFICIT)
------ ------ ----------------- ------------ ------------- ----------------
Balance at July 31, 1994...... 1,000 $ -- $ 1 $ -- $ -- $ 1
Stock Transfer, as adjusted
(Note 1)................. -- -- 175,018 (65,287) -- 109,731
Issuance of common stock.... 8,000 -- -- -- -- --
Net loss.................... -- -- -- (118,984) -- (118,984)
----- ---- -------- --------- -------- ---------
Balance at July 31, 1995.... 9,000 -- 175,019 (184,271) -- (9,252)
Net loss.................... -- -- -- (26,777) -- (26,777)
----- ---- -------- --------- -------- ---------
Balance at January 31, 1996... 9,000 -- 175,019 (211,048) -- (36,029)
Transfer of litigation
escrow to affiliate...... -- -- (22,484) -- -- (22,484)
Contribution of Signal
Capital Holdings
Corporation stock by
affiliate................ -- -- 6,000 -- -- 6,000
Advances to affiliates...... -- -- -- -- (57,036) (57,036)
Preferred stock dividends... -- -- -- (19) -- (19)
Elimination of intercompany
gain on property
purchased from
affiliate................ -- -- -- (3,918) -- (3,918)
Net income.................. -- -- -- 66,477 -- 66,477
----- ---- -------- --------- -------- ---------
Balance at January 31, 1997... 9,000 $ -- $158,535 $(148,508) $(57,036) $ (47,009)
===== ==== ======== ========= ======== =========
Prior year periods are not presented because the Company's predecessor was
not a separate entity with its own capital structure.
The accompanying notes are an integral part of the consolidated financial
statements.
40
43
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------- ----------------------- ---------------------
1997 1996 1996 1995 1995 1994
--------- ----------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
Operating activities:
Net income (loss)............................. $ 66,477 $(122,367) $ (26,777) $ (23,394) $(118,984) $ 6,403
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item.......................... -- 56,637 -- -- 56,637 --
Litigation, net............................. -- (9,300) (16,300) 4,500 11,500 13,000
Depreciation, depletion and amortization.... 139,678 126,821 64,053 73,051 135,819 116,447
Amortization of discount on long-term
debt...................................... 8,470 11,062 3,389 -- 7,673 --
Amortization of debt issue costs............ 1,653 4,348 1,533 1,524 4,339 2,818
Amortization of deferred revenue............ (36,917) -- -- -- -- --
Gain on sale of TransTexas stock............ (42,607) -- -- -- -- --
Gain on asset dispositions.................. (1,343) (474) (474) -- -- --
Deferred income taxes....................... (8,889) 6,263 (416) (1,483) 5,196 (5,961)
Inventory writedown......................... -- 5,671 4,406 -- 1,265 79
Proceeds from volumetric production
payment................................... 58,621 32,850 32,850 -- -- --
Changes in assets and liabilities:
Accounts receivable....................... (42,288) (4,264) (9,189) 14,760 19,685 (45,616)
Inventories............................... (1,035) (7,299) 4,057 4,816 (6,540) (3,600)
Other current assets...................... 2,671 (8,468) 1,564 (2,414) (12,446) 351
Accounts payable.......................... 13,914 (18,405) 1,995 2,901 (17,499) 9,690
Accrued liabilities....................... 32,561 (22,306) (6,975) (11,853) (27,184) 26,473
Transactions with affiliates, net......... (2) (16,032) (3,447) 265 (12,320) (721)
Other assets.............................. 21,491 (2,798) 569 (323) (3,690) (1,816)
Other liabilities......................... (20,173) (1,994) (1,928) 500 434 7,516
--------- --------- --------- --------- --------- ---------
Net cash provided by operating
activities............................ 192,282 29,945 48,910 62,850 43,885 125,063
--------- --------- --------- --------- --------- ---------
Investing activities:
Capital expenditures.......................... (427,232) (493,433) (275,451) (158,476) (376,458) (290,494)
Property dispositions......................... 92,518 20,500 20,500 -- -- --
Withdrawals from interest reserve account..... 92,000 44,722 44,722 -- -- --
Deposits to interest reserve account.......... (92,000) (90,722) (46,000) -- (44,722) --
Advances to affiliate......................... (24,750) -- -- -- -- (8,257)
Payment of advances by affiliate.............. -- -- -- -- -- 8,257
Purchase of production payment from
affiliate................................... -- -- -- -- -- (5,000)
Proceeds from the sale of TransTexas stock.... 42,607 -- -- -- -- --
Production payment by affiliate............... -- 3,547 -- 844 4,391 609
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities... (316,857) (515,386) (256,229) (157,632) (416,789) (294,885)
--------- --------- --------- --------- --------- ---------
Financing activities:
Principal payments on long-term debt.......... (20,238) (20,219) (219) -- (20,000) --
Proceeds from long-term borrowings............ 26,200 313,750 3,000 10,000 320,750 --
Revolving credit agreement, net............... 5,903 11,664 20,365 8,701 -- --
Issuance of production payment................ 28,598 49,500 -- -- 49,500 --
Repayment of production payment............... (45,205) (16,699) (8,833) -- (7,866) --
Issuance of redeemable preferred stock........ -- 96 -- -- 96 --
Issuance of senior secured notes.............. -- 800,000 -- -- 800,000 500,000
Retirement of senior secured notes............ -- (542,500) -- -- (542,500) --
Debt issue costs.............................. (9,187) (36,195) (1,258) (3,578) (38,515) (19,638)
Issuance of common stock...................... -- -- -- -- -- 66,143
Issuance of subordinated notes................ 99,445 -- -- -- -- --
Dividend to TransAmerican..................... -- -- -- -- -- (32,960)
Long-term proceeds held in Collateral
Account..................................... (26,549) (173,000) -- -- (173,000) --
Withdrawals from Collateral Account........... 50,949 148,595 116,452 -- 32,143 --
Advances from TransAmerican and affiliates to
TARC........................................ 49,152 12,905 12,270 86,925 87,560 68,523
Repayment of advances......................... (1,925) (48,750) (8,750) (20,000) (60,000) --
Transfer of litigation escrow to affiliate.... (22,484) -- -- -- -- --
Restricted cash............................... -- -- -- -- -- (29,133)
Series A Preferred Stock Dividends............ (19) -- -- -- -- --
Other......................................... -- (458) (458) -- -- --
--------- --------- --------- --------- --------- ---------
Net cash provided by financing
activities............................ 134,640 498,689 132,569 82,048 448,168 552,935
--------- --------- --------- --------- --------- ---------
TransTexas transactions with TransAmerican,
net........................................... -- -- -- -- -- (369,529)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................... 10,065 13,248 (74,750) (12,734) 75,264 13,584
Beginning cash and cash equivalents............. 14,114 866 88,864 13,600 13,600 16
--------- --------- --------- --------- --------- ---------
Ending cash and cash equivalents................ $ 24,179 $ 14,114 $ 14,114 $ 866 $ 88,864 $ 13,600
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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44
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to the Year Ended January 31, 1996
and the Interim Period Ended January 31, 1995 is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Data by Entity
The indentures 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 consolidated financial statements should be
read in conjunction with the separate financial statements of TransTexas and
TARC filed in their respective Annual Reports on Form 10-K for the fiscal year
ended January 31, 1997 (see Note 14).
Organization
The consolidated financial statements include the following subsidiaries of
TransAmerican Natural Gas Corporation ("TransAmerican"):
TransTexas Gas Corporation and subsidiary and its combined
predecessors ("TransTexas")
TransAmerican Refining Corporation ("TARC")
The combined entity described above is referred to as "TAEC." TAEC is the
predecessor to TransAmerican Energy Corporation (the "Company" or "TEC"), a
subsidiary of TransAmerican. The Company was formed on July 12, 1994 to hold 55
million shares of common stock (74.3% of outstanding shares) of TransTexas and
all of the outstanding capital stock of TARC. TransAmerican transferred 55
million shares (74.3% of the total outstanding) of TransTexas common stock to
the Company in connection with the public offering of debt securities by TARC
(the "Stock Transfer"). The Company then contributed 15 million of these shares
(20.3% of the total outstanding) 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 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. Prior to the Stock Transfer, all financial
statements were presented on a combined basis.
TransAmerican and certain subsidiaries emerged from a proceeding under
Chapter 11 of the Bankruptcy Code on October 19, 1987, pursuant to a confirmed
plan of reorganization. With the proceeds of the public offering of TransTexas'
10 1/2% senior secured notes (the "Prior Notes"), TransTexas paid all allowed
claims under TransAmerican's plan of reorganization as well as certain other
debts of TransAmerican. During 1996, TransTexas reclassified approximately $21.6
million of deferred income taxes payable to capital to properly reflect
liabilities of TransAmerican.
TransTexas Transmission Corporation was incorporated in June 1993 as a
wholly owned subsidiary of TransTexas. In December 1995, TransTexas Exploration
Corporation ("TTEX") was incorporated as a wholly owned subsidiary of TransTexas
and is an Unrestricted Subsidiary, as defined in the TransTexas Indenture (as
defined in Note 3). TransTexas Drilling Services, Inc. was incorporated in
January 1997 as a wholly owned subsidiary of TransTexas.
All significant intercompany transactions between the consolidated entities
have been eliminated. All significant intercompany transactions and balances
with TransAmerican prior to the Stock Transfer are recorded in TransAmerican's
equity investment.
The results of operations and cash flows for the year ended July 31, 1994
represent that of TAEC. Included in the results of operations and cash flows for
the year ended July 31, 1995, are the activities of TAEC through February 23,
1995.
42
45
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Change in Fiscal Year
On January 30, 1996, the Board of Directors approved a change in the
Company's fiscal year end for financial reporting purposes to January 31 from
July 31. The consolidated financial statements include presentation of the year
ended January 31, 1997, the six months ended January 31, 1996 (the "Transition
Period") and the unaudited comparable prior year and six month periods.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date(s) of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period(s). Actual results could differ from these estimates.
Cash and Cash Equivalents and Accounts Receivable
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
The Company's inventories, consisting primarily of tubular goods,
feedstocks and refined products, are stated at the lower of average cost or
market. TARC wrote down the value of its inventories by approximately $4.4
million and $1.3 million at January 31, 1996 and July 31, 1995, respectively, to
reflect existing market prices. The major components of inventories are as
follows (in thousands of dollars):
JANUARY 31, JULY 31,
----------------- -----------------
1997 1996 1995 1994
------- ------- ------- -------
Refinery feedstocks and blendstocks............... $ -- $ 4,395 $21,571 $ 2,128
Intermediate and refined products................. -- 32,836 18,403 2,370
Tubular goods and other........................... 12,481 11,421 8,236 9,945
------- ------- ------- -------
$12,481 $48,652 $48,210 $14,443
======= ======= ======= =======
Gas and Oil Properties
The Company uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, the cost for successful as
well as unsuccessful exploration and development activities are capitalized.
Such capitalized costs and estimated future development and reclamation costs
are amortized on a unit-of-production method. Net capitalized costs of gas and
oil properties are limited to the lower of unamortized cost or the cost center
ceiling, defined as the sum of the present value (10% discount rate) of
estimated unescalated future net revenues from proved reserves; plus the cost of
properties not being amortized, if any; plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any; less
related income tax effects.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.
Unevaluated properties and associated costs not currently being amortized
and included in oil and gas properties were $159 million and $136 million at
January 31, 1997 and 1996, respectively. The properties represented by these
costs were undergoing exploration activities at such dates, or are properties on
which the
43
46
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company intends to commence such activities in the future. The Company believes
that the unevaluated properties at January 31, 1997 will be substantially
evaluated in 12 to 24 months and it will begin to amortize these costs at such
time.
Refining Properties
Property and equipment acquired subsequent to 1983, including assets
transferred from TransAmerican in 1994, are stated at TransAmerican's or TARC's
historical cost. During the period from 1987 through August 1993, property and
equipment acquired prior to 1983 were carried at estimated net realizable value
and no depreciation expense was charged. New or refurbished units are
depreciated as placed in service. Depreciation of refinery equipment and other
buildings and equipment is computed by the straight-line method at rates which
will amortize the unrecovered cost of depreciable property and equipment
including assets acquired under capital leases, over their estimated useful
lives. Costs of improving leased property are amortized over the estimated
useful lives of the assets or the terms of the leases, whichever is shorter.
Other Property and Equipment
Other property and equipment are stated at cost. The cost of repairs and
minor replacements is charged to operating expense while the cost of renewals
and betterments is capitalized. At the time depreciable assets other than gas
and oil properties are retired, or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts. Gains or
losses on dispositions in the ordinary course of business are included in the
consolidated statement of operations. Impairment of other property and equipment
is reviewed whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable.
Depreciation of pipeline and transmission facilities, oilfield services
equipment and other buildings and equipment is computed by the straightline
method at rates which will amortize the unrecovered cost of depreciable property
and equipment, including assets acquired under capital leases, over their
estimated useful lives.
Costs of improving leased property are amortized over the estimated useful
lives of the assets or the terms of the leases, whichever is shorter.
Turnarounds
A turnaround consists of a complete shutdown, inspection and maintenance of
a unit. The estimated costs of turnarounds are accrued over the period to the
next scheduled turnaround, which is generally greater than one year.
Environmental Remediation Costs
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have future
economic benefits are expensed. Liabilities for these expenditures are provided
when the responsibility to remediate is probable and the amount of associated
cost is reasonably estimable.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other
Assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the interest method. In the event of a
redemption of long-term debt, the related debt issue costs will be charged to
income in the period of redemption.
44
47
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Defined Contribution Plan
The Company, through its parent company, TransAmerican, maintains a defined
contribution plan, which incorporates a "401(k) feature" as allowed under the
Internal Revenue Code. All investments are made through Massachusetts Mutual
Life Insurance Company. Employees who are at least 21 years of age and have
completed one year of credited service are eligible to participate on the next
semiannual entry date. The Company matches 10%, 20%, or 50% of employee
contributions up to a maximum of 3% of the participant's compensation, based on
years of plan participation. The Company and its predecessor's contributions
with respect to this plan totaled approximately $0.6, $0.3, $0.2 million, $0.1
million, $0.3 million and $0.2 million, for the years ended January 31, 1997 and
1996, the six months ended January 31, 1996 and 1995, and the years ended July
31, 1995 and 1994, respectively. All contributions are currently funded.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
different from the book value. The Company believes the book value of those
financial instruments that are classified as current approximate fair value
because of the short maturity of these instruments. For noncurrent financial
instruments, the Company uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
Revenue Recognition
The Company recognizes revenues from the sales of refined products, natural
gas, condensate, oil and natural gas liquids in the period of delivery. Revenues
are recognized from transportation of natural gas in the period the service is
provided. The sales method is used for natural gas imbalances that arise from
jointly produced properties.
Price Management Activities
TARC's revenues and feedstock costs have been, and will continue to be,
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on refined
product prices and refining margins, which are subject to significant seasonal,
cyclical and other fluctuations that are beyond TARC's control.
From time to time, TARC enters into commonly traded refinery feedstock and
finished goods related futures contracts, options on futures, swap agreements
and forward sale agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory, or fixed price
purchase commitments. Commitments involving future settlement give rise to
market risk, which represents the potential loss that can be caused by a change
in the market value of a particular instrument and credit risk, which represents
the potential loss if a counterparty is unable to perform. Under the guidelines
of Statement of Financial Accounting Standards No. 80 ("SFAS 80"), gains and
losses associated with such transactions that meet the hedge criteria in SFAS 80
will be deferred until realized. Those transactions which do not meet the
hedging criteria in SFAS 80 are recorded at market value resulting in a gain or
a loss which is recorded in other income in the period in which a change in
market value occurs.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk
consist principally of cash, trade receivables, commodity price swap agreements
and forward contracts. The Company selects depository banks based upon
management's review of the financial stability of the institution. Balances
periodically exceed the $100,000 level covered by federal deposit insurance. To
date, there have been no losses incurred due to excess deposits in any financial
institution. Trade accounts receivable are generally from companies
45
48
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with significant natural gas marketing and petroleum activities, who would be
impacted by conditions or occurrences affecting those industries. All futures
contracts were with major brokerage firms, and in the opinion of management, did
not expose the Company to any undue credit risks. In addition, as of January 31,
1996, TARC had deposited cash totaling $5.1 million with two third parties to
permit the third parties to hedge their price risk in connection with TARC's
product financing arrangements. For further information regarding the Company's
hedging arrangements, see Note 15.
Income Taxes
The Company, TARC and TransTexas file a consolidated tax return with
TransAmerican. Income taxes are due from or payable to TransAmerican in
accordance with a tax allocation agreement (the "Tax Allocation Agreement"). It
is each company's policy to record income tax expense as though such company had
filed separately. Deferred income taxes are recognized, at enacted tax rates, to
reflect the future effects of tax carryforwards and temporary differences
arising between the tax bases of assets and liabilities and their financial
reporting amounts in accordance with Statement of Financial Accounting Standards
No. 109 and the Tax Allocation Agreement between the Company, TransAmerican and
TransAmerican's other subsidiaries. Income taxes include federal and state
income taxes. The Company could not file a consolidated return as it owns less
than 80% of TransTexas and, therefore, income taxes are presented on a combined
basis.
Recently Issued Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") and
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). These statements will be adopted by the
Company effective January 31, 1998. SFAS 128 simplifies the computation of
earnings per share by replacing primary and fully diluted presentations with the
new basic and diluted disclosures. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. The Company has not determined
the impact of these pronouncements on its financial statements.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. The Company
does not believe the effect of adoption of SOP 96-1 in 1998 will have a material
impact on the Company's financial position, results of operations or cash flows.
2. ADDITIONAL FINANCING AND WORKING CAPITAL REQUIREMENTS
Primarily because additional funding was not available to TARC, TARC was
unable to meet the construction completion timetable for the Capital Improvement
Program as required under the TARC Notes Indenture. In February 1997, TARC
solicited and received from the holders of the TARC Notes consents to certain
waivers under and amendments to the TARC Notes Indenture. Pursuant to this
consent solicitation, the holders of the TARC Notes have waived, until July 15,
1997, the default under the TARC Notes Indenture which would have occurred on
February 15, 1997 as a result of TARC's failure to meet the required completion
timetable. The waiver of this default will cease to be effective on July 15,
1997. Unless the default has been further waived, or the Company completes a
recapitalization that satisfies the holders of the TARC Notes, such holders
would then be entitled to pursue remedies available under the TARC Notes
Indenture, including acceleration of the maturity of the TARC Notes.
TARC must obtain substantial additional financing to fund any additional
expansion or modification of the refinery. It is likely that the scope,
completion schedule and other aspects of the Capital Improvement Program will be
modified in connection with obtaining additional financing. The scope,
completion schedule, amount of additional expenditures required and other
aspects of additional expansion and modification of the
46
49
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
refinery will depend upon, among other factors, the availability and timing of
such financing. TEC and its operating subsidiaries are considering various
financing alternatives, including a recapitalization of TEC, TARC and
TransTexas. The Company expects that these recapitalizations can be completed by
July 15, 1997. However, there can be no assurance that TARC will obtain the
required additional financing.
TARC has incurred losses and negative cash flow from operations as a result
of limited refinery operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements including debt
service and losses on refined product sales and processing arrangements. In
order to operate the refinery at expected levels after completion of expansion
and modification of the refinery, TARC will require additional working capital
and ultimately must achieve profitable operations.
If TARC (i) does not obtain additional financing, (ii) does not complete a
recapitalization that satisfies the holders of the TARC Notes, or (iii) does not
complete construction of a refinery capable of profitable operations, TARC's
investment in the refinery may not be recovered (see Note 5). Without additional
funding to complete expansion and modification of the refinery and to provide
working capital for operations and debt service, there is substantial doubt
about TARC's continuation as a going concern. The financial statements do not
include any adjustments as a result of such uncertainties.
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. Since July 31, 1995,
TransTexas has relied on asset sales and various financings, in addition to cash
flow from operating activities to meet its working capital requirements,
including maintenance of Working Capital as defined in the TransTexas Indenture.
TransTexas anticipates that it will require additional financing or sales of
assets to fund planned levels of operations through at least January 1998.
TransTexas is engaged in exclusive negotiations to sell all of the stock of
TTC, its subsidiary that owns substantially all of TransTexas' Lobo Trend
producing properties and related pipeline transmission system, for an estimated
sales price of approximately $1.1 billion. In addition, TransTexas has engaged
an investment banking firm to assist in the sale of its interest in the
Lodgepole prospect in North Dakota. TransTexas intends to use the proceeds from
these transactions for general corporate purposes, which may include a
recapitalization of TransTexas. There can be no assurance that the Lobo Sale
will be consummated or, if consummated, will be upon the terms described herein.
3. PUBLIC OFFERINGS
TARC
On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of Guaranteed First Mortgage Discount Notes
due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase
Warrants ("Warrants"), and 100,000 B Units consisting of $100 million aggregate
principal amount of Guaranteed First Mortgage Notes due 2002 ("Mortgage Notes"
and, together with the Discount Mortgage Notes, the "TARC Notes") and 1,683,540
Warrants. The TARC Notes are senior obligations of TARC, collateralized as of
January 31, 1997 by a first priority lien on substantially all of TARC's
property and assets, pledges of 50.45 million shares of common stock of
TransTexas, and all of TARC's outstanding common stock. The Warrants entitle
holders to purchase in the aggregate 7,495,313 shares of TARC's common stock,
representing 19.99% of TARC's common stock assuming the exercise of all of the
Warrants, at an exercise price of $0.01 per share. The Warrants are immediately
exercisable and expire
47
50
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on February 15, 2002. TARC allocated $23.3 million of the proceeds from the
issuance of the TARC Notes to the Warrants based on their estimated fair value.
TARC received approximately $301 million from the sale of A Units and B
Units. Net proceeds received by TARC approximated $92 million after deducting
approximately $16 million for underwriting discounts, commissions, fees and
expenses, approximately $20 million for the repayment of the balance of a loan
from TransAmerican ("TransAmerican Loan"), and $173 million which was deposited
into a cash collateral account ("Collateral Account") to fund the expansion and
upgrading of TARC's refinery.
Pursuant to a Disbursement Agreement, funds in the Collateral Account are
held and invested by the Disbursement Agent until needed from time to time to
fund the Capital Improvement Program. The Disbursement Agent disburses funds
from the Collateral Account in accordance with a budget prepared by TARC and
approved by the Construction Supervisor, a third party approved by the trustee
and compensated by TARC. 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. All funds in the Collateral Account are pledged as
security for the repayment of the TARC Notes and are classified as "long-term
debt proceeds held in collateral account" in the consolidated financial
statements. To the extent TARC has current liabilities related to the Capital
Improvement Program, the corresponding amount in the Collateral Account is
classified as a current asset. As of January 31, 1997, TARC had expended all
amounts deposited in the Collateral Account.
TransTexas
On June 20, 1995, TransTexas issued $800 million aggregate principal amount
of 11 1/2% Senior Secured Notes due 2002 (the "TransTexas Notes"). The
TransTexas Notes are senior obligations of TransTexas collateralized by a lien
on substantially all existing and future collateral of TransTexas, which
initially includes substantially all of the properties and assets of TransTexas
other than Equipment, Receivables and Inventory, as defined in the indenture
governing the TransTexas Notes (the "TransTexas Indenture"). Such lien is
subject to subordination under certain circumstances as provided in the
TransTexas Indenture. The TransTexas Notes bear interest at the rate of 11 1/2%
per annum, payable semiannually on June 15 and December 15, commencing December
15, 1995. The TransTexas Notes will mature on June 15, 2002.
In connection with the offering of the TransTexas Notes, TransTexas
commenced a tender offer to purchase for cash all of its $500 million principal
amount of 10 1/2% Senior Secured Notes due 2000 (the "Prior Notes") for 105% of
their principal amount plus accrued and unpaid interest to the date of purchase.
In addition, holders of the Prior Notes were offered a consent fee equal to $30
per $1,000 principal amount of Prior Notes in return for their consents to
amendments to the indenture governing the Prior Notes. Substantially all of the
Prior Notes were tendered pursuant to this offer.
48
51
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TransTexas received net proceeds of approximately $787 million from the
sale of the TransTexas Notes after deducting underwriting discounts, fees and
expenses. TransTexas used approximately $556 million of the net proceeds to
retire the entire principal amount of the Prior Notes, including premium and
consent fees and accrued and unpaid interest, and approximately $46 million to
establish an interest reserve account. The remainder was used for lease
acquisitions, drilling and development and general and corporate purposes.
TransTexas recorded an extraordinary loss on the extinguishment of the Prior
Notes of approximately $56.6 million, net of an income tax benefit. The
components of this charge are as follows (in thousands of dollars):
Premium and consent fee..................................... $40,000
Write-off of unamortized deferred financing costs........... 15,628
Underwriting fees and expenses.............................. 2,500
Related income tax benefit.................................. (1,491)
-------
Extraordinary item........................................ $56,637
=======
The Company
In February 1995, the Company's Board of Directors established one series
of preferred stock, designated "Series A Preferred Stock", consisting of an
aggregate of 1,000 shares (the "Preferred Stock"). In connection with the
offering of TARC Notes, the Company sold 1,000 shares of Preferred Stock
realizing net proceeds of $95,600. Holders of shares of the Company's Preferred
Stock who are not affiliates of the Company are entitled to one vote per share
on any matter submitted to a vote of stockholders of the Company. Holders of
Preferred Stock are entitled to receive a cumulative cash dividend each year of
$19 per share payable on February 15 of each year beginning February 15, 1996.
In addition, holders of Preferred Stock have the right to nominate and elect one
director of the Company. Upon liquidation, dissolution, or winding-up of the
affairs of the Company, the holders of Preferred Stock are entitled to receive
in cash from the Company's net assets, $100 per share plus all accrued but
unpaid dividends and interest accrued thereon, before any distribution or
payment is made to holders of the Company's common stock or any other shares of
capital stock of the Company ranking junior to the Preferred Stock. The
Preferred Stock must be redeemed on December 31, 2002 at a redemption price
equal to $100 per share plus all accrued but unpaid dividends and interest
accrued thereon. The Preferred Stock does not have any conversion rights, and
holders of shares of Preferred Stock have no preemptive rights to maintain their
respective percentage ownership in future offerings or sales of the Company's
stock.
4. INVENTORIES AND OTHER CURRENT ASSETS
The major components of inventories are as follows (in thousands of
dollars):
JANUARY 31,
------------------
1997 1996
------- -------
Refinery feedstocks and blendstocks......................... $ -- $ 4,395
Intermediate and refined products........................... -- 32,836
Tubular goods and other..................................... 12,481 11,421
------- -------
$12,481 $48,652
======= =======
49
52
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The major components of other current assets are as follows (in thousands
of dollars):
JANUARY 31,
------------------
1997 1996
------- -------
Prepayments:
Trade and Drilling........................................ $ 9,580 $ 4,464
Insurance................................................. 2,913 2,457
Product charges........................................... 51 4,452
Properties held for sale.................................... -- 6,000
Deferred loss on commodity price swap agreements............ 8,276 31,317
Other....................................................... 4,818 7,610
------- -------
$25,638 $56,300
======= =======
5. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows (in
thousands of dollars):
ESTIMATED JANUARY 31,
USEFUL LIFE -----------------------
(YEARS) 1997 1996
----------- ---------- ----------
Land.................................................. $ 10,746 $ 10,022
Gas and oil properties................................ 2,004,967 1,775,597
Gas transportation.................................... 10 193,443 160,819
Refinery.............................................. 20 to 30 532,428 411,650
Drilling services equipment and other................. 4-10 95,112 80,838
---------- ----------
$2,836,696 $2,438,926
========== ==========
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
such gas sales.
In March 1996, TransTexas sold its 41.67% interest in the 76-mile, 24-inch
MidCon pipeline that 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.
Approximately $45 million of refinery assets were being depreciated at
January 31, 1997 and 1996. The remaining refinery and other assets are
considered construction in process. Approximately $90.4 million of property,
plant and equipment represents assets transferred by TransAmerican at net
realizable value and $465.4 million represents additions recorded at historical
cost. As of January 31, 1997, the Company changed the estimated useful lives of
the refinery equipment currently under construction from 10 years to a range of
20 to 30 years. The change in estimate was not material to 1997 net income. TARC
recognized $6.7 million, $2.9 million, $5.9 million and $2.7 million in
depreciation expense for the year ended January 31, 1997, the six months ended
January 31, 1996 and the years ended July 31, 1995 and 1994, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"). As
of February 1, 1996, TARC adopted the requirements of SFAS No. 121.
50
53
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TARC currently believes, based on estimates of refining margins and current
estimates for costs of the expansion and modification 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. Management
believes that the book value of the refinery is in excess of its current
estimated fair market value.
6. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
JANUARY 31,
-----------------
1997 1996
------- -------
Debt issue costs, net of accumulated amortization of $9,320
at January 31, 1997 and $4,607 at January 31, 1996........ $32,127 $34,631
Litigation escrow........................................... -- 22,972
Contractual rights and licenses, net of accumulated
amortization of $992 at January 31, 1997 and $1,464 at
January 31, 1996.......................................... 5,979 6,516
Other....................................................... 3,392 660
------- -------
$41,498 $64,779
======= =======
The Company uses the straight-line method to amortize intangibles over the
periods estimated to be benefited.
7. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
JANUARY 31,
------------------
1997 1996
------- -------
Royalties................................................... $27,607 $ 9,793
Taxes other than income taxes............................... 13,501 3,054
Accrued interest............................................ 20,978 19,365
Payroll..................................................... 6,012 6,153
Litigation settlements...................................... 1,263 9,553
Settlement values of commodity price swap agreements........ 13,276 31,317
Insurance................................................... 7,840 1,628
Maintenance turnarounds..................................... 1,909 1,145
Other....................................................... 6,475 7,308
------- -------
$98,861 $89,316
======= =======
51
54
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
The major components of long-term debt are as follows (in thousands of
dollars):
JANUARY 31,
------------------------
1997 1996
---------- ----------
11 1/2% Senior Secured Notes due 2002 -- TransTexas......... $ 800,000 $ 800,000
13 1/4% Senior Secured Notes due 2003 -- TransTexas......... 101,092 --
Guaranteed First Mortgage Discount Notes due 2002-TARC...... 269,606 221,155
Guaranteed First Mortgage Notes due 2002-TARC............... 96,124 95,383
Notes payable, ranging from 9.43% to 13.0%, due through
2001...................................................... 14,562 3,876
---------- ----------
Total long-term debt.............................. 1,281,384 1,120,414
Less current maturities (TARC $365,730, TransTexas $5,787
and $1,335 at January 31, 1997 and 1996, respectively).... 371,517 1,335
---------- ----------
$ 909,867 $1,119,079
========== ==========
The TransTexas Notes are senior obligations of TransTexas collateralized by
a lien on substantially all existing and future collateral of TransTexas, which
initially includes substantially all of the properties and assets of TransTexas
other than Equipment, Receivables and Inventory, as defined in the TransTexas
Indenture. The TransTexas Notes bear interest at the rate of 11 1/2% per annum,
payable semiannually on June 15 and December 15, commencing December 15, 1995.
The TransTexas Notes will mature on June 15, 2002.
Capitalized words in the following discussion concerning the TransTexas
Notes have the meaning as defined in the TransTexas Indenture. TransTexas will
not have the right to redeem the TransTexas Notes prior to June 15, 2000, except
that (i) prior to June 15, 1998, TransTexas may redeem, at its option, up to
$240 million aggregate principal amount of the TransTexas Notes in cash at a
redemption price equal to 111.5% of the principal amount of the TransTexas Notes
so redeemed, together with accrued and unpaid interest, if any, to the
redemption date, with the net proceeds of any Public Equity Offering and (ii) if
TransTexas makes a Major Asset Sale, TransTexas may redeem, at its option, at
any time after consummation of such Major Asset Sale, but in any event within 90
days of the expiration of any Offer to Purchase or any Change of Control Offer,
as applicable, made as a result of such Major Asset Sale, any or all of the
outstanding TransTexas Notes in cash at a redemption price equal to 111.5% of
the principal amount of the TransTexas Notes so redeemed, together with accrued
and unpaid interest, if any, to the redemption date. On or after June 15, 2000
and 2001, TransTexas will have the right to redeem all or any part of the
TransTexas Notes in cash at the redemption prices of 105.750% and 102.875%,
respectively, together with accrued and unpaid interest, if any, to the
redemption date.
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 deposited into the Interest Reserve
Account, out of the net proceeds from the sale of the TransTexas Notes, funds
sufficient to pay the aggregate amount of the first interest payment due in
respect of the TransTexas Notes. Funds in the Interest Reserve Account may be
invested, at the direction of TransTexas (except as provided below), only in
cash and Cash Equivalents, 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;
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
52
55
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
If TransTexas' Working Capital, as of the end of any fiscal quarter, is
less than $20 million, then TransTexas' Capital Expenditures for the next
succeeding fiscal quarter may not exceed 90% of (a) TransTexas' Consolidated
EBITDA for such prior fiscal quarter minus (b) TransTexas' Consolidated Fixed
Charges for such prior fiscal quarter. The TransTexas Indenture also contains
other covenants affecting TransTexas' liquidity and capital resources, including
restrictions on TransTexas' ability to incur indebtedness, pledge assets, and
pay dividends on its common stock. Working Capital does not include current
assets or current liabilities of TTEX, an Unrestricted Subsidiary.
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
Notes are rated "B1" or better by Moody's Investors Service, Inc. and "BB" or
better by Standard & Poor's Corporation, Inc., or when the Notes are paid in
full, the Subordinated Notes will be exchanged for notes bearing interest at a
rate of 13 1/4% per annum, payable semi-annually on December 31 and June 30. In
addition, the holders of the Subordinated Notes will have the right to exchange
their notes for notes to be registered under the Securities Act of 1933, as
amended. Proceeds from the issuance of the Subordinated Notes were used for
working capital and general corporate purposes.
On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of Guaranteed First Mortgage Discount Notes
due 2002 ('Discount Mortgage Notes') and 5,811,773 Common Stock Purchase
Warrants ('Warrants'), and 100,000 B Units consisting of $100 million aggregate
principal amount of Guaranteed First Mortgage Notes due 2002 ('Mortgage Notes'
and, together with the Discount Mortgage Notes, the 'TARC Notes') and 1,683,540
Warrants. The TARC Notes are senior obligations of TARC, collateralized as of
January 31, 1997 by a first priority lien on substantially all of TARC's
property and assets and pledges of 50.45 million shares of common stock of
TransTexas and all of TARC's outstanding common stock. The Warrants entitle
holders to purchase in the aggregate 7,495,313 shares of TARC's common stock,
representing 19.99% of TARC's common stock assuming the exercise of all of the
Warrants, at an exercise price of $0.01 per share. The Warrants are immediately
exercisable and expire on February 15, 2002. TARC allocated $23.3 million of the
proceeds from the issuance of the TARC Notes to the Warrants based on their
estimated fair value.
The Discount Mortgage Notes and the Mortgage Notes initially bear interest
at rates of 18 1/2% and 16 1/2%, respectively. Interest is payable semi-annually
with the first interest payment on the Discount Mortgage Notes due August 15,
1998. Interest payments on the Mortgage Notes began August 15, 1995. TARC is
required to redeem $110 million of the principal amount of the TARC Notes on
each of February 15, 2000 and 2001. The TARC Notes mature on February 15, 2002.
Upon the occurrence of a change of control, TARC is required to offer to
purchase all outstanding TARC Notes at a price equal to 101% of the principal
amount thereof plus
53
56
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued and unpaid interest. In addition, TARC is required, subject to certain
conditions, to make an offer to purchase the TARC Notes with the net proceeds of
certain asset sales or dispositions of assets, with a percentage of excess cash
(as defined), or if, at the end of each of any two consecutive quarters,
commencing with the quarter ending January 31, 1998, TARC's Net Worth is less
than $75 million and TARC's Consolidated Fixed Charge Coverage Ratio as of the
end of each of such quarters is less than 1.25 to 1. TARC will be required to
generate net income or increase its present capital before January 1998 to
comply with certain of these covenants. The TARC Notes Indenture contains
certain covenants which limit TARC's ability to incur additional indebtedness,
transfer or sell assets, pay dividends or make certain other restricted
payments, enter into certain transactions with affiliates, or consummate a
merger, consolidation or sale of all or substantially all of its assets.
TARC received approximately $301 million from the sale of A Units and B
Units. Net proceeds received by TARC approximated $92 million after deducting
approximately $16 million for underwriting discounts, commissions, fees and
expenses, approximately $20 million for the repayment of the balance of a loan
from TransAmerican ("TransAmerican Loan"), and $173 million which was deposited
into a cash collateral account ("Collateral Account") to fund the expansion and
upgrading of TARC's refinery.
Pursuant to a Disbursement Agreement, funds in the Collateral Account are
held and invested by the Disbursement Agent until needed from time to time to
fund the Capital Improvement Program. The Disbursement Agent disburses funds
from the Collateral Account in accordance with a budget prepared by TARC and
approved by the Construction Supervisor, a third party approved by the trustee
and compensated by TARC. 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. All funds in the Collateral Account are pledged as
security for the repayment of the TARC Notes and are classified as "long-term
debt proceeds held in collateral account" in the financial statements. To the
extent TARC has current liabilities related to the Capital Improvement Program,
the corresponding amount in the Collateral Account is classified as a current
asset. As of January 31, 1997, TARC had expended all amounts deposited in the
Collateral Account.
In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes are secured by
a pledge of the 5 million shares of TransTexas common stock, which were released
from the lien securing the TARC Notes. Proceeds from the issuance of these notes
were deposited in a cash collateral account to be used for refinery construction
and general corporate purposes.
TransTexas' notes payable bear interest at rates ranging from 9.43% to 13%
per annum and mature at various dates through 2001. These notes payable are
collateralized by certain of TransTexas' operating equipment. Aggregate
principal payments on TransTexas' notes payable at January 31, 1997 total $5.2
million, $5.6 million and $0.7 million for the fiscal years ending January 31,
1998, 1999 and 2000, respectively.
TARC's capitalized lease obligations were approximately $1.3 million and
$2.4 million at January 31, 1997 and 1996, respectively. Maturities of such
obligations are approximately $0.8 million, $0.3 million and $0.2 million in the
years ending January 31, 1998, 1999 and 2000, respectively.
The fair value of the TransTexas Notes, based on quoted market prices, was
approximately $880 million and $818 million as of January 31, 1997 and 1996,
respectively. The fair value of the TARC Notes, based on quoted market prices,
was approximately $404 million and $295 million as of January 31, 1997 and 1996,
respectively. The fair value of the Subordinated Notes, based on quoted market
prices of similar instruments, was $104 million as of January 31, 1997.
9. CREDIT AGREEMENT
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 and inventory. At January 31, 1997, the
outstanding balance under the BNY Facility was $26.3 million. Based on
54
57
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated accounts receivable levels, the Company estimates average amounts
available under the facility will not exceed $26 million. Amounts available
under and other terms of the BNY Facility may change if the Lobo Sale is
consummated.
In May 1996, TransTexas entered into a Note Purchase Agreement pursuant to
which the Company issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes, which bore interest
at 13 1/3% per annum, were paid in full in July 1996. The notes were guaranteed
on a senior secured basis by TransAmerican.
10. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
JANUARY 31,
------------------
1997 1996
------- -------
Litigation accrual.......................................... $ 8,008 $12,171
Litigation settlements...................................... 1,633 --
Short-term obligations expected to be refinanced:
Litigation settlement..................................... 2,500 14,747
Accrued capital expenditures.............................. 19,738 5,443
Current portion of dollar-denominated production
payment................................................. -- 1,765
Other....................................................... 1,112 2,232
------- -------
$32,991 $36,358
======= =======
In February 1996, TransTexas completed a financing in the amount of $10
million at an interest rate of 12 1/2% 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 April 1997, 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 net proceeds of approximately $20 million. TransTexas
also completed a financing in the amount of $8.3 million at an interest rate of
12.7% per annum and a 36-month term, collateralized by certain operating
equipment. 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, 1997.
55
58
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------- ------------------- -------------------
1997 1996 1996 1995 1995 1994
-------- ------------ ----- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
Federal:
Current......................... $21,380 $ (8,963) $ -- $ 1,352 $(7,611) $10,909
Deferred........................ (8,889) 6,263 (416) (1,483) 5,196 (5,961)
State:
Current......................... -- -- -- -- -- 432
------- ----------- ----- ----------- ------- -------
Income tax expense (benefit)
before extraordinary item....... 12,491 (2,700) (416) (131) (2,415) 5,380
Tax benefit of extraordinary
item............................ -- (1,491) -- -- (1,491) --
------- ----------- ----- ----------- ------- -------
Total income tax expense
(benefit)....................... $12,491 $ (4,191) $(416) $ (131) $(3,906) $ 5,380
======= =========== ===== =========== ======= =======
In August 1993, the Omnibus Reconciliation Act of 1993, among other things,
increased the maximum corporate marginal federal income tax rate to 35% from 34%
effective January 1, 1993. Deferred income taxes as of July 31, 1994 include an
adjustment of approximately $2.7 million related to this increase in corporate
tax rates. Included in "Payable to affiliates" at January 31, 1997 and 1996 are
income taxes payable to TransAmerican totaling approximately $14.4 million and
$3.0 million, respectively.
During the third quarter of 1994, TARC reached a level of operations,
which, for federal income tax purposes, changed the tax status of
TransAmerican's consolidated group to an integrated oil company from an
independent producer. As a result of this change in tax status, TransTexas was
able to utilize a greater portion of its available tight sands credits, thereby
reducing its effective tax rate for 1994. TransTexas was unable to utilize any
tight sands credits during the Transition Period or in 1995 due to its net loss
position. Total income tax expense differs from amounts computed by applying the
statutory federal income tax rate to income before income taxes. The items
accounting for this difference are as follows (in thousands of dollars):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
---------------------- --------------------- --------------------
1997 1996 1996 1995 1995 1994
-------- ----------- ------- ----------- --------- --------
(UNAUDITED) (UNAUDITED)
Federal income tax expense
(benefit) at the
statutory
rate.................... $ 27,639 $ (44,295) $(9,518) $(8,234) $(43,011) $ 4,124
Increase (decrease) in tax
resulting from:
Net operating losses not
utilizable............ (7,707) 32,262 9,102 8,103 31,263 6,073
Tax rate change....... -- -- -- -- -- 2,745
State income taxes,
net of federal
income tax
benefit............ -- -- -- -- -- 281
Tight sands credit.... (7,441) 7,842 -- -- 7,842 (7,843)
-------- --------- ------- ------- -------- -------
$ 12,491 $ (4,191) $ (416) $ (131) $ (3,906) $ 5,380
======== ========= ======= ======= ======== =======
56
59
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's tax attributes are as follows (in
thousand of dollars):
JANUARY 31,
---------------------
1997 1996
--------- ---------
Deferred tax assets:
Investment in affiliates.................................. $ 275,450 $ --
Receivable from TransAmerican in lieu of federal net
operating loss carryforwards............................ 72,430 86,716
Safe harbor leases........................................ 81,976 85,283
Contingent liabilities.................................... 3,403 3,700
Alternative minimum tax credit carryforward............... 48,643 31,044
Capital loss carryforward................................. -- --
Other..................................................... 3,530 10,483
--------- ---------
485,432 217,226
Valuation allowance....................................... (430,194) (167,141)
--------- ---------
Net deferred tax assets............................ 55,238 50,085
--------- ---------
Deferred tax liabilities
Depreciation, depletion and amortization.................. 86,605 90,341
Other, net................................................ -- --
--------- ---------
86,605 90,341
--------- ---------
Net deferred tax liabilities....................... $ 31,367 $ 40,256
========= =========
In order to realize the deferred tax asset related to the investment in
affiliate, TransTexas must sell the common stock of the affiliate and generate
sufficient taxable income to offset the asset amount. A valuation allowance has
been provided for this deferred tax asset as it is more likely than not that the
aforementioned events will occur.
On a separate return basis, TARC and TransTexas have a total of
approximately $206.5 million of regular tax net operating loss ("NOL")
carryforwards at January 31, 1997 which would expire from 2004 through 2013.
Under the tax allocation agreement with TransAmerican and TransAmerican's other
subsidiaries, as long as TARC and TransTexas remain in the consolidated group
for tax purposes, TARC and TransTexas will receive benefits in the future for
loss carryforwards in the form of reduced current tax payable to the extent (i)
their loss carryforwards are available for and utilized by TransAmerican and
(ii) TransAmerican has the ability to pay tax then due. The Company can only use
alternative minimum tax credit carryforwards to the extent it is a regular
federal income tax payer. At January 31, 1997, TARC and TransTexas had NOL
carryforwards of approximately $32.6 million which have not been used by
TransAmerican and would expire in 2013.
Under certain circumstances, TransAmerican, TransAmerican Exploration
Corporation, a subsidiary of 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 the TNGC
Consolidated Group for federal tax purposes (the "TNGC Consolidated Group") and,
with certain exceptions, will no longer be obligated under the terms and
conditions of the Tax Allocation Agreement ("Deconsolidation"). 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
TNGC Consolidated Group, then a Deconsolidation of both TARC and TransTexas from
the TNGC Consolidated Group would occur. An event that results in
Deconsolidation of TARC or TransTexas from the TNGC Consolidated Group for tax
purposes could result in the acceleration of payment
57
60
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of a substantial amount of federal income taxes by TransAmerican. The tax
liability to TransAmerican that would result from Deconsolidation is estimated
to be approximately $15 million at January 31, 1997. Each member of a
consolidated group filing a consolidated federal income tax return is severally
liable to the Internal Revenue Service (the "IRS") for the consolidated federal
income tax liability of the consolidated group. There can be no assurance that
TransAmerican will have the ability to satisfy the above tax obligation at the
time due and, therefore, 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.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
---------------------- --------------------- --------------------
1997 1996 1996 1995 1995 1994
-------- ----------- ------- ----------- -------- ---------
(UNAUDITED) (UNAUDITED)
Seller financed
obligations incurred for
capital expenditures.... $ 3,621 $ -- $ 1,095 $ -- $ -- $ --
======== ======= ======= ====== ======= ========
Capitalized lease
obligations incurred for
property and
equipment............... $ -- $ 2,544 $ 1,643 $ 66 $ 967 $ 1,336
======== ======= ======= ====== ======= ========
Accounts payable and long-
term liabilities for
property and
equipment............... $ 19,673 $39,571 $36,080 $8,293 $11,784 $ 10,429
======== ======= ======= ====== ======= ========
Interest accretion on
notes and discount notes
capitalized in property
and equipment........... $ 49,109 $29,306 $18,186 $ -- $11,120 $ --
======== ======= ======= ====== ======= ========
Forgiveness of advances
from TransAmerican
(including $25.0 million
for property, plant and
equipment transferred
from TransAmerican at
net book value in
1994)................... $ -- $71,170 $ -- $ -- $71,170 $100,000
======== ======= ======= ====== ======= ========
Product financing
arrangements............ $(37,206) $64,877 $37,206 $ -- $27,671 $ --
======== ======= ======= ====== ======= ========
58
61
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------- --------------------- -------------------
1997 1996 1996 1995 1995 1994
-------- ------------ ------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
Interest.................... $87,680 $96,945 $49,771 $29,971 $77,145 $26,978
======= ======= ======= ======= ======= =======
Income taxes (paid to
TransAmerican)............ $ 7,000 $ -- $ -- $ -- $ -- $ 1,858
======= ======= ======= ======= ======= =======
TransTexas incurred approximately $112.9 million, $90.2 million, $50.8
million and $69.4 million of interest charges of which approximately $15.9
million, $8.3 million, $7.4 million and $0.9 million was capitalized for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
the year ended July 31, 1995, respectively, in connection with the acquisition
of certain of TransTexas' unevaluated gas and oil properties. During 1994,
TransTexas capitalized a total of approximately $0.7 million of interest in
connection with the expansion of TransTexas' pipeline system. TARC capitalized
interest of $68.8 million and $41.5 million for the year ended January 31, 1997
and 1996, respectively, in connection with the Capital Improvement Program.
Total interest charges incurred by TARC were $73.5 million and $60.0 million for
the respective periods.
13. TRANSACTIONS WITH AFFILIATES
During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital.
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $11.7
million, $21.4 million, $11.1 million, $4.4 million and $14.8 million for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
1995 and the year ended July 31, 1995, respectively. The receivable from
TransAmerican for natural gas sales totaled approximately $13.6 million at
January 31, 1997. 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, 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 $23.7 million issued by TTEX. In July 1996, TTEX
transferred this production payment to the Company 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 $26.6 million at January 31, 1997.
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 shares of TransTexas' common stock by TransAmerican or its
affiliates. TransAmerican has not made its scheduled interest payments on this
note. TTEX has agreed to defer the interest payments on the note until 1998.
Pursuant to the terms of the Transfer Agreement, TransAmerican is obligated
to indemnify TransTexas for all future losses incurred in connection with
litigation or bankruptcy claims assumed in the Transfer. In order to facilitate
the settlement of the Terry/Penrod litigation in May 1996, TransTexas advanced
to
59
62
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TransAmerican $16.4 million of the settlement amount in exchange for a note
receivable. TransAmerican has not made the scheduled interest payments on this
note. TransTexas has agreed to defer the interest payments on the note until
1998. In addition, the Company transferred escrowed funds of approximately $22
million to TransAmerican pursuant to the Terry/Penrod Settlement. 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. The amount outstanding under this
agreement totaled approximately $7 million at January 31, 1997.
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 TransTexas'
financial statements at carryover basis and the $3.9 million has been classified
as a reduction of retained earnings.
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. On January 31, 1997, TransAmerican conveyed at historical cost
certain oil and gas properties to TransTexas for a purchase price of $31.6
million. A portion of the purchase price was used to offset obligations under
the September 1996 production payment. At January 31, 1997, $59 million of
related-party receivables has been recorded as a contra-stockholder equity
account due to uncertainties regarding the repayment terms for such receivables.
TransTexas has agreed to defer any interest payments due from TransAmerican
until 1998.
TransTexas has made various advances to TransAmerican in an aggregate of
approximately $7 million for lease purchases and other corporate expenses. The
entire amount was outstanding at January 31, 1997.
In January 1997, an affiliate of the Company contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with a
book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TransTexas Transmission Corporation ("TTC").
In January 1997, TransTexas contributed substantially all of its Lobo Trend
properties to TTC.
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors"), a
subsidiary of TransAmerican, provides construction personnel to TARC in
connection with TARC's expansion and construction program. These construction
workers are temporary employees, and the number and composition of the workforce
will vary throughout TARC's expansion and construction 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 were
approximately $14.1 million, $20.2 million and $15.5 million for the year ended
January 31, 1997, the six months ended January 31, 1996 and the year ended July
31, 1995, respectively. Amounts payable to Southeast Contractors were $1.8
million and $2.3 million at January 31, 1997 and 1996, respectively. No labor
costs were charged by Southeast Contractors in prior years.
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
January 31, 1997, 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 (together with the
first promissory note, the "TransAmerican Notes"). At January 31, 1997, TARC had
approximately
60
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$44.4 million outstanding under both of these notes. TransAmerican has waived
any default occurring as a result of TARC's failure to make the scheduled
interest payment provided for in the notes. In February 1997, the November 1996
promissory note was replaced with a $50 million note bearing interest at an
annual rate of 15% and which matures on July 31, 2002. Interest payments are due
quarterly commencing on April 30, 1997. The debt represented by the new note is
subordinate in right of payment to the TARC Notes. As of April 25, 1997,
approximately $31.4 million had been advanced under the new note.
Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily operations
and capital expenditures were advanced by TransAmerican. In October 1994,
TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican
advanced approximately $50 million of the proceeds from these stock sales to
TARC, of which approximately $20 million was used by TARC to repay a portion of
the intercompany debt owed to TransAmerican, and the remaining $30 million was
used for working capital and general corporate purposes. TARC used approximately
$30 million of the net proceeds of the sale of the TARC Notes to repay
additional intercompany debt to TransAmerican. TransAmerican contributed to the
capital of TARC (through TEC) all but $10 million of the remainder of TARC's
intercompany debt owed to TransAmerican. In April 1995, TARC repaid the
remaining $10 million of intercompany indebtedness owed to TransAmerican. In
August 1995, TARC received an advance of $3 million from TransTexas which TARC
used to settle its remaining portion of certain litigation. In September 1995,
TARC received an advance of $1.7 million from TransAmerican which TARC used to
purchase feedstock. In October 1995, TARC repaid these advances without
interest. Additionally in October 1995, TARC received an advance of
approximately $4 million from TransAmerican for working capital, which has not
been repaid.
In September 1995, TARC received an advance of $1 million from TransTexas
which TARC used to purchase feedstock. This advance was repaid by TARC without
interest. In December 1995, TARC advanced $1 million to TransTexas. This advance
was repaid to TARC with interest.
TransAmerican, its existing subsidiaries, including TARC, the Company, and
TransTexas, entered into a Tax Allocation Agreement, the general terms of which
require TransAmerican and all of its subsidiaries to file federal income tax
returns as members of a consolidated group to the extent permitted by law.
Filing on a consolidated basis allows income and tax of one member to be offset
by losses and credits of another and allows deferral of certain intercompany
gains; however, each member is severally liable for the consolidated federal
income tax liability of the consolidated group.
The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal income
tax liabilities among the members if the IRS or the courts ultimately
re-determine the group's regular tax or alternative minimum tax liability. In
the event of an IRS audit or examination, the Tax Allocation Agreement generally
gives TransAmerican the authority to compromise or settle disputes and to
control litigation, subject to the approval of TARC, the Company or TransTexas,
as the case may be, where such compromise or settlement affects the
determination of the separate tax liability of that company.
Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year except
that each subsidiary will be able to utilize net operating losses and credits of
TransAmerican and the other members of the TransAmerican consolidated group
effectively to defer payment of tax liabilities that it would have otherwise
owed had it filed a separate federal income tax return. Each subsidiary will
essentially pay the deferred taxes at the time TransAmerican (or the member
whose losses or credits are utilized by such subsidiary) begins generating
taxable income or tax. This will have the effect of deferring a portion of such
subsidiary's tax liability to future years.
61
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The TARC Notes Indenture requires that, with certain exceptions,
transactions between TARC and certain related parties be on terms no less
favorable to TARC than would be available from an unrelated party and that are
fair and reasonable to TARC. This standard will apply to future transactions, if
any, with entities in which Mr. Stanley or members of his family may have an
interest. A similar covenant is in the indentures governing notes issued by
TransTexas.
14. BUSINESS SEGMENTS
The Company conducts its operations through three industry segments:
exploration and production ("E&P"), gas transportation ("Transportation") and
refining operations ("Refining"). 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. The refining segment is engaged in refining and storage operations.
All of the Company's significant gas and oil operations are located in Webb,
Zapata and Starr counties, Texas. The Company's refinery is located in Norco,
Louisiana, approximately 20 miles from New Orleans, Louisiana. Segment income
excludes interest income, interest expense and unallocated general corporate
expenses. Identifiable assets are those assets used in the operations of the
segment. Other assets consist primarily of deferred financing costs, escrowed
funds, certain receivables and other property and equipment. The Company's
revenues are derived principally from sales to interstate and intrastate gas
pipelines, direct end users, industrial companies, marketers, and refiners
located in the United States. As a general policy, collateral is not required
for receivables, but customers' financial condition and credit worthiness are
regularly evaluated. The Company is not aware of any significant credit risk
relating to its customers and has not experienced significant credit losses
associated with such receivables.
For the year ended January 31, 1997, three customers provided approximately
$70 million, $59 million and $48 million respectively in E&P and Transportation
revenues. For the Transition Period, three customers provided approximately $25
million, $22 million and $14 million, respectively, in E&P and Transportation
revenues. For the year ended July 31, 1995, two customers provided approximately
$73 million and $41 million, respectively, in E&P and Transportation revenues.
In 1994, one customer provided approximately $51 million in E&P and
Transportation revenues.
62
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended January 31, 1997, TARC had two customers which accounted
for 96% of total revenues. For the six months ended January 31, 1996, TARC had
three customers which accounted for 41% of total revenues. For the year ended
July 31, 1995, TARC had two customers which accounted for 56% of total revenues.
For the year ended July 31, 1994, TARC had two customers which accounted for 46%
of total revenues.
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------ ------------ ------------
YEAR ENDED JANUARY 31, 1997
Exploration and production............ $360,740 $230,560 $122,570 $314,013 $ 881,390
Gas transportation.................... 42,200 (9,018) 8,466 33,636 98,903
Refining.............................. 10,857 (54,995) 7,225 127,123 563,826
Other................................. 376 (34,637) 1,417 11,165 69,616
-------- -------- -------- -------- ----------
$414,173 $131,910 $139,678 $485,937 $1,613,735
======== ======== ======== ======== ==========
YEAR ENDED JANUARY 31, 1996 (UNAUDITED)
Exploration and production............ $254,275 $ 81,438 $111,993 $335,903 $ 738,648
Gas transportation.................... 33,518 (4,362) 8,204 17,005 72,815
Refining.............................. 176,230 (43,178) 6,308 208,799 518,205
Other................................. 834 (15,155) 316 17,835 126,754
-------- -------- -------- -------- ----------
$464,857 $ 18,743 $126,821 $579,542 $1,456,422
======== ======== ======== ======== ==========
TRANSITION PERIOD ENDED JANUARY 31, 1996
Exploration and production............ $123,253 $ 51,443 $ 56,543 $176,386 $ 738,648
Gas transportation.................... 15,892 (4,393) 4,194 13,266 72,815
Refining.............................. 107,237 (21,971) 3,159 150,238 518,205
Other................................. 601 (7,892) 157 16,904 126,754
-------- -------- -------- -------- ----------
$246,983 $ 17,187 $ 64,053 $356,794 $1,456,422
======== ======== ======== ======== ==========
SIX MONTHS ENDED JANUARY 31, 1995
(UNAUDITED)
Exploration and production............ $142,070 $ 32,860 $ 66,175 $ 99,672 $ 483,511
Gas transportation.................... 19,161 2,796 4,031 6,366 63,541
Refining.............................. 71,586 (23,239) 2,706 58,093 229,462
Other................................. 52 (6,972) 139 11,855 47,213
-------- -------- -------- -------- ----------
$232,869 $ 5,445 $ 73,051 $175,986 $ 823,727
======== ======== ======== ======== ==========
YEAR ENDED JULY 31, 1995
Exploration and production............ $273,092 $ 62,855 $121,625 $259,189 $ 712,322
Gas transportation.................... 36,787 2,827 8,041 10,105 60,916
Refining.............................. 140,579 (44,446) 5,855 116,654 499,879
Other................................. 285 (14,235) 298 12,786 52,539
-------- -------- -------- -------- ----------
$450,743 $ 7,001 $135,819 $398,734 $1,325,656
======== ======== ======== ======== ==========
YEAR ENDED JULY 31, 1994
Exploration and production............ $300,210 $ 96,828 $107,727 $180,426 $ 462,951
Gas transportation.................... 33,240 (2,257) 5,913 35,763 66,019
Refining.............................. 177,178 (14,526) 2,589 84,295 176,327
Other................................. 157 (15,280) 218 34,522 53,367
-------- -------- -------- -------- ----------
$510,785 $ 64,765 $116,447 $335,006 $ 758,664
======== ======== ======== ======== ==========
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary Information
The following summary financial information of TransTexas Transmission
Corporation reflects its financial position and its results of operations for
the periods presented (in thousands of dollars):
JANUARY 31,
-------------------
1997 1996
-------- -------
ASSETS
Total current assets...................................... $ 5,831 $ 811
Property and equipment, net............................... 482,351 70,273
Other assets.............................................. 2,004 3
-------- -------
$490,186 $71,087
======== =======
LIABILITIES AND EQUITY
Total current liabilities................................. $ 14,013 $ 6,191
Total noncurrent liabilities.............................. 107,367 34,284
Total equity.............................................. 368,806 30,612
-------- -------
$490,186 $71,087
======== =======
In January 1997, TransTexas contributed to TTC certain Lobo Trend
properties, and related liabilities, with historical costs of $386.7 million.
YEAR ENDED JANUARY 31, SIX MONTHS ENDED
1996 JANUARY 31, YEAR ENDED JULY 31,
---------------------- --------------------- --------------------
1997 1996 1996 1995 1995 1994
-------- ----------- ------- ----------- --------- --------
(UNAUDITED) (UNAUDITED)
Revenues................... $107,921 $ 81,034 $36,226 $53,120 $ 97,928 $77,915
Operating costs and
expenses................. 100,105 71,947 35,236 40,443 77,154 79,566
-------- -------- ------- ------- -------- -------
Operating income (loss).... 7,816 9,087 990 12,677 20,774 (1,651)
Interest income (expense),
net...................... (8,598) (13,196) (4,202) (2,777) (11,771) (4,483)
-------- -------- ------- ------- -------- -------
Income (loss) before
income taxes.......... (782) (4,109) (3,212) 9,900 9,003 (6,134)
Income tax expense
(benefit)................ (274) (1,438) (1,124) 3,465 3,151 (2,067)
-------- -------- ------- ------- -------- -------
Net income (loss)........ $ (508) $ (2,671) $(2,088) $ 6,435 $ 5,852 $(4,067)
======== ======== ======= ======= ======== =======
TTC conducts significant intercompany activities with TransTexas and
TransAmerican. Included in the results of operations of Transmission are the
following transactions with affiliates (in thousands of dollars):
YEAR ENDED JANUARY 31, SIX MONTHS ENDED
1996 JANUARY 31, YEAR ENDED JULY 31,
----------------------- --------------------- -------------------
1997 1996 1996 1995 1995 1994
-------- ------------ ------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
Revenues.................... $24,848 $31,691 $14,879 $18,242 $35,054 $30,398
Operating costs and
expenses.................. 77,204 52,235 24,751 32,235 59,719 53,459
Affiliated operating costs and expenses for the years ended January 31,
1997 and 1996, include the cost of natural gas purchased from TransTexas and its
predecessor of approximately $49 million and $36 million, respectively, $16
million and $25 million, respectively, for the six months ended January 31, 1996
and 1995 and $44 million and $34 million, respectively, for the years ended July
31, 1995 and 1994. Nonaffiliated
64
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues include the sales of natural gas liquids and condensate extracted from
this purchased gas of, $62 million and $46 million, respectively for the years
ended January 31, 1997 and 1996, $20 million and $33 million, respectively, for
the six months ended January 31, 1996 and 1995 and $59 million and $44 million,
respectively, for the years ended July 31, 1995 and 1994.
15. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As part of 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.
TRANSTEXAS
Alameda. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican and John R. Stanley in the 234th Judicial District Court, Harris
County, Texas, claiming that TransAmerican failed to account to Alameda for a
share of the proceeds TransAmerican received in a 1990 settlement of litigation
with El Paso Natural Gas Company ("El Paso"), and that TransAmerican has been
unjustly enriched by its failure to share such proceeds with Alameda. The court
granted Mr. Stanley's motion for summary judgment. On September 20, 1995, the
jury rendered a verdict in favor of TransAmerican. Alameda appealed to the
Fourteenth Court of Appeals, which affirmed the trial court judgment in favor of
TransAmerican. Alameda filed a motion for rehearing on April 10, 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. In
December 1996, the Supreme Court of Texas declined to hear the appeal. Pursuant
to the final judgment, TransTexas is required to remit the judgment amount plus
interest on or before May 25, 1997 or Coastal has a right of offset for gas
delivered pursuant to a contract with TransTexas.
Aspen. TransAmerican brought suit on September 29, 1993 against Aspen
Services, Inc. ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. This suit
is pending in the 215th Judicial District Court, Harris County, Texas. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts received
by Aspen. On July 19, 1995, Aspen filed a counterclaim and third party claim
against TransAmerican, the Company, and affiliated entities, asserting, among
other things, that these entities failed to make certain payments and
65
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
properly market the gas from these wells. Aspen is seeking damages in an
unspecified amount, as well as certain equitable claims. In April 1997, the
trial court ruled against Aspen on all of their counterclaims.
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, which 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. In November 1996, Finkelstein filed an application for writ
of error with 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 and attorneys' fees in
excess of $33.7 million. On November 18, 1993, the plaintiff added TransTexas as
an additional defendant. The parties arbitrated this matter in January 1997. A
decision is expected in May 1997.
Briones. In an arbitration proceeding, Jesus Briones, a lessor, claimed
that one of TransTexas' wells 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. In March, 1997, the court determined to grant
Briones' motion for summary judgment. TransTexas intends to file a motion for a
new trial.
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 September 8, 1997.
Farias. On February 15, 1996, Celita Suzana Farias filed a wrongful death
action in the 93rd Judicial District Court, 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 employee filed a petition in
intervention also alleging negligence, gross negligence and malice and seeking
unspecified damages. This litigation is in the discovery stage.
TARC
EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity Commission
("EEOC") issued a Commissioner's Charge against TARC and Southeast Contractors
(the "Commissioner's Charge") pursuant to Sections 706 and 707 of Title VII of
the Civil Rights Act of 1964, as amended, 42 U.S.C. sec. 2000e et seq. ("Title
VII"). In the Commissioner's Charge, the EEOC charged TARC and Southeast
Contractors with engaging in unlawful discriminatory hiring and promotion
practices based on race and gender. Each violation of Title VII, if proven,
potentially could subject TARC and/or Southeast Contractors to liability for
66
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) monetary damages for backpay and/or front pay in an undetermined amount, and
for compensatory damages and/or punitive damages in an amount that should not
exceed $300,000, (ii) injunctive relief, (iii) attorney's fees, and/or (iv)
interest. During the period covered by the Commissioner's Charge, TARC and
Southeast Contractors estimate that they received a combined total of
approximately 15,000 to 22,000 employment applications and hired (or rehired) a
combined total of approximately 1,500 to 2,200 workers. TARC and Southeast
Contractors have responded to the Commissioner's Charge and have denied engaging
in any unlawful employment practices. TARC and Southeast Contractors have been
cooperating fully with the EEOC in connection with its investigation. TARC and
Southeast Contractors intend to vigorously defend against the allegations
contained in the Commissioner's Charge in all proceedings before the EEOC and in
any subsequent litigation. If TARC and/or Southeast Contractors are found liable
for violations of Title VII based on the matters asserted in the Commissioner's
Charge, the Company can make no assurance that such liability would not have a
material adverse effect on the financial condition of the Company or TARC or the
Company's or TARC's ability to pay interest or principal on the TARC Notes.
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.
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 water bottoms of Bayou Trepagnier. Shell dismissed this suit without
prejudice.
General. TransTexas and TARC are also named defendants in other ordinary
course, routine litigation incidental to their businesses. Although the outcome
of these other lawsuits cannot be predicted with certainty, the Company does not
expect these matters to have a material adverse effect on its financial
position. At January 31, 1997, the possible range of estimated losses related to
all of the aforementioned claims, in addition to the estimates accrued by the
Company, is $0 to $36 million. The resolution in any reporting period of one or
more of these matters in a manner adverse to the Company could have a material
impact on the Company's results of operations and cash flows for that period.
Litigation expense, including legal fees, for the years ended January 31, 1997
and 1996 for the six months ended January 31, 1996 and 1995 was approximately
$19.8 million, $13.5 million, $5 million and $7 million, respectively.
Litigation expense for the years ended July 31, 1995 and 1994 was approximately
$15 million and $20 million, respectively. 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. TransTexas has delivered letters of credit and
placed into escrow cash, which letters of credit and cash total approximately
$21 million, to be applied to the litigation claims described above.
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
67
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, may 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.
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 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 flows or financial position.
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. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a material
adverse effect on its financial position, results of operations or cash flows.
However, until the refinery is in full operation, there can be no assurance that
the regulations will not have such an effect.
In addition, the Environmental Protection Agency ("EPA") promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organics NESHAPS") regulations for petroleum refineries under
the Clean Air Act in 1995, and subsequently has amended such regulations. These
regulations set "Maximum Achievable Control Technology" ("MACT") standards for
petroleum refineries. The Louisiana Department of Environmental Quality (the
"LDEQ") has incorporated MACT standards into TARC's air permits under federal
and state air pollution prevention laws. TARC believes that compliance with the
Hazardous Organics NESHAPS will not have a material adverse effect on TARC's
financial position, results of operations or cash flows. However, until the
refinery is in full operation, there can be no assurance that the regulations
will not have such an effect.
The EPA recently 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 the new 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 sulfur,
olefins, 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 EPA's National Ambient Air Quality Standards ("NAAQS")
proposals for particulate matter and ozone are implemented 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
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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 producers may not
be able to develop an individual 1990 baseline for a number of reasons,
including, for example, lack of adequate 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.
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
appropriate regulatory relief. TARC will continue to pursue regulatory relief
with the EPA. 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.
Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The deadline for a refinery to submit an Operating
Permit Application under the Louisiana program was October 12, 1996. TARC timely
submitted its Title V Operating Permit application and the LDEQ has designated
the application as being administratively complete. As yet, the LDEQ has not
responded further regarding the status of TARC's Title V Operating Permit. TARC
believes that its application will be approved. However, there can be no
assurance that additional expenditures required pursuant to Title V Operating
Permit obligations will not have a material adverse effect on TARC's financial
position, results of operations or cash flow.
Cleanup Matters. TARC also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of clean up
relating to, 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 facility assessment at the 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 LDEQ agreed that the LDEQ would
serve as the lead agency with respect to the investigation and remediation of
areas of concern identified in the investigations. TARC, under a voluntary
initiative approved by the LDEQ, has submitted a work plan to the LDEQ to
determine which areas may require further investigation and remediation. The
LDEQ has not yet responded to TARC's submission or issued any further requests
relating to this matter. As a result, TARC is unable at this time to estimate
what the costs, if any, will be if the LDEQ does require further investigation
or remediation of the areas identified.
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 three 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
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
At one Superfund site, TARC has submitted information to the EPA indicating
that it should have no liability for this matter, and negotiations with the EPA
are continuing. With respect to the remaining two sites, TARC's liability for
each such matter has not been determined, and TARC 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 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 liability will be significant; however,
it is not possible to determine the ultimate environmental liabilities, if any,
that may arise from the matters discussed above.
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 Indenture), each holder of the
TransTexas Notes will have the right to require TransTexas to repurchase such
holder's Notes at 101% of the principal amount thereof plus accrued and unpaid
interest. A Change of Control would be deemed to occur under the 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 Notes 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. The holders of TransTexas'
Subordinated Notes would also have a right to require TransTexas to repurchase
such securities upon the occurrence of a change of control. 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 January 31, 1997, TransTexas had approximately $34.7 million of
indebtedness (excluding the TransTexas Notes and Subordinated Notes) subject to
such right of repayment or repurchase. In the event of a Change of Control under
the TransTexas Indenture or
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
TARC owns a large petroleum refinery in the Gulf Coast region along the
Mississippi River, approximately 20 miles from New Orleans, Louisiana. In
February 1995, TARC began a construction and expansion program designed to
reactivate the refinery and increase its complexity ("Capital Improvement
Program"). TARC's debt securities are collateralized by, among other things, an
aggregate of 50.45 million shares of TransTexas' common stock (the "Common
Stock"). From February 1995 through March 1997, TARC spent approximately $238
million on the Capital Improvement Program, procured a majority of the equipment
required and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary to complete this
project.
Primarily because additional funding was not available to TARC on a timely
basis, TARC was unable to meet the construction completion timetable for the
Capital Improvement Program as required under the TARC Notes Indenture. The
Holders of the TARC Notes have waived, until July 15, 1997, the default under
the TARC Notes Indenture which would have occurred on February 15, 1997 as a
result of TARC's failure to meet the required completion timetable. The waiver
of this default will cease to be effective on July 15, 1997. Unless the default
has been further waived or TARC completes a recapitalization that satisfies
holders of the TARC Notes, such holders would then be entitled to pursue
remedies available under the TARC Notes Indenture, including acceleration of the
maturity of the TARC Notes. 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 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 the Company to repay amounts outstanding thereunder. A sale of
such shares following a foreclosure could also result in a Change of Control
under the TransTexas Indenture.
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 January 31, 1997, TARC had commitments for refinery construction
and maintenance of approximately $53.0 million. TARC is acting as general
contractor and can generally cancel or postpone capital projects.
Subsequent to year end, TARC entered into a commitment to purchase 0.6
million barrels of feedstock at $24.68 per barrel plus interest at 8.25%,
demurrage, bank fees, and other related costs. Based on a market value of
approximately $18.15 per barrel at April 29, 1997, the loss on the feedstock is
estimated to range between $4 and $5 million.
GAS SALES COMMITMENTS
In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for future
sales under the amended contract. In consideration, TransAmerican agreed to pay
the buyer approximately $0.4 million per month through June 1997. This
commitment was assumed by TransTexas.
TransTexas and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which TransTexas
will deliver 100,000 MMBtu of natural gas per day through August 1997. The
selling price for this gas is determined by certain industry averages as defined
in the contract.
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
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 of
TransTexas. 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 TransTexas common stock 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. Based on the current capitalization of TransTexas, the
issuance of shares to satisfy this obligation would result in Deconsolidation
for tax purposes. See Note 11.
PRODUCTION PAYMENTS
On February 28, 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
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 January 31, 1997, approximately 23 Bcf of natural gas
remained subject to this production payment.
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
January 31, 1997, approximately 24 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%
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
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 primary sum of
such reimbursed costs, plus an amount equivalent to a 17.5% annual interest rate
on the unpaid portion of such primary sum.
In April 1997, 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 approximately $20 million. The production
payment calls for the repayment of the primary sum plus an amount equivalent to
a 16% annual interest rate on the unpaid portion of such primary sum.
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. No
federal tax opinion was rendered with respect to this transaction, however, and
TransAmerican has not obtained a ruling from the Internal Revenue Service (the
"IRS") regarding this transaction. 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 ("COD Exclusions") of
the Internal Revenue Code of 1986, as amended (the "Code") and has reduced its
tax attributes (including its net operating loss and credit carryforwards) as a
consequence of the COD Exclusion. TransTexas believes that there is substantial
legal authority to support the position that the COD Exclusion applies to the
cancellation of TransAmerican's indebtedness. However, due to factual and legal
uncertainties, there can be no assurance that the IRS will not challenge this
position, or that any such challenge would not be upheld. Under the Tax
Allocation Agreement, TransTexas has agreed to pay an amount equal to any
federal tax liability (which would be approximately $25.4 million) attributable
to the inapplicability of the COD Exclusion. Any such tax would be offset in
future years by alternative minimum tax credits and retained loss and credit
carryforwards to the extent recoverable from TransAmerican. The IRS has
commenced an audit of the TransAmerican Consolidated Group's tax return for its
taxable years ended July 31, 1994 and July 31, 1995. Because the audit is in its
initial stages,it is not possible to predict the scope of the IRS' review or
whether any tax deficiencies will be proposed by the IRS as a result of its
review.
TransTexas has significant contingent liabilities, including liabilities
with respect to litigation matters and other obligations assumed in the
Transfer. In addition, a change of control or other event that results in
deconsolidation of TransTexas and TransAmerican for federal income tax purposes
could result in acceleration of a substantial amount of federal income taxes.
These matters, individually and in the aggregate, amount to significant
potential liability which, if adjudicated in a manner adverse to 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 contingencies
or the probability of the occurrence of these contingencies cannot be predicted
with certainty, TransTexas does not expect these matters to have a material
adverse effect on its financial position.
PRICE MANAGEMENT ACTIVITIES
TARC enters into futures contracts, options on futures, and swap 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. At January 31, 1997, TARC's position in open
futures contracts, options on futures, and swap agreements was not significant.
A net trading gain of approximately $2.3 million and a trading loss of
approximately $3.1 million were reflected in other income (expense) for the
years ended July 31, 1995 and 1994, respectively. These transactions did not
qualify for hedge accounting
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
treatment under the guidelines of SFAS 80; therefore, gains or losses associated
with these futures contracts were not deferred.
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
TARC enters into financing arrangements in order to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock which 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. In the
event the refinery is not operating, these cargos may be sold on the spot
market. During the year ended January 31, 1997, 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. For the year ended January 31, 1997,
TARC processed approximately 1.1 million barrels of feedstock pursuant to this
agreement. 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 January 31, 1997, TARC had
completed processing approximately 6.4 million barrels of feedstocks and is
storing approximately 1.0 million barrels of intermediate and refined products
under this agreement. TARC also entered into a processing agreement with this
third party to process approximately 0.8 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. For the year ended January 31, 1997, TARC recorded a net loss of
approximately $4.5 million related to these processing arrangements primarily as
a result of price management activities.
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 the
company or the counterparty thereto is required to make a payment to the other
at the end of each month (the "Settlement Date"). The payments will equal the
product of a notional quantity ("Base Quantity") of natural gas and the
difference between a specified fixed price ("Fixed Price") and a market price
("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for TransTexas to make payments
to the counterparty to the extent that the Floating Price exceeds the Fixed
Price, up to a maximum ("Maximum Floating 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 year ended January 31, 1997, TransTexas made net
settlement payments totaling approximately $37 million to the counterparty
pursuant to the Hedge Agreements. As of January 31, 1997, TransTexas has Hedge
Agreements with Settlement Dates ranging from February 1997 through April 1997
involving total Base Quantities for all monthly periods aggregating
approximately 20.4 TBtu of natural gas. Fixed Prices for these agreements range
from $1.70 to $1.78 per MMBtu ($1.76 to $1.84 per Mcf) up to Maximum Floating
Prices ranging from
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2.00 to $2.20 per MMBtu ($2.07 to $2.28 per Mcf). In addition, one agreement
has a Fixed Price of $2.48 per MMBtu ($2.57 per Mcf) with no Maximum Floating
Price. Under the terms of this agreement, the counterparty advanced $5 million
to TransTexas. At January 31, 1997, the estimated cost to settle all of the
Hedge Agreements would have been approximately $13 million. These agreements are
accounted for as hedges and accordingly, any gains or losses are deferred and
recognized in the respective months as physical volumes are sold. At January 31,
1997, TransTexas maintained $1.0 million in a margin account related to the
Hedge Agreements.
OPERATING LEASES
As of January 31, 1997, the Company has long-term leases covering land and
other property and equipment. Rental expense was approximately $10 million for
the year ended January 31, 1997, $5 million for the six months ended January 31,
1996 and $9 million and $7 million for the fiscal years ended July 31, 1995 and
1994, respectively. Future minimum rental payments required under operating
leases that have initial or remaining noncancellable lease terms in excess of
one year as of January 31, 1997, including the sale-leaseback transaction
described below, are as follows (in thousands of dollars):
1998........................................................ $ 6,132
1999........................................................ 4,869
2000........................................................ 1,974
2001........................................................ 1,633
2002........................................................ 1,109
Thereafter.................................................. 522
-------
$16,239
=======
In January 1996, TransTexas completed a sale-leaseback transaction in the
amount of $3 million, related to its operating equipment. The sale-leaseback
transaction has a monthly lease payment of approximately $56,000 per month and a
60-month term. At the end of the lease term, the lease will automatically renew
for 12 months at approximately $38,000 per month.
16. LITIGATION SETTLEMENTS
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. This case has been
settled.
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 District Court, Ector County, Texas
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. This litigation
was settled in December 1996.
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
75
78
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, TransTexas 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, TransTexas paid Terry
approximately $19 million and caused escrowed funds held for the benefit of the
Bank Group of approximately $22 million to be paid to Terry. Upon payment of the
settlement amount, Terry released the judgments, released all liens and
reassigned to TransTexas 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. TransTexas appealed the judgment to the Fifth
Circuit Court of Appeals. On July 2, 1996, TransTexas 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,
TransTexas 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 TransTexas 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.
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.
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79
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning TransTexas' gas and
oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Estimates of TransTexas' proved reserves and proved developed reserves were
prepared by Netherland, Sewell & Associates, Inc., an independent firm of
petroleum engineers, based on data supplied to them by TransTexas. Such
estimates are inherently imprecise and may be subject to substantial revisions
as additional information such as reservoir performance, additional drilling,
technological advancements and other factors become available.
Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):
JANUARY 31,
------------------------
1997 1996
---------- ----------
Proved properties........................................... $1,845,994 $1,639,237
Unproved properties......................................... 158,973 136,360
---------- ----------
Total............................................. 2,004,967 1,775,597
Less accumulated depletion.................................. 1,288,860 1,165,943
---------- ----------
$ 716,107 $ 609,654
========== ==========
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
SIX
YEAR MONTHS YEAR ENDED
ENDED ENDED JULY 31,
JANUARY 31, JANUARY 31, -------------------
1997 1996 1995 1994
----------- ----------- -------- --------
Property acquisitions....................... $ 50,963 $ 11,485 $124,956 $ 18,593
Exploration................................. 100,737 27,039 84,201 114,266
Development................................. 162,313 115,812 50,032 47,567
-------- -------- -------- --------
$314,013 $154,336 $259,189 $180,426
======== ======== ======== ========
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80
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
SIX
YEAR MONTHS YEAR ENDED
ENDED ENDED JULY 31,
JANUARY 31, JANUARY 31, -------------------
1997 1996 1995 1994
----------- ----------- -------- --------
Revenues.................................... $363,459 $124,663 $275,627 $302,522
-------- -------- -------- --------
Expenses:
Production costs.......................... 97,619 31,376 76,798 76,928
Depletion................................. 122,570 56,543 121,625 107,727
General and administrative................ 8,710 3,601 14,349 21,039
Litigation settlement..................... (96,000) (18,300) -- --
-------- -------- -------- --------
Total operating expenses.......... 132,899 73,220 212,772 205,694
-------- -------- -------- --------
Income before income taxes........ 230,560 51,443 62,855 96,828
Income taxes................................ 80,696 18,005 21,999 26,047
-------- -------- -------- --------
$149,864 $ 33,438 $ 40,856 $ 70,781
======== ======== ======== ========
Depletion rate per net equivalent Mcf....... $ .96 $ .82 $ .81 $ .80
======== ======== ======== ========
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating conditions. Natural gas quantities
represent wet gas volumes, which include amounts that will be extracted as
natural gas liquids. TransTexas' estimated net proved reserves and proved
developed reserves of natural gas (billions of cubic feet) and condensate
(millions of barrels) are shown in the table below.
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ----------------------------
1997 1996 1995 1994
------------- ------------- ------------- ------------
GAS OIL GAS OIL GAS OIL GAS OIL
------- --- ------- --- ------- --- ------ ---
Proved reserves:
Beginning of year................ 1,139.1 2.9 1,122.6 3.0 717.4 1.9 695.0 2.0
Increase (decrease) during the
year attributable to:
Revisions of previous
estimates..................... 6.5 .1 43.0 -- 143.5 .5 .5 .1
Extensions, discoveries and other
additions..................... 90.3 3.6 73.8 .2 409.6 1.2 152.8 .4
Litigation settlement............ -- -- 9.5 -- -- -- -- --
Sales of reserves................ (204.9) (.4) (42.9) -- -- -- -- --
Purchase of reserves............. 11.3 .1 -- -- -- -- -- --
Production....................... (122.6) (.6) (66.9) (.3) (147.9) (.6) (130.9) (.6)
------- --- ------- --- ------- --- ------ ---
End of year................... 919.7 5.7 1,139.1 2.9 1,122.6 3.0 717.4 1.9
======= === ======= === ======= === ====== ===
Proved developed reserves:
Beginning of year................ 425.3 .9 476.6 1.1 442.2 1.1 384.2 1.1
End of year...................... 381.5 2.4 425.3 .9 476.6 1.1 442.2 1.1
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81
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standardized Measure Information
The calculation of estimated future net cash flows in the following table
assumed the continuation of existing economic conditions and applied year-end
prices (except for future price changes as allowed by contract) of gas and
condensate to the expected future production of such reserves, less estimated
future expenditures (based on current costs) to be incurred in developing and
producing those proved reserves.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value of
TransTexas' gas and oil reserves. These estimates reflect proved reserves only
and ignore, among other things, changes in prices and costs, revenues that could
result from probable reserves which could become proved reserves in fiscal 1998
or later years, and the risks inherent in reserve estimates. The standardized
measure of discounted future net cash flows relating to proved gas and oil
reserves is as follows (in thousands of dollars):
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, -----------------------
1997 1996 1995 1994
----------- ---------------- ---------- ----------
Future cash inflows.............. $3,051,397 $2,269,585 $1,591,011 $1,194,656
Future production costs.......... (506,882) (427,482) (316,055) (219,485)
Future development costs......... (459,326) (582,798) (461,471) (243,991)
Future income taxes.............. (563,812) (310,445) (196,942) (199,065)
---------- ---------- ---------- ----------
Future net cash flows............ 1,521,377 948,860 616,543 532,115
Annual discount (10%) for
estimated timing of cash
flows.......................... (464,121) (340,002) (201,479) (136,541)
---------- ---------- ---------- ----------
Standardized measure of
discounted future net cash
flows.......................... $1,057,256 $ 608,858 $ 415,064 $ 395,574
========== ========== ========== ==========
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ---------------------
1997 1996 1995 1994
----------- ----------- --------- ---------
Beginning of year............................. $ 608,858 $ 415,064 $ 395,574 $ 512,460
Revisions:
Quantity estimates and production rates..... 13,903 31,712 122,771 (31,403)
Prices, net of lifting costs................ 665,054 331,936 (155,257) (158,906)
Estimated future development costs.......... (75,622) (128,584) (13,631) 26,667
Additions, extensions, discoveries and
improved recovery........................... 209,932 47,026 172,365 141,008
Net sales of production....................... (262,066) (92,139) (198,829) (233,031)
Development costs incurred.................... 156,430 115,812 49,873 35,285
Accretion of discount......................... 80,806 27,382 54,439 63,824
Net changes in income taxes................... (192,608) (66,622) (16,722) 39,670
Sale of reserves.............................. (165,949) (77,879) -- --
Litigation settlement......................... -- 5,150 4,481 --
Purchase of reserves.......................... 18,518 -- -- --
---------- --------- --------- ---------
End of year................................... $1,057,256 $ 608,858 $ 415,064 $ 395,574
========== ========= ========= =========
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82
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Year-end wellhead prices received by TransTexas from sales of natural gas
including margins from natural gas liquids, were $3.17, $1.95, $1.37 and $1.62
per Mcf for 1997, 1996, 1995 and 1994, respectively. Year-end condensate prices
were $23.99, $18.34, $16.27 and $17.62 per barrel for 1996, 1995 and 1994,
respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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83
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors and executive officers are as follows
NAME OFFICE AGE
---- ------ ---
James V. Langston.................... Director -- Independent 72
John R. Blinn........................ Director -- Independent 53
Thomas B. McDade..................... Director -- Independent 73
Kim E. Morris........................ Director -- Independent 40
Donald B. Henderson.................. Director -- Independent 46
John R. Stanley...................... Director, Chairman of the Board and Chief
Executive Officer 58
Ed Donahue........................... Vice President and Secretary 46
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company:
James V. Langston has been a director of the Company since February 1995.
Mr. Langston is the Chairman and Chief Executive Officer of Arctic Offshore
Technology Company. From 1977 to 1984 he was President, Director, and Chief
Operating Officer of Dual Drilling Company. Prior thereto, he was with Exxon,
USA for 29 years and served as Manager of Exploration and Production Drilling.
Mr. Langston was a director of TransAmerican from 1986 to 1995.
John R. Blinn became a director of the Company in September 1995. Mr. Blinn
is Of Counsel to the law firm of Leonard, Hurt, Terry & Blinn. Prior thereto, he
was in private practice, and he served as U.S. Bankruptcy Judge for the Southern
District of Texas from 1975 to 1982. Mr. Blinn previously served as a director
of TransAmerican until his resignation in 1995.
Thomas B. McDade has been a director of the Company and TARC since July
1994. He is also a director of TransTexas. Mr. McDade is primarily engaged in
managing his personal investments and in providing consulting services in
Houston, Texas. Mr. McDade served as a director of TransAmerican from 1985 until
his resignation in February 1995. Prior to 1989, he served as a consultant to
Texas Commerce Bancshares, Inc. and prior to July 1985 he served as Vice
Chairman and director of Texas Commerce Bancshares, Inc. and Vice Chairman and
Advisory Director of Texas Commerce Bank. Mr. McDade is a former director and
trustee of eleven registered investment companies from 1985 to 1995 for which
John Hancock Funds serves as investment advisor in Boston, Massachusetts. Mr.
McDade is a former director of Houston Industries, Inc. and Houston Lighting &
Power Company. He is also a former member of the Board of Managers of the Harris
County Hospital District and former Chairman of the State Securities Board of
Texas.
Kim E. Morris was elected to the Company's Board of Directors in December
1995 by the holders of the Company's Series A Preferred Stock. Ms. Morris is a
portfolio manager at R.H. Capital Associates in Glen Rock, New Jersey. She
joined that firm in August 1995 after holding similar positions at Cerberus
Partners and Morgens Waterfall for the previous five years. Prior thereto, Ms.
Morris was an analyst at Paine Webber, specializing in the energy, manufacturing
and retail industries.
Donald B. Henderson has been a director of the Company and of TARC since
July 1994. Mr. Henderson is a partner in the law firm of Blackburn & Henderson
and is a director of Colonial Casualty Insurance Co. From 1972 to 1978, Mr.
Henderson was a member of the Texas House of Representatives. Mr. Henderson has
been a member of the Texas Senate since 1982. Mr. Henderson served as a director
of TransAmerican from 1985 until his resignation in February 1995.
John R. Stanley has been a director and Chief Executive Officer of the
Company since July 1994. Mr. Stanley has been a director and Chief Executive
Officer of TARC since September 1987 and has been a
81
84
director and Chief Executive Officer of TransTexas since May 1993. Mr. Stanley
is the founder, Chairman of the Board, Chief Executive Officer, and sole
stockholder of TNGC Holdings Corporation, which is the sole stockholder of
TransAmerican. He has operated TransAmerican since 1958.
Edwin B. Donahue has served as Vice President and Secretary of TEC since
February 1997. Mr. Donahue also serves as Vice President, Chief Financial
Officer and Secretary of TransTexas and TTC and as Vice President and Secretary
of TransAmerican and TARC. Mr. Donahue has been employed in various positions
with TransAmerican for over 20 years.
Information about other directors and executive officers of the Company's
subsidiaries is hereby incorporated from Part III, Item 10, of each of
TransTexas' and TARC's annual reports on Form 10-K for their fiscal years ended
January 31, 1997.
DIRECTOR COMPENSATION
Each director, other than John R. Stanley, receives an annual director's
fee of $75,000 plus $750 for each board meeting and committee meeting attended
(exclusive of committee meetings held on the same day as board meetings).
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is hereby incorporated from Part III,
Item 11, of each of TransTexas' and TARC's annual reports on Form 10-K for their
fiscal years ended January 31, 1997.
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85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
TransAmerican owns 100% of the outstanding shares of the Company's common
stock. TransAmerican's address is 1300 North Sam Houston Parkway East, Suite
300, Houston, Texas 77032.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Preferred Stock, $0.01 par value, as of
January 31, 1997, by each person known to the Company to beneficially own more
than 5% of the outstanding shares of Preferred Stock. Except as otherwise
indicated, each stockholder identified in the table has sole voting and
investment power with respect to his or its shares.
SHARES OWNED
--------------------
NUMBER PERCENTAGE
------ ----------
Merrill Lynch Asset Management.............................. 250 25%
800 Scudders Mill Rd.
Plainsboro, NJ 08336
Alliance Capital............................................ 200 20%
135 W. 50th Street, 5th Floor
New York, NY 10019
Daniel Nir.................................................. 150 15%
10 Gracie Square #4A
New York, NY 10020
McKay-Shields Financial..................................... 150 15%
9 West 57th Street
New York, NY 10019
Kim Morris.................................................. 100 10%
55 Harriston Road
Glen Rock, NJ 07452
Smith 1995 InterVivos Trust................................. 100 10%
156 W. 56th Street, Suite 901
New York, NY 10019
Trust Company of The West................................... 50 5%
865 South Figueroa, 16th Floor
Los Angeles, CA 90017
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is hereby incorporated from Part III,
Item 13, of each of TransTexas' and TARC's annual reports on Form 10-K for their
fiscal years ended January 31, 1997.
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86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
PAGE
----
(1) Report of Independent Accountants........................... 37
Consolidated Balance Sheet.................................. 38
Consolidated Statement of Operations........................ 39
Consolidated Statement of Stockholder's Deficit............. 40
Consolidated Statement of Cash Flows........................ 41
Notes to Consolidated Financial Statements.................. 42
(2) Financial Statement Schedule
Report of Independent Accountants........................... 92
Schedule II -- Valuation and Qualifying Accounts............ 93
Schedules other than those listed above are omitted for the reason that
they are not required or are not applicable or the required information
is included in the financial statements or related notes.
(3) Exhibits
The following instruments are included as exhibits to this Annual Report
on Form 10-K and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by parenthetical information.
3.1 -- Certificate of Incorporation, as amended (previously
filed as Exhibit 3.2(i) to the Company's and TARC's
Registration Statement on Form S-1 (33-85930), and
incorporated herein by reference).
3.2 -- By-laws of the Company (previously filed as Exhibit
3.2(ii) to the Company's and TARC's Registration
Statement on Form S-1 (33-85930), and incorporated herein
by reference).
3.3 -- Certificate of Designation of Series A Preferred Stock
(previously filed as Exhibit 3.2(iii) to the Company's
and TARC's Registration Statement on Form S-1 (33-85930),
and incorporated herein by reference).
3.4 -- Certificate of Amendment to Certificate of Incorporation
(previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended January 31, 1997,
and incorporated herein by reference).
4.1 -- Indenture dated as of June 15, 1995, among TransTexas,
Transmission, and American Bank National Association, as
Trustee (the "Indenture Trustee"), with respect to the
TransTexas Notes including the forms of Note and Senior
Secured Guarantee as exhibits (previously filed as
Exhibit 2 to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference).
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement, effective as
of June 23, 1995, from TransTexas to James A. Taylor, as
trustee for the benefit of the Indenture Trustee
(previously filed as Exhibit 3 to TransTexas' Current
Report on Form 8-K filed with the Securities and Exchange
Commission in June 1995, and incorporated herein by
reference).
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87
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of June 20,
1995, from TTC to James A. Taylor, as trustee for the
benefit of the Indenture Trustee (previously filed as
Exhibit 5 to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference).
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TransTexas in favor of the
Indenture Trustee (previously filed as Exhibit 6 to
TransTexas' Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference).
4.5 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TTC in favor of the Indenture
Trustee (previously filed as Exhibit 7 to TransTexas'
Current Report on Form 8-K filed with the Securities and
Exchange Commission in June 1995, and incorporated herein
by reference).
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among TransTexas, the Indenture Trustee
and the Disbursement Agent (previously filed as Exhibit 9
to TransTexas' Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference).
4.7 -- Indenture dated as of February 15, 1995, between TARC,
First Fidelity Bank, National Association, as Trustee and
the Company, with respect to the Guaranteed First
Mortgage Discount Notes and the Guaranteed First Mortgage
Notes (together, the "TARC Notes"), including the forms
of TARC Notes as exhibits (previously filed as Exhibit 3
to the Company's and TARC's Current Report on Form 8-K
dated March 14, 1995, and incorporated herein by
reference).
4.8 -- Warrant Agreement dated as of February 23, 1995, among
the Company, TARC and First Fidelity Bank, National
Association, as Warrant Trustee, with respect to the
Common Stock Purchase Warrants including the form of
Warrant as an exhibit (previously filed as Exhibit 4 to
the Company's and TARC's Current Report on Form 8-K dated
March 14, 1995, and incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, from TARC
to First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 5 to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.10 -- Security Agreement dated as of February 23, 1995, from
TARC to First Fidelity Bank, National Association, as
Trustee (previously filed as Exhibit 6 to the Company's
and TARC's Current Report on Form 8-K dated March 14,
1995, and incorporated herein by reference).
4.11 -- Cash Collateral and Disbursement Agreement dated as of
February 23, 1995, among TARC, First Fidelity Bank,
National Association, as Trustee, First Fidelity Bank,
N.A., as Disbursement Agent, and Baker & O'Brien, Inc.,
as Construction Supervisor (previously filed as Exhibit 7
to the Company's and TARC's Current Report on Form 8-K
dated March 14, 1995, and incorporated herein by
reference).
4.12 -- Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement from TARC in favor of
First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 8 to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.13 -- Registration Rights Agreement dated as of February 23,
1995, between TransTexas, the Company, and TARC
(previously filed as Exhibit 10 to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
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88
4.14 -- Pledge and Security Agreement dated as of September 19,
1996, between TransAmerican Exploration Corporation and
Fleet National Bank (previously filed as exhibit 4.1 to
TransTexas' Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
4.15 -- Registration Rights Agreement dated as of September 19,
1996, by and among TransTexas Gas Corporation,
TransAmerican Natural Gas Corporation, TransAmerican
Exploration Corporation and Fleet National Bank
(previously filed as exhibit 4.2 to TransTexas' Form 10-Q
for the quarter ended October 31, 1996, and incorporated
herein by reference).
4.16 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas and the Purchasers named therein of 13 1/4%
Series A Senior Subordinated Notes due 2002 (previously
filed as exhibit 4.12 to TransTexas' Post-Effective
Amendment No. 5 to Form S-3 (33-91494), and incorporated
herein by reference).
4.17 -- Indenture dated December 13, 1996 between TransTexas and
Bank One, Columbus, N.A., as Trustee (previously filed as
exhibit 4.13 to TransTexas' Post-Effective Amendment No.
5 to Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Registration Rights Agreement dated December 13, 1996
between TransTexas and the Purchasers named therein
(previously filed as exhibit 4.14 to TransTexas' Post-
Effective Amendment No. 5 to Form S-3 (33-91494), and
incorporated herein by reference).
4.19 -- First Supplemental Indenture dated as of February 24,
1997 among TARC, TEC and First Union National Bank, f/k/a
First Fidelity Bank, N.A. (filed as an exhibit to TARC's
Annual Report on Form 10-K for the year ended January 31,
1997, and incorporated herein by reference).
4.20 -- Indenture dated as of March 14, 1997, between TARC and
First Union National Bank, as Trustee, with respect to
the $36 million Senior Secured Notes due 1998, including
the form of Note as an exhibit (filed as an exhibit to
TARC's Annual Report on Form 10-K for the year ended
January 31, 1997, and incorporated herein by reference).
4.21 -- Pledge Agreement dated as of March 14, 1997, from TARC to
First Union National Bank, as Trustee (filed as an
exhibit to TARC's Annual Report on Form 10-K for the year
ended January 31, 1997, and incorporated herein by
reference).
4.22 -- Security Agreement dated as of March 14, 1997, from TARC
to First Union National Bank, as Trustee (filed as an
exhibit to TARC's Annual Report on Form 10-K for the year
ended January 31, 1997, and incorporated herein by
reference).
4.23 -- Cash Collateral and Disbursement Agreement dated as of
March 14, 1997, between TARC and First Union National
Bank, as Trustee and Disbursement Agent (filed as an
exhibit to TARC's Annual Report on Form 10-K for the year
ended January 31, 1997, and incorporated herein by
reference).
4.24 -- First Amendment to Cash Collateral and Disbursement
Agreement dated as of April 3, 1997, between TARC and
First Union National Bank, as Trustee and Disbursement
Agent (filed as an exhibit to TARC's Annual Report on
Form 10-K for the year ended January 31, 1997, and
incorporated herein by reference).
4.25 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (previously filed as
an exhibit to TransTexas' Registration Statement on Form
S-3 (33-91494), and incorporated herein by reference).
86
89
4.26 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas' Gas
Corporation and RECO Industries, Inc. (previously filed
as an exhibit to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.27 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Frito-Lay, Inc. (previously filed as an
exhibit to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.28 -- Pledge Agreement dated as of February 23, 1995 among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and EM Sector Holdings, Inc. (previously
filed as an exhibit to TransTexas' Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.29 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican Natural Gas Corporation and ITT Commercial
Corp. (previously filed as an exhibit to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.30 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican Natural Gas Corporation, TransTexas
Gas Corporation and ITT Commercial Finance Corp.
(previously filed as an exhibit to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
10.1 -- Services Agreement dated August 24, 1993, by and between
TransTexas and TransAmerican (previously filed as Exhibit
3 to TransTexas' Current Report on Form 8-K filed with
the SEC on October 4, 1993, and incorporated herein by
reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the other direct and
indirect subsidiaries of TransAmerican, as amended
(previously filed as Exhibit 10.4 to TransTexas'
Registration Statement on Form S-1 (33-75050), and
incorporated herein by reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between
TransTexas and TARC, as amended (previously filed as
Exhibit 10.4 to TARC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group previously
filed as Exhibit 4 to TransTexas' Current Report on Form
8-K filed with the SEC on October 4, 1993, and
incorporated herein by reference).
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and between
TransAmerican and The Coastal Corporation, as amended by
the Amendment to Gas Purchase Agreement dated February
13, 1990, by and between TransAmerican and Texcol Gas
Services, Inc., as successor to The Coastal Corporation
(previously filed as Exhibit 10.6 to TransTexas'
Registration Statement on Form S-1 (33-62740), and
incorporated herein by reference).
10.6 -- Gas Purchase Agreement dated October 29, 1987, by and
between TransAmerican and The Coastal Corporation as
amended by the Amendment to Gas Purchase Agreement dated
February 13, 1990, by and between TransAmerican and
Texcol Gas Services, Inc., successor to The Coastal
Corporation (previously filed as Exhibit 10.7 to
TransTexas' Registration Statement on Form S-1
(33-62740), and incorporated herein by reference).
87
90
10.7 -- Gas Transportation Agreement dated the Effective Date (as
therein defined), by and between TransAmerican and The
Coastal Corporation, as amended by the Amendment to Gas
Transportation Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (previously filed as
Exhibit 10.8 to TransTexas' Registration Statement on
Form S-1 (33-62740), and incorporated herein by
reference).
10.8 -- Firm Natural Gas Sales Agreement dated September 30,
1993, by and between TransTexas and Associated Natural
Gas, Inc. (previously filed as Exhibit 10.1 to
TransTexas' Quarterly Report on Form 10-Q for the three
months ended October 31, 1993, and incorporated herein by
reference).
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (previously filed as
Exhibit 6 to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission on October 4,
1993, and incorporated herein by reference).
10.10 -- Gas Purchase Agreement dated November 1, 1985, between
TransAmerican and Washington Gas and Light Company,
Frederick Gas Company, Inc., and Shenandoah Gas Company
(previously filed as Exhibit 10.13 to TransTexas'
Registration Statement on Form S-1 (33-75050), and
incorporated herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(previously filed as Exhibit 10.1 to TransTexas'
Quarterly Report on Form 10-Q for the three months ended
October 31, 1993, and incorporated herein by reference).
10.12 -- Amendment Extending Gas Purchase Agreement between
TransTexas and Washington Gas Light Company, Inc., and
Shenandoah Gas Company, as amended, dated November 1,
1993 (previously filed as Exhibit 10.1 to TransTexas'
Quarterly Report on Form 10-Q for the three months ended
January 31, 1994, and incorporated herein by reference).
10.13 -- Agreement for Purchase of Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (previously filed as Exhibit 10.1 to the
TransTexas' Quarterly Report on Form 10-Q for the three
months ended April 30, 1994, and incorporated herein by
reference).
10.14 -- Assignment of Proceeds Production Payment between dated
April 1, 1994, TransTexas and Southern States
Exploration, Inc. (previously filed as Exhibit 10.2 to
the TransTexas' Quarterly Report on Form 10-Q for the
three months ended April 30, 1994, and incorporated
herein by reference).
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, Transmission, and John R.
Stanley (previously filed as Exhibit 1 to the Company's
Current Report on Form 8-K filed with the SEC on October
4, 1993, and incorporated herein by reference).
10.16 -- Employment Agreement between TransTexas and Richard
Bianchi dated August 12, 1996 (previously filed as
exhibit 10.1 to TransTexas' Form 10-Q for the quarter
ended October 31, 1996, and incorporated herein by
reference).
10.17 -- Amended and Restated Accounts Receivable Management and
Security Agreement dated as of October 31, 1995, between
TransTexas and BNY Financial Corporation (previously
filed as Exhibit 10.1 to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended October 31, 1995, and
incorporated herein by reference).
88
91
10.18 -- Processing Agreement dated March 20, 1996 by and between
TARC and J. Aron & Company (previously filed as Exhibit
10.19 to TARC's Transition Report on Form 10-K for the
transition period ended January 31, 1996, and
incorporated herein by reference).
10.19 -- Stock Transfer Agreement dated as of February 23, 1995,
between TARC, the Company and TransAmerican (previously
filed as Exhibit 2 to TARC's and the Company's Current
Report on Form 8-K dated March 14, 1995, and incorporated
herein by reference).
10.20 -- Employment Agreement dated June 12, 1995 by and between
TARC and R. Glenn McGinnis (previously filed as Exhibit
10.20 to TARC's Transition Report on Form 10-K for the
transition period ended January 31, 1996, and
incorporated herein by reference).
10.21 -- Indemnification Agreement by and between TARC and each of
its directors (previously filed as Exhibit 10.3 to the
Company's and TEC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
10.22 -- Intercompany Note dated as of August 12, 1994, executed
by TARC for the benefit of TransAmerican (previously
filed as Exhibit 10.5 to the Company's and TEC's
Registration Statement on Form S-1 (33-82200), and
incorporated herein by reference).
10.23 -- Second Amendment to Gas Transportation Agreement,
effective from and after August 1, 1994 between
TransTexas and Coastal Gas Marketing Company (previously
filed as Exhibit 10.1 to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended October 31, 1994, and
incorporated herein by reference).
10.24 -- Employment Agreement between TransTexas and Arnold
Brackenridge dated August 12, 1996 (previously filed as
Exhibit 10.2 to TransTexas' Form 10-Q for the quarter
ended October 31, 1996, and incorporated herein by
reference).
10.25 -- Note Purchase Agreement, dated as of May 10, 1996, among
TransTexas Gas Corporation, TCW Shared Opportunity Fund
II, L.P. and Jefferies & Company, Inc. (previously filed
as an exhibit to TransTexas' Form 10-Q for the quarter
ended April 30, 1996, and incorporated herein by
reference).
10.26 -- Master Swap Agreement, dated June 6, 1996, between
TransTexas Gas Corporation and AIG Trading Corporation
(previously filed as an exhibit to the TransTexas' Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.27 -- Purchase Agreement, dated January 30, 1996, between
TransTexas Gas Corporation and Sunflower Energy Finance
Company (previously filed as exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.28 -- Production Payment Conveyance, executed on January 30,
1996, from TransTexas Gas Corporation to Sunflower Energy
Finance Company (previously filed as exhibit to
TransTexas' Form 10-Q for the quarter ended April 30,
1996, and incorporated herein by reference).
10.29 -- First Supplement to Purchase Agreement, dated as of
February 12, 1996, among TransTexas Gas Corporation,
Sunflower Energy Finance Company and TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. (previously filed
as an exhibit to TransTexas' Form 10-Q for the quarter
ended April 30, 1996, and incorporated herein by
reference).
89
92
10.30 -- First Supplement to Production Payment Conveyance,
executed February 12, 1996, among TransTexas Gas
Corporation, Sunflower Energy Finance Company and TCW
Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended April 30, 1996, and incorporated
herein by reference).
10.31 -- Purchase Agreement, dated May 14, 1996, among TransTexas
Gas Corporation, TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. and Sunflower Energy Finance Company
(previously filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended April 30, 1996, and incorporated
herein by reference).
10.32 -- Production Payment Conveyance, executed May 14, 1996,
from TransTexas Gas Corporation to TCW Portfolio No. 1555
Dr V Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (previously filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended April 30,
1996, and incorporated herein by reference).
10.33 -- Processing Agreement dated April 22, 1996 between TARC
and Glencore Ltd. (previously filed as an exhibit to
TARC's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference)
21.1 -- List of the subsidiaries of the Company, their state of
incorporation and the name under which such subsidiary
does business (previously filed as Exhibit 21.1 to the
Company's and TARC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
*23.1 -- Consent of Netherland, Sewell & Associates, Inc.
*27.1 -- Financial Data Schedule.
99.1 -- Part III of the Annual Report on Form 10-K of TransTexas
Gas Corporation for the fiscal year ended January 31,
1997 (previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended January 31,
1997, and incorporated herein by reference).
99.2 -- Part III of the Annual Report on Form 10-K of
TransAmerican Refining Corporation for the fiscal year
ended January 31, 1997 (previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the year
ended January 31, 1997, and incorporated herein by
reference).
- ---------------
* filed herewith
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the fourth
quarter of the fiscal year ended January 31, 1997.
90
93
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) 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, on May 7, 1997.
TRANSAMERICAN ENERGY CORPORATION
By: /s/ JOHN R. STANLEY
----------------------------------
John R. Stanley,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on May 7, 1997.
NAME TITLE
---- -----
/s/ JOHN R. STANLEY Director, Chairman of the Board and Chief
- ----------------------------------------------------- Executive Officer
John R. Stanley (Principal Executive Officer)
/s/ THOMAS B. MCDADE Director
- -----------------------------------------------------
Thomas B. McDade
/s/ JAMES V. LANGSTON Director
- -----------------------------------------------------
James V. Langston
/s/ JOHN R. BLINN Director
- -----------------------------------------------------
John R. Blinn
Director
- -----------------------------------------------------
Donald B. Henderson
/s/ KIM E. MORRIS Director
- -----------------------------------------------------
Kim E. Morris
/s/ EDWIN B. DONAHUE Vice President and Secretary
- ----------------------------------------------------- (Principal Financial and Accounting Officer)
Edwin B. Donahue
91
94
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransAmerican Energy Corporation:
Our report on the consolidated financial statements of TransAmerican Energy
Corporation and TAEC, predecessor to TransAmerican Energy Corporation, is
included on page 37 of this Annual Report on Form 10-K/A. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 83 of this Annual Report on Form
10-K/A.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 7, 1997
92
95
SCHEDULE II
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER END
DESCRIPTION OF PERIOD AT COSTS RETIREMENTS CHANGES OF PERIOD
----------- ---------- --------- ----------- ------- ----------
Year Ended January 31, 1997
Valuation allowance long-term receivables.... $1,230 $516 $1,746 $ -- $ --
====== ==== ====== ==== ======
Transition Period ended January 31, 1996:
Valuation allowance - long-term
receivables............................... $ 952 $278 $ -- $ -- $1,230
====== ==== ====== ==== ======
Year ended July 31, 1995:
Valuation allowance - long-term
receivables............................... $ 531 $421 $ -- $ -- $ 952
====== ==== ====== ==== ======
Year Ended July 31, 1994:
Valuation allowance - long-term
receivables............................... $ -- $531 $ -- $ -- $ 531
====== ==== ====== ==== ======
Year ended July 31, 1993:
Valuation allowance - long-term receivable... $ -- $ -- $ -- $ -- $ --
====== ==== ====== ==== ======
93
96
INDEX TO EXHIBITS
3.1 -- Certificate of Incorporation, as amended (previously
filed as Exhibit 3.2(i) to the Company's and TARC's
Registration Statement on Form S-1 (33-85930), and
incorporated herein by reference).
3.2 -- By-laws of the Company (previously filed as Exhibit
3.2(ii) to the Company's and TARC's Registration
Statement on Form S-1 (33-85930), and incorporated herein
by reference).
3.3 -- Certificate of Designation of Series A Preferred Stock
(previously filed as Exhibit 3.2(iii) to the Company's
and TARC's Registration Statement on Form S-1 (33-85930),
and incorporated herein by reference).
3.4 -- Certificate of Amendment to Certificate of Incorporation
(previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended January 31, 1997,
and incorporated herein by reference).
4.1 -- Indenture dated as of June 15, 1995, among TransTexas,
Transmission, and American Bank National Association, as
Trustee (the "Indenture Trustee"), with respect to the
TransTexas Notes including the forms of Note and Senior
Secured Guarantee as exhibits (previously filed as
Exhibit 2 to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference).
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement, effective as
of June 23, 1995, from TransTexas to James A. Taylor, as
trustee for the benefit of the Indenture Trustee
(previously filed as Exhibit 3 to TransTexas' Current
Report on Form 8-K filed with the Securities and Exchange
Commission in June 1995, and incorporated herein by
reference).
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of June 20,
1995, from TTC to James A. Taylor, as trustee for the
benefit of the Indenture Trustee (previously filed as
Exhibit 5 to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference).
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TransTexas in favor of the
Indenture Trustee (previously filed as Exhibit 6 to
TransTexas' Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference).
4.5 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TTC in favor of the Indenture
Trustee (previously filed as Exhibit 7 to TransTexas'
Current Report on Form 8-K filed with the Securities and
Exchange Commission in June 1995, and incorporated herein
by reference).
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among TransTexas, the Indenture Trustee
and the Disbursement Agent (previously filed as Exhibit 9
to TransTexas' Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference).
4.7 -- Indenture dated as of February 15, 1995, between TARC,
First Fidelity Bank, National Association, as Trustee and
the Company, with respect to the Guaranteed First
Mortgage Discount Notes and the Guaranteed First Mortgage
Notes (together, the "TARC Notes"), including the forms
of TARC Notes as exhibits (previously filed as Exhibit 3
to the Company's and TARC's Current Report on Form 8-K
dated March 14, 1995, and incorporated herein by
reference).
97
4.8 -- Warrant Agreement dated as of February 23, 1995, among
the Company, TARC and First Fidelity Bank, National
Association, as Warrant Trustee, with respect to the
Common Stock Purchase Warrants including the form of
Warrant as an exhibit (previously filed as Exhibit 4 to
the Company's and TARC's Current Report on Form 8-K dated
March 14, 1995, and incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, from TARC
to First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 5 to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.10 -- Security Agreement dated as of February 23, 1995, from
TARC to First Fidelity Bank, National Association, as
Trustee (previously filed as Exhibit 6 to the Company's
and TARC's Current Report on Form 8-K dated March 14,
1995, and incorporated herein by reference).
4.11 -- Cash Collateral and Disbursement Agreement dated as of
February 23, 1995, among TARC, First Fidelity Bank,
National Association, as Trustee, First Fidelity Bank,
N.A., as Disbursement Agent, and Baker & O'Brien, Inc.,
as Construction Supervisor (previously filed as Exhibit 7
to the Company's and TARC's Current Report on Form 8-K
dated March 14, 1995, and incorporated herein by
reference).
4.12 -- Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement from TARC in favor of
First Fidelity Bank, National Association, as Trustee
(previously filed as Exhibit 8 to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.13 -- Registration Rights Agreement dated as of February 23,
1995, between TransTexas, the Company, and TARC
(previously filed as Exhibit 10 to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.14 -- Pledge and Security Agreement dated as of September 19,
1996, between TransAmerican Exploration Corporation and
Fleet National Bank (previously filed as exhibit 4.1 to
TransTexas' Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
4.15 -- Registration Rights Agreement dated as of September 19,
1996, by and among TransTexas Gas Corporation,
TransAmerican Natural Gas Corporation, TransAmerican
Exploration Corporation and Fleet National Bank
(previously filed as exhibit 4.2 to TransTexas' Form 10-Q
for the quarter ended October 31, 1996, and incorporated
herein by reference).
4.16 -- Note Purchase Agreement dated December 23, 1996 between
TransTexas and the Purchasers named therein of 13 1/4%
Series A Senior Subordinated Notes due 2002 (previously
filed as exhibit 4.12 to TransTexas' Post-Effective
Amendment No. 5 to Form S-3 (33-91494), and incorporated
herein by reference).
4.17 -- Indenture dated December 13, 1996 between TransTexas and
Bank One, Columbus, N.A., as Trustee (previously filed as
exhibit 4.13 to TransTexas' Post-Effective Amendment No.
5 to Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Registration Rights Agreement dated December 13, 1996
between TransTexas and the Purchasers named therein
(previously filed as exhibit 4.14 to TransTexas' Post-
Effective Amendment No. 5 to Form S-3 (33-91494), and
incorporated herein by reference).
98
4.19 -- First Supplemental Indenture dated as of February 24,
1997 among TARC, TEC and First Union National Bank, f/k/a
First Fidelity Bank, N.A. (previously filed as an exhibit
to TARC's Annual Report on Form 10-K for the year ended
January 31, 1997, and incorporated herein by reference).
4.20 -- Indenture dated as of March 14, 1997, between TARC and
First Union National Bank, as Trustee, with respect to
the $36 million Senior Secured Notes due 1998, including
the form of Note as an exhibit (previously filed as an
exhibit to TARC's Annual Report on Form 10-K for the
fiscal year ended January 31, 1997, and incorporated
herein by reference).
4.21 -- Pledge Agreement dated as of March 14, 1997, from TARC to
First Union National Bank, as Trustee (previously filed
as an exhibit to TARC's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997, and incorporated
herein by reference).
4.22 -- Security Agreement dated as of March 14, 1997, from TARC
to First Union National Bank, as Trustee (previously
filed as an exhibit to TARC's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997, and
incorporated herein by reference).
4.23 -- Cash Collateral and Disbursement Agreement dated as of
March 14, 1997, between TARC and First Union National
Bank, as Trustee and Disbursement Agent (previously filed
as an exhibit to TARC's Annual Report on Form 10-K for
the fiscal year ended January 31, 1997, and incorporated
herein by reference).
4.24 -- First Amendment to Cash Collateral and Disbursement
Agreement dated as of April 3, 1997, between TARC and
First Union National Bank, as Trustee and Disbursement
Agent (previously filed as an exhibit to TARC's Annual
Report on Form 10-K for the fiscal year ended January 31,
1997, and incorporated herein by reference).
4.25 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (previously filed as
an exhibit to TransTexas' Registration Statement on Form
S-3 (33-91494), and incorporated herein by reference).
4.26 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and RECO Industries, Inc. (previously filed
as an exhibit to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.27 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Frito-Lay, Inc. (previously filed as an
exhibit to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.28 -- Pledge Agreement dated as of February 23, 1995 among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and EM Sector Holdings, Inc. (previously
filed as an exhibit to TransTexas' Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.29 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican Natural Gas Corporation and ITT Commercial
Corp. (previously filed as an exhibit to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.30 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican Natural Gas Corporation, TransTexas
Gas Corporation and ITT Commercial Finance Corp.
(previously filed as an exhibit to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
99
10.1 -- Services Agreement dated August 24, 1993, by and between
TransTexas and TransAmerican (previously filed as Exhibit
3 to TransTexas' Current Report on Form 8-K filed with
the SEC on October 4, 1993, and incorporated herein by
reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the other direct and
indirect subsidiaries of TransAmerican, as amended
(previously filed as Exhibit 10.4 to TransTexas'
Registration Statement on Form S-1 (33-75050), and
incorporated herein by reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between
TransTexas and TARC, as amended (previously filed as
Exhibit 10.4 to TARC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group previously
filed as Exhibit 4 to TransTexas' Current Report on Form
8-K filed with the SEC on October 4, 1993, and
incorporated herein by reference).
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and between
TransAmerican and The Coastal Corporation, as amended by
the Amendment to Gas Purchase Agreement dated February
13, 1990, by and between TransAmerican and Texcol Gas
Services, Inc., as successor to The Coastal Corporation
(previously filed as Exhibit 10.6 to TransTexas'
Registration Statement on Form S-1 (33-62740), and
incorporated herein by reference).
10.6 -- Gas Purchase Agreement dated October 29, 1987, by and
between TransAmerican and The Coastal Corporation as
amended by the Amendment to Gas Purchase Agreement dated
February 13, 1990, by and between TransAmerican and
Texcol Gas Services, Inc., successor to The Coastal
Corporation (previously filed as Exhibit 10.7 to
TransTexas' Registration Statement on Form S-1
(33-62740), and incorporated herein by reference).
10.7 -- Gas Transportation Agreement dated the Effective Date (as
therein defined), by and between TransAmerican and The
Coastal Corporation, as amended by the Amendment to Gas
Transportation Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (previously filed as
Exhibit 10.8 to TransTexas' Registration Statement on
Form S-1 (33-62740), and incorporated herein by
reference).
10.8 -- Firm Natural Gas Sales Agreement dated September 30,
1993, by and between TransTexas and Associated Natural
Gas, Inc. (previously filed as Exhibit 10.1 to
TransTexas' Quarterly Report on Form 10-Q for the three
months ended October 31, 1993, and incorporated herein by
reference).
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (previously filed as
Exhibit 6 to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission on October 4,
1993, and incorporated herein by reference).
10.10 -- Gas Purchase Agreement dated November 1, 1985, between
TransAmerican and Washington Gas and Light Company,
Frederick Gas Company, Inc., and Shenandoah Gas Company
(previously filed as Exhibit 10.13 to TransTexas'
Registration Statement on Form S-1 (33-75050), and
incorporated herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(previously filed as Exhibit 10.1 to TransTexas'
Quarterly Report on Form 10-Q for the three months ended
October 31, 1993, and incorporated herein by reference).
100
10.12 -- Amendment Extending Gas Purchase Agreement between
TransTexas and Washington Gas Light Company, Inc., and
Shenandoah Gas Company, as amended, dated November 1,
1993 (previously filed as Exhibit 10.1 to TransTexas'
Quarterly Report on Form 10-Q for the three months ended
January 31, 1994, and incorporated herein by reference).
10.13 -- Agreement for Purchase of Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (previously filed as Exhibit 10.1 to the
TransTexas' Quarterly Report on Form 10-Q for the three
months ended April 30, 1994, and incorporated herein by
reference).
10.14 -- Assignment of Proceeds Production Payment between dated
April 1, 1994, TransTexas and Southern States
Exploration, Inc. (previously filed as Exhibit 10.2 to
the TransTexas' Quarterly Report on Form 10-Q for the
three months ended April 30, 1994, and incorporated
herein by reference).
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, Transmission, and John R.
Stanley (previously filed as Exhibit 1 to the Company's
Current Report on Form 8-K filed with the SEC on October
4, 1993, and incorporated herein by reference).
10.16 -- Employment Agreement between TransTexas and Richard
Bianchi dated August 12, 1996 (previously filed as
exhibit 10.1 to TransTexas' Form 10-Q for the quarter
ended October 31, 1996, and incorporated herein by
reference).
10.17 -- Amended and Restated Accounts Receivable Management and
Security Agreement dated as of October 31, 1995, between
TransTexas and BNY Financial Corporation (previously
filed as Exhibit 10.1 to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended October 31, 1995, and
incorporated herein by reference).
10.18 -- Processing Agreement dated March 20, 1996 by and between
TARC and J. Aron & Company (previously filed as Exhibit
10.19 to TARC's Transition Report on Form 10-K for the
transition period ended January 31, 1996, and
incorporated herein by reference).
10.19 -- Stock Transfer Agreement dated as of February 23, 1995,
between TARC, the Company and TransAmerican (previously
filed as Exhibit 2 to TARC's and the Company's Current
Report on Form 8-K dated March 14, 1995, and incorporated
herein by reference).
10.20 -- Employment Agreement dated November 12, 1995 by and
between TARC and Jeffery H. Siegel (previously filed as
Exhibit 10.21 to TARC's Transition Report on Form 10-K
for the transition period ended January 31, 1996, and
incorporated herein by reference).
10.21 -- Indemnification Agreement by and between TARC and each of
its directors (previously filed as Exhibit 10.3 to the
Company's and TEC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
10.22 -- Intercompany Note dated as of August 12, 1994, executed
by TARC for the benefit of TransAmerican (previously
filed as Exhibit 10.5 to the Company's and TEC's
Registration Statement on Form S-1 (33-82200), and
incorporated herein by reference).
10.23 -- Second Amendment to Gas Transportation Agreement,
effective from and after August 1, 1994 between
TransTexas and Coastal Gas Marketing Company (previously
filed as Exhibit 10.1 to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended October 31, 1994, and
incorporated herein by reference).
101
10.24 -- Employment Agreement between TransTexas and Arnold Brackenridge dated August 12, 1996
(previously filed as Exhibit 10.2 to TransTexas' Form 10-Q for the quarter ended
October 31, 1996, and incorporated herein by reference).
10.25 -- Note Purchase Agreement, dated as of May 10, 1996, among TransTexas Gas Corporation,
TCW Shared Opportunity Fund II, L.P. and Jefferies & Company, Inc. (previously filed as
an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.26 -- Master Swap Agreement, dated June 6, 1996, between TransTexas Gas Corporation and AIG
Trading Corporation (previously filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended April 30, 1996, and incorporated herein by reference).
10.27 -- Purchase Agreement, dated January 30, 1996, between TransTexas Gas Corporation and
Sunflower Energy Finance Company (previously filed as exhibit to TransTexas' Form 10-Q
for the quarter ended April 30, 1996, and incorporated herein by reference).
10.28 -- Production Payment Conveyance, executed on January 30, 1996, from TransTexas Gas
Corporation to Sunflower Energy Finance Company (previously filed as exhibit to
TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by
reference).
10.29 -- First Supplement to Purchase Agreement, dated as of February 12, 1996, among TransTexas
Gas Corporation, Sunflower Energy Finance Company and TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. (previously filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended April 30, 1996, and incorporated herein by reference).
10.30 -- First Supplement to Production Payment Conveyance, executed February 12, 1996, among
TransTexas Gas Corporation, Sunflower Energy Finance Company and TCW Portfolio No. 1555
DR V Sub-Custody Partnership, L.P. (previously filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1996, and incorporated herein by reference).
10.31 -- Purchase Agreement, dated May 14, 1996, among TransTexas Gas Corporation, TCW Portfolio
No. 1555 DR V Sub-Custody Partnership, L.P. and Sunflower Energy Finance Company
(previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April
30, 1996, and incorporated herein by reference).
10.32 -- Production Payment Conveyance, executed May 14, 1996, from TransTexas Gas Corporation
to TCW Portfolio No. 1555 Dr V Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (previously filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended April 30, 1996, and incorporated herein by reference).
10.33 -- Processing Agreement dated April 22, 1996 between TARC and Glencore Ltd. (previously
filed as an exhibit to TARC's Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference)
21.1 -- List of the subsidiaries of the Company, their state of incorporation and the name
under which such subsidiary does business (previously filed as Exhibit 21.1 to the
Company's and TARC's Registration Statement on Form S-1 (33-82200), and incorporated
herein by reference).
*23.1 -- Consent of Netherland, Sewell & Associates, Inc.
*27.1 -- Financial Data Schedule.
102
99.1 -- Part III of the Annual Report on Form 10-K of TransTexas Gas Corporation for the year
ended January 31, 1997 (previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended January 31, 1997, and incorporated herein by
reference).
99.2 -- Part III of the Annual Report on Form 10-K of TransAmerican Refining Corporation for
the year ended January 31, 1997 (previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended January 31, 1997, and incorporated herein by
reference).
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* filed herewith