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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
Commission File Number 1-12204
_______________________________
TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 987-8600
(Registrant's telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of shares of common stock of the registrant outstanding on
June 19, 1997 was 74,000,000.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
Page
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 2
Condensed Consolidated Balance Sheet as of April 30, 1997 and January 31, 1997 3
Condensed Consolidated Statement of Operations for the three months ended
April 30, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for the three months ended
April 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 16
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of April 30, 1997 and the related condensed
consolidated statements of operations and cash flows for the three months ended
April 30, 1997 and 1996. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1997, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended (not presented herein); and in our report dated
May 1, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January 31, 1997, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 18, 1997
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
APRIL 30, JANUARY 31,
1997 1997
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 11,667 $ 23,561
Cash restricted for interest 46,000 46,000
Accounts receivable 30,327 78,660
Receivable from affiliates 70,436 3,248
Inventories 15,164 12,481
Other current assets (Note 4) 13,749 24,984
----------- -----------
Total current assets 187,343 188,934
----------- -----------
Property and equipment 2,379,463 2,280,880
Less accumulated depreciation, depletion and amortization 1,469,982 1,434,487
----------- -----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $157,028 and
$158,973 was excluded from amortization at April 30, 1997
and January 31, 1997, respectively 909,481 846,393
----------- -----------
Other assets, net 17,436 17,825
----------- -----------
$ 1,114,260 $ 1,053,152
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 8,406 $ 5,787
Revolving credit agreement 8,386 --
Accounts payable 60,377 28,150
Accrued liabilities (Note 5) 102,609 83,411
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Total current liabilities 179,778 117,348
----------- -----------
Long-term debt, less current maturities 13,024 8,775
Production payments, less current portion 25,362 11,931
Senior secured notes 800,000 800,000
Subordinated notes 104,386 101,092
Revolving credit agreement -- 26,268
Deferred revenue 46,176 54,554
Deferred income taxes 35,542 31,367
Payable to affiliates 7,618 19,621
Other liabilities (Note 6) 8,429 32,991
Commitments and contingencies (Note 3) -- --
Stockholders' deficit:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 74,000,000 shares 740 740
Capital deficit (123,524) (123,524)
Retained earnings 16,729 31,267
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(106,055) (91,517)
Less advances to affiliates -- (59,278)
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Total stockholders' deficit (106,055) (150,795)
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$ 1,114,260 $ 1,053,152
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See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
---------------------------------
1997 1996
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Revenues:
Gas, condensate and natural gas liquids $ 72,882 $ 79,802
Transportation 9,291 8,195
Gains on the sale of assets -- 7,762
Other 178 199
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Total revenues 82,351 95,958
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Costs and expenses:
Operating 27,142 27,438
Depreciation, depletion and amortization 33,557 30,099
General and administrative (Note 4) 15,140 7,439
Taxes other than income taxes 5,214 5,184
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Total costs and expenses 81,053 70,160
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Operating income 1,298 25,798
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Other income (expense):
Interest income 1,694 1,134
Interest expense, net (25,358) (22,286)
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Total other income (expense) (23,664) (21,152)
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Income (loss) before income taxes (22,366) 4,646
Income taxes (benefit) (7,828) 1,626
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Net income (loss) $ (14,538) $ 3,020
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Net income (loss) per share $ (0.20) $ 0.04
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Weighted average number of shares outstanding 74,000,000 74,000,000
========== ============
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
-------------------------------
1997 1996
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Operating activities:
Net income (loss) $ (14,538) $ 3,020
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization 33,557 30,099
Amortization of debt issue costs 706 1,018
Accretion of interest on subordinated notes 3,294 --
Gains on the sale of assets -- (7,762)
Deferred income taxes 4,175 1,626
Proceeds from volumetric production payment -- 15,537
Amortization of deferred revenue (8,378) (6,875)
Changes in assets and liabilities:
Accounts receivable 48,333 4,455
Receivable from affiliates (649) 405
Inventories (2,683) (361)
Other current assets 11,235 (1,316)
Accounts payable 19,689 6,453
Accrued liabilities 17,123 35,066
Transactions with affiliates, net (19,108) (12,502)
Other assets 105 (1,088)
Other liabilities (824) (726)
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Net cash provided by operating activities 92,037 67,049
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Investing activities:
Capital expenditures (104,001) (72,616)
Proceeds from the sale of assets -- 7,779
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Net cash used by investing activities (104,001) (64,837)
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Financing activities:
Issuance of production payments 20,977 --
Principal payments on production payments (9,471) (8,097)
Issuance of long-term debt 8,300 10,000
Principal payments on long-term debt (1,432) (723)
Debt issue costs (422) (1,038)
Revolving credit agreement, net (17,882) 319
----------- -----------
Net cash provided by financing activities 70 461
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Increase (decrease) in cash and cash equivalents (11,894) 2,673
Beginning cash and cash equivalents 23,561 11,248
----------- -----------
Ending cash and cash equivalents $ 11,667 $ 13,921
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Noncash operating and investing activities:
Accounts payable for property and equipment $ 39,730 $ 41,728
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See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas") as of April 30,
1997 and the results of its operations and cash flows for the interim periods
ended April 30, 1997 and 1996. The results of operations for interim periods
should not be regarded as necessarily indicative of results that may be expected
for the entire year. The financial information presented herein should be read
in conjunction with the consolidated financial statements and notes included in
TransTexas' annual report on Form 10-K for the period ended January 31, 1997.
Unless otherwise noted, the term "TransTexas" refers to TransTexas Gas
Corporation and its subsidiaries as of April 30, 1997, TransTexas Transmission
Corporation ("TTC"), TransTexas Exploration Corporation ("TTEX"), TransTexas
Drilling Services, Inc. ("TTXD") and Signal Capital Holdings Corporation
("SCHC"). TransTexas is a subsidiary of TransAmerican Energy Corporation ("TEC")
and indirectly a subsidiary of TransAmerican Natural Gas Corporation
("TransAmerican"). TransAmerican Refining Corporation ("TARC") is a subsidiary
of TEC.
LIQUIDITY
TransTexas makes substantial capital expenditures for the exploration,
development and production of natural gas reserves. TransTexas historically has
financed its capital expenditures, debt service and working capital requirements
with public and private offerings of debt and equity securities, the sale of
production payments, asset sales, its accounts receivable revolving credit
facility and other financings in addition to cash from operations. 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.
TransTexas' leverage and debt covenants may limit its ability to obtain
additional financing.
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 TransTexas 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. TransTexas does not believe the effects of adoption of these
statements will have a material impact 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. SOP 96-1
was adopted by TransTexas effective February 1, 1997. The adoption of SOP 96-1
did not have a material impact on TransTexas' financial position, results of
operations or cash flows.
2. RECENT EVENTS
LOBO SALE. On May 29, 1997, TransTexas entered into and consummated a stock
purchase agreement with an unaffiliated buyer (the "Lobo Sale Agreement"), with
an effective date of March 1, 1997, to effect the sale (the "Lobo Sale") of the
stock of TTC, its subsidiary that owned substantially all of TransTexas' Lobo
Trend producing properties and related pipeline transmission system, for a sales
price of approximately $1.1 billion, subject to adjustments as provided for in
the Lobo Sale Agreement. Purchase price adjustments were made for, among other
things: the value of certain NGLs and stored hydrocarbons; the value of gas in
TTC's pipeline; prepaid expenses relating to post-effective date operations;
post-closing expenses related to pre-closing operations; the value of oil and
gas produced and sold between the effective date of the Lobo Sale Agreement and
closing (approximately $44 million); property defects; and
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
estimated costs associated with liabilities incurred before closing. Purchase
price adjustments made at the closing of the Lobo Sale are subject to a review,
reconciliation and resolution process, which is expected to be completed within
105 days following the closing. With proceeds from the Lobo Sale, TransTexas
repaid certain indebtedness and other obligations, including production
payments, in an aggregate amount of approximately $84 million. The remaining net
proceeds have been or will be used for the repurchase or redemption of the
Senior Secured Notes, and for general corporate purposes.
TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "TEC Offering") of $475 million aggregate principal amount of 11 1/2%
Senior Secured Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion
aggregate principal amount of 13% Senior Secured Discount Notes due 2002 (the
"TEC Senior Secured Discount Notes" and, together with the TEC Senior Secured
Notes, the "TEC Notes") for net proceeds of approximately $1.3 billion. The TEC
Notes are senior obligations of TEC, secured by a lien on substantially all its
existing and future assets, including the intercompany loans described below.
In conjunction with the TEC Offering, TransTexas has completed or intends to
complete the following transactions: (a) borrowing $450 million pursuant to an
intercompany loan from TEC; (b) a tender offer and consent solicitation (the
"Tender Offer") for TransTexas' $800 million aggregate principal amount of 11
1/2% Senior Secured Notes due 2002 (the "Senior Secured Notes"), (c) an offer
(the "Subordinated Notes Exchange Offer") to exchange approximately $115.8
million aggregate principal amount of new notes that pay interest in cash at the
rate of 13 3/4% per annum for TransTexas' $189 million aggregate principal
amount of 13 1/4% Senior Subordinated Notes due 2003 (the "Subordinated Notes");
and (d) a dividend on, or share repurchase program for, shares of TransTexas'
common stock (the "Dividend/Share Repurchase Program") in an aggregate amount of
approximately $400 million. The Dividend/Share Repurchase Program has not yet
been commenced.
INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the TEC
Offering, TEC made intercompany loans to TransTexas (the "TransTexas
Intercompany Loan") and TARC (the "TARC Intercompany Loan"). The TransTexas
Intercompany Loan is in the principal amount of $450 million and (i) bears
interest at a rate of 10 7/8% per annum, payable semi-annually in cash in
arrears and (ii) is secured initially by a security interest in substantially
all of the assets of TransTexas including the TransTexas Disbursement Account
(described below), but excluding inventory, receivables and equipment. The TARC
Intercompany Loan is in the original amount of $676 million, and (i) accretes
principal at 16% per annum, compounded semi-annually, until June 15, 1999, to a
final accreted value of $920 million, and thereafter pays interest semi-annually
in cash in arrears on the accreted value thereof, at a rate of 16% per annum,
and (ii) is secured initially by a security interest in substantially all of
TARC's assets other than inventory, receivables and equipment. The Intercompany
Loans will mature on June 1, 2002. The Intercompany Loan Agreements contain
certain restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates. Upon
the occurrence of a Change of Control (as defined), TEC will be required to make
an offer to purchase all of the outstanding TEC Notes at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, or, in the case of any such offer to purchase the TEC Senior Secured
Discount Notes prior to June 15, 1999, at a price equal to 101% of the accreted
value thereof, in each case, to and including the date of purchase. Pursuant to
the terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay
a pro rata share of the purchase price paid by TEC. See "Potential Effects of
a Change of Control" in Note 3 to Condensed Consolidated Financial Statements.
SENIOR SECURED NOTES TENDER OFFER. On June 13, 1997, TransTexas completed
a tender offer for its Senior Secured Notes for 111 1/2% of their principal
amount (plus accrued and unpaid interest). Approximately $785.4 million
principal amount of Senior Secured Notes were tendered and accepted by
TransTexas. TransTexas has called the Senior Secured Notes remaining outstanding
for redemption on June 30, 1997 pursuant to the terms of the Senior Secured
Notes Indenture.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
SUBORDINATED NOTES EXCHANGE OFFER. On June 19, 1997, TransTexas completed
an exchange offer, pursuant to which it exchanged approximately $115.8 million
aggregate principal amount of its 13 3/4% Senior Subordinated Notes due 2001
(the "Subordinated Exchange Notes") for all of the Subordinated Notes. The
indenture governing the Subordinated Exchange Notes includes certain
restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates.
As a result of the Lobo Sale, the Tender Offer and the Exchange Offer,
TransTexas expects to record a $600 million pretax gain and a $120 million
pretax extraordinary change during the quarter ending July 31, 1997.
DIVIDEND/SHARE REPURCHASE PROGRAM. TransTexas intends to implement a
dividend and/or stock repurchase program pursuant to which it plans to pay a
dividend on its common stock and/or repurchase common stock from its public
stockholders and from its affiliates, including TEC and TARC, in an aggregate
amount of approximately $400 million in dividends and the value of stock
purchased. To the extent that TransTexas purchases shares of its common stock,
it is anticipated that TransTexas will acquire four times the number of shares
from its affiliated stockholders than it acquires from its public stockholders.
Shares may be purchased through open market purchases, negotiated transactions
or tender offers, or a combination of the above. It is anticipated that the
price paid to affiliated stockholders will equal the weighted average price
paid to purchase shares from the public stockholders.
TRANSTEXAS DISBURSEMENT ACCOUNT. Pursuant to a disbursement agreement
(the "Disbursement Agreement") among TransTexas, TEC, the TEC Indenture
Trustee, and Firstar Bank of Minnesota, N.A. as disbursement agent,
approximately $400 million of the proceeds of the TransTexas Intercompany Loan
was placed in an account (the "Disbursement Account") to be held and invested
by the disbursement agent until disbursed. Funds in the Disbursement Account
will be disbursed to TransTexas as needed to fund the dividend/share repurchase
program. In addition, TransTexas may at any time request disbursement of
interest earned on the funds in the Disbursement Account.
3. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As part of the transfer of the natural gas exploration, production and
transmission businesses of TransAmerican to TransTexas (the "Transfer"),
TransTexas has succeeded to the potential liability, if any, of TransAmerican
and certain subsidiaries in connection with certain of the lawsuits described
below and claims related to the transferred properties.
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 and
TransAmerican responded. The court has not acted on Alameda's motion.
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
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
claim against TransAmerican, TransTexas, and affiliated entities, asserting,
among other things, that these entities failed to make certain payments and
properly market the gas from these wells. Aspen is seeking damages in an
unspecified amount, as well as certain equitable claims. In April 1997, the
trial court ruled against Aspen on all of its claims and counterclaims.
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 April 1997, the court granted
Briones' motion for summary judgment. TransTexas intends to file a motion for
a new trial after the court enters a final judgment.
FARIAS. On February 15, 1996, Celita Suzana Farias filed a wrongful
death action in the 93rd 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 Company employee filed a petition
in intervention also alleging negligence, gross negligence and malice and
seeking unspecified damages. This litigation is in the discovery stage.
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, Finkelstein 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, Finkelstein 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 from the arbitration panel has not been rendered.
GENERAL. TransTexas is also a named defendant in other ordinary
course, routine litigation incidental to its business. Although the outcome of
these other lawsuits cannot be predicted with certainty, TransTexas does not
expect these matters to have a material adverse effect on its financial
position. At April 30, 1997, the possible range of estimated losses related to
all of the aforementioned claims, in addition to the estimates accrued by
TransTexas is $0 to $36 million. The resolution in any reporting period of one
or more of these matters in a manner adverse to TransTexas could have a
material impact on TransTexas' results of operations and cash flows for that
period. Litigation expense, including legal fees, totaled approximately $5
million and $1 million for the quarters ended April 30, 1997 and 1996,
respectively.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
ENVIRONMENTAL MATTERS
TransTexas' operations and properties are subject to extensive
federal, state, and local laws and regulations relating to the generation,
storage, handling, emission, transportation, and discharge of materials into
the environment. Permits are required for various of TransTexas' operations,
and these permits are subject to revocation, modification, and renewal by
issuing authorities. TransTexas also is subject to federal, state, and local
laws and regulations that impose liability for the cleanup or remediation of
property that has been contaminated by the discharge or release of hazardous
materials or wastes into the environment. Governmental authorities have the
power to enforce compliance with their regulations, and violations are subject
to fines or injunctions, or both. It is not anticipated that TransTexas will be
required in the near future to expend amounts that are material to the
financial condition or operations of TransTexas by reason of environmental laws
and regulations, but because such laws and regulations are frequently changed
and, as a result, may impose increasingly strict requirements, TransTexas is
unable to predict the ultimate cost of complying with such laws and
regulations.
PRODUCTION PAYMENTS
In April 1997, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $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.
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 its 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 TransTexas' current capitalization, the
issuance of shares of TransTexas' common stock to satisfy this obligation would
result in deconsolidation of TransTexas for federal income tax purposes.
POTENTIAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
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. 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 such challenge would not be upheld. Under
an agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. 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. As
a
10
12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
member of the TNGC Consolidated Group (defined below), each of TransTexas, TEC
and TARC will be severally liable for any tax liability resulting from the
above-described transactions. The IRS has commenced an audit of the
consolidated federal income tax returns of the TNGC Consolidated Group for its
taxable years ended July 31, 1994 and 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.
Based upon independent legal advice, TransTexas has determined that it
will not report any significant federal income tax liability as a result of the
Lobo Sale. There are, however, significant uncertainties regarding TransTexas'
tax position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been
or will be obtained from the IRS regarding the Lobo Sale by any member of the
TNGC Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $230 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that TransAmerican
would be able to fund any such payment at the time due and the other members of
the TNGC Consolidated Group, thus, may be required to pay the tax. TransTexas
expects to reserve approximately $75 million with respect to the potential tax
liability for financial reporting purposes to reflect a portion of the federal
tax liability that TransAmerican might not be able to pay. If TransTexas were
required to pay this tax deficiency, it is likely that it would be required to
sell significant assets or raise additional debt or equity capital to fund the
payment.
TEC and TARC, both subsidiaries of TransAmerican, currently own
approximately 59% and 14%, respectively, of the outstanding common stock of
TransTexas. These shares are pledged as collateral for TEC's outstanding debt
securities. Upon completion of the Dividend/Share Repurchase Program and other
Transactions, it is anticipated that TEC will own approximately 70% of the
outstanding common stock of TransTexas, TransAmerican will own approximately
11% of TransTexas' common stock and TARC will no longer own any of TransTexas'
common stock.
Under certain circumstances, TransAmerican or TEC may sell or
otherwise dispose of shares of common stock of the Company. If, as a result of
any sale or other disposition of the Company's common stock, the aggregate
ownership of TransTexas by members of the TNGC Consolidated Group (excluding
TransTexas) 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 ("Deconsolidation") 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. 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
represents more than 20% of the voting power or equity value of TARC, then a
Deconsolidation of TARC would occur. A Deconsolidation of TARC would result in
a Deconsolidation of TransTexas if the TNGC Consolidated Group, excluding TARC,
does not then own at least 80% of the voting power and equity value of
TransTexas. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred during
the fiscal year ending January 31, 1998, the aggregate amount of this tax
liability is estimated to be between $175 million and $200 million, assuming no
reduction for tax attributes of the TNGC Consolidated Group. However, such tax
liability generally would be substantially reduced or eliminated in the event
that the IRS successfully challenged TransTexas' position on the Lobo Sale.
Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the IRS for the consolidated federal income tax
liability of the consolidated group. There can be no assurance that each TNGC
Consolidated Group member will have the ability to satisfy any tax obligation
attributable to the Transactions at the time due and, therefore, other members
of the group, including TEC, TransTexas or TARC, may be required to pay the
tax.
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TEC, or TARC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit pursuant
to the Tax Allocation Agreement for net operating losses of TransTexas used by
other members of the TNGC Consolidated Group prior to the Deconsolidation of
TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay
any Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of
a Change of Control, each holder of the Subordinated Exchange 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. Pursuant to the terms
of the TransTexas Intercompany Loan, upon the occurrence of a Change of Control,
TEC would have the right to require TransTexas to repay the principal of the
TransTexas Intercompany Loan in an amount equal to a pro rata share of the
amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount of
the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of Control
would be deemed to occur under the Subordinated Notes Indenture in the case of
certain changes or other events in respect of the ownership of TransTexas,
including any circumstances pursuant to which any person or group other than
John R. Stanley and his wholly owned subsidiaries or the TEC Indenture Trustee
is or become the beneficial owner of more than 50% of the total voting power of
TransTexas' then outstanding voting stock, and during the 90 days thereafter,
the rating of the notes is downgraded or withdrawn. A Change of Control would be
deemed to occur under the TransTexas Intercompany Loan in the case of certain
changes or other events in respect of the ownership or control of TEC,
TransTexas, or TARC including any circumstance pursuant to which (i) any person
or group, other than John R. Stanley and his wholly-owned subsidiaries or the
TEC Indenture Trustee is or becomes the beneficial owner of more than 50% of the
total voting power of TEC's then outstanding voting stock, or (iii) TEC or any
of its subsidiaries own some of TransTexas' or TARC's capital stock,
respectively, but less than 50% of the total voting stock or economic value of
TransTexas or TARC, respectively, unless the TEC Notes have an investment grade
rating for the period of 120 days thereafter. The term "person," as used in the
definition of Change of Control, means a natural person, company, government or
political subdivision, agency or instrumentality of a government and also
includes a "group," which is defined as two or more persons acting as a
partnership, limited partnership or other group. In addition, certain changes or
other events in respect of the ownership or control of TransTexas that do not
constitute a Change of Control under the TEC Notes 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 April
30, 1997, TransTexas had approximately $24.3 million of indebtedness (excluding
the Senior Secured Notes and the Subordinated Notes) subject to such right of
repayment or repurchase. In the event of a Change of Control under the
Subordinated Notes Indenture or the TEC Notes 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.
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,
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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.
LOBO SALE
Pursuant to the Lobo Sale, TransTexas is 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.
4. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
April 30, January 31,
1997 1997
----------- -----------
Prepayments:
Trade $ 6,820 $ 9,580
Insurance 1,774 2,310
Deferred loss on commodity price swap agreements -- 8,276
Other 5,155 4,818
--------- -----------
$ 13,749 $ 24,984
========= ===========
5. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in
thousands of dollars):
April 30, January 31,
1997 1997
----------- ------------
Royalties $ 22,584 $ 27,607
Taxes other than income taxes 7,774 10,136
Accrued interest 36,870 13,370
Payroll 6,596 5,413
Litigation settlements and other 9,704 1,263
Settlement values of commodity price swap agreements 5,000 13,276
Insurance 6,908 6,618
Other 7,173 5,728
--------- ----------
$ 102,609 $ 83,411
========= ==========
Included in litigation settlements and other are certain non-recurring
costs associated with the Lobo Sale.
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands
of dollars):
April 30, January 31,
1997 1997
----------- ------------
Litigation settlements and accruals $ 7,317 $ 9,641
Short-term obligations expected to be refinanced:
Litigation settlements -- 2,500
Accrued capital expenditures -- 19,738
Other 1,112 1,112
---------- ----------
$ 8,429 $ 32,991
========== ==========
During the months of April and May 1997, TransTexas obtained additional
financing in the aggregate amount of approximately $45.8 million, of which
approximately $26.5 million remains outstanding as of June 13, 1997. Proceeds
from these transactions, net of current maturities, were used to pay the
obligations listed above under the caption "Short-term obligations expected to
be refinanced" and for general corporate purposes.
7. HEDGING AGREEMENTS
From time to time, TransTexas enters into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. The Hedge Agreements are accounted for as hedges
and accordingly, any gains or losses are deferred and recognized in the
respective month as physical volumes are sold. For the three months ended
April 30, 1997, TransTexas incurred net settlement losses pursuant to the Hedge
Agreements of approximately $4.6 million. As of April 30, 1997, TransTexas had
one Hedge Agreement with a Settlement Date of June 1997 and a settlement cost
of approximately $5 million.
8. 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 was settled in
April 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. The
judgment was paid on May 27, 1997. Coastal executed a Release of Judgment and
Judgment Lien which will be recorded in Webb and Zapata Counties.
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
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
accurately calculate royalties under a lease. The plaintiff had demanded $10
million plus interest. This case was settled in May 1997.
9. CREDIT AGREEMENTS
TransTexas and BNY Financial Corporation ("BNY") entered into an
Amended and Restated Accounts Receivable Management and Security Agreement
("BNY Facility") for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of TransTexas and is
guaranteed by John R. Stanley. The amount outstanding under the line of credit
as of April 30, 1997 was $8.4 million. In connection with the Lobo Sale,
TransTexas and BNY entered into a waiver agreement pursuant to which BNY
consented to the Lobo Sale and agreed to continue to make discretionary
advances during the 60-day period following the closing of the Lobo Sale. At
the end of such 60-day period, the BNY Facility will terminate if not
previously amended. TransTexas expects to enter into an amendment that will
allow it to borrow up to $40 million based on the amount of its accounts
receivable. Based on anticipated accounts receivable levels, TransTexas
estimates average amounts available under the facility will approximate $25
million during the next twelve months.
10. TRANSACTIONS WITH AFFILIATES
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $10.4
million for the three months ended April 30, 1996. TransAmerican did not
purchase any gas from TransTexas for the three months ended April 30, 1997. The
receivable from TransAmerican for natural gas sales totaled approximately $13.6
million at April 30, 1997. Pursuant to this agreement, interest accrues on all
unpaid balances at a rate of prime plus 2% per annum. All amounts owed under
the agreement were paid on June 13, 1997.
TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.2 million and $0.3 million for the three months ended April 30, 1997 and
1996, respectively. The receivable from TARC for natural gas sales totaled
approximately $3.9 million at April 30, 1997.
Since July 1996, TTEX has made advances 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. The principal amount outstanding under this
promissory note totaled approximately $25 million at April 30, 1997. The note
was repaid on June 13, 1997.
In order to facilitate the settlement of certain litigation in May 1996,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. The amount outstanding under this note totaled
approximately $7 million at April 30, 1997. The note was repaid on June 13,
1997.
TransTexas has made various advances to TransAmerican in an aggregate
amount of approximately $7 million for lease purchases and other corporate
expenses. The entire amount was outstanding at April 30, 1997. This amount was
repaid on June 13, 1997.
On June 13, 1997, the Transfer Agreement was amended to eliminate
TransAmerican's indemnity obligations to TransTexas.
TransTexas has provided accounting and legal services to TARC and TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement. TransTexas has provided general commercial legal services and
certain accounting services (including payroll, tax, and treasury services) to
TARC and TEC for a fee of $26,000 per month. At TransAmerican's request,
TransTexas, at its election, has provided drilling and workover services. The
receivable from TransAmerican under the services agreement was approximately
$5.1 at April 30, 1997. The receivable was paid and the services agreement was
terminated in June 1997.
On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services agreement,
TransTexas will provide accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican will provide
advisory services to TransTexas, TARC and TEC. TARC will pay to TransTexas
approximately $300,000 per month for services rendered to, and for allocated
expenses paid by TransTexas on behalf of TARC and TEC. TEC and its subsidiaries
will pay $2.5 million in the aggregate per year to TransAmerican for advisory
services and benefits provided by TransAmerican.
15
17
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto of TransTexas
included elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
NGLs. The profitability of TransTexas also depends on the volume of natural gas
it gathers and transports, its ability to minimize finding and lifting costs
and maintaining its reserve base while maximizing production.
TransTexas' operating data for the three months ended April 30, 1997
and 1996, is as follows:
Three Months Ended
April 30,
-----------------------
1997 1996
---------- ---------
Sales volumes:
Gas (Bcf) (1) 35.4 36.2
NGLs (MMgal) 47.4 48.2
Condensate (MBbls) 275 164
Average prices:
Gas (dry) (per Mcf) (2) $ 1.67 $ 2.03
NGLs (per gallon) .30 .31
Condensate (per Bbl) 20.08 20.03
Number of gross wells drilled 29 52
Percentage of wells completed 72% 75%
______________________
(1) Sales volumes for the three months ended April 30, 1997 and 1996 include
7.2 Bcf and 5.9 Bcf, respectively, delivered pursuant to volumetric
production payments.
(2) Average price for the three months ended April 30, 1997 and 1996 includes
amounts delivered under volumetric production payments. The average gas
price for TransTexas' undedicated production for these periods was $1.80
per Mcf and $2.18 per Mcf, respectively. Gas prices do not include the
effect of hedging agreements.
A summary of TransTexas' operating expenses is set forth below (in millions
of dollars):
Three Months Ended
April 30,
----------------------
1997 1996
--------- --------
Operating costs and expenses:
Lease $ 8.0 $ 6.7
Pipeline 8.2 8.2
Natural gas liquids 10.9 12.5
--------- ----------
27.1 27.4
Taxes other than income taxes (1) 5.2 5.2
--------- ----------
Total $ 32.3 $ 32.6
========= ==========
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18
(1) Taxes other than income taxes include severance, property, and other
taxes.
TransTexas' average depletion rates have been as follows:
Three Months Ended
April 30,
----------------------
1997 1996
--------- ----------
Depletion rates (per Mcfe) $ 1.05 $ .90
========= ==========
TransTexas' Consolidated EBITDA, as defined in the Senior Secured
Notes Indenture, which consists of TransTexas' earnings before consolidated
fixed charges (excluding capitalized interest) income taxes, depreciation,
depletion, and amortization are set forth below (in millions of dollars):
Three Months Ended
April 30,
----------------------
1997 1996
--------- ----------
Consolidated EBITDA $ 36.9 $ 57.2
========= ==========
THREE MONTHS ENDED APRIL 30, 1997, COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1996
Gas, condensate and NGLs revenues for the three months ended April
30, 1997 decreased $6.9 million from the comparable prior year quarter, due
primarily to decreases in gas and NGL sales prices. The average monthly prices
received per Mcf of gas, excluding amounts dedicated to volumetric production
payments, ranged from $2.29 to $1.49 in the three months ended April 30, 1997,
compared to a range of $2.45 to $2.04 in the same period in the prior year.
As of April 30, 1997, TransTexas had a total of 872 producing wells compared to
1,020 at April 30, 1996. NGL sales volumes decreased as a result of decreases
in the volumes of natural gas processed. Transportation revenues increased $1.1
million over the prior year quarter due to increases in volumes transported
through TransTexas' pipeline system.
Lease operating expenses for the quarter ended April 30, 1997
increased $1.3 million over the comparable prior year period primarily due to
increased salt water disposal charges. Pipeline operating expenses were
unchanged from the same period in the prior year. NGLs cost decreased $1.6
million from the comparable quarter in the prior year due to decreases in the
cost and volumes of natural gas processed. Depreciation, depletion and
amortization expense for the three months ended April 30, 1997 increased $3.5
million due to a $0.15 increase in the depletion rate, offset in part by a
decrease in TransTexas' undedicated natural gas production. General and
administrative expenses increased $7.7 million in the three months ended April
30, 1997, due primarily to certain nonrecurring accruals associated with the
Lobo Sale and increases in wages and benefits.
Interest income for the three months ended April 30, 1997 increased
approximately $0.6 million over the comparable prior year period due to
increased cash balances in the current quarter resulting from the issuance of
the Subordinated Notes in December 1996. Interest expense increased $3.1
million over the same period of the prior year primarily as a result of the
accretion of interest on the Subordinated Notes, offset in part by an increase
in the amount of interest capitalized in connection with the acquisition of
undeveloped leasehold acreage.
LIQUIDITY AND CAPITAL RESOURCES
TransTexas makes substantial capital expenditures for the
exploration, development and production of natural gas. TransTexas historically
has financed its capital expenditures, debt service and working capital
requirements from 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 financing. 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 7
of Notes to Condensed Consolidated Financial Statements included elsewhere in
this report. Proceeds from natural gas sales are
17
19
received at approximately the same time that production related burdens, such
as royalties, production taxes and drilling program obligations are payable.
TransTexas' leverage and debt covenants may limit its ability to obtain
additional financings.
For the three months ended April 30, 1997, total capital expenditures
were $95 million, including $21 million for lease acquisitions, $56 million for
drilling and development and $18 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. TransTexas
anticipates total capital expenditures of approximately $220 million in fiscal
1998, of which approximately $180 million will be used for drilling and
development, and $20 million for TransTexas' gas gathering and pipeline system
and other equipment and seismic acquisitions, and $20 million for lease
acquisitions. 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.
On May 29, 1997, TransTexas entered into and consummated a stock
purchase agreement with an unaffiliated buyer (the "Lobo Sale Agreement"), with
an effective date of March 1, 1997, to effect the sale (the "Lobo Sale") of the
stock of TTC, its subsidiary that owned substantially all of TransTexas' Lobo
Trend producing properties and related pipeline transmission system, for a sales
price of approximately $1.1 billion, subject to adjustments as provided for in
the Lobo Sale Agreement. Purchase price adjustments were made for, among other
things: the value of certain NGLs and stored hydrocarbons; the value of gas in
TTC's pipeline; prepaid expenses relating to post-effective date operations;
post- closing expenses related to pre-closing operations; the value of oil and
gas produced and sold between the effective date of the Lobo Sale Agreement and
closing (approximately $44 million); property defects; and estimated costs of
associated with liabilities discovered before closing. Purchase price
adjustments made at the closing of the Lobo Sale are subject to a review,
reconciliation and resolution process, which is expected to be completed within
105 days following the closing. With proceeds from the Lobo Sale, TransTexas
repaid certain indebtedness and production payments in an aggregate amount of
approximately $84 million. The remaining net proceeds have been or will be used
for the redemption or repurchase of the Senior Secured Notes and for general
corporate purposes.
On June 13, 1997, TEC completed a private offering (the "TEC
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.
With the proceeds of the TEC Offering, TEC made intercompany loans to
TransTexas in the principal amount of $450 million (the "TransTexas Intercompany
Loan") and to TARC in the amount of $676 million (the "TARC Intercompany Loan").
The promissory note evidencing the TransTexas Intercompany Loan (i) bears
interest at a rate of 10 7/8% per annum, payable semi-annually in cash in
arrears and (ii) is secured initially by a security interest in substantially
all of the assets of TransTexas other than inventory, receivables and equipment.
The promissory note evidencing the TARC Intercompany Loan (i) accretes principal
at the rate of 16% per annum, compounded semi-annually, until June 15, 1999 to a
final accreted value of $920 million, and thereafter pays interest semi-annually
in cash in arrears on the accreted value thereof, at a rate of 16% per annum and
(ii) is secured initially by a security interest in substantially all of TARC's
assets other than inventory, receivables and equipment. The Intercompany Loans
will mature on June 1, 2002. The Intercompany Loan Agreements contain certain
restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates. Upon
the occurrence of a Change of Control (as defined), TEC will be required to make
an offer to purchase all of the outstanding TEC Notes at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, or, in the case of any such offer to purchase the TEC Senior Secured
Discount Notes prior to June 15, 1999, at a price equal to 101% of the accreted
value thereof, in each case, to and including the date of purchase. Pursuant to
the terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay
a pro rata share of the purchase price paid by TEC. See "Potential Effects of a
Change of Control."
On June 13, 1997, TransTexas completed a tender offer for its Senior
Secured Notes for 111 1/2% of their principal amount (plus accrued and unpaid
interest). Approximately $785.4 million principal amount of Senior Secured Notes
were tendered and accepted by TransTexas. TransTexas has called the Senior
Secured Notes remaining outstanding for redemption on June 30, 1997 pursuant to
the terms of the Senior Secured Notes Indenture.
18
20
On June 18, 1997, TransTexas completed an exchange offer, pursuant to
which it exchanged approximately $115.8 million aggregate principal amount of
its 13 3/4% Senior Subordinated Notes due 2001 (the "Subordinated Exchange
Notes") for all of the Subordinated Notes. The Subordinated Exchange Notes
pay interest in cash semi-annually in arrears on each June 30 and December 31
commencing December 31, 1997. The indenture governing the Subordinated
Exchange Notes includes certain restrictive covenants, including, among
others, limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates.
TransTexas intends to implement a dividend and/or stock repurchase
program pursuant to which it plans to pay a dividend on its common stock and/or
repurchase common stock from its public stockholders and from its affiliates,
including TEC and TARC, in an aggregate amount of approximately $400 million in
dividends and the value of stock purchased. To the extent that TransTexas
purchases shares of its common stock , it is anticipated that TransTexas will
acquire four times the number of shares from its affiliated stockholders than it
acquires from its public stockholders. Shares may be purchased through open
market purchases, negotiated transactions or tender offers, or a combination of
the above. It is anticipated that the price paid to affiliated stockholders
will equal the weighted average price paid to purchase shares from the public
stockholders.
TransTexas and BNY Financial Corporation ("BNY") entered into an
Amended and Restated Accounts Receivable Management and Security Agreement ("BNY
Facility") for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of TransTexas and is
guaranteed by John R. Stanley. The amount outstanding under the line of credit
as of April 30, 1997 was $8.4 million. In connection with the Lobo Sale,
TransTexas and BNY entered into a waiver agreement pursuant to which BNY
consented to the Lobo Sale and agreed to continue to make discretionary advances
during the 60-day period following the closing of the Lobo Sale. At the end of
such period, the BNY Facility will terminate if not previously amended.
TransTexas expects to enter into an amendment that will allow it to borrow up to
$40 million based on the amount of its accounts receivables. Based on
anticipated accounts receivable levels, TransTexas estimates average amounts
available under the facility will approximate $25 million during the next twelve
months.
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million,
of which approximately $26.5 million remains outstanding. Proceeds from these
transactions, net of current maturities, were used to pay certain short-term
obligations.
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including
liabilities with respect to litigation matters as described above.
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. TransTexas has caused delivery of a
letter of credit to secure potential liabilities totaling approximately $20
million in connection with certain litigation described above.
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 common stock of TransTexas to
the third party if this contingent obligation to such third party becomes fixed
and remains unpaid for 60 days. TransTexas does not believe that this
contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, TransTexas could elect to sell shares of
TransTexas' common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
Pursuant to the Lobo Sale Agreement, TransTexas is 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
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payment thereof will not have a material adverse effect on its ability to fund
its debt service, capital expenditure and working capital requirements.
POTENTIAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
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. 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 such challenge would not be upheld. Under
an agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. 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. As
a member of the TNGC Consolidated Group (defined below), each of TransTexas,
TEC and TARC will be severally liable for any tax liability resulting from the
above-described transactions. The IRS has commenced an audit of the
consolidated federal income tax returns of the TNGC Consolidated Group for its
taxable years ended July 31, 1994 and 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.
Based upon independent legal advice, TransTexas has determined that it
will not report any significant federal income tax liability as a result of the
Lobo Sale. There are, however, significant uncertainties regarding TransTexas'
tax position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been
or will be obtained from the IRS regarding the Lobo Sale by any member of the
TNGC Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $230 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that TransAmerican
would be able to fund any such payment at the time due and the other members of
the TNGC Consolidated Group, thus, may be required to pay the tax. TransTexas
expects to reserve approximately $75 million with respect to the potential tax
liability for financial reporting purposes to reflect a portion of the federal
tax liability that TransAmerican might not be able to pay. If TransTexas were
required to pay this tax deficiency, it is likely that it would be required to
sell significant assets or raise additional debt or equity capital to fund the
payment.
TEC and TARC, both subsidiaries of TransAmerican, currently own
approximately 59% and 14%, respectively, of the outstanding common stock of
TransTexas. These shares are pledged as collateral for TEC's outstanding debt
securities. Upon completion of the Dividend/Share Repurchase Program and other
Transactions, TEC will own approximately 70% of the outstanding common stock of
TransTexas, TransAmerican will own approximately 11% of TransTexas' common
stock and TARC will no longer own any of TransTexas' common stock.
Under certain circumstances, TransAmerican or TEC may sell or
otherwise dispose of shares of common stock of the Company. If, as a result of
any sale or other disposition of the Company's common stock, the aggregate
ownership of TransTexas by members of the TNGC Consolidated Group (excluding
TransTexas) 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 ("Deconsolidation") 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. 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
represents more than 20% of the voting power or equity value of TARC, then a
Deconsolidation of TARC would occur. A deconsolidation of TARC would result in
a Deconsolidation
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of TransTexas if the TNGC Consolidated Group, excluding TARC, does not own at
least 80% of the voting power and equity value of TransTexas. Upon a
Deconsolidation of TransTexas, members of the TNGC Consolidated Group that own
TransTexas' common stock could incur a substantial amount of federal income tax
liability. If such Deconsolidation occurred during the fiscal year ending
January 31, 1998, the aggregate amount of this tax liability is estimated to be
between $175 million and $200 million, assuming no reduction for tax attributes
of the TNGC Consolidated Group. However, such tax liability generally would be
substantially reduced or eliminated in the event that the IRS successfully
challenged TransTexas' position on the Lobo Sale. Each member of a consolidated
group filing a consolidated federal income tax return is severally liable to
the IRS for the consolidated federal income tax liability of the consolidated
group. There can be no assurance that each TNGC Consolidated Group member will
have the ability to satisfy any tax obligation attributable to the Transactions
at the time due and, therefore, other members of the group, including TEC,
TransTexas or TARC, may be required to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TEC or TARC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit pursuant
to the Tax Allocation Agreement for net operating losses of TransTexas used by
other members of the TNGC Consolidated Group prior to the Deconsolidation of
TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay
any Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12- month period.
POTENTIAL EFFECTS OF CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Exchange 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. Pursuant to the terms
of the TransTexas Intercompany Loan, upon the occurrence of a Change of Control,
TEC would have the right to require TransTexas to repay the principal of the
TransTexas Intercompany Loan in an amount equal to a pro rata share of the
amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount of
the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of Control
would be deemed to occur under the Subordinated Notes Indenture in the case of
certain changes or other events in respect of the ownership of TransTexas,
including any circumstances pursuant to which any person or group other than
John R. Stanley and his wholly owned subsidiaries or the TEC Indenture Trustee
is or become the beneficial owner of more than 50% of the total voting power of
TransTexas' then outstanding voting stock, and during the 90 days thereafter,
the rating of the notes is downgraded or withdrawn. A Change of Control would be
deemed to occur under the TransTexas Intercompany Loan in the case of certain
changes or other events in respect of the ownership or control of TEC,
TransTexas, or TARC including any circumstance pursuant to which (i) any person
or group, other than John R. Stanley and his wholly-owned subsidiaries or the
TEC Indenture Trustee is or becomes the beneficial owner of more than 50% of the
total voting power of TEC's then outstanding voting stock, or (iii) TEC or any
of its subsidiaries own some of TransTexas' or TARC's capital stock,
respectively, but less than 50% of the total voting stock or economic value of
TransTexas or TARC, respectively, unless the TEC Notes have an investment grade
rating for the period of 120 days thereafter. The term "person," as used in the
definition of Change of Control, means a natural person, company, government or
political subdivision, agency or instrumentality of a government and also
includes a "group," which is defined as two or more persons acting as a
partnership, limited partnership or other group. In addition, certain changes or
other events in respect of the ownership or control of TransTexas that do not
constitute a Change of Control under the TEC Notes 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 April
30, 1997, TransTexas had approximately $24.3 million of indebtedness (excluding
the Senior Secured Notes and the Subordinated Notes) subject to such right of
repayment or repurchase. In
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the event of a Change of Control under the Indenture or a "change of control"
under the terms of other outstanding indebtedness, there can be no assurance
that TransTexas will have sufficient funds to satisfy any such payment
obligations.
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.
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 report regarding TransTexas' 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" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, the ultimate resolution of
litigation, and competition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 3 and 8 to the condensed consolidated financial statements
for a discussion of TransTexas' legal proceedings.
ITEM 2. CHANGES IN SECURITIES
In connection with the Senior Secured Notes Tender Offer, TransTexas
obtained consents from holders of the Senior Secured Notes to certain waivers
under, and amendments to the Senior Secured Notes Indenture, which eliminate or
modify certain restrictive covenants and other provisions contained in the
Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer, pursuant to which
it exchanged approximately $115.8 million aggregate principal amount of its
13 3/4% Senior Subordinated Notes due 2001 for all of its Series A Senior
Subordinated Notes due 2003 (the "Subordinated Notes"). Jefferies & Company,
Inc. acted as Dealer Manager for the exchange offer which was made solely to
holders of the Subordinated Notes, in reliance on the exemption from
registration in Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
April 30, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial and accounting
officer.
TRANSTEXAS GAS CORPORATION
(Registrant)
By: /s/ Edwin B. Donahue
--------------------------------
Edwin B. Donahue, Vice President
and Chief Financial Officer
June 19, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 Financial Data Schedule