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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

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)

(281) 986-8822
(Registrant's telephone number, including area code)

-------------------------

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

The number of shares of common stock of the registrant outstanding on
June 19, 1997 was 9,000.

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TRANSAMERICAN ENERGY CORPORATION

TABLE OF CONTENTS

PAGE
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PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of April 30, 1997 and January 31, 1997 . . . . . . . . . 1
Condensed Consolidated Statement of Operations for the three months ended
April 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statement of Cash Flows for the three months ended
April 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . 32

PART II.
OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

(i)
3
PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRANSAMERICAN ENERGY 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 $ 12,997 $ 24,179
Cash restricted for interest - TransTexas 46,000 46,000
Debt proceeds held in collateral account - TARC 14,037 --
Accounts receivable 30,327 78,660
Receivable from affiliates 63,961 --
Inventories 15,164 12,481
Other current assets 14,197 25,638
---------- ----------
Total current assets 196,683 186,958
---------- ----------

Property and equipment 2,965,412 2,836,696
Less accumulated depreciation, depletion and amortization 1,488,510 1,451,417
---------- ----------
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 1,476,902 1,385,279
---------- ----------
Other assets, net 42,102 41,498
---------- ----------
$1,715,687 $1,613,735
========== ==========

LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
Current maturities of long-term debt $ 8,406 $ 5,787
Revolving credit agreement 8,386 --
Accounts payable 77,451 48,202
Payable to affiliate 1,972 1,604
Notes payable 36,000 --
Accrued liabilities 116,986 98,861
Long-term debt -- 365,730
---------- ----------
Total current liabilities 249,201 520,184
---------- ----------

Due to affiliates 14,292 26,295
Notes payable to affiliate 60,630 46,589
Long-term debt, less current maturities 1,297,048 910,469
Revolving credit agreement -- 26,268
Production payments, less current portion 25,362 11,931
Deferred revenue 46,176 54,554
Deferred income taxes 35,542 31,367
Other liabilities 8,934 32,991
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 5)
Stockholder's deficit:
Common stock, $0.01 par value, 100,000 shares authorized; 9,000 shares issued
and outstanding -- --
Additional paid-in capital 158,535 158,535
Accumulated deficit (180,129) (148,508)
---------- ----------
(21,594) 10,027
Less advances to affiliates -- (57,036)
---------- ----------
Total stockholder's deficit (21,594) (47,009)
---------- ----------
$1,715,687 $1,613,735
========== ==========

See accompanying notes to condensed consolidated financial statements.

1
4
TRANSAMERICAN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED
APRIL 30,
------------------------------
1997 1996
----------- ----------

Revenues:
Gas, condensate and natural gas liquids $ 72,649 $ 79,508
Transportation 9,291 8,195
Product sales -- 10,857
Gain on asset sales -- 7,762
Other 100 199
----------- ----------
Total revenues 82,040 106,521
----------- ----------

Costs and expenses:
Operating 35,437 43,580
Depreciation, depletion and amortization 35,268 31,903
General and administrative (Note 7) 17,852 9,641
Taxes other than income taxes 6,118 5,583
----------- ----------
Total costs and expenses 94,675 90,707
----------- ----------
Operating income (loss) (12,635) 15,814
----------- ----------

Other income (expense):
Interest income 1,821 1,277
Interest expense, net (28,654) (23,374)
Other, net 39 42,870
----------- ----------
Total other income (expense) (26,794) 20,773
----------- ----------
Income (loss) before income taxes (39,429) 36,587
Income tax expense (benefit) (7,828) 1,626
----------- ----------
Net income (loss) $ (31,601) $ 34,961
=========== ==========

Net income (loss) per common share $ (3,511) $ 3,885
=========== ==========
Weighted average number of shares outstanding 9,000 9,000
=========== ==========

See accompanying notes to condensed consolidated financial statements.

2
5
TRANSAMERICAN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

THREE MONTHS ENDED
APRIL 30,
----------------------------
1997 1996
-------- ---------

Operating activities:
Net income (loss) $ (31,601) $ 34,961
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 35,268 31,903
Amortization of discount on long-term debt 3,294 --
Amortization of debt issue costs 993 1,018
Gain on the sale of assets -- (7,762)
Deferred income taxes 4,175 1,626
Gain on the sale of TransTexas stock -- (42,607)
Proceeds from volumetric production payments -- 15,537
Amortization of deferred revenue (8,378) (6,875)
Changes in assets and liabilities:
Accounts receivable 48,333 4,358
Inventories (2,683) (368)
Other current assets 11,441 1,658
Accounts payable 19,958 9,165
Accrued liabilities 16,172 30,702
Transactions with affiliates, net (16,368) (13,127)
Other assets 388 (1,694)
Other liabilities (824) (726)
--------- ---------
Net cash provided by operating activities 80,168 57,769
--------- ---------

Investing activities:
Capital expenditures (122,845) (117,868)
Proceeds from the sale of assets -- 7,779
--------- ---------
Net cash used by investing activities (122,845) (110,089)
--------- ---------

Financing activities:
Proceeds from long-term borrowings 8,300 10,000
Principal payments on long-term debt (1,432) (723)
Long-term debt proceeds held in collateral account (34,920) (26,549)
Withdrawals from collateral account 20,883 33,933
Issuance of notes payable 36,000 --
Issuance of production payments 20,977 --
Principal payments on production payments (9,471) (8,097)
Net proceeds from sale of TransTexas stock -- 42,607
Principal payments on capital lease obligations (219) (245)
Revolving credit agreement, net (17,882) 319
Dividend payment on preferred stock (19) (19)
Advances from TransAmerican and affiliates to TARC 12,003 2,075
Debt issue costs (2,725) (1,038)
--------- ---------
Net cash provided by financing activities 31,495 52,263
--------- ---------
Increase (decrease) in cash and cash equivalents (11,182) (57)
Beginning cash and cash equivalents 24,179 14,114
--------- ---------
Ending cash and cash equivalents $ 12,997 $ 14,057
========= =========

See accompanying notes to condensed consolidated financial statements.

3
6
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

TransAmerican Energy Corporation (the "Company" or "TEC") was formed on
July 12, 1994 to hold 55 million shares of common stock (74.3% of outstanding
shares) of TransTexas Gas Corporation ("TransTexas") and all of the outstanding
capital stock of TransAmerican Refining Corporation ("TARC"). TransAmerican
Natural Gas Corporation ("TransAmerican") contributed 55 million shares of
TransTexas common stock and all of the capital stock of TARC to the Company in
connection with the public offering of TARC's senior secured notes (the "TARC
Notes"). The Company then contributed 15 million of these shares (20.3% of the
total outstanding) of TransTexas common stock to TARC. In March 1996, TARC
sold 4.55 million shares (6.2% of the total outstanding) of TransTexas common
stock in public offerings. The condensed consolidated financial statements
include the financial statements of TransTexas and TARC on a wholly-owned
basis. Once TransTexas is in a positive equity position, 19.8% of the results
of its operations will be allocated to nonaffiliates. Capitalized terms used
herein and not otherwise defined are as defined in the respective Annual
Reports on Form 10-K of TransTexas, TARC and the Company for the fiscal year
ended January 31, 1997. The condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring accruals, which are, in
the opinion of management, necessary for a fair presentation of the results for
the interim periods. Interim results of operations are not necessarily
indicative of the results that may be expected for the year ending January 31,
1998. The financial information presented herein should be read in conjunction
with the financial statements and notes included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1997.

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 does not believe the effect 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 the Company effective February 1, 1997. The Company does not
believe the effect of adoption of SOP 96-1 will have a material impact on its
financial position, results of operations or cash flows.

As of April 30, 1997, the respective indentures of TransTexas and TARC
contained restrictions that substantially limit the Company's ability to use
the assets of one entity to satisfy the liabilities of the other. Accordingly,
the condensed consolidated financial statements should be read in conjunction
with the separate condensed financial statements of TransTexas and TARC filed
on their respective quarterly reports on Form 10-Q for the three months ended
April 30, 1997.

4
7
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

Below is selected financial information for each consolidated entity
(in millions of dollars):

April 30, 1997
-----------------------------------------------------------
Consolidation
Balance Sheet Data TARC TransTexas Entries Consolidated
------- ----- ---- -------- ---------- ------------- ------------

Working capital (deficit) $ (60.1) $ 7.6 $ -- $ (52.5)
Total assets 608.4 1,114.3 (7.0) 1,715.7
Long-term debt 440.3 925.8 -- 1,366.1
Stockholder's equity (deficit) 62.3 (106.1) 22.2 (21.6)

Three Months Ended April 30, 1997
-----------------------------------------------------------
Consolidation
Operations Data TARC TransTexas Entries Consolidated
--------------- -------- ---------- ------------- ------------

Revenues $ -- $ 82.4 $ (0.4) $ 82.0
Operating income (loss) (13.9) 1.3 -- (12.6)
Net income (loss) (19.0) (14.5) 1.9 (31.6)

Cash Flow Data
--------------

Operating (11.9) 92.0 0.1 80.2
Investing (18.8) (104.0) -- (122.8)
Financing 31.4 0.1 -- 31.5

Following consummation of the TEC Notes Offering and the transactions
described below, TEC's only source of funds for its holding company operations
and debt service will be from approximately $50 million in working capital
currently held by TEC, payments on the Intercompany Loans (described below),
dividends from its subsidiaries, interest on funds on the Disbursement Account
(defined below), payments made by TARC on behalf of TEC pursuant to the Services
Agreement (as defined) and, in limited circumstances as permitted by the
Indenture, sales of stock TEC holds in its subsidiaries.

During the two years following the TEC Notes Offering, TEC anticipates
that its annual cash needs for holding company operations will be approximately
$2.0 million, which TEC expects to be paid on its behalf by TARC pursuant to
the Services Agreement, and TEC's annual cash interest expense will be
approximately $54.6 million. In addition, TEC and its subsidiaries will pay
$2.5 million in the aggregate per year to TransAmerican for advisory services
and other benefits provided by TransAmerican. TransTexas will be required to
pay TEC approximately $48.9 million in interest annually on the TransTexas
Intercompany Loan. TEC expects to use this interest income together with
income generated from its working capital and, to the extent necessary, its
working capital to satisfy its cash needs, including its cash interest
payments. If TEC incurs unforeseen expenses, there is no assurance that its
capital resources will be sufficient to fund those expenses in addition to
anticipated holding company expenses and debt service.

The TEC Notes Indenture prohibits TEC from selling stock of TransTexas
and TARC during the two years following consummation of the TEC Notes Offering
unless the proceeds from such sales would be used to make an offer to purchase
the TEC Notes. Consequently, during the two years following the consummation
of the TEC Notes Offering, unless holders of the TEC Notes rejected all or a
portion of any such offer to purchase, sales of such stock would not be a
source of funds to supplement TEC's other resources in order to pay unforeseen
expenses.

5
8
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

2. RECENT EVENTS

TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "TEC Notes 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 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. The TEC Notes Indenture contains certain restrictive covenants,
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates.

The TEC Senior Secured Notes bear interest at a rate of 11 1/2% per
annum payable semi-annually in cash in arrears on June 15 and December 15 of
each year, commencing December 15, 1997. Principal on the TEC Senior Secured
Discount Notes will accrete to 100% of the face value thereof by June 15, 1999.
Commencing December 15, 1999, cash interest on the TEC Senior Secured Discount
Notes will be payable semi-annually in arrears on June 15 and December 15 of
each year at a rate of 13% per annum. The TEC Notes will mature on June 15,
2002. The TEC Notes are not redeemable prior to June 15, 2000, except that the
Company may redeem, at its option, prior to June 15, 2000, up to 35% of the
original aggregate principal amount of the TEC Senior Secured Notes and up to
35% of the accreted value of the TEC Senior Secured Discount Notes, at the
redemption prices set forth in the indenture governing the TEC Notes (the "TEC
Notes Indenture"), plus accrued and unpaid interest, if any, to and including
the date of redemption, with the net proceeds of any equity offering. On or
after June 15, 2000, the Notes will be redeemable at the option of TEC, in
whole or in part, at the redemption prices set forth in the TEC Notes
Indenture, plus accrued and unpaid interest, if any, to and including the date
of redemption. 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 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. In addition, TEC will be obligated, subject to certain conditions,
to make an offer to purchase TEC Notes with Excess Cash (as defined) at a price
equal to 105% of the principal amount of accreted value thereof, as applicable,
if such purchase occurs on or prior to December 31, 1997, at a price equal to
108% of the principal amount or accreted value thereof, as applicable, if such
purchase occurs during the period from January 1, 1998 through June 14, 2000,
and thereafter at the redemption prices set forth in the TEC Notes Indenture in
each case, together with accrued and unpaid interest, if any, to and including
the date of purchase.

INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the TEC
Notes Offering, TEC made intercompany loans to TransTexas in the principal
amount of $450 million (the "TransTexas Intercompany Loan") and to TARC in the
original 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 including the TransTexas Disbursement Account (described below), but
excluding inventory, receivables and equipment. The promissory note evidencing
the TARC Intercompany Loan (i) accretes principal at a 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 including the
Disbursement Account (described below) but excluding inventory, receivables and
equipment. Each Intercompany Loan 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. TARC used approximately $103 million of the
proceeds of the TARC Intercompany Loan to repay certain indebtedness including
senior secured notes of TARC that were issued in March 1997 and debt owed to an
affiliate, and to complete the TARC Notes Tender Offer described below.
Remaining proceeds will be used for the Capital Improvement Program described
below and for general corporate purposes.

6
9
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

Upon the occurrence of a Change of Control (as defined in the TEC Notes
Indenture), 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 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 TARC and TransTexas to pay a pro rata share of the purchase
price paid by TEC. See "Potential Effects of a Change of Control" in Note 5.

TARC WARRANTS TENDER OFFER. On June 13, 1997, TEC completed a tender
offer for the outstanding common stock purchase warrants of TARC ("TARC
Warrants") at a price of $4.50 per warrant. Pursuant to the tender offer, TEC
purchased 7,335,452 TARC Warrants for an aggregate purchase price of
approximately $33 million. TARC intends to enter into a merger with one of its
affiliates pursuant to which each remaining warrant would become exercisable
(at an exercise price of $.01) to receive $4.51 of cash instead of one share
of common stock of TARC.

TARC EQUITY CONTRIBUTION. TEC intends to make a capital contribution
to TARC in the amount of $226 million from the proceeds of the TransTexas
dividend/share repurchase program (discussed below). The amount of this
capital contribution will be retained initially in the Disbursement Account and
contributed to TARC pursuant to the terms of the Disbursement Agreement. See
Note 4.

DIVIDEND TO TRANSAMERICAN. TEC paid a dividend to TransAmerican in the
amount of $23 million. A portion of the dividend was used to repay the debt of
an affiliate, which had been secured by a pledge of 3.7 million shares of
TransTexas common stock. In connection with the TEC Notes Offering,
TransAmerican contributed the 3.7 million shares of TransTexas common stock to
TEC.

TEC PREFERRED STOCK REDEMPTION. TEC has called for redemption all of
its outstanding preferred stock for an aggregate amount of $100,000, plus
accrued and unpaid dividends.

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 estimated costs 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 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.

TRANSTEXAS SENIOR SECURED NOTES TENDER OFFER. On June 13, 1997,
TransTexas completed a tender offer for its TransTexas 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 also called the remaining
Senior Secured Notes for redemption on June 30, 1997 pursuant to the terms of
the Senior Secured Notes Indenture.

TRANSTEXAS 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 "TransTexas Subordinated Exchange Notes") for
all of its outstanding 13 1/4% Senior Subordinated Notes due 2003 (the
"TransTexas Subordinated Notes"). The indenture governing the TransTexas

7
10
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

Subordinated Exchange Notes (the "Subordinated Notes Indenture") contains
certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.

TRANSTEXAS 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 that 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.

TARC NOTES TENDER OFFER. On June 13, 1997, TARC completed a tender offer
(the "TARC Notes Tender Offer") for the (i) TARC Mortgage Notes for 112% of
their principal amount (plus accrued and unpaid interest) and (ii) TARC Discount
Notes for 112% of their accreted value. In connection with the TARC Notes Tender
Offer, TARC has obtained consents from holders of the TARC Notes to certain
waivers under, and amendments to the indenture governing the TARC Notes (the
"TARC Notes Indenture"), which eliminate or modify certain of the covenants and
other provisions contained in the TARC Notes Indenture. Approximately $423
million aggregate principal amount of TARC Mortgage Notes and TARC Discount
Notes were tendered and accepted by TARC at a cost to TARC of approximately $437
million (including accrued interest and premiums). As a result of the TARC
Notes Tender Offer, TARC expects to record a pretax extraordinary charge of
approximately $85 million during the quarter ending July 31, 1997.

3. CAPITAL IMPROVEMENT PROGRAM

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 reactive the refinery and increase its complexity. From February
1995 through April 1997, TARC spent approximately $245 million on the
construction and expansion 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.

In connection with the TEC Notes Offering, the TARC Intercompany Loan
and the TARC Notes Tender Offer, TARC has adopted a revised capital improvement
program designed to increase the capacity and complexity of the refinery
("Capital Improvement Program"). The most significant projects include: (i)
conversion of the visbreaker unit to 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. In addition, TARC plans to
expand, modify and add other processing units, tankage and offsite facilities
as part of the Capital Improvement Program. The Capital Improvement Program
includes expenditures 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. TARC will act as general
contractor, but has engaged a number of specialty consultants and engineering
and construction firms to assist TARC in completing the individual projects
that comprise the Capital Improvement Program. Each of these firms was
selected because of its specialized expertise in a particular process or unit
integral to the Capital Improvement Program.

8
11
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

The Capital Improvement Program will be executed in two phases. TARC
estimates that Phase I will be completed at a cost of $223 million, will be
tested and operational by September 30, 1998 and will result in the refinery
having the capacity to process up to 200,000 BPD of sour crude oil. Phase II
of the Capital Improvement Program includes the completion and start-up of the
Fluid Catalytic Cracking Unit utilizing state-of-the-art MSCC(SM) technology and
the installation of additional equipment expected to further improve operating
margins by allowing for a significant increase in the refinery's capacity to
produce gasoline. TARC estimates that Phase II will be completed at a cost of
$204 million and will be tested and operational by July 31, 1999. The proceeds
received or to be received by TARC from the TARC Intercompany Loan, the
TransTexas dividend/share repurchase program and the equity contribution from
TEC will include $427 million designated for use in the Capital Improvement
Program, which TARC believes is adequate to fund the completion of the project.
The foregoing estimates, as well as other estimates and projections herein, are
subject to substantial revision upon the occurrence of future events, such as
unavailability of financing, engineering problems, work stoppages and cost
overruns over which TARC may not have any control, and there can be no
assurance that any such projections or estimates will prove accurate.

4. DISBURSEMENT AND COLLATERAL ACCOUNTS

Pursuant to a disbursement agreement (the "Disbursement Agreement")
among TARC, TEC, the TEC Indenture Trustee, Firstar Bank of Minnesota, as
disbursement agent (the "Disbursement Agent"), and Baker & O'Brien, Inc., as
construction supervisor (the "Construction Supervisor"), $208 million of the
net proceeds from the sale of the TEC Notes was placed into accounts in the
name of TARC and TEC (together, the "Disbursement Account") to be held and
invested by the Disbursement Agent until needed from time to time to fund the
Capital Improvement Program and TARC's operating expenses and working capital.
Proceeds to TEC and TARC of approximately $300 million from the TransTexas
dividend/share repurchase program will also be deposited in the Disbursement
Account.

The Disbursement Agent will make disbursements for the Capital
Improvement Program out of the Disbursement Account in accordance with
requests made by TARC and approved by the Construction Supervisor. The
Construction Supervisor is required to review each such disbursement request by
TARC. No disbursements may be made from the Disbursement Account for purposes
other than the Capital Improvement Program other than (i) up to $1.5 million
per month (except for December 1997, in which disbursements may be up to $4.5
million) to fund administrative costs and certain taxes and insurance payments,
not in excess of $25.5 million in the aggregate; provided, that if less than
$1.5 million is spent in any month (or less than $4.5 million is spent in
December 1997) the amounts which may be disbursed in one or more subsequent
months will be increased by the amount of such difference, (ii) up to $50
million for feedstock upon certification by the Construction Supervisor of the
Mechanical Completion (as defined) of the Delayed Coking Unit and associated
facilities, (ii) up to $19 million to pay interest on, and to redeem,
repurchase, defease or otherwise retire the remaining TARC Notes and (iv) an
initial disbursement of approximately $7 million. In addition, interest income
from the Disbursement Account may be used for the Capital Improvement Program
or disbursed to fund administrative and other costs of TARC and TEC.

Pursuant to a disbursement agreement (the "TransTexas 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
"TransTexas Disbursement Account") to be held and invested by the disbursement
agent until disbursed. Funds in the TransTexas 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 TransTexas Disbursement Account.

In March 1997, TARC issued $36 million of 15% senior secured notes due
March 1998 to unaffiliated third parties. These notes were collateralized by a
pledge of 5 million shares of TransTexas common stock. Proceeds from the
issuance of these notes were deposited in a cash collateral account to be used
for refinery construction and general corporate purposes. These notes were
repaid in June 1997.

9
12
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

5. 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 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.

10
13
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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.

EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Commissioner's Charge against TARC and Southeast
Louisiana Contractors of Norco, Inc. (the "Commissioners Charge") pursuant to
Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended,
42 U.S.C. Section 2000e et seq. ("Title VII"). In the Commissioner's Charge,
the EEOC charged TARC and Southeast Louisiana Contractors of Norco, Inc.
("Southeast Contractors"), a subsidiary of TransAmerican, 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 (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, TARC can make no assurance that such liability would not have a
material adverse effect on the financial condition of TARC or TARC's ability to
pay interest or principal on its debt.

RINEHEART. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court,
Middle District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon
and Indian Village. TARC intends to vigorously defend this claim.

GENERAL. TransTexas and TARC are also named defendants in other
ordinary course, routine litigation incidental to their businesses. While the
outcome of these other lawsuits cannot be predicted with certainty, the Company
does not expect these matters to have a material adverse effect on its
financial position. At April 30, 1997, the possible range of estimated losses
related to all of the aforementioned claims in addition to the estimates
accrued by TransTexas and TARC is $0 to $36 million. The resolution in any
reporting period of one or more of these matters in a manner adverse to TARC or
TransTexas could have a material adverse impact on the Company's results of
operations or cash flows for that period.

11
14
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

ENVIRONMENTAL MATTERS

TransTexas' operations and properties are subject to extensive
federal, state, and local laws and regulations relating to the generation,
storage, handling, emission, transportation, and discharge of materials into
the environment. Permits are required for various of TransTexas' operations,
and these permits are subject to revocation, modification, and renewal by
issuing authorities. TransTexas also is subject to federal, state, and local
laws and regulations that impose liability for the cleanup or remediation of
property which has been contaminated by the discharge or release of hazardous
materials or wastes into the environment. Governmental authorities have the
power to enforce compliance with their regulations, and violations are subject
to fines or injunctions, or both. It is not anticipated that TransTexas will
be required in the near future to expend amounts that are material to the
financial condition or operations of TransTexas by reason of environmental laws
and regulations, but because such laws and regulations are frequently changed,
and as a result may impose increasingly strict requirements, TransTexas is
unable to predict the ultimate cost of complying with such laws and
regulations.

COMPLIANCE MATTERS. TARC is subject to federal, state, and local
laws, regulations, and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, will require TARC to make capital expenditures
in order to comply with such laws and regulations. To ensure continuing
compliance, TARC has made environmental compliance and permitting issues an
integral part of its refinery's start-up plans and has budgeted for such
capital expenditures in the Capital Improvement Program.

TARC uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes, that are or may
be deemed hazardous substances or wastes. In the past, the refinery has been
the subject of certain environmental enforcement actions, and has incurred
certain fines, as a result of certain of TARC's operations. TARC also was
previously subject to enforcement proceedings relating to its prior production
of leaded gasoline and air emissions. TARC believes that, with minor
exception, all of these past matters were resolved prior to or in connection
with the resolution of the bankruptcy proceedings of its predecessor in
interest, TransAmerican, or are no longer applicable to TARC's operations. As
a result, TARC believes that such matters will not have a material adverse
effect on TARC's future results of operations, cash flow or financial position.

REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. At
this time, TARC cannot estimate the costs of such compliance. 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 flow. 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 flow. However, until
the refinery is in full operation, there can be no assurance that the
regulations will not have such an effect.

12
15
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 exceptions, to determine its compliance as
of January 1, 1995, a refiner must compare its post-1994 and 1990 average
values of controlled fuel parameters and emissions. The Gasoline Standards
recognize that many gasoline refiners may not be able to develop an individual
1990 baseline for a number of reasons, including, for example, lack of adequate
data 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 TARC's refinery
pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The
EPA performed a follow up assessment in March 1996, but has not yet issued a
report of its investigations. In July 1996, the EPA and 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 investigation. 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.

13
16
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 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
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
liabilities will be significant; however, it is not possible to determine the
ultimate environmental liabilities, if any, that may arise from the matters
discussed above.

PURCHASE COMMITMENTS

TARC has various purchase commitments for materials, supplies and
services incidental to the ordinary course of business and for the Capital
Improvement Program. As of April 30, 1997, TARC had commitments for refinery
construction and maintenance of approximately $50 million. TARC acts as
general contractor and can generally cancel or postpone capital projects.

FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS

TARC enters into financing arrangements to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock that is scheduled for delivery to TARC's
refinery. TARC pays through the third party all transportation costs, related
taxes and duties and letter of credit fees for the cargo, plus a negotiated
commission. Prior to arrival at the refinery, another third party purchases
the cargo, and TARC commits to purchase, at a later date, the cargo at an
agreed price plus commission and costs. TARC also places margin deposits with
the third party to permit the third party to hedge its price risk. TARC
purchases these cargos in quantities sufficient to maintain expected operations
and is obligated to purchase all of the cargos delivered pursuant to these
arrangements. In the event the refinery is not operating, these cargos may be
sold on the spot market.

14
17
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

In April 1997, 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. TARC accrued a loss of approximately $5.1
million on this commitment as of April 30, 1997.

In April 1996, TARC entered into a processing agreement with another
third party to process feedstocks. For the three months ended April 30, 1997,
TARC processed approximately 6.4 million barrels of feedstocks and as of April
30, 1997, was storing approximately 1.0 million barrels of intermediate and
refined products under this agreement. TARC also entered into processing
agreements with this third party to process approximately 1.1 million barrels
of the third party's feedstocks for a fixed price per barrel. As of April 30,
1997, TARC recorded a net gain of approximately $0.2 million related to these
processing arrangements primarily as a result of income on the fixed fee
processing agreement.

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.

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.

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 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.

POTENTIAL TAX LIABILITY

15
18
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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, 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

16
19
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 A CHANGE OF CONTROL

The Subordinated Notes Indenture provides that, upon the occurrence of
a Change of Control, each holder of the TransTexas 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 and TARC
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 (or, for TARC,
the accreted value of the outstanding principal amount of the TARC 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-day period thereafter the rating on
the notes is downgraded or withdrawn. A Change of Control would be deemed to
occur under the Indenture, the TransTexas Intercompany Loan and the TARC
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 Subordinated Notes Indenture of the 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 TEC
Notes Indenture or a "change of control" under the terms of other outstanding
indebtedness, there can be no assurance that TransTexas or TARC will have
sufficient funds to satisfy any such payment obligations.

17
20
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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.

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.

6. 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 2,165 2,913
Deferred loss on commodity price swap agreements -- 8,276
Other 5,212 4,869
---------- ----------
$ 14,197 $ 25,638
========== ==========

18
21
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

7. 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 9,022 13,501
Accrued interest 41,058 20,978
Payroll 7,122 6,012
Litigation settlements and other 9,704 1,263
Settlement values of commodity price swap agreements 5,000 13,276
Insurance 8,196 7,840
Other 14,300 8,384
--------- ----------
$ 116,986 $ 98,861
========= ==========

Included in litigation settlements and other are certain non-recurring
costs associated with the Lobo Sale.

8. 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 1,617 1,112
---------- ----------
$ 8,934 $ 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. 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 general corporate purposes.

19
22
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):

Three Months Ended
April 30,
---------------------------
1997 1996
---------- ----------

Accounts payable for property and equipment $ 51,339 $ 53,803

Interest accretion on TARC Notes capitalized
in property and equipment 14,826 11,687

Capital lease obligations incurred for property
and equipment -- --

Product financing arrangements -- (11,022)

10. 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
accurately calculate royalties under a lease. The plaintiff had demanded $10
million plus interest. This case was settled in May 1997.

20
23
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

11. 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.

12. 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. TARC purchases natural gas from
TransTexas on an interruptible basis. The total cost of natural gas purchased
for the three months ended April 30, 1997 and 1996 was approximately $0.2
million and $0.3 million, respectively.

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 July 1996, TARC executed a promissory note to TransAmerican for up
to $25 million. The note bore interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996. As of April 30, 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 bore interest at
15% per annum, payable quarterly beginning December 31, 1996 (together with the
first promissory note, the "TransAmerican Notes"). In February 1997, the
November 1996 promissory note was replaced with a $50 million note bearing
interest at an annual rate of 15%. At April 30, 1997, TARC had approximately
$56.4 million in principal amount outstanding under both of these notes.
TransAmerican waived any default occurring as a result of TARC's failure to
make the scheduled interest payment provided for in the notes. All amounts
outstanding under the TransAmerican Notes were repaid on June 13, 1997.

Southeast Contractors 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

21
24
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

for the direct costs it incurs (which consist solely of employee payroll and
benefits) plus administrative costs and fees of up to $2.0 million per year.
Total labor costs charged by Southeast Contractors for the three months ended
April 30, 1997 and 1996 were $2.2 million and $0.9 million, respectively, of
which $2.0 million and $1.8 million were payable at April 30, 1997 and January
31, 1997, respectively.

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. TARC expects its general and
administrative expenses to increase significantly when the refinery commences
more complex operations. 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 million 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.

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.

22
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The consolidated financial statements of TEC reflect the results of
operations of TEC's wholly and majority owned subsidiaries, TARC and
TransTexas. As of April 30, 1997, TransTexas 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. TARC's single business segment is refining and storage operations
("Refining"). As described in Note 1 to the condensed consolidated financial
statements, transactions between TransTexas and TARC are significantly
restricted. The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto of the Company
included elsewhere in this report.

E&P AND TRANSPORTATION

RESULTS OF OPERATIONS

TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate and
NGLs. The profitability of TransTexas also depends on the volume of natural
gas it gathers and transports, its ability to minimize finding and lifting
costs and maintaining its reserve base while maximizing production.

TransTexas' operating data for the three 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):

23
26

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
========= ==========

- -----------------------------
(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 $ .09
======= ======

TransTexas' Consolidated EBITDA, as defined in the TransTexas Senior
Secured Notes Indenture, which consists of TransTexas' earnings before
consolidated fixed charges (including capitalized interest and the interest
component of rent expense totaling approximately $5.0 million and $3.9 million
for the quarters ended April 30, 1997 and 1996, respectively, 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.

24
27
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 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 5 of Notes to Condensed Consolidated Financial Statements
included elsewhere in this report. 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' 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.

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 original 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 including the
TransTexas Disbursement Account described below, but

25
28
excluding 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.

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 each June 30 and December 31,
commencing December 31, 1997. The indenture governing the TransTexas
Subordinated Exchange Notes (the "Subordinated Notes Indenture") contains
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 a percentage of 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.

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.

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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.

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

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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
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.

POTENTIAL EFFECTS OF CHANGE OF CONTROL

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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-day period thereafter the rating on 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
TransTexas Subordinated Exchange Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under 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.

REFINING

RESULTS OF OPERATIONS

GENERAL

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 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 may operate the No. 2 Crude Unit and the
No. 2 Vacuum Unit if market conditions are 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.

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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, and in constructing and operating a large scale refinery, 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.

THREE MONTHS ENDED APRIL 30, 1997, COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1996

There were no revenues for the three months ended April 30, 1997 as
compared to $10.9 million in revenues from the processing of feedstocks for
sale to third parties for the same period in 1996.

There were no costs of products sold for the three months ended April
30, 1997 as compared to $13.4 million for the same period in 1996 for the
purchase of feedstocks for processing.

Gross margins from processing arrangements were $0.2 million and
($1.9) million for the three months ended April 30, 1997 and 1996,
respectively. As discussed below in "Liquidity and Capital Resources,"
positive margins were primarily due to income from fixed fee processing
agreements and negative margins were primarily due to price management
activities.

Operations and maintenance expense for the three months ended April
30, 1997 increased to $3.6 million from $3.0 million for the same period in
1996, primarily due to an increase in the utilization of outside labor.

Depreciation and amortization expense for the three months ended April
30, 1997 decreased to $1.7 million from $1.8 million for the same period in
1996, primarily due to the full amortization of intangible assets during 1996.

General and administrative expenses increased to $2.7 million for the
three months ended April 30, 1997 from $2.1 million for the same period in
1996, primarily due to increased insurance expense.

Taxes other than income taxes for the three months ended April 30,
1997 increased to $0.9 million from $0.4 million for the same period in 1996,
primarily due to increased property tax expense.

Loss on purchase commitment for the three months ended April 30, 1997
consists of a $5.1 million loss related to a commitment to purchase 0.6 million
barrels of feedstock.

Interest income for the three months ended April 30, 1997 remained
consistent with the same period in 1996. Interest expense, net for the three
months ended April 30, 1997 increased $2.2 million, due primarily to interest
on the promissory notes to TransAmerican and the senior secured notes. During
the three months ended April 30, 1997, TARC capitalized approximately $18.8
million of interest related to property and equipment additions at TARC's
refinery compared to $16.6 million for the three months ended April 30, 1996.

The equity in earnings (loss) of TransTexas for the three months ended
April 30, 1997 and 1996 of ($2.1) million and $1.0 million, respectively,
reflects TARC's equity interest in TransTexas.

LIQUIDITY AND CAPITAL RESOURCES

TARC is not currently operating the completed units of the refinery
because market conditions make limited operations uneconomic. Although TARC
has no current plans to commence regular refinery operations before completion
of the Delayed Coking Unit, if market conditions become favorable, TARC could
resume limited processing operations. TARC, however, anticipates that, until
completion of the Delayed Coking Unit, its capital needs will be limited to
expenditures for the Capital Improvement Program, for general and
administrative expenses and refinery maintenance costs.

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In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes were secured
by a pledge of 5 million shares of TransTexas common stock. Proceeds from the
issuance of these notes have been or will be used for construction at the
refinery and general corporate purposes. These notes were repaid in June 1997.

Following completion of the transactions described in Note 2 to Notes
to Condensed Financial Statements, TARC and TEC will have deposited
approximately $529 million into the Disbursement Account. Of these funds, $427
million will be available only for the Capital Improvement Program,
approximately $25.5 million will be available for general and administrative
expenses, $7 million will be available for outstanding accounts payable, $50
million will be available for working capital upon completion of the Delayed
Coking Unit and certain supporting units and approximately $19 million will be
available pay interest installments on, or for the redemption, purchase,
defeasance or other retirement of, the remaining TARC Notes. TARC's estimated
capital expenditures for the Capital Improvement Program are $201 million, $210
million, and $16 million, respectively, during the remainder of fiscal 1998,
and the fiscal years ending January 31, 1999 and 2000. If engineering
problems, cost overruns or delays occur and other financing sources are not
available, TARC may not be able to complete both phases of the Capital
Improvement Program.

On June 13, 1997, TEC completed a private offering (the "TEC Notes
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.

With the proceeds of the TEC Notes Offering, TEC made an intercompany
loan to TARC in the original amount of $676 million. The TARC Intercompany
Loan will accrete to June 15, 1999 to a fully accreted value of $920 million
and cash interest will thereafter accrue at a rate of 16% per annum, payable
semi-annually, and will mature on June 1, 2002. The TARC Intercompany Loan
Agreement contains certain restrictive covenants including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates. If TARC's cash flow from operations is
insufficient to pay interest as it becomes payable on the TARC
Intercompany Loan, TARC may be required to sell any shares of TransTexas common
stock owned by it or attempt to sell debt or equity securities of TARC. There
can be no assurance that proceeds from such sales would be adequate to pay
interest due. See Note 2 and Note 6 of Notes to Condensed Consolidated
Financial Statements.

On June 13, 1997, TEC completed a tender offer for all of the
outstanding common stock purchase warrants of TARC ("TARC Warrants") at a price
of $4.50 per warrant. Pursuant to the tender offer, TEC purchased 7,335,452
TARC Warrants for an aggregate purchase price of approximately $33 million.
TARC intends to enter into a merger with one of its affiliates pursuant to
which each remaining warrant would become exercisable (at an exercise price of
$.01) to receive $4.51 of cash instead of one share of common stock of TARC.

TEC intends to make a capital contribution to TARC in the aggregate
amount of $226 million from the proceeds of the TEC Notes Offering and the
TransTexas dividend/share repurchase program (discussed below). The amount of
this capital contribution will be retained initially in the Disbursement
Account and contributed to TARC pursuant to the terms of the
Disbursement Agreement. See Note 4 to Notes to Condensed Consolidated Financial
Statements.

On June 13, 1997, TARC completed a tender offer for the (i) TARC
Mortgage Notes for 112% of their principal amount (plus accrued and unpaid
interest) and (ii) TARC Discount Notes for 112% of their accreted value. In
connection with the TARC Notes Tender Offer, TARC has obtained consents from
holders of the TARC Notes to certain waivers under, and amendments to the
indenture governing the TARC Notes (the "TARC Notes Indenture"), which
eliminate or modify certain of the covenants and other provisions contained in
the TARC Notes Indenture. Approximately $423 million aggregate principal
amount of TARC Mortgage Notes and TARC Discount Notes were tendered and
accepted by TARC at a cost to TARC of approximately $437 million (including
accrued interest and

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premiums). As a result of the TARC Notes Tender Offer, TARC expects to record
a pretax extraordinary charge of approximately $85 million during the quarter
ending July 31, 1997.

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 that
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 prices paid to affiliated stockholders
will equal the weighted average price paid to purchase shares from the public
stockholders.

The TEC Notes Indenture permits TARC to obtain a revolving credit
facility but places certain limitations on TARC's ability to incur other
indebtedness. In order to operate the refinery at expected levels after the
completion of Phase I of the Capital Improvement Program, TARC will require
additional working capital. TARC and a lender are currently discussing the
terms of a revolving credit facility, but there can be no assurance TARC will
be able to obtain such a facility.

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.

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 operations,
cash flows or financial condition. TARC also has contingent liabilities with
respect to litigation matters as more fully described in Note 7 of Notes to
Condensed Financial Statements.

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 Quarterly Report on Form 10-Q regarding TEC's
financial position, business strategy, plans and objectives of management for
future operations, including but not limited to words such as "anticipates,"
"expects," "believes," "estimates," "intends," "projects" and "likely" indicate
forward-looking statements. TEC's management believes that its current views
and expectations are based on reasonable assumptions; however, there are
significant risks and uncertainties that could significantly affect expected
results. Factors that could cause actual results to differ materially from
those in the forward-looking statements include, without limitation,
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, engineering problems, work stoppages, cost
overruns, personnel or materials shortages, fluctuations in commodity prices
for petroleum and refined products, casualty losses, conditions in the equity
and capital markets, the ultimate resolution of litigation and competition.

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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 5 and 10 to the condensed consolidated financial statements
for a discussion of the Company's legal proceedings.

ITEM 2. CHANGES IN SECURITIES

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"). The TEC Notes were sold to Jefferies & Company, Inc., as initial
purchaser, and offered and sold to qualified institutional buyers in reliance
on Rule 144A under the Securities Act. The aggregate offering price was
approximately $1.35 billion and the discount to the initial purchaser was
approximately $33.8 million.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

27.1 - Financial Data Schedule

(b) REPORTS ON FORM 8-K

There were no reports on Form 8-K filed during the three months ended 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, thereunto duly authorized.

TRANSAMERICAN ENERGY CORPORATION
(Registrant)

By: /s/ED DONAHUE
-----------------------------------
Ed Donahue, Vice President and
Chief Financial Officer

June 19, 1997

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INDEX TO EXHIBITS

EXHIBIT
NUMBER EXHIBIT
- ------ -------

27.1 Financial Data Schedule