1
================================================================================
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 July 31, 1997
Commission File Number 1-12204
------------------------------
TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 987-8600
(Registrant's telephone number, including area code)
------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock of the registrant outstanding on
September 15, 1997 was 57,515,566.
================================================================================
2
TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
Page
----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 2
Condensed Consolidated Balance Sheet as of July 31, 1997 and January 31, 1997 3
Condensed Consolidated Statement of Operations for the three and six months ended
July 31, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for the six months ended
July 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 27
1
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of July 31, 1997 and the related condensed
consolidated statements of operations for the three and six months ended July
31, 1997 and 1996 and cash flows for the six months ended July 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1997, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended (not presented herein); and in our report dated
May 1, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January 31, 1997, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 15, 1997
2
4
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JULY 31, JANUARY 31,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 38,279 $ 23,561
Cash restricted for interest . . . . . . . . . . . . . . . . . . . -- 46,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 31,277 78,660
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . 4,162 3,248
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,105 12,481
Other current assets (Note 3) . . . . . . . . . . . . . . . . . . 15,357 24,984
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 104,180 188,934
----------- -----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . 1,221,755 2,280,880
Less accumulated depreciation, depletion and amortization . . . . . 682,062 1,434,487
----------- -----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $147,080 and
$158,973 are excluded from amortization at July 31, 1997
and January 31, 1997, respectively . . . . . . . . . . . . . . . 539,693 846,393
----------- -----------
Cash restricted for share repurchases (Note 2) . . . . . . . . . . . 349,685 --
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . 18,254 17,825
----------- -----------
$ 1,011,812 $ 1,053,152
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . $ 9,542 $ 5,787
Revolving credit agreement . . . . . . . . . . . . . . . . . . . 6,249 --
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 45,307 28,150
Accrued interest payable to affiliate . . . . . . . . . . . . . . 6,510 --
Accrued liabilities (Note 4) . . . . . . . . . . . . . . . . . . . 34,169 83,411
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . 101,777 117,348
----------- -----------
Long-term debt, less current maturities . . . . . . . . . . . . . . . 14,538 8,775
Production payments, less current portion . . . . . . . . . . . . . . 11,218 11,931
Note payable to affiliate . . . . . . . . . . . . . . . . . . . . . . 450,000 --
Senior secured notes . . . . . . . . . . . . . . . . . . . . . . . . -- 800,000
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . 115,815 101,092
Revolving credit agreement . . . . . . . . . . . . . . . . . . . . . -- 26,268
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . -- 54,554
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 53,909 31,367
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . -- 19,621
Other liabilities (Note 5) . . . . . . . . . . . . . . . . . . . . . 11,120 32,991
Commitments and contingencies (Note 2) . . . . . . . . . . . . . . . -- --
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
70,899,352 shares issued and outstanding, 3,100,648 shares held
as treasury shares . . . . . . . . . . . . . . . . . . . . . . . 740 740
Additional paid-in capital (capital deficit) . . . . . . . . . . . 22,820 (123,524)
Retained earnings (accumulated deficit) . . . . . . . . . . . . . 279,474 31,267
----------- -----------
303,034 (91,517)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . (49,599) --
Less advances to affiliates . . . . . . . . . . . . . . . . . . . -- (59,278)
----------- -----------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . 253,435 (150,795)
----------- -----------
$ 1,011,812 $ 1,053,152
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
5
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
Gas, condensate and natural gas liquids ............. $ 39,288 $ 77,899 $ 112,170 $ 157,701
Transportation ...................................... 2,764 8,675 12,055 16,870
Gains on the sale of assets ......................... 532,929 -- 532,929 7,762
Other ............................................... 439 158 617 357
------------ ------------ ------------ ------------
Total revenues .................................... 575,420 86,732 657,771 182,690
------------ ------------ ------------ ------------
Costs and expenses:
Operating ........................................... 11,683 25,048 38,825 52,486
Depreciation, depletion and amortization ............ 20,415 31,446 53,972 61,545
General and administrative .......................... 9,383 12,350 24,523 19,789
Taxes other than income taxes ....................... 2,514 7,192 7,728 12,376
Litigation settlement ............................... -- (96,000) -- (96,000)
------------ ------------ ------------ ------------
Total costs and expenses .......................... 43,995 (19,964) 125,048 50,196
------------ ------------ ------------ ------------
Operating income .................................. 531,425 106,696 532,723 132,494
------------ ------------ ------------ ------------
Other income (expense):
Interest income ..................................... 5,593 790 7,287 1,924
Interest expense, net ............................... (21,845) (29,763) (47,203) (52,049)
------------ ------------ ------------ ------------
Total other income (expense) ...................... (16,252) (28,973) (39,916) (50,125)
------------ ------------ ------------ ------------
Income before income taxes ........................ 515,173 77,723 492,807 82,369
Income taxes .......................................... 180,311 6,162 172,483 7,788
------------ ------------ ------------ ------------
Net income before extraordinary item .............. 334,862 71,561 320,324 74,581
Extraordinary item - early extinguishment
of debt (net of income tax benefit of $38,833) .... (72,117) -- (72,117) --
------------ ------------ ------------ ------------
Net income ........................................ $ 262,745 $ 71,561 $ 248,207 $ 74,581
============ ============ ============ ============
Net income per common share:
Income before extraordinary item .................. $ 4.60 $ 0.97 $ 4.36 $ 1.01
Extraordinary item ................................ (0.99) -- (0.98) --
------------ ------------ ------------ ------------
Net income per common share ............... $ 3.61 $ 0.97 $ 3.38 $ 1.01
============ ============ ============ ============
Weighted average number of shares outstanding ......... 72,832,632 74,000,000 73,406,642 74,000,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
6
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JULY 31,
--------------------------
1997 1996
----------- -----------
Operating activities:
Net income .......................................................... $ 248,207 $ 74,581
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Extraordinary item ................................................ 72,117 --
Depreciation, depletion and amortization .......................... 53,972 61,545
Amortization of debt issue costs .................................. 1,348 6,999
Accretion on subordinated notes ................................... 4,941 --
Gains on the sale of assets ....................................... (532,929) (7,762)
Deferred income taxes ............................................. 172,483 (11,244)
Proceeds from volumetric production payment ....................... -- 58,621
Repayment of volumetric production payments ....................... (45,134) --
Amortization of deferred revenue .................................. (9,420) (16,087)
Changes in assets and liabilities:
Accounts receivable .............................................. 47,383 (2,961)
Receivable from affiliates ....................................... (914) (736)
Inventories ...................................................... (2,621) (5,578)
Other current assets ............................................. 5,627 19,039
Accounts payable ................................................. 16,640 (1,260)
Accrued liabilities .............................................. (44,603) (3,637)
Transactions with affiliates, net ................................ (1,898) (11,519)
Other assets ..................................................... 54 (2,221)
Other liabilities ................................................ 1,867 (16,452)
----------- -----------
Net cash provided (used) by operating activities .............. (12,880) 141,328
----------- -----------
Investing activities:
Capital expenditures ................................................ (235,996) (129,767)
Proceeds from the sale of assets .................................... 1,030,032 69,971
Advances to affiliates .............................................. (13,304) (9,500)
Payment of advances by affiliate .................................... 56,354 --
Increase in cash restricted for interest ............................ -- (46,000)
Withdrawals from cash restricted for interest ....................... 46,000 46,000
Increase in cash restricted for share repurchases ................... (399,284) --
Withdrawals from cash restricted for share repurchases .............. 49,599 --
----------- -----------
Net cash provided (used) by investing activities .............. 533,401 (69,296)
----------- -----------
Financing activities:
Issuance of production payments ..................................... 20,977 --
Principal payments on production payments ........................... (23,909) (32,800)
Issuance of note payable to TEC ..................................... 450,000 --
Issuance of long-term debt .......................................... 14,946 25,000
Principal payments on long-term debt ................................ (5,428) (17,044)
Revolving credit agreement, net ..................................... (20,019) (12,417)
Debt issue costs .................................................... (771) (4,256)
Retirement of senior secured notes .................................. (892,000) --
Purchases of treasury stock ......................................... (49,599) --
----------- -----------
Net cash provided (used) by financing activities .............. (505,803) (41,517)
----------- -----------
Increase in cash and cash equivalents ......................... 14,718 30,515
Beginning cash and cash equivalents ................................... 23,561 11,248
----------- -----------
Ending cash and cash equivalents ...................................... $ 38,279 $ 41,763
=========== ===========
Noncash operating and investing activities:
Accounts payable for property and equipment ......................... $ 27,709 $ 13,969
Exchange of Subordinated Notes....................................... 115,815 --
Deferred financing costs from affiliate.............................. 12,228 --
See accompanying notes to condensed consolidated financial statements.
5
7
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas") as of July 31,
1997 and the results of its operations and cash flows for the interim periods
ended July 31, 1997 and 1996. The results of operations for interim periods
should not be regarded as necessarily indicative of results that may be
expected for the entire year. The financial information presented herein
should be read in conjunction with the consolidated financial statements and
notes included in TransTexas' annual report on Form 10-K for the period ended
January 31, 1997. Unless otherwise noted, the term "TransTexas" refers to
TransTexas Gas Corporation and its subsidiaries as of July 31, 1997,
TransTexas Exploration Corporation ("TTEX"), TransTexas Drilling Services, Inc.
("TTXD") and TransTexas Energia de Mexico, S.A. de C.V. TransTexas is a
subsidiary of TransAmerican Energy Corporation ("TEC") and indirectly a
subsidiary of TransAmerican Natural Gas Corporation ("TransAmerican").
TransAmerican Refining Corporation ("TARC") is a subsidiary of TEC.
LIQUIDITY
TransTexas is required to make substantial capital expenditures for
the exploration and development of natural gas reserves in order to increase and
maintain production at levels sufficient to service its debt and fund future
capital requirements. TransTexas historically has financed its capital
expenditures, debt service and working capital requirements with public and
private offerings of debt and equity securities, the sale of production
payments, asset sales, its accounts receivable revolving credit facility and
other financings in addition to cash from operations. Cash flow from operations
is sensitive to the prices TransTexas receives for its natural gas. TransTexas'
leverage and debt covenants may limit its ability to obtain additional
financing, and there is no assurance that cash flow from operations will be
sufficient to fund capital and debt service requirements.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income and its components in financial statements. This statement will be
adopted by TransTexas effective February 1, 1998. TransTexas does not believe
the effect of adoption of this statement will have a material effect on its
financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"). These
statements will be adopted by TransTexas effective January 31, 1998. SFAS 128
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. TransTexas does not believe the effects of adoption of these
statements will have a material impact on its financial statements.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities"
("SOP 96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. SOP 96-1
was adopted by TransTexas effective February 1, 1997. The adoption of SOP 96-1
did not have a material impact on TransTexas' financial position, results of
operations or cash flows.
2. RECENT EVENTS
LOBO SALE. On May 29, 1997, TransTexas entered into and consummated a
stock purchase agreement with an unaffiliated buyer (the "Lobo Sale
Agreement"), with an effective date of March 1, 1997, to effect the sale (the
"Lobo Sale") of the stock of TransTexas Transmission Corporation ("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-
6
8
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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
incurred before closing. Purchase price adjustments made at the closing of the
Lobo Sale are subject to a review, reconciliation and resolution process. 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.
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.
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 TEC Senior
Secured Notes, the "TEC Notes") for net proceeds of approximately $1.3 billion.
The TEC Notes are senior obligations of TEC, secured by a lien on substantially
all its existing and future assets, including the intercompany loans described
below. In conjunction with the TEC Notes Offering, TransTexas completed the
following transactions (collectively, the "Transactions"): (a) borrowing $450
million pursuant to an intercompany loan from TEC; (b) a tender offer and
consent solicitation (the "Tender Offer") for TransTexas' $800 million
aggregate principal amount of 11 1/2% Senior Secured Notes due 2002 (the
"Senior Secured Notes"); (c) an offer (the "Subordinated Notes Exchange Offer")
to exchange approximately $115.8 million aggregate principal amount of new
notes that pay interest in cash at the rate of 13 3/4% per annum for
TransTexas' $189 million aggregate principal amount of 13 1/4% Senior
Subordinated Notes due 2003 (the "Subordinated Notes"); and (d) a share
repurchase program for shares of TransTexas' common stock (the Share Repurchase
Program") in an aggregate amount of approximately $399 million.
INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the TEC
Notes Offering, TEC made intercompany loans to TransTexas (the "TransTexas
Intercompany Loan") and TARC (the "TARC Intercompany Loan" and, together with
the TransTexas Intercompany Loan, the "Intercompany Loans"). The TransTexas
Intercompany Loan (i) is in the principal amount of $450 million, (ii) bears
interest at a rate of 10 7/8% per annum, payable semi-annually in cash in
arrears and (iii) is secured initially by a security interest in substantially
all of the assets of TransTexas including the TransTexas Disbursement Account
(described below), but excluding inventory, receivables and equipment. The TARC
Intercompany Loan (i) is in the original amount of $676 million, (ii) accretes
principal at 16% per annum, compounded semi-annually, until June 15, 1999, to a
final accreted value of $920 million, and thereafter pays interest semi-
annually in cash in arrears on the accreted value thereof, at a rate of 16% per
annum, and (iii) 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. TEC allocated $24.9 million of debt issuance
costs to TARC and $12.2 million to TransTexas which are reflected as a
contribution of capital. Such costs are being amortized over the term of the
Intercompany Loans using the interest method. Upon the occurrence of a Change of
Control (as defined), TEC will be required to make an offer to purchase all of
the outstanding TEC Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, or, in the case of
any such offer to purchase the TEC Senior Secured Discount Notes prior to June
15, 1999, at a price equal to 101% of the accreted value thereof, in each case,
to and including the date of purchase. Pursuant to the terms of the
Intercompany Loans, TEC may require TransTexas and TARC to pay a pro rata share
of the purchase price paid by TEC. See "Potential Effects of a Change of
Control" in Note 3 to the condensed consolidated financial statements.
SENIOR SECURED NOTES TENDER OFFER. On June 13, 1997, TransTexas completed
the 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. The Senior Secured Notes remaining outstanding were called for
redemption on June 30, 1997 pursuant to the terms of the Senior Secured Notes
Indenture.
7
9
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
SUBORDINATED NOTES EXCHANGE OFFER. On June 19, 1997, TransTexas completed
an exchange offer, pursuant to which it exchanged approximately $115.8 million
aggregate principal amount of its 13 3/4% Senior Subordinated Notes due 2001
(the "Subordinated Exchange Notes") for all of the Subordinated Notes. The
indenture governing the Subordinated Exchange Notes includes certain
restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates.
As a result of the Lobo Sale, the Tender Offer and the Exchange Offer,
TransTexas recorded a $533 million pretax gain and a $72 million after tax
extraordinary charge during the quarter ended July 31, 1997.
SHARE REPURCHASE PROGRAM. TransTexas has implemented the Share Repurchase
Program pursuant to which it plans to repurchase common stock from its public
stockholders and from its affiliates, including TEC and TARC, in an aggregate
amount of approximately $399 million in value of stock purchased. 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 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. As of July 31, 1997,
approximately 3.1 million shares had been repurchased from public stockholders
for an aggregate purchase price of approximately $49.6 million. As of September
15, 1997, approximately 0.8 million additional shares had been repurchased from
public stockholders for an aggregate purchase price of approximately $11.8
million, and approximately 12.6 million shares had been repurchased from TARC
and TEC for an aggregate purchase price of $201 million.
TRANSTEXAS DISBURSEMENT ACCOUNT. Pursuant to a disbursement agreement
(the "Disbursement Agreement") among TransTexas, TEC, the TEC Indenture Trustee,
and Firstar Bank of Minnesota, N.A. as disbursement agent, approximately $399
million of the proceeds of the TransTexas Intercompany Loan was placed in an
account (the "Disbursement Account") to be held and invested by the disbursement
agent until disbursed. Funds in the Disbursement Account will be disbursed to
TransTexas as needed to fund the Share Repurchase Program. TransTexas may at
any time request disbursement of interest earned on the funds in the
Disbursement Account. The Disbursement Account is classified as "cash
restricted for share repurchase" in the accompanying condensed consolidated
balance sheet. As of July 31, 1997, approximately $49.6 million had been
disbursed for use in the Share Repurchase Program.
3. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican 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. 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 denied Alameda's motion, and Alameda
has appealed to the Texas Supreme Court.
8
10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 sought 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 a petition to confirm the arbitrator's award. In April 1997, the court
granted Briones' motion for summary judgment. In August 1997, the court
entered a final judgment for Briones in the amount of approximately $1.6
million. TransTexas intends to file a motion for new trial.
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 partial decision from the arbitration panel has been rendered in favor of
Finkelstein. Although the amount of damages has yet to be determined under the
panel's decision, such amount will be substantially less than that sought by
plaintiff.
ARABIAN OFFSHORE PARTNERS. On June 27, 1997, Arabian Offshore
Partners filed a lawsuit against TransTexas in the 14th Judicial District
Court, Dallas County, Texas, seeking $20 million in damages in connection with
TransTexas' refusal to proceed with the acquisition of two jack-up drilling
rigs. TransTexas has filed its answer and is preparing a motion for summary
judgment.
GENERAL. TransTexas is also a named defendant in other ordinary
course, routine litigation incidental to its business. Although the outcome of
these other lawsuits cannot be predicted with certainty, TransTexas does not
expect these matters to have a material adverse effect on its financial
position. At July 31, 1997, the possible range of estimated losses related to
all of the aforementioned claims, in addition to the estimates accrued by
TransTexas is $0 to $36 million. The resolution in any reporting period of
one or more of these matters in a manner adverse to
9
11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
TransTexas could have a material impact on TransTexas' results of operations
and cash flows for that period. Litigation expense, including legal fees,
totaled approximately $4.3 million and $5.9 million for the three months ended
July 31, 1997 and 1996, respectively, and approximately $9.4 million and $7.3
million for the six months ended July 31, 1997 and 1996.
ENVIRONMENTAL MATTERS
TransTexas' operations and properties are subject to extensive
federal, state, and local laws and regulations relating to the generation,
storage, handling, emission, transportation, and discharge of materials into
the environment. Permits are required for various of TransTexas' operations,
and these permits are subject to revocation, modification, and renewal by
issuing authorities. TransTexas also is subject to federal, state, and local
laws and regulations that impose liability for the cleanup or remediation of
property that has been contaminated by the discharge or release of hazardous
materials or wastes into the environment. Governmental authorities have the
power to enforce compliance with their regulations, and violations are subject
to fines or injunctions, or both. It is not anticipated that TransTexas will
be required in the near future to expend amounts that are material to the
financial condition or operations of TransTexas by reason of environmental laws
and regulations, but because such laws and regulations are frequently
changed and, as a result, may impose increasingly strict requirements,
TransTexas is unable to predict the ultimate cost of complying with such laws
and regulations.
PRODUCTION PAYMENTS
In April 1997, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $20 million.
The production payment calls for the repayment of the primary sum plus an
amount equivalent to a 16% annual interest rate on the unpaid portion of such
primary sum.
LETTER OF CREDIT
In January 1996, TransTexas entered into a reimbursement agreement
with an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days. TransTexas
has agreed to issue up to 8.6 million shares of its common stock to the third
party if this contingent obligation to such third party becomes fixed and
remains unpaid for 60 days. TransTexas does not believe that this contingency
will occur. If the obligation becomes fixed, and alternative sources of
capital are not available, TransTexas could elect to sell shares of TransTexas'
common stock prior to the maturity of the obligation and use the proceeds of
such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
POTENTIAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no
10
12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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
has reserved 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.
Under certain circumstances, TransAmerican or TEC may sell or
otherwise dispose of shares of common stock of the Company. If, as a
result of any sale or other disposition of the Company's common stock, the
aggregate ownership of TransTexas by members of the TNGC Consolidated Group
(excluding TransTexas) is less than 80% (measured by voting power and value),
TransTexas will no longer be a member of the TNGC Consolidated Group for
federal tax purposes ("Deconsolidation") and, with certain exceptions, will no
longer be obligated under the terms and conditions of, or entitled to the
benefits of, the Tax Allocation Agreement. Further, if TEC or TARC sells or
otherwise transfers any stock of TARC, or issues any options, warrants or
other similar rights relating to such stock, outside of the TNGC Consolidated
Group, which represents more than 20% of the voting power or equity value of
TARC, then a Deconsolidation of TARC would occur. A Deconsolidation of TARC
would result in a Deconsolidation of TransTexas if the TNGC Consolidated Group,
excluding TARC, does not then own at least 80% of the voting power and equity
value of TransTexas. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred
during the fiscal year ending January 31, 1998, the aggregate amount of this
tax liability is estimated to be between $175 million and $200 million,
assuming no reduction for tax attributes of the TNGC Consolidated Group.
However, such tax liability generally would be substantially reduced or
eliminated in the event that the IRS successfully challenged TransTexas'
position on the Lobo Sale. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable to the IRS for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that each TNGC Consolidated Group member will have the ability
to satisfy any tax obligation attributable to the Transactions at the time due
and, therefore, other members of the group, including TEC, TransTexas or TARC,
may be required to pay the tax.
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TARC or TEC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit
pursuant to the Tax Allocation Agreement for net operating losses of TransTexas
used by other members of the TNGC Consolidated Group prior to the
Deconsolidation of TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay
any Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Exchange Notes will have the
right to require TransTexas to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the
terms of the TransTexas Intercompany Loan, upon the occurrence of a Change of
Control, TEC would have the right to require TransTexas to repay the principal
of the TransTexas Intercompany Loan in an amount equal to a pro rata share of
the amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount
of the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of
Control would be deemed to occur under the Subordinated Notes Indenture in the
case of certain changes or other events in respect of the ownership of
TransTexas, including any circumstances pursuant to which any person or group
other than John R. Stanley and his wholly owned subsidiaries or the TEC
Indenture Trustee is or become the beneficial owner of more than 50% of the
total voting power of TransTexas' then outstanding voting stock, and during the
90 days thereafter, the rating of the notes is downgraded or withdrawn. A
Change of Control would be deemed to occur under the TransTexas Intercompany
Loan in the case of certain changes or other events in respect of the ownership
or control of TEC, TransTexas, or TARC including any circumstance pursuant to
which (i) any person or group, other than John R. Stanley and his
wholly-owned subsidiaries or the TEC Indenture Trustee is or becomes the
beneficial owner of more than 50% of the total voting power of TEC's then
outstanding voting stock, or (ii) 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 July 31, 1997, TransTexas had
approximately $26.6 million of indebtedness (excluding the Senior Secured
Notes and the Subordinated Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under the Subordinated Notes
Indenture or the TEC Notes Indenture or a "change of control" under the terms
of other outstanding indebtedness, there can be no assurance that TransTexas
will have sufficient funds to satisfy any such payment obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. These matters,
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
individually and in the aggregate, amount to significant potential liability
which, if adjudicated in a manner adverse to TransTexas in one reporting
period, could have a material adverse effect on TransTexas' cash flow or
operations for that period. Although the outcome of these contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position.
4. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
July 31, January 31,
1997 1997
--------- ---------
Prepayments:
Trade $ 10,566 $ 9,580
Insurance 2,698 2,310
Deferred loss on commodity price swap agreements -- 8,276
Other 2,093 4,818
--------- ---------
$ 15,357 $ 24,984
========= =========
5. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in
thousands of dollars):
July 31, January 31,
1997 1997
--------- ---------
Royalties $ 11,326 $ 27,607
Taxes other than income taxes 5,284 10,136
Accrued interest 4,356 13,370
Payroll 5,366 5,413
Litigation settlements and other -- 1,263
Settlement values of commodity price swap agreements -- 13,276
Insurance 5,030 6,618
Other 2,807 5,728
--------- ---------
$ 34,169 $ 83,411
========= =========
Included in litigation settlements and other at January 31, 1997 are
certain non-recurring costs associated with the Lobo Sale.
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands
of dollars):
July 31, January 31,
1997 1997
--------- ---------
Litigation accrual $ 10,008 $ 8,008
Litigation settlement -- 1,633
Short-term obligations expected to be refinanced:
Litigation settlement -- 2,500
Accrued capital expenditures -- 19,738
Other 1,112 1,112
--------- ---------
$ 11,120 $ 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 $21.0 million remains outstanding as of July 31, 1997. Proceeds
from these transactions, net of current maturities, were used to pay the
obligations listed above under the caption "Short-term obligations expected to
be refinanced" at January 31, 1997 and for general corporate purposes.
7. HEDGING AGREEMENTS
From time to time, TransTexas enters into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. The Hedge Agreements are accounted for as
hedges if the pricing of the hedge agreement correlates with the pricing
of the natural gas production hedged. Accordingly, gains or losses are
deferred and recorded as assets or liabilities and recognized as an increase or
decrease in revenues in the respective month the physical volumes are sold.
For the three and six months ended July 31, 1997, TransTexas incurred net
settlement losses pursuant to the Hedge Agreements of approximately $2.8
million and $7.4 million, respectively. As of July 31, 1997, TransTexas had no
Hedge Agreements outstanding.
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. LITIGATION SETTLEMENTS
BENTSEN. On August 13, 1990, Calvin R. Bentsen, et al. filed suit against
TransAmerican and Mr. Stanley in the 139th Judicial District Court, Hidalgo
County, Texas, seeking a portion of the El Paso settlement proceeds, and an
accounting of monies allegedly owed to them, claiming that TransAmerican
produced gas that belonged to them without their knowledge and that
TransAmerican entered into an oral agreement with them which entitled them to
receive a portion of the El Paso settlement proceeds. This case was settled in
April 1997.
COASTAL. On October 28, 1991, The Coastal Corporation ("Coastal") filed
an action against TransAmerican that was consolidated in the 49th Judicial
District Court, Webb County, Texas, alleging breach of contract and tortious
interference related to two gas sales contracts and a transportation agreement,
seeking unspecified actual and punitive damages and injunctive relief. On
April 22, 1994, the court entered a judgment adverse to TransAmerican and
TransTexas requiring them to pay $1.3 million plus $0.7 million in attorneys'
fees to Coastal. On May 29, 1996, the Court of Appeals affirmed the judgment.
In December 1996, the Supreme Court of Texas declined to hear the appeal. The
judgment was paid on May 27, 1997. Coastal executed a Release of Judgment and
Judgment Lien which has been 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.
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 TransTexas employee filed a
petition in intervention also alleging negligence, gross negligence and malice
and seeking unspecified damages. This litigation was settled in August 1997.
9. CREDIT AGREEMENTS
TransTexas and BNY Financial Corporation are parties to an Amended
and Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 31, 1995 and amended in December 1996. In
connection with the Lobo Sale, the TEC Notes Offering and the Transactions
described in Note 2, TransTexas and BNY entered into a waiver of the BNY
Facility, pursuant to which advances under the BNY Facility are made at the
sole discretion of the lender and the lender may require repayment of principal
and interest at any time. As of July 31, 1997, outstanding advances under the
BNY Facility totaled approximately $6.2 million. Interest accrues on advances
at the rate of (i) the higher of (a) the prime rate of The Bank of New York or
(b) the Federal Funds Rate plus 1/2 of 1% plus (ii) 1/2 of 1%.
Obligations under the BNY Facility are secured by liens on TransTexas'
receivables and inventory. TransTexas is currently negotiating an amendment
and restatement of the BNY Facility.
10. TRANSACTIONS WITH AFFILIATES
In June 1997, certain affiliates repaid approximately $65 million owed to
TransTexas.
TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.3 million and $1.5 million for the six months ended July 31, 1997
15
17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
and 1996, respectively. The receivable from TARC for natural gas sales totaled
approximately $3.0 million at July 31, 1997.
On June 13, 1997, the Transfer Agreement was amended to eliminate
TransAmerican's indemnity obligations to TransTexas other than for tax
liabilities.
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. TransAmerican will pay
to TransTexas approximately $20,000 per month for such services. TEC and its
subsidiaries will pay $2.5 million in the aggregate per year to TransAmerican
for advisory services and benefits provided by TransAmerican.
16
18
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto of TransTexas
included elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
NGLs. The profitability of TransTexas also depends on the volume of natural
gas it gathers and transports, its ability to minimize finding and lifting
costs and maintaining its reserve base while maximizing production. 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
TransTexas Transmission Corporation ("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.
Accordingly, the Company's reported results for the three and six months ended
July 31, 1997 include the effect of reduced volumes attributable to the
producing properties sold as part of the Lobo Sale.
TransTexas' operating data for the three months and six months ended
July 31, 1997 and 1996, is as follows:
Three Months Ended Six Months Ended
July 31, July 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
Sales volumes:
Gas (Bcf) (1) 17.8 38.1 53.2 74.3
NGLs (MMgal) 14.3 41.1 61.7 89.3
Condensate (MBbls) 151 116 426 280
Average prices:
Gas (dry) (per Mcf) (2) $ 2.06 $ 1.95 $ 1.80 $ 1.99
NGLs (per gallon) .26 .31 .29 .31
Condensate (per Bbl) 18.33 19.62 19.46 19.86
Number of gross wells drilled 26 13 55 58
Percentage of wells completed 54% 38% 58% 74%
- ----------------------
(1) Sales volumes for six months ended July 31, 1997 include 7.3 Bcf
delivered pursuant to volumetric production payments.
(2) Average prices for the three and six months ended July 31, 1997 includes
amounts delivered under volumetric production payments. The average gas
price for TransTexas' undedicated production for these periods was $2.06
per Mcf and $1.91 per Mcf, respectively. Gas prices do not include the
effect of hedging agreements.
17
19
A summary of TransTexas' operating expenses is set forth below (in millions
of dollars):
Three Months Ended Six Months Ended
July 31, July 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Operating costs and expenses:
Lease $ 4.9 $ 6.2 $ 12.9 $ 13.0
Pipeline 3.2 8.1 11.4 16.3
Natural gas liquids 3.6 10.7 14.5 23.2
-------- -------- -------- --------
11.7 25.0 38.8 52.5
Taxes other than income taxes (1) 2.5 7.2 7.7 12.4
-------- -------- -------- --------
Total $ 14.2 $ 32.2 $ 46.5 $ 64.9
======== ======== ======== ========
- ----------
(1) Taxes other than income taxes include severance, property, and other
taxes.
TransTexas' average depletion rates have been as follows:
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- --------- ---------
Depletion rates (per Mcfe) $ 1.02 $ 0 .94 $ 1.04 $ 0.92
=========== ========== ======== =========
TransTexas' Consolidated EBITDA, as defined in the Indenture, which
consists of TransTexas' earnings before consolidated fixed charges (excluding
capitalized interest), income taxes, depreciation, depletion, and amortization
is set forth below (in millions of dollars):
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- --------- ---------
Consolidated EBITDA $ 557.4 $ 143.1 $ 594.3 $ 204.0
=========== ========== ======== =========
THREE MONTHS ENDED JULY 31, 1997, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1996
Gas, condensate and NGLs revenues for the three months ended July 31,
1997 decreased $38.6 million from the comparable prior year quarter, due
primarily to lower prices for and decreased volumes of natural gas and NGLs,
primarily in the second quarter. The average monthly prices received per Mcf
of gas, excluding amounts dedicated to volumetric production payments, ranged
from $2.02 to $2.17 in the three months ended July 31, 1997, compared to a
range of $2.04 to $2.37 in the same period in the prior year. The decrease in
natural gas sales volumes resulted primarily from the sale of approximately 207
Bcfe of TransTexas' reserves in the Lobo Trend. As of July 31, 1997,
TransTexas had a total of 105 producing wells compared to 861 at July 31,
1996. NGL sales volumes decreased as a result of decreases in the volumes of
natural gas processed. Transportation revenues decreased $5.9 million over the
prior year quarter due to the sale of the pipeline system.
As a result of the Lobo Sale, the Tender Offer and the Exchange Offer,
TransTexas recorded a $533 million pretax gain and a $72 million after tax
extraordinary charge during the quarter ended July 31, 1997.
Primarily as a result of the Lobo Sale, lease operating expenses,
pipeline operating expenses and NGLs cost for the quarter ended July 31, 1997
decreased $1.3 million, $4.9 million and $7.1 million, respectively, over the
comparable prior year period. Depreciation, depletion and amortization expense
for the three months ended July 31, 1997 decreased $11.0 million due to a
decrease in TransTexas' undedicated natural gas production as a result of the
Lobo sale, offset by a $0.08 increase in the depletion rate. General and
administrative expenses decreased approximately $3.0 million in the three months
ended July 31, 1997, due primarily to lower professional fees and litigation
expenses.
Interest income for the three months ended July 31, 1997 increased
approximately $4.8 million over the comparable prior year period due to
increased cash balances in the current quarter. Interest expense decreased
$7.9 million over the same period of the prior year primarily as a
result of the retirement of the Senior Secured Notes, offset in part by an
increase in the amount of interest capitalized in connection with the
acquisition of undeveloped leasehold acreage.
18
20
SIX MONTHS ENDED JULY 31, 1997, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1996
Gas, condensate and NGL revenues for the six months ended July 31, 1997
decreased by $45.5 million from the comparable period of the prior year, due
primarily by decreases in gas, condensate and NGLs sales prices and gas sales
volumes, offset in part by increases in condensate sales volumes. 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 six months
ended July 31, 1997, compared to a range of $2.02 to $2.45 in the same period
in the prior year. The increase in condensate sales volumes is due primarily
to increased production from Trans Texas' new development areas, offset in part
by the normal decline in natural gas production from the TransTexas Lobo Trend
wells and the sale of the TransTexas producing properties in the Lobo Trend.
NGLs sales volumes decreased as a result of decreases in the volumes of natural
gas processed. Transportation revenues decreased by $4.8 million for the six
months ended July 31, 1997, due primarily to decreases in volumes transported
and the sale of the pipeline system.
Lease operating expenses in the six months ended July 31, 1997 decreased by
$0.1 million from the prior year period due primarily to decreases in the number
of producing wells during the second quarter offset partially by an increase in
salt water disposal and the initiation of a program to increase flow rates on
certain TransTexas' wells through increased workovers and the installation of
leased wellhead compressors. Pipeline operating expenses decreased by $4.9 due
primarily to the sale of the pipeline system as part of the Lobo sale. NGLs
cost decreased by $8.7 million from the comparable period in the prior year due
to increases in the cost of natural gas used in NGL processing, offset by a
decrease in volumes of natural gas processed. Depreciation, depletion and
amortization expense for the six months ended July 31, 1997 decreased by $7.9
million due to the decrease in TransTexas' undedicated natural gas production
partially offset by a $0.12 increase in the depletion rate. General and
administrative expenses increased by $4.7 million due primarily to increases in
wages and benefits and litigation expense. Taxes other than income taxes
decreased by $4.6 million over the comparable prior year period due primarily to
a decrease in ad valorem and excise taxes.
Interest income for the six months ended July 31, 1997 increased by
approximately $5.4 million over the comparable period of the prior year due to
increased average cash balances. Interest expense decreased by $4.8 million
primarily as a result of the retirement of the Senior Secured Notes offset in
part by the accretion on subordinated notes.
Cash flow from operating activities for the six months ended July 31, 1997
decreased by approximately $154.2 million from the prior-year period due
primarily to lower net income from gas and oil production activities and
repayment of production payments in connection with the Lobo Sale.
Cash used in investing activities increased by $602.7 million due to
proceeds from the sale of certain TransTexas producing properties offset in
part by the increase in cash restricted for share repurchases.
Cash flow from financing activities decreased by approximately $464.3
million due primarily to the retirement of the Senior Secured Notes offset in
part by the TransTexas Intercompany Loan of $450 million.
LIQUIDITY AND CAPITAL RESOURCES
TransTexas makes substantial capital expenditures for the exploration,
development and production of natural gas. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements from
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, its accounts
receivable revolving credit facility 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. 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 six months ended July 31, 1997, total capital expenditures
were $206 million, including $41 million for lease acquisitions, $129 million
for drilling and development and $36 million for TransTexas' gas
19
21
gathering and pipeline system and other equipment and seismic acquisitions.
During this period, TransTexas accelerated its exploration and development
drilling program which included the successful exploration efforts in Galveston
Bay, Goliad County and Brazoria County and, as a result, its capital
expenditures for fiscal 1998 will significantly exceed its original anticipated
amount of $220 million. Anticipated capital expenditures in fiscal 1998,
including the development of the successful exploration areas will require
supplementing cash flow from operations with asset sales or financings.
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. 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 redemption or
repurchase of the Senior Secured Notes and for general corporate purposes.
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.
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" and, together with the TransTexas Intercompany Loan,
the "Intercompany Loans"). The promissory note evidencing the TransTexas
Intercompany Loan (i) bears interest at a rate of 10 7/8% per annum, payable
semi-annually in cash in arrears and (ii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than
inventory, receivables and equipment. The promissory note evidencing the TARC
Intercompany Loan (i) accretes principal at the rate of 16% per annum,
compounded semi-annually, until June 15, 1999 to a final accreted value of $920
million, and thereafter pays interest semi-annually in cash in arrears on the
accreted value thereof, at a rate of 16% per annum and (ii) is secured
initially by a security interest in substantially all of TARC's assets other
than inventory, receivables and equipment. The Intercompany Loans will mature
on June 1, 2002. The Intercompany Loan Agreements contain certain restrictive
covenants including, among others, limitations on incurring additional debt,
asset sales, dividends and transactions with affiliates. Upon the occurrence
of a Change of Control (as defined), TEC will be required to make an offer to
purchase all of the outstanding TEC Notes at a price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any,
or, in the case of any such offer to purchase the TEC Senior Secured Discount
Notes prior to June 15, 1999, at a price equal to 101% of the accreted value
thereof, in each case, to and including the date of purchase. Pursuant to the
terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay a
pro rata share of the purchase price paid by TEC. See " Potential Effects of a
Change of Control."
On June 13, 1997, TransTexas completed a tender offer for its Senior
Secured Notes for 111 1/2% of their principal amount (plus accrued and unpaid
interest). Approximately $785.4 million principal amount of Senior Secured
Notes were tendered and accepted by TransTexas. The Senior Secured Notes
remaining outstanding were called for redemption on June 30, 1997 pursuant to
the terms of the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer, pursuant to
which it exchanged approximately $115.8 million aggregate principal amount of
its 13 3/4% Senior Subordinated Notes due 2001 (the "Subordinated Exchange
Notes") for all of the Subordinated Notes. The Subordinated Exchange Notes pay
interest in cash semi-annually in arrears on each June 30 and December 31
commencing December 31, 1997. The indenture governing
20
22
the Subordinated Exchange Notes includes certain restrictive covenants,
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates.
TransTexas has implemented a stock repurchase program pursuant to
which it plans to repurchase common stock from its public stockholders and from
its affiliates, including TEC and TARC, in an aggregate amount of approximately
$399 million in value of stock purchased. 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. As of July 31, 1997, approximately 3.1 million shares
had been repurchased from public stockholders for an aggregate purchase price of
approximately $49.6 million. As of September 15, 1997, approximately 0.8
million additional shares had been repurchased from public stockholders for an
aggregate purchase price of approximately $11.8 million, and approximately 12.6
million shares had been repurchased from TARC and TEC for an aggregate purchase
price of approximately $201 million.
TransTexas and BNY Financial Corporation are parties to an Amended
and Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 31, 1995 and amended in December 1996. In
connection with the Lobo Sale, the TEC Notes Offering and the Transactions
described in Note 2 of Notes to Condensed Consolidated Financial Statements,
TransTexas and BNY entered into a waiver of the BNY Facility, pursuant to which
advances under the BNY Facility are made at the sole discretion of the lender
and the lender may require repayment of principal and interest at any time. As
of July 31, 1997, outstanding advances under the BNY Facility totaled
approximately $6.2 million. Interest accrues on advances at the rate of (i)
the higher of (a) the prime rate of The Bank of New York or (b) the Federal
Funds Rate plus 1/2 of 1% plus (ii) 1/2 of 1%. Obligations under the BNY
Facility are secured by liens on TransTexas' receivables and inventory.
TransTexas is currently negotiating an amendment and restatement of the BNY
Facility.
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million, of
which approximately $21.0 million remains outstanding. Proceeds from these
transactions, net of current maturities, were used to pay certain short-term
obligations outstanding at January 31, 1997.
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including
liabilities with respect to litigation matters as described above. These
matters, individually and in the aggregate, amount to significant potential
liability which, if adjudicated in a manner adverse to TransTexas in one
reporting period, could have a material adverse effect on TransTexas' cash
flow or operations for that period. Although the outcome of these
contingencies or the probability of the occurrence of these contingencies
cannot be predicted with certainty, TransTexas does not expect these matters to
have a material adverse effect on its financial position. TransTexas has
caused delivery of a letter of credit to secure potential liabilities totaling
approximately $20 million in connection with certain litigation described
above.
In January 1996, TransTexas entered into a reimbursement agreement
with an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days. TransTexas
has agreed to issue up to 8.6 million shares of common stock of TransTexas to
the third party if this contingent obligation to such third party becomes fixed
and remains unpaid for 60 days. TransTexas does not believe that this
contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, TransTexas could elect to sell shares of
TransTexas' common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
Pursuant to the Lobo Sale Agreement, TransTexas is required to
indemnify the buyer for certain liabilities related to the assets owned by TTC.
Although TransTexas does not anticipate that it will incur any material
indemnity liability, no assurance can be given that TransTexas will have
sufficient funds to satisfy any such indemnity obligation or that any payment
thereof will not have a material adverse effect on its ability to fund its debt
service, capital expenditure and working capital requirements.
21
23
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 has reserved 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.
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
22
24
consolidated group filing a consolidated federal income tax return is severally
liable to the IRS for the consolidated federal income tax liability of the
consolidated group. There can be no assurance that each TNGC Consolidated
Group member will have the ability to satisfy any tax obligation attributable
to the Transactions at the time due and, therefore, other members of the group,
including TEC, TransTexas or TARC, may be required to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TEC, or TARC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit
pursuant to the Tax Allocation Agreement for net operating losses of TransTexas
used by other members of the TNGC Consolidated Group prior to the
Deconsolidation of TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay
any Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Exchange Notes will have the
right to require TransTexas to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the
terms of the TransTexas Intercompany Loan, upon the occurrence of a Change of
Control, TEC would have the right to require TransTexas to repay the principal
of the TransTexas Intercompany Loan in an amount equal to a pro rata share of
the amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount of
the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of Control
would be deemed to occur under the Subordinated Notes Indenture in the case of
certain changes or other events in respect of the ownership of TransTexas,
including any circumstances pursuant to which any person or group other than
John R. Stanley and his wholly owned subsidiaries or the TEC Indenture Trustee
is or become the beneficial owner of more than 50% of the total voting power of
TransTexas' then outstanding voting stock, and during the 90 days thereafter,
the rating of the notes is downgraded or withdrawn. A Change of Control would be
deemed to occur under the TransTexas Intercompany Loan in the case of certain
changes or other events in respect of the ownership or control of TEC,
TransTexas, or TARC including any circumstance pursuant to which (i) any person
or group, other than John R. Stanley and his wholly-owned subsidiaries or the
TEC Indenture Trustee is or becomes the beneficial owner of more than 50% of
the total voting power of TEC's then outstanding voting stock, or (ii) 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 July
31, 1997, TransTexas had approximately $26.6 million of indebtedness (excluding
the Senior Secured Notes and the Subordinated Notes) subject to such right of
repayment or repurchase. In the event of a Change of Control under the
Subordinated Notes Indenture or the TEC Notes Indenture or a "change of control"
under the terms of other outstanding indebtedness, there can be no assurance
that TransTexas will have sufficient funds to satisfy any such payment
obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. These matters,
individually and in the aggregate, amount to significant potential liability
which, if adjudicated in a manner adverse
23
25
to TransTexas in one reporting period, could have a material adverse effect on
TransTexas' cash flow or operations for that period. Although the outcome of
these contingencies or the probability of the occurrence of these contingencies
cannot be predicted with certainty, TransTexas does not expect these matters to
have a material adverse effect on its financial position.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, the ultimate resolution of
litigation, and competition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
24
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 3 and 8 to the condensed consolidated financial statements
for a discussion of TransTexas' legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the Senior Secured Notes Tender Offer, TransTexas
obtained consents from holders of the Senior Secured Notes to certain waivers
under, and amendments to the Senior Secured Notes Indenture, which eliminate or
modify certain restrictive covenants and other provisions contained in the
Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer, pursuant to
which it exchanged approximately $115.8 million aggregate principal amount of
its 13 3/4% Senior Subordinated Notes due 2001 ("Subordinated Exchange Notes")
for all of its Series A Senior Subordinated Notes due 2003 (the "Subordinated
Notes"). Jefferies & Company, Inc. acted as Dealer Manager for the exchange
offer which was made solely to holders of the Subordinated Notes, in reliance
on the exemption from registration in Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.
The TransTexas Intercompany Loan Agreement and the indenture governing
the Subordinated Exchange Notes contain certain restrictive covenants,
including, among others, limitations on incurring additional debt, asset sales,
the payment of dividends and transactions with affiliates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
4.1 Second Supplemental Indenture dated June 13, 1997 between
TransTexas, as issuer, and Firstar Bank of Minnesota, N.A., as
trustee (filed as Exhibit 4.1 to TransTexas' current report on
Form 8-K dated June 13, 1997, and incorporated herein by
reference thereto).
4.2 Indenture dated June 13, 1997 governing TransTexas' Senior
Subordinated Notes due 2001 between TransTexas, as issuer, and
Bank One, N.A., as trustee (filed as Exhibit 4.1 to TransTexas'
registration statement on Form S-4 (333-33803), and incorporated
herein by reference thereto).
4.3 Registration Rights Agreement dated June 13, 1997 between
TransTexas and the holders of TransTexas' Senior Subordinated
Notes due 2001 (filed as Exhibit 4.2 to TransTexas' registration
statement on Form S-4 (333- 33803), and incorporated herein by
reference thereto).
4.4 Loan Agreement dated June 13, 1997 between the Company and TEC
(filed as Exhibit 4.4 to TransTexas' current report on Form 8-K
dated June 13, 1997, and incorporated herein by reference
thereto).
4.5 Security and Pledge Agreement dated June 13, 1997 by the Company
in favor of TEC (filed as Exhibit 4.5 to TransTexas' current
report on Form 8-K dated June 13, 1997, and incorporated herein
by reference thereto).
4.6 Disbursement Agreement dated June 13, 1997 among the Company, TEC
and Firstar Bank of Minnesota, as disbursement agent and Trustee
(filed as Exhibit 4.6 to TransTexas' current report on Form 8-K
dated June 13, 1997, and incorporated herein by reference
thereto).
4.7 Forms of Mortgage dated June 13, 1997 between TransTexas and
TransAmerican Energy Corporation, (filed as Exhibit 4.6 to
TransTexas' registration statement on Form S-4 (333-33803), and
incorporated herein by reference thereto).
25
27
4.8 First Supplemental Indenture dated as of September 2, 1997,
between TransTexas, as issuer, and Bank One, N.A., as trustee
(filed as Exhibit 4.7 to TransTexas' registration statement on
Form S-4 (333-33803), and incorporated herein by reference
thereto).
10.1 Interruptible Gas Transportation Agreement dated effective March
1, 1997 between TransTexas, as shipper, and Lobo Pipeline
Company, as transporter.
10.2 Intrastate Firm Gas Transportation Agreement dated effective
March 1, 1997 between TransTexas, as shipper, and Lobo Pipeline
Company, as transporter.
10.3 Master Services Contract dated May 30, 1997 between Conoco Inc.
and TransTexas.
10.4 Agreement for Services dated effective March 1, 1997 between
Conoco Inc. and TransTexas.
10.5 Services Agreement dated June 13, 1997 among TNGC Holdings
Corporation, TransAmerican, TEC, TARC, TransTexas and TTXD.
10.6 Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997.
10.7 Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997.
10.8 Amendment No. 2 to Transfer Agreement dated May 29, 1997.
10.9 Amendment No. 3 to Transfer Agreement dated June 13, 1997.
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On May 15, 1997, the Company filed a current report on Form 8-K dated May
14, 1997 to report under Item 5 the announcement of the Senior Secured Notes
Tender Offer.
On June 13, 1997, the Company filed a current report on Form 8-K dated
May 29, 1997 to report under Item 2 the Lobo Sale. Pro forma financial
statements were filed as a part of the report.
On August 18, 1997, the Company filed a current report on Form 8-K dated
June 13, 1997 to report under Item 5 the completion of the TEC Notes Offering
and related transactions. Pro forma financial statements were filed as an
exhibit to this report.
26
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial and accounting
officer.
TRANSTEXAS GAS CORPORATION
(Registrant)
By: /s/ Edwin B. Donahue
--------------------------------
Edwin B. Donahue, Vice President
and Chief Financial Officer
September 15, 1997
27
29
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
4.1 Second Supplemental Indenture dated June 13, 1997 between
TransTexas, as issuer, and Firstar Bank of Minnesota, N.A., as
trustee (filed as Exhibit 4.1 to TransTexas' current report on
Form 8-K dated June 13, 1997, and incorporated herein by reference
thereto).
4.2 Indenture dated June 13, 1997 governing TransTexas' Senior
Subordinated Notes due 2001 between TransTexas, as issuer, and
Bank One, N.A., as trustee (filed as Exhibit 4.1 to TransTexas'
registration statement on Form S-4 (333-33803), and incorporated
herein by reference thereto).
4.3 Registration Rights Agreement dated June 13, 1997 between
TransTexas and the holders of TransTexas' Senior Subordinated
Notes due 2001 (filed as Exhibit 4.2 to TransTexas' registration
statement on Form S-4 (333- 33803), and incorporated herein by
reference thereto).
4.4 Loan Agreement dated June 13, 1997 between the Company and TEC
(filed as Exhibit 4.4 to TransTexas' current report on Form 8-K
dated June 13, 1997, and incorporated herein by reference
thereto).
4.5 Security and Pledge Agreement dated June 13, 1997 by the Company
in favor of TEC (filed as Exhibit 4.5 to TransTexas' current
report on Form 8-K dated June 13, 1997, and incorporated herein by
reference thereto).
4.6 Disbursement Agreement dated June 13, 1997 among the Company, TEC
and Firstar Bank of Minnesota, as disbursement agent and Trustee
(filed as Exhibit 4.6 to TransTexas' current report on Form 8-K
dated June 13, 1997, and incorporated herein by reference
thereto).
4.7 Forms of Mortgage dated June 13, 1997 between TransTexas and
TransAmerican Energy Corporation, (filed as Exhibit 4.6 to
TransTexas' registration statement on Form S-4 (333-33803), and
incorporated herein by reference thereto).
4.8 First Supplemental Indenture dated as of September 2, 1997,
between TransTexas, as issuer, and Bank One, N.A., as trustee
(filed as Exhibit 4.7 to TransTexas' registration statement on
Form S-4 (333-33803), and incorporated herein by reference
thereto).
10.1 Interruptible Gas Transportation Agreement dated effective March
1, 1997 between TransTexas, as shipper, and Lobo Pipeline Company,
as transporter.
10.2 Intrastate Firm Gas Transportation Agreement dated effective March
1, 1997 between TransTexas, as shipper, and Lobo Pipeline Company,
as transporter.
10.3 Master Services Contract dated May 30, 1997 between Conoco Inc.
and TransTexas.
10.4 Agreement for Services dated effective March 1, 1997 between
Conoco Inc. and TransTexas.
10.5 Services Agreement dated June 13, 1997 among TNGC Holdings
Corporation, TransAmerican, TEC, TARC, TransTexas and TTXD.
10.6 Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997.
10.7 Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997.
10.8 Amendment No. 2 to Transfer Agreement dated May 29, 1997.
30
10.9 Amendment No. 3 to Transfer Agreement dated June 13, 1997.
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 Financial Data Schedule