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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 31, 1997
Registration Number 33-85930
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TRANSAMERICAN REFINING CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0229632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 320
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 986-8811
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of shares of common stock of the registrant outstanding on
December 15, 1997 is 30,000,000.
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TRANSAMERICAN REFINING CORPORATION
TABLE OF CONTENTS
Page
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheet as of October 31, 1997 and January 31, 1997........................... 2
Condensed Statement of Operations for the three and nine months ended October 31, 1997
and 1996................................................................................... 3
Condensed Statement of Cash Flows for the nine months ended October 31, 1997 and 1996......... 4
Notes to Condensed Financial Statements....................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 20
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 21
Item 6. Exhibits and Reports on Form 8-K................................................................ 21
Signatures................................................................................................. 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 82 $ 613
Debt proceeds held in disbursement account ..................... 11,891 --
Accounts receivable ............................................ 924 --
Receivable from affiliates ..................................... -- 22
Other current assets ........................................... 1,345 654
- --------- ---------
Total current assets ....................................... 14,242 1,289
---------- ---------
Property and equipment ............................................. 777,232 555,816
Less accumulated depreciation and amortization ..................... 22,060 16,930
---------- ---------
Net property and equipment ................................. 755,172 538,886
---------- ---------
Debt proceeds held in disbursement accounts ........................ 143,840 --
Investment in TransTexas ........................................... 2,648 --
Receivable from affiliates ......................................... -- 393
Other assets, net .................................................. 87,062 23,673
---------- ---------
$1,002,964 $ 564,241
=========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ............................................... $ 17,514 $ 20,033
Payable to affiliates .......................................... 7,933 7,094
Accrued liabilities ............................................ 8,943 15,450
---------- ---------
Total current liabilities .................................. 34,390 42,577
---------- ---------
Payable to affiliates .............................................. 6,225 6,674
Notes payable to affiliate ......................................... 762,880 46,589
Long-term debt ..................................................... 16,020 365,730
Investment in TransTexas ........................................... -- 20,706
Other .............................................................. 3,751 602
Commitments and contingencies (Note 6) ............................. -- --
Stockholder's equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
30,000,000 shares issued and outstanding ..................... 300 300
Additional paid-in capital ..................................... 436,833 248,513
Accumulated deficit ............................................ (257,435) (167,450)
---------- ---------
Total stockholder's equity ................................. 179,698 81,363
---------- ---------
$1,002,964 $ 564,241
========== =========
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------- --------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Product sales ................................. $ -- $ -- $ -- $ 10,857
Other ......................................... 571 -- 571 --
--------- --------- --------- ---------
Total revenues ............................ 571 -- 571 10,857
--------- --------- --------- ---------
Costs and expenses:
Costs of products sold ........................ -- -- -- 12,441
Processing arrangements, net .................. 125 5,232 (3,112) 8,551
Operations and maintenance .................... 2,789 2,989 10,651 9,589
Depreciation and amortization ................. 1,984 1,691 5,409 5,311
General and administrative .................... 6,024 1,733 11,029 7,394
Taxes other than income taxes ................. 903 905 2,709 3,783
Loss on purchase commitments .................. -- -- 4,759 --
--------- --------- --------- ---------
Total costs and expenses .................. 11,825 12,550 31,445 47,069
--------- --------- --------- ---------
Operating loss ............................ (11,254) (12,550) (30,874) (36,212)
--------- --------- --------- ---------
Other income (expense):
Interest income ............................... 2,002 5 3,045 202
Interest expense, net ......................... (7,103) (995) (13,870) (3,067)
Equity in income (loss) of TransTexas
before extraordinary item .................. 20 (1,325) 45,185 9,766
Gain on the sale of TransTexas stock .......... -- -- -- 56,162
Other ......................................... 374 18 1,109 346
--------- --------- --------- ---------
Total other income (expense) .............. (4,707) (2,297) 35,469 63,409
--------- --------- --------- ---------
Income (loss) before extraordinary items .. (15,961) (14,847) 4,595 27,197
Extraordinary items:
Equity in extraordinary item of TransTexas .... 10 -- (10,158) --
Loss on the early extinguishment of debt ...... -- -- (84,422) --
--------- --------- --------- ---------
Net income (loss) ......................... $ (15,951) $ (14,847) $ (89,985) $ 27,197
========= ========= ========= =========
Net income (loss) per share:
Income (loss) before extraordinary items ...... $ (0.53) $ (0.49) $ 0.15 $ 0.73
Extraordinary items ........................... -- -- (3.15) --
--------- --------- --------- ---------
Net income (loss) per share ............... $ (0.53) $ (0.49) $ (3.00) $ 0.73
========= ========= ========= =========
Weighted average number of common and
common equivalent shares (thousands) .......... 30,000 30,000 30,000 37,458
========= ========= ========= =========
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
--------------------------
1997 1996
--------- ---------
Operating activities:
Net income (loss)................................................................. $ (89,985) $ 27,197
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Extraordinary item ............................................................ 84,422 --
Depreciation and amortization ................................................. 5,409 5,311
Amortization of discount on long-term debt .................................... 10,935 83
Amortization of debt issue costs .............................................. 894 6
Equity in income and extraordinary item of TransTexas ......................... (35,027) (9,766)
Gain on the sale of TransTexas stock .......................................... -- (56,162)
Changes in assets and liabilities:
Accounts receivable ......................................................... (924) 83
Prepayments and other ....................................................... (691) --
Accounts payable ............................................................ (727) 5,106
Payable to affiliates, net .................................................. 5,190 627
Accrued liabilities ......................................................... (6,274) (3,173)
Other assets ................................................................ (2,669) 5,114
Other liabilities ........................................................... 3,100 --
--------- ---------
Net cash used by operating activities .................................... (26,347) (25,574)
--------- ---------
Investing activities:
Capital expenditures ............................................................. (168,856) (76,949)
Prepaid Capital Improvement Program costs......................................... (21,096) --
Net proceeds from sale of TransTexas stock ....................................... 136,158 42,607
--------- ---------
Net cash used by investing activities..................................... (53,794) (34,342)
--------- ---------
Financing activities:
Issuance of notes payable to affiliate ........................................... 721,649 --
Retirement of long-term debt ..................................................... (432,333) --
Issuance of note payable ......................................................... 36,000 --
Retirement of note payable ....................................................... (36,000) --
Increase in debt proceeds held in disbursement accounts .......................... (317,451) (26,549)
Withdrawals from disbursement accounts ........................................... 161,720 50,949
Advances from affiliate .......................................................... 15,026 35,785
Repayment of advances and notes payable to affiliate ............................. (66,000) (1,925)
Capital contribution from affiliate............................................... 6,000 --
Debt issue costs ................................................................. (7,892) --
Principal payments on capital lease obligations .................................. (1,109) (789)
--------- ---------
Net cash provided by financing activities ................................ 79,610 57,471
--------- ---------
Decrease in cash and cash equivalents .................................... (531) (2,445)
Beginning cash and cash equivalents ................................................. 613 2,779
--------- ---------
Ending cash and cash equivalents .................................................... $ 82 $ 334
========= =========
Noncash financing and investing activities:
Accounts payable for property and equipment ...................................... $ 13,064 $ 17,420
Product financing arrangements ................................................... -- (37,206)
Accretion on long-term debt capitalized in property and equipment ................ 51,284 36,193
Debt issue costs allocated from affiliate ........................................ 24,893 --
Purchase of warrants by affiliate ................................................ 32,942 --
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransAmerican Refining Corporation ("TARC" or the
"Company") as of October 31, 1997 and the results of its operations and cash
flows for the interim periods ended October 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 financial statements and
notes included in TARC's annual report on Form 10-K for the fiscal year ended
January 31, 1997 and quarterly reports on Form 10-Q for the quarters ended April
30, 1997 and July 31, 1997. The condensed balance sheet as of January 31, 1997
was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. Certain
reclassifications have been made in the prior period's financial statements to
conform to the current period's presentation. These reclassifications did not
affect previously reported net income (loss) or stockholder's equity. As a
result of the transactions described in Note 2, the long-term debt previously
classified as current as of January 31, 1997 has been reclassified to long-term.
Unless otherwise noted, all capitalized terms used herein but not
otherwise defined are as defined in TARC's annual report on Form 10-K for the
fiscal year ended January 31, 1997. TARC is a subsidiary of TransAmerican Energy
Corporation ("TEC") and is indirectly a subsidiary of TransAmerican Natural Gas
Corporation ("TransAmerican"). TARC was formed in Texas in September 1987 to
hold and operate the refinery assets of TransAmerican. In 1994, TransAmerican
formed TEC, a limited-purpose holding company, to hold certain shares of common
stock of TransTexas Gas Corporation ("TransTexas") and all of TARC's capital
stock.
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 TARC effective February 1, 1997. The adoption of SOP 96-1 did
not have a material impact on TARC's financial position, results of operations
or cash flows.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128") and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"). These
statements will be adopted by TARC effective January 31, 1998. SFAS 128
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. TARC does not believe that adoption of these statements will have a
material impact on its financial statements.
In June 1997, the FASB 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 TARC effective
February 1, 1998. TARC does not believe that adoption of this statement will
have a material impact on its financial statements.
2. RECENT EVENTS
TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "TEC Notes Offering") of $475 million aggregate principal amount of
11 1/2% Senior Secured Notes due 2002 (the "TEC Senior Secured Notes") and
$1.13 billion aggregate principal amount of 13% Senior Secured Discount Notes
due 2002 (the "TEC Senior Secured Discount Notes" and, together with the TEC
Senior Secured Notes, the "TEC Notes") for net proceeds of approximately
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
$1.3 billion. The TEC Notes are senior obligations of TEC, secured by a lien on
substantially all of its existing and future assets, including the intercompany
loans described below. The indenture governing the TEC Notes (the "TEC Notes
Indenture") contains certain restrictive covenants, including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates.
INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the TEC
Notes Offering, TEC made intercompany loans to TransTexas in the principal
amount of $450 million (the "TransTexas Intercompany Loan") and to TARC in the
original amount of $676 million (the "TARC Intercompany Loan"). The promissory
note evidencing the TARC Intercompany Loan (i) accretes principal at a rate of
16% per annum, compounded semi-annually until June 15, 1999 to a final accreted
value of $920 million, and thereafter pays interest semi-annually in cash in
arrears on the accreted value thereof, at a rate of 16% per annum and (ii) is
currently secured by a security interest in substantially all of TARC's assets
other than inventory, receivables and equipment. The agreements governing the
Intercompany Loans contain certain restrictive covenants including, among
others, limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates. The Intercompany Loans mature on June 1, 2002.
TARC used approximately $103 million of the proceeds of the TARC Intercompany
Loan to repay certain indebtedness, including $36 million of senior secured
notes of TARC that were issued in March 1997 and $66 million of advances and
notes payable owed to an affiliate, and used approximately $437 million to
complete the TARC Notes Tender Offer (described below). Remaining proceeds will
be used for the Capital Improvement Program (described below) and for general
corporate purposes. 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 in the TEC Notes
Indenture), TEC will be required to make an offer to purchase all of the
outstanding TEC Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, or, in the case of any such
offer to purchase TEC Senior Secured Discount Notes prior to June 15, 1999, at
a price equal to 101% of the accreted value thereof, in each case, to and
including the date of purchase. Pursuant to the terms of the Intercompany
Loans, TEC may require TARC and TransTexas to pay a pro rata share of the
purchase price paid by TEC in an offer to purchase pursuant to a Change of
Control. See "Potential Effects of a Change of Control" in Note 6.
TARC WARRANTS TENDER OFFER. On June 13, 1997, TEC completed a tender
offer for all of the outstanding common stock purchase warrants of TARC ("TARC
Warrants") at a price of $4.50 per warrant. Pursuant to the tender offer, TEC
purchased 7,320,552 TARC Warrants for an aggregate purchase price of
approximately $33 million. TransAmerican subsequently purchased 163,679 TARC
Warrants for an aggregate purchase price of approximately $0.7 million. TEC,
TransAmerican or TARC may repurchase additional TARC Warrants, and TARC may
enter into a merger with one of its affiliates pursuant to which each remaining
TARC Warrant would become exercisable (at an exercise price of $.01) to receive
$4.51 of cash instead of one share of common stock of TARC.
TARC NOTES TENDER OFFER. On June 13, 1997, TARC completed a tender offer
("TARC Notes Tender Offer") for the (i) TARC Mortgage Notes for 112% of their
principal amount (plus accrued and unpaid interest) and (ii) TARC Discount
Notes for 112% of their accreted value. In connection with the TARC Notes
Tender Offer, TARC obtained consents from holders of the TARC Notes to certain
waivers under, and amendments to the indenture governing the TARC Notes (the
"TARC Notes Indenture"), which eliminate or modify certain of the covenants and
other provisions
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
contained in the TARC Notes Indenture. TARC Mortgage Notes and TARC Discount
Notes with an aggregate carrying value of $423 million were tendered and
accepted by TARC at a cost to TARC of approximately $437 million (including
accrued interest, premiums and other costs). As a result of the TARC Notes
Tender Offer, $22.8 million of debt issuance costs were written off and TARC
recorded a total extraordinary charge of approximately $84 million during the
nine months ended October 31, 1997. As of October 31, 1997, TARC Mortgage Notes
and TARC Discount Notes with an aggregate carrying value of approximately $16.0
million remained outstanding.
TRANSTEXAS SHARE REPURCHASE PROGRAM. In June 1997, TransTexas implemented
a share repurchase program (the "TransTexas 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. 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 October 31, 1997, TransTexas had
repurchased approximately 3.9 million shares of common stock from public
stockholders for an aggregate purchase price of approximately $61.4 million,
and approximately 12.6 million shares had been repurchased from TARC and TEC
for an aggregate purchase price of approximately $201 million. TARC received
$136.2 million of the purchase price, of which $124.5 million (representing the
excess of the cash received over TARC's carrying value of the stock sold) was
recorded as a capital contribution.
TANK STORAGE AND TERMINAL ACQUISITION. In September 1997, TARC purchased a
tank storage facility located adjacent to the refinery for a cash purchase price
of $40 million (which does not include a $3.1 million liability recorded for
environmental remediation, as discussed below). Environmental investigations
conducted by the previous owner of the facilities have indicated soil and
groundwater contamination in several areas of the property. As a result, the
former owner submitted to the Louisiana Department of Environmental Quality (the
"LDEQ") plans for the remediation of any significant indicated contamination in
such areas. TARC has analyzed these investigations and has carried out further
Phase II Environmental Assessments to verify their results. TARC intends to
incorporate any required remediation into its ongoing work at the refinery. In
connection with the purchase of the facilities, TARC agreed to indemnify the
seller from all cleanup costs and certain other damages resulting from
contamination of the property, and created a $5 million escrow account to fund
required remediation costs and indemnification claims by the seller. As a result
of TARC's Phase II Environmental Assessments, TARC believes that the amount in
escrow should be sufficient to fund the remediation costs associated with
identified contamination; however, because the LDEQ has not yet approved certain
of the remediation plans, there can be no assurance that the funds set aside in
the escrow account will be sufficient to pay all required remediation costs.
During the three months ended October 31, 1997, TARC recorded a liability of
$3.1 million for this contingency.
ACQUISITION NOTE. On December 10, 1997, TARC issued to an unaffiliated
third party a 13% Senior Secured Note due 2002 (the "Acquisition Note") in the
principal amount of $36 million to finance a portion of the purchase price of
the tank storage facility purchased in September 1997. The Acquisition Note is
secured by a mortgage on the tank storage facility, and is governed by a Note
Purchase Agreement containing restrictive covenants substantially similar to
those contained in the TARC Intercompany Loan and the TEC Indenture. The
Acquisition Note bears interest at 13%, payable semiannually on June 15 and
December 15, and matures on December 15, 2002.
3. CAPITAL IMPROVEMENT PROGRAM
TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
refining margins by converting low-cost, heavy, sour crude oils into
high-value, light petroleum products including primarily gasoline and heating
oil.
In February 1995, TARC began a construction and expansion program (the
"1995 Program") designed to reactivate the refinery and increase its
complexity. From February 1995 through April 1997, TARC spent approximately
$245 million on the 1995 Program, procured a majority of the equipment required
and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary for its completion.
In connection with the TEC Notes Offering, the TARC Intercompany Loan and
the TARC Notes Tender Offer, TARC has adopted a revised capital improvement
program designed to increase the capacity and complexity of the refinery
("Capital Improvement Program"). The most significant projects include: (i)
converting the visbreaker unit
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
into a delayed coking unit to process vacuum tower bottoms into lighter
petroleum products, (ii) modernizing and upgrading a fluid catalytic cracking
unit to increase gasoline production capacity and allow the direct processing
of low-cost atmospheric residual feedstocks, and (iii) upgrading and expanding
hydrotreating, alkylation and sulfur recovery units to increase sour crude
processing capacity. In addition, TARC plans to expand, modify and add other
processing units, tankage and offsite facilities as part of the Capital
Improvement Program. The Capital Improvement Program includes expenditures
necessary to ensure that the refinery is in compliance with certain existing
air and water discharge regulations and that gasoline produced will comply with
federal standards. TARC will act as general contractor, but has engaged a
number of specialty consultants and engineering and construction firms to
assist TARC in completing the individual projects that comprise the Capital
Improvement Program. Each of these firms was selected because of its
specialized expertise in a particular process or unit integral to the Capital
Improvement Program.
The Capital Improvement Program will be executed in two phases. TARC
estimates that Phase I will be completed at a cost of $223 million, will be
tested and operational by September 30, 1998 and will result in the refinery
having the capacity to process up to 200,000 BPD of sour crude oil. Phase II of
the Capital Improvement Program includes the completion and start-up of the
Fluid Catalytic Cracking Unit utilizing state-of-the-art MSCC(SM) technology and
the installation of additional equipment expected to further improve operating
margins by allowing for a significant increase in the refinery's capacity to
produce gasoline. TARC estimates that Phase II will be completed at a cost of
$204 million and will be tested and operational by July 31, 1999. The proceeds
received or to be received by TARC from the TARC Intercompany Loan, the
TransTexas Share Repurchase Program and equity contributions from TEC will
include $427 million designated for use in the Capital Improvement Program,
which TARC believes is adequate to fund the completion of the project. As of
October 31, 1997, TARC had spent approximately $98.3 million on the Capital
Improvement Program with commitments for another approximately $67.7 million.
The foregoing estimates, as well as other estimates and projections herein, are
subject to substantial revision upon the occurrence of future events, such as
unavailability of financing, engineering problems, work stoppages, personnel
shortages and cost overruns over which TARC may not have any control, and there
can be no assurance that any such projections or estimates will prove accurate.
TARC believes, based on current estimates of refining margins and costs of
the expansion and modification of the refinery, that future undiscounted cash
flows will be sufficient to recover the cost of the refinery over its estimated
useful life. Management believes there have been no events or changes in
circumstances that would require the recognition of an impairment loss. However,
due to the inherent uncertainties in estimating future refining margins, and in
constructing and operating a large scale refinery, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Management believes
that the book value of the refinery is in excess of its current estimated fair
market value.
TARC has incurred losses and negative cash flow from operations as a
result of limited refinery operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements (including
debt service) and losses on refined product sales and processing arrangements.
In order to operate the refinery at expected levels after completion of
expansion and modification of the refinery, TARC will require additional
working capital and ultimately must achieve profitable operations. As a result,
there is substantial doubt about TARC's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
4. DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement (the "Disbursement Agreement") among
TARC, TEC, Firstar Bank of Minnesota, N.A., as trustee (the "TEC Indenture
Trustee"), Firstar Bank of Minnesota, N.A., as disbursement agent (the
"Disbursement Agent"), and Baker & O'Brien, Inc., as construction supervisor
(the "Construction Supervisor"), $208
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10
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
million of the net proceeds from the sale of the TEC Notes was placed into
accounts in the name of TARC ($135 million) and TEC ($73 million) (together, the
"TARC Disbursement Account") to be held and invested by the Disbursement Agent
until disbursed. TEC disbursements for TARC expenditures will be treated as
capital contributions. In addition, proceeds to TEC and TARC of approximately
$201 million from the TransTexas Share Repurchase Program have been deposited in
the TARC Disbursement Account. All funds in the TARC Disbursement Account are
pledged as security for the repayment of the TEC Notes.
The Disbursement Agent will make disbursements for the Capital
Improvement Program out of the TARC Disbursement Account in accordance with
requests made by TARC and approved by the Construction Supervisor. The
Construction Supervisor is required to review each such disbursement request by
TARC. No disbursements may be made from the TARC Disbursement Account for
purposes other than the Capital Improvement Program other than (i) up to $1.5
million per month (except for December 1997, in which disbursements may be up
to $4.5 million) to fund administrative costs and certain taxes and insurance
payments, not in excess of $25.5 million in the aggregate; provided, that if
less than $1.5 million is spent in any month (or less than $4.5 million is
spent in December 1997) the amounts that may be disbursed in one or more
subsequent months will be increased by the amount of such difference, (ii) up
to $50 million for feedstock upon certification by the Construction Supervisor
of the Mechanical Completion (as defined in the TEC Notes Indenture) of the
Delayed Coking Unit and associated facilities, (iii) up to $19 million to pay
interest on, and to redeem, repurchase, defease, or otherwise retire the
remaining TARC Notes and (iv) up to $7 million for outstanding accounts
payable. In addition, interest income from the TARC Disbursement Account may be
used for the Capital Improvement Program or disbursed to fund administrative
and other costs of TARC and TEC. As of October 31, 1997, $119 million had been
disbursed to TARC out of the TARC Disbursement Account for use in the Capital
Improvement Program and $13 million for general corporate purposes.
5. INVESTMENT IN TRANSTEXAS
TARC uses the equity method to account for its investment in TransTexas
and initially recorded this investment at TransAmerican's historical basis. The
equity in earnings or loss of TransTexas reflects TARC's 20.3% interest in
TransTexas until March 1996, when TARC's interest in TransTexas was reduced to
14.1% as a result of its sale of 4.55 million shares of TransTexas stock. As of
October 31, 1997, TransTexas repurchased approximately 8.5 million shares from
TARC, thereby reducing TARC's ownership of TransTexas to 3.4%. TARC received
$136.2 million in connection with the repurchase, of which $124.5 million
(representing the excess of the cash received over TARC's carrying value of the
stock) was recorded as a capital contribution. TARC continues to record its pro
rata share of income or losses using the equity method due to the common control
of TransTexas and TARC by TransAmerican and TEC. Summarized financial
information of TransTexas is as follows (in thousands of dollars):
October 31, January 31,
1997 1997
---------- ----------
ASSETS
Total current assets .................... $ 61,865 $ 188,934
Property and equipment, net ............. 627,560 846,393
Other assets ............................ 154,440 17,825
---------- ----------
$ 843,865 $1,053,152
========== ==========
9
11
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities...................... $ 137,373 $ 117,348
Total noncurrent liabilities................... 667,112 1,086,599
Total stockholders' equity (deficit)........... 39,380 (150,795)
----------- -----------
$ 843,865 $ 1,053,152
=========== ===========
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ----------
Revenues............................................. $ 37,233 (1) $ 80,104 $ 695,004 (1) $ 262,794
Operating costs and expenses......................... 27,647 74,246 152,695 124,442
--------- --------- --------- ----------
Operating income.................................. 9,586 5,858 542,309 138,352
Other expense........................................ (11,621) (20,313) (51,537) (70,438)
--------- --------- --------- ----------
Income (loss) before income taxes
and extraordinary item........................... (2,035) (14,455) 490,772 67,914
Income taxes (benefit)............................... (712) (5,059) 171,771 2,729
--------- --------- ------- ----------
Income (loss) before extraordinary item........... (1,323) (9,396) 319,001 65,185
Extraordinary item................................... 74 -- (72,043) --
--------- --------- ------- ----------
Net income (loss)................................. $ (1,249) $ (9,396) $ 246,958 $ 65,185
========= ========= ========= ==========
Net income (loss) per share.......................... $ (0.02) $ (0.13) $ 3.52 $ 0.88
========= ========= ========= ==========
(1) Revenues for the three months and nine months ended October 31, 1997
include a gain on sale of the stock of TransTexas Transmission Corporation
of $7,482 and $540,411, respectively.
6. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
EEOC. On September 30, 1997, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Determination (the "Determination) as a result of
the Commissioner's Charge that had been filed in August 1995 against TARC and
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors")
pursuant to Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
Section 2000e et seq. ("Title VII"). In the Determination, the EEOC stated that
it found reasonable cause to believe that each of TARC and Southeast
Contractors had discriminated based on race and gender in its hiring and
promotion practices. Each violation of Title VII (for each individual allegedly
aggrieved), if proven, potentially could subject TARC and Southeast
Contractors to liability for (i) monetary damages for backpay and front pay
in an undetermined amount, and for compensatory damages and punitive damages
in an amount not to exceed $300,000 per plaintiff, (ii) injunctive relief,
(iii) attorney's fees, and (iv) interest. During the period covered by the
Commissioner's Charge and the Determination, TARC and Southeast Contractors
estimate that they received a combined total of approximately 23,000 to 30,000
employment applications and hired (or rehired) a combined total of
approximately 3,400 to 4,100 workers, although the total number of individuals
who ultimately are covered in any conciliation proposal or any subsequent
lawsuit may be higher. TARC and Southeast Contractors deny engaging in any
unlawful employment practices. TARC and Southeast Contractors intend vigorously
to defend against the allegations contained in the Commissioner's Charge and
the findings set forth in the Determination in any
10
12
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
proceedings in state or federal court, regardless of whether any such lawsuit is
brought by the EEOC or any individual or groups of individuals. TARC is unable
to estimate the amount of liability, if any, related to these claims. If TARC or
Southeast Contractors is found liable for violations of Title VII based on the
matters asserted in the Determination, TARC can make no assurance that such
liability would not have a material adverse effect on its financial position,
results of operations or cash flows.
RINEHEART. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court,
Middle District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon
and Indian Village. TARC intends to vigorously defend this claim.
SHELL OIL. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination
of Bayou Trapagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the plaintiffs during trial by purchasing their land
for $5 million. On June 27, 1997, Shell amended its third party action to bring
TARC back into the case. Shell has demanded $400,000 from TARC. TARC has
refused to pay such amount and is defending the case vigorously.
GENERAL. The litigation matters discussed above amount to significant
potential liability which, if adjudicated in a manner adverse to TARC in one
reporting period, could have a material adverse effect on TARC's financial
position, results of operations or cash flow for that period. TARC is also a
named defendant in other ordinary course, routine litigation incidental to its
business. Although the outcome of these lawsuits cannot be predicted with
certainty, TARC does not expect these matters to have a material adverse effect
on its financial position, results of operations or cash flow.
ENVIRONMENTAL MATTERS
COMPLIANCE MATTERS. TARC is subject to federal, state, and local laws,
regulations, and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, may require TARC to make additional capital
expenditures. Environmental compliance and permitting issues are an integral
part of the capital expenditures anticipated in connection with the Capital
Improvement Program.
TARC uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes that are or may be
deemed hazardous substances or wastes. In the past, the refinery has been the
subject of certain environmental enforcement actions, and has incurred certain
fines, as a result of certain of TARC's operations. TARC also was previously
subject to enforcement proceedings relating to its prior production of leaded
gasoline and air emissions. TARC believes that, with minor exception, all of
these past matters were resolved prior to or in connection with the resolution
of the bankruptcy proceedings of its predecessor in interest, TransAmerican, or
are no longer applicable to TARC's operations. As a result, TARC believes that
such matters will not have a material adverse effect on its financial position,
future results of operations or cash flow.
In September 1997, TARC purchased a tank storage facility adjacent to the
refinery. Environmental investigations conducted by the previous owner of the
facilities have indicated soil and groundwater contamination in several areas
of the property. As a result, the former owner submitted to the LDEQ plans for
the remediation of any significant indicated contamination in such areas. TARC
has analyzed these investigations and has carried out further Phase II
Environmental Assessments to verify their results. TARC intends to incorporate
any required remediation into its ongoing work at the refinery. In connection
with the purchase of the facilities, TARC agreed to indemnify the seller from
all costs and certain other damages resulting from contamination of the
property, and created a $5 million escrow
11
13
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
account to fund required remediation costs and indemnification claims by the
seller. As a result of TARC's Phase II Environmental Assessments, TARC believes
that the amount in escrow should be sufficient to fund the remediation costs
associated with identified contamination; however, because the LDEQ has not yet
approved certain of the remediation plans, there can be no assurance that the
funds set aside in the escrow account will be sufficient to pay all required
remediation costs. During the three months ended October 31, 1997, TARC
recorded a liability of $3.1 million for this contingency.
REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. At
this time, TARC cannot estimate the costs of such compliance. TARC believes
that compliance with the Benzene Waste NESHAPS will not have a material adverse
effect on its financial position, results of operations or cash flow. Until the
refinery is in full operation, however, there can be no assurance that the
regulations will not have such an effect.
In addition, the Environmental Protection Agency ("EPA") promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organics NESHAPS") regulations for petroleum refineries under
the Clean Air Act in 1995, and subsequently has amended such regulations. These
regulations set Maximum Achievable Control Technology ("MACT") standards for
petroleum refineries. The LDEQ has incorporated MACT standards into TARC's air
permits under federal and state air pollution prevention laws. TARC believes
that compliance with the Hazardous Organics NESHAPS will not have a material
adverse effect on TARC's financial position, results of operations or cash
flow. Until the refinery is in full operation, however, there can be no
assurance that the regulations will not have such an effect.
The EPA has promulgated federal regulations pursuant to the Clean Air Act
to control fuels and fuel additives (the "Gasoline Standards") that could have
a material adverse effect on TARC. Under the new regulations, only reformulated
gasoline can be sold in certain domestic geographic areas in which the EPA has
mandated or approved its use. Reformulated gasoline must contain a minimum
amount of oxygen, have a lower vapor pressure, and have reduced sulfur,
olefins, benzene and aromatics compared to the average 1990 gasoline. The EPA
recently promulgated final National Ambient Air Quality Standards ("NAAQS")
that revise the standards for particulate matter and ozone. The number and
extent of the areas subject to reformulated gasoline standards may increase in
the future after the NAAQs are implemented. Conventional gasoline may be used
in all other domestic markets; however, a refiner's post- 1994 average
conventional gasoline must not be more polluting than it was in 1990. With
limited exceptions, to determine its compliance as of January 1, 1995, a
refiner must compare its post-1994 and 1990 average values of controlled fuel
parameters and emissions. The Gasoline Standards recognize that many gasoline
refiners may not be able to develop an individual 1990 baseline for a number of
reasons, including, for example, lack of adequate data or the absence or
limited scope of operations in 1990. Under such circumstances, the refiner must
use a statutory baseline reflecting the 1990 industry average. The EPA has
authority, upon a showing of extenuating circumstances by a refiner, to grant
an individual adjusted baseline or other appropriate regulatory relief to that
refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The
EPA has denied TARC's request for an individual baseline adjustment and other
appropriate regulatory relief. TARC will continue to
12
14
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
pursue regulatory relief with the EPA. There can be no assurance that any
action taken by the EPA will not have a material adverse effect on TARC's
future results of operations, cash flow or financial position.
Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The deadline for a refinery to submit an Operating
Permit Application under the Louisiana program was October 12, 1996. TARC
timely submitted its Title V Operating Permit application and the LDEQ has
designated the application as being administratively complete. As yet, the LDEQ
has not responded further regarding the status of TARC's Title V Operating
Permit. TARC believes that its application will be approved. However, there can
be no assurance that additional expenditures required pursuant to Title V
Operating Permit obligations will not have a material adverse effect on TARC's
financial position, results of operations or cash flow.
CLEANUP MATTERS. TARC also is subject to federal, state, and local laws,
regulations, and ordinances that impose liability for the costs of clean up
relating to, and certain damages resulting from, past spills, disposals, or
other releases of hazardous substances ("Hazardous Substance Cleanup Laws").
Over the past several years, TARC has been, and to a limited extent continues
to be, engaged in environmental cleanup or remedial work relating to or arising
out of operations or activities at the refinery. In addition, TARC has been
engaged in upgrading its solid waste facilities, including the closure of
several waste management units. Similar to numerous other industrial sites in
the state, the refinery has been listed by the LDEQ on the Federal
Comprehensive Environmental Response, Compensation and Liability Information
System, as a result of TARC's prior waste management activities (as discussed
below).
In 1991, the EPA performed a facility assessment at TARC's refinery
pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The
EPA performed a follow up assessment in March 1996, but has not yet issued a
report of its investigations. In July 1996, the EPA and LDEQ agreed that the
LDEQ would serve as the lead agency with respect to the investigation and
remediation of areas of concern identified in the investigation. TARC, under a
voluntary initiative approved by the LDEQ, has submitted a work plan to the
LDEQ to determine which areas may require further investigation and
remediation. The LDEQ has not yet responded to TARC's submission or issued any
further requests relating to this matter. As a result, TARC is unable at this
time to estimate what the costs, if any, will be if the LDEQ does require
further investigation or remediation of the areas identified.
TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA
to include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRPs liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from
13
15
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
other responsible parties. A number of states have laws similar to Superfund,
pursuant to which cleanup obligations, or the costs thereof, also may be
imposed.
At one Superfund site, TARC has submitted information to the EPA
indicating that it should have no liability for this matter, and negotiations
with the EPA in this regard are continuing. With respect to the remaining two
sites, TARC's liability for each such matter has not been determined, and TARC
anticipates that it may incur costs related to the cleanup (and possibly
including additional costs arising in connection with any recovery or other
action brought pursuant or relating to such matters) at each such site. After a
review of the data available to TARC regarding the basis of TARC's alleged
liability at each site, and based on various factors, which depend on the
circumstances of the particular Superfund site (including, for example, the
relationship of TARC to each such site, the volume of wastes TARC is alleged to
have contributed to each such site in comparison to other PRPs without giving
effect to the ability of any other PRPs to contribute to or pay for any
liabilities incurred, and the range of likely cleanup costs at each such site),
TARC does not believe its ultimate environmental liabilities will be
significant; however, it is not possible to determine the ultimate
environmental liabilities, if any, that may arise from the matters discussed
above.
PURCHASE COMMITMENTS
TARC has various purchase commitments for materials, supplies and
services incidental to the ordinary course of business and for the Capital
Improvement Program. As of October 31, 1997, TARC had commitments for refinery
construction and maintenance of approximately $67.7 million. TARC is acting as
general contractor and can generally cancel or postpone capital projects.
PROCESSING AGREEMENTS
In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned from the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. As of October 31, 1997, TARC has processed 6.4 million
barrels of feedstocks under this agreement. TARC also entered into processing
agreements with this third party to process approximately 1.1 million barrels of
the third party's feedstocks for a fixed price per barrel. As of October 31,
1997 and January 31, 1997, TARC was storing approximately 0.7 million and 1.0
million barrels, respectively, of feedstock and intermediate or refined
products. For the nine months ended October 31, 1997 and 1996, TARC recorded
income (loss) from processing agreements of $3.1 million and $(8.6) million,
respectively. For the three months ended October 31, 1997 and 1996, TARC
recorded a loss from processing agreements of $0.1 million and $5.2 million,
respectively. Included in the 0.7 million barrels of product stored at the
refinery as of October 31, 1997, is approximately 0.6 million barrels of
feedstock related to a purchase commitment entered into in April 1997. The 0.6
million barrels have been sold to the third party involved in the processing
arrangement. For the nine months ended October 31, 1997, TARC incurred a loss of
approximately $4.8 million related to this purchase commitment.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
Pursuant to the terms of the TARC Intercompany Loan, upon the occurrence
of a Change of Control, TEC would have the right to require TARC to repay the
principal of the TARC Intercompany Loan in an amount equal to a pro rata share
of the amount TEC is required to pay under the TEC Indenture. Such pro rata
share would be calculated using the ratio of the accreted value of the
outstanding principal amount of the TARC Intercompany Loan to the sum of (i)
the outstanding principal amount of the TransTexas Intercompany Loan plus (ii)
the accreted value of the outstanding principal amount of the TARC Intercompany
Loan. A Change of Control would be deemed to occur under the TARC Intercompany
Loan in the case of certain changes or other events in respect of the ownership
or control of TEC, TARC or TransTexas including any circumstance pursuant to
which (i) any person or group, other than John R. Stanley (or his
14
16
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
heirs, his estate or any trust in which he or his immediate family members
have, directly or indirectly, a beneficial interest in excess of 50%) and his
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 TARC's or TransTexas'
capital stock, respectively, but less than 50% of the total voting stock or
economic value of TARC or TransTexas, respectively, unless (in the case of
either (i) or (ii) above) the 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 the event of a change of control under
the TEC Notes Indenture, there can be no assurance that TransTexas or TARC 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.
7. TRANSACTIONS WITH AFFILIATES
TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the nine months ended October 31, 1997
and 1996 was approximately $0.4 million and $2.2 million, respectively. During
the quarter ended October 31, 1997, TARC paid TransTexas approximately $3.2
million which represented the payable to TransTexas for natural gas purchases.
Southeast Contractors, a subsidiary of TransAmerican, provides
construction personnel to TARC in connection with the Capital Improvement
Program. These construction workers are temporary employees, and the number and
composition of the workforce will vary throughout the Capital Improvement
Program. Southeast Contractors charges TARC for the direct costs it incurs
(which consist solely of employee payroll and benefits) plus administrative
costs and fees of up to $2.0 million per year. Total labor costs charged by
Southeast Contractors for the nine months ended October 31, 1997 and 1996 were
$26.8 million and $13.5 million, respectively, of which $3.9 million and $1.8
million were payable at October 31, 1997 and January 31, 1997, respectively.
On June 13, 1997, the Company entered into a services agreement with
TransAmerican, TransTexas and TEC. Under the agreement, TransTexas provides
accounting, legal, administrative and other services to TARC, TEC and
TransAmerican and its affiliates. TransAmerican provides advisory services
to TransTexas, TARC and TEC. TARC will pay TransTexas approximately $300,000
per month for services rendered to, and for allocated expenses paid by
TransTexas on behalf of, TARC and TEC. TEC and its subsidiaries will pay $2.5
million in the aggregate per year to TransAmerican for advisory services and
benefits provided by TransAmerican. As of October 31, 1997, $1.2 million and
$1.0 million was payable to TransTexas and TransAmerican, respectively,
pursuant to the services agreement.
In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. All of the advances are governed by the terms of a promissory note that is
due June 14, 2002 bearing interest at a rate that, when added to the interest
paid by TransTexas on the TransTexas Intercompany Loan, will equal the amount of
interest payable on the TEC Notes. In November and December 1997, TARC repaid
approximately $33.9 million in principal and interest to TEC.
For the nine months ended October 31, 1997, TEC has contributed $6 million
to TARC for operating expenses.
15
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals
and its expenses consisted of maintenance and repairs, tank rentals, general
and administrative expenses and property taxes. TARC commenced partial
operations at the refinery in March 1994 and has operated the No. 2 Vacuum Unit
intermittently since that time. TARC may operate the No. 2 Crude Unit and the
No. 2 Vacuum Unit if market conditions are favorable. TARC's decision to
commence or suspend operations will depend on the availability of working
capital, current operating margins and the need to tie-in units as they are
completed. TARC does not consider its historical results to be indicative of
future results.
TARC's results of operations are dependent on the operating status of
certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the unit
costs of purchased feedstocks and the unit prices of refined products, which
can vary significantly. The Capital Improvement Program is designed to
significantly change TARC's throughput capacity, the feedstocks processed, and
refined product yields.
TARC believes, based on current estimates of refining margins and
costs of the expansion and modification of the refinery, that future
undiscounted cash flows will be sufficient to recover the cost of the refinery
over its estimated useful life. Management believes there have been no events or
changes in circumstances that would require the recognition of an impairment
loss. However, due to the inherent uncertainties in estimating future refining
margins, and in constructing and operating a large-scale refinery, there can be
no assurance that TARC will ultimately recover the cost of the refinery.
Management believes that the book value of the refinery is in excess of its
current estimated fair market value.
THREE MONTHS ENDED OCTOBER 31, 1997, COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1996
Other revenues of $0.6 million for the three months ended October 31,
1997 were from operations of TARC'S terminal facility acquired in September
1997.
Processing arrangements reflect a loss of $0.1 million and $5.2 million
for the three months ended October 31, 1997 and 1996, respectively. Losses were
primarily due to unfavorable prices for refined products and price management
activities.
Operations and maintenance expense for the three months ended October 31,
1997 decreased to $2.8 million from $3.0 million for the same period in 1996,
primarily due to increased amounts of labor costs capitalized in connection
with the Capital Improvement Program partially offset by the expensing of
certain prepaid costs for storage and related facilities.
Depreciation and amortization expense for the three months ended October
31, 1997 increased to $2.0 million from $1.7 million for the same period in
1996, primarily due to depreciation related to the terminal facility acquired
in September 1997.
General and administrative expenses increased to $6.0 million for the
three months ended October 31, 1997 from $1.7 million for the same period in
1996, primarily due to the write-off of certain intangibles related to the
terminal facility acquired in September 1997 and increased Services Agreement
fees.
Taxes other than income taxes for the three months ended October 31, 1997
remained at the same level as in 1996.
16
18
Interest income for the three months ended October 31, 1997 increased to
$2.0 million as compared to the same period in 1996, primarily due to the
investment of proceeds from the TARC Intercompany Loan. Interest expense, net
for the three months ended October 31, 1997, increased $6.1 million, due
primarily to interest on the TARC Intercompany Loan. During the three months
ended October 31, 1997, TARC capitalized approximately $23.3 million of
interest related to property and equipment additions at TARC's refinery
compared to $17.7 million for the three months ended October 31, 1996.
Equity in income of TransTexas before extraordinary items for the three
months ended October 31, 1997 increased $1.3 million as compared to the same
period in 1996. In September 1997, TARC sold approximately 8.5 million shares
of TransTexas common stock pursuant to the TransTexas Share Repurchase Program.
TARC received $136.2 million in connection with the repurchase, of which $124.5
million (representing the excess of the cash received over TARC's carrying
value of the stock) was recorded as a capital contribution.
NINE MONTHS ENDED OCTOBER 31, 1997, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1996
There were no product sales for the nine months ended October 31, 1997 as
compared to $10.9 million for the same period in 1996, primarily as a result of
processing the majority of refinery throughput for third parties under
processing agreements.
Other revenues of $0.6 million for the nine months ended October 31, 1997
were from operations of TARC's terminal facility acquired in September 1997.
There were no costs of products sold for the nine months ended October
31, 1997 as compared to $12.4 million for the same period in 1996, due
primarily to the Company's use in 1997 of processing arrangements pursuant to
which TARC processed feedstock owned by third parties (as opposed to TARC's
purchase of feedstock and sale of product).
Processing arrangements reflect income of $3.1 million and a loss of $8.6
million for the nine months ended October 31, 1997 and 1996, respectively.
Income and losses were primarily due to unfavorable prices for refined products
and price management activities.
Operations and maintenance expense for the nine months ended October 31,
1997 increased $1.1 million to $10.7 million from $9.6 million for the same
period in 1996, primarily due to the increase of the Company's labor force in
connection with the Capital Improvement Program.
Depreciation and amortization expense for the nine months ended October
31, 1997 increased $0.1 million to $5.4 million from $5.3 million for the same
period in 1996, primarily due to depreciation related to the terminal facility
acquired in September 1997.
General and administrative expenses increased $3.6 million to $11
million for the nine months ended October 31, 1997 from the $7.4 million for
the same period in 1996, primarily due to the write-off of certain intangibles
related to the terminal facility acquired in September 1997, increased services
agreement fees and an offsetting decrease in insurance expense and professional
fees.
Taxes other than income taxes for the nine months ended October 31, 1997
decreased $1.1 million to $2.7 million from $3.8 million for the same period in
1996, primarily due to decreased property tax expense.
Loss on purchase commitments for the nine months ended October 31, 1997
consists of a $4.8 million loss related to a commitment to purchase 0.6 million
barrels of feedstock. These barrels have been sold to a third party and are now
subject to a processing agreement.
Interest income for the nine months ended October 31, 1997 increased $2.8
million as compared to the same period in 1996, primarily due to the investment
of proceeds from the TARC Intercompany Loan. Interest expense for the nine
months ended October 31, 1997 increased $10.8 million, primarily due to
interest on the TARC Intercompany Loan. During the nine months ended October
31, 1997, the Company capitalized approximately $64.9 million of interest
related to property and equipment additions at the Company's refinery compared
to $51.0 million for the nine months ended October 31, 1996.
Equity in income of TransTexas before extraordinary item for the nine
months ended October 31, 1997 increased to $45.2 million as compared to $9.8
million for the same period in 1996, due primarily to a $540 million gain on the
sale by TransTexas of a subsidiary. In September 1997, TARC sold approximately
8.5 million shares of TransTexas common stock pursuant to the TransTexas Share
Repurchase Program. TARC received $136 million in connection with the
repurchase, of which $124.5 million (representing the excess of the cash
received over TARC's carrying value of the stock) was recorded as a capital
contribution. TARC recognized equity in an extraordinary item of TransTexas of
$(10.2) million for the nine months ended October 31, 1997. The extraordinary
loss of TransTexas is attributable to a loss on the early extinguishment of debt
as a result of the repurchase by TransTexas of its Senior Secured Notes and the
Subordinated Notes Exchange Offer. The gain on the sale of TransTexas stock of
$56.2 million for the nine months ended October 31, 1996 was a result of TARC's
sale of 4.55 million shares of TransTexas common stock in March 1996.
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The loss on the early extinguishment of debt of $84.4 million for the
nine months ended October 31, 1997 is a result of the completion of the TARC
Notes Tender Offer as described in Note 2 of Notes to Condensed Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Although TARC may operate the No. 2 Crude Unit and the No. 2 Vacuum
Unit if it obtains a favorable processing arrangement, TARC anticipates that,
until completion of the Delayed Coking Unit, its capital needs will be limited
to expenditures for the Capital Improvement Program, general and administrative
expenses and refinery maintenance costs.
TARC has incurred losses and negative cash flow from operations as a
result of limited refinery operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements (including
debt service) and losses on refined product sales and processing arrangements.
In order to operate the refinery at expected levels after completion of
expansion and modification of the refinery, TARC will require additional
working capital and ultimately must achieve profitable operations. As a result,
there is substantial doubt about TARC's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
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 a portion of the proceeds of the TEC Notes Offering, TEC made an
intercompany loan to TARC in the original amount of $676 million (the "TARC
Intercompany Loan"). The TARC Intercompany Loan will accrete principal at the
rate of 16% per annum, compounded semi-annually until June 15, 1999 to a final
accreted value of $920 million, and cash interest will thereafter accrue at a
rate of 16% per annum, payable semi-annually. The TARC Intercompany Loan will
mature on June 1, 2002. The TARC Intercompany Loan Agreement contains certain
restrictive covenants including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates. If
TARC's cash flow from operations is insufficient to pay interest as it becomes
payable on the TARC Intercompany Loan, TARC may be required to attempt to sell
debt or equity securities of TARC. There can be no assurance that proceeds from
such sales would be adequate to pay interest due. TARC used approximately $103
million of the proceeds from the TARC Intercompany Loan to repay certain
indebtedness, including $36 million of senior secured notes issued in March
1997 and $66 million of advances and notes payable owed to an affiliate, and
used approximately $437 million to complete the TARC Notes Tender Offer
described below. Remaining proceeds will be used for the Capital Improvement
Program described in Note 3 of Notes to Condensed Financial Statements and for
general corporate purposes. See Note 2 of Notes to Condensed Financial
Statements.
Following completion of the transactions described in Note 2 of Notes to
Condensed Financial Statements, TARC and TEC will have deposited approximately
$529 million into accounts in the name of TARC and TEC (together, the "TARC
Disbursement Account") from which disbursements will be made pursuant to a
disbursement agreement (the "Disbursement Agreement") among TARC, TEC, the TEC
Indenture Trustee, Firstar Bank of Minnesota, N. A., as Disbursement Agent, and
Baker & O'Brien, Inc., as Construction Supervisor. See Note 4 of Notes to
Condensed Financial Statements. Of these funds, $427 million will be available
only for the Capital Improvement Program, approximately $25.5 million will be
available for general and administrative expenses, $7 million will be available
for outstanding accounts payable, $50 million will be available for working
capital upon completion of the Delayed Coking Unit and certain supporting units
and $19 million will be available for the payment of interest on, or the
redemption, purchase, defeasance or other retirement of, the outstanding TARC
Notes. TARC's estimated capital expenditures for the Capital Improvement
Program are $201 million, $210 million, and $16 million, respectively, during
the remainder of fiscal 1998, and the fiscal years ending January 31, 1999 and
2000. If engineering problems, cost overruns or delays occur and other
financing sources are not available, TARC may not be able to complete both
phases of the Capital Improvement Program. As of October 31, 1997, $119 million
had been disbursed to TARC out of the TARC Disbursement Account for use in the
Capital Improvement Program and $13 million for general corporate purposes.
On June 13, 1997, TARC completed a tender offer (the "TARC Notes Tender
Offer") for the (i) TARC Mortgage Notes for 112% of their principal amount
(plus accrued and unpaid interest) and (ii) TARC Discount Notes for 112% of
their accreted value. TARC Mortgage Notes and TARC Discount Notes with an
aggregate carrying value of $423 million were tendered and accepted by TARC at
a cost to TARC of approximately $437 million (including accrued interest,
premiums and other costs). As a result of the TARC Notes Tender Offer, $22.8
million in debt issuance costs were written off and TARC recorded a total
extraordinary charge of approximately $84 million during the nine months
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ended October 31, 1997. As of October 31, 1997, TARC Mortgage Notes and TARC
Discount Notes with a carrying value of approximately $16.0 million remained
outstanding.
In June 1997, TransTexas implemented the TransTexas 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. 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 October 31, 1997, TransTexas had
repurchased approximately 3.9 million shares of common stock from public
stockholders for an aggregate purchase price of approximately $61.4 million, and
approximately 12.6 million shares had been purchased from TARC and TEC for an
aggregate purchase price of approximately $201 million. TARC received $136.2
million of the purchase price, of which $124.5 million (representing the excess
of the cash received over TARC's carrying value of the stock) was recorded as a
capital contribution.
The TEC Notes Indenture permits TARC to obtain a revolving credit
facility but places certain limitations on TARC's ability to incur other
indebtedness. In order to operate the refinery at expected levels after the
completion of Phase I of the Capital Improvement Program, TARC will require
additional working capital. Although TARC and a lender have engaged in
discussions concerning the terms of a revolving credit facility, there can be
no assurance TARC will be able to obtain such a facility.
In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned by the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. As of October 31, 1997, TARC has processed 6.4 million barrels
of feedstocks under this agreement. TARC also entered into processing agreements
with this third party to process approximately 1.1 million barrels of the third
party's feedstocks for a fixed price per barrel. As of October 31, 1997 and
January 31, 1997, TARC was storing approximately 0.7 million and 1.0 million
barrels, respectively, of feedstock and intermediate or refined products. For
the nine months ended October 31, 1997 and 1996, TARC recorded income (loss)
from processing agreements of $3.1 million and $(8.6) million, respectively. For
the three months ended October 31, 1997 and 1996, TARC recorded a loss from
processing arrangements of $0.1 million and $5.2 million, respectively. Included
in the 0.7 million barrels of product stored at the refinery as of October 31,
1997, is approximately 0.6 million barrels of feedstock related to a purchase
commitment entered into in April 1997. The 0.6 million barrels have been sold to
the third party involved in the processing arrangement. For the nine months
ended October 31, 1997, TARC incurred a loss of approximately $4.8 million
related to this purchase commitment.
In July and September 1997, TARC received advances from TEC in the
aggregate amount of $46 million. In November and December 1997, TARC repaid
approximately $31 million in principal, and in December 1997 paid
approximately $2.9 million in interest to TEC. See Note 7 of Notes to Condensed
Financial Statements.
In September 1997, TARC purchased a tank storage facility adjacent to the
refinery for a cash purchase price of $40 million (which does not include a
$3.1 million liability recorded for environmental remediation, as discussed
below). Environmental investigations conducted by the previous owner of the
facilities have indicated soil and groundwater contamination in several areas of
the property. As a result, the former owner submitted to the Louisiana
Department of Environmental Quality (the "LDEQ") plans for the remediation of
any significant indicated contamination in such areas. TARC has analyzed these
investigations and has carried out further Phase II Environmental Assessments to
verify their results. TARC intends to incorporate any required remediation into
its ongoing work at the refinery. In connection with the purchase of the
facilities, TARC agreed to indemnify the seller from all cleanup costs and
certain other damages resulting from contamination on the property, and created
a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessments, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination; however, because the LDEQ has not yet approved certain
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of the remediation plans, there can be no assurance that the funds set aside in
the escrow account will be sufficient to pay all required remediation costs.
During the three months ended October 31, 1997, TARC recorded a liability of
$3.1 million for this contingency.
On December 10, 1997, TARC issued to an unaffiliated third party a 13%
Senior Secured Note due 2002 (the "Acquisition Note") in the principal amount
of $36 million to finance a portion of the purchase price of the tank storage
facility purchased in September 1997. The Acquisition Note is secured by a
mortgage on the tank storage facility, and is governed by a Note Purchase
Agreement containing restrictive covenants substantially similar to those
contained in the TARC Intercompany Loan and TEC Indenture. The Acquisition Note
bears interest at 13%, payable semiannually on June 15 and December 15, and
matures on December 15, 2002.
Environmental compliance and permitting issues are an integral part of
the capital expenditures anticipated in connection with the expansion and
modification of the refinery. TARC does not expect to incur any additional
significant expenses for environmental compliance during fiscal 1998 or fiscal
1999 other than those budgeted for the Capital Improvement Program. There is no
assurance, however, that costs incurred to comply with environmental laws will
not have a material adverse effect on TARC's future results of operations, cash
flows or financial condition. TARC also has contingent liabilities with respect
to certain legal proceedings as more fully described in Note 7 of Notes to
Condensed Financial Statements.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Quarterly Report on Form 10-Q regarding
TARC's financial position, business strategy, plans and objectives of
management for future operations and expansion and modification of the
refinery, including but not limited to words such as "anticipates," "expects,"
"believes," "estimates," "intends," "projects" and "likely" indicate
forward-looking statements. TARC's management believes that its current views
and expectations are based on reasonable assumptions; however, there are
significant risks and uncertainties that could significantly affect expected
results. Factors that could cause actual results to differ materially from
those in the forward-looking statements include, without limitation,
engineering problems, work stoppages, cost overruns, personnel or materials
shortages, fluctuations in commodity prices for petroleum and refined products,
casualty losses, conditions in the capital markets and competition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 6 of Notes to Condensed Financial Statements for a
discussion of TARC's legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 - Asset Purchase Agreement dated September 19, 1997 between
GATX Terminals Corporation and TARC.
11.1 - Computation of Net Income per Share
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
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 giving effect to the TEC Notes Offering and related
transactions were included in the report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSAMERICAN REFINING CORPORATION
(Registrant)
December 15, 1997 By: /s/ JOHN R. STANLEY
--------------------------------------------
John R. Stanley, Chief Executive Officer
December 15, 1997 By: /s/ ED DONAHUE
--------------------------------------------
Ed Donahue, Vice President and Secretary
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.1 - Asset Purchase Agreement dated September 19, 1997 between GATX
Terminals Corporation and TARC.
11.1 - Computation of Net Income per Share
27.1 - Financial Data Schedule