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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
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
December 15, 1997 was 57,515,566.
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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 October 31, 1997
and January 31, 1997 3
Condensed Consolidated Statement of Operations for the three
and nine months ended October 31, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for the nine
months ended October 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 6. Exhibits and Reports on Form 8-K 26
Signature 27
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of October 31, 1997 and the related condensed
consolidated statements of operations for the three and nine months ended
October 31, 1997 and 1996 and cash flows for the nine months ended October 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
December 15, 1997
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 3,513 $ 23,561
Cash restricted for interest . . . . . . . . . . . . . . . . . . . -- 46,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 30,538 78,660
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . -- 3,248
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,784 12,481
Other current assets (Note 4) . . . . . . . . . . . . . . . . . . 11,030 24,984
------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 61,865 188,934
------- ----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . 1,325,422 2,280,880
Less accumulated depreciation, depletion and amortization . . . . . 697,862 1,434,487
---------- ----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $122,709 and
$158,973 are excluded from amortization at October 31, 1997
and January 31, 1997, respectively . . . . . . . . . . . . . . . 627,560 846,393
----------- ----------
Cash restricted for share repurchases (Note 2) . . . . . . . . . . . 136,879 --
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . 17,561 17,825
----------- ----------
$ 843,865 $1,053,152
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . $ 9,726 $ 5,787
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 70,571 28,150
Accrued interest payable to affiliate . . . . . . . . . . . . . . 18,759 --
Accrued liabilities (Note 5) . . . . . . . . . . . . . . . . . . . 38,317 83,411
----------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . 137,373 117,348
----------- ----------
Long-term debt, less current maturities . . . . . . . . . . . . . . . 12,015 8,775
Production payments, less current portion . . . . . . . . . . . . . . 6,696 11,931
Note payable to affiliate . . . . . . . . . . . . . . . . . . . . . . 453,000 --
Senior secured notes . . . . . . . . . . . . . . . . . . . . . . . . -- 800,000
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . 115,815 101,092
Revolving credit agreement . . . . . . . . . . . . . . . . . . . . . 11,329 26,268
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . -- 54,554
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 53,237 31,367
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . 1,087 19,621
Other liabilities (Note 6) . . . . . . . . . . . . . . . . . . . . . 13,933 32,991
Commitments and contingencies (Note 3) . . . . . . . . . . . . . . . -- --
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
57,515,566 shares issued and outstanding . . . . . . . . . . . . 740 740
Additional paid-in capital (capital deficit) . . . . . . . . . . . 22,820 (123,524)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 278,225 31,267
----------- -----------
301,785 (91,517)
Treasury stock, at cost, 16,484,434 shares . . . . . . . . . . . . (262,405) --
Less advances to affiliates . . . . . . . . . . . . . . . . . . . -- (59,278)
----------- ------------
Total stockholders' equity (deficit) . . . . . . . . . . . . 39,380 (150,795)
----------- ------------
$ 843,865 $ 1,053,152
=========== ============
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
Revenues:
Gas, condensate and natural gas liquids . . $ 28,347 $ 70,993 $ 140,517 $ 228,694
Transportation . . . . . . . . . . . . . . . -- 8,928 12,055 25,798
Gains on the sale of assets . . . . . . . . 7,482 80 540,411 7,842
Other . . . . . . . . . . . . . . . . . . . 1,404 103 2,021 460
---------- ---------- ---------- -----------
Total revenues . . . . . . . . . . . . . . 37,233 80,104 695,004 262,794
---------- ---------- ---------- -----------
Costs and expenses:
Operating . . . . . . . . . . . . . . . . . 7,113 25,819 45,938 78,305
Depreciation, depletion and amortization . . 13,247 30,811 67,219 92,356
General and administrative . . . . . . . . . 5,170 15,535 29,693 35,324
Taxes other than income taxes . . . . . . . 2,117 2,081 9,845 14,457
Litigation settlement . . . . . . . . . . . -- -- -- (96,000)
---------- ----------- ---------- -----------
Total costs and expenses . . . . . . . . . 27,647 74,246 152,695 124,442
---------- ---------- ---------- -----------
Operating income . . . . . . . . . . . . . 9,586 5,858 542,309 138,352
---------- ---------- ---------- -----------
Other income (expense):
Interest income . . . . . . . . . . . . . . 3,999 1,020 11,286 2,944
Interest expense, net . . . . . . . . . . . (15,620) (21,333) (62,823) (73,382)
---------- ---------- ---------- -----------
Total other income (expense) . . . . . . . (11,621) (20,313) (51,537) (70,438)
---------- ---------- ---------- -----------
Income (loss) before income taxes and
extradordinary item. . . . . . . . . . (2,035) (14,455) 490,772 67,914
Income taxes (benefit) . . . . . . . . . . . . (712) (5,059) 171,771 2,729
---------- ---------- ---------- -----------
Income (loss) before income taxes and
extraordinary item . . . . . . . . . . (1,323) (9,396) 319,001 65,185
Extraordinary item - early extinguishment . .
of debt (net of income tax benefit of $38,793) 74 -- (72,043) --
---------- ---------- ---------- -----------
Net income (loss) . . . . . . . . . . . . $ (1,249) $ (9,396) $ 246,958 $ 65,185
========== ========== ========== ===========
Net income (loss) per common share:
Income (loss) before extraordinary item . . $ (0.02) $ (0.13) $ 4.55 $ 0.88
Extraordinary item . . . . . . . . . . . . -- -- (1.03) --
---------- ---------- ------------ -----------
Net income (loss) per common share. $ (0.02) $ (0.13) $ 3.52 $ 0.88
========== ========== ============ ===========
Weighted average number of shares outstanding . 63,404,675 74,000,000 70,082,047 74,000,00
========== ========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
------------------------------
1997 1996
------------ -----------
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,958 $ 65,185
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . 72,043 --
Depreciation, depletion and amortization . . . . . . . . . . . . 67,219 92,356
Amortization of debt issue costs . . . . . . . . . . . . . . . . 1,879 7,654
Accretion on subordinated notes . . . . . . . . . . . . . . . . 4,941 --
Gains on the sale of assets . . . . . . . . . . . . . . . . . . (540,411) (7,842)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 171,771 (14,242)
Proceeds from volumetric production payment . . . . . . . . . . -- 58,621
Repayment of volumetric production payments . . . . . . . . . . (45,134) --
Amortization of deferred revenue . . . . . . . . . . . . . . . . (9,420) (27,070)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 48,122 (9,759)
Receivable from affiliates . . . . . . . . . . . . . . . . . 3,248 697
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (4,300) (617)
Other current assets . . . . . . . . . . . . . . . . . . . . 9,954 2,837
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 23,826 2,225
Accrued interest payable to affiliate. . . . . . . . . . . . . 18,759 --
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . (47,924) 27,058
Transactions with affiliates, net . . . . . . . . . . . . . . (811) (23,500)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 255 (1,312)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 4,680 (9,464)
----------- -----------
Net cash provided by operating activities . . . . . . . . . 25,655 162,827
----------- -----------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (316,706) (201,630)
Proceeds from the sale of assets . . . . . . . . . . . . . . . . 1,035,188 91,559
Advances to affiliates . . . . . . . . . . . . . . . . . . . . . (13,304) (24,750)
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 . . . . . 262,405 --
----------- -----------
Net cash provided (used) by investing activities . . . . . 670,653 (134,821)
----------- -----------
Financing activities:
Issuance of dollar-denominated production payments. . . . . . . . 20,977 16,903
Principal payments on production payments . . . . . . . . . . . (27,472) (34,348)
Issuance of note payable to affiliate . . . . . . . . . . . . . . 453,000 --
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . 14,946 25,480
Principal payments on long-term debt . . . . . . . . . . . . . . (7,767) (17,827)
Revolving credit agreement, net . . . . . . . . . . . . . . . . (14,939) (5,534)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . (696) (4,284)
Retirement of senior secured notes . . . . . . . . . . . . . . . (892,000) --
Purchases of treasury stock . . . . . . . . . . . . . . . . . . (262,405) --
----------- -----------
Net cash used by financing activities . . . . . . . . . . . (716,356) (19,610)
----------- -----------
Increase (decrease) in cash and cash equivalents . . . . . (20,048) 8,396
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . 23,561 11,248
----------- -----------
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,513 $ 19,644
=========== ===========
Noncash operating and investing activities:
Accounts payable and other liabilities for property and equipment $ 45,787 $ 24,046
Exchange of Subordinated Notes . . . . . . . . . . . . . . . . . 115,815 --
Deferred financing costs from affiliate . . . . . . . . . . . . 12,228 --
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas") as of 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 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 October 31, 1997,
TransTexas Exploration Corporation ("TTEX"), TransTexas Drilling Services, Inc.
("TTXD"), TransTexas Energia de Mexico, S.A. de C.V. and TransTexas Gas
Corporation - Liberia. 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
Cash flow from operations is sensitive to the prices TransTexas
receives for its natural gas. TransTexas' debt covenants may limit its ability
to obtain additional financing or to sell properties, and there is no assurance
that cash flow from operations will be sufficient to fund capital and debt
service requirements.
TransTexas makes substantial capital expenditures for the exploration
and development of natural gas reserves. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements with
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, an accounts receivable
revolving credit facility and other financings.
For the nine months ended October 31, 1997, total capital expenditures
were $317 million, including $45 million for lease acquisitions, $206 million
for drilling and development and $66 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. Additional
capital expenditures of $60 million are anticipated for the fourth quarter.
During fiscal 1998, 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 have significantly exceeded its original
anticipated amount of $220 million. In addition, TransTexas is developing
several oil and gas prospects with the potential to increase production and cash
flow from operations, but which require capital expenditures in excess of
projected cash flow over at least the next twelve months. To finance these
capital expenditure requirements and reduce its working capital deficit,
TransTexas intends to supplement its cash flow from operations with a
combination of asset sales and financings. There is no assurance that adequate
funds can be obtained on a timely basis from such sources. Failure to obtain
adequate funds for capital expenditures could have a material adverse effect on
financial position, results of operations and cash flows.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which establishes
standards for reporting information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement will be adopted by
TransTexas effective February 1, 1998. TransTexas has not determined the impact
that adoption of this statement will have on the 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
TransTexas effective February 1, 1998. TransTexas does not believe that
adoption of this statement will have a material impact on its financial
statements.
In February 1997, the 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 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
that adoption of these statements will have a material impact on its financial
statements.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 flow.
2. RECENT EVENTS
LOBO SALE. On May 29, 1997, TransTexas 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-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 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 (the "TransTexas Intercompany
Loan"); (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 "Old Subordinated Notes"); and (d)
commencement of 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 the TransTexas Intercompany Loan and also made an
intercompany loan to 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-
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
annually in cash in arrears and (iii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than 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 in an offer to purchase
pursuant to a Change of Control. See "Potential Effects of a Change of
Control" in Note 3.
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.
SUBORDINATED NOTES EXCHANGE OFFER. On June 19, 1997, TransTexas
completed the Subordinated Notes Exchange Offer, pursuant to which it exchanged
approximately $115.8 million aggregate principal amount of its 13 3/4% Series C
Senior Subordinated Notes due 2001 (the "Series C Subordinated Notes") for all
of the Old Subordinated Notes. On October 10, 1997, the Company completed a
registered exchange offer whereby it issued $115.8 million aggregate principal
amount of its 13 3/4% Series D Senior Subordinated Notes due 2001 (the
"Subordinated Notes") in exchange for all of the outstanding Series C
Subordinated Notes. The indenture governing the Subordinated 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 Subordinated
Notes Exchange Offer, TransTexas recorded a $540 million pretax gain and a $72
million after tax extraordinary charge during the nine months ended October 31,
1997.
SHARE REPURCHASE PROGRAM. In June 1997, TransTexas 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.
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 October 31, 1997,
approximately 3.9 million shares had been repurchased 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.
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
8
10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 repurchases" in the
accompanying condensed consolidated balance sheet. As of October 31, 1997,
approximately $262.4 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's motion for rehearing was denied, and
Alameda has appealed to the Texas Supreme Court.
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' motion for summary judgment is pending before the court.
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. The court amended the final judgment and denied TransTexas' motion
for new trial in October 1997. TransTexas has filed a revised 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
9
11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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
originally sought by plaintiff.
GENERAL. TransTexas is also a named defendant in other ordinary course,
routine litigation incidental to its business. These matters, individually and
in the aggregate, amount to significant potential liability. The resolution in
any reporting period of one or more of these matters in a manner adverse to
TransTexas could have a material adverse effect on TransTexas' results of
operations and cash flows for that period. Although the outcome of these
lawsuits cannot be predicted with certainty, TransTexas does not expect these
matters to have a material adverse effect on its financial position. At October
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. Litigation expense, including legal fees, totaled approximately
$0.5 million and $8.0 million for the three months ended October 31, 1997 and
1996, respectively, and approximately $11.9 million and $15.0 million for the
nine months ended October 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 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.
10
12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
LETTER OF CREDIT
In January 1996, TransTexas entered into a reimbursement agreement with
an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas. If there is a draw under the letter of credit, TransTexas
is required to reimburse the third party within 60 days. TransTexas has agreed
to issue up to 8.6 million shares of its common stock to the third party if this
contingent obligation to such third party becomes fixed and remains unpaid for
60 days. TransTexas does not believe that this contingency will occur. If the
obligation becomes fixed, and alternative sources of capital are not available,
TransTexas could elect to sell shares of TransTexas' common stock prior to the
maturity of the obligation and use the proceeds of such sale to repay the third
party. Based on TransTexas' current capitalization, the issuance of shares of
TransTexas' common stock to satisfy this obligation would result in
deconsolidation of TransTexas for federal income tax purposes.
POTENTIAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will not
challenge this position, or that such challenge would not be upheld. Under an
agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such tax
would be offset in future years by alternative minimum tax credits and retained
loss and credit carryforwards to the extent recoverable from TransAmerican. As
a 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. At this time, 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 $250 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
11
13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 $50 million and $100 million, assuming no
reduction for tax attributes of the TNGC Consolidated Group. However, such tax
liability generally would be substantially reduced or eliminated in the event
that the IRS successfully challenged TransTexas' position on the Lobo Sale.
Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the IRS for the consolidated federal income tax
liability of the consolidated group. There can be no assurance that each TNGC
Consolidated Group member will have the ability to satisfy any tax obligation
attributable to the Transactions at the time due and, therefore, other members
of the group, including TEC, TransTexas or TARC, may be required to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, 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 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
12
14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
pursuant to which any person or group other than John R. Stanley (or his 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 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 (or his 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
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 the BNY Facility and certain equipment financing. Such an
occurrence could create an obligation for TransTexas to repay such other
indebtedness. At October 31, 1997, TransTexas had approximately $29.7 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 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):
October 31, January 31,
1997 1997
----------- -----------
Prepayments:
Trade $ 6,548 $ 9,580
Insurance 1,891 2,310
Deferred loss on commodity price swap agreements -- 8,276
Other 2,591 4,818
----------- ----------
$ 11,030 $ 24,984
=========== ==========
13
15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
5. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in
thousands of dollars):
October 31, January 31,
1997 1997
----------- ------------
Royalties $ 8,213 $ 27,607
Taxes other than income taxes 5,793 10,136
Accrued interest 7,276 13,370
Payroll 6,878 5,413
Litigation settlements and other -- 1,263
Settlement values of commodity price swap agreements -- 13,276
Insurance 4,981 6,618
Other 5,176 5,728
---------- ----------
$ 38,317 $ 83,411
========== ==========
Included in litigation settlements and other at January 31, 1997 are
certain non-recurring costs associated with the Lobo Sale.
6. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands
of dollars):
October 31, January 31,
1997 1997
----------- ------------
Litigation accrual $ 10,008 $ 8,008
Litigation settlement -- 1,633
Accrued interest 2,813 --
Short-term obligations expected to be refinanced:
Litigation settlement -- 2,500
Accrued capital expenditures -- 19,738
Other 1,112 1,112
----------- ----------
$ 13,933 $ 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 $13.8 million remains outstanding as of October 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 nine months ended
October 31, 1997, TransTexas incurred net settlement losses pursuant to the
Hedge Agreements of approximately $7.4 million. TransTexas had no Hedge
Agreements outstanding during the quarter ended October 31, 1997.
14
16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. LITIGATION SETTLEMENT
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 a Second
Amended and Restated Accounts Receivable Management and Security Agreement (the
"BNY Facility"), dated as of October 14, 1997. As of October 31, 1997,
outstanding advances under the BNY Facility totaled approximately $11.3
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.
10. TRANSACTIONS WITH AFFILIATES
TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.4 million and $2.2 million for the nine months ended October 31, 1997 and
1996, respectively.
15
17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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. As of October
31, 1997, the receivable from TARC and TransAmerican for such services was $1.3
million and $0.1 million, respectively.
In September, November and December 1997, TEC advanced an aggregate of
approximately $34 million to TransTexas pursuant to promissory notes which
mature on June 14, 2002. The notes bear interest in an amount equal to a
proportionate share of the fixed semi-annual interest payment of $2.8 million
based upon the average outstanding balance of all notes (other than the notes
evidencing the Intercompany Loans) between TransTexas and TEC and the average
outstanding balance of all notes (other than the notes evidencing the
Intercompany Loans) between TARC and TEC.
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 its ability to minimize
finding and lifting costs and maintain its reserve base while maximizing
production. On May 29, 1997, TransTexas 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 nine months ended October 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 nine months ended
October 31, 1997 and 1996, is as follows:
Nine Months Ended Three Months Ended
October 31, October 31,
----------------------- ---------------------
1997 1996 1997 1996
-------- ------- ------- --------
Sales volumes:
Gas (Bcf) (1) 10.3 38.1 63.5 112.4
NGLs (MMgal) -- 39.3 61.7 128.6
Condensate (MBbls) 92 120 518 400
Average prices:
Gas (dry) (per Mcf)(2) $ 2.66 $ 1.62 $ 2.04 $ 1.87
NGLs (per gallon) -- .38 .29 .33
Condensate (per Bbl) 18.45 22.07 19.52 20.47
Number of gross wells drilled 21 34 79 111
Percentage of wells completed 76% 79% 63% 73%
- ----------------------
(1) Sales volumes for the nine months ended October 31, 1997 include 7.3 Bcf
delivered prior to the third quarter pursuant to volumetric production
payments.
(2) Average prices for the nine months ended October 31, 1997 includes amounts
delivered under volumetric production payments. The average gas price for
TransTexas' undedicated production for this period was $2.15 per Mcf. 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 Nine Months Ended
October 31, October 31,
------------------------- -----------------------
1997 1996 1997 1996
---------- ---------- --------- ----------
Operating costs and expenses:
Lease $ 3.0 $ 7.0 $ 15.2 $ 19.8
Pipeline 2.7 8.9 14.1 25.2
Natural gas liquids 0.1 9.7 14.6 32.9
Well services 1.4 0.2 2.1 0.4
---------- -------- --------- ---------
7.2 25.8 46.0 78.3
Taxes other than income taxes (1) 2.1 2.1 9.8 14.4
---------- -------- --------- ---------
Total $ 9.3 $ 27.9 $ 55.8 $ 92.7
- ----------------------------- ========== ========= ========= =========
(1) Taxes other than income taxes include severance, property, and other
taxes.
TransTexas' average depletion rates have been as follows:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- -------- ---------
Depletion rates (per Mcfe) $ 1.09 $ 0.94 $ 1.04 $ 0.93
=========== ========== ======== =========
TransTexas' Consolidated EBITDA, as defined in the Indenture, is set
forth below (in millions of dollars). EBITDA consists of TransTexas' earnings
before consolidated fixed charges (excluding capitalized interest), income
taxes, depreciation, depletion, and amortization. EBITDA is not intended to
represent cash flow or any other measure of financial performance in accordance
with generally accepted accounting principles.
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- --------- ---------
Consolidated EBITDA $ 27.2 $ 40.0 $ 621.6 $ 234.4
Cash flows from:
Operating activities 38.5 21.5 25.7 162.8
Investing activities 137.3 (65.5) 670.7 (134.8)
Financing activities (210.6) 21.9 (716.4) (19.6)
=========== ========== ========= =========
THREE MONTHS ENDED OCTOBER 31, 1997, COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1996
Gas, condensate and NGLs revenues for the three months ended October
31, 1997 decreased $42.6 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 and third quarters. The average monthly prices received
per Mcf of gas, ranged from $2.30 to $2.94 in the three months ended October 31,
1997, compared to a range of $1.70 to $1.99 in the same period in the prior
year. The decrease in natural gas sales volumes resulted primarily from the
divestiture of approximately 207 Bcfe of TransTexas' reserves as a result of the
Lobo Sale. Lobo Trend production was 12.1 Bcfe for the three months ended
October 31, 1996. As of October 31, 1997, TransTexas had a total of 106
producing wells compared to 832 at October 31, 1996. NGL sales volumes
decreased as a result of decreases in the volumes of natural gas processed.
Transportation revenues decreased $8.9 million over the prior year quarter due
to the divestiture of the pipeline system as a result of the Lobo Sale.
As a result of the Lobo Sale, the Tender Offer and the Subordinated
Notes Exchange Offer described in Note 2 of Notes to Condensed Consolidated
Financial Statements, TransTexas recorded a $540 million pretax gain
($7.5 million of which was realized in the third quarter as a result of
post-closing adjustments) and a $72 million after tax extraordinary charge
during the nine months ended October 31, 1997.
Primarily as a result of the Lobo Sale, lease operating expenses,
pipeline operating expenses and NGLs cost for the quarter ended October 31,
1997 decreased $4.0 million, $6.2 million and $9.6 million, respectively,
compared
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to the comparable prior year period. Well service expense for the three months
ended October 31, 1997 increased $1.2 million as compared to the same period of
1996 primarily due to costs related to providing services to third parties.
Depreciation, depletion and amortization expense for the three months ended
October 31, 1997 decreased $17.6 million due to a decrease in TransTexas'
undedicated natural gas production as a result of the Lobo Sale offset by a
$0.15 increase in the depletion rate. The depletion rate increased primarily as
a result of the transfer of approximately $30 million of previously excluded
costs of unevaluated properties into the full cost pool.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests which are classified as unevaluated properties. As a result
of exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $13 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the full cost pool which could result in continued increases in
the depletion rate. The majority of unevaluated properties will be evaluated
over the next two years.
General and administrative expenses decreased approximately
$10.4 million in the three months ended October 31, 1997, due primarily to
lower litigation expenses.
Interest income for the three months ended October 31, 1997 increased
approximately $3.0 million over the comparable prior year period due to
increased cash balances in the current quarter. TransTexas does not expect to
earn significant interest income during fiscal 1999. Interest expense decreased
$5.7 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 a decrease in the
amount of interest capitalized in connection with the acquisition of undeveloped
leasehold acreage.
NINE MONTHS ENDED OCTOBER 31, 1997, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1996
Gas, condensate and NGL revenues for the nine months ended October 31,
1997 decreased by $88.2 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 amount dedicated to
volumetric production payments, ranged from $2.94 to $1.49 in the nine months
ended October 31, 1997, compared to a range of $1.70 to $2.45 in the same period
in the prior year. The increase in condensate sales volumes is due primarily to
increased production from TransTexas' new development areas, offset in part by
the divestiture of certain producing properties as a result of the Lobo Sale.
NGLs sales volumes decreased as a result of decreases in the volumes of natural
gas processed. Transportation revenues decreased by $13.7 million for the nine
months ended October 31, 1997, due primarily to the divestiture of the pipeline
system as a result of the Lobo Sale.
Lease operating expenses in the nine months ended October 31, 1997
decreased by $4.6 million from the prior year period due primarily to a decrease
in the number of producing wells as a result of the Lobo Sale offset partially
by an increase in salt water disposal costs 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 $11.1 due primarily to the divestiture of the pipeline system as a
result of the Lobo Sale. NGLs cost decreased by $18.3 million from the
comparable period in the prior year primarily due to a decrease in volumes of
natural gas processed as a result of the Lobo Sale. Well service expenses for
the nine months ended October 31, 1997 increased $1.7 million as compared to the
comparable prior year period primarily due to costs related to providing
services to third parties. Depreciation, depletion and amortization expense for
the nine months ended October 31, 1997 decreased by $25.1 million due to the
decrease in TransTexas' undedicated natural gas production as a result of the
Lobo Sale, partially offset by a $0.11 increase in the depletion rate. The
depletion rate increased primarily as a result of the transfer of approximately
$30 million of previously excluded costs of unevaluated properties into the full
cost pool. General and administrative expenses decreased by $5.6 million due
primarily to a decrease in 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, severance, and excise taxes.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests which are classified as unevaluated properties. As a result
of exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $13 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the full cost pool which could result in continued increases in
the depletion rate. The majority of unevaluated properties will be evaluated
over the next two years.
Interest income for the nine months ended October 31, 1997 increased by
approximately $8.3 million over the comparable period of the prior year due to
increased average cash balances. TransTexas does not expect to earn significant
interest income during fiscal 1999. Interest expense decreased by $10.6 million
primarily as a result of the retirement of the Senior Secured Notes offset in
part by the accretion on the Old Subordinated Notes.
Cash flow from operating activities for the nine months ended October
31, 1997 decreased by approximately $137.2 million from the prior-year period
due primarily to lower net income from gas and oil production activities and
cash settlement of volumetric production payments in connection with the Lobo
Sale. In addition, during fiscal 1997, TransTexas collected $58.6 million
from the sale of volumetric production payments.
Cash provided by investing activities increased by $805.5 million
due to proceeds from the sale of certain TransTexas producing properties
offset in part by the net increase in cash restricted for share repurchases
pursuant to the Share Repurchase Program and increased capital expenditures.
Cash flow used in financing activities increased by approximately
$696.7 million due primarily to the retirement of the Senior Secured Notes and
purchases of stock pursuant to the Share Repurchase Program offset in part by
the TransTexas Intercompany Loan.
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LIQUIDITY AND CAPITAL RESOURCES
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 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, an accounts receivable
revolving credit facility and other financings. TransTexas' debt covenants may
limit its ability to obtain additional financings or to sell properties, and
there is no assurance that cash flow from operations will be sufficient to fund
capital and debt service requirements.
For the nine months ended October 31, 1997, total capital expenditures
were $317 million, including $45 million for lease acquisitions, $206 million
for drilling and development and $66 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. Additional
capital expenditures of $60 million are anticipated for the fourth quarter.
During fiscal 1998, 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 have significantly exceeded its original
anticipated amount of $220 million. In addition, TransTexas is developing
several oil and gas prospects with the potential to increase production and cash
flow from operations, but which require capital expenditures in excess of
projected cash flow over at least the next twelve months. To finance these
capital expenditure requirements and reduce its working capital deficit,
TransTexas intends to supplement its cash flow from operations with a
combination of asset sales and financings. There is no assurance that adequate
funds can be obtained on a timely basis from such sources. Failure to obtain
adequate funds for capital expenditures could have a material adverse effect on
financial position, results of operations and cash flows.
On May 29, 1997, TransTexas consummated the Lobo Sale Agreement, with
an effective date of March 1, 1997, to effect the Lobo Sale for a sales price of
approximately $1.1 billion. 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 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
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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."
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% Series C Senior Subordinated Notes due 2001 (the "Series C
Subordinated Notes") for all of the Old Subordinated Notes. On October 10,
1997, TransTexas completed a registered exchange offer resulting in the
issuance of $115.8 million aggregate principal amount of its 13 3/4% Series D
Senior Subordinated Notes due 2001 (the "Subordinated Notes") in exchange for
all of its outstanding Series C Subordinated Notes. The Subordinated Notes pay
interest in cash semi-annually in arrears on each June 30 and December 31
commencing December 31, 1997. The indenture governing the Subordinated Notes
includes certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
In June 1997, TransTexas implemented a 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, approximately 3.9
million shares had been repurchased 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.
TransTexas and BNY Financial Corporation are parties to a Second
Amended and Restated Accounts Receivable Management and Security Agreement (the
"BNY Facility"), dated as of October 14, 1997. As of October 31, 1997,
outstanding advances under the BNY Facility totaled approximately $11.3
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.
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million, of
which approximately $13.8 million remains outstanding as of October 31, 1997.
Proceeds from these transactions, net of current maturities, were used to pay
certain short-term obligations outstanding at January 31, 1997.
In September 1997, TEC advanced $3 million to TransTexas pursuant to a
non-interest-bearing note which matures on June 14, 2002. In November and
December 1997, TEC advanced an aggregate of approximately $31 million to
TransTexas pursuant to promissory notes which mature on June 14, 2002. The
notes bear interest in an amount equal to a proportionate share of the fixed
semi-annual interest payment of $2.8 million based upon the average outstanding
balance of all notes (other than the note evidencing the Intercompany Loans)
between TransTexas and TEC and the average outstanding balance of all notes
(other than the note evidencing the Intercompany Loans) between TARC and TEC.
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including
liabilities with respect to litigation matters described in Note 3 of Notes to
Condensed Consolidated Financial Statements. These matters, individually and
in the aggregate, amount to significant potential liability which, if
adjudicated in a manner adverse to TransTexas in one reporting period, could
have a material adverse effect on TransTexas' cash flow or operations for that
period. Although the outcome of these contingencies or the probability of the
occurrence of these contingencies cannot be predicted with certainty, TransTexas
does not expect these matters to have a material adverse effect on its financial
position.
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In January 1996, TransTexas entered into a reimbursement agreement
with an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days. TransTexas
has agreed to issue up to 8.6 million shares of common stock of TransTexas to
the third party if this contingent obligation to such third party becomes fixed
and remains unpaid for 60 days. TransTexas does not believe that this
contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, TransTexas could elect to sell shares of
TransTexas' common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
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.
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. At this time, 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 $250 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.
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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 $50 million and $100 million, assuming
no reduction for tax attributes of the TNGC Consolidated Group. However, such
tax liability generally would be substantially reduced or eliminated in the
event that the IRS successfully challenged TransTexas' position on the Lobo
Sale. Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the IRS for the consolidated federal income
tax liability of the consolidated group. There can be no assurance that each
TNGC Consolidated Group member will have the ability to satisfy any tax
obligation attributable to the Transactions at the time due and, therefore,
other members of the group, including TEC, TransTexas, or TARC, may be required
to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TEC, or TARC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit
pursuant to the Tax Allocation Agreement for net operating losses of TransTexas
used by other members of the TNGC Consolidated Group prior to the
Deconsolidation of TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of
a Change of Control, each holder of the Subordinated 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 (or his 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 become the beneficial owner of more than
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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 (or his
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 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 the BNY Facility and certain equipment financing. Such an occurrence
could create an obligation for TransTexas to repay such other indebtedness. At
October 31, 1997, TransTexas had approximately $29.7 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 to TransTexas in one reporting
period, could have a material adverse effect on TransTexas' cash flow or
operations for that period. Although the outcome of these contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, the ultimate resolution of
litigation, and competition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 3 and 8 of Notes to Condensed Consolidated Financial
Statements for a discussion of TransTexas' legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.1 Second Amended and Restated Accounts Receivable Management
Agreement dated October 14, 1997 between TransTexas and BNY
Financial Corporation.
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
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 were filed
as an exhibit to this report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial and accounting
officer.
TRANSTEXAS GAS CORPORATION
(Registrant)
By: /s/ Edwin B. Donahue
---------------------------------
Edwin B. Donahue, Vice President
and Chief Financial Officer
December 15, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.1 Second Amended and Restated Accounts Receivable Management Agreement dated October 14, 1997
between TransTexas and BNY Financial Corporation.
15.1 Letter of Independent Accountants regarding awareness of incorporation by reference.
27.1 Financial Data Schedule