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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, 1998
REGISTRATION NUMBER 33-85930
---------------------
TRANSAMERICAN REFINING CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0229632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 320
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 986-8811
(Registrant's telephone number, including area code)
---------------------
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 21, 1998 is 30,000,000.
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TRANSAMERICAN REFINING CORPORATION
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements:
Condensed Balance Sheet as of October 31, 1998 and January
31, 1998.................................................... 2
Condensed Statement of Operations for the three and nine
months ended October 31, 1998 and 1997...................... 3
Condensed Statement of Cash Flows for the nine months ended
October 31, 1998 and 1997................................... 4
Notes to Condensed Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 5. Other Information........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 30
Signatures........................................................... 31
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 626 $ 10,021
Restricted cash held in disbursement accounts............. -- 71,563
Cash restricted for interest.............................. 36,688 32,823
Investments held in trust................................. 9,010 9,114
Accounts receivable....................................... 3,403 870
Inventories............................................... 30,649 --
Other..................................................... 2,304 1,346
---------- ----------
Total current assets.............................. 82,680 125,737
---------- ----------
Property and equipment...................................... 1,417,885 939,780
Less accumulated depreciation and amortization.............. 32,271 25,257
---------- ----------
Net property and equipment........................ 1,385,614 914,523
---------- ----------
Restricted cash held in disbursement accounts............... -- 60,166
Cash restricted for interest................................ -- 16,348
Investments held in trust................................... -- 8,591
Receivable from affiliates.................................. 1,931 1,655
Other assets, net........................................... 44,566 68,429
---------- ----------
$1,514,791 $1,195,449
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 95,343 $ 32,022
Payable to affiliates..................................... 13,758 6,976
Accrued liabilities....................................... 19,971 9,528
Note payable.............................................. 7,000 --
Current maturities of long-term debt...................... 7,896 6,710
---------- ----------
Total current liabilities......................... 143,968 55,236
---------- ----------
Payable to affiliates....................................... 5,556 3,825
Long-term debt, less current maturities..................... 228,069 210,666
Notes payable to affiliate.................................. 883,394 760,266
Other....................................................... 4,708 5,048
Commitments and contingencies (Note 7)...................... -- --
Stockholder's equity:
Common stock, $0.01 par value, 100,000,000 shares
authorized, 30,000,000 shares issued and outstanding... 300 300
Additional paid-in capital................................ 569,435 439,566
Accumulated deficit....................................... (320,639) (279,458)
---------- ----------
Total stockholder's equity........................ 249,096 160,408
---------- ----------
$1,514,791 $1,195,449
========== ==========
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Product sales.................................... $ 58,326 $ -- $ 66,701 $ --
Other............................................ 722 571 3,999 571
-------- -------- -------- --------
Total revenues........................... 59,048 571 70,700 571
-------- -------- -------- --------
Costs and expenses:
Costs of products sold........................... 59,002 -- 66,821 --
Processing arrangements, net..................... (2,073) 125 (3,899) (3,112)
Operations and maintenance....................... 8,269 2,789 14,062 10,651
Depreciation and amortization.................... 4,214 1,984 8,679 5,409
General and administrative....................... 5,198 6,024 17,152 11,029
Taxes other than income taxes.................... 1,269 903 3,588 2,709
Loss on purchase commitments..................... -- -- -- 4,759
-------- -------- -------- --------
Total costs and expenses................. 75,879 11,825 106,403 31,445
-------- -------- -------- --------
Operating loss........................... (16,831) (11,254) (35,703) (30,874)
-------- -------- -------- --------
Other income (expense):
Interest income.................................. 682 2,002 4,435 3,045
Interest expense, net............................ (2,761) (7,103) (10,785) (13,870)
Equity in income of TransTexas before
extraordinary item............................ -- 20 (229) 45,185
Other............................................ (279) 374 (279) 1,109
-------- -------- -------- --------
Total other income (expense)............. (2,358) (4,707) (6,858) 35,469
-------- -------- -------- --------
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle................... (19,189) (15,961) (42,561) 4,595
Extraordinary items:
Equity in extraordinary item of TransTexas....... -- 10 -- (10,158)
Loss on the early extinguishment of debt......... -- -- (1,294) (84,422)
Cumulative effect of a change in accounting
principle........................................ -- -- 2,674 --
-------- -------- -------- --------
Net loss................................. $(19,189) $(15,951) $(41,181) $(89,985)
======== ======== ======== ========
Basic and diluted net loss per share:
Income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle..................................... $ (0.64) $ (0.53) $ (1.42) $ 0.15
Extraordinary items.............................. -- -- (0.04) (3.15)
Cumulative effect of a change in accounting
principle..................................... -- -- 0.09 --
-------- -------- -------- --------
$ (0.64) $ (0.53) $ (1.37) $ (3.00)
======== ======== ======== ========
Weighted average number of common shares
outstanding for basic and diluted net loss per
share (in thousands)............................. 30,000 30,000 30,000 30,000
======== ======== ======== ========
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 31,
---------------------
1998 1997
--------- ---------
Operating activities:
Net loss.................................................. $ (41,181) $ (89,985)
Adjustments to reconcile net loss to net cash used by
operating activities:
Loss on early extinguishment of debt.................... 1,294 84,422
Cumulative effect of a change in accounting principle... (2,674) --
Depreciation and amortization........................... 8,679 5,409
Amortization of discount on long-term debt.............. 6,180 10,935
Amortization of debt issue costs........................ 293 894
Equity in net (earnings) loss of TransTexas............. 229 (35,027)
Changes in assets and liabilities:
Accounts receivable................................... (2,533) (924)
Inventories........................................... (30,649) --
Other current assets.................................. (958) (691)
Accounts payable...................................... 35,089 (727)
Payable to affiliates, net............................ 8,237 5,190
Accrued liabilities................................... 13,294 (6,274)
Other assets.......................................... (82) (2,669)
Other liabilities..................................... (69) 3,100
--------- ---------
Net cash used by operating activities.............. (4,851) (26,347)
--------- ---------
Investing activities:
Capital expenditures...................................... (342,289) (189,952)
Proceeds from the sale of TransTexas stock................ -- 136,158
Increase in investments held in trust..................... (419) --
Decrease in investments held in trust..................... 9,114 --
--------- ---------
Net cash used by investing activities.............. (333,594) (53,794)
--------- ---------
Financing activities:
Issuance of long-term debt................................ 26,625 36,000
Issuance of note payable.................................. 7,000 --
Issuance of note payable to affiliate..................... -- 721,649
Retirement of long-term debt.............................. (7,792) (468,333)
Increase in debt proceeds held in disbursement accounts... -- (317,451)
Withdrawals from disbursement accounts.................... 131,729 161,720
Disbursements of cash restricted for interest............. 12,483 --
Repayment of advances and notes payable to affiliate...... (6,146) (66,000)
Capital contributions from parent......................... 128,891 6,000
Advances from affiliate................................... 38,104 15,026
Debt issue costs.......................................... (1,396) (7,892)
Principal payments on capital lease obligations........... (448) (1,109)
--------- ---------
Net cash provided by financing activities.......... 329,050 79,610
--------- ---------
Decrease in cash and cash equivalents.............. (9,395) (531)
Beginning cash and cash equivalents......................... 10,021 613
--------- ---------
Ending cash and cash equivalents............................ $ 626 $ 82
========= =========
Noncash financing and investing activities:
Accounts payable for property and equipment............... $ 52,446 $ 13,064
Accrued interest on long-term debt capitalized in property
and equipment........................................... 86,466 51,284
Debt issue costs allocated from affiliate................. -- 24,893
Purchase of warrants by affiliate......................... -- 32,942
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransAmerican Refining Corporation ("TARC" or the
"Company") as of October 31, 1998 and the results of its operations and cash
flows for the interim periods ended October 31, 1998 and 1997. The results of
operations for interim periods should not be regarded as necessarily indicative
of results that may be expected for the entire year. The financial information
presented herein should be read in conjunction with the financial statements and
notes included in TARC's annual report on Form 10-K for the fiscal year ended
January 31, 1998. Unless otherwise noted, all capitalized terms used herein but
not otherwise defined are as defined in TARC's annual report on Form 10-K for
the fiscal year ended January 31, 1998. TARC is a subsidiary of TransAmerican
Energy Corporation ("TEC"), which is a wholly owned subsidiary of TransAmerican
Natural Gas Corporation ("TransAmerican"). TransTexas Gas Corporation
("TransTexas") is a subsidiary of TEC.
Prior to December 15, 1998, TARC owned a refinery located in the Gulf Coast
region along the Mississippi River approximately 20 miles from New Orleans,
Louisiana. Its business strategy was to modify, expand and reactivate its
refinery and to maximize its refining margins by converting low cost, heavy
sour, crude oils into light petroleum products, including gasoline and heating
oil. As a result of the Transaction (as defined in Note 2 below), TARC no longer
owns the refinery, but maintains a non-controlling equity interest in TCR
Holding Corporation, a Delaware corporation ("TCR Holding"). TCR Holding owns a
controlling equity interest in TransContinental Refining Corporation, a Delaware
corporation ("TransContinental"), the corporation that owns the refinery.
TransContinental intends to operate the existing units and to complete the
construction of additional units. Accordingly, for periods subsequent to
December 15, 1998 the financial statements of TARC will no longer reflect
ownership and operation of the refinery but will reflect the results of TARC's
investment in TCR Holding using the equity method.
Earnings Per Share
Weighted average shares outstanding exclude potential common shares of
approximately 3.0 million, 3.0 million, 0.1 million and 3.8 million for the
three and nine months ended October 31, 1998 and 1997, respectively.
Recently Issued Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
will adopt SFAS 133 effective February 1, 2000. TARC is uncertain as to the
impact on its financial statements of the adoption of SFAS 133.
2. REFINERY CONSTRUCTION AND DISPOSITION
In February 1995, TARC began a construction and expansion program (the
"1995 Program") designed to reactivate the refinery and increase its complexity.
From February 1995 through May 1997, TARC spent approximately $251 million on
the 1995 Program, procured a majority of the equipment required and completed
substantially all of the process design engineering and a substantial portion of
the remaining engineering necessary for its completion.
In order to capitalize on the progress on the refinery made through its
expenditures on the 1995 Program, in June 1997 TARC commenced a modified
two-phase construction and expansion program (the "Capital Improvement
Program"), which had a budget of $427 million. Phase I of the Capital
Improvement Program
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
includes the completion and start-up of several units, including the Delayed
Coking Unit, one of the refinery's major conversion units, which commenced
operation in September 1998. Phase II of the Capital Improvement Program
includes the completion and start-up of the Fluid Catalytic Cracking Unit
(utilizing state-of-the-art MSCC(SM) technology) and the installation of
additional equipment expected to allow for a significant increase in the
refinery's capacity to produce gasoline.
Since June 1997, TARC experienced unanticipated cost increases resulting
primarily from (i) acceleration of the construction schedule for the Capital
Improvement Program, resulting in extensive overtime charges, low overall labor
productivity and increased costs to expedite deliveries of equipment, (ii)
inadequate engineering quality on the Hydrodesulfurization Unit, resulting in
substantial rework and lower labor productivity, (iii) extensive required
refurbishment of used equipment, (iv) inadequate contractor estimates and cost
controls, work planning and reporting and (v) increased competition for labor
requiring higher labor compensation. Because of these factors, TARC has incurred
costs substantially in excess of the June 1997 budget for the Capital
Improvement Program. At October 31, 1998, TARC reviewed its current estimates of
refining margins and costs of expansion and modification of the refinery, and
believes that future undiscounted cash flows will be sufficient to recover the
cost of the refinery over its estimated useful life. However, due to the
inherent uncertainties in estimating future refining margins, and in
constructing and operating a large scale refinery, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Based upon TARC's
revised budget as of October 31, 1998, estimated expenditures from June 13, 1997
to completion of the Capital Improvement Program are anticipated to exceed the
original budget by approximately $285 million. At October 31, 1998, TARC had
spent an aggregate of $501.3 million on the Capital Improvement Program and had
incurred accounts payable and other short-term obligations relating thereto in
the aggregate amount of $59.0 million. TARC estimates that, as of October 31,
1998, construction costs of $138 million to $159 million (in addition to
accounts payable) were required to complete the Capital Improvement Program,
depending upon the extent to which an unallocated contingency amount of $21
million is used. The Capital Improvement Program, including the budget, is
subject to change by TransContinental.
The following Transaction was consummated on December 15, 1998 in order to
provide additional capital for construction of the refinery.
The Transaction included the following:
(i) the issuance by TARC of $150 million aggregate principal amount of
its 15% Senior Secured Notes due 2003 (the "Notes") to certain purchasers
(the "New Lenders");
(ii) the transfer by TARC to TCR Holding of substantially all of its
assets (the "Refinery Assets") in exchange for (x) all of the capital stock
of TCR Holding, which includes the following,
(a) Class A Participating Preferred Stock, Series A and Class A
Participating Preferred Stock, Series B (the "TCR Voting Preferred
Stock"),
(b) Class B junior non-voting participating preferred Stock ("Class
B Preferred Stock"), Class C junior non-voting participating preferred
Stock ("Class C Preferred Stock") and Class D junior non-voting
participating preferred Stock ("Class D Preferred Stock," and together
with the Class B Preferred Stock and Class C Preferred Stock, the "TCR
Repurchasable Preferred Stock"),
(c) Class E junior non-voting participating preferred Stock (the
"TCR Non-Repurchasable Preferred Stock" and, together with the TCR
Repurchasable Preferred Stock, the "TCR Non-Voting Preferred Stock"),
(d) Class A Voting Common Stock, Series A (the "TCR Voting Common
Stock"), and
(e) Class B Non-Voting Common Stock (the "TCR Non-Voting Common
Stock" and, together with the TCR Voting Common Stock, the "TCR Common
Stock"),
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
and (y) the assumption of debt and other specified obligations of TARC
(including the Notes, approximately $43.5 million in post-Transaction
intercompany debt to TEC (the "TARC Working Capital Loan") and
approximately $36 million in debt secured by certain tank storage and
terminal facilities (the "Tank Storage Debt")) other than (a) the debt
issued pursuant to the Loan Agreement dated as of June 13, 1997, as
amended, between TEC and TARC (the "TARC Intercompany Loan"), (b) TARC's
Series A 16% Senior Subordinated Notes due 2003 (the "Series A Notes"),
(c) TARC's Series C 16% Senior Subordinated Notes due 2003 (the "Series C
Notes" and, together with the Series A Notes, the "TARC Subordinated
Notes") and (d) certain accounts payable and other liabilities;
(iii) the transfer by TCR Holding to TransContinental of the Refinery
Assets as a capital contribution and the assumption by TransContinental of
the debt and other obligations of TARC assumed by TCR Holding on the date
of such transfer (including the Notes and the Tank Storage Debt) other than
the TARC Working Capital Loan;
(iv) the acquisition from TARC by the New Lenders, certain holders
(the "TEC Holders") of TEC's 11 1/2% Senior Secured Notes due 2002 and 13%
Senior Secured Discount Notes due 2003 (the "TEC Notes") and certain of the
holders of the TARC Subordinated Notes (together with the TEC Holders, the
"Purchasers") of TCR Repurchasable Preferred Stock representing 30.0% of
the Residual Equity of TCR Holding and TCR Non-Repurchasable Preferred
Stock representing 29.6% of the Residual Equity of TCR Holding. Affiliates
of Trust Company of the West (the "TCW Affiliates") received the TCR
Non-Voting Common Stock representing 5% of the Residual Equity of TCR
Holding. Certain of the Purchasers acquired the TCR Voting Common Stock
representing 0.4% of the Residual Equity and 59% of the voting power of TCR
Holding. TARC retained the TCR Voting Preferred Stock representing 30.6% of
the Residual Equity and 41% of the voting power of TCR Holding. The
remaining 4.4% of the Residual Equity of TCR Holding, in the form of TCR
Non-Repurchasable Preferred Stock, initially will be retained by TARC and
is expected to be offered to holders of certain of TARC's outstanding
common stock purchase warrants (the "TARC Warrants") in exchange for such
TARC Warrants. "Residual Equity" means the interest of the indicated
stockholders in the assets of TCR Holding upon a liquidation or winding up
of TCR Holding, which interest is subject to the prior payment of the
liquidation preference of the TCR Voting Preferred Stock and the TCR
Non-Voting Preferred Stock;
(v) the grant by TARC of a security interest in the TCR Voting
Preferred Stock to secure the TARC Intercompany Loan and the collateral
assignment of such security interest by TEC to secure the TEC Notes, the
grant by TCR Holding to TEC of a security interest in the common stock of
TransContinental to secure the TARC Working Capital Loan, the collateral
assignment of such security interest to secure the TEC Notes, and the
provision in the TCR Voting Preferred Stock of the right of holders of such
stock in certain circumstances to require TCR Holding to sell common stock
of TransContinental held by TCR Holding, or any assets received on exchange
or sale therefor, and apply the proceeds to reduce the liquidation
preference and certain accrued but unpaid dividend amounts on the TCR
Voting Preferred Stock; and
(vi) the purchase from TransContinental by the New Lenders of the
TransContinental's 6% Participating Preferred Stock ("TransContinental
Preferred Stock").
As part of the Transaction, (i) the holders of TCR Holding capital stock
entered into a stockholders agreement providing for the election of two nominees
of TARC, two nominees of the TCW Affiliates and one nominee of an affiliate of
one of the Purchasers as directors of TCR Holding and the election of two
nominees of TARC and two nominees of the TCW Affiliates as directors of
TransContinental, (ii) the stockholders of TransContinental entered into an
agreement providing for the election of one nominee of the holders of the
TransContinental Preferred Stock (which initially shall be a nominee of an
affiliate of one of the Purchasers)
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
and four nominees of TCR Holding as directors of TransContinental, (iii) the
holders of the TransContinental Preferred Stock would have the right to elect a
majority of the directors of TransContinental if either of such stockholders
agreements has been breached, is not being complied with or has been adjudicated
to be unenforceable, (iv) TransAmerican, as the sole stockholder of TEC, and
TEC, as the sole stockholder of TARC, would agree to elect a representative of
the TCW Affiliates as a director of TEC and of TARC, respectively, (v) TCR
Holding and TransContinental would enter into registration rights agreements or
otherwise provide for certain registration rights relating to their respective
securities being issued to the New Lenders in the Transaction, (vi) TCR Holding
and TransContinental, respectively, would enter into services agreements with
TransTexas providing for certain services to be rendered to TCR Holding and
TransContinental by TransTexas and (vii) TEC or one of its affiliates will be
granted certain rights to repurchase shares of the TCR Repurchasable Preferred
Stock (which would become voting stock upon exercise of such rights), which
could result in TEC and its affiliates owning a majority of the capital stock of
TCR Holding and being entitled to elect a majority of the directors of TCR
Holding and, indirectly, TransContinental. Such repurchase rights would only be
exercisable after the Notes, the TEC Notes and the TARC Subordinated Notes have
been fully repaid and certain financial performance tests have been met. In
addition, TARC would have the right to repurchase the shares of TCR Non-Voting
Common Stock issued to the TCW Affiliates pursuant to the Transaction for $5
million at any time during the two-year period commencing with the Issue Date
(as defined); provided, however, that if the TCR Voting Preferred Stock remains
outstanding after July 31, 1999, TARC will have the option to repurchase such
stock at a nominal cost.
All of the above-described transactions, as well as other agreements and
transactions necessary to facilitate or related to the foregoing, are referred
to herein as the "Transaction."
As a result of the Transaction, subsequent to December 15, 1998, TARC no
longer owns the Refinery Assets. TARC's investment in TCR Holding consists of
TCR Voting Preferred Stock representing 30.6% of the Residual Equity and 41% of
the voting power of TCR Holding. The TCR Voting Preferred Stock will be recorded
at a carrying value equal to the carrying value of the TARC Intercompany Loan
and the TARC Subordinated Notes at December 15, 1998. The Residual Equity
interest will be recorded based on the remaining carry over basis in the net
assets transferred after considering the effects of the sale of the majority
interest. TARC also expects to report a loss on disposition of the stock of TCR
Holding of approximately $121 million in the fourth quarter of fiscal 1999.
The following unaudited pro forma condensed financial information of TARC
illustrates the effect of the Transaction. The unaudited pro forma condensed
balance sheet has been prepared assuming that the Transaction was completed on
October 31, 1998. The unaudited pro forma condensed statements of operations
have been prepared assuming that the Transaction was completed on February 1,
1997.
The unaudited pro forma adjustments and the resulting unaudited pro forma
condensed financial information are based on the assumptions noted in the
footnotes thereto. The unaudited pro forma condensed financial information does
not purport to represent what TARC's results of operations would have been had
the Transaction actually occurred on the dates indicated or the results of
operations for any future date or period.
The allocation of the proceeds of the Transaction is based on preliminary
estimates by the Company of the fair values of the various securities issued.
The Company does not believe that the final estimates will differ materially
from the estimates used in these unaudited pro forma condensed financial
statements.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
OCTOBER 31, 1998
(DOLLARS IN THOUSANDS)
ASSETS
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
Current assets:
Cash and cash equivalents....................... $ 626 $ 150,000(a) $ 1,726
(10,000)(a)
(138,900)(b)
1,100(c)
(1,100)(d)
Cash restricted for interest.................... 36,688 (4,680)(b) 32,008
Investments held in trust....................... 9,010 -- 9,010
Accounts receivable............................. 3,403 (3,403)(b) --
Inventories..................................... 30,649 (30,649)(b) --
Other........................................... 2,304 (2,304)(b) --
---------- ----------- ----------
Total current assets.................... 82,680 (39,936) 42,744
---------- ----------- ----------
Property and equipment............................ 1,417,885 (1,417,885)(b) --
Accumulated depreciation and amortization......... 32,271 (32,271)(b) --
---------- ----------- ----------
Net property and equipment.............. 1,385,614 (1,385,614) --
---------- ----------- ----------
Receivables from affiliates....................... 1,931 -- 1,931
Other assets, net................................. 44,566 188(g) 35,734
6,500(a)
1,100(d)
(16,620)(b)
Investment in subsidiary.......................... -- 1,226,416(b) 1,089,060
(1,100)(c)
(166)(c)
(1,100)(c)
(188)(g)
(134,802)(c)
---------- ----------- ----------
$1,514,791 $ (345,322) $1,169,469
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 95,343 $ (93,617)(b) $ 1,726
Payable to affiliates........................... 13,758 (9,723)(b) 4,035
Accrued liabilities............................. 19,971 (8,839)(b) 11,132
Note payable.................................... 7,000 (7,000)(b) --
Current maturities of long-term debt............ 7,896 -- 7,896
---------- ----------- ----------
Total current liabilities............... 143,968 (119,179) 24,789
---------- ----------- ----------
Payable to affiliates............................. 5,556 -- 5,556
Long-term debt, less current maturities........... 228,069 150,000(a) 192,069
(1,100)(c)
(184,900)(b)
Notes payable to affiliate........................ 883,394 (46,967)(b) 836,427
Other............................................. 4,708 (4,708)(b) --
Stockholders' equity:
Common stock.................................... 300 -- 300
Additional paid-in capital...................... 569,435 (166)(c) 569,269
Accumulated deficit............................. (320,639) (134,802)(c) (458,941)
(3,500)(a)
---------- ----------- ----------
Total stockholders' equity.............. 249,096 (138,468) 110,628
---------- ----------- ----------
$1,514,791 $ (345,322) $1,169,469
========== =========== ==========
See accompanying notes to the unaudited pro forma condensed financial
statements.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Revenues:
Product sales........................................... $ 66,701 $ (66,701)(e) $ --
Other................................................... 3,999 (3,999)(e) --
-------- --------- --------
Total revenues.................................. 70,700 (70,700) --
-------- --------- --------
Costs and expenses:
Costs of products sold.................................. 66,821 (66,821)(e) --
Processing arrangements, net............................ (3,899) 3,899(e) --
Operations and maintenance.............................. 14,062 (14,062)(e) --
Depreciation and amortization........................... 8,679 (8,679)(e) --
General and administrative.............................. 17,152 (17,152)(e) --
Taxes other than income taxes........................... 3,588 (3,588)(e) --
-------- --------- --------
Total costs and expenses........................ 106,403 (106,403) --
-------- --------- --------
Operating loss.................................. (35,703) 35,703 --
-------- --------- --------
Other income (expense):
Interest income......................................... 4,435 (4,435)(e) 0
Interest expense, net................................... (10,785) 1,375(e) (9,410)
Equity in loss of TransTexas before extraordinary
item................................................. (229) -- (229)
Equity in loss of TCR Holding........................... -- (10,074)(f) (10,074)
Other................................................... (279) 279(e) --
-------- --------- --------
Total other expense............................. (6,858) (12,855) (19,713)
-------- --------- --------
Net loss before extraordinary items and
cumulative effect of a change in accounting
principle..................................... $(42,561) $ 22,848 $(19,713)
======== ========= ========
Basic and diluted net loss per share...................... $ (1.42) $ (0.66)
======== ========
Weighted average number of common shares outstanding for
basic and diluted net loss per share (in thousands)..... 30,000 30,000
======== ========
See accompanying notes to the unaudited pro forma condensed financial
statements.
10
12
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Revenues:
Product sales........................................... $ -- $ -- $ --
Other................................................... 2,828 (2,828)(e) --
-------- -------- --------
Total revenues.................................. 2,828 (2,828) --
-------- -------- --------
Costs and expenses:
Costs of products sold.................................. -- -- --
Processing arrangements, net............................ (1,413) 1,413(e) --
Operations and maintenance.............................. 11,834 (11,834)(e) --
Depreciation and amortization........................... 8,416 (8,416)(e) --
General and administrative.............................. 19,196 (19,196)(e) --
Taxes other than income taxes........................... 3,369 (3,369)(e) --
Loss on purchase commitments............................ 7,824 (7,824)(e) --
-------- -------- --------
Total costs and expenses........................ 49,226 (49,226) --
-------- -------- --------
Operating loss.................................. (46,398) 46,398 --
-------- -------- --------
Other income (expense):
Interest income......................................... 5,190 (5,190)(e) --
Interest expense, net................................... (20,446) 122(e) (20,324)
Equity in income of TransTexas before extraordinary
item................................................. 44,552 -- 44,552
Equity in loss of TCR Holding........................... -- (12,647)(f) (12,647)
Other................................................... 5 (5)(e) --
-------- -------- --------
Total other income.............................. 29,301 (17,720) 11,581
-------- -------- --------
Net income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle..................................... $(17,097) $ 28,678 $ 11,581
======== ======== ========
Basic and diluted net income (loss) per share............. $ (0.57) $ 0.39
======== ========
Weight average number of common shares outstanding for
basic and diluted net income (loss) per share (in
thousands).............................................. 30,000 30,000
======== ========
See accompanying notes to the unaudited pro forma condensed financial
statements.
11
13
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(a) To initially record the proceeds of the Notes and payment of $6.5
million of debt issue costs which will be amortized as a yield adjustment to the
Notes and $3.5 million in transaction costs which will be charged to operations.
(b) To record, at carryover basis, (i) the transfer to TCR Holding of the
Refinery Assets and (ii) the assumption of debt and other specified obligations
of TARC other than the TARC Intercompany Loan and the TARC Subordinated Notes in
exchange for all of the capital stock of TCR Holding, which includes the
following:
Class A Participating Preferred Stock Series A and B, $0.01 par value,
18,360,000 shares authorized; 18,360,000 shares issued and outstanding
Class B Junior Non-Voting Participating Preferred Stock, $0.01 par
value, 7,500,000 shares authorized; 6,000,000 shares issued and outstanding
Class C Junior Non-Voting Participating Preferred Stock, $0.01 par
value, 4,125,000 shares authorized; 3,300,000 shares issued and outstanding
Class D Junior Non-Voting Participating Preferred Stock, $0.01 par
value, 10,875,000 shares authorized; 8,700,000 shares issued and
outstanding
Class E Junior Non-Voting Participating Preferred Stock, $0.01 par
value, 24,900,000 shares authorized; 20,400,000 shares issued and
outstanding
Class A Voting Common Stock, Series A, $0.01 par value, 240,000 shares
authorized; 240,000 shares issued and outstanding
Class B Non-Voting common stock, $0.01 par value, 3,000,000 shares
authorized, issued and outstanding
Subsequent to October 31, 1998, TARC entered into an intercompany bridge loan
with its parent ("TARC Intercompany Bridge Loan") for an aggregate principal
amount of $25 million. Concurrent with the transfer to TCR Holding described
above, approximately $25 million of the proceeds from the Notes was used to
repay the TARC Intercompany Bridge Loan, and substantially concurrently with the
transfer to TransContinental, approximately $47.0 million of accounts payable
have been or will be paid.
(c) To record (i) the acquisition of the TCR Voting Common Stock
representing 0.4% of the Residual Equity and the TCR Non-Repurchasable Preferred
Stock representing 29.6% of Residual Equity by allocating $1.1 million of
proceeds from the Notes to the investment account based on the estimated fair
value of the securities, (ii) the acquisition by the Purchasers of a portion of
the TCR Repurchasable Preferred Stock representing 30% of the Residual Equity
for $1.1 million in cash with a corresponding reduction in the investment
account, (iii) the issuance of TCR Non-Repurchasable Preferred Stock
representing 4.4% of Residual Equity with a fair value of $166,000 to the TARC
warrant holders in exchange for the TARC warrants and (iv) a net loss of $134.8
million on the sale of 69.4% of the Residual Equity of TCR Holding in (i), (ii)
and (iii) above. After consummation of the Transaction, TARC's investment in TCR
Holding will consist of:
Class A Participating Preferred Stock, Series A... $ 836,427
Class A Participating Preferred Stock, Series B... 192,069
Residual Equity Interest.......................... 60,564
----------
$1,089,060
==========
12
14
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
(d) To record the payment of consent fees of $1.1 million to TEC Note
holders and TARC Subordinated Debt holders.
(e) To reflect the transfer to TCR Holding of operations associated with
the Refinery Assets as a result of the exchange described in (b). The unaudited
condensed pro forma statements exclude an estimated pro forma loss of $134.8
million on disposition of the stock of TCR Holding. The actual loss will be
recorded by TARC during the fourth quarter of fiscal 1999.
(f) To reflect TARC's 30.6% Residual Equity in the net loss of TCR Holding.
As a result of the Transaction, TARC will account for its interest in TCR
Holding using the equity method.
(g) To record the issuance of 3,000,000 shares of TCR Non-Voting Common
Stock with a fair value of $188,000 to the TCW Affiliates as debt issue cost
with a corresponding reduction in the investment account.
13
15
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIQUIDITY
TARC will be dependent primarily on dividends from TCR Holding in order to
meet its debt service and working capital requirements. TCR Holding is a holding
company with no business operations. TCR Holding's only sources of liquidity
will be dividends on the TransContinental common stock that it holds and
proceeds from the sale of such TransContinental common stock. TransContinental
will have no obligation to make dividends or other distributions to TCR Holding.
TransContinental will be able to pay dividends only if it has sufficient cash
from operations. In addition, TransContinental's ability to make dividends or
other distributions on its common stock is restricted by the Indenture governing
the Notes and terms of the TransContinental Preferred Stock. TransContinental's
ability to make dividends or other distributions under the Indenture will be
dependent, in part, on a determination by the independent engineer who will be
appointed in connection with the Transaction to monitor construction of the
refinery on behalf of the holders of the Notes (the "Independent Engineer") of
whether the following funds are sufficient to complete the Capital Improvement
Program: funds in the Disbursement Account (as defined), plus 50% of Projected
Net Operating Cash Flow (as defined) for the 90-day period commencing on the
date a dividend is declared, plus an amount equal to the portion of the proceeds
of the Port Commission Bond Financing (as defined) held by the entity serving as
collateral agent or in a similar capacity with respect to such financing plus,
without duplication, cash on hand that has been approved by TransContinental's
Board of Directors to be escrowed in a segregated account and allocated only for
the purpose of completion of the Capital Improvement Program. If any capital
project is added to the Capital Improvement Program that cannot be fully funded
out of cash flow (as defined) during the relevant 90-day period plus such other
sources of funds, the Indenture will prohibit payment of dividends to TCR
Holding. The Capital Improvement Program may be amended at any time by
TransContinental's Board of Directors. Dividends or distributions might not be
made by TransContinental on its common stock, or, if made, might not be
sufficient to satisfy TCR Holding's obligations, including under the terms of
the TCR Voting Preferred Stock and the TARC Working Capital Loan. Therefore,
TARC may not be able to satisfy its debt service obligations. As a result,
TARC's investment in TCR Holding, including the carrying value of the TCR Voting
Preferred Stock, could be impaired or TARC may not be able to meet its
obligations as they become due. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
4. ACCOUNTING CHANGES
Effective May 1, 1998, TARC changed its method of accounting for turnaround
costs. Turnaround costs consist of required periodic maintenance on major
processing units including the shutdown and restart of the units. Previously,
TARC estimated the costs of a scheduled turnaround and ratably accrued these
costs over the period until the next scheduled turnaround. To provide for better
matching of turnaround costs with revenues and to be more consistent with
industry standards, TARC changed its method of accounting for turnaround costs
to one that results in the amortization of incurred costs on a straight-line
basis over the period of time estimated to lapse until the next scheduled
turnaround. The cumulative effect of this accounting change through January 31,
1998, was a decrease in net loss for the nine months ended October 31, 1998 of
$2.7 million or $0.09 per common share. Excluding the cumulative effect, the
change decreased net loss for the three and nine months ended October 31, 1998
by $0.2 million and $0.6 million, respectively, or $0.01 and $0.02,
respectively, per common share.
14
16
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma amounts assuming the change in accounting principle is applied
retroactively are as follows: (in thousands of dollars except per share
amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Income (loss) before extraordinary items... $(19,189) $(15,770) $(42,370) $ 5,168
Basic and diluted net income (loss) per
share before extraordinary items:
As reported.............................. (0.64) (0.53) (1.42) 0.15
Pro forma................................ (0.64) (0.53) (1.42) 0.17
Net loss................................... (19,189) (15,760) (40,990) (89,412)
Basic and diluted net loss per share:
As reported.............................. (0.64) (0.53) (1.37) (3.00)
Pro forma................................ (0.64) (0.53) (1.37) (2.98)
TARC's inventories consist primarily of feedstocks and refined products and
are stated at the lower of cost or market. Effective May 1, 1998, the Company
changed its method of inventory pricing for feedstocks and refined products from
the average cost method to the first-in-first-out method. Historically, sales of
refined products have been limited and sporadic due to intermittent operations
of the refinery during periods of construction and expansion. Upon completion of
the Capital Improvement Program, the refinery will be capable of producing
multiple refined products from a variety of feedstocks. The Company believes the
change from the average cost method to the first-in-first-out method will
provide a more efficient means of valuing inventory and a better matching of
revenues and costs. Furthermore, the Company believes the first-in-first-out
method is more widely used than the average cost method in the refining industry
and desires to present more comparative information. There was no cumulative
effect of this accounting change for any period presented.
5. DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement dated June 13, 1997, as amended
December 30, 1997 (the "Disbursement Agreement") among TARC, TEC, Firstar Bank
of Minnesota, N.A., as trustee (the "TEC Indenture Trustee"), Firstar Bank of
Minnesota, N.A., as disbursement agent (the "Disbursement Agent"), and Baker &
O'Brien, Inc., as construction supervisor (the "Construction Supervisor"), $208
million of the net proceeds from the sale of the TEC Notes was placed into
accounts (collectively, the "TARC Disbursement Account") to be held and invested
by the Disbursement Agent until disbursed. In addition, proceeds to TEC and TARC
of approximately $201 million from the TransTexas share repurchase program were
deposited in the TARC Disbursement Account. On December 30, 1997, TARC deposited
$119 million of the net proceeds from the issuance of its Series A Senior
Subordinated Notes into the TARC Disbursement Account for use in the Capital
Improvement Program. All funds in the TARC Disbursement Account are pledged as
security for the repayment of the TEC Notes. TEC disbursements for TARC
expenditures are treated as capital contributions.
The Disbursement Agent makes disbursements for the Capital Improvement
Program out of the TARC Disbursement Account in accordance with requests made by
TARC and approved by the Construction Supervisor. The Construction Supervisor is
required to review each such disbursement request by TARC. Disbursements from
the TARC Disbursement Account are generally restricted to reimbursement for
expenses incurred in connection with the Capital Improvement Program.
Disbursements for general and administrative expenses ($1.5 million monthly)
and, upon Mechanical Completion of certain units, for feedstock purchases (up to
a maximum aggregate of $50 million) are also permitted. Interest income from the
TARC Disbursement Account may be used for the Capital Improvement Program or
disbursed to fund administrative
15
17
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
and other costs of TARC and TEC. As of October 31, 1998, substantially all of
the amounts deposited in the TARC Disbursement Account had been expended for the
designated purposes.
6. INVENTORIES
The major components of inventories are as follows (in thousands of
dollars):
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
Refinery feedstocks and blendstocks.................... $11,885 $--
Intermediate and refined products...................... 18,764 --
------- ---
$30,649 $--
======= ===
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
EEOC. On September 30, 1997, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Determination (the "Determination") as a result of
the Commissioner's Charge that had been filed in August 1995 against TARC and
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors")
pursuant to Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
sec.2000e et seq. ("Title VII"). In the Determination, the EEOC stated that it
found reasonable cause to believe that each of TARC and Southeast Contractors
had discriminated based on race and gender in its hiring and promotion
practices. Each violation of Title VII (for each individual allegedly
aggrieved), if proven, potentially could subject TARC and Southeast Contractors
to liability for (i) monetary damages for backpay and front pay in an
undetermined amount, and for compensatory damages and punitive damages in an
amount not to exceed $300,000 per plaintiff, (ii) injunctive relief, (iii)
attorney's fees, and (iv) interest. During the period covered by the
Commissioner's Charge and the Determination, TARC and Southeast Contractors
estimate that they received a combined total of approximately 23,000 to 30,000
employment applications and hired (or rehired) a combined total of approximately
3,400 to 4,100 workers, although the total number of individuals who ultimately
are covered in any conciliation proposal or any subsequent lawsuit may be
higher. TARC and Southeast Contractors deny engaging in any unlawful employment
practices. TARC and Southeast Contractors intend vigorously to defend against
the allegations contained in the Commissioner's Charge and the findings set
forth in the Determination in any proceedings in state or federal court. If TARC
or Southeast Contractors is found liable for violations of Title VII based on
the matters asserted in the Determination, TARC can make no assurance that such
liability would not have a material adverse effect on its financial position,
results of operations or cash flows. TransContinental will provide to TARC an
indemnity with respect to this matter. Such indemnity is limited, however, and
there can be no assurance that such indemnity will be adequate to cover all
potential liability.
Rineheart. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court, Middle
District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon and
Indian Village. On October 2, 1998, plaintiff's motion for class certification
was denied. TARC and TransContinental intend to vigorously defend this claim.
Shell Oil. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination of
Bayou Trepagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the
16
18
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
plaintiffs during trial by purchasing their land for $5 million. On June 27,
1997, Shell amended its third party action to bring TARC back into the case.
However, TARC has not yet been served in the case. Based on the amount of
Shell's settlement and TARC's evaluation of its potential share of this
liability, TARC anticipates that its liability, if any, in this case will not be
material. TARC and TransContinental intend to defend the case vigorously.
General. The litigation matters discussed above amount to significant
potential liability which, if adjudicated in a manner adverse to TARC in one
reporting period, could have a material adverse effect on TARC's financial
position, results of operations or cash flow for that period. TARC is also a
named defendant in other ordinary course, routine litigation incidental to its
business. Although the outcome of these lawsuits cannot be predicted with
certainty, TARC does not expect these matters to have a material adverse effect
on its financial position.
Environmental Matters
Compliance Matters. TARC has been, and TransContinental will be, subject to
federal, state and local laws, regulations and ordinances ("Pollution Control
Laws"), which regulate activities such as discharges to air and water and the
handling and disposal of solid and hazardous wastes. Such laws may require
substantial capital expenditures to ensure compliance and impose material civil
and criminal penalties and other sanctions for failure to comply. In general,
during the process of construction and start-up of the refinery, TARC has sought
to comply with Pollution Control Laws, including cooperating, as appropriate,
with regulatory authorities in an effort to ensure compliance and mitigate the
risk of enforcement action. TARC is not aware of any pending or threatened
enforcement action that it likely to have a material adverse effect on its
future financial position, results of operations or cash flow. TARC made
environmental compliance and permitting issues an integral part of its
refinery's start-up plans and has budgeted for such capital expenditures in the
Capital Improvement Program. There can be no assurance, however, that
TransContinental will not incur material capital expenditures in excess of the
amounts currently budgeted. In addition, Pollution Control Laws that may be
enacted in the future, as well as enforcement of existing Pollution Control
Laws, may require TransContinental to make material additional capital
expenditures in order to comply with such laws and regulations or result in
liabilities that could have a material adverse effect on TransContinental's
future financial position, results of operations or cash flow.
In the past, the refinery has been the subject of certain environmental
enforcement actions, and has incurred certain fines, as a result of certain of
TARC's operations. TARC also was previously subject to enforcement proceedings
relating to its prior production of leaded gasoline and air emissions. TARC
believes that, with minor exception, all of these past matters were resolved
prior to or in connection with the resolution of the bankruptcy proceedings of
its predecessor in interest, TransAmerican, or are no longer applicable to
TARC's operations. As a result, TARC believes that such matters will not have a
material adverse effect on TransContinental's future financial position, results
of operations or cash flow.
Requirements Under the Federal Clean Air Act
Permitting. The federal Clean Air Act requires certain owners or operators
of facilities with air emissions to obtain permits before beginning construction
or modification of their facilities. Under Title V of the Clean Air Act, states
are required to implement an operating permit program that codifies all
federally enforceable limitations that are applicable to a particular source.
The Environmental Protection Agency (the "EPA") has approved Louisiana's
operating permit program. The operating permit is necessary for TransContinental
to produce at projected levels upon completion of the Capital Improvement
Program. TARC has submitted its Title V operating permit application covering
the refinery and the adjacent tank storage facility. TARC's initial Title V
permit application under the Clean Air Act was deemed administratively complete.
As the construction of the refinery has progressed, however, TARC has revised
the design and operation of the
17
19
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
refinery. As a result, TARC reviewed its permit application and determined that
there may have been changes in the configuration, start-up and potential
emissions of certain of its air sources, including the tank storage and
terminaling facility. Consequently, in early 1998, TARC submitted a modified
Title V permit application based on the developments since the permit
application was originally submitted. TARC is in the process of evaluating and
discussing with the Louisiana Department of Environmental Quality (the "LDEQ")
how the changes to its permit application may affect its anticipated Title V
permit. As a result, there can be no assurances the application will be approved
as submitted or that additional expenditures required pursuant to such operating
permit will not have a material adverse effect on TransContinental's financial
position, results of operations or cash flow.
In a related matter, TARC has obtained a permit from the LDEQ under the
federal prevention of significant deterioration program. Pursuant to that
program, and as a result of the modifications to its Clean Air Act permit
application, the LDEQ recently informed TARC that it will be required to conduct
certain modeling of air emissions and additional review of new or modified
sources. The refinery may be required to modify its plans for refinery
construction or operations as a result of such modeling results, review or other
information submitted in connection with the revised Clean Air Act permit
application. Such modifications may result in material additional capital or
operating expenditures or lost revenue. In addition, the necessary Clean Air Act
permits may not be received by TransContinental in time for the start-up of
Phase II. In that event, TransContinental may not be able to run certain
equipment at maximum capacity until such permits are received.
Benzene Waste NESHAPS. The National Emission Standards for Hazardous Air
Pollutants for Benzene Waste Operations (the "Benzene Waste NESHAPS"),
promulgated in January 1993 pursuant to the Clean Air Act, regulate benzene
emissions from numerous industries, including petroleum refineries. The Benzene
Waste NESHAPS require all existing, new, modified or reconstructed sources to
reduce benzene emissions to a level that will provide an ample margin of safety
to protect public health. TransContinental will be required to comply with the
Benzene Waste NESHAPS as its refinery operations start up. TARC believes that
compliance with the Benzene Waste NESHAPS will not have a material adverse
effect on TransContinental's financial position, results of operations or cash
flow. Until the refinery is in full operation, however, there can be no
assurance that the regulations will not have such an effect.
Hazardous Organic NESHAPS. In addition, in 1995, the EPA promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organic NESHAPS") regulations for petroleum refineries under the
Clean Air Act, and subsequently has amended such regulations. These regulations
set Maximum Achievable Control Technology ("MACT") standards for petroleum
refineries. The LDEQ has incorporated MACT standards into TARC's air permits
under federal and state air pollution prevention laws. TARC believes that
compliance with the Hazardous Organics NESHAPS will not have a material adverse
effect on TransContinental's financial position, results of operations or cash
flow. Until the refinery is in full operation, however, there can be no
assurance that the regulations will not have such an effect.
Reformulated Gasoline Program. The EPA has promulgated federal regulations
pursuant to the Clean Air Act to control fuels and fuel additives (the "Gasoline
Standards") that could have a material adverse effect on TransContinental. Under
these regulations, only reformulated gasoline can be sold in certain domestic
geographic areas in which the EPA has mandated or approved its use. Reformulated
gasoline must contain a minimum amount of oxygen, have a lower vapor pressure,
and have reduced sulfur, olefins, benzene and aromatics compared to the average
1990 gasoline. The EPA recently promulgated final National Ambient Air Quality
Standards ("NAAQS") that revise the standards for particulate matter and ozone.
The number and extent of the areas subject to reformulated gasoline standards
likely will increase in the future after the NAAQS are implemented. Conventional
gasoline may be used in all other domestic markets; however, a refiner's
post-1994 average conventional gasoline must not be more polluting than it was
in 1990. With limited
18
20
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
exceptions, to determine its compliance as of January 1, 1995, a refiner must
compare its post-1994 and 1990 average values of controlled fuel parameters and
emissions. The Gasoline Standards recognize that many gasoline refiners may not
be able to develop an individual 1990 baseline for a number of reasons,
including, for example, lack of adequate data or the absence or limited scope of
operations in 1990. Under such circumstances, the refiner must use a statutory
baseline reflecting the 1990 industry average. The EPA has authority, upon a
showing of extenuating circumstances by a refiner, to grant an individual
adjusted baseline or other appropriate regulatory relief to that refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances, including that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The EPA
denied TARC's initial request for an individual baseline adjustment and other
regulatory relief. TARC recently submitted a revised petition. TransContinental
anticipates that it will continue to pursue regulatory relief with the EPA.
However, regulatory relief may not be granted. Any action taken by the EPA may
have a material adverse effect on TransContinental's future financial position,
results of operations or cash flow.
Requirements Under the Federal Clean Water Act. The federal Clean Water Act
regulates the discharge of industrial wastewater and stormwater into waters of
the United States through the use of discharge permits. The EPA has delegated
the federal pollution discharge permit program in Louisiana to the LDEQ. TARC's
pollution discharge permit expired in 1992; however, TARC submitted a permit
renewal application to the LDEQ before the expiration date, which allowed TARC
to continue to operate under the old permit beyond its original expiration date.
Since then, TARC has identified engineering, design and process changes to its
wastewater discharges and treatment system that are not currently reflected in
its permit application. TARC has informed the LDEQ that it will be submitting an
amended permit application to reflect these changes in the near future. The LDEQ
may include more stringent discharge limitation in the new permit or request
certain changes to processes at the refinery that may require additional
expenditures that could have a material adverse effect on TransContinental's
financial position, results of operations or cash flow.
Cleanup Matters. The refinery is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of clean up
related to, and certain damages resulting from, past spills, disposals or other
releases of hazardous substances and govern the use, storage, handling and
disposal of such substances. The refinery's operations generate, and in the past
have generated, hazardous substances. Over the past several years, TARC has
been, and to a limited extent continues to be, engaged in environmental cleanup
or remedial work relating to or arising out of operations or activities at the
refinery. In addition, TARC has been engaged in upgrading its solid waste
facilities, including the closure of several waste management units. Similar to
numerous other industrial sites in the state, the refinery has been listed by
the LDEQ on the federal Comprehensive Environmental Response, Compensation and
Liability Information System, as a result of TARC's prior waste management
activities (as discussed below).
In 1991, the EPA performed a facility assessment at the refinery. A follow
up assessment was commenced in March 1996. In July 1996, the EPA and the LDEQ
agreed that the LDEQ was would serve as the lead agency with respect to the
investigation and remediation of areas of concern identified in the
investigations. TARC, under a voluntary initiative approved by the LDEQ,
submitted a work plan to the LDEQ to determine which areas may require further
investigation and remediation. The LDEQ requested additional information and
TARC submitted such information in January 1998. Based on the workplan submitted
and additional requests by the LDEQ, TARC believes that any further action will
not have a material adverse effect on TransContinental's financial position,
results of operations or cash flow. However, because the work plans have not yet
been approved, the LDEQ or the EPA may require additional remediation or
investigation.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
TARC has been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("CERCLA" or "Superfund"), for the cleanup of contamination from
hazardous substances at three Superfund sites. It has been alleged that TARC, or
its predecessors, sent hazardous substances in the past to these sites. CERCLA
requires cleanup of sites from which there has been a "release" or threatened
release of "hazardous substances" (as such terms are defined under CERCLA). Past
and present owners and operators of a site, as well as generators and
transporters of wastes to a site from which hazardous substances are released,
may be considered potentially responsible for the costs of investigating and
cleaning up such releases, among other damages. Courts have interpreted CERCLA
to impose strict, joint and several liability upon all persons liable for the
entire amount of necessary cleanup costs. As a practical matter, at sites where
there are multiple potentially responsible parties for a cleanup, the costs of
cleanup typically are allocated according to a volumetric or other standard
among the parties. A number of states have laws similar to Superfund, pursuant
to which cleanup operations, or the costs thereof, also may be imposed.
At one Superfund site, TARC has submitted information to the EPA indicating
that it should have no liability for this matter. With respect to the remaining
two sites, TARC's liability for each such matter has not been determined. TARC
anticipates that it may incur costs related to the cleanup at each such site
(and possibly including additional costs arising in connection with any recovery
or other actions brought pursuant or relating to such matters). TARC believes
that its or TransContinental's ultimate environmental liabilities will not be
significant. This determination is based in part on review of the data available
to TARC regarding the basis of TARC's alleged liability at each site. Depending
on the circumstances of the particular Superfund site, other factors are
analyzed, including, for example, the relationship of TARC to each such site,
the volume of wastes TARC is alleged to have contributed to each such site in
comparison to other responsible parties (without giving effect to the ability of
any other responsible parties to contribute to or pay for any liabilities
incurred) and the range of likely cleanup costs at each such site. However, it
is not possible at this time to determine the ultimate environmental
liabilities, if any, that may arise from the matters discussed above.
In September 1997, TARC purchased a tank storage facility located adjacent
to the refinery for a cash purchase price of $40 million (which does not include
a $3.1 million liability recorded for environmental remediation, as discussed
below). Environmental investigations conducted by the previous owner of the
facilities indicated soil and groundwater contamination in several areas on the
property. As a result, the former owner submitted to the LDEQ plans for the
remediation of significant indicated contamination in such areas. TARC has
analyzed these investigations and has carried out further Phase II environmental
assessments to verify their results. TARC intends to incorporate any required
remediation into its ongoing work at the refinery. In connection with the
purchase of the facilities, TARC agreed to indemnify the seller for all cleanup
costs and certain other damages resulting from contamination of the property.
TARC created a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessment, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination. However, because the LDEQ has not yet approved certain of the
remediation plans, the funds set aside in the escrow account may not be
sufficient to pay all required remediation costs. As of October 31, 1998, TARC
had recognized a liability of $3.1 million for this contingency.
TEC and TARC have indemnified TCR Holding, TransContinental and the
Purchasers with respect to certain representations and warranties made in the
Securities Purchase Agreement and Asset Transfer Agreements executed in
connection with the Transaction, including representations and warranties
regarding environmental compliance.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Commitments
TARC has various purchase commitments for materials, supplies and services
incidental to the ordinary course of business and for the Capital Improvement
Program. As of October 31, 1998, TARC had commitments for refinery construction
and maintenance of approximately $48.0 million.
Processing Agreements
In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned from the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. During the three and nine months ended October 31, 1998 and
1997, TARC processed approximately 0.8 million barrels, 1.6 million barrels, 0
barrels and 6.4 million barrels, respectively, pursuant to the processing
agreement. Income (loss) from this processing agreement was $2.1 million, $3.9
million, $(0.1) million and $3.1 million for the three and nine months ended
October 31, 1998 and 1997, respectively.
Registration Rights Agreement
TARC had an obligation under its Registration Rights Agreement with the
holders of its Senior Subordinated Notes to have its registration statement on
Form S-4 relating to the Exchange Offer for the Senior Subordinated Notes
declared effective by the Securities and Exchange Commission by July 28, 1998.
As a result of its failure to meet its obligation under the Registration Rights
Agreement, TARC had accrued approximately $0.1 million in liquidated damages as
of October 31, 1998. Such amount accrued at a rate of $10,000 per week from July
28, 1998 until November 25, 1998, and thereafter at a rate of $30,000 per week
until such date as the registration statement is declared effective.
8. TRANSACTIONS WITH AFFILIATES
Southeast Contractors, a subsidiary of TransAmerican, has provided
construction personnel to TARC in connection with the Capital Improvement
Program and will continue to provide such personnel to TransContinental under a
new contract. These construction workers are temporary employees, and the number
and composition of the workforce will vary throughout the Capital Improvement
Program. Southeast Contractors charged TARC for the direct costs it incurs
(which consist solely of employee payroll and benefits) plus administrative
costs and fees of up to $2.0 million per year. Total labor costs charged by
Southeast Contractors for the three and nine months ended October 31, 1998 and
1997 were $19.8 million, $101.8 million, $17.1 million and $26.8 million,
respectively, of which $9.7 million and $2.0 million were payable at October 31,
1998 and January 31, 1998, respectively.
On June 13, 1997, the Company entered into a services agreement with
TransAmerican, TransTexas and TEC. Under the agreement, TransTexas provides
accounting, legal, administrative and other services to TARC, TEC and
TransAmerican and its affiliates. TransAmerican provides advisory services to
TransTexas, TARC and TEC. During the three and nine months ended October 31,
1998, TARC recognized $1.5 million and $4.6 million in service agreement
expense, of which $2.1 million and $3.4 million was payable to TransTexas and
TransAmerican, respectively, as of October 31, 1998. In connection with the
Transaction, TransTexas will enter into an Amended and Restated Services
Agreement with TransAmerican and its affiliates (other than TCR Holding and
TransContinental) and a separate Amended and Restated Services Agreement with
TCR Holding and TransContinental.
TEC has made advances to TARC pursuant to a $50 million promissory note
(the "TARC Working Capital Loan") due June 14, 2002 which bears interest in an
amount equal to a fixed semi-annual interest payment of $2.8 million, prorated
based on the average outstanding balance of TARC's note to TEC and the
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23
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
average outstanding balance of all notes between TransTexas and TEC. Interest
payments are due and payable each June 15 and December 15. As of October 31,
1998, the outstanding balance of the note was $47.0 million. At December 15,
1998, the outstanding balance of the note was $49.5 million. In connection with
the Transaction, $6.0 million was repaid to TEC and the obligations under the
note were assumed by TCR Holding.
During the nine months ended October 31, 1998, TEC contributed $12.8
million to TARC for general corporate purposes and $116.1 million for use in the
Capital Improvement Program from funds available in a disbursement account
intended for such purposes.
Subsequent to October 31, 1998, TARC entered into an intercompany bridge
loan with TEC for an aggregate principal amount of $25 million. In connection
with the Transaction, approximately $25 million of the proceeds of the Notes was
used to repay the intercompany bridge loan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
General
TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals and
its expenses consisted of maintenance and repairs, tank rentals, general and
administrative expenses and property taxes. The No. 2 Vacuum Unit was operated
intermittently between March 1994 and January 1997. The No. 2 Vacuum Unit
recommenced operations in May 1998 and the No. 2 Crude Unit commenced operations
in June 1998. The Delayed Coking Unit, HDS Unit and Sulfur Recovery System have
also commenced operations. TARC does not consider its historical results to be
indicative of future results.
TARC's historical results of operations are dependent on the operating
status of certain units within its refinery, which determines the types of
feedstocks processed and refined product yields. The results are also affected
by the unit costs of purchased feedstocks and the unit prices of refined
products, which can vary significantly. The Capital Improvement Program is
designed to significantly change the refinery's throughput capacity, the
feedstocks processed, and refined product yields.
As described in Note 2 to the accompanying condensed financial statements,
on December 15, 1998, TARC completed the Transaction resulting in the transfer
of the refinery assets to TCR Holding in exchange for an equity interest in TCR
Holding. TCR Holding subsequently transferred the refinery assets to its wholly
owned subsidiary, TransContinental. Also as part of the Transaction, TARC sold a
majority of the capital stock of TCR Holding to third parties. As a result,
subsequent to December 15, 1998, TARC will not report any operating results, but
will report its pro rata share of net earnings and losses of TCR Holding,
dividend income, if any on the TCR Voting Preferred Stock and interest expense
on the TARC Intercompany Loan and the TARC Subordinated Notes. TARC expects to
report a loss on disposition of the stock of TCR Holding of approximately $121
million in the fourth quarter of fiscal 1999.
Three Months Ended October 31, 1998, Compared with the Three Months Ended
October 31, 1997
TARC's revenues for the three months ended October 31, 1998 resulted
primarily from sales of finished and intermediate products. The average price of
approximately 0.9 million barrels of finished products sold was $15.45 per
barrel, and the average price of 3.4 million barrels of intermediate products
sold was $13.29 per barrel. Finished products include primarily distillate,
diesel, kerosene, No. 2 fuel oil and liquid petroleum gas. Intermediate products
include primarily cutter, vacuum gas oil and naphtha. Other revenues consisted
primarily of rental income from TARC's tank storage facility acquired in
September 1997.
Cost of products sold of $59.0 million for the three months ended October
31, 1998 related to the refining of approximately 4.2 million barrels of
feedstocks at an average price of $14.15 per barrel.
During 1998 and 1997, TARC entered into processing arrangements whereby
TARC did not take title to feedstocks or refined products but processed
feedstocks in exchange for a fee based on margins, if any, realized by the
counterparty to the arrangement. TARC retained all market and production risks
related to barrels processed. These arrangements, which are recorded net in the
statement of operations, resulted in income of $2.1 million and a loss of $0.01
million for the three months ended October 31, 1998 and 1997, respectively.
Operations and maintenance expense for the three months ended October 31,
1998 increased to $8.3 million from $2.8 million for the same period in 1997,
primarily due to the commencement of operations of certain units in Phase I of
the Capital Improvement Program.
Depreciation and amortization expense for the three months ended October
31, 1998 increased to $4.2 million from $2.0 million for the same period in
1997, primarily due to placing into operation certain units in Phase I of the
Capital Improvement Program.
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General and administrative expenses for the three months ended October 31,
1998 decreased to $5.2 million from $6.0 million for the same period in 1997.
The decrease was primarily due to a write-off of certain intangible assets
offset by an increase in payroll.
Taxes other than income taxes for the three months ended October 31, 1998
increased to $1.3 million from $0.9 million for the same period in 1997,
primarily due to increased franchise taxes.
Interest income for the three months ended October 31, 1998 decreased to
$0.7 million from $2.0 million for the same period in 1997, primarily due to
lower cash balances available for investment. Net interest expense for the three
months ended October 31, 1998 decreased to $2.8 million from $7.1 million for
the same period in 1997, due primarily to increased interest capitalization.
During the three months ended October 31, 1998, TARC capitalized approximately
$43.4 million of interest related to Capital Improvement Program additions
compared to $23.3 million for the three months ended October 31, 1997.
In September 1997, TARC sold approximately 8.5 million shares of TransTexas
common stock pursuant to the TransTexas Share Repurchase Program. TARC received
$136.2 million in connection with the repurchase, of which $124.5 million
(representing the excess of the cash received over TARC's carrying value of the
stock) was recorded as a capital contribution.
Nine Months Ended October 31, 1998, Compared with the Nine Months Ended
October 31, 1997
TARC's revenues for the nine months ended October 31, 1998 resulted
primarily from sales of finished and intermediate products. The average price of
approximately 1.0 million barrels of finished products sold was $15.42 per
barrel, and the average price of the 3.9 million barrels of intermediate
products sold was $13.39 per barrel. Finished products primarily include
distillate, diesel, kerosene, No. 2 fuel oil and liquid petroleum gas.
Intermediate products primarily include cutter, vacuum gas oil, and naphtha.
Other revenues consisted primarily of rental income from TARC's tank storage
facility acquired in September 1997.
Cost of products sold of $66.8 million for the nine months ended October
31, 1998 related to the refining of approximately 4.8 million barrels of
feedstocks at an average price of $14.06 per barrel.
During 1998 and 1997, TARC entered into processing arrangements whereby
TARC did not take title to feedstocks or refined products but processed
feedstocks in exchange for a fee based on margins, if any, realized by the
counterparty to the arrangement. TARC retained all market and production risks
related to barrels processed. These arrangements, which are recorded net in the
statement of operations, resulted in income of $3.9 million and $3.1 million for
the nine months ended October 31, 1998 and 1997, respectively.
Operations and maintenance expense for the nine months ended October 31,
1998 increased to $14.1 million from $10.7 million for the same period in 1997,
primarily due to the commencement of operations of certain units in Phase I of
the Capital Improvement Plan.
Depreciation and amortization expense for the nine months ended October 31,
1998 increased to $8.7 million from $5.4 million for the same period in 1997,
primarily due to placing into operations certain units in Phase I of the Capital
Improvement Program.
General and administrative expenses increased to $17.2 million for the nine
months ended October 31, 1998 from $11.0 million for the same period in 1997.
The increase was primarily due to increased salaries and training for personnel
added upon commencement of refinery operations, services agreement fees and
increased professional fees.
Taxes other than income taxes for the nine months ended October 31, 1998
increased to $3.6 million from $2.7 million for the same period in 1997,
primarily due to increased franchise taxes.
Loss on purchase commitments of $4.8 million for the nine months ended
October 31, 1997 related to a commitment to purchase 0.6 million barrels of
feedstock. These barrels have been sold to a third party and the Company has
processed the barrels pursuant to a processing agreement with the third party.
Interest income for the nine months ended October 31, 1998 increased to
$4.4 million from $3.0 million for the same period in 1997, primarily due to the
temporary investment of proceeds from the TARC
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Intercompany Loan and Senior Subordinated Notes. Net interest expense for the
nine months ended October 31, 1998 decreased to $10.8 million from $13.9 million
for the same period in 1997, due primarily to increased interest capitalization.
During the nine months ended October 31, 1998, TARC capitalized approximately
$118.7 million of interest related to Capital Improvement Program additions
compared to $64.9 million for the nine months ended October 31, 1997.
The equity in loss of TransTexas for the nine months ended October 31, 1998
of $(0.2) million reflects TARC's equity interest in TransTexas through April
30, 1998. TARC distributed all of its shares of TransTexas common stock to TEC
in April 1998. Equity in income of TransTexas before extraordinary item for the
nine months ended October 31, 1997 of $45.2 million was due primarily to a $540
million gain on the sale by TransTexas of a subsidiary. In September 1997, TARC
sold approximately 8.5 million shares of TransTexas common stock pursuant to the
TransTexas Share Repurchase Program. TARC received $136.2 million in connection
with the repurchase, of which $124.5 million (representing the excess of the
cash received over TARC's carrying value of the stock) was recorded as a capital
contribution. TARC recognized equity in an extraordinary item of TransTexas of
$(10.2) million for the nine months ended October 31, 1997. The extraordinary
loss of TransTexas is attributable to a loss on the early extinguishment of debt
as a result of the repurchase by TransTexas of its Senior Secured Notes and the
Subordinated Notes Exchange Offer.
The loss on the early extinguishment of debt of $1.3 million for the nine
months ended October 31, 1998 is a result of the redemption of $7.0 million of
TARC Notes in February 1998. The loss on the early retirement of debt of $84.4
million for the nine months ended October 31, 1997 was a result of the
completion of the TARC Notes Tender Offer.
The cumulative effect of a change in accounting principle of $2.7 million
for the nine months ended October 31, 1998 relates to TARC's change to the
deferred method of accounting for turnaround costs from the accrual method, as
described in Note 4 of Notes to Condensed Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
TARC has historically incurred losses and negative cash flow from operating
activities as a result of limited refinery operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
(including debt service) and losses on refined product sales and processing
arrangements. As a result of the Transaction, TARC will no longer operate the
refinery, and will be dependent primarily on dividends from TCR Holding in order
to meet its debt service and working capital requirements. TCR Holding is a
holding company with no business operations. TCR Holding's only sources of
liquidity will be dividends on the TransContinental common stock that it holds
and proceeds from the sale of such TransContinental common stock.
TransContinental will have no obligation to make dividends or other
distributions to TCR Holding. TransContinental will be able to pay dividends
only if it has sufficient cash from operations. In addition, TransContinental's
ability to make dividends or other distributions on its common stock is
restricted by the Indenture governing the Notes and terms of the
TransContinental Preferred Stock. TransContinental's ability to make dividends
or other distributions under the Indenture will be dependent, in part, on a
determination by the independent engineer who will be appointed in connection
with the Transaction to monitor construction of the refinery on behalf of the
holders of the Notes (the "Independent Engineer") of whether the following funds
are sufficient to complete the Capital Improvement Program: funds in the
Disbursement Account (as defined), plus 50% of Projected Net Operating Cash Flow
(as defined) for the 90-day period commencing on the date a dividend is
declared, plus an amount equal to the portion of the proceeds of the Port
Commission Bond Financing (as defined) held by the entity serving as collateral
agent or in a similar capacity with respect to such financing plus, without
duplication, cash on hand that has been approved by TransContinental's Board of
Directors to be escrowed in a segregated account and allocated only for the
purpose of completion of the Capital Improvement Program. If any capital project
is added to the Capital Improvement Program that cannot be fully funded out of
cash flow (as defined) during the relevant 90-day period plus such other sources
of funds, the Indenture will prohibit payment of dividends to TCR Holding. The
Capital Improvement Program may be amended at any time by TransContinental's
Board of Directors. Dividends or distributions might not be made by
TransContinental on its common stock, or, if made, might not be sufficient to
satisfy TCR Holding's obligations, including under the terms of the TCR
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Voting Preferred Stock and the TARC Working Capital Loan. Therefore, TARC may
not be able to satisfy its working capital and debt service obligations. As a
result, TARC's investment in TCR Holding, including the carrying value of the
TCR Voting Preferred Stock, could be impaired or TARC may not be able to meet
its obligations as they become due. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
As of October 31, 1998, TARC and TEC had deposited an aggregate of $529
million into accounts (collectively, the "TARC Disbursement Account") from which
disbursements were made pursuant to a disbursement agreement, as amended (the
"Disbursement Agreement") among TARC, TEC, Firstar Bank of Minnesota, N.A., as
trustee (the "TEC Indenture Trustee") under the indenture governing the TEC
Notes (the "TEC Notes Indenture"), Firstar Bank of Minnesota, N. A., as
Disbursement Agent, and Baker & O'Brien, Inc., as Construction Supervisor. See
Note 4 of Notes to Condensed Financial Statements. Of these funds, $427 million
was designated for the Capital Improvement Program, approximately $25.5 million
was designated for general and administrative expenses, $7 million was
designated for outstanding accounts payable, $50 million was designated for
working capital upon completion of the Delayed Coking Unit and certain
supporting units and $19 million was designated for the payment of interest on,
or the redemption, purchase, defeasance or other retirement of, the outstanding
TARC Notes. As of October 31, 1998, substantially all of the amounts deposited
in the TARC Disbursement Account had been expended for the designated purposes.
In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned from the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. During the nine months ended October 31, 1998 and 1997, TARC
processed approximately 1.6 million barrels and 6.4 million barrels,
respectively, pursuant to the processing agreement. Income from this processing
agreement was $3.9 million and $3.1 million for the nine months ended October
31, 1998 and 1997, respectively.
TARC had an obligation under its Registration Rights Agreement with the
holders of its Senior Subordinated Notes to have its registration statement on
Form S-4 relating to the Exchange Offer for the Senior Subordinated Notes
declared effective by the Securities and Exchange Commission by July 28, 1998.
As a result of its failure to meet its obligation under the Registration Rights
Agreement, TARC had accrued approximately $0.1 million in liquidated damages as
of October 31, 1998. Such amount accrued at a rate of $10,000 per week from July
28, 1998 until November 25, 1998, and thereafter at a rate of $30,000 per week
until such date as the registration statement is declared effective.
TEC had made advances to TARC pursuant to a $50 million promissory note due
June 14, 2002 which bears interest in an amount equal to a fixed semi-annual
interest payment of $2.8 million, prorated based on the average outstanding
balance of TARC's note to TEC and the average outstanding balance of all notes
between TransTexas and TEC. Interest payments are due and payable each June 15
and December 15. As of October 31, 1998, the outstanding balance under the note
was $47.0 million. At December 15, 1998, the outstanding balance of the note was
$49.5 million. In connection with the Transaction, $6.0 million was repaid to
TEC and the obligations under the note were assumed by TCR Holding.
Subsequent to October 31, 1998, TARC entered into an intercompany bridge
loan with TEC for an aggregate principal amount of $25 million. In connection
with the Transaction, approximately $25 million of the proceeds of the Notes was
used to repay the intercompany bridge loan.
In connection with the Transaction, TARC, TEC and TransContinental expect
to enter into an expense reimbursement agreement pursuant to which certain of
TARC's and TEC's expenses related to compliance with existing debt instruments
will be reimbursed by TransContinental.
During the nine months ended October 31, 1998, TEC contributed $12.8
million to TARC for general corporate purposes and $116.1 million for use in the
Capital Improvement Program from funds available in a disbursement account
intended for such purposes.
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Environmental compliance and permitting issues are an integral part of the
capital expenditures anticipated in connection with the expansion and
modification of the refinery. TARC does not expect TransContinental to incur any
additional significant expenses for environmental compliance during fiscal 1999
other than those budgeted for the Capital Improvement Program; however,
TransContinental will control any changes to the Capital Improvement Program and
the budget therefor. There is no assurance that costs incurred to comply with
environmental laws will not have a material adverse effect on TARC's future
financial condition, results of operations or cash flow. TARC also has
contingent liabilities with respect to certain legal proceedings as more fully
described in Note 7 of Notes to Condensed Financial Statements.
IMPACT OF YEAR 2000 ISSUE
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
information technology ("IT") systems to malfunction in and around the Year
2000. Such malfunctions may lead to significant business delays in the U.S. and
internationally. The Year 2000 problem will potentially impact the refining
industry because information necessary to monitor and control various process
units is controlled by computers. In addition to potential problems from
computer systems, potential problems could arise from equipment with embedded
chips, such as the various equipment utilized in the refining process and other
non-IT systems.
TARC has defined a Year 2000-compliant system as one capable of correct
identification, manipulation and calculation when processing data in connection
with the year change from December 31, 1999 to January 1, 2000. A Year
2000-compliant system is also capable of correct identification, manipulation
and calculation using leap years both along and in conjunction with other dates.
Not all of TARC's systems that were transferred to TransContinental are
compliant under the above definition. However, TARC has addressed and expects
TransContinental to continue to address the issues associated with this problem
in the following manner:
- In the first stage, TARC commenced preparation of an inventory of all IT
and non-IT systems, as well as equipment that could have embedded chips,
whether or not critical to the operation of the refinery. TARC also
compiled a listing of material relationships with third parties with
which TARC conducts business. These relationships include contractors,
suppliers and public utilities. This stage of the Year 2000 compliance
process is approximately 95% complete.
- In stage two, TARC is assessing the results of the inventory done in the
first stage to determine the Year 2000 impact and what actions need to be
taken to obtain Year 2000 compliance. For internal systems, actions
needed range from obtaining vendor certification of Year 2000 compliance,
remediating internal systems or replacing systems and equipment that
cannot be remediated. This stage is approximately 85% complete with
respect to internal systems. Major outstanding items include receipt of
vendor certifications and installation of Year 2000 upgrades for certain
non-critical systems. TARC has determined a course of action for
remediation or replacement of all identified critical internal systems.
This stage will also include surveying and obtaining information about
Year 2000 readiness of its material third-party relationships, including
those of service providers such as TransTexas. Contingency plans will be
developed for those third parties that cannot satisfactorily demonstrate
Year 2000 compliance.
- The third stage includes the repair, replacement or retirement of
systems. This stage of the Year 2000 process is ongoing and is dependent
upon the availability of upgrades from the refinery's vendors, technician
time to implement the upgrades and notification from other third parties
of Year 2000 compliance. TARC has been upgrading packaged software
throughout the organization. TARC began implementation of a new financial
reporting software system on September 1, 1998 that will handle the
recording of all financial transactions to the general ledger, accounts
payable, accounts receivable and other subledgers, as well as facilitate
the reporting of financial results. Several operational systems are in
various stages of implementation, which should be completed prior to June
1999. The vendors of these new systems have provided certification that
their respective software packages are Year 2000 compliant according to
TARC's definition. The refinery is also heavily dependent upon the power
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infrastructure serving the refinery and would be subject to business
interruptions as a result of the failure of those systems. TARC opened
communication with these third parties in order to obtain assurances
regarding Year 2000 readiness.
- The last stage of the implementation process, which is approximately 40%
complete, includes testing all of the changes implemented individually
and integrating those changes with all of the systems of the refinery and
its suppliers and customers. Various forms of testing are used depending
on the type of change implemented. Each upgrade, to the extent
economically feasible, will be run through a test environment before it
is implemented. It is then tested to see how well it integrates into the
refinery's overall IT environment. TARC has not employed any independent
verification processes of its systems' tests.
As of October 31, 1998, TARC had incurred costs of approximately $3 million
with respect to its Year 2000 compliance program. TARC anticipates additional
costs of approximately $1 million to complete the Year 2000 compliance program.
Despite TARC's best efforts to ready its systems and infrastructure for the
Year 2000, there are many factors outside of TARC's control that could affect
readiness for the Year 2000. Although TARC believes that Year 2000 compliance
will be accomplished by the implementation of the program described above, there
could be operational issues with the new systems implemented that prevent
resolution of the Year 2000 compliance issue in a timely manner. In such event,
the refinery could be required to implement a contingency plan for Year 2000
compliance. The refinery could select from several alternative plans including
remediation of its software, installation of other third party vendor software
or some combination of alternatives. Substantial completion of these plans is
expected by September 30, 1999 with continual refinement to the plans ongoing
until all of the refinery's critical systems and all critical third-party
relationships have demonstrated Year 2000 compliance.
The potential impact of the Year 2000 problem on the refinery could be
material, as virtually every aspect of the refining process will be affected.
The refinery may be adversely affected by this problem, depending on whether it
and the entities with which it does business address this issue successfully.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Quarterly Report on Form 10-Q regarding TARC's
financial position, business strategy, plans and objectives of management for
future operations and expansion and modification of the refinery, sources of
funds and capital expenditures, including but not limited to words such as
"anticipates," "expects," "believes," "estimates," "intends," "projects" and
"likely" indicate forward-looking statements. TARC's management believes that
its current views and expectations are based on reasonable assumptions; however,
there are significant risks and uncertainties that could significantly affect
expected results. Factors that could cause actual results to differ materially
from those in the forward-looking statements include, without limitation,
engineering problems, work stoppages, further cost overruns, personnel or
materials shortages, fluctuations in commodity prices for petroleum and refined
products, casualty losses, conditions in the capital markets, competition and
lack of majority control over the operations of TransContinental.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 7 of Notes to Condensed Financial Statements for a discussion of
TARC's legal proceedings.
ITEM 5. OTHER INFORMATION.
The following table sets forth certain information with respect to the
Capital Improvement Program, including the original budget as of June 13, 1997,
expenditures as of October 31, 1998 and the revised budget as of October 31,
1998:
ORIGINAL EXPENDITURES TO REVISED
BUDGET(1) OCTOBER 31, 1998(2) BUDGET(3)
----------- ------------------- -----------
(DOLLARS IN (DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS) MILLIONS)
PHASE I:
Crude Unit................................... $ 3.0 $ 8.4 $ 8.9
Delayed Coking Unit.......................... 27.0 77.9 81.2
Naphtha Pretreater........................... 12.0 21.5 24.0
No. 2 Reformer(4)............................ 9.0 2.1 14.6
HDS Unit..................................... 24.0 40.8 49.5
Sulfur Recovery System....................... 53.0 65.8 73.7
Offsite Facilities/Tankage................... 46.0 87.8 96.6
Other........................................ 3.0 0.5 0.4
Engineering and Administrative............... 7.0 16.2 16.2
Contingencies(4)............................. 39.0 -- 5.0
------ ------ ------
Total Phase I........................ 223.0 321.0 370.1
------ ------ ------
PHASE II:
FCC Unit..................................... 115.0 127.3 204.4
FCC Flue Gas Scrubber........................ 14.0 9.8 14.4
Alkylation Unit.............................. 24.0 21.8 57.6
Offsite Facilities/Tankage................... 26.0 19.6 40.7
Other........................................ 2.0 -- --
Engineering and Administrative............... 3.0 1.8 4.0
Fee to Contractor............................ -- -- 5.0
Contingencies(5)............................. 20.0 -- 16.0
------ ------ ------
Total Phase II....................... 204.0 180.3 342.1
------ ------ ------
Total Phase I and Phase II........... $427.0 $501.3 $712.2
====== ====== ======
- ---------------
(1) Budget as of June 13, 1997 for estimated expenditures from June 13, 1997 to
completion.
(2) From June 13, 1997 through October 31, 1998. In addition to these
expenditures, approximately $52 million of work has been completed but not
yet paid as of October 31, 1998.
(3) Revised budget as of October 31, 1998 for estimated expenditures from June
13, 1997 to completion.
(4) The No. 2 Reformer will not be considered part of Phase I for purposes of
the Phase I performance tests required to be met by the Indenture governing
the Notes.
(5) To the extent expenditures have exceeded or are expected to exceed the
approved capital budget for a unit or units, the contingencies portion of
the budget is allocated to specific units.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
1. The following reports on Form 8-K were filed during the quarter ended
October 31, 1998:
a. Form 8-K dated August 31, 1998 to report under Item 5 information
contained in a press release issued by the Company on the same day.
b. Form 8-K dated September 1, 1998 to report under Item 5 information
contained in a press release issued by the Company on the same day.
2. The following report on Form 8-K was filed subsequent to October 31,
1998:
a. Form 8-K dated December 11, 1998 to report under Item 5 the filing
of certain documents related to the Transaction.
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32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSAMERICAN REFINING CORPORATION
(Registrant)
December 21, 1998 By: /s/ R. GLENN MCGINNIS
-------------------------------------
R. Glenn McGinnis
Chief Executive Officer
December 21, 1998 By: /s/ ED DONAHUE
-------------------------------------
Ed Donahue
Vice President and Secretary
(Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
27.1 -- Financial Data Schedule