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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 1-12204
TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 987-8600
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on April 30, 1997, was $203,480,200.
The number of shares of common stock of the registrant outstanding on April
30, 1997, was 74,000,000.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 38
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 71
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 72
Item 11. Executive Compensation...................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 78
Item 13. Certain Relationships and Related Transactions.............. 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 81
Signatures.................................................. 86
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PART I
ITEM 1. BUSINESS
TransTexas Gas Corporation (together with its subsidiaries, the "Company"
or "TransTexas") is engaged in the exploration for and development and
production of natural gas, primarily in South Texas. The Company also owns and
operates a system of approximately 1,100 miles of gathering and transmission
pipelines and performs most of its own well site preparation, drilling,
workover, completion, pipeline and production services. The Company's business
strategy is to utilize its extensive experience gained from over 20 years of
drilling and operating wells in South Texas, to continue to find, develop and
produce reserves at a low cost. The Company's average net production for the
year ended January 31, 1997 was 420 MMcfd, for a total net production of 153.6
Bcf of natural gas. During fiscal 1997, the Company drilled 151 wells and
intends to drill approximately 130 wells in fiscal 1998. As of February 1, 1997,
the Company owned 769,594 gross (603,062 net) acres of mineral interests, with
proved reserves of 954 Bcfe.
The Company is engaged in exclusive negotiations to sell all of the stock
of TransTexas Transmission Corporation ("TTC"), its subsidiary that owns
substantially all the Company's Lobo Trend (defined below) producing properties
and related pipeline transmission system, for an estimated sales price of
approximately $1.1 billion (the "Lobo Sale"). As of February 1, 1997, the
Company's Lobo Trend producing properties to be owned by TTC at the time of the
Lobo Sale had proved reserves of 550 Bcfe. As of February 1, 1997, after giving
effect to the Lobo Sale, the Company's lease acreage would have approximated
545,000 gross (395,000 net) acres, with net proved reserves of 404 Bcfe and net
daily production of approximately 230 MMcfd of natural gas and 3,250 barrels per
day ("BPD") of condensate and crude oil. For the quarter ended January 31, 1997,
such operations generated approximately $52 million of TransTexas' total EBITDA
of $89 million. TransTexas intends to use the proceeds from the Lobo Sale for
general corporate purposes, which may include a recapitalization of TransTexas.
There can be no assurance that the Lobo Sale will be consummated or, if
consummated, will be upon the terms described herein.
See Note 13 of Notes to the Consolidated Financial Statements included
elsewhere herein for business segment information regarding the Company.
The address of the Company's principal executive office is 1300 North Sam
Houston Parkway East, Suite 310, Houston, Texas 77032, and its telephone number
at that address is (281) 987-8600.
BACKGROUND
The Company was organized in May 1993 to facilitate the refinancing of
$349.9 million of the indebtedness of TransAmerican Natural Gas Corporation
("TransAmerican"). The Company is currently an indirect subsidiary of
TransAmerican. The Company's operations consist of the natural gas exploration,
production and transmission businesses of TransAmerican, which were transferred
to the Company in August 1993.
Founded in 1958 by John R. Stanley with a single gas station, TransAmerican
grew rapidly and by the mid-1970s had developed a chain of over 200 independent
gasoline stations in New England and New York. In the early 1970s, TransAmerican
sought to vertically integrate its gasoline operations by purchasing a refinery
in Louisiana. During this period, TransAmerican also entered the exploration and
production business by acquiring certain oil and gas properties in South Texas.
Prompted by its successful gas drilling program in South Texas, in 1974,
TransAmerican began constructing gas gathering and transmission facilities.
In 1974, TransAmerican also began construction of a $140 million ammonia
plant intended to use natural gas from its South Texas drilling operations as
feedstock. Primarily as a result of a collapse in ammonia prices, TransAmerican
was unable to obtain sufficient financing to complete construction of the plant.
Unable to meet
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its obligations, TransAmerican and its affiliates filed a voluntary bankruptcy
petition in October 1975. TransAmerican began operating pursuant to a confirmed
plan of reorganization in May 1980.
Between 1979 and 1982, TransAmerican began to modernize and expand its
refinery. As a result of financial difficulties, TransAmerican filed a voluntary
bankruptcy petition in January 1983. TransAmerican emerged from bankruptcy in
October 1987. As a condition of the bankruptcy plan, TransAmerican formed
TransAmerican Refining Corporation ("TARC") as a wholly-owned subsidiary and
transferred its refinery's assets to TARC.
On August 24, 1993, TransAmerican and its subsidiaries transferred
substantially all of their natural gas exploration, production and transmission
businesses to the Company (the "Transfer") pursuant to an agreement among
TransAmerican, the Company and John R. Stanley (the "Transfer Agreement").
Simultaneously with the Transfer, the Company issued $500 million principal
amount of its 10 1/2% Senior Secured Notes due 2000 (the "Prior Notes"). With
the proceeds from the sale of the Prior Notes, the Company paid $349.9 million
of TransAmerican's indebtedness, including all of the allowed claims under
TransAmerican's plan of reorganization. In March 1994, the Company completed an
initial public offering of 5 million shares of its common stock. In October
1994, TransAmerican sold to the public 5.25 million shares of the Company's
common stock. In February 1995, in connection with a public offering of debt
securities by TARC, TransAmerican transferred 55 million shares of the Company's
common stock (74.3% of the total then outstanding) to TransAmerican Energy
Corporation ("TEC"), a newly-formed subsidiary of TransAmerican. TEC then
transferred 15 million of these shares (20.3% of the total then outstanding) to
TARC. In March 1996, TARC sold to the public 4.55 million shares of the
Company's common stock (6.2% of the total shares outstanding) to provide
additional financing for TARC's capital improvement program. An aggregate of
50.45 million shares of the Company's common stock (68.2% of the total shares
outstanding) held by TEC and TARC are currently pledged as collateral for TARC's
debt securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
On June 20, 1995, the Company completed a public offering of $800 million
principal amount of 11 1/2% Senior Secured Notes due 2002 (the "Notes"). The
Company used a portion of the net proceeds from the sale of the Notes to retire
or defease the entire $500 million principal amount of the Prior Notes. For
further information, see Note 2 of Notes to Consolidated Financial Statements
included elsewhere herein.
EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of the Company consist of
geological evaluation of current and prospective leased properties, the
acquisition of mineral leases or other interests in prospects, and the
development and operation of leased properties for the production and sale of
natural gas, condensate and crude oil. The Company operates substantially all of
its producing properties. Drilling activities are performed by the Company and,
when necessary, by independent drilling contractors.
To maintain its reserve base and production, the Company must locate and
acquire new gas and condensate reserves to replace those being depleted by
production. Without successful drilling and exploration or acquisition
activities, the Company's reserves and production will decline appreciably. In
particular, the Company's principal producing properties are characterized by a
high initial production rate, followed by a steep decline in production
resulting in an average half-life per well of less than two years and an
economic life of ten years. The Company's business strategy is to add reserves
by pursuing an active drilling program on its existing undeveloped properties
and on properties that it may acquire in the future. There can be no assurance
that production from new wells will be sufficient to replace production from
existing wells.
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As of April 30, 1997, the Company was drilling 24 gross (21 net) wells and
intends to drill a total of approximately 130 wells during fiscal 1998. The
Company drilled, or participated in the drilling of, the following numbers of
wells during the periods indicated:
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SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ---------------------------
1997 1996 1995 1994
------------ ------------ ------------ ------------
GROSS NET GROSS NET GROSS NET GROSS NET
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Exploratory Wells:
Productive(1)...................... 36 33 12 11 13 13 4 4
Non-Productive..................... 45 41 13 12 7 6 1 1
% Productive....................... 44% 45% 48% 48% 65% 68% 80% 80%
Development Wells:
Productive(1)...................... 67 66 36 36 63 63 112 112
Non-Productive..................... 3 3 4 4 15 15 23 23
% Productive....................... 96% 96% 90% 90% 81% 81% 83% 83%
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(1) Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connection. Wells that are completed
in more than one producing zone are counted as one well. As of January 31,
1997, the Company had a total of 855 productive wells, 24 of which had
multiple completions.
Net Production, Unit Prices, and Costs
The following table sets forth information with respect to net production
and average unit prices and costs for the periods indicated:
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SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
JANUARY 31 JANUARY 31, JULY 31,
--------------- --------------- ---------------
1997 1996 1996 1995 1995 1994
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Production:
Gas (Bcf)(1)................................. 153.6 137.9 66.8 76.9 147.9 130.9
NGLs (MMgals)................................ 174.2 169.2 65.3 121.3 225.3 164.0
Condensate and oil (MBbls)................... 604 543 258 354 638 650
Average sales prices:
Gas (dry) (per Mcf)(2)....................... $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96
NGLs (per gallon)............................ .36 .27 .30 .27 .26 .27
Condensate and oil (per Bbl)................. 21.54 17.76 17.39 16.50 17.22 15.13
Average lifting cost per Mcfe(3)............... .29 .23 .23 .21 .21 .24
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(1) Net gas production volumes for the year ended January 31, 1997, include 32.0
Bcf delivered to third parties under volumetric production payments.
(2) Average price calculations for the year ended January 31, 1997, include
prices for amounts delivered to third parties under volumetric production
payments. The average gas price for the Company's undedicated production for
this period was $2.39 per Mcf. Gas prices do not include the effect of
hedging.
(3) Condensate and oil are converted to a common unit of measure ("Mcfe" or
thousand cubic feet of gas equivalent) on the basis of six Mcf of natural
gas to one barrel of condensate or oil. The components of production costs
may vary substantially among wells depending on the methods of recovery
employed and other factors. The calculation of average lifting cost per Mcfe
for the year ended January 31, 1997 gives effect to volumes delivered to
third parties under volumetric production payments.
Drilling Services
The Company performs substantially all of its own drilling and oil field
services through its drilling services division. These activities include
drilling, oil and natural gas well workover and completion services as
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well as a variety of other support services required for the exploration and
production of natural gas. As of March 31, 1997, the Company owned 22 land
drilling rigs, nine workover rigs and two fracture stimulation fleets.
Complementary drilling, completion and workover service equipment includes a
ready-mix concrete plant, twin cementing trucks, a coiled tubing unit, a
snubbing unit, electric line and logging units, slickline units, tag units and
an extensive fleet of construction, inspection and other rolling stock.
Activity in the contract drilling industry and related oil services
businesses has shown significant improvement over the last three years due to
the increased worldwide demand for oil and natural gas. TransTexas intends to
consider alternatives to maximize stockholder value with respect to the drilling
services division including options such as a spinoff, a sale to a third party,
a merger or another business combination.
DEVELOPMENT ACTIVITY AND RECENT DISCOVERIES
Lobo Trend. At January 31, 1997, the Company held approximately 234,000
gross (217,000 net) acres in the Lower Wilcox Lobo Trend, located in Webb and
Zapata Counties, Texas ("Lobo Trend"). The Company has developed approximately
29% of its net Lobo Trend acreage. As of January 31, 1997, the Company owned a
100% working interest in substantially all of its lease acreage in the Lobo
Trend. The Company is the operator of substantially all of its Lobo Trend
properties. At January 31, 1997, the Company had interests in approximately 754
producing wells in the Lobo Trend.
Bob West North. In late 1994, the Company made a natural gas discovery in
the Bob West North area of southern Zapata County, Texas. Since the discovery,
the Company has drilled 46 wells and completed 44 wells in the area. The
Company's mineral interests in Bob West North consist of a 98% working interest
in 15,800 gross (14,400 net) acres and a 90% net profits interest in 660 gross
acres. By the end of fiscal 1997, the Company's net daily natural gas production
from the Bob West North area surpassed that of the Lobo Trend. On January 31,
1997, the Company was drilling two wells in Bob West North, was in the process
of completing two wells and had daily gross natural gas production of 261 MMcfd
(186 net MMcfd). For the twelve months ended January 31, 1997, the Company
produced 45.7 Bcf (32.6 net Bcf) from the Bob West North area. Recent drilling
results indicate the potential for a new productive fault block of the structure
that previously had not been drilled.
Lodgepole, North Dakota. The Company is participating in the exploration
and development of the Lodgepole area of Stark and Dunn Counties, North Dakota.
In late 1996, the Company announced the discovery of a Lodgepole carbonate reef
oil field in Dickinson, North Dakota with the Heart River #1, which flow tested
at a daily rate of 6,836 BPD. The Company has conducted or participated in a
series of 3-D seismic surveys covering more than 270 square miles in order to
develop its drilling locations and evaluate acreage holdings. Based upon such
3-D seismic information, the Company has selected additional drilling locations
in the producing reef and further seismic anomalies. The Company holds an
average working interest of 80% in approximately 198,800 gross (98,400 net)
acres in the Lodgepole. As of January 31, 1997, the Company was drilling one
well, completing one well, and had drilled a total of seven wells in the
Lodgepole, two of which had been completed and were producing at a combined
gross daily production rate of 4,016 BPD. Since January 31, 1997, the Company
has drilled and completed one additional well in the Lodgepole. Effective March
1997, all producing wells in the field were restricted to a State-mandated daily
rate of approximately 1,000 BPD per well.
Austin Chalk. The Austin Chalk formation, lying in an area from South Texas
to East Louisiana, exhibits geological characteristics requiring the drilling of
horizontal wells for the production of natural gas. In 1996, the Company began
the implementation of a strategy consisting of the evaluation of electric logs
and production characteristics of existing vertically drilled wells. The Company
selects areas where the thickness and resistivity of prospective pay is
sufficient to economically justify the acquisition of mineral lease acreage
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and the drilling of horizontal development wells. As of January 31, 1997, the
Company had drilled and completed one such horizontal well in Walker County,
Texas that flow tested at a gross rate of 5.7 MMcfd (4.6 MMcfd net). The Company
is drilling a second well, and a pipeline connection is currently under
construction. As of January 31, 1997, the Company held a 100% working interest
in approximately 30,200 gross (29,900 net) acres in the Austin Chalk in Walker,
Angelina, Polk and Tyler Counties, Texas and Point Coupee Parish, Louisiana.
Fandango South. The Company is developing an additional natural gas
discovery located in the Lower Wilcox sands in Jim Hogg County, Texas known as
the Fandango South area. As of January 31, 1997, the Company had drilled and
completed one well in Fandango South, which was producing at a gross rate of 32
MMcfd (24.6 MMcfd net), and was drilling an additional well in the area that it
intends to complete. As of January 31, 1997, the Company held a 100% working
interest in approximately 4,600 acres in Fandango South.
Wharton County. In 1995, the Company entered into an agreement with a
privately held concern to jointly develop the mineral interests in Frio and
Miocene sands in Wharton County, Texas. The Company is not the operator of this
interest but interprets data from a dedicated 3-D seismic program to select
drilling locations in which prior production has not depleted the shallow
reservoirs. As of January 31, 1997, 47 wells had been drilled in shallow
formations of the area, 22 of which had been completed and were producing at a
combined gross rate of 13.6 MMcfd (8.4 MMcfd net). The Company also acquired
lease acreage covering deep mineral rights of the Wilcox formation in Wharton
County. The Company is currently drilling a well to test the potential of deeper
formations. Preliminary electric log interpretation indicates 40 feet of
potential pay in the Middle Wilcox formation. As of January 31, 1997, the
Company held a 75% working interest in the shallow mineral rights in
approximately 43,200 gross (34,300 net) acres in Wharton County and a 100%
working interest in the deep mineral rights in approximately 1,800 gross (1,700
net) acres.
La Grulla. The Company holds a working interest in excess of 80% in
approximately 105,000 gross (84,000 net) acres in the La Grulla area of Starr
County, Texas. As of January 31, 1997, the Company had combined daily gross
natural gas production of 9.4 MMcfd (6.0 MMcfd net) from a total of 28 wells
drilled in La Grulla of which 14 had been completed.
Other Areas. The Company has also made discoveries of natural gas and oil
in other prospects that, as of January 31, 1997, have undergone less development
drilling, but which management believes could add material reserves and
production.
The Company owns approximately 7,000 gross (2,900 net) acres in a
development area in Wayne County, Mississippi, in which it has drilled and
completed an initial well. As of January 31, 1997, the Company was completing a
second well and drilling a third well. The discovery well, The Foote Estate #1,
has flow tested at a daily gross production rate of 12.4 MMcfd (7.0 MMcfd net)
and 440 BPD (247 BPD net) of condensate and is being recompleted.
The Company holds an 89% working interest in approximately 38,600 gross
(35,600 net) acres in the Cuba Libre area of Webb County, Texas. As of January
31, 1997, the Company had daily gross natural gas production of 5.9 MMcfd (3.6
MMcfd net) from a total of 19 wells drilled in Cuba Libre, of which 9 had been
completed by the Company.
SECTION 29 TAX CREDIT
Significant federal tax incentives are available under Section 29 of the
Internal Revenue Code of 1986, as amended (the "Code"), for the production and
sale of certain qualified fuels from nonconventional sources, including natural
gas produced from tight sand formations. These federal tax incentives (the
"Section 29 Tax Credit") apply to tight sand gas produced and sold to an
unrelated party before January 1, 2003, from wells drilled after November 4,
1990, and before January 1, 1993. The Section 29 Tax Credit is approximately
$0.52 per MMBtu of natural gas produced from tight sand formations. The amount
of the Section 29 Tax Credit is not adjusted for inflation although it could be
reduced if the average reference price of domestic crude oil rises
substantially. As of February 1, 1997, the Company had remaining developed
reserves of approximately 27.6
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Bcf that the Company believes qualify for the Section 29 Tax Credit. The Company
currently benefits on a separate taxpayer basis from the Section 29 Tax Credits
to the extent that it has taxable income.
The State of Texas exempts from severance taxes tight sand gas produced and
sold from September 1991 through August 2001, from wells drilled after May 24,
1989, and before September 1, 1996. The majority of the Company's reserves from
wells drilled in the Lobo Trend after May 24, 1989 qualify for this exemption.
In addition, the State of Texas recently adopted a bill extending this severance
tax exemption to tight sand gas produced from wells drilled after August 31,
1996 and before September 1, 2002. Tight sand gas produced from such wells is
entitled to a reduction in severance taxes for the first 120 months beginning on
the first day of production or until the cumulative value of the tax reduction
equals 50% of the drilling and completion costs incurred for the well.
PIPELINE AND TRANSMISSION OPERATIONS
The Company owns and operates approximately 1,100 miles of intrastate gas
gathering and mainline transmission pipeline systems (the "Pipeline System") in
South Texas. The Pipeline System provides direct access to several major
intrastate and interstate pipeline systems with major sales points at Laredo,
Thompsonville, Alice and Agua Dulce, Texas. All of the interstate pipelines to
which the Pipeline System is connected are "open access" systems of FERC's Order
636, requiring nondiscriminatory transportation of natural gas by third parties.
The Pipeline System includes gathering systems that connect the Company's
producing wells to its compression stations and transmission pipelines. The
Pipeline System includes eleven compression stations providing combined mainline
compression of approximately 78,100 horsepower and five dehydration plants with
daily aggregate capacities of 900 MMcfd.
The Company's high-Btu mainline system consists of a 27.5-mile, 30-inch
line (550 MMcfd capacity) from Vaquillas to Hebbronville; a 55-mile, 20-inch
line (320 MMcfd capacity) from the Company's Laredo dehydration station to
Hebbronville; and a 9-mile, 16-inch line from Mirando to Vaquillas. All the
high-Btu gas converges on a 40-mile, 30-inch line (630 MMcfd capacity) from
Hebbronville to the Exxon King Ranch gas processing plant. This system
transports the Company's production gathered from its northern properties in
Webb and Zapata Counties.
The Company's low-Btu mainline system consists of a 25-mile, 20-inch line
(300 MMcfd capacity) from its Jennings compressor station to the Thompsonville
compressor station; a 21-mile, 30-inch pipeline from Thompsonville to
Hebbronville; and a 50-mile, 20-inch pipeline (320 MMcfd capacity) from
Hebbronville to Agua Dulce. This system transports the Company's production from
its southern properties in Zapata County to the sales points at Agua Dulce.
On March 27, 1996, the Company completed the sale of its 41.67% interest in
the 76-mile, 24-inch Midcon Texas pipeline that runs from the Company's
Thompsonville compressor station to Agua Dulce. This 41.67% interest represented
a capacity right to transport 125 MMcfd.
As part of the Lobo Sale, the Company would divest the majority of its
pipeline assets. However, the Company expects to enter into transportation
contracts with the buyer of TTC that will permit the Company to transport
substantially all of its natural gas production from South Texas during the
three years following the Lobo Sale. The Company will retain ownership of its
pipeline systems in the Bob West North and Fandango South fields. The Company
believes that there is currently adequate pipeline transportation capacity for
the Company's hydrocarbon production in all of its operating areas. The Company
intends to build additional pipeline capacity as future needs require. However,
there can be no assurance that the Company will have funds available to build
additional pipeline capacity.
Volume and Throughput
The delivery capacity of the Pipeline System is currently 900 MMcfd. For
the fiscal year ended January 31, 1997, 66% (389 MMcfd) of the natural gas
transported by the Pipeline System was from the Company's production; the
remaining 34% (196 MMcfd) was from third parties in the South Texas area.
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Virtually all of the Company's significant third-party transportation
arrangements are on an interruptible basis with the exception of a
transportation contract with The Coastal Corporation (together with its
subsidiaries, "Coastal"). The agreement with Coastal provides for transportation
rights of up to 38,700 MMBtu per day and terminates on July 1, 1999. The Company
charges Coastal a transportation fee of $0.05 per MMBtu for deliveries in or
near Agua Dulce. If the Company arranges for deliveries in the vicinity of
Houston the charge is $0.13 per MMBtu.
During the last three fiscal years, transportation fees charged for natural
gas production of third parties have ranged from $0.05 to $0.17 per Mcf. For the
fiscal year ended January 31, 1997, the average fee charged by TTC for
transportation of natural gas production of third parties and TransAmerican was
$0.14 per Mcf, while natural gas transportation, gathering, dehydration and
compression charges with respect to the Company's production have been $0.17 per
Mcf.
The Company and MidCon Texas Pipeline Corp. ("MidCon") entered into a firm
transportation agreement on January 10, 1996, under which MidCon is required for
a period of five years to transport up to 150,000 MMBtu per day from four
specified receipt points to the proposed pipeline interconnection between
MidCon's pipeline and the Company's pipeline at Thompsonville. The minimum
transportation fee is equal to 50,000 MMBtu times $0.03 times the number of days
in the month, and the Company is required to pay the minimum fee for a total of
91.25 TBtu during the five-year period.
In connection with the conveyance by the Company of certain production
payment interests, the Company and an unaffiliated third party entered into a
transportation agreement in January and May 1996 under which the Company will
transport all gas produced under such production payment to the Company's Agua
Dulce hub for the term of the production payment at no more than $0.17 per Mcf.
The table below reflects the amounts of the Company's natural gas
production and third parties' and TransAmerican's natural gas production
transported by the Pipeline System for the periods indicated:
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SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
------------------------- ------------------------- ---------------------------------------
1997 1996 1996 1995 1995 1994 1993
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(BCF) % (BCF) % (BCF) % (BCF) % (BCF) % (BCF) % (BCF) %
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Company........................ 142.4 66 179.9 87 84.6 86 104.0 90 199.3 89 179.0 90 168.1 92
Third-parties and
TransAmerican................ 71.8 34 27.2 13 13.6 14 11.7 10 25.3 11 19.2 10 14.7 8
----- --- ----- --- ---- --- ----- --- ----- --- ----- --- ----- ---
Total volume........... 214.2 100 207.1 100 98.2 100 115.7 100 224.6 100 198.2 100 182.8 100
===== === ===== === ==== === ===== === ===== === ===== === ===== ===
</TABLE>
Natural Gas Processing
The Company is currently processing natural gas at the Exxon King Ranch
plant located in Kleberg County, Texas, pursuant to a contract that terminates
in May 1997. The Company is currently negotiating a new contract with Exxon.
There is no assurance that this contract can be renewed on the same terms and
conditions.
The Company's average daily production of natural gas liquids and the
average price received by the Company from the sale of its NGLs was
approximately 0.5 million gallons and $0.36 per gallon, respectively, for the
fiscal year ended January 31, 1997. The Company's NGLs are sold to Exxon
pursuant to the processing contract described above.
NATURAL GAS MARKETING
The Company sells its natural gas on the spot market on an interruptible
basis or pursuant to long-term contracts at market prices. The Company currently
delivers gas to between 25 and 30 customers each month.
TransTexas has two gas supply agreements with Coastal, both of which expire
on June 15, 1997. Under the first agreement, TransTexas is currently required to
make available for delivery and sale to Coastal 50 MMcf per day and Coastal is
obligated to purchase a minimum quantity of an average of 40 MMcf per day. Under
a second agreement with Coastal, Coastal has the right, but not the obligation,
to purchase up to an
7
<PAGE> 10
additional 40 MMcf per day from TransTexas. The purchase price for the gas each
month is determined by an averaging mechanism of two indices. The purchase price
under the second agreement is subject to a further price adjustment of $0.12 per
MMBtu.
The Company and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994, under which the Company
will deliver 100,000 MMBtu per day through August 1997. The selling price for
this gas is determined by certain industry averages as defined in the contract.
TransTexas and MidCon entered into a long-term gas purchase contract on
January 10, 1996, under which TransTexas is required to deliver a total of
100,000 MMBtu per day to four specified delivery points for a period of five
years. The purchase price is determined by an industry index less $0.09 per
MMBtu. Deliveries commenced on September 1, 1996. As part of this agreement,
TransTexas built a 24-inch pipeline for MidCon that spans approximately 68 miles
from the Bob West North field to MidCon's 30-inch pipeline in Webb County,
Texas. The agreement provides for TransTexas to earn a 50% interest in a 28-mile
segment of the new pipeline after 10 years.
Three purchasers accounted for a total of 44% of the consolidated net gas,
condensate, NGLs and transportation revenues of the Company for the year ended
January 31, 1997. The Company believes that the loss of any single purchaser
would not have a material adverse effect on the Company due to the availability
of other purchasers for the Company's production at comparable prices.
HEDGING
Beginning in April 1995, the Company entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either the
Company or the counterparty thereto is required to make a payment to the other
at the end of each month (the "Settlement Date"). The payments will equal the
product of a notional quantity ("Base Quantity") of natural gas and the
difference between a specified fixed price ("Fixed Price") and a market price
("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for the Company to make
payments to the counterparty to the extent that the Floating Price exceeds the
Fixed Price, up to a maximum ("Maximum Floating Price") and for the counterparty
to make payments to the Company to the extent that the Floating Price is less
than the Fixed Price. For the year ended January 31, 1997, the Company has made
net settlement payments totaling approximately $37 million to the counterparty
pursuant to the Hedge Agreements. As of January 31, 1997, the Company has Hedge
Agreements with Settlement Dates ranging from February 1997 through April 1997
involving total Base Quantities for all monthly periods aggregating
approximately 20.4 TBtu of natural gas. Fixed Prices for these agreements range
from $1.70 to $1.78 per MMBtu ($1.76 to $1.84 per Mcf) up to Maximum Floating
Prices ranging from $2.00 to $2.20 per MMBtu ($2.07 to $2.28 per Mcf). In
addition, one agreement has a Fixed Price of $2.48 per MMBtu ($2.57 per Mcf)
with no Maximum Floating Price. Under the terms of this agreement, the
counterparty advanced $5 million to the Company. At January 31, 1997, the
estimated cost to settle all of the Hedge Agreements would have been
approximately $13 million. These agreements are accounted for as hedges and,
accordingly, any gains or losses are deferred and recognized in the respective
months as physical volumes are sold. At January 31, 1997, the Company maintained
$1.0 million in a margin account related to the Hedge Agreements.
COMPETITION
The Company encounters intense competition from major oil and gas companies
and independent operators in the acquisition of desirable undeveloped natural
gas leases and in the sale of natural gas. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than the Company's and which, in many instances, have
been engaged in the energy business for a much longer time than the Company.
8
<PAGE> 11
The primary bases for competition in the natural gas and oil exploration
and production businesses are the costs involved in the finding and development
of such resources combined with commodity sales prices and market access. The
Company places considerable emphasis upon the expertise of its exploration
personnel and believes that its strategy of seeking undeveloped acreage with
exploration and production potential allows it to leverage this expertise into
low finding and development costs. The Company believes that its proven
abilities in finding and developing natural gas and oil reserves enable it to
compete effectively. The Company uses its expertise in South Texas, its
financial resources and its ability to quickly evaluate and execute acreage
acquisition transactions to compete with other oil and gas companies in the
acquisition of prospective acreage in its principal areas of operation.
GOVERNMENTAL REGULATION
The Company's gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the gas industry increases the
Company's cost of doing business and affects its profitability. Because such
rules and regulations are frequently amended or reinterpreted, the Company is
unable to predict the future cost or impact of complying with such laws.
The State of Texas (through the Texas Railroad Commission) and many other
states, including North Dakota, require permits for drilling operations,
drilling bonds and reports concerning operations, and impose other requirements
related to the exploration and production of gas. Such states also have statutes
or regulations addressing conservation matters, including provisions for the
unitization or pooling of gas properties, the establishment of maximum rates of
production from oil or gas wells and the regulation of spacing, plugging and
abandonment of such wells. The statutes and regulations of the State of Texas
limit the rate at which gas can be produced from the Company's properties.
However, these statutes and regulations have not materially impacted TransTexas'
results of operations; however, there can be no assurance that such statutes and
regulations will not affect TransTexas' operating results in the future.
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") since 1985 that affect the economics of
natural gas production, transportation and sales. In addition, the FERC
continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry, most notably
interstate natural gas transmission companies, that remain subject to the FERC's
jurisdiction. These initiatives may also affect the intrastate transportation of
gas under certain circumstances. The stated purpose of many of these regulatory
changes is to promote competition among the various sectors of the gas industry.
The ultimate impact on the Company of these complex and overlapping rules and
regulations, many of which are repeatedly subjected to judicial challenge and
interpretation, cannot be predicted.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters affecting the Company, see Note
12 of Notes to Consolidated Financial Statements included elsewhere herein.
EMPLOYEES
As of April 1, 1997, the Company had approximately 2,600 employees,
including approximately 2,100 field employees related to its natural gas
exploration, production, transmission and service businesses. The Company will
employ additional personnel as required by its operations and may engage the
services of independent geological, engineering, land and other consultants from
time to time. None of the Company's employees are parties to a collective
bargaining agreement.
9
<PAGE> 12
ITEM 2. PROPERTIES
ACREAGE
The following table sets forth the Company's total developed and
undeveloped acreage and productive wells at January 31, 1997:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)(2)
--------- ----------- -----------
<S> <C> <C> <C>
Gross............................................ 82,228 687,366 855
Net.............................................. 74,907 528,155 840
</TABLE>
- - ---------------
(1) Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connection. Wells that are completed
in more than one producing zone are counted as one well. As of January 31,
1997, the Company had interests in a total of 855 productive wells, 24 of
which had multiple completions.
(2) Two of the productive wells (gross and net) are oil wells.
RESERVES
The following table sets forth certain information with respect to the
Company's proved reserves and the present value (discounted at 10%) of estimated
future net revenues before income taxes, as estimated by Netherland, Sewell &
Associates, Inc. ("Netherland, Sewell"), the Company's independent petroleum
engineers, as of the dates indicated. For additional information regarding the
Company's proved reserves at February 1, 1997, see Note 17 of Notes to
Consolidated Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
FEBRUARY 1, AUGUST 1,
------------------------ ----------------------
1997 1996 1995 1994
---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved Developed Reserves:
Gas (MMcf)(1)............................ 381,527 425,317 476,582 442,157
Condensate and oil (MBbls)............... 2,388 880 1,073 1,109
Estimated future net revenues(2)......... $ 951,435 $ 572,882 $ 457,982 $514,567
Present value of estimated future net
revenues discounted at 10%(2)......... $ 683,282 $ 416,205 $ 351,428 $405,414
Proved Undeveloped Reserves:
Gas (MMcf)............................... 538,191 713,810 646,063 275,210
Condensate and oil (MBbls)............... 3,350 2,023 1,976 826
Estimated future net revenues(2)......... $1,133,754 $ 686,423 $ 355,502 $216,613
Present value of estimated future net
revenues discounted at 10%(2)......... $ 765,786 $ 391,857 $ 196,218 $138,973
Total Proved Reserves:
Gas (MMcf)(1)............................ 919,718 1,139,127 1,122,645 717,367
Condensate and oil (MBbls)............... 5,738 2,903 3,049 1,935
Estimated future net revenues(2)......... $2,085,189 $1,259,305 $ 813,484 $731,180
Present value of estimated future net
revenues discounted at 10%(2)......... $1,449,068 $ 808,062 $ 547,646 $544,387
</TABLE>
- - ---------------
(1) Excludes approximately 47 Bcf and 43 Bcf as of February 1, 1997 and 1996,
respectively, attributable to volumetric production payments.
(2) Before income taxes.
In accordance with applicable guidelines of the Securities and Exchange
Commission, the estimates of the Company's proved reserves and future net
revenues therefrom set forth herein are made using gas, condensate and oil sales
prices in effect as of the date of such reserve estimates and are held constant
10
<PAGE> 13
throughout the life of the properties (except for fixed and determinable price
escalations as provided by contract). Estimated quantities of proved reserves
and future net revenues therefrom are affected by changes in gas, condensate and
oil prices. Prices have fluctuated widely in recent years. The Company has
entered into hedging transactions to mitigate a portion of such natural gas
price volatility. As of February 1, 1997 and 1996 and August 1, 1995 and 1994,
the sales prices used for purposes of estimating the Company's proved reserves
and the future net revenues from those reserves were $3.17, $1.95, $1.37, and
$1.62 per Mcf of gas, respectively, and $23.99, $18.34, $16.27 and $17.62 per
Bbl of condensate and crude oil, respectively.
Proved reserves are the estimated quantities of natural gas, condensate and
oil that geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that can
be expected to be recovered through existing wells with existing equipment and
operating methods. The estimation of reserves requires substantial judgment on
the part of petroleum engineers, resulting in imprecise determinations,
particularly with respect to recent discoveries. The accuracy of any reserve
estimate depends on the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing, and production after
the date of the estimate may result in revisions of the estimate. Accordingly,
estimates of reserves are often materially different from the quantities of
natural gas and condensate that are ultimately recovered, and these estimates
will change as future production and development information becomes available.
The reserve data represent estimates only and should not be construed as being
exact.
The present value of estimated future net revenues relating to proved
reserves are presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." In computing these data, assumptions and estimates have been used,
and the Company cautions against viewing this information as a forecast of
future economic conditions. The future net revenues are determined by using
estimated quantities of proved reserves and the periods in which they are
expected to be developed and produced based on economic conditions at the date
of the estimates. The estimated future production is based on prices in effect
at the date of the estimates, except where fixed and determinable price
escalations are provided by contract. The resulting estimated future gross
revenues are reduced by estimated future costs to develop and produce the proved
reserves based on cost levels in effect at the date of the estimates, but not
for debt service, income taxes and general and administrative expenses (except
to the extent such general and administrative expenses constitute overhead costs
incurred at the district or field level that are allowed under joint operating
agreements). The present value of proved reserves set forth herein should not be
construed as the current market value of the estimated proved reserves
attributable to the Company's properties.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company performs only a
preliminary title investigation before leasing undeveloped properties.
Accordingly, working interest percentages set forth above for undeveloped
properties are preliminary. However, a title opinion is obtained before the
commencement of drilling operations and any material defects in title are
remedied prior to the time actual drilling of a well on the lease is commenced.
The Company believes that it has satisfactory title to developed properties in
accordance with standards generally accepted in the oil and gas industry. The
Company's properties are subject to customary royalty interests, liens incident
to operating agreements, liens for current taxes and other burdens which the
Company believes do not materially interfere with the use of or affect the value
of such properties. In addition, several litigants against the Company have
filed claims that affect certain of the Company's properties. The Company does
not expect these claims to interfere with the use of, or affect the value of,
its properties in any material way.
ITEM 3. LEGAL PROCEEDINGS
See Notes 12 and 14 of Notes to Consolidated Financial Statements included
elsewhere herein for information concerning legal proceedings. The liability for
lawsuits, which includes liabilities the Company assumed from TransAmerican,
which matters individually and in the aggregate amount to significant potential
11
<PAGE> 14
liability, if adjudicated in a manner adverse to the Company in one reporting
period, could have a material adverse effect on the Company's results of
operations and cash flows for that period. Although the outcome of the matters
described cannot be predicted with certainty, the Company believes that the
matters will not have a material adverse effect on its financial position. The
Company also assumed liability for other ordinary course, routine litigation
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on January 27, 1997,
the holders of 72,924,021 shares of the Company's common stock (98.5% of
outstanding shares) re-elected James R. Lesch, Robert L. May and Donald D.
Sykora as Class III directors to serve until the 1999 annual meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market ("NNM") under the symbol "TTXG." The following table sets
forth, on a per-share basis for the periods indicated, the high and low last
sale prices for the Company's common stock as reported by NNM.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ended January 31, 1997:
First Quarter............................................. $13.000 $10.000
Second Quarter............................................ 10.250 7.250
Third Quarter............................................. 14.250 8.500
Fourth Quarter............................................ 17.250 13.250
Transition Period ended January 31, 1996:
First Quarter............................................. $21.000 $14.250
Second Quarter............................................ 16.000 10.500
Fiscal year ended July 31, 1995:
First Quarter............................................. $13.375 $11.000
Second Quarter............................................ 13.750 10.500
Third Quarter............................................. 13.500 9.375
Fourth Quarter............................................ 15.750 13.250
</TABLE>
As of April 30, 1997, there were approximately 47 record holders of the
Company's common stock.
The Company has not paid any cash dividends on its capital stock since
inception, except a dividend of approximately $33 million to TransAmerican from
the proceeds of its initial public offering. The Company's ability to pay
dividends in the future is restricted by the Company's existing debt instruments
and will depend upon the Company's debt levels, earnings levels and book value
and discounted value of certain tangible assets. In determining whether to
declare and pay a dividend, the Board of Directors will consider various other
factors, including the Company's capital requirements and financial condition.
12
<PAGE> 15
ITEM 6.
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
------------------------- ----------------------- ----------------------
1997 1996 1996 1995 1995 1994
----------- ----------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate and natural gas
liquids revenue................... $ 363,459 $ 256,986 $ 124,663 $ 143,304 $ 275,627 $ 302,522
Transportation revenues............. 34,423 33,518 15,892 19,161 36,787 33,240
Other revenues...................... 8,465 834 601 52 285 157
----------- --------- --------- --------- --------- ---------
406,347 291,338 141,156 162,517 312,699 335,919
Operating costs and expenses........ 137,019 94,046 45,629 50,893 99,310 103,459
Depreciation, depletion, and
amortization...................... 132,453 120,513 60,894 70,345 129,964 113,858
General and administrative
expenses.......................... 45,596 33,025 13,685 12,595 31,935 40,311
Net interest expense................ 91,463 77,174 40,436 29,059 65,797 50,155
Income taxes and other.............. (83,509) (21,000) (18,716) (131) (2,415) 4,380
Extraordinary loss, net of taxes.... -- 56,637 -- -- 56,637 --
----------- --------- --------- --------- --------- ---------
Net income (loss)............. $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529) $ 23,756
=========== ========= ========= ========= ========= =========
Net income (loss) per share:(1)
Income (loss) before extraordinary
item............................ $ 1.13 $ (0.17) $ (0.01) $ -- $ (0.16) $ 0.33
Extraordinary item................ -- (0.77) -- -- (0.77) --
----------- --------- --------- --------- --------- ---------
Net income (loss)................. $ 1.13 $ (0.94) $ (0.01) $ -- $ (0.93) $ 0.33
=========== ========= ========= ========= ========= =========
Dividends declared per common
share............................. -- -- -- -- -- --
OTHER FINANCIAL DATA:
Cash provided by operating
activities........................ $ 221,061 $ 72,152 $ 52,172 $ 74,332 $ 94,312 $ 136,243
Cash used in investing activities... (272,883) (340,753) (136,664) (105,326) (309,415) (237,781)
Cash provided by financing
activities........................ 64,135 279,030 13,055 18,249 284,224 484,631
Ratio of earnings to fixed
charges(3)........................ 1.8x -- -- -- -- 1.6x
EBITDA(4)........................... 325,962 187,884 103,413 100,224 184,695 195,044
Consolidated fixed charges.......... 113,581 90,755 51,088 30,254 69,921 52,760
Capital expenditures................ 358,814 373,136 205,488 110,842 278,490 241,268
OPERATING DATA:
Sales volumes:
Gas (average daily) (MMcfd)....... 419.6 376.8 363.4 417.7 405.2 358.8
Gas (Bcf)......................... 153.6 137.9 66.9 76.9 147.9 130.9
NGLs (MMgal)...................... 174.2 169.2 65.3 121.3 225.3 164.0
Condensate and oil (MBbls)........ 604 543 259 354 638 650
Total production (Bcfe)............. 157.2 141.1 68.4 79.0 151.7 134.8
Average prices:
Gas (dry) (per Mcf)............... $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96
NGLs (per gallon)................. .36 .27 .30 .27 .26 .27
Condensate and oil (per Bbl)...... 21.54 17.76 17.39 16.50 17.22 15.13
Average lifting costs (per Mcfe).... .29 .23 .23 .21 .21 .24
Proved reserves (net) (end of
period):
Gas (Bcf)........................... 919.7 1,139.1 1,139.1 943.4 1,122.6 717.4
Condensate and oil (MBbls).......... 5,738 2,903 2,903 2,637 3,049 1,935
Number of gross wells drilled....... 151 102 65 60 97 140
Percentage of wells drilled
completed......................... 68% 75% 74% 78% 77% 83%
<CAPTION>
YEAR ENDED JULY 31,
---------------------
1993 1992
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate and natural gas
liquids revenue................... $ 294,753 $ 227,208
Transportation revenues............. 30,816 30,749
Other revenues...................... 247 223
--------- ---------
325,816 258,180
Operating costs and expenses........ 99,982 75,416
Depreciation, depletion, and
amortization...................... 95,016 96,523
General and administrative
expenses.......................... 23,613 27,855
Net interest expense................ 2,442 1,703
Income taxes and other.............. 11,146 4,274
Extraordinary loss, net of taxes.... -- --
--------- ---------
Net income (loss)............. $ 93,617 $ 52,409
========= =========
Net income (loss) per share:(1)
Income (loss) before extraordinary
item............................
Extraordinary item................
Net income (loss).................
Dividends declared per common
share.............................
OTHER FINANCIAL DATA:
Cash provided by operating
activities........................ $ 184,466 $ 131,869
Cash used in investing activities... (142,848) (88,515)
Cash provided by financing
activities........................ 507 (1,652)
Ratio of earnings to fixed
charges(3)........................ 34.9x 17.8x
EBITDA(4)........................... 208,635 156,573
Consolidated fixed charges.......... 3,256 3,367
Capital expenditures................ 147,202 92,544
OPERATING DATA:
Sales volumes:
Gas (average daily) (MMcfd)....... 326.8 350.8
Gas (Bcf)......................... 119.3 128.4
NGLs (MMgal)...................... 183.8 165.9
Condensate and oil (MBbls)........ 617 498
Total production (Bcfe)............. 123.0 131.4
Average prices:
Gas (dry) (per Mcf)............... $ 1.98 $ 1.36
NGLs (per gallon)................. .30 .29
Condensate and oil (per Bbl)...... 18.65 19.52
Average lifting costs (per Mcfe).... .22 .19
Proved reserves (net) (end of
period):
Gas (Bcf)........................... 695.0 686.2
Condensate and oil (MBbls).......... 1,968 2,171
Number of gross wells drilled....... 103 71
Percentage of wells drilled
completed......................... 85% 82%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
------------------------------------- ---------------------------------------------
1997 1996 1995 1995 1994 1993 1992
----------- --------- ----------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(5)......... $ 71,586 $ 43,602 $ (56,749) $ 106,836 $ (8,865) $ (56,949) $ (35,295)
Net property and equipment........... 846,393 715,340 498,165 601,460 462,340 341,976 292,587
Total assets......................... 1,053,152 938,827 594,738 826,570 583,591 360,241 306,842
Total debt........................... 941,922 824,241 518,701 800,000 500,000 8,270 3,246
Stockholders' equity (deficit)....... (150,795) (154,440) (85,383) (153,668) (85,139) 204,575 153,741
</TABLE>
13
<PAGE> 16
- - ---------------
(1) Net income per share for the year ended July 31, 1994 gives effect to
69,000,000 shares of common stock outstanding after the 69,000-for-1 stock
split which was effective in February 1994. Per share data for 1993 and 1992
is omitted because the Company's predecessor was not a separate entity with
its own capital structure.
(2) The Company's existing debt instruments contain certain restrictions with
respect to the payment of dividends on the Company's common stock.
(3) Earnings for the year ended January 31, 1996, the six months ended January
31, 1996 and 1995 and the year ended July 31, 1995 were inadequate to cover
fixed charges by $15.1 million, $1.2 million, $0.4 million and $14.3
million, respectively.
(4) Earnings before consolidated fixed charges, income taxes, depreciation,
depletion and amortization. Consolidated fixed charges consist of interest
expense (including capitalized interest) on all indebtedness and a portion
of operating lease rental expense that represents the interest component.
EBITDA for the year ended January 31, 1997 includes a gain on a litigation
settlement of $96.0 million. EBITDA for the year ended January 31, 1996 and
the Transition Period includes a gain on a litigation settlement of $18.3
million. EBITDA includes capitalized interest of $15.9 million and $8.3
million for the years ended January 31, 1997 and 1996, respectively, $7.4
million for the Transition Period and $0.9 million and $0.7 million for the
years ended July 31, 1995 and 1994, respectively. EBITDA includes litigation
accruals of $15.5 million and $7.0 million for the years ended January 31,
1997 and 1996, respectively. EBITDA includes litigation accruals of $7.0
million, $13.0 million, $10.0 million and $3.1 million for the years ended
July 31, 1995, 1994, 1993 and 1992, respectively. EBITDA, as defined herein
and in the Indenture, is not presented in accordance with generally accepted
accounting principles ("GAAP") and should not be used in lieu of GAAP
presentations of results of operations and cash flows.
(5) Working capital for 1993 and 1992 excludes all cash and accounts receivable
because those assets were not transferred to the Company in the Transfer.
Working capital as of January 31, 1997 and 1996 and July 31, 1995 includes
$46.0 million, $46.0 million and $44.7 million, respectively, in a
restricted interest reserve account pursuant to the Indenture.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
General
The Company's results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, crude
oil and natural gas liquids ("NGLs"). The profitability of the Company also
depends on the volume of natural gas it gathers and transports and its ability
to minimize finding and lifting costs and maintain its reserve base while
maximizing production.
The Company's operating data for the years ended January 31, 1997 and 1996,
the six months ended January 31, 1996 and 1995 and the years ended July 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
-------------------- -------------------- ---------------
1997 1996 1996 1995 1995 1994
------ ----------- ------ ----------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf)...................... 153.6 137.9 66.9 76.9 147.9 130.9
NGLs (MMgals).................. 174.2 169.2 65.3 121.3 225.3 164.0
Condensate and oil (MBbls)..... 604 543 259 354 638 650
Average prices:
Gas (dry) (per Mcf)............ $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96
NGLs (per gallon).............. .36 .27 .30 .27 .26 .27
Condensate and oil (per Bbl)... 21.54 17.76 17.39 16.50 17.22 15.13
Number of gross wells drilled.... 151 102 65 60 98 140
Percentage of wells completed.... 68% 75% 74% 78% 78% 83%
</TABLE>
The Company uses the full-cost method of accounting for exploration and
development costs. Under the full-cost method, the cost for successful, as well
as unsuccessful, exploration and development activities is capitalized and
amortized on a unit-of-production basis over the life of the remaining proved
reserves. A summary of the Company's operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
-------------------- ------------------- --------------
1997 1996 1996 1995 1995 1994
------ ----------- ----- ----------- ----- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Lease............................ $ 27.5 $18.7 $ 9.4 $10.3 $19.6 $ 19.8
Pipeline......................... 37.2 24.4 13.0 9.8 21.2 25.5
Natural gas liquids.............. 49.3 35.5 15.6 24.5 44.4 44.8
Well service..................... .4 .2 .1 -- .1 .1
------ ----- ----- ----- ----- ------
114.4 78.8 38.1 44.6 85.3 90.2
Taxes other than income taxes(1)... 22.6 15.2 7.5 6.3 14.0 13.2
------ ----- ----- ----- ----- ------
$137.0 $94.0 $45.6 $50.9 $99.3 $103.4
====== ===== ===== ===== ===== ======
</TABLE>
- - ---------------
(1) Taxes other than income taxes include severance, property, and other taxes.
The Company's average depletion rates have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
-------------------- ------------------- --------------
1997 1996 1996 1995 1995 1994
------ ----------- ----- ----------- ----- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Depletion rates (per Mcfe)......... $ .96 $ .79 $ .82 $ .84 $ .81 $ .80
====== ===== ===== ===== ===== ======
</TABLE>
15
<PAGE> 18
Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996
Gas, condensate and NGL revenues for the year ended January 31, 1997,
increased by $106.5 million from the year ended January 31, 1996, primarily due
to higher prices for and increased volumes of natural gas, condensate, oil and
NGLs, primarily in the fourth quarter. The average monthly prices received for
natural gas, excluding amounts delivered to third parties under volumetric
production payments, ranged from $1.71 to $3.74 per Mcf during the year ended
January 31, 1997, compared to prices ranging from $1.29 to $1.95 per Mcf in the
year ended January 31, 1996. The increase in natural gas sales volumes resulted
primarily from increased production from the Company's Bob West North
development area, offset in part by the normal decline in natural gas production
from the Company's Lobo Trend wells and the sale of approximately 176 Bcfe of
the Company's reserves in the Lobo Trend. NGLs sales volumes increased as a
result of increases in the volumes of natural gas processed. Transportation
revenues increased by $0.9 million for the year ended January 31, 1997,
primarily due to increased volumes of natural gas transported.
Lease operating expenses for the year ended January 31, 1997 increased by
$8.8 million from the year ended January 31, 1996 primarily due to increases in
repairs and maintenance and workover expenses attributable to an increase in the
number of producing wells prior to the sale of certain of the Company's Lobo
Trend properties and the initiation in the first quarter of fiscal 1997 of a
program to increase flow rates on certain wells. This program included the
installation of leased wellhead compressors and additional workover projects.
Pipeline operating expenses increased by $12.8 million, primarily due to
increases in compressor fuel costs, compressor rentals, chemicals used in the
operation of the Company's amine plants and volumetric losses. NGLs cost
increased by $13.8 million from the year ended January 31, 1996 due to increases
in the cost of natural gas used in NGL processing. Depreciation, depletion and
amortization expense for the year ended January 31, 1997 increased by $11.9
million due to a $0.17 increase in the depletion rate, offset in part by a
decrease in the Company's undedicated natural gas production. The depletion rate
increased for the year ended January 31, 1997 primarily due to higher costs
associated with the Company's expanded exploration activities. General and
administrative expenses increased by $12.6 million in the year ended January 31,
1997, due primarily to increases in litigation accruals and wages and benefits.
Taxes other than income taxes increased by $7.3 million over the year ended
January 31, 1996 due primarily to an increase in severance taxes, including an
accrual of $2.7 million as a result of a severance tax audit adjustment, offset
in part by a reduction in ad valorem taxes.
Interest income for the year ended January 31, 1997 increased by
approximately $0.8 million from the year ended January 31, 1996 due to higher
average cash balances in fiscal 1997. Interest expense increased by $15.1
million primarily as a result of interest incurred on the Notes and the
amortization of related debt issue costs, offset in part by an increase of $7.6
million of interest capitalized in connection with the acquisition of the
Company's unevaluated gas and oil properties.
Litigation settlements for the year ended January 31, 1997 increased by
$77.7 million as a result of the settlement with Tennessee Gas Pipeline Company
of which TransTexas' share of the proceeds was $96 million.
Income tax expense for the year ended January 31, 1997 was $12.5 million
compared to income tax benefit of $4.2 million in the prior year. Income tax
expense for the year ended January 31, 1997 is net of a decrease in a valuation
allowance of $13.6 million relating to the utilization of net operating loss
carryforwards and tight sands credits of $7.4 million. Income tax benefit for
the year ended January 31, 1996 is net of a valuation allowance of $13.6 million
relating to net operating loss carryforwards and an adjustment relating to tight
sands credits of $7.8 million.
Cash flow from operating activities for the year ended January 31, 1997
increased by approximately $148.9 million from the prior year primarily due to
increased net income, the settlement of take-or-pay litigation in the second
quarter of fiscal 1997 and proceeds from the sale of volumetric production
payments partially offset by increases in working capital.
Cash used in investing activities decreased by $67.9 million due to the
sale of approximately 176 Bcfe of the Company's reserves, offset in part by
advances to an affiliate and increased capital spending. Capital
16
<PAGE> 19
expenditures for fiscal 1997 included $47.7 million for purchases of oil and gas
properties from TransAmerican.
Cash flow from financing activities decreased by approximately $214.9
million from the year ended January 31, 1996 due primarily to the issuance of
the Notes in June 1995, offset in part by the issuance of Subordinated Notes in
fiscal 1997.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Gas, condensate and NGL revenues for the six months ended January 31, 1996
decreased by $18.6 million from the comparable period of the prior year, due
primarily to decreases in gas, condensate and NGL sales volumes, partly offset
by increases in gas, condensate and NGL prices. The decrease in gas sales
volumes reflects the normal decline in natural gas production from the Company's
Lobo Trend wells, offset in part by production from the Company's new
development areas. The average monthly prices received per Mcf of gas ranged
from $1.33 to $1.95 in the six months ended January 31, 1996, compared to a
range of $1.32 to $1.52 in the same period in the prior year. NGL sales volumes
decreased primarily due to the decrease in the volumes of natural gas processed.
Transportation revenues decreased by $3.3 million for the six months ended
January 31, 1996, due primarily to decreases in volumes transported.
Lease operating expenses in the six months ended January 31, 1996 decreased
by $0.9 million from the prior year period as increases in repairs and
maintenance expense attributable to the increase in the number of producing
wells were offset by a decrease in workover expense due to fewer workovers
performed. Pipeline operating expenses increased by $3.2 million, primarily due
to increases in repairs and maintenance expenses, compressor fuel costs, and
pipeline loss. Also contributing to the increase in pipeline operating expenses
were costs incurred by the Company to remove carbon dioxide from natural gas
produced from certain of the Company's new development areas. NGL cost decreased
by $8.9 million from the comparable period in the prior year, due to the
decrease in volumes of natural gas processed. Depreciation, depletion and
amortization expense for the six months ended January 31, 1996 decreased by $9.4
million due to the decrease in natural gas production and a $0.02 decrease in
the depletion rate. General and administrative expenses increased by $1.1
million in the six months ended January 31, 1996, due primarily to costs
associated with the relocation of the Company's corporate offices, offset in
part by decreases in consulting and professional fees. The gain on litigation
settlement of $18.3 million represents the value of properties received in a
litigation settlement.
Interest income for the six months ended January 31, 1996 increased by
approximately $2 million over the comparable period of the prior year due to
increased cash balances resulting from the issuance of the Notes. Interest
expense increased by $13.4 million, primarily as a result of interest accrued on
the Notes and a dollar-denominated production payment, offset in part by the
capitalization of approximately $7.4 million of interest in connection with the
acquisition of the Company's unevaluated gas and oil properties.
Cash flow from operating activities for the six months ended January 31,
1996 decreased by approximately $21.2 million from the prior-year period due
primarily to decreased production, offset in part by net proceeds of $32.9
million from the sale of a volumetric production payment.
Cash used in investing activities increased by $31.4 million due to
increases in lease acquisitions and drilling activity, and the purchase and
installation of three amine plants to treat gas produced from certain of the
Company's new discovery areas. These increases were offset by cash proceeds from
the sale of a portion of the Company's Lodgepole properties and a sale-leaseback
of drilling equipment.
Cash flow from financing activities decreased by approximately $5.2 million
due primarily to repayments of the Company's dollar-denominated production
payment, offset in part by increases in long-term borrowings.
Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994
Gas, condensate and NGL revenues decreased by $26.9 million, due primarily
to the decline in prices for natural gas, offset in part by increases in NGL and
natural gas production. The average monthly prices received per Mcf of gas
ranged from a low of $1.29 to a high of $1.52 in the year ended July 31, 1995,
compared to a low of $1.71 to a high of $2.21 in fiscal 1994. The increase in
gas sales volumes was due to a net
17
<PAGE> 20
increase in producing wells to 947 at July 31, 1995 from 865 at July 31, 1994.
NGL production increased due to increased volumes of the Company's natural gas
processed at the Exxon King Ranch Plant. Transportation revenues for the year
ended July 31, 1995 increased by $3.5 million compared to 1994 due primarily to
increases in volumes transported.
Lease operating expenses decreased by $0.2 million, primarily as a result
of a decrease in operating materials and supplies expense. The decrease in NGL
cost of $0.4 million reflects the decrease in the cost of natural gas used in
NGL processing, offset in part by increased NGL production. Pipeline operating
expenses decreased by $4.3 million as increases in repair and maintenance
expenses associated with higher volumes transported were offset by a decrease in
compressor fuel costs. Depreciation, depletion and amortization expenses
increased by $16.1 million in the year ended July 31, 1995 over the prior year
due to the increase in natural gas production and a $.01 increase in the
depletion rate. General and administrative expenses decreased by $8.4 million
compared to the prior year due primarily to a $6.0 million decrease in
litigation accruals and a corresponding reduction in legal fees. Litigation
accruals totaled $7.0 million in the year ended July 31, 1995 compared to $13.0
million in 1994.
Interest expense for the year ended July 31, 1995 increased by $16.8
million over the prior year as a result of the increase in principal amount and
interest rate on the Notes as compared to the Prior Notes, along with interest
accrued on the Company's production payment, short-term borrowings and certain
litigation settlements.
Income tax benefit for the year ended July 31, 1995 is net of a valuation
allowance of $13.6 million relating to net operating loss carryforwards and an
adjustment relating to tight sands credits of $7.8 million. Income tax expense
for the year ended July 31, 1994 includes $5.8 million of tax benefits that
became available as a result of a change in tax status of TransAmerican's
consolidated group to an integrated oil company.
The Company recorded an extraordinary loss of approximately $56.6 million,
net of taxes, on the retirement of the Prior Notes. This loss consists of $40.0
million in premium and consent fees paid to the holders of the Prior Notes, $2.5
million in underwriting fees and expenses and the recognition of approximately
$15.6 million of unamortized deferred financing costs, less a related income tax
benefit of approximately $1.5 million.
Capital expenditures for the year ended July 31, 1995 increased by $37.2
million to $278.5 million from $241.3 million for the prior year, due primarily
to an increase in lease acquisitions, offset in part by the completion of a
major pipeline expansion project in July 1994.
Liquidity and Capital Resources
The Company historically has financed its capital expenditures, debt
service and working capital requirements with cash from operations, public and
private offerings of debt and equity securities, the sale of production
payments, asset sales, its accounts receivable revolving credit facilities and
other financings. Cash flow from operations is sensitive to the prices the
Company receives for its natural gas. The Company from time to time enters into
commodity price swap agreements to reduce its exposure to price risk in the spot
market for natural gas. See Note 16 of Notes to Consolidated Financial
Statements included elsewhere in this report. A substantial portion of its
production, however, will remain subject to price risk. Proceeds from natural
gas sales are received at approximately the same time that production related
burdens, such as royalties, production taxes and drilling program obligations
are payable.
The Company is engaged in exclusive negotiations to sell all of the stock
of TTC, its subsidiary that owns substantially all the Company's Lobo Trend
producing properties and related pipeline transmission system, for an estimated
sales price of approximately $1.1 billion. In addition, the Company has engaged
an investment banking firm to assist in the sale of its interest in the
Lodgepole prospect in North Dakota. The Company intends to use the proceeds from
these transactions for general corporate purposes which may include a
recapitalization of TransTexas. There can be no assurance that the Lobo Sale
will be consummated or, if consummated, will be upon the terms described herein.
18
<PAGE> 21
The Company makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. For the fiscal year
ended January 31, 1997, the Company's total capital expenditures were $359
million, including $74 million for lease acquisitions, $228 million for drilling
and development and $57 million for the Company's gas gathering and pipeline
system and other equipment and seismic acquisitions. The Company anticipates
that cash on hand and cash flow from operations will fund approximately $160
million of capital expenditures during fiscal 1998. The Company may supplement
these capital resources with proceeds from asset sales and other financings in
order to fund additional capital expenditures. There is no assurance that
additional funds can be obtained from these sources. Subject to availability of
cash, however, the Company plans total capital expenditures of approximately
$220 million in fiscal 1998, of which approximately $180 million would be used
for drilling and development, $20 million for the Company's gas gathering and
pipeline systems and other equipment and seismic acquisitions, and $20 million
for lease acquisitions. If the Lobo Sale or a recapitalization is consummated,
the capital expenditure budget will change. If capital expenditures are higher
than anticipated, cash flow from operations is lower than anticipated,
additional asset sales or financings are not completed or certain contingent
obligations of the Company become fixed, the Company may not have sufficient
funds for capital expenditures necessary to replace its reserves or to maintain
production at current levels and, as a result, production may decrease over
time. Although cash from operating activities for the fiscal year ended January
31, 1997 has increased, primarily due to sales of volumetric production payments
and a litigation settlement, net cash provided by operating activities declined
over the three years ended January 31, 1996.
In December 1996, the Company issued $189 million in face amount of its
13 1/4% Series A Senior Subordinated Notes Due 2003 ("Subordinated Notes") to
unaffiliated third parties. The Subordinated Notes were sold with original issue
discount at a price equal to 52.6166% of the principal amount shown on the face
thereof, for gross proceeds of approximately $99.45 million. The Subordinated
Notes accrete at a rate of 13 1/4% compounded semi-annually for a period of five
years. Thereafter, the Subordinated Notes will pay cash interest at the same
rate. The holders of the Subordinated Notes have the right to exchange their
notes for notes to be registered under the Securities Act of 1933 ("Securities
Act"). Proceeds from the issuance of the Subordinated Notes were used for
working capital and general corporate purposes.
The Company currently has a $40 million credit facility with BNY Financial
Corporation (the "BNY Facility") pursuant to which it may borrow funds based on
the amount of its accounts receivable. At January 31, 1997, the outstanding
balance under the BNY Facility was $26.3 million. Based on anticipated accounts
receivable levels, the Company estimates average amounts available under the
facility will not exceed $26 million. Amounts available under and other terms of
the BNY Facility may change if the Lobo Sale is consummated.
The Company finances a portion of its working capital requirements and
capital expenditures by entering into installment notes collateralized by
certain equipment. These notes bear interest at rates ranging from 9.43% to 13%
per annum and mature at various dates through 2001.
In January 1996, the Company entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
the Company. If there is a draw under the letter of credit, the Company is
required to reimburse the third party within 60 days.
In January 1996, the Company sold to an unaffiliated third party a term
overriding royalty interest in the form of a volumetric production payment
carved out of its interests in certain of its producing properties. For net
proceeds of approximately $33 million, the Company conveyed to the third party a
term overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional net
proceeds of approximately $16 million, the Company supplemented the production
payment to subject a percentage of its interests in certain additional producing
properties to the production payment and to include additional volumes of
approximately 14 Bcf of natural gas within the base volume subject to the
production payment. At January 31, 1997, approximately 23 Bcf of natural gas
remained subject to this production payment.
19
<PAGE> 22
In May 1996, the Company sold to two unaffiliated third parties a
volumetric production payment for net proceeds of approximately $43 million. The
Company conveyed to the third parties a term overriding royalty equivalent to a
base volume of approximately 37 Bcf of natural gas, subject to certain increases
in the base volume and in the percentage interest dedicated if certain minimum
performance and delivery requirements are not met. Concurrently with the closing
of that transaction, the Company and one of the unaffiliated third parties
terminated, prior to the expiration of its stated term, a dollar-denominated
term overriding royalty interest previously sold by the Company to that
unaffiliated third party for a payment by the Company of approximately $25
million. At January 31, 1997, approximately 24 Bcf of natural gas remained
subject to the May 1996 production payment.
In September 1996, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of the
Company's properties for proceeds of $13.5 million. The production payment calls
for the repayment of the primary sum plus an amount equivalent to a 16% annual
interest rate on the unpaid portion of such primary sum.
In September 1996, the Company entered into a drilling program agreement
with an unaffiliated third party for the reimbursement of certain drilling costs
with respect to wells drilled by the Company. Pursuant to the agreement, upon
the approval of the third party of a recently drilled or currently drilling well
for inclusion in the program, the third party will commit to the reimbursement
of all or a portion of the cost of such well, up to an aggregate maximum for all
such wells of $16.5 million. The program wells are subject to a dollar-
denominated production payment equal to the primary sum of such reimbursed
costs, plus an amount equivalent to a 17.5% annual interest rate on the unpaid
portion of such primary sum. In April 1997, all amounts due were paid in full.
In April 1997, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of the
Company's properties for proceeds of approximately $20 million. The production
payment calls for the repayment of the primary sum plus an amount equivalent to
a 16% annual interest rate on the unpaid portion of such primary sum.
On July 2, 1996, the Company consummated the sale, effective as of May 1,
1996, of producing properties in Zapata County, Texas for consideration of
approximately $62 million. On June 17, and August 13, 1996, the Company
consummated the sales, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million and $21.5 million, respectively. The purchase price for each of
the properties discussed above was subject to adjustment for gas sales between
the effective date and the closing date. The Company retained the proceeds of
all such gas sales.
Contingent Liabilities
The Company has significant contingent liabilities, including liabilities
with respect to litigation matters and other obligations assumed in the
Transfer. These matters, individually and in the aggregate, amount to
significant potential liability which, if adjudicated in a manner adverse to the
Company in one reporting period, could have a material adverse effect on the
Company's cash flow or operations for that period. Although the outcome of these
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position. The Company
has delivered letters of credit and placed into escrow cash, which letters of
credit and cash total approximately $21 million, to be applied to certain
potential litigation claims.
Pursuant to the proposed terms of the Lobo Sale, TransTexas would be
required to indemnify the buyer for certain liabilities related to the assets
owned by TTC. Although TransTexas does not anticipate that it will incur any
material indemnity liability, no assurance can be given that TransTexas will
have sufficient funds to satisfy any such indemnity obligation or that any
payment thereof will not have a material adverse effect on its ability to fund
its debt service, capital expenditure and working capital requirements.
20
<PAGE> 23
Deconsolidation for Federal Income Tax Purposes
Under certain circumstances, TransAmerican, TransAmerican Exploration
Corporation ("TEXC"), TEC or TARC may sell or otherwise dispose of shares of
common stock of the Company. If, as a result of any sale or other disposition of
the Company's common stock or otherwise, the aggregate ownership of the Company
by TransAmerican and certain of its affiliates (the "TNGC Consolidated Group")
(excluding the Company) is less than 80% (measured by voting power and value),
the Company will no longer be a member of the TNGC Consolidated Group for
federal income tax purposes and, with certain exceptions, will no longer be
obligated under the terms and conditions of, or entitled to the benefits of, a
tax allocation agreement ("Tax Allocation Agreement") among members of the TNGC
Consolidated Group ("Deconsolidation"). Such sales may be necessary to raise
funds required to complete TARC's expansion and modification program. Further,
if TEC or TARC sells or otherwise transfers any stock of TARC, or issues any
options, warrants or other similar rights relating to such stock, outside of the
TNGC Consolidated Group, which when aggregated with warrants outstanding to
purchase shares of common stock of TARC (the "TARC Warrants") represents more
than 20% of the voting power or equity value of TARC, then a Deconsolidation of
both TARC and the Company from the TNGC Consolidated Group would occur. An event
that results in Deconsolidation of the Company from the TNGC Consolidated Group
for tax purposes could result in the acceleration of payment of a substantial
amount of federal income taxes by TransAmerican. The tax liability to
TransAmerican that would result from Deconsolidation is estimated to be
approximately $15 million at January 31, 1997. Each member of a consolidated
group filing a consolidated federal income tax return is severally liable for
the consolidated federal income tax liability of the consolidated group. There
can be no assurance that TransAmerican will have the ability to satisfy the
above tax obligation at the time due and, therefore, the Company, TARC or TEC
may be required to pay the tax.
Under the Tax Allocation Agreement, the Company will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and will
be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
Potential Effects of Change of Control
Capitalized words in the following discussion have the meanings as defined
in the Indenture.
The Indenture provides that, upon the occurrence of a Change of Control,
each holder of the Notes will have the right to require the Company to
repurchase such holder's Notes at 101% of the principal amount thereof plus
accrued and unpaid interest. As used in the Indenture, "Change of Control" means
(i) any sale, transfer, or other conveyance, whether direct or indirect, of all
or substantially all of the assets of the Company, on a consolidated basis, to
any "person" or "group" (as such terms are used for purposes of Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934 ("Exchange Act"), whether or
not applicable), other than to or among the Company's Wholly Owned Subsidiaries
or the trustee under the Indenture, whether in a single transaction or a series
of related transactions, unless, immediately after such transaction, John R.
Stanley has, directly or indirectly, in the aggregate, sole beneficial ownership
of more than 50%, on a fully diluted basis, of the total voting power entitled
to vote in the election of directors, managers, or trustees of the transferee,
(ii) the liquidation or dissolution of the Company, or (iii) any transaction,
event or circumstance pursuant to which any "person" or "group" (as such terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether
or not applicable), other than John R. Stanley and his Wholly Owned Subsidiaries
or the trustee under the Indenture, is or becomes the "beneficial owner" (as
that term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or
not applicable, except that a person shall be deemed to be the "beneficial
owner" of all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the Company's then
outstanding Voting Stock, unless, at the time of the occurrence of an event
specified in clauses (i), (ii) or (iii), the Notes, issued under the Indenture
have an Investment Grade Rating provided, however, that if, at any time within
120 days after such occurrence, the Notes cease having an Investment Grade
Rating, such event would constitute a "Change of Control." The term "person," as
used in the definition of Change of Control, means a natural person, company,
government
21
<PAGE> 24
or political subdivision, agency or instrumentality of a government and also
includes a "group," which is defined as two or more persons acting as a
partnership, limited partnership or other group. The holders of the Subordinated
Notes would also have a right to require the Company to repurchase such
securities upon the occurrence of a change of control. In addition, certain
changes or other events in respect of the ownership or control of the Company
that do not constitute a Change of Control under the Indenture may result in a
"change of control" of the Company under the terms of the BNY Facility and
certain equipment financing. Such an occurrence could create an obligation for
the Company to repay such other indebtedness. At January 31, 1997, the Company
had approximately $34.7 million of indebtedness (excluding the Notes and
Subordinated Notes) subject to such right of repayment or repurchase. In the
event of a Change of Control under the Indenture or a "change of control" under
the terms of other outstanding indebtedness, there can be no assurance that the
Company will have sufficient funds to satisfy any such payment obligations.
TARC owns a large petroleum refinery in the Gulf Coast region along the
Mississippi River, approximately 20 miles from New Orleans, Louisiana. In
February 1995, TARC began a construction and expansion program designed to
reactivate the refinery and increase its complexity ("Capital Improvement
Program"). TARC's debt securities are collateralized by, among other things, an
aggregate of 50.45 million shares of the Company's common stock (the "Common
Stock"). From February 1995 through March 1997, TARC spent approximately $238
million on the Capital Improvement Program, procured a majority of the equipment
required and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary to complete this
project.
Primarily because additional funding was not available to TARC on a timely
basis, TARC was unable to meet the construction completion timetable for the
Capital Improvement Program as required under the TARC Notes Indenture. The
holders of the TARC Notes have waived, until July 15, 1997, the default under
the TARC Notes Indenture which would have occurred on February 15, 1997 as a
result of TARC's failure to meet the required completion timetable. The waiver
of this default will cease to be effective on July 15, 1997. Unless the default
has been further waived or TARC completes a recapitalization that satisfies the
holders of the TARC Notes, such holders would then be entitled to pursue
remedies available under the TARC Notes Indenture, including acceleration of the
maturity of the TARC Notes. Any such event of default could result in the sale,
following the occurrence of such event of default, of some or all of the
remaining shares of Common Stock pledged to collateralize the TARC Notes. A
foreclosure on such shares would constitute a "change of control" of the Company
under the BNY Facility and certain equipment financing, which may create an
obligation for the Company to repay amounts outstanding thereunder. A sale of
such shares following a foreclosure could also result in a Change of Control
under the Indenture. See "Item 7 -- TARC Financial Information."
Inflation and Changes in Prices
The Company's results of operations and the value of its gas properties are
highly dependent upon the prices the Company receives for its natural gas.
Substantially all of the Company's sales of natural gas are made in the spot
market, or pursuant to contracts based on spot market prices, and pursuant to
long-term, fixed-price contracts. Accordingly, the prices received by the
Company for its natural gas production are dependent upon numerous factors
beyond the control of the Company, including the level of consumer product
demand, the North American supply of natural gas, government regulations and
taxes, the price and availability of alternative fuels, the level of foreign
imports of oil and natural gas and the overall economic environment. Demand for
natural gas is seasonal, with demand typically higher during the summer and
winter, and lower during spring and fall, with concomitant changes in price.
Although certain of the Company's costs and expenses are affected by the level
of inflation, inflation has not had a significant effect on the Company's
results of operations during the year ended January 31, 1997.
Any significant decline in current prices for natural gas could have a
material adverse effect on the Company's financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Based on
current levels of production and certain hedge agreements, the Company estimates
that a $0.10 per MMBtu change in average gas prices received would change annual
operating income by approximately $12 million.
22
<PAGE> 25
Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, are included throughout this
report. All statements other than statements of historical facts included in
this Annual Report on Form 10-K regarding the Company's financial position,
business strategy, and plans and objectives of management for future operations,
including, but not limited to words such as "anticipates," "expects,"
"estimates," "believes" and "likely" indicate forward-looking statements. The
Company's management believes its current views and expectations are based on
reasonable assumptions; however, there are significant risks and uncertainties
that could significantly affect expected results. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include fluctuations in the commodity prices for natural gas, crude oil,
condensate and natural gas liquids, the extent of the Company's success in
discovering, developing and producing reserves, conditions in the equity and
capital markets, the ultimate resolution of litigation, and competition.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of TransTexas. The
reserve data included and incorporated by reference in this Offering Circular
represent only estimates prepared by Netherland, Sewell & Associates, Inc.
("Netherland Sewell"). Gas reserve assessment is a subjective process of
estimating the recovery from underground accumulations of gas that cannot be
measured in an exact way, and estimates by other persons might differ materially
from those of Netherland Sewell. Certain events, including production,
acquisitions and future drilling and development could result in increases or
decreases in estimated quantities of proved reserves. In addition, estimates of
TransTexas' future net revenues from proved reserves and the present value
thereof are based on certain assumptions regarding future natural gas prices,
production levels, production and ad valorem taxes and operating and development
costs that may not prove to be correct over time.
TARC Financial Information
The information relating to TARC which is set forth below is included
because a default by TARC on certain of its obligations could, under certain
circumstances, result in a change of control of the Company that could require
the Company to repay or repurchase the Notes.
TARC is subject to the informational requirements of the Exchange Act and,
in accordance therewith, files reports and other information with the Securities
and Exchange Commission ("Commission"). Such reports and other information can
be inspected and copied at the public reference facilities maintained by the
Commission. TARC is a separate legal entity that does not control, and is not
controlled by, the Company. The Company and TARC have separate operations and
are separately managed, although two of the Company's directors and its Chief
Executive Officer and a Vice President also hold the same positions with TARC.
The Company has no control over the content or presentation of TARC's financial
or operating information.
The following information has been excerpted directly from TARC's filings
under the Exchange Act. The Company makes no representations as to, and
disclaims any responsibility for, the accuracy, adequacy or completeness of such
information, which should be read in conjunction with other publicly available
information filed by TARC with the Commission. The information presented is the
most recent publicly available information.
For purposes only of the information which follows under this caption "TARC
Financial Information," the term "Company" refers to TARC, cross-references are
to the relevant sections of the TARC filing from which the information is
excerpted, and other capitalized terms have the meanings attributed to such
terms in the TARC filing from which the information is excerpted.
23
<PAGE> 26
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
ITEM 6. SELECTED FINANCIAL DATA
On January 29, 1996, the Company changed its fiscal year end for financial
reporting purposes to January 31, from July 31. The following table sets forth
selected financial data of the Company as of and for each of the five years
ended July 31, 1995 and the six months ended January 31, 1996 and 1995. This
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto. The financial data for fiscal years ended July 31, 1993, 1992 and
1991 represent the results of operations and financial position of the Company
prior to the reactivation of the refinery. During these periods, the Company had
only maintenance expenses and lease income for storage facilities. The data for
the year ended July 31, 1994 reflects the limited operations of the refinery
since March 1994 and expenses related to reactivation of portions of the
refinery. The Company temporarily ceased processing operations in December 1994
pending additional funding, recommenced operations in May 1995 and temporarily
ceased operations again in October 1995 due to low operating margins and pending
additional funding and recommenced operations in April 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
---------------------------------------------------- -------------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Refining revenues................ $140,027 $174,143 $ -- $ -- $ -- $107,237 $ 71,035
Storage and other income......... 552 3,035 5,178 3,179 278 -- 551
Operating expenses............... 171,411 187,208 13,238 11,693 10,225 121,770 86,383
General and administrative
expenses(1).................... 13,614 4,496 11,341 7,057 2,329 7,438 8,442
Equity in loss before
extraordinary item of
TransTexas..................... (2,428) -- -- -- -- (156) --
Other income (expense)......... (5,966) (2,827) 28 666 309 (3,944) 89
Extraordinary item(2).......... (11,497) -- -- -- -- -- --
Net loss....................... (64,337) (17,353) (19,373) (14,905) (11,967) (26,071) (23,150)
Net loss per common share(3)..... (2.14) (.58) (.65) (.50) (.40) (.87) (.77)
Weighted average number of common
shares outstanding (in
thousands)(3).................. 30,000 30,000 30,000 30,000 30,000 30,000 30,000
BALANCE SHEET DATA:
Working capital (deficit)........ $ 5,965 $(16,838) $ (1,494) $ (949) $ (756) $(17,707) $(35,509)
Long-term debt proceeds held in
collateral account(4).......... 140,857 -- -- -- -- 24,405 --
Total assets..................... 499,879 176,327 70,900 70,579 70,650 518,323 229,462
Total long-term liabilities...... 352,696 45,373 64,512 45,636 31,287 378,282 112,719
Stockholder's equity............. 87,837 100,400 4,253 23,626 38,163 61,766 77,250
</TABLE>
- - ---------------
(1) Includes litigation accruals of $4.5 million, $9.0 million, and $4.5 million
for the years ended July 31, 1995, 1993 and 1992, respectively and $2.0
million for the six months ended January 31, 1996.
(2) Represents the Company's equity in the early extinguishment of debt at
TransTexas.
(3) Gives retroactive effect to a 30,000-for-1 stock split effected in July
1994.
(4) Includes $7.9 million and $14.7 million at July 31, 1995 and January 31,
1996, respectively, which is classified as a current asset.
24
<PAGE> 27
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
------------------------------- -----------------------
1995 1994 1993 1996 1995
--------- -------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss......................................... $ (64,337) $(17,353) $(19,373) $ (26,071) (23,150)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 5,855 2,694 -- 3,159 2,706
Litigation..................................... 4,500 -- 9,000 2,000 4,500
Amortization of discount on long-term debt..... 7,673 -- -- 3,389 --
Amortization of debt issue costs............... 552 -- -- 238 --
Equity in net loss of TransTexas............... 13,925 -- -- 156 --
Inventory write down........................... 1,265 79 -- 4,406 --
Changes in assets and liabilities:
Accounts receivable.......................... 4,570 (8,558) (326) 3,671 6,901
Inventories.................................. (8,249) (4,577) -- 7,242 3,063
Prepayments and other........................ (7,244) -- -- 1,765 (221)
Accounts payable............................. (2,690) 5,194 131 (1,675) (105)
Payable to affiliate, net.................... (1,214) 1,239 -- 1,979 (765)
Accrued liabilities.......................... (2,625) 11,391 687 (3,132) (4,871)
Other assets................................. (2,126) (1,088) -- (130) 562
Other liabilities............................ (259) (96) (41) -- (102)
--------- -------- -------- --------- --------
Net cash used by operating activities..... (50,404) (11,075) (9,922) (3,003) (11,482)
--------- -------- -------- --------- --------
Investing activities:
Capital expenditures............................. (107,374) (57,209) -- (119,565) (52,306)
--------- -------- -------- --------- --------
Financing activities:
Issuance of long-term debt and warrants.......... 300,750 -- -- -- --
Advances from TransAmerican and affiliates....... 87,560 68,523 9,869 16,698 86,925
Repayment of advances from TransAmerican and
affiliates..................................... (60,000) -- -- (13,450) (20,000)
Long-term debt proceeds held in collateral
account........................................ (173,000) -- -- -- --
Withdrawals from collateral account.............. 32,143 -- -- 116,452 --
Debt issue costs................................. (23,605) (220) -- -- (3,126)
Principal payments on capital lease
obligations.................................... -- -- -- (458) --
--------- -------- -------- --------- --------
Net cash provided by financing
activities.............................. 163,848 68,303 9,869 119,242 63,799
--------- -------- -------- --------- --------
Increase (decrease) in cash and cash
equivalent.............................. 6,070 19 (53) (3,326) 11
Beginning cash and cash equivalents................ 35 16 69 6,105 35
--------- -------- -------- --------- --------
Ending cash and cash equivalents................... $ 6,105 $ 35 $ 16 $ 2,779 $ 46
========= ======== ======== ========= ========
Cash paid for:
Interest......................................... $ 1,282 $ -- $ -- $ 8,719 $ --
Noncash financing and investing activities:
Forgiveness of advances from TransAmerican
(including $25.0 million for property, plant
and equipment transferred from TransAmerican at
net book value in 1994)........................ 71,170 100,000 -- -- --
Contribution of TransTexas stock................. 37,176 -- -- -- --
TransTexas assumption of litigation
liabilities.................................... -- 13,500 -- -- --
Accounts payable for property and equipment...... 11,784 10,429 -- 10,591 8,293
Capital lease obligations and other incurred for
property and equipment......................... 967 1,336 -- 1,643 66
Product financing arrangements................... 27,671 -- -- 37,206 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 28
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto.
RESULTS OF OPERATIONS
General
The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues related primarily to tank
rentals and its expenses were for maintenance and repairs, tank rentals, general
and administrative expenses and property taxes. The Company commenced partial
operations at the refinery in March 1994 and temporarily ceased processing
operations in December 1994 pending additional funding. Other factors in the
decision to suspend processing operations included relatively low refining
margins. The relatively low margins were attributable to the high cost of
feedstocks relative to intermediate product prices produced from the limited
portion of the refinery being operated. The Company recommenced processing
operations in May 1995 and temporarily ceased operations from October 1995 to
April 1996. From time to time, the Company will be required to suspend
operations in order to tie-in units as they are completed. Additionally, the
Company may suspend operations because of working capital constraints or
operating margins. The Company does not consider its historical results to be
indicative of future results.
The Company's results of operations are dependent on the operating status
of certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the unit
costs of purchased feedstocks and the unit prices of refined products, which can
vary significantly. The Capital Improvement Program is designed to significantly
change the Company's throughput capacity, the feedstocks processed, and refined
product yields.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Total revenues for the six months ended January 31, 1996 increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.
Cost of products sold for the six months ended January 31, 1996 increased
$36.2 million to $110.1 million from $73.9 million for the same period in 1995,
primarily due to an increase in the volume of products sold, partially offset by
a decrease in the average price of feedstocks purchased.
Operations and maintenance expenses for the six months ended January 31,
1996 increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expenses for the six months ended January 31,
1996 increased $0.5 million to $3.2 million from $2.7 million for the same
period in 1995, primarily due to the transfer of certain terminal facilities and
tankage equipment from construction in progress to depreciable assets during the
recent period.
General and administrative expenses for the six months ended January 31,
1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a reduction in litigation
26
<PAGE> 29
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
accruals, $2.5 million, partially offset by an increase in payroll of $1.1
million arising from operations support requirements.
Taxes other than income taxes for the six months ended January 31, 1996
decreased $1.4 million to $0.7 million from $2.1 million for the same period in
1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.
Interest income for the six month period ended January 31, 1996, increased
$2.3 million compared to the same period in 1995 due primarily to interest
earned on long-term debt proceeds held in the Collateral Account. Interest
expense for the six month period ended January 31, 1996, increased $28.6 million
due to interest accrued on long-term debt issued in February 1995, amortization
of debt issue costs and financing costs associated with product purchases.
During the six months ended January 31, 1996, the Company capitalized $26.2
million of interest related to property and equipment associated with the
Capital Improvement Program.
Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994
Total revenues for the year ended July 31, 1995, decreased $36.6 million to
$140.6 million from $177.2 million in the same period in 1994, primarily due to
a decrease in the volume of products sold which was partially offset by an
increase in the average price of products sold.
Cost of products sold for the year ended July 31, 1995, decreased $19.8
million to $149.1 million from $168.9 million for the same period in 1994,
primarily as a result of a decrease in volume of products sold, partially offset
by an increase in the average price of feedstocks purchased and a contract
cancellation loss of approximately $3.8 million.
Operations and maintenance expense for the year ended July 31, 1995,
increased $0.2 million to $12.3 million from $12.1 million for the same period
in 1994, primarily as a result of an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expense for the year ended July 31, 1995,
increased $3.3 million to $5.9 million from $2.6 million for the same period in
1994, primarily as a result of increased depreciation expense being recorded for
refinery assets which were taken out of discontinued operations during 1994.
General and administrative expenses for the year ended July 31, 1995,
increased $9.1 million to $13.6 million from $4.5 million in the same period in
1994, primarily as a result of a litigation accrual of $4.5 million and
increases in legal and consulting fees and insurance costs as a result of
expanded refinery operations.
Taxes other than income taxes for the year ended July 31, 1995, increased
$0.5 million to $4.2 million from $3.7 million for the same period in 1994,
primarily as a result of an increase in property taxes assessed.
Interest income for the year ended July 31, 1995, increased $4.1 million
compared to the same period in 1994 due primarily to interest earned on
long-term debt proceeds held in the Collateral Account. Interest expense for the
year ended July 31, 1995, increased $31.3 million due to interest accrued on
long-term debt issued during 1995, amortization of debt issue costs and
financing costs associated with product purchases. During the year ended July
31, 1995, the Company capitalized $18.9 million of interest related to property
and equipment associated with the Company's Capital Improvement Program.
Other income for the year ended July 31, 1995, was $2.5 million compared to
other expense of $2.9 million for the same period in 1994 primarily as a result
of trading gains on futures contracts.
27
<PAGE> 30
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
During the fourth quarter of 1995, net loss before an extraordinary item
increased $35.5 million over the same period in 1994, primarily due to interest
associated with the Company's long-term debt and amortization of debt issue
costs.
In February 1995, TransAmerican contributed 55 million shares of TransTexas
common stock to TEC, and TEC then contributed 15 million of these shares of
TransTexas common stock to the Company. The equity in loss of TransTexas for the
year ended July 31, 1995, reflects the Company's 20.3% equity interest in
TransTexas' loss before an extraordinary item from the date of acquisition. The
equity in extraordinary loss of TransTexas represents the Company's equity in a
charge recorded by TransTexas in the fourth quarter for the early retirement of
$500 million of its 10 1/2% Senior Secured Notes due 2000 from the proceeds of
the issuance by TransTexas in June 1995 of $800 million in 11 1/2% Senior
Secured Notes due 2002.
Year Ended July 31, 1994, Compared with the Year Ended July 31, 1993
Total revenues for the year ended July 31, 1994, increased $172.0 million
to $177.2 million from $5.2 million in the same period in 1993, primarily as a
result of the Company's operation of the vacuum unit at its refinery.
Approximately 32% of sales were to a single customer pursuant to a processing
agreement.
Cost of products sold for the year ended July 31, 1994, increased $168.9
million as compared to the same period in 1993, due to the operation of the
vacuum unit at the refinery.
Operations and maintenance expense for the year ended July 31, 1994,
increased $2.5 million to $12.1 million from $9.6 million for the same period in
1993, primarily due to the operation of the vacuum unit at the refinery.
Depreciation and amortization expense for the year ended July 31, 1994,
increased $2.6 million as compared to the same period in 1993, due to the
depreciation of refinery assets that were taken out of discontinued operations
during 1994.
General and administrative expenses for the year ended July 31, 1994,
decreased $6.8 million to $4.5 million from $11.3 million in the same period in
1993, primarily as a result of a litigation accrual of $9 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the issuance of the TARC Notes, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. The current budget for the Capital
Improvement Program calls for total expenditures of $434 million; however, the
Company estimates that expenditures of approximately $122 million to $127
million in addition to the current budget will be required to complete the
Capital Improvement Program. The foregoing estimates, as well as other estimates
and projections herein, are subject to substantial revision upon the occurrence
of future events, such as unavailability of, or delays in, financing,
engineering problems, work stoppages and cost overruns over which the Company
may not have any control.
As of January 31, 1996, expenditures on the Capital Improvement Program
funded by or approved for reimbursement from the cash collateral account totaled
approximately $155 million. Approximately $24 million remained in the cash
collateral account as of January 31, 1996. The Company sold 4.55 million shares
of TransTexas common stock in March 1996, and deposited approximately $26.6
million of the proceeds of such sale into the cash collateral account in
accordance with the requirements of the Indenture. Giving effect to current
estimates and the sale of TransTexas stock in March 1996, additional funding of
$350 million to $355 million will be required to complete the Capital
Improvement Program. As of January 31, 1996, the
28
<PAGE> 31
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
Company had commitments for refinery construction and maintenance of
approximately $121 million. Additional funds necessary to complete the Capital
Improvement Program may be provided from (i) the sale of additional shares of
TransTexas common stock held by the Company, (ii) the sale of common stock of
the Company, (iii) equity investments in the Company (including the sale of
preferred stock of the Company to TEC, funded by the sale of TransTexas common
stock held by TEC), (iv) capital contributions by TransAmerican, or (v) other
sources of financing, the access to which could require the consent of the
holders of the TARC Notes. There is no assurance that sufficient funds will be
available from these sources or upon terms acceptable to the Company and
TransAmerican. The Company anticipates completing this financing on a timely
basis; however, if this financing is not available or if significant engineering
problems, work stoppages or cost overruns occur, the Company likely will not be
able to complete and test Phase I of the Capital Improvement Program by February
15, 1997. Under the Indenture, the failure of the Company to complete and test
Phase I by February 15, 1997 (subject to extension to August 15, 1997 if certain
financial coverage ratios are met) would constitute an event of default at such
date.
The Company and the South Louisiana Port Commission ("Port Commission")
have reached an agreement in principle which would allow for the issuance of
approximately $75 million in Port Commission tax exempt bonds, the proceeds of
which may be used to construct tank storage facilities, docks and air and waste
water treatment facilities for the Company's FCC Unit. The air and waste water
treatment facility are included in the Capital Improvement Program; however, the
issuance of the tax exempt bonds could provide an alternate source of financing
for the construction of such facilities. The Port Commission would own the
facilities built with the proceeds of the bonds, and the Company would operate
the facilities pursuant to a long-term (30-year) lease. There can be no
assurance that the issuance of the taxexempt bonds, which may require the
consent of the holders of the TARC Notes, will occur.
The Company has incurred losses and negative cash flow from operations as a
result of limited refining operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to product financing costs and low margins. Based on
recent refining margins, projected levels of operations and debt service
requirements, such negative cash flows are likely to continue. In order to
operate the refinery and service its debt, the Company must raise debt or equity
capital in addition to the funds required to complete the Capital Improvement
Program. TransAmerican, TEC or the Company may sell securities to raise funds
for additional working capital. There is no assurance that additional capital
will be available.
Without additional funding to complete Phase I of the Capital Improvement
Program and to provide working capital for operations and debt service, there is
substantial doubt about the Company's continued existence. If the Company (i)
does not complete the Capital Improvement Program timely, (ii) incurs
significant cost overruns, (iii) does not ultimately achieve profitable
operations, or (iv) ceases to continue operations, the Company's investment in
the refinery may not be recovered. The financial statements do not include any
adjustments for such uncertainties.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax purposes
could result in the acceleration of payment of a substantial amount of federal
income taxes by TransAmerican. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable for the consolidated
federal income tax liability of the consolidated group. There can be no
assurance that TransAmerican will have the ability to satisfy the above tax
obligation at the time due and, therefore, the Company, or other members may be
required to pay the tax. A decision by TEC or the Company to sell TransTexas
shares could result in deconsolidation of TransTexas for tax purposes. The tax
liability to TransAmerican at January 31, 1996 which would result from
deconsolidation is estimated to be approximately $45 million.
29
<PAGE> 32
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC
FOR THE TRANSITION PERIOD FROM AUGUST 1, 1995 TO JANUARY 31, 1996
(AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES
ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION
IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH
TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED.)
The Company enters into financing arrangements in order to maintain an
available supply of feedstocks. Typically, the Company enters into an agreement
with a third party to acquire a cargo of feedstock which is scheduled to be
delivered to the Company's refinery. The Company pays through the third party
all transportation costs, related taxes and duties and letter of credit fees for
the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and the Company commits to purchase, at
a later date, the cargo at an agreed price plus commission and costs. The
Company also places margin deposits with the third party to permit the third
party to hedge its price risk. The Company purchases these cargos in quantities
sufficient to maintain expected operations and is obligated to purchase all of
the cargos delivered pursuant to these arrangements. In the event the refinery
is not operating, these cargos may be sold on the spot market. During the six
months ended January 31, 1996, approximately 0.5 million barrels of feedstocks
with a cost of $8.8 million were sold by a third party on the spot market prior
to delivery to the Company without a material gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. The Company is
required to pay all costs for feedstock acquisition, transportation, processing
and inspections plus a commission for each barrel processed. The Company is
entitled to a processing fee based on the margin after all costs, if any, earned
by the third party on the sale of refined products. This agreement provides for
the Company to process approximately 1.1 million barrels of feedstock. In April
1996, the Company entered into a similar processing agreement with another third
party.
Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years the Company does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on the
Company's future results of operations, cash flows or financial condition. The
Company also has contingent liabilities with respect to litigation matters as
more fully described in Note 11 of Notes to Financial Statements.
On December 13, 1995, litigation with Frito-Lay, Inc. was settled. The
Company intends to pay $2.5 million to Frito-Lay, Inc. during fiscal year 1997
in accordance with the Tax Allocation Agreement and other relevant documents.
INFLATION AND CHANGES IN PRICES
The Company's revenues and feedstock costs have been and will continue to
be affected by changes in the prices of petroleum and petroleum products. The
Company's ability to obtain additional capital is also substantially dependent
on refined product prices and refining margins, which are subject to significant
seasonal, cyclical and other fluctuations that are beyond the Company's control.
From time to time, the Company enters into futures contracts, options on
futures, swap agreements and forward sale agreements for crude and refined
products intended to protect against a portion of the price risk associated with
price declines from holding inventory of feedstocks and refined products, or for
fixed price purchase commitments. The Company's policy is not to enter into
fixed price or other purchase commitments in excess of anticipated processing
requirements. The Company believes that these current and anticipated futures
transactions do not and will not constitute speculative trading as specified
under and prohibited by the Indenture.
30
<PAGE> 33
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1996 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 334 $ 2,779
Long-term debt proceeds held in collateral account........ 8 14,840
Accounts receivable....................................... 38 121
Receivable from affiliates................................ 430 118
Inventories............................................... 23 37,231
Other..................................................... 428 5,479
--------- ---------
Total current assets............................... 1,261 60,568
--------- ---------
Property and equipment...................................... 541,476 430,858
Less accumulated depreciation and amortization.............. 15,129 10,244
--------- ---------
Net property and equipment......................... 526,347 420,614
--------- ---------
Long-term debt proceeds held in collateral account.......... -- 9,565
Other assets, net........................................... 24,649 27,576
--------- ---------
$ 552,257 $ 518,323
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 23,703 $ 23,552
Payable to affiliates..................................... 3,896 2,957
Accrued liabilities....................................... 11,047 14,560
Product financing arrangements............................ -- 37,206
--------- ---------
Total current liabilities.......................... 38,646 78,275
--------- ---------
Payable to affiliates....................................... 37,659 3,799
Long-term debt.............................................. 352,814 316,538
Investment in TransTexas.................................... 23,265 46,586
Other liabilities........................................... 719 1,168
Commitments and contingencies (Note 7)...................... -- --
Stockholder's equity:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 30,000,000 shares........ 300 300
Additional paid-in capital................................ 248,513 248,513
Accumulated deficit....................................... (149,659) (176,856)
--------- ---------
Total stockholder's equity......................... 99,154 71,957
--------- ---------
$ 552,257 $ 518,323
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
31
<PAGE> 34
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales.............................. $ -- $ 74,811 $ 10,857 $ 143,804
---------- ---------- ---------- ----------
Total revenues..................... -- 74,811 10,857 143,804
---------- ---------- ---------- ----------
Costs and expenses:
Costs of products sold..................... -- 75,824 12,441 151,049
Processing arrangements, net............... 5,232 -- 8,551 --
Operations and maintenance................. 2,989 4,533 9,589 9,105
Depreciation and amortization.............. 1,691 1,584 5,311 4,733
General and administrative................. 1,733 4,014 7,394 9,186
Taxes other than income taxes.............. 905 1,103 3,783 3,185
---------- ---------- ---------- ----------
Total costs and expenses........... 12,550 87,058 47,069 177,258
---------- ---------- ---------- ----------
Operating loss..................... (12,550) (12,247) (36,212) (33,454)
---------- ---------- ---------- ----------
Other income (expense):
Interest income............................ 5 1,546 202 5,633
Interest expense........................... (18,671) (15,673) (54,081) (43,517)
Interest capitalized....................... 17,676 10,828 51,014 26,168
Equity in earnings (loss) of TransTexas.... (1,325) (1,373) 9,766 (3,801)
Gain on sale of TransTexas stock........... -- -- 56,162 --
Other...................................... 18 35 346 2,397
---------- ---------- ---------- ----------
Total other income (expense)....... (2,297) (4,637) 63,409 (13,120)
---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................. (14,847) (16,884) 27,197 (46,574)
Extraordinary item:
Equity in extraordinary loss of
TransTexas.............................. -- -- -- (11,497)
---------- ---------- ---------- ----------
Net income (loss).................. $ (14,847) $ (16,884) $ 27,197 $ (58,071)
========== ========== ========== ==========
Net income (loss) per share:
Income (loss) before extraordinary item.... $ (0.49) $ (0.56) $ 0.91 $ (1.55)
Extraordinary item......................... -- -- -- (0.39)
---------- ---------- ---------- ----------
Net income (loss) per share........ $ (0.49) $ (0.56) $ 0.91 $ (1.94)
========== ========== ========== ==========
Weighted average number of shares
outstanding................................ 30,000,000 30,000,000 30,000,000 30,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
32
<PAGE> 35
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $ 27,197 $(58,071)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization.......................... 5,311 4,733
Amortization of discount on long-term debt............. 83 10,857
Amortization of debt issue costs....................... 6 777
Equity in (earnings) loss of TransTexas................ (9,766) 15,298
Gain on sale of TransTexas stock....................... (56,162) --
Changes in assets and liabilities:
Accounts receivable.................................. 83 415
Receivable from affiliates........................... (312) --
Inventories.......................................... -- (14,064)
Accounts payable..................................... 5,106 (6,739)
Payable to affiliates................................ 939 946
Accrued liabilities.................................. (3,173) 6,290
Other assets......................................... 5,114 3,097
-------- --------
Net cash used by operating activities............. (25,574) (36,461)
-------- --------
Investing activities:
Capital expenditures...................................... (76,949) (110,189)
-------- --------
Financing activities:
Issuance of long-term debt and warrants................... -- 300,750
Net proceeds from sale of TransTexas stock................ 42,607 --
Long-term debt and stock sale proceeds held in collateral
account................................................ (26,549) (173,000)
Withdrawals from collateral account....................... 50,949 87,051
Advances from TransAmerican............................... 35,785 5,335
Payment of advances to TransAmerican...................... (1,925) (44,700)
Debt issue costs.......................................... -- (20,479)
Principal payments on capital lease obligations........... (789) (871)
-------- --------
Net cash provided by financing activities......... 100,078 154,086
-------- --------
Increase (decrease) in cash and cash
equivalents..................................... (2,445) 7,436
Beginning cash and cash equivalents......................... 2,779 46
-------- --------
Ending cash and cash equivalents............................ $ 334 $ 7,482
======== ========
Noncash financing and investing activities:
Accounts payable for property and equipment............... $ (4,955) $ 1,079
Product financing arrangements............................ (37,206) 7,900
Interest accretion on notes and discount notes capitalized
in property and equipment.............................. 36,193 18,495
Contribution of TransTexas stock.......................... -- 37,176
Forgiveness of advances from TransAmerican, contributed to
capital................................................ -- 71,170
Capital lease obligations incurred for property and
equipment.............................................. -- 2,678
</TABLE>
See accompanying notes to condensed financial statements.
33
<PAGE> 36
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
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
The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues were primarily from tank
rentals and its expenses were composed of maintenance and repairs, tank rentals,
general and administrative expenses and property taxes. The Company commenced
partial operations at the refinery in March 1994 and has operated the vacuum
unit intermittently since then. The Company's decision to commence or suspend
operations is based on the availability of financing, current operating margins
and the need to tie-in units as they are completed. The Company does not
consider its historical results to be indicative of future results.
The Company's results of operations are dependent on the operating status
of its refinery equipment, 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 Company's throughput capacity, the feedstocks processed, and refined
product yields.
As more fully described in "Liquidity and Capital Resources," management
does not believe that the Company will be able to complete Phase I of the
Capital Improvement Program by February 15, 1997. Under the Indenture, the
failure of the Company to complete and test Phase I by February 15, 1997 would
constitute an Event of Default at such date.
Three Months Ended October 31, 1996, Compared with the Three Months Ended
October 31, 1995
There were no revenues for the three months ended October 31, 1996.
There were no costs of products sold for the three months ended October 31,
1996. Costs of products sold of $75.8 million for the same period in 1995 was
primarily a result of processing feedstocks for third parties pursuant to
processing arrangements.
Losses from processing arrangements, which are discussed below in
"Liquidity and Capital Resources," of $5.2 million for the three months ended
October 31, 1996 were primarily due to low margins and price management
activities.
Operations and maintenance expense for the three months ended October 31,
1996 decreased to $3.9 million from $4.5 million for the same period in 1995,
primarily due to decreases in salaries and refinery fuel costs.
Taxes other than income taxes for the three months ended October 31, 1996
decreased to $0.9 million from $1.1 million for the same period in 1995,
primarily due to decreased franchise tax expense.
General and administrative expenses decreased to $1.7 million for the three
months ended October 31, 1996 from $4.0 million for the same period in 1995,
primarily due to decreased litigation expense.
Interest income for the three months ended October 31, 1996 decreased $1.5
million as compared to the same period in 1995 primarily due to interest earned
in 1995 on a higher balance held in the Collateral Account. Interest expense,
net for the three months ended October 31, 1996 decreased $3.9 million,
primarily
34
<PAGE> 37
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
due to a larger portion of interest capitalized in 1996 versus 1995. During the
three months ended October 31, 1996, the Company capitalized approximately $17.7
million of interest related to property and equipment additions at the Company's
refinery compared to $10.8 million for the three months ended October 31, 1995.
The equity in loss of TransTexas for the three months ended October 31,
1996 of $1.3 million reflects the Company's 14.1% equity interest in TransTexas.
Nine Months Ended October 31, 1996, Compared with the Nine Months Ended
October 31, 1995
Total revenues for the nine months ended October 31, 1996 decreased to
$10.9 million from $143.8 million for the same period in 1995, due to processing
of feedstocks for third parties in the prior period.
Costs of products sold for the nine months ended October 31, 1996 decreased
to $12.4 million from $151.0 million for the same period in 1995, due to
processing feedstocks for third parties in the prior period.
Losses from processing arrangements, which are discussed below in
"Liquidity and Capital Resources," for the nine months ended October 31, 1996 of
$8.5 million were primarily due to low margins and price management activities.
Operations and maintenance expense for the nine months ended October 31,
1996 increased to $9.6 million from $9.1 million for the same period in 1995,
primarily due to an increase in fuel costs during the first six months of fiscal
year 1997 and contract labor costs.
Taxes other than income taxes for the nine months ended October 31, 1996
increased to $3.8 million from $3.2 million for the same period in 1995,
primarily due to increased property tax expense.
General and administrative expenses for the nine months ended October 31,
1996 decreased to $7.4 million from $9.2 million for the same period in 1995,
primarily due to decreased litigation expense.
Interest income for the nine months ended October 31, 1996 decreased $5.4
million as compared to the same period in 1995 primarily due to interest earned
in 1995 on a higher balance held in the Collateral Account. Interest expense,
net for the nine months ended October 31, 1996 decreased $14.3 million,
primarily due to a larger portion of interest capitalized in 1996 versus 1995.
During the nine months ended October 31, 1996, the Company capitalized
approximately $51.0 million of interest related to property and equipment
additions at the Company's refinery, compared to $26.1 million for the nine
months ended October 31,1995.
The equity in earnings of TransTexas for the nine months ended October 31,
1996 of $9.8 million reflects the Company's 20.3% equity interest in TransTexas
until the Company's sale of 4.55 million shares of TransTexas stock in March
1996 which decreased the Company's interest in TransTexas to 14.1%.
Other income for the nine months ended October 31, 1995 was $2.4 million
which was primarily a result of trading gains on futures contracts.
LIQUIDITY AND CAPITAL RESOURCES
The current budget for the Capital Improvement Program calls for total
expenditures of $434 million. As of October 31, 1996, expenditures on the
Capital Improvement Program funded by or approved for reimbursement from the
cash collateral account totaled approximately $206 million. The Company will
require substantial additional financing in excess of the current budget over
the course of the remaining construction period to complete the Capital
Improvement Program. Completion schedules and the amount of additional
expenditures required will depend upon, among other factors, the structure and
timing of additional
35
<PAGE> 38
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
financing. The Company is currently negotiating with potential third-party
investors to provide for additional funding, including strategic equity
investors, financial investors and foreign producers of crude oil.
Primarily because additional funding was not available to the Company on a
timely basis, management believes that the Company will not be able to complete
Phase I of the Capital Improvement Program by February 15, 1997. Under the
Indenture, the failure of the Company to complete and test Phase I by February
15, 1997 would constitute an Event of Default at such date. If an Event of
Default occurs and is continuing, either the Indenture Trustee or the Holders of
25% in aggregate principal amount of the TARC Notes then outstanding may declare
all principal of the TARC Notes and accrued interest thereon to be due and
payable immediately. Prior to the declaration of acceleration of the maturity of
the TARC Notes, the Holders of a majority in aggregate principal amount of the
TARC Notes at the time outstanding may waive on behalf of all the Holders any
default, except a default in the payment of principal, of premium, if any, or
interest on any TARC Note not yet cured, or a default with respect to any
covenant or provision that cannot be modified or amended without the consent of
the Holder of each outstanding TARC Note affected.
The Company anticipates that, prior to February 15, 1997, it will solicit
the Holders' approval with respect to any elements of a proposed financing that
otherwise would be limited by the terms of the Indenture, as well as to a
revised budget and an extension of the required completion date for Phase I.
There can be no assurance that current negotiations will result in additional
financing for the Capital Improvement Program, that other financing will be
available, or that the requisite approval of the Holders can be obtained.
As of October 1996, the Company had expended the $173 million placed in the
collateral account from the issuance of the TARC Notes in February 1995 as well
as the proceeds from the March 1996 sale of TransTexas common stock. In May
1996, in anticipation of the limited availability of collateral account funds,
the Company began scaling back expenditures on the Capital Improvement Program
so that remaining funds were expended only on those critical path items
necessary to complete and test refinery units by the dates specified in the
Indenture.
In July 1996, the Company executed a promissory note to TransAmerican for
up to $25 million. The note bears interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, and matures on July 31, 1998. As of
October 31, 1996, the entire $25 million was outstanding under the note. On
November 1, 1996, the Company executed an additional $25 million promissory note
to TransAmerican which bears interest at 15% per annum, payable quarterly
beginning December 31, 1996, and which matures on September 30, 1998. At
November 30, 1996, the Company had approximately $34.1 million outstanding under
these notes. The Company has not made the scheduled interest payment provided
for in the first note. These and additional borrowings are being utilized by the
Company to fund the critical path items mentioned above, as well as working
capital needs, pending additional financing from other sources. There can be no
assurance that TransAmerican will make additional advances to the Company.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As of
February 1, 1996, the Company adopted the requirements of SFAS No. 121. The
Company currently believes, based on estimates of refining margins and current
estimates for costs of the Capital Improvement Program that future undiscounted
cash flows will be sufficient to recover the cost of the refinery over its
estimated useful life as well as the costs of related identifiable intangible
assets. Management believes there have been no events or changes in
circumstances that would require the recognition of an impairment loss. However,
due to the inherent uncertainties in estimating future refining margins, in
constructing and operating a large scale refinery and the uncertainty regarding
the Company's ability to complete the Capital Improvement Program there can be
no assurance that the Company will ultimately
36
<PAGE> 39
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
recover the cost of the refinery. See Note 3 to the condensed financial
statements included elsewhere in this report.
The Company has incurred losses and negative cash flow from operations as a
result of limited refining operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales and processing arrangements. Such losses are due to
financing costs, low margins and price management activities. Based on recent
refining margins, recent projected levels of operations and debt service
requirements, such negative cash flows from operations are likely to continue.
Primarily as a result of these factors and accounts payable related to the
Capital Improvement Program, the Company had negative working capital of $37.4
million at October 31, 1996. In order to operate the refinery and service its
debt, the Company must raise debt or equity capital in addition to the funds
required to complete the Capital Improvement Program. There is no assurance that
additional financing for the Capital Improvement Program, additional working
capital, or any necessary approval from the Holders will be obtained or that
profitable operations will be ultimately achieved. As a result, there is
substantial doubt about the Company's ability to continue as a going concern. If
the Company (i) does not complete the Capital Improvement Program timely, (ii)
incurs significant cost overruns, (iii) does not ultimately achieve profitable
operations, or (iv) ceases to continue operations, the Company's investment in
the refinery may not be recovered. The financial statements do not include any
adjustments for the above uncertainties.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax purposes
could result in the acceleration of payment of a substantial amount of federal
income taxes by TransAmerican. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable for the consolidated
federal income tax liability of the consolidated group. There can be no
assurance that TransAmerican will have the ability to satisfy the above tax
obligation at the time due and, therefore, the Company or other members may be
required to pay the tax. A decision by TEC or the Company to sell TransTexas
shares could result in deconsolidation of TransTexas for tax purposes. Such
sales may be necessary to raise funds required to complete the Capital
Improvement Program. TransAmerican's tax liability that could result from
deconsolidation is estimated to be approximately $35 million at October 31,
1996. The Company as a member of the consolidated group is severally liable for
this liability. To the extent TransAmerican is unable to fund the entire
liability, the Company may be required to pay a portion of this tax. The Company
is unable to determine its share, if any, of the liability which would result
from deconsolidation because (i) it is uncertain whether deconsolidation will
occur and (ii) if deconsolidation should occur, it is uncertain whether the
Company would be required to fund any portion of the tax liability under the
joint and several liability provisions.
The Company enters into financing arrangements to maintain an available
supply of feedstocks. Typically, the Company enters into an agreement with a
third party to acquire a cargo of feedstock scheduled for delivery to the
Company's refinery. The Company pays through the third party all transportation
costs, related taxes and duties and letter of credit fees for the cargo, plus a
negotiated commission. Prior to arrival at the refinery, another third party
purchases the cargo, and the Company commits to purchase, at a later date, the
cargo at an agreed price plus commission and costs. The Company also places
margin deposits with the third party to permit the third party to hedge its
price risk. The Company purchases these cargos in quantities sufficient to
maintain expected operations and is obligated to purchase all of the cargos
delivered pursuant to these arrangements. In the event the refinery is not
operating, these cargos may be sold on the spot market. During the nine months
ended October 31, 1996, approximately 1.1 million barrels of feedstocks with a
cost of $23 million were sold by a third party on the spot market prior to
delivery to the Company without a material gain or loss to the Company.
37
<PAGE> 40
EXCERPTED FROM THE QUARTERLY REPORT ON FORM 10-Q OF TARC FOR THE QUARTER ENDED
OCTOBER 31, 1996 (THE FOLLOWING IS NOT A COMPLETE FINANCIAL STATEMENT
PRESENTATION. MATERIAL INFORMATION RELATING TO TARC IS INCLUDED IN THE RELATED
FOOTNOTES AND OTHER FINANCIAL INFORMATION OF TARC NOT INCLUDED HEREIN. AS USED
HEREIN, THE TERM "COMPANY" REFERS TO TARC, CROSS-REFERENCES ARE TO THE RELEVANT
SECTIONS OF THE TARC FILING FROM WHICH THE INFORMATION IS EXCERPTED, AND OTHER
CAPITALIZED TERMS HAVE THE MEANINGS ATTRIBUTED TO SUCH TERMS IN THE TARC FILING
FORM WHICH THE INFORMATION IS EXCERPTED.)
In March 1996, the Company entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. Under the terms
of the agreement, the processing fee earned by the Company 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. This agreement provides
for the Company to process a total of approximately 1.1 million barrels of the
third party's feedstock. For the nine months ended October 31, 1996, the Company
incurred a loss of approximately $2.6 million related to this processing
agreement primarily as a result of low margins and price management activities.
In April 1996, the Company entered into a similar processing agreement with
another third party to process feedstocks. As of October 31, 1996, the Company
had completed processing approximately 5.1 million barrels of feedstocks and is
storing approximately 0.3 million barrels of intermediate and refined products
under this agreement. Also, during the quarter ended October 31, 1996, the
Company entered into a processing agreement with this third party to process
approximately 0.6 million barrels of the third party's feedstocks for a fixed
price per barrel. Under the terms of this fixed price agreement, the Company met
all quantity and quality yields earning the full price per barrel. As of October
31, 1996, the Company recorded a net loss of approximately $5.9 million related
to these processing arrangements primarily as a result of low margins and price
management activities.
Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years the Company does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on the
Company's future results of operations, cash flows or financial condition. The
Company also has contingent liabilities with respect to litigation matters as
more fully described in Note 7 of Notes to Condensed Financial Statements
included elsewhere in this report.
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. Words such as "anticipates," "expects,"
"believes" and "likely" indicate forward-looking statements. The Company'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 the Company's success in raising additional capital to complete the
Capital Improvement Program, engineering problems, work stoppages, cost
overruns, personnel shortages, fluctuations in the commodity prices for
petroleum and refined products, casualty losses, conditions in the capital
markets and competition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
38
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 40
Financial Statements:
Consolidated Balance Sheet................................ 41
Consolidated Statement of Operations...................... 42
Consolidated Statement of Cash Flows...................... 43
Consolidated Statement of Stockholders' Deficit........... 44
Notes to Consolidated Financial Statements................ 45
</TABLE>
39
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransTexas Gas Corporation:
We have audited the accompanying consolidated balance sheet of TransTexas
Gas Corporation as of January 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders deficit and cash flows for the year ended
January 31, 1997, the six months ended January 31, 1996 and each of the two
years in the period ended July 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TransTexas Gas Corporation as of January 31, 1997 and 1996, and the results of
its operations and cash flows for the year ended January 31, 1997, the six
months ended January 31, 1996, and each of the two years in the period ended
July 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 1, 1997
40
<PAGE> 43
TRANSTEXAS GAS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,561 $ 11,248
Cash restricted for interest (Note 6)..................... 46,000 46,000
Accounts receivable....................................... 78,660 36,251
Receivable from affiliates................................ 3,248 3,697
Inventories............................................... 12,481 11,421
Other current assets...................................... 24,984 50,821
---------- ----------
Total current assets.............................. 188,934 159,438
---------- ----------
Property and equipment...................................... 2,280,880 2,008,068
Less accumulated depreciation, depletion and amortization... 1,434,487 1,292,728
---------- ----------
Net property and equipment -- based on the full cost
method of accounting for gas and oil properties of
which $158,973 and $136,360 at January 31, 1997 and
1996, respectively, were excluded from amortization.... 846,393 715,340
---------- ----------
Due from affiliates......................................... -- 26,846
Other assets, net........................................... 17,825 37,203
---------- ----------
$1,053,152 $ 938,827
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt...................... $ 5,787 $ 1,335
Accounts payable.......................................... 28,150 39,745
Accrued liabilities....................................... 83,411 74,756
---------- ----------
Total current liabilities......................... 117,348 115,836
---------- ----------
Long-term debt, less current maturities..................... 8,775 2,541
Production payments, less current portion................... 11,931 31,036
Senior secured notes........................................ 800,000 800,000
Subordinated notes.......................................... 101,092 --
Revolving credit agreement.................................. 26,268 20,365
Deferred revenue............................................ 54,554 32,850
Deferred income taxes....................................... 31,367 40,256
Payable to affiliates....................................... 19,621 15,193
Other liabilities........................................... 32,991 35,190
Commitments and contingencies (Note 12)..................... -- --
Stockholders' deficit:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 74,000,000 shares....... 740 740
Capital deficit........................................... (123,524) (107,040)
Retained earnings (accumulated deficit)................... 31,267 (48,140)
---------- ----------
(91,517) (154,440)
Advances to affiliates.................................... (59,278) --
---------- ----------
Total stockholders' deficit....................... (150,795) (154,440)
---------- ----------
$1,053,152 $ 938,827
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
41
<PAGE> 44
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
------------------------ ------------------------ -----------------------
1997 1996 1996 1995 1995 1994
---------- ----------- ---------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas
liquids......................... $ 363,459 $ 256,986 $ 124,663 $ 143,304 $ 275,627 $ 302,522
Transportation.................... 34,423 33,518 15,892 19,161 36,787 33,240
Gains on the sale of assets....... 7,856 474 474 -- -- --
Other............................. 609 360 127 52 285 157
---------- ---------- ---------- ---------- ---------- ----------
Total revenues................ 406,347 291,338 141,156 162,517 312,699 335,919
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating......................... 114,453 78,812 38,145 44,605 85,272 90,216
Depreciation, depletion and
amortization.................... 132,453 120,513 60,894 70,345 129,964 113,858
General and administrative........ 45,596 33,025 13,685 12,595 31,935 40,311
Taxes other than income taxes..... 22,566 15,234 7,484 6,288 14,038 13,243
Litigation settlements............ (96,000) (18,300) (18,300) -- -- (1,000)
---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses...... 219,068 229,284 101,908 133,833 261,209 256,628
---------- ---------- ---------- ---------- ---------- ----------
Operating income.............. 187,279 62,054 39,248 28,684 51,490 79,291
---------- ---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income................... 5,544 4,733 2,934 912 2,711 1,516
Interest expense.................. (97,007) (81,907) (43,370) (29,971) (68,508) (51,671)
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(expense).................. (91,463) (77,174) (40,436) (29,059) (65,797) (50,155)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes...................... 95,816 (15,120) (1,188) (375) (14,307) 29,136
Income tax expense (benefit)........ 12,491 (2,700) (416) (131) (2,415) 5,380
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item......... 83,325 (12,420) (772) (244) (11,892) 23,756
Extraordinary item -- loss on early
extinguishment of debt, net of tax
(Note 2).......................... -- (56,637) -- -- (56,637) --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............. $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529) $ 23,756
========== ========== ========== ========== ========== ==========
Net income (loss) per share:
Income (loss) before extraordinary
item............................ $ 1.13 $ (0.17) $ (0.01) $ -- $ (0.16) $ 0.33
Extraordinary item................ -- (0.77) -- -- (0.77) --
---------- ---------- ---------- ---------- ---------- ----------
$ 1.13 $ (0.94) $ (0.01) $ -- $ (0.93) $ 0.33
========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding....................... 74,000,000 74,000,000 74,000,000 74,000,000 74,000,000 71,105,263
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE> 45
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------- ----------------------- ---------------------
1997 1996 1996 1995 1995 1994
--------- ----------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............................ $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529) $ 23,756
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item......................... -- 56,637 -- -- 56,637 --
Depreciation, depletion and amortization... 132,453 120,513 60,894 70,345 129,964 113,858
Amortization of debt issue costs........... 8,387 3,558 1,295 1,524 3,787 2,818
Accretion of interest on subordinated
notes.................................... 1,647 -- -- -- -- --
Gain on litigation settlement.............. -- (18,300) (18,300) -- -- --
Gains on the sale of assets................ (7,856) (474) (474) -- -- --
Deferred income taxes...................... (8,889) 6,263 (416) (1,483) 5,196 (5,961)
Proceeds from volumetric production
payments................................. 58,621 32,850 32,850 -- -- --
Amortization of deferred revenue........... (36,917) -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable...................... (42,409) (5,604) (12,860) 7,859 15,115 (37,058)
Receivable from affiliates............... 449 380 272 765 873 (1,239)
Inventories.............................. (1,060) (3,229) (3,185) 1,753 1,709 977
Other current assets..................... (2,154) (3,210) (201) (2,193) (5,202) 351
Accounts payable......................... 9,900 (14,150) 3,677 3,006 (14,821) 4,496
Accrued liabilities...................... 31,134 (21,420) (3,843) (6,982) (24,559) 15,082
Transactions with affiliates, net........ (6,825) (17,788) (5,536) 265 (11,987) (721)
Other assets............................. 21,428 20 699 (885) (1,564) (728)
Other liabilities........................ (20,173) 5,163 (1,928) 602 7,693 20,612
--------- --------- --------- --------- --------- ---------
Net cash provided by operating
activities........................... 221,061 72,152 52,172 74,332 94,312 136,243
--------- --------- --------- --------- --------- ---------
Investing activities:
Capital expenditures......................... (340,651) (318,800) (155,886) (106,170) (269,084) (233,390)
Proceeds from the sale of assets............. 92,518 20,500 20,500 -- -- --
Withdrawals from cash restricted for
interest................................... 92,000 44,722 44,722 -- -- --
Increase in cash restricted for interest..... (92,000) (90,722) (46,000) -- (44,722) --
Advances to affiliate........................ (24,750) (4,700) (4,700) -- -- (8,257)
Payment of advances by affiliate............. -- 4,700 4,700 -- -- 8,257
Purchase of production payment from
affiliate.................................. -- -- -- -- -- (5,000)
Production payment by affiliate.............. -- 3,547 -- 844 4,391 609
--------- --------- --------- --------- --------- ---------
Net cash used in investing
activities........................... (272,883) (340,753) (136,664) (105,326) (309,415) (237,781)
--------- --------- --------- --------- --------- ---------
Financing activities:
Principal payments on long-term debt......... (19,135) (20,219) (219) -- (20,000) --
Proceeds from long-term borrowings........... 26,200 13,000 3,000 10,000 20,000 --
Revolving credit agreement, net.............. 5,903 11,664 20,365 8,701 -- --
Issuance of production payments.............. 28,598 49,500 -- -- 49,500 --
Principal payments on production payments.... (45,205) (16,699) (8,833) -- (7,866) --
Issuance of senior secured notes............. -- 800,000 -- -- 800,000 500,000
Retirement of senior secured notes........... -- (542,500) -- -- (542,500) --
Issuance of subordinated notes............... 99,445 -- -- -- -- --
Debt issue costs............................. (9,187) (15,716) (1,258) (452) (14,910) (19,418)
Issuance of common stock..................... -- -- -- -- -- 66,142
Dividend to TransAmerican.................... -- -- -- -- -- (32,960)
Transfer of litigation escrow to affiliate... (22,484) -- -- -- -- --
Restricted cash.............................. -- -- -- -- -- (29,133)
--------- --------- --------- --------- --------- ---------
Net cash provided by financing
activities........................... 64,135 279,030 13,055 18,249 284,224 484,631
--------- --------- --------- --------- --------- ---------
Net transactions with parent company........... -- -- -- -- -- (369,529)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.......................... 12,313 10,429 (71,437) (12,745) 69,121 13,564
Beginning cash and cash equivalents............ 11,248 819 82,685 13,564 13,564 --
--------- --------- --------- --------- --------- ---------
Ending cash and cash equivalents............... $ 23,561 $ 11,248 $ 11,248 $ 819 $ 82,685 $ 13,564
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE> 46
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
------------------- (ACCUMULATED ADVANCES STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT) TO AFFILIATES EQUITY (DEFICIT)
---------- ------ ----------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1993..... 1,000 $ -- $ 1 $ -- $ -- $ 1
Transfer, as adjusted
(Note 1)................ -- -- (142,078) -- -- (142,078)
Effect of stock split...... 68,999,000 690 (690) -- -- --
Issuance of common stock... 5,000,000 50 66,092 -- -- 66,142
Dividend to
TransAmerican........... -- -- (32,960) -- -- (32,960)
Net income................. -- -- 2,595 21,161 -- 23,756
---------- ---- --------- -------- -------- ---------
Balance at July 31, 1994..... 74,000,000 740 (107,040) 21,161 -- (85,139)
Net loss................... -- -- -- (68,529) -- (68,529)
---------- ---- --------- -------- -------- ---------
Balance at July 31, 1995..... 74,000,000 740 (107,040) (47,368) -- (153,668)
Net loss................... -- -- -- (772) -- (772)
---------- ---- --------- -------- -------- ---------
Balance at January 31,
1996....................... 74,000,000 740 (107,040) (48,140) -- (154,440)
Elimination of intercompany
gain on property
purchased from
affiliate............... -- -- -- (3,918) -- (3,918)
Transfer of litigation
escrow to affiliate..... -- -- (22,484) -- -- (22,484)
Contribution of Signal
Capital Holdings
Corporation stock by
affiliate............... -- -- 6,000 -- -- 6,000
Advances to affiliates..... -- -- -- -- (59,278) (59,278)
Net income................. -- -- -- 83,325 -- 83,325
---------- ---- --------- -------- -------- ---------
Balance at January 31,
1997....................... 74,000,000 $740 $(123,524) $ 31,267 $(59,278) $(150,795)
========== ==== ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE> 47
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to the Year Ended January 31, 1996 and the Interim
Period
Ended January 31, 1995, is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
TransTexas Gas Corporation (together with its subsidiaries, the "Company"
or "TransTexas") was incorporated in May 1993 for the purpose of operating
certain oil and gas and transmission assets previously operated by TransAmerican
Natural Gas Corporation ("TransAmerican") and certain of its subsidiaries. On
August 24, 1993, the Company issued $500 million in 10 1/2% Senior Secured Notes
due 2000 (the "Prior Notes"), and concurrently certain of these operations were
transferred at predecessor basis pursuant to an agreement among the Company,
TransAmerican and certain of its subsidiaries, and TransAmerican's sole
stockholder (the "Transfer"). As a result of the Transfer, the Company became a
wholly-owned subsidiary of TransAmerican and succeeded to the gas and oil
properties, exploration and development operations, and natural gas gathering
and transportation operations of TransAmerican and certain subsidiaries, except
for specific excluded assets (including accounts receivable) retained by
TransAmerican. The Company is currently an indirect subsidiary of TransAmerican.
TransAmerican and certain subsidiaries emerged from a proceeding under
Chapter 11 of the Bankruptcy Code on October 19, 1987, pursuant to a confirmed
Plan of Reorganization. With the proceeds of the Company's public offering of
the Prior Notes, the Company paid all allowed claims under TransAmerican's Plan
of Reorganization as well as certain other debts of TransAmerican. During 1996,
the Company reclassified approximately $21.6 million of deferred income taxes
payable to capital to properly reflect liabilities of TransAmerican.
TransTexas Transmission Corporation was incorporated in June 1993. In
December 1995, TransTexas Exploration Corporation ("TTEX") was incorporated as a
wholly-owned subsidiary of the Company and is an Unrestricted Subsidiary, as
defined in the Indenture (defined below). In January 1997, TransTexas Drilling
Services, Inc. was incorporated as a wholly-owned subsidiary of the Company.
Change in Fiscal Year
On January 12, 1996, the Board of Directors determined to change the fiscal
year end of the Company to January 31. The consolidated financial statements
include presentation of the year ended January 31, 1997 and the six months ended
January 31, 1996 (the "Transition Period") and the comparable prior year and six
month periods which are unaudited. Certain previously reported financial
information has been reclassified to conform with the current presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). The Company's most significant financial estimates are for
amounts based on remaining proved gas and oil reserves (see Note 17) and
contingencies. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
45
<PAGE> 48
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
The Company's inventories, consisting primarily of tubular goods, are
stated at the lower of average cost or market.
Gas and Oil Properties
The Company uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, the cost for successful as
well as unsuccessful exploration and development activities are capitalized.
Such capitalized costs and estimated future development and reclamation costs
are amortized on a unit-of-production method. Net capitalized costs of gas and
oil properties are limited to the lower of unamortized cost or the cost center
ceiling, defined as the sum of the present value (10% discount rate) of
estimated unescalated future net revenues from proved reserves; plus the cost of
properties not being amortized, if any; plus the lower of cost or estimated fair
value of unproved properties included in the costs being amortized, if any; less
related income tax effects.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.
Unevaluated properties and associated costs not currently being amortized
and included in oil and gas properties were $159 million and $136 million at
January 31, 1997 and 1996, respectively. The properties represented by these
costs were undergoing exploration activities at such date, or are properties on
which the Company intends to commence such activities in the future. The Company
believes that the unevaluated properties at January 31, 1997 will be
substantially evaluated in 12 to 24 months and it will begin to amortize these
costs at such time.
Other Property and Equipment
Other property and equipment are stated at cost. The cost of repairs and
minor replacements is charged to operating expense while the cost of renewals
and betterments is capitalized. At the time depreciable assets are retired, or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts. Gains or losses on dispositions in
the ordinary course of business are included in the consolidated statement of
operations. Impairment of other property and equipment is reviewed whenever
events or changes in circumstances indicate that the carrying value of assets
may not be recoverable.
Depreciation of pipeline and transmission facilities, oilfield services
equipment and other buildings and equipment is computed by the straight-line
method at rates that will amortize the unrecovered cost of depreciable property,
including assets acquired under capital leases, over their estimated useful
lives.
Costs of improving leased property are amortized over the estimated useful
lives of the assets or the terms of the leases, whichever is shorter.
Environmental Remediation Costs
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have future
economic benefits are expensed. Liabilities for these expenditures are provided
when the responsibility to remediate is probable and the amount of associated
costs is reasonably estimable.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other
Assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the straight-line method. In the
46
<PAGE> 49
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
event of a redemption of long-term debt, the related debt issue costs will be
charged to income in the period of redemption.
Defined Contribution Plan
The Company, through its parent company, TransAmerican, maintains a defined
contribution plan, which incorporates a "401(k) feature" as allowed under the
Internal Revenue Code. All investments are made through Massachusetts Mutual
Life Insurance Company. Employees who are at least 21 years of age and have
completed one year of credited service are eligible to participate on the next
semiannual entry date. The Company matches 10%, 20% or 50% of employee
contributions up to a maximum of 3% of the participant's compensation, based on
years of plan participation. The Company and its predecessor's contributions
with respect to this plan totaled $0.5 million, $0.3 million, $0.2 million, $0.1
million, $0.3 million and $0.2 million for years ended January 31, 1997 and
1996, the six months ended January 31, 1996 and 1995 and the years ended July
31, 1995 and 1994, respectively. All Company contributions are currently funded.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
different from the book value. The Company believes the book value of those
financial instruments that are classified as current approximate fair value
because of the short maturity of these instruments. For noncurrent financial
instruments, the Company uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
Revenue Recognition
The Company recognizes revenues from the sales of natural gas, condensate,
oil and natural gas liquids in the period of delivery. Revenues are recognized
from transportation of natural gas in the period the service is provided. The
sales method is used for natural gas imbalances that arise from jointly produced
properties.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to credit risk
consist principally of cash, trade receivables and commodity price swap
agreements. TransTexas selects depository banks based upon management's review
of the financial stability of the institution. Balances periodically exceed the
$100,000 level covered by federal deposit insurance. To date, there have been no
losses incurred due to excess deposits in any financial institution. Trade
accounts receivable are generally from companies with significant natural gas
marketing activities, who would be impacted by conditions or occurrences
affecting that industry. For further information regarding the Company's hedging
arrangements, see Note 16. The Company performs ongoing credit evaluations and,
generally, requires no collateral from its customers.
Income Taxes
The Company files a consolidated tax return with TransAmerican. Income
taxes are due from or payable to TransAmerican in accordance with a tax
allocation agreement (the "Tax Allocation Agreement"). It is the Company's
policy to record income tax expense as though the Company had filed separately.
Pursuant to the Tax Allocation Agreement, the Company is able to recognize
currently any benefits related to available tight sands credits. Deferred income
taxes are recognized, at enacted tax rates, to reflect the future effects of tax
carryforwards and temporary differences arising between the tax bases of assets
and liabilities and their financial reporting amounts in accordance with
Statement of Financial Accounting Standards No. 109 and the Tax Allocation
Agreement between the Company, TransAmerican and TransAmerican's other
subsidiaries. Income taxes include federal and state income taxes.
47
<PAGE> 50
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recently Issued Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") and
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). These statements will be adopted by the
Company effective January 31, 1998. SFAS 128 simplifies the computation of
earnings per share by replacing primary and fully diluted presentations with the
new basic and diluted disclosures. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. The Company has not determined
the impact of these pronouncements on its financial statements.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. The Company
does not believe the effect of adoption of SOP 96-1 in 1998 will have a material
impact on the Company's financial position, results of operations or cash flows.
2. PUBLIC OFFERING
On June 20, 1995, the Company issued $800 million aggregate principal
amount of 11 1/2% Senior Secured Notes due 2002 (the "Notes"). The Notes are
senior obligations of the Company collateralized by a lien on substantially all
existing and future collateral of the Company, which initially includes
substantially all of the properties and assets of the Company other than
Equipment, Receivables and Inventory, as defined in the indenture governing the
Notes (the "Indenture"). Such lien is subject to subordination under certain
circumstances as provided in the Indenture governing the TransTexas Notes. The
Notes bear interest at the rate of 11 1/2% per annum, payable semiannually on
June 15 and December 15, commencing December 15, 1995. The Notes will mature on
June 15, 2002.
In connection with the offering of the Notes, the Company commenced a
tender offer to purchase for cash all of its $500 million principal amount of
Prior Notes for 105% of their principal amount plus accrued and unpaid interest
to the date of purchase. In addition, holders of the Prior Notes were offered a
consent fee equal to $30 per $1,000 principal amount of Prior Notes in return
for their consents to amendments to the indenture governing the Prior Notes.
Substantially all of the Prior Notes were tendered pursuant to this offer.
The Company received net proceeds of approximately $787 million from the
sale of the Notes after deducting underwriting discounts, fees and expenses. The
Company used approximately $556 million of the net proceeds to retire the entire
principal amount of the Prior Notes, including premium and consent fees and
accrued and unpaid interest, and approximately $46 million to establish an
interest reserve account. The remainder was used for lease acquisitions,
drilling and development and general and corporate purposes. The Company
recorded an extraordinary loss on the extinguishment of the Prior Notes of
approximately $56.6 million, net of an income tax benefit. The components of
this charge are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Premium and consent fee..................................... $40,000
Write-off of unamortized debt issue costs................... 15,628
Underwriting fees and expenses.............................. 2,500
Related income tax benefit.................................. (1,491)
-------
$56,637
=======
</TABLE>
48
<PAGE> 51
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Prepayments:
Trade..................................................... $ 9,580 $ 4,464
Insurance................................................. 2,310 1,430
Properties held for sale.................................... -- 6,000
Deferred loss on commodity price swap agreements............ 8,276 31,317
Other....................................................... 4,818 7,610
------- -------
$24,984 $50,821
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
ESTIMATED JANUARY 31,
USEFUL LIFE ------------------------
(YEARS) 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Land............................................ $ 1,384 $ 660
Gas and oil properties.......................... 2,004,967 1,774,937
Gas transportation.............................. 10 193,443 160,819
Drilling services equipment and other........... 4-10 81,086 71,652
---------- ----------
$2,280,880 $2,008,068
========== ==========
</TABLE>
On July 2, 1996, the Company consummated the sale, effective as of May 1,
1996, of producing properties in Zapata County, Texas for consideration of
approximately $62 million. On June 17, and August 13, 1996, the Company
consummated the sales, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million and $21.5 million, respectively. The purchase price for each of
the properties discussed above was subject to adjustment for gas sales between
the effective date and the closing date. The Company retained the proceeds of
such gas sales.
In March 1996, the Company sold its 41.67% interest in the 76-mile, 24-inch
MidCon pipeline that runs from the Company's Thompsonville compressor station to
Agua Dulce for $7.5 million. The Company believes that its existing
transportation capacity in this area is adequate for the Company's production
and does not anticipate any material constraints on the transportation of its
natural gas as a result of this sale.
49
<PAGE> 52
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Debt issue costs, net of accumulated amortization of $2,875,
and $1,788 at January 31, 1997 and 1996, respectively..... $14,645 $13,845
Litigation escrow........................................... -- 22,972
Other....................................................... 3,180 386
------- -------
$17,825 $37,203
======= =======
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
11 1/2% Senior Secured Notes due 2002....................... $800,000 $800,000
13 1/4% Senior Subordinated Notes due 2003.................. 101,092 --
Notes payable, ranging from 9.43% to 13.0%, due through
2001...................................................... 14,562 3,876
-------- --------
Total long-term debt...................................... 915,654 803,876
Less current maturities..................................... 5,787 1,335
-------- --------
$909,867 $802,541
======== ========
</TABLE>
The Notes are senior obligations of the Company collateralized by a lien on
substantially all existing and future collateral of the Company, which initially
includes substantially all of the properties and assets of the Company other
than Equipment, Receivables and Inventory, as defined in the Indenture. The
Notes bear interest at the rate of 11 1/2% per annum, payable semiannually on
June 15 and December 15, commencing December 15, 1995. The Notes will mature on
June 15, 2002.
Capitalized words in the following discussion have the meanings as defined
in the Indenture. The Company will not have the right to redeem the Notes prior
to June 15, 2000, except that (i) prior to June 15, 1998, the Company may
redeem, at its option, up to $240 million aggregate principal amount of the
Notes in cash at a redemption price equal to 111.5% of the principal amount of
the Notes so redeemed, together with accrued and unpaid interest, if any, to the
redemption date, with the net proceeds of any Public Equity Offering and (ii) if
the Company makes a Major Asset Sale, the Company may redeem, at its option, at
any time after consummation of such Major Asset Sale, but in any event within 90
days of the expiration of any Offer to Purchase or any Change of Control Offer,
as applicable, made as a result of such Major Asset Sale, any or all of the
outstanding Notes in cash at a redemption price equal to 111.5% of the principal
amount of the Notes so redeemed, together with accrued and unpaid interest, if
any, to the redemption date. On or after June 15, 2000 and 2001, the Company
will have the right to redeem all or any part of the Notes in cash at the
redemption prices of 105.750% and 102.875%, respectively, together with accrued
and unpaid interest, if any, to the redemption date.
Pursuant to the Indenture, the Company maintains an account (the "Interest
Reserve Account") from which funds may only be disbursed in accordance with the
terms of a Cash Collateral and Disbursement Agreement (the "Disbursement
Agreement"). The Company deposited into the Interest Reserve Account, out of the
net proceeds from the sale of the Notes, funds sufficient to pay the aggregate
amount of the first interest payment due in respect of the Notes. Funds in the
Interest Reserve Account may be invested, at the direction of the Company
(except as provided below), only in cash and Cash Equivalents, and any interest
50
<PAGE> 53
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income thereon will be added to the balance of the Interest Reserve Account. The
Company must maintain a balance (the "Requisite Balance") in the Interest
Reserve Account at least equal to the amount necessary to satisfy the Company's
obligation to pay interest in respect of all then outstanding Notes on the next
Interest Payment Date; provided, however, that if, pursuant to the Disbursement
Agreement, any funds in the Interest Reserve Account are applied to the payment
of interest on the Notes, the Company shall not be obligated to maintain the
Requisite Balance during the period of 60 days immediately following the
Interest Payment Date in respect of which such payment was made.
The Company may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date,
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement provides that if the Company fails to pay an installment of interest
on the Notes on any Interest Payment Date, then all investments in the Interest
Reserve Account will be immediately liquidated and all funds in the Interest
Reserve Account will be deposited with the Indenture Trustee. If the Company has
not paid such installment of interest within five days after such Interest
Payment Date, or if the Company so instructs the Indenture Trustee, the
Indenture Trustee will apply such deposited funds to the payment of interest on
the Notes. The Disbursement Agreement will provide that funds may be disbursed
from the Interest Reserve Account and released to the Company only to the extent
that the balance thereof exceeds the Requisite Balance.
If the Company's Working Capital, as of the end of any fiscal quarter, is
less than $20 million, then the Company's Capital Expenditures for the next
succeeding fiscal quarter may not exceed 90% of (a) the Company's Consolidated
EBITDA for such prior fiscal quarter minus (b) the Company's Consolidated Fixed
Charges for such prior fiscal quarter. The Indenture also contains other
covenants affecting the Company's liquidity and capital resources, including
restrictions on the Company's ability to incur indebtedness, pledge assets and
pay dividends on its common stock. Working Capital does not include current
assets or current liabilities of TTEX, an Unrestricted Subsidiary.
In December 1996, the Company issued $189 million in face amount of 13 1/4%
Series A Senior Subordinated Notes due 2003 ("Subordinated Notes") to
unaffiliated third parties. The Subordinated Notes were sold with original issue
discount at a price equal to 52.6166% of the principal amount shown on the face
thereof, for gross proceeds of approximately $99.45 million. The Subordinated
Notes accrete at a rate of 13 1/4% compounded semi-annually. At such time as the
Notes are rated "B1" or better by Moody's Investors Service, Inc. and "BB" or
better by Standard & Poor's Corporation, Inc., or when the Notes are paid in
full, the Subordinated Notes will be exchanged for notes bearing interest at a
rate of 13 1/4% per annum, payable semi-annually on December 31 and June 30. In
addition, the holders of the Subordinated Notes will have the right to exchange
their notes for notes to be registered under the Securities Act of 1933, as
amended. Proceeds from the issuance of the Subordinated Notes were used for
working capital and general corporate purposes.
The Company's notes payable bear interest at rates ranging from 9.43% to
13% per annum and mature at various dates through 2001. These notes payable are
collateralized by certain of the Company's operating equipment. Aggregate
principal payments on the Company's notes payable at January 31, 1997 total $5.2
million, $5.6 million and $0.7 million for the fiscal years ended January 31,
1998, 1999 and 2000, respectively.
The fair value of the Notes, based on quoted market prices, was
approximately $880 million and $818 million as of January 31, 1997 and 1996,
respectively. The fair value of the Subordinated Notes, based on quoted market
prices of similar instruments, was $104 million as of January 31, 1997.
Liquidity
A primary source of funds to meet the Company's debt service and capital
requirements is net cash flow provided by operating activities, which is
extremely sensitive to the prices the Company receives for its natural
51
<PAGE> 54
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gas. The Company has entered into hedge agreements to reduce its exposure to
price risk in the spot market for natural gas. However, a substantial portion of
the Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development,
lease acquisitions, pipeline and other equipment additions. Since July 31, 1995,
the Company has relied on asset sales and various financings, in addition to
cash flow from operating activities, to meet its working capital requirements,
including maintenance of Working Capital as defined in the Indenture. The
Company anticipates that it will require additional financing or sales of assets
to fund planned levels of operations through at least January 1998.
The Company is engaged in exclusive negotiations to sell all of the stock
of TTC, its subsidiary that owns substantially all of the Company's Lobo Trend
producing properties and related pipeline transmission system, for an estimated
sales price of approximately $1.1 billion. In addition, the Company has engaged
an investment banking firm to assist in the sale of its interest in the
Lodgepole prospect in North Dakota. The Company intends to use the proceeds from
these transactions for general corporate purposes, which may include a
recapitalization of TransTexas. There can be no assurance that the Lobo Sale
will be consummated or, if consummated, will be upon the terms described herein.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
--------------------- --------------------- -------------------
1997 1996 1996 1995 1995 1994
------- ----------- ------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Seller financed obligations
incurred for capital
expenditures.............. $ 3,621 $ 1,095 $ 1,095 $ -- $ -- $ --
======= ======= ======= ======= ======= =======
Accounts payable and
long-term liabilities for
property and equipment.... $27,192 $29,191 $29,191 $ -- $ -- $ --
======= ======= ======= ======= ======= =======
</TABLE>
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
--------------------- --------------------- -------------------
1997 1996 1996 1995 1995 1994
------- ----------- ------- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest.................... $85,254 $88,468 $41,052 $29,971 $75,863 $26,978
======= ======= ======= ======= ======= =======
Income taxes (paid to
TransAmerican)............ $ 7,000 $ -- $ -- $ -- $ -- $ 1,858
======= ======= ======= ======= ======= =======
</TABLE>
The Company incurred approximately $112.9 million, $90.2 million, $50.8
million and $69.4 million of interest charges of which approximately $15.9
million, $8.3 million, $7.4 million and $0.9 million was capitalized for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
the year ended July 31, 1995, respectively, in connection with the acquisition
of certain of the Company's unevaluated gas and oil properties. During 1994, the
Company capitalized a total of approximately $0.7 million of interest in
connection with the expansion of the Company's pipeline system.
52
<PAGE> 55
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Royalties................................................... $27,607 $ 9,793
Taxes other than income taxes............................... 10,136 2,733
Accrued interest............................................ 13,370 11,756
Payroll..................................................... 5,413 4,832
Litigation settlements...................................... 1,263 7,053
Settlement values of commodity price swap agreements........ 13,276 31,317
Insurance................................................... 6,618 1,248
Other....................................................... 5,728 6,024
------- -------
$83,411 $74,756
======= =======
</TABLE>
9. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Litigation accrual.......................................... $ 8,008 $12,171
Litigation settlements...................................... 1,633 --
Short-term obligations expected to be refinanced:
Litigation settlements.................................... 2,500 14,747
Accrued capital expenditures.............................. 19,738 5,443
Current portion of dollar-denominated production
payments............................................... -- 1,765
Other....................................................... 1,112 1,064
------- -------
$32,991 $35,190
======= =======
</TABLE>
In April 1997, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of the
Company's properties for net proceeds of approximately $20 million. The Company
also completed a financing in the amount of $8.3 million at an interest rate of
12.7% per annum and a 36-month term, collateralized by certain operating
equipment. Proceeds from these transactions, net of current maturities, were
used to pay all of the obligations listed above under the caption "Short-term
obligations expected to be refinanced" at January 31, 1997.
In February 1996, the Company completed a financing in the amount of $10
million at an interest rate of 12% per annum and a 36-month term, collateralized
by certain operating equipment. In February 1996, the Company also amended a
purchase agreement with an unaffiliated third party related to a volumetric
production payment to include an additional 14 Bcf which were sold to the third
party for a purchase price of approximately $16 million. Proceeds from these
transactions net of current maturities were used to pay all of the obligations
listed above under the caption "Short-term obligations expected to be
refinanced" at January 31, 1996.
53
<PAGE> 56
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
---------------------- ------------------- -------------------
1997 1996 1996 1995 1995 1994
-------- ----------- ----- ----------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal:
Current.................... $ 21,380 $(8,963) $ -- $ 1,352 $(7,611) $10,909
Deferred................... (8,889) 6,263 (416) (1,483) 5,196 (5,961)
State:
Current.................... -- -- -- -- -- 432
-------- ------- ----- ------- ------- -------
Income tax expense (benefit)
before extraordinary
item....................... 12,491 (2,700) (416) (131) (2,415) 5,380
Tax benefit of extraordinary
item....................... -- (1,491) -- -- (1,491) --
-------- ------- ----- ------- ------- -------
Total income tax expense
(benefit).................. $ 12,491 $(4,191) $(416) $ (131) $(3,906) $ 5,380
======== ======= ===== ======= ======= =======
</TABLE>
In August 1993, the Omnibus Reconciliation Act of 1993, among other things,
increased the maximum corporate marginal federal income tax rate to 35% from 34%
effective January 1, 1993. Deferred income taxes as of July 31, 1994 include an
adjustment of approximately $2.7 million related to this increase in corporate
tax rates. Included in "Payable to affiliates" at January 31, 1997 and 1996 are
income taxes payable to TransAmerican totaling approximately $14.4 million and
$3.0 million, respectively.
During the third quarter of 1994, TransAmerican's refining subsidiary
reached a level of operations, which, for federal income tax purposes, changed
the tax status of TransAmerican's consolidated group to an integrated oil
company from an independent producer. As a result of this change in tax status,
the Company was able to utilize a greater portion of its available tight sands
credits, thereby reducing its effective tax rate for 1994. The Company was
unable to utilize any tight sands credits during the Transition Period or in
1995 due to its net loss position. Total income tax expense differs from amounts
computed by applying the statutory federal income tax rate to income before
income taxes. The items accounting for this difference are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
--------------------- ------------------- --------------------
1997 1996 1996 1995 1995 1994
------- ----------- ----- ----------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
(benefit) at the statutory
rate....................... $33,536 $(25,637) $(416) $(131) $(25,352) $10,197
Increase (decrease) in tax
resulting from:
Tax rate change............ -- -- -- -- -- 2,745
State income taxes, net of
Federal income tax
benefit................. -- -- -- -- -- 281
Tight sands credit......... (7,441) 7,842 -- -- 7,842 (7,843)
Valuation allowance........ (13,604) 13,604 -- -- 13,604 --
------- -------- ----- ----- -------- -------
$12,491 $ (4,191) $(416) $(131) $ (3,906) $ 5,380
======= ======== ===== ===== ======== =======
</TABLE>
54
<PAGE> 57
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's tax attributes are as follows (in
thousand of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1997 1996
--------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation, depletion and amortization.................. $ 82,274 $ 83,724
Other, net................................................ 1,139 359
--------- --------
83,413 84,083
--------- --------
Deferred tax assets:
Investment in affiliates.................................. 275,450 --
Net operating loss carryforwards.......................... -- 22,687
Contingent liabilities.................................... 3,403 3,700
Alternative minimum tax credit carryforward............... 48,643 31,044
--------- --------
327,496 57,431
Valuation allowance......................................... (275,450) (13,604)
--------- --------
Net deferred tax assets..................................... 52,046 43,827
--------- --------
$ 31,367 $ 40,256
========= ========
</TABLE>
The Company can only use alternative minimum tax credit carryforwards to
the extent it is a regular federal income tax payer.
In order to realize the deferred tax asset related to the investment in
affiliate, TransTexas must sell the common stock of the affiliate and generate
sufficient taxable income to offset the asset amount. A valuation allowance has
been provided for this deferred tax asset as it is not more likely than not that
the aforementioned events will occur.
Under certain circumstances, TransAmerican, TransAmerican Exploration
Corporation ("TEXC"), TEC or TARC may sell or otherwise dispose of shares of
common stock of the Company. If, as a result of any sale or other disposition of
the Company's common stock, the direct and indirect ownership of the Company by
TransAmerican is less than 80% (measured by voting power and value), the Company
will no longer be a member of TransAmerican's consolidated group for federal tax
purposes (the "TNGC Consolidated Group") and, with certain exceptions, will no
longer be obligated under the terms and conditions of, or entitled to the
benefits of, the Tax Allocation Agreement ("Deconsolidation"). Such sales may be
necessary to raise funds required to complete TARC's Capital Improvement
Program. Further, if TEC or TARC sells or otherwise transfers any stock of TARC,
or issues any options, warrants or other similar rights relating to such stock,
outside of the TNGC Consolidated Group, then a Deconsolidation of both TARC and
the Company from the TNGC Consolidated Group would occur. An event that results
in Deconsolidation of the Company from the TNGC Consolidated Group for tax
purposes could result in the acceleration of payment of a substantial amount of
federal income taxes by TransAmerican. The tax liability to TransAmerican that
would result from Deconsolidation is estimated to be approximately $15 million
at January 31, 1997. Each member of a consolidated group filing a consolidated
federal income tax return is severally liable for the consolidated federal
income tax liability of the consolidated group. There can be no assurance that
TransAmerican will have the ability to satisfy the above tax obligation at the
time due and, therefore, the Company, TARC or TEC may be required to pay the
tax.
Under the Tax Allocation Agreement, the Company will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and will
be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
55
<PAGE> 58
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. TRANSACTIONS WITH AFFILIATES
In February 1996, the Company purchased the building for its corporate
headquarters from TransAmerican for $4 million.
In December 1994, the Company entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $11.7
million, $21.4 million, $11.1 million, $4.4 million and $14.8 million for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
1995 and the year ended July 31, 1995, respectively. The receivable from
TransAmerican for natural gas sales totaled approximately $13.6 million at
January 31, 1997. Pursuant to this agreement, interest accrues on all unpaid
balances at a rate of prime plus 2% per annum.
The Company sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$2.7 million and $2.4 million, respectively, for the years ended January 31,
1997 and 1996, $2.2 million and $2.3 million, respectively, for the six months
ended January 31, 1996 and 1995 and $2.5 million and $2.3 million, respectively,
for the years ended July 31, 1995 and 1994. The receivable from TARC for natural
gas sales totaled approximately $3.2 million at January 31, 1997.
As of January 1996, the Company and TTEX entered into a Drilling Program,
as defined in the Indenture. Pursuant to the Program, TTEX received a portion of
revenues, in the form of a production payment, from certain of the Company's
wells. The production payment was transferred in consideration of a note payable
in the amount of $23.7 million issued by TTEX. In July 1996, TTEX transferred
this production payment to the Company in the form of a dividend, and the
Company forgave the $13.2 million remaining balance of the note payable.
In July 1996, TTEX loaned $9.5 million to TransAmerican pursuant to the
terms of a $25 million promissory note due July 31, 1998 that bears interest,
payable quarterly, at 15% per annum. TTEX has made further advances pursuant to
the note, subject to the same terms. The amount outstanding under this
promissory note totaled approximately $26.6 million at January 31, 1997. The
Company believes that the advances by TTEX to TransAmerican reduce the risk of
tax deconsolidation (and potential tax liability of the Company) that could be
caused by the sale of shares of the Company's common stock by TransAmerican or
its affiliates. TransAmerican has not made its scheduled interest payments on
this note. TTEX has agreed to defer the interest payments on the note until
1998.
Pursuant to the terms of the Transfer Agreement, TransAmerican is obligated
to indemnify the Company for all future losses incurred in connection with
litigation or bankruptcy claims assumed in the Transfer. In order to facilitate
the settlement of the Terry/Penrod litigation in May 1996, the Company advanced
to TransAmerican $16.4 million of the settlement amount in exchange for a note
receivable. TransAmerican has not made its scheduled interest payments on this
note. The Company has agreed to defer the interest payments on the note until
1998. In addition, the Company transferred escrowed funds of approximately $22
million to TransAmerican pursuant to the Terry/Penrod settlement. In connection
with this settlement, the Company received from Terry the reversionary interest
in certain producing properties. The Company and TransAmerican had intended that
such interests would revert to TransAmerican under the Transfer Agreement;
however, the Company retained such interests in partial satisfaction of
TransAmerican's indemnity obligations. The amount outstanding under this
agreement totaled approximately $7 million at January 31, 1997.
In September 1996, the Company purchased from TransDakota Oil Corporation
("TDOC"), a subsidiary of TransAmerican, certain oil and gas leasehold interests
located in the Lodgepole area in North Dakota for approximately $20 million. The
Company believes that the combination of these interests, together with the
Company's other interests in the Lodgepole area, will produce a more marketable
property package. The purchase price was $3.9 million greater than TDOC's basis
in the properties. The properties have been
56
<PAGE> 59
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded in the Company's financial statements at carryover basis and the $3.9
million has been classified as a reduction of retained earnings.
The Company provides accounting and legal services to TARC and TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement (the "Services Agreement"). The Company provides general commercial
legal services and certain accounting services (including payroll, tax, and
treasury services) to TARC and TEC for a fee of $26,000 per month. At
TransAmerican's request, the Company, at its election, may provide drilling and
workover services. The receivable under this agreement was approximately $5.1
million as of January 31, 1997.
The Company has made various advances in an aggregate of approximately $7
million for lease purchases and other corporate expenses. The entire amount was
outstanding at January 31, 1997.
In September 1996, the Company and TransAmerican entered into an agreement
pursuant to which the Company obtained an $11.5 million dollar-denominated
production payment, subsequently increased to $19 million, bearing interest at
17% per annum, burdening certain oil and gas interests owned by TransAmerican as
a source of repayment for certain of the receivables from TransAmerican
discussed above. On January 31, 1997, TransAmerican conveyed at historical cost
certain oil and gas properties to the Company for a purchase price of $31.6
million. A portion of the purchase price was used to offset obligations under
the September 1996 production payment. At January 31, 1997, $59 million of
related-party receivables has been recorded as a contra-stockholder equity
account due to uncertainties regarding the repayment terms for such receivables.
The Company has agreed to defer any interest payments due from TransAmerican
until 1998.
In January 1997, an affiliate of the Company contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with a
book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TransTexas Transmission Corporation ("TTC").
In January 1997, TransTexas contributed substantially all of its Lobo Trend
properties to TTC (see Note 13).
12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
As part of the Transfer, the Company has succeeded to the potential
liability, if any, of TransAmerican and certain subsidiaries in connection with
the lawsuits described below. The Company has assumed liability for litigation
up to $15 million plus the difference, if any, between $10 million and the costs
(if less than $10 million) incurred to resolve the disputed claims. Pursuant to
an agreement among the Company, TransAmerican and certain of its subsidiaries,
as amended (the "Transfer Agreement"), TransAmerican has agreed to indemnify the
Company against all losses incurred by the Company in excess of $25 million in
connection with (a) disputed claims in TransAmerican's bankruptcy and (b) other
litigation assumed by the Company and other agreements related to
TransAmerican's plan of reorganization (other than settlements and judgments
paid from escrowed cash established in connection with TransAmerican's plan of
reorganization). TransAmerican is required to indemnify the Company for all
future losses incurred in connection with litigation or bankruptcy claims
assumed in the Transfer. Any indemnification payments received from
TransAmerican for which the Company is the primary obligor will be considered a
contribution of capital. There can be no assurance that TransAmerican will have
the financial ability to meet its indemnification obligations.
Alameda. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican and John R. Stanley in the 234th Judicial District Court, Harris
County, Texas, claiming that TransAmerican failed to
57
<PAGE> 60
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
account to Alameda for a share of the proceeds TransAmerican received in a 1990
settlement of litigation with El Paso Natural Gas Company ("El Paso"), and that
TransAmerican has been unjustly enriched by its failure to share such proceeds
with Alameda. The court granted Mr. Stanley's motion for summary judgment. On
September 20, 1995, the jury rendered a verdict in favor of TransAmerican.
Alameda appealed to the Fourteenth Court of Appeals, which affirmed the trial
court judgment in favor of TransAmerican. Alameda filed a motion for rehearing
on April 10, 1997.
Coastal. On October 28, 1991, The Coastal Corporation ("Coastal") filed an
action against TransAmerican that was consolidated in the 49th Judicial District
Court, Webb County, Texas, alleging breach of contract and tortious interference
related to two gas sales contracts and a transportation agreement, seeking
unspecified actual and punitive damages and injunctive relief. On April 22,
1994, the court entered a judgment adverse to TransAmerican and the Company
requiring them to pay $1.3 million plus $0.7 million in attorneys' fees to
Coastal. On May 29, 1996, the Court of Appeals affirmed the judgment. In
December 1996, the Supreme Court of Texas declined to hear the appeal. Pursuant
to the final judgment, TransTexas is required to remit the judgment amount plus
interest on or before May 25, 1997 or Coastal will have a right of offset for
gas delivered pursuant to a contract with TransTexas.
Aspen. TransAmerican brought suit on September 29, 1993 against Aspen
Services, Inc. ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. This suit
is pending in the 215th Judicial District Court, Harris County, Texas. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts received
by Aspen. On July 19, 1995, Aspen filed a counterclaim and third party claim
against TransAmerican, the Company, and affiliated entities, asserting, among
other things, that these entities failed to make certain payments and properly
market the gas from these wells. Aspen is seeking damages in an unspecified
amount, as well as certain equitable claims. In April 1997, the trial court
ruled against Aspen on all of its claims and counterclaims.
Finkelstein. On April 15, 1990, H.S. Finkelstein filed suit against
TransAmerican in the 49th Judicial District Court, Zapata County, Texas,
alleging that TransAmerican failed to pay royalties and improperly marketed oil
and gas produced from certain leases. On September 27, 1994, the plaintiff added
the Company as an additional defendant. On January 6, 1995, a judgment against
TransAmerican and the Company was entered for approximately $18 million in
damages, interest and attorneys' fees. The Company and TransAmerican appealed
the judgment to the Fourth Court of Appeals, San Antonio, Texas, which affirmed
the judgment on April 3, 1996. The Company and TransAmerican filed a motion for
rehearing. On August 14, 1996, the Fourth Court of Appeals reversed the trial
court judgment and rendered judgment in favor of TransAmerican and the Company.
On August 29, 1996, the plaintiff filed a motion for stay and a motion for
rehearing with the court. On October 9, 1996, the court denied Finkelstein's
rehearing request. In November 1996, Finkelstein filed an application for writ
of error with the Supreme Court of Texas.
On April 22, 1991, the plaintiff filed a separate suit against
TransAmerican and various affiliates in the 49th Judicial District Court, Zapata
County, Texas, alleging an improper calculation of overriding royalties
allegedly owed to the plaintiff and seeking damages and attorneys' fees in
excess of $33.7 million. On November 18, 1993, the plaintiff added the Company
as an additional defendant. The parties arbitrated this matter in January 1997.
A decision is expected in May 1997.
Briones. In an arbitration proceeding, Jesus Briones, a lessor, claimed
that one of the Company's wells on adjacent lands had been draining natural gas
from a portion of his acreage leased to the Company on which no well had been
drilled. On October 31, 1995, the Arbitrator decided that drainage had occurred.
On June 3, 1996, the Arbitrator issued a letter indicating that drainage damages
would be awarded to Briones in the amount of approximately $1.4 million. The
Arbitrator entered his award of damages on June 27, 1996. On
58
<PAGE> 61
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
July 3, 1996, the Company filed a petition in the 49th Judicial District Court,
Zapata County, Texas, to vacate the Arbitrator's award. Briones also filed its
petition to confirm the Arbitrator's award. In March 1997, the court determined
to grant Briones' motion for summary judgment. TransTexas intends to file a
motion for a new trial.
Frost. On November 10, 1994, Frost National Bank filed suit against the
Company in the 111th Judicial District Court, Webb County, Texas, seeking a
declaratory judgment determination that the Company failed to properly and
accurately calculate royalties under a lease. The plaintiff has demanded $10
million plus interest. This litigation is in the discovery stage and trial is
set for September 8, 1997.
Farias. On February 15, 1996, Celita Suzana Farias filed a wrongful death
action in the 93rd Judicial District Court, Hidalgo County, Texas, against the
Company and one of its contractors for fatal injuries suffered by the
plaintiff's husband at the Yzaguirre Heirs #3 Well on February 13, 1996. The
plaintiff alleges the defendants operated a crane in such a manner that they
were negligent and grossly negligent. The plaintiff seeks unspecified damages.
On March 7, 1996, the mother of the deceased Company employee filed a petition
in intervention also alleging negligence, gross negligence and malice and
seeking unspecified damages. This litigation is in the discovery stage.
The Company is also a named defendant in other ordinary course, routine
litigation incidental to its business. Although the outcome of these other
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position. At January
31, 1997, the possible range of estimated losses related to all of the
aforementioned claims, in addition to the estimates accrued by the Company, is
$0 to $36 million. The resolution in any reporting period of one or more of
these matters in a manner adverse to the Company could have a material impact on
the Company's results of operations and cash flows for that period. Litigation
expense, including legal fees, was approximately $19 million and $11 million for
the years ended January 31, 1997 and 1996, respectively. Litigation expense,
consisting primarily of legal fees, totaled approximately $3 million and $2
million, respectively, for the six months ended January 31, 1996 and 1995.
Litigation expense, including legal fees, was approximately $11 million and $20
million for the years ended July 31, 1995 and 1994, respectively. The Company
has delivered letters of credit and placed into escrow cash, which letters of
credit and cash total approximately $21 million, to be applied to the litigation
claims described above.
Environmental Matters
The Company's operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of the Company's operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. The Company also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. It is not anticipated that the Company will be required
in the near future to expend amounts that are material to the financial
condition or operations of the Company by reason of environmental laws and
regulations, but because such laws and regulations are frequently changed and,
as a result, may impose increasingly strict requirements, the Company is unable
to predict the ultimate cost of complying with such laws and regulations.
Potential Effects of a Change of Control
The Indenture provides that, upon the occurrence of a Change of Control (as
such term is defined in the Indenture), each holder of the Notes will have the
right to require the Company to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. A Change of Control
would
59
<PAGE> 62
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be deemed to occur under the Indenture in the case of certain changes or other
events in respect of the ownership or control of the Company, including any
circumstance pursuant to which any person or group, other than John R. Stanley
and his wholly-owned subsidiaries or the trustee under the indenture governing
TARC's $440 million aggregate principal amount of mortgage notes ("TARC Notes")
is or becomes the beneficial owner of more than 50% of the total voting power of
the Company's then outstanding voting stock, unless the Notes have an investment
grade rating for the period of 120 days thereafter. The term "person," as used
in the definition of Change of Control, means a natural person, company,
government or political subdivision, agency or instrumentality of a government
and also includes a "group," which is defined as two or more persons acting as a
partnership, limited partnership or other group. The holders of the Subordinated
Notes would also have a right to require the Company to repurchase such
securities upon the occurrence of a change of control. In addition, certain
changes or other events in respect of the ownership or control of the Company
that do not constitute a Change of Control under the Indenture may result in a
"change of control" of the Company under the terms of the Company's credit
facility (the "BNY Facility") and certain equipment financing. Such an
occurrence could create an obligation for the Company to repay such other
indebtedness. At January 31, 1997, the Company had approximately $34.7 million
of indebtedness (excluding the Notes and Subordinated Notes) subject to such
right of repayment or repurchase. In the event of a Change of Control under the
Indenture or a "change of control" under the terms of other outstanding
indebtedness, there can be no assurance that the Company will have sufficient
funds to satisfy any such payment obligations.
TARC owns a large petroleum refinery in the Gulf Coast region along the
Mississippi River, approximately 20 miles from New Orleans, Louisiana. In
February 1995, TARC began a construction and expansion program designed to
reactivate the refinery and increase its complexity ("Capital Improvement
Program"). TARC's debt securities are collateralized by, among other things, an
aggregate of 50.45 million shares of the Company's common stock (the "Common
Stock"). From February 1995 through March 1997, TARC spent approximately $238
million on the Capital Improvement Program, procured a majority of the equipment
required and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary to complete this
project.
Primarily because additional funding was not available to TARC on a timely
basis, TARC was unable to meet the construction completion timetable for the
Capital Improvement Program as required under the TARC Notes Indenture. The
Holders of the TARC Notes have waived, until July 15, 1997, the default under
the TARC Notes Indenture which would have occurred on February 15, 1997 as a
result of TARC's failure to meet the required completion timetable. The waiver
of this default will cease to be effective on July 15, 1997. Unless the default
has been further waived or TARC completes a recapitalization that satisfies the
holders of the TARC Notes, such holders would then be entitled to pursue
remedies available under the TARC Notes Indenture, including acceleration of the
maturity of the TARC Notes. Any such event of default could result in the sale,
following the occurrence of such event of default, of some or all of the
remaining shares of Common Stock pledged to collateralize the TARC Notes. A
foreclosure on such shares would constitute a "change of control" of the Company
under the BNY Facility and certain equipment financing, which may create an
obligation for the Company to repay amounts outstanding thereunder. A sale of
such shares following a foreclosure could also result in a Change of Control
under the Indenture.
60
<PAGE> 63
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
As of January 31, 1997, the Company has long-term leases covering land and
other property and equipment. Rental expense was approximately $6 million and $4
million for the twelve months ended January 31, 1997 and 1996, respectively, $3
million for each of the six months ended January 31, 1996 and 1995 and $5
million and $4 million for the fiscal years ended July 31, 1995 and 1994,
respectively. Future minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
as of January 31, 1997, including the sale-leaseback transaction described
below, are as follows (in thousands of dollars):
<TABLE>
<S> <C>
1998...................................................... $2,896
1999...................................................... 1,900
2000...................................................... 1,791
2001...................................................... 1,450
2002...................................................... 926
------
$8,963
======
</TABLE>
In January 1996, the Company completed a sale-leaseback transaction in the
amount of $3 million, related to its operating equipment. The sale-leaseback
transaction has a monthly lease payment of approximately $56,000 per month and a
60-month term. At the end of the lease term, the lease will automatically renew
for 12 months at approximately $38,000 per month.
Gas Sales Commitments
In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for future
sales under the amended contract. In consideration, TransAmerican agreed to pay
the buyer approximately $0.4 million per month through June 1997. This
commitment was assumed by the Company.
The Company and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which the Company
will deliver 100,000 MMBtu of natural gas per day through August 1997. The
selling price for this gas is determined by certain industry averages as defined
in the contract.
The Company and MidCon entered into a long-term gas purchase contract on
January 10, 1996, under which the Company is required to deliver a total of
100,000 MMBtu per day to four specified delivery points for a period of five
years. The purchase price is determined by an industry index less $0.09 per
MMBtu. Deliveries commenced September 1, 1996.
Letter of Credit
In January 1996, the Company entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
the Company. If there is a draw under the letter of credit, the Company is
required to reimburse the third party within 60 days. The Company has agreed to
issue up to 8.6 million shares of common stock of the Company to the third party
if this contingent obligation to such third party becomes fixed and remains
unpaid for 60 days. The Company does not believe that this contingency will
occur. If the obligation becomes fixed, and alternative sources of capital are
not available, the Company could elect to sell shares of the Company's common
stock prior to the maturity of the obligation and use the proceeds of such sale
to repay the third party. Based on the current capitalization of the Company,
the issuance of shares to satisfy this obligation would result in
Deconsolidation for tax purposes (see Note 10).
61
<PAGE> 64
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Production Payments
On February 28, 1995, the Company sold to an unaffiliated third party a
term royalty in the form of a dollar-denominated production payment in certain
of the Company's properties for proceeds of $49.5 million, less closing costs of
approximately $2 million. This production payment was paid in full in May 1996
with a portion of the proceeds of the volumetric production payment described
below.
In January 1996, the Company sold to an unaffiliated third party a term
overriding royalty interest in the form of a volumetric production payment
carved out of its interests in certain of its producing properties. For net
proceeds of approximately $33 million, the Company conveyed to the third party a
term overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional net
proceeds of approximately $16 million, the Company supplemented the production
payment to subject a percentage of its interests in certain additional producing
properties to the production payment and to include additional volumes of
approximately 14 Bcf of natural gas within the base volume subject to the
production payment. At January 31, 1997, approximately 23 Bcf of natural gas
remained subject to this production payment.
In May 1996, the Company sold to two unaffiliated third parties a
volumetric production payment for net proceeds of approximately $43 million. The
Company conveyed to the third parties a term overriding royalty equivalent to a
base volume of approximately 37 Bcf of natural gas, subject to certain increases
in the base volume and in the percentage interest dedicated if certain minimum
performance and delivery requirements are not met. Concurrently with the closing
of that transaction, the Company and one of the unaffiliated third parties
terminated, prior to the expiration of its stated term, a dollar-denominated
term overriding royalty interest previously sold by the Company to that
unaffiliated third party for a payment by the Company of approximately $25
million. At January 31, 1997, approximately 24 Bcf of natural gas remained
subject to this production payment.
In September 1996, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of the
Company's properties for proceeds of $13.5 million. The production payment calls
for the repayment of the primary sum plus an amount equivalent to a 16% annual
interest rate on the unpaid portion of such primary sum.
In September 1996, the Company entered into a drilling program agreement
with an unaffiliated third party for the reimbursement of certain drilling costs
with respect to wells drilled by the Company. Pursuant to the agreement, upon
the approval of the third party of a recently drilled or currently drilling well
for inclusion in the program, the third party will commit to the reimbursement
of all or a portion of the cost of such well, up to an aggregate maximum for all
such wells of $16.5 million. The program wells are subject to a dollar-
denominated production payment equal to the primary sum of such reimbursed
costs, plus an amount equivalent to a 17.5% annual interest rate on the unpaid
portion of such primary sum.
In April 1997, the Company sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of the
Company's properties for proceeds of approximately $20 million. The production
payment calls for the repayment of the primary sum plus an amount equivalent to
a 16% annual interest rate on the unpaid portion of such primary sum.
Possible Federal Tax Liability
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican. No
federal tax opinion was rendered with respect to this transaction, however, and
TransAmerican has not obtained a ruling from the Internal Revenue Service (the
"IRS") regarding this transaction. TransAmerican has taken the federal tax
position that the entire amount of this debt cancellation
62
<PAGE> 65
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is excluded from its income under the cancellation of indebtedness provisions
("COD Exclusion") of the Internal Revenue Code of 1986, as amended (the "Code"),
and has reduced its tax attributes (including its net operating loss and credit
carryforwards) as a consequence of the COD Exclusion. TransTexas believes that
there is substantial legal authority to support the position that the COD
Exclusion applies to the cancellation of TransAmerican's indebtedness. However,
due to factual and legal uncertainties there can be no assurance that the IRS
will not challenge this position, or that any such challenge would not be
upheld. Under the Tax Allocation Agreement, the Company has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such tax
would be offset in future years by alternative minimum tax credits and retained
loss and credit carryforwards to the extent recoverable from TransAmerican. The
IRS has commenced an audit of the TransAmerican Consolidated Group's tax returns
for its taxable years ended July 31, 1994 and July 31, 1995. Because the audit
is in its initial stages, it is not possible to predict the scope of the IRS'
review or whether any tax deficiencies will be proposed by the IRS as a result
of its review.
The Company has significant contingent liabilities, including liabilities
with respect to litigation matters and other obligations assumed in the
Transfer. In addition, a change of control or other event that results in
deconsolidation of the Company and TransAmerican for federal income tax purposes
could result in acceleration of a substantial amount of federal income taxes.
These matters, individually and in the aggregate, amount to significant
potential liability which, if adjudicated in a manner adverse to the Company in
one reporting period, could have a material adverse effect on the Company's cash
flow or operations for that period. Although the outcome of these contingencies
or the probability of the occurrence of these contingencies cannot be predicted
with certainty, the Company does not expect these matters to have a material
adverse effect on its financial position.
13. BUSINESS SEGMENTS
The Company conducts its operations through two industry segments:
exploration and production ("E&P"), and gas transportation ("Transportation").
The E&P segment explores for, develops, produces and markets natural gas,
condensate and natural gas liquids. The Transportation segment engages in
intrastate natural gas transportation and marketing. All of the Company's
significant gas and oil operations are located in Webb, Zapata and Starr
Counties, Texas. Segment income excludes interest income, interest expense and
unallocated general corporate expenses. Identifiable assets are those assets
used in the operations of the segment. Other assets consist primarily of debt
issue costs, certain receivables and other property and equipment. The Company's
revenues are derived principally from sales to interstate and intrastate gas
pipelines, direct end users, industrial companies, marketers, and refiners
located in the United States. As a general policy, collateral is not required
for receivables, but customers' financial condition and credit worthiness are
regularly evaluated. The Company is not aware of any significant credit risk
relating to its customers and has not experienced significant credit losses
associated with such receivables.
For the year ended January 31, 1997, three customers provided approximately
$70 million, $59 million and $48 million, respectively, in E&P and
Transportation revenues. For the Transition Period, three customers provided
approximately $25 million, $22 million and $14 million, respectively, in E&P and
Transportation revenues. For the year ended July 31, 1995, two customers
provided approximately $73 million and $41 million, respectively, in E&P and
Transportation revenues. In 1994, one customer provided approximately $51
million in E&P and Transportation revenues.
63
<PAGE> 66
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Business segment information is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1997
Exploration and production.... $363,459 $230,560 $122,570 $314,013 $ 884,638
Gas transportation............ 42,200 (9,018) 8,466 33,636 98,903
Other......................... 688 (34,263) 1,417 11,165 69,611
-------- -------- -------- -------- ----------
$406,347 $187,279 $132,453 $358,814 $1,053,152
======== ======== ======== ======== ==========
YEAR ENDED JANUARY 31,
1996(unaudited)
Exploration and production.... $256,986 $ 81,438 $111,993 $335,903 $ 739,345
Gas transportation............ 33,518 (4,362) 8,204 17,005 72,815
Other......................... 834 (15,022) 316 20,228 126,667
-------- -------- -------- -------- ----------
$291,338 $ 62,054 $120,513 $373,136 $ 938,827
======== ======== ======== ======== ==========
TRANSITION PERIOD ENDED JANUARY
31, 1996
Exploration and production.... $124,663 $ 51,443 $ 56,543 $176,386 $ 739,345
Gas transportation............ 15,892 (4,393) 4,194 13,266 72,815
Other......................... 601 (7,802) 157 15,836 126,667
-------- -------- -------- -------- ----------
$141,156 $ 39,248 $ 60,894 $205,488 $ 938,827
======== ======== ======== ======== ==========
SIX MONTHS ENDED JANUARY 31,
1995(unaudited)
Exploration and production.... $143,304 $ 32,860 $ 66,175 $ 99,672 $ 483,984
Gas transportation............ 19,161 2,796 4,031 6,366 63,541
Other......................... 52 (6,972) 139 4,804 47,213
-------- -------- -------- -------- ----------
$162,517 $ 28,684 $ 70,345 $110,842 $ 594,738
======== ======== ======== ======== ==========
YEAR ENDED JULY 31, 1995
Exploration and production.... $275,627 $ 62,855 $121,625 $259,189 $ 712,322
Gas transportation............ 36,787 2,827 8,041 10,105 60,916
Other......................... 285 (14,192) 298 9,196 53,332
-------- -------- -------- -------- ----------
$312,699 $ 51,490 $129,964 $278,490 $ 826,570
======== ======== ======== ======== ==========
YEAR ENDED JULY 31, 1994
Exploration and production.... $302,522 $ 96,828 $107,727 $180,426 $ 464,190
Gas transportation............ 33,240 (2,257) 5,913 35,763 66,019
Other......................... 157 (15,280) 218 25,079 53,382
-------- -------- -------- -------- ----------
$335,919 $ 79,291 $113,858 $241,268 $ 583,591
======== ======== ======== ======== ==========
</TABLE>
64
<PAGE> 67
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary Information
The following summary financial information of TransTexas Transmission
Corporation reflects its financial position and its results of operations for
the periods presented (in thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Total current assets........................................ $ 1,831 $ 811
Property and equipment, net................................. 482,351 70,273
Other assets................................................ 6,004 3
-------- -------
$490,186 $71,087
======== =======
LIABILITIES AND EQUITY
Total current liabilities................................... $ 14,013 $ 6,191
Total noncurrent liabilities................................ 107,367 34,284
Total equity................................................ 368,806 30,612
-------- -------
$490,186 $71,087
======== =======
</TABLE>
In January 1997, the Company contributed to TTC certain Lobo Trend
properties, and related liabilities, with historical costs of approximately
$386.7 million.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
---------------------- --------------------- ------------------
1997 1996 1996 1995 1995 1994
-------- ----------- ------- ----------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $107,921 $ 81,034 $36,226 $53,120 $ 97,928 $77,915
Operating costs and
expenses................. 100,105 71,947 35,236 40,443 77,154 79,566
-------- -------- ------- ------- -------- -------
Operating income
(loss)................ 7,816 9,087 990 12,677 20,774 (1,651)
Interest income (expense),
net...................... (8,598) (13,196) (4,202) (2,777) (11,771) (4,483)
-------- -------- ------- ------- -------- -------
Income (loss) before
income taxes.......... (782) (4,109) (3,212) 9,900 9,003 (6,134)
Income tax expense
(benefit)................ (274) (1,438) (1,124) 3,465 3,151 (2,067)
-------- -------- ------- ------- -------- -------
Net income (loss)........ $ (508) $ (2,671) $(2,088) $ 6,435 $ 5,852 $(4,067)
======== ======== ======= ======= ======== =======
</TABLE>
TTC conducts significant intercompany activities with TransTexas Gas
Corporation and TransAmerican. Included in the results of operations of
Transmission are the following transactions with affiliates (in thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JULY 31,
--------------------- --------------------- -----------------
1997 1996 1996 1995 1995 1994
------- ----------- ------- ----------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $24,848 $31,691 $14,879 $18,242 $35,054 $30,398
Operating costs and expenses.... 77,204 52,235 24,751 32,235 59,719 53,459
</TABLE>
65
<PAGE> 68
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Affiliated operating costs and expenses for the years ended January 31,
1997 and 1996, include the cost of natural gas purchased from TransTexas Gas
Corporation and its predecessor of approximately $49 million and $36 million,
respectively, $16 million and $25 million, respectively, for the six months
ended January 31, 1996 and 1995 and $44 million and $34 million, respectively,
for the years ended July 31, 1995 and 1994. Nonaffiliated revenues include the
sales of natural gas liquids and condensate extracted from this purchased gas
of, $62 million and $46 million, respectively for the years ended January 31,
1997 and 1996, $20 million and $33 million, respectively, for the six months
ended January 31, 1996 and 1995 and $59 million and $44 million, respectively,
for the years ended July 31, 1995 and 1994.
14. LITIGATION SETTLEMENTS
Bentsen. On August 13, 1990, Calvin R. Bentsen, et al. filed suit against
TransAmerican and Mr. Stanley in the 139th Judicial District Court, Hidalgo
County, Texas, seeking a portion of the El Paso settlement proceeds, and an
accounting of monies allegedly owed to them, claiming that TransAmerican
produced gas that belonged to them without their knowledge and that
TransAmerican entered into an oral agreement with them which entitled them to
receive a portion of the El Paso settlement proceeds. This case has been
settled.
McNamara. On June 28, 1996, the Company consummated a settlement of
litigation with Tennessee Gas Pipeline Company ("Tennessee") that was filed on
October 14, 1993 in the 244th Judicial District Court, Ector County, Texas
pursuant to which the Company and another plaintiff received approximately $125
million from Tennessee. The Company's share of the settlement proceeds was $96
million. On July 2, 1996, John McNamara, Jr. et al. ("The Hubberd Trusts") filed
a new suit against the Company in the 241st District Court, Webb County, Texas
asserting that the Company had breached its duties to The Hubberd Trusts under
certain oil and gas leases and that the Company owed The Hubberd Trusts 25% of
the gross settlement proceeds, or approximately $31.25 million. This litigation
was settled in December 1996.
Kathryn M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred to
the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in certain leases, are
entitled to receive a portion of the settlement proceeds received by
TransAmerican from El Paso. On April 16, 1996, additional nonparticipating
royalty interest owners intervened, making the same claims as the plaintiffs. In
June 1996, TransAmerican filed its motion for summary judgment. Plaintiffs also
filed a motion for partial summary judgment. On August 2, 1996, the court denied
TransAmerican's motion and plaintiffs' motion. The plaintiffs and intervenors
agreed on November 15, 1996 to dismiss their claims without prejudice.
Terry/Penrod. TransAmerican and a group of TransAmerican's former bank
lenders (the "Bank Group") were parties to a consolidated suit filed December 6,
1991, in the United States District Court for the Southern District of Texas,
Houston Division, relating to the interpretation of two third-party drilling
agreements. Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling
Corporation, Terry Oilfield Supply Co., Inc. and Terry Resources, Inc. ("Terry")
sued TransAmerican for approximately $50 million in actual damages and punitive
damages of not less than five times actual damages. On April 5, 1996, the court
entered a final judgment against TransAmerican, the Company and several of their
affiliates, in the amount of approximately $43 million, plus interest. On April
18, 1996, the court entered a separate judgment against the same parties for
Terry's attorneys' fees of $2 million. In May 1996, the Company paid Terry
approximately $19 million and caused escrowed funds held for the benefit of the
Bank Group of approximately $22 million to be paid to Terry. Upon payment of the
settlement amount, Terry released the judgments, released all liens and
reassigned to the Company a production payment in certain properties. Terry
dismissed an unrelated administrative proceeding upon payment of the settlement
amount described above.
Ginther/Warren. Wilbur L. Ginther and Howard C. Warren conveyed a portion
of a lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas Supreme Court
upheld a judgment in favor of Messrs. Ginther and Warren against Taub's interest
in
66
<PAGE> 69
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the lease. The lower court judgment had awarded a portion of the lease to
Messrs. Ginther and Warren because Taub's attorney had defrauded Messrs. Ginther
and Warren with respect to their interest in the lease. On November 26, 1986,
the estates of Messrs. Ginther and Warren filed an adversary proceeding in the
United States Bankruptcy Court for the Southern District of Texas, Houston
Division (the "Bankruptcy Court") against TransAmerican seeking damages and
claiming that TransAmerican had constructive notice of their disputes but
continued to pay royalties and proceeds of production to Taub. TransAmerican
filed an interpleader action in the Bankruptcy Court and deposited the disputed
funds accruing from and after November 1984 into the registry of the court. On
September 30, 1993, the Bankruptcy Court entered a judgment against
TransAmerican in the amount of $6.3 million plus post judgment interest. On
September 15, 1995, the U.S. District Court for the Southern District of Texas
entered an order reversing an award of interest to Taub and affirming the final
judgment in all other respects. The Company appealed the judgment to the Fifth
Circuit Court of Appeals. On July 2, 1996, the Company and the estates of
Messrs. Ginther and Warren entered into a settlement pursuant to which such
estates received $3.5 million and a promissory note for $2.8 million. The
promissory note is payable in 36 equal monthly installments commencing August 1,
1996, and bears no interest unless an installment payment is not made. In
addition, the Company transferred to such estates an additional overriding
royalty interest in a portion of the lease and agreed to drill additional wells
on the lease. In conjunction with the settlement, the estates of Messrs. Ginther
and Warren agreed to farm out to the Company an additional working interest in
the lease.
15. CREDIT AGREEMENTS
The Company and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement ("BNY Facility"),
as of October 31, 1995, for a $40 million line of credit. The BNY Facility was
subsequently amended in December 1996. The line of credit is collateralized by
accounts receivable and inventory of the Company and is guaranteed by John R.
Stanley. The amounts that may be advanced to the Company under this line of
credit are based on a percentage of the Company's natural gas receivables from
unaffiliated third parties. The amount outstanding under the line of credit as
of January 31, 1997 was $26.3 million. The Company expects that it will maintain
or increase this level of borrowings under the Agreement for the next twelve
months.
Under the terms of the BNY Facility, as amended, the Company's net loss
(including any extraordinary losses) may not exceed $10 million for each
six-month period ending on the last day of any fiscal quarter ending after
January 31, 1996. This line of credit is also subject to certain other covenants
which relate to, among other things, the maintenance of certain financial
ratios.
In May 1996, the Company entered into a Note Purchase Agreement pursuant to
which the Company issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes, which bore interest
at 13 1/3% per annum, were paid in full in July 1996. The notes were guaranteed
on a senior secured basis by TransAmerican.
16. HEDGING AGREEMENTS
Beginning in April 1995, the Company entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either the
company or the counterparty thereto is required to make a payment to the other
at the end of each month (the "Settlement Date"). The payments will equal the
product of a notional quantity ("Base Quantity") of natural gas and the
difference between a specified fixed price ("Fixed Price") and a market price
("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for the Company to make
payments to the counterparty to the extent that the Floating Price exceeds the
Fixed Price, up to a maximum ("Maximum Floating Price") and for the counterparty
to make payments
67
<PAGE> 70
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the Company to the extent that the Floating Price is less than the Fixed
Price. For the year ended January 31, 1997, the Company made net settlement
payments totaling approximately $37 million to the counterparty pursuant to the
Hedge Agreements. As of January 31, 1997, the Company has Hedge Agreements with
Settlement Dates ranging from February 1997 through April 1997 involving total
Base Quantities for all monthly periods aggregating approximately 20.4 TBtu of
natural gas. Fixed Prices for these agreements range from $1.70 to $1.78 per
MMBtu ($1.76 to $1.84 per Mcf) up to Maximum Floating Prices ranging from $2.00
to $2.20 per MMBtu ($2.07 to $2.28 per Mcf). In addition, one agreement has a
Fixed Price of $2.48 per MMBtu ($2.57 per Mcf) with no Maximum Floating Price.
Under the terms of this agreement, the counterparty advanced $5 million to the
Company. At January 31, 1997, the estimated cost to settle all of the Hedge
Agreements would have been approximately $13 million. These agreements are
accounted for as hedges and accordingly, any gains or losses are deferred and
recognized in the respective months as physical volumes are sold. At January 31,
1997, the Company maintained $1.0 million in a margin account related to the
Hedge Agreements.
17. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning the Company's gas
and oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Estimates of the Company's proved reserves and proved developed reserves
were prepared by Netherland, Sewell & Associates, Inc., an independent firm of
petroleum engineers, based on data supplied to them by the Company. Such
estimates are inherently imprecise and may be subject to substantial revisions
as additional information such as reservoir performance, additional drilling,
technological advancements and other factors become available.
Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Proved properties........................................... $1,845,994 $1,639,237
Unproved properties......................................... 158,973 136,360
---------- ----------
Total..................................................... 2,004,967 1,775,597
Less accumulated depletion.................................. 1,288,860 1,165,943
---------- ----------
$ 716,107 $ 609,654
========== ==========
</TABLE>
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR
ENDED SIX MONTHS ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, -------------------
1997 1996 1995 1994
----------- ---------------- -------- --------
<S> <C> <C> <C> <C>
Property acquisitions................ $ 50,963 $ 11,485 $124,956 $ 18,593
Exploration.......................... 100,737 27,039 84,201 114,266
Development.......................... 162,313 115,812 50,032 47,567
-------- -------- -------- --------
$314,013 $154,336 $259,189 $180,426
======== ======== ======== ========
</TABLE>
68
<PAGE> 71
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
YEAR YEAR ENDED
ENDED SIX MONTHS ENDED JULY 31,
JANUARY 31, JANUARY 31, -------------------
1997 1996 1995 1994
----------- ---------------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................. $363,459 $124,663 $275,627 $302,522
-------- -------- -------- --------
Expenses:
Production costs................... 97,619 31,376 76,798 76,928
Depletion.......................... 122,570 56,543 121,625 107,727
General and administrative......... 8,710 3,601 14,349 21,039
Litigation settlement.............. (96,000) (18,300) -- --
-------- -------- -------- --------
Total operating expenses........ 132,899 73,220 212,772 205,694
-------- -------- -------- --------
Income before income taxes...... 230,560 51,443 62,855 96,828
Income taxes......................... 80,696 18,005 21,999 26,047
-------- -------- -------- --------
$149,864 $ 33,438 $ 40,856 $ 70,781
======== ======== ======== ========
Depletion rate per net equivalent
Mcf................................ $ .96 $ .82 $ .81 $ .80
======== ======== ======== ========
</TABLE>
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating conditions. Natural gas quantities
represent wet gas volumes, which include amounts that will be extracted as
natural gas liquids. The Company's estimated net proved reserves and proved
developed reserves of natural gas (billions of cubic feet) and condensate
(millions of barrels) are shown in the table below.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ----------------------------
1997 1996 1995 1994
------------ ------------- ------------- ------------
GAS OIL GAS OIL GAS OIL GAS OIL
------ --- ------- --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year........................ 1,139.1 2.9 1,122.6 3.0 717.4 1.9 695.0 2.0
Increase (decrease) during the year
attributable to:
Revisions of previous estimates....... 6.5 .1 43.0 -- 143.5 .5 .5 .1
Extensions, discoveries and other
additions........................... 90.3 3.6 73.8 .2 409.6 1.2 152.8 .4
Litigation settlement................. -- -- 9.5 -- -- -- -- --
Sales of reserves..................... (204.9) (.4) (42.9)
Purchase of reserves.................. 11.3 .1
Production............................ (122.6) (.6) (66.9) (.3) (147.9) (.6) (130.9) (.6)
------ --- ------- --- ------- --- ------ ---
End of year.............................. 919.7 5.7 1,139.1 2.9 1,122.6 3.0 717.4 1.9
====== === ======= === ======= === ====== ===
Proved developed reserves:
Beginning of year........................ 425.3 .9 476.6 1.1 442.2 1.1 384.2 1.1
End of year.............................. 381.5 2.4 425.3 .9 476.6 1.1 442.2 1.1
</TABLE>
69
<PAGE> 72
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standardized Measure Information
The calculation of estimated future net cash flows in the following table
assumed the continuation of existing economic conditions and applied year-end
prices (except for future price changes as allowed by contract) of gas and
condensate to the expected future production of such reserves, less estimated
future expenditures (based on current costs) to be incurred in developing and
producing those proved reserves.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value of the
Company's gas and oil reserves. These estimates reflect proved reserves only and
ignore, among other things, changes in prices and costs, revenues that could
result from probable reserves which could become proved reserves in fiscal 1998
or later years, and the risks inherent in reserve estimates. The standardized
measure of discounted future net cash flows relating to proved gas and oil
reserves is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, -----------------------
1997 1996 1995 1994
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Future cash inflows.................. $3,051,397 $2,269,585 $1,591,011 $1,194,656
Future production costs.............. (506,882) (427,482) (316,055) (219,485)
Future development costs............. (459,326) (582,798) (461,471) (243,991)
Future income taxes.................. (563,812) (310,445) (196,942) (199,065)
---------- ---------- ---------- ----------
Future net cash flows................ 1,521,377 948,860 616,543 532,115
Annual discount (10%) for estimated
timing of cash flows............... (464,121) (340,002) (201,479) (136,541)
---------- ---------- ---------- ----------
Standardized measure of discounted
future net cash flows.............. $1,057,256 $ 608,858 $ 415,064 $ 395,574
========== ========== ========== ==========
</TABLE>
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JULY 31,
JANUARY 31, JANUARY 31, ---------------------
1997 1996 1995 1994
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Beginning of year..................... $ 608,858 $ 415,064 $ 395,574 $ 512,460
Revisions:
Quantity estimates and production
rates............................ 13,903 31,712 122,771 (31,403)
Prices, net of lifting costs........ 665,054 331,936 (155,257) (158,906)
Estimated future development
costs............................ (75,622) (128,584) (13,631) 26,667
Additions, extensions, discoveries and
improved recovery................... 209,932 47,026 172,365 141,008
Net sales of production............... (262,066) (92,139) (198,829) (233,031)
Development costs incurred............ 156,430 115,812 49,873 35,285
Accretion of discount................. 80,806 27,382 54,439 63,824
Net changes in income taxes........... (192,608) (66,622) (16,722) 39,670
Sale of Reserves...................... (165,949) (77,879) -- --
Litigation settlement................. -- 5,150 4,481 --
Purchases of reserves................. 18,518 -- -- --
---------- --------- --------- ---------
End of year........................... $1,057,256 $ 608,858 $ 415,064 $ 395,574
========== ========= ========= =========
</TABLE>
70
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TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Year-end wellhead prices received by the Company from sales of natural gas
including margins from natural gas liquids, were $3.17, $1.95, $1.37 and $1.62
per Mcf for 1997, 1996, 1995 and 1994, respectively. Year-end condensate prices
were $23.99, $18.34, $16.27 and $17.62 per barrel for 1996, 1995 and 1994,
respectively.
18. CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------- --------------------- --------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------- ---------- -------- ------- ------- ------- --------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $95,958 $ 86,732 $80,104 $143,553 $66,336 $ 74,346 $81,450 $81,067 $72,828 $ 77,354
Operating income......... 25,798 106,696 5,858 48,927 30,893 7,881 14,108 14,576 12,932 9,874
Net income (loss)........ 3,020 71,561 (9,396) 18,140 11,529 (12,301) 316 (560) (3,844) (64,441)
Net income (loss) per
share.................. 0.04 0.97 (0.13) 0.25 0.16 (0.17) -- (.01) (.05) (.87)
</TABLE>
Operating income for the second quarter of 1997 includes a gain on
settlement of litigation of $96.0 million.
Operating income for the third quarter of 1997 includes litigation expense
of $7.5 million.
Operating income for the first quarter of 1996 includes a gain on
settlement of litigation of $18.3 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
71
<PAGE> 74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
John R. Stanley...................... Director and Chief Executive Officer 58
Thomas B. McDade..................... Director and Chairman of the Board 73
James R. Lesch....................... Director 75
Robert L. May........................ Director 73
Donald D. Sykora..................... Director 66
Arnold H. Brackenridge............... President and Chief Operating Officer 64
Edwin B. Donahue..................... Vice President, Chief Financial Officer and
Secretary 46
Richard P. Bianchi................... Vice President and General Counsel 45
Alan E. Drane........................ Vice President of Operations 35
</TABLE>
The Company's Board of Directors is divided into three classes, Class I,
Class II, and Class III. The Board of Directors presently consists of five
directors: one in Class I, one in Class II, and three in Class III, whose terms
of office expire with the 1997, 1998 and 1999 annual meetings, respectively, and
when their successors are elected and qualified.
Set forth below is a description of the backgrounds of the directors of the
Company:
CLASS I -- TERM EXPIRES IN 1997
John R. Stanley has been a director and Chief Executive Officer of the
Company since May 1993. Mr. Stanley is also a director and the Chief Executive
Officer of Transmission, TEC and TARC. Mr. Stanley is also the founder, Chairman
of the Board, Chief Executive Officer, and sole stockholder of TNGC Holdings,
which is the sole stockholder of TransAmerican, which is the indirect majority
stockholder of the Company. He has operated TransAmerican since 1958. Mr.
Stanley is the father-in-law of Alan E. Drane, the Vice President of Operations
for the Company.
CLASS II -- TERM EXPIRES IN 1998
Thomas B. McDade has been Chairman of the Board of the Company since May
1993. Mr. McDade is also a director of Transmission, TEC and TARC. Mr. McDade is
primarily engaged in managing his personal investments and in providing
consulting services in Houston, Texas. Mr. McDade was a director of
TransAmerican from 1985 until 1995. Prior to 1989, he served as a consultant to
Texas Commerce Bancshares, Inc. and prior to July 1985 he served as Vice
Chairman and Director of Texas Commerce Bancshares, Inc. and Vice Chairman and
Advisory Director of Texas Commerce Bank. Mr. McDade served as a director and
trustee of eleven registered investment companies from 1985 to 1995 for which
John Hancock Funds serves as investment advisor in Boston, Massachusetts. Mr.
McDade is a former director of Houston Industries, Inc. and Houston Lighting &
Power Company. He is also a former member of the Board of Managers of the Harris
County Hospital District and former Chairman of the State Securities Board of
Texas.
CLASS III -- TERM EXPIRES IN 1999
James R. Lesch has been a director of the Company since August 1993. Mr.
Lesch also serves as a director of Transmission. He is retired from Hughes Tool
Company, where he was the Chairman and Chief Executive Officer. Mr. Lesch was
with Hughes Tool Company for 40 years. He is a former director of Raymond
International, Borg-Warner Corporation, Texas Commerce Bancshares, Dun &
Bradstreet Corporation, Houston Industries, Inc., Houston Lighting & Power
Company and Rowan Companies, Inc. Mr. Lesch currently serves as a director of
YPF Sociedad Anonima and Maxus Energy Corporation.
Robert L. May has been a director of the Company since August 1993. Mr. May
is also a director of Transmission. He is retired from Arthur Andersen & Co.,
where he was a Senior Partner. Mr. May was a
72
<PAGE> 75
partner with Arthur Andersen & Co. for over 25 years. He has served as Chairman
of the Board of the American Institute of Certified Public Accountants and as
President of the International Federation of Accountants. Mr. May is a former
director of Christiana General Insurance Corporation of New York, Integrated
Resources, Inc. and Fairchild Industries, Inc.
Donald D. Sykora has been a director of the Company since August 1993. Mr.
Sykora is also a director of Transmission. He is the former President and Chief
Operating Officer of Houston Industries, Inc., where he is currently attached to
the Office of the Chairman, with responsibility for special projects. Mr. Sykora
has been with Houston Industries, Inc. or its subsidiaries for 41 years. Mr.
Sykora is on the board of directors of Powell Industries, Inc., Pool Oil Field
Services, Inc. and American Residential Services, Inc. Mr. Sykora is a former
director of Houston Industries, Inc., Houston Lighting & Power Co., Utility
Fuels, Inc. and KBLCOM Incorporated.
Set forth below is a description of the backgrounds of the executive
officers of the Company:
Arnold H. Brackenridge has been President and Chief Operating Officer of
the Company since May 1993. Mr. Brackenridge is also the President of
Transmission and Executive Vice President of TransAmerican. From 1984 until June
1992, Mr. Brackenridge was the President and Chief Executive Officer of
Wintershall Energy, a business group of BASF Corporation. Mr. Brackenridge has
worked in the domestic and international oil and gas industry for 38 years.
Edwin B. Donahue has been Vice President, Chief Financial Officer and
Secretary of the Company since May 1993 and also serves as Vice President, Chief
Financial Officer and Secretary of Transmission and Vice President and Secretary
of TransAmerican, TEC and TARC. Mr. Donahue has been employed in various
positions with TransAmerican and the Company over 20 years.
Richard P. Bianchi has been Vice President and General Counsel since June
1995. From 1990 to June 1995, he was Judge of the 333rd State District Court in
Harris County, Texas. Prior to 1990, he was a partner in Bivin and Bianchi, a
business and civil litigation firm in Houston, Texas.
Alan E. Drane has been Vice President of Operations of the Company and
Transmission since November 1995. Mr. Drane has held various production,
engineering, purchasing and operational responsibilities with TransTexas and its
affiliates since in March 1993. Prior to joining the Company, Mr. Drane was a
Senior Testing Engineer with the Teledynamics division of Hamilton Standard, a
subsidiary of United Technologies Corp. Mr. Drane is a son-in-law of Mr.
Stanley.
BOARD MEETINGS AND COMMITTEES
The Board of Directors met 35 times during the fiscal year ended January
31, 1997. All directors, other than Mr. Stanley, attended at least 75% of all
meetings of the Board of Directors and each of the committees on which they
served. Mr. Stanley attended approximately 68% of such meetings.
The Company has an Audit Committee and a Compensation Committee, but no
Nominating Committee.
The Audit Committee is composed of Messrs. Lesch, May, and Sykora. The
Audit Committee reviews the scope of the independent auditors' examinations of
the Company's financial statements and receives and reviews their reports. The
Audit Committee meets with the independent auditors, receives recommendations or
suggestions for changes in accounting procedures, and initiates or supervises
any special investigations it may choose to undertake. The Audit Committee met
one time during the fiscal year ended January 31, 1997.
The Compensation Committee is composed of Messrs. Lesch, Sykora, and
McDade. The Compensation Committee determines the nature and amount of
compensation of the Company's executive officers. The Compensation Committee met
one time during the fiscal year ended January 31, 1997.
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<PAGE> 76
DIRECTOR COMPENSATION
Each director, other than Mr. Stanley, is paid an annual director's fee of
$75,000 plus $750 for each board meeting and committee meeting attended
(exclusive of committee meetings occurring on the same day as board of
meetings.)
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers, and holders of more than 10% of the
Common Stock to file with the Securities and Exchange Commission ("SEC") and
Nasdaq initial reports of ownership and reports of changes in ownership of the
Common Stock. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) reports they file with the SEC. During
the fiscal year ended January 31, 1997, TARC, TEC, TransAmerican, TNGC Holdings
and John R. Stanley each filed one late report with respect to a sale. In
addition, Messrs. Sykora and Lesch each filed one late report with respect to a
transfer.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid during the fiscal
years ended July 31, 1994 and 1995, the six month Transition Period ended
January 31, 1996 and the fiscal year ended January 31, 1997 to the Chief
Executive Officer and each other executive officer of the Company whose total
annual salary and bonus exceeded $100,000 in the fiscal year ended January 31,
1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------
NAME AND PRINCIPAL POSITION FISCAL ALL OTHER OTHER ANNUAL
IN THE COMPANY YEAR SALARY BONUS COMPENSATION(A)
--------------------------- ------ -------- --------- ---------------
<S> <C> <C> <C> <C>
John R. Stanley................................ 1997 $397,117 $ -- $5,154
Chief Executive Officer 1996* 175,000 -- 807
1995 350,000 -- 4,620
1994 350,000 -- 4,620
Arnold H. Brackenridge......................... 1997 $294,808 $111,089 $2,435
President and Chief Operating Officer 1996* 137,500 85,397(c) 721
1995 221,154 -- 1,454
1994 175,000 -- 80
Edwin B. Donahue............................... 1997 $215,385 $113,885 $4,731
Vice President, Chief Financial Officer 1996* 90,384 83,397(c) 1,110
and Secretary 1995 149,423 -- 4,364
1994 134,234 -- 3,997
Richard P. Bianchi(b).......................... 1997 $214,154 $ -- $ 777
Vice President and General Counsel 1996* 100,000 -- --
1995 11,538 -- --
Alan E. Drane.................................. 1997 $116,923 $ -- $3,508
Vice President of Operations 1996* 23,077 -- 692
</TABLE>
- - ---------------
* Six months ended January 31, 1996 ("Transition Period")
(a) Reflects the amount contributed under the Company's savings plan. Certain of
the Company's executive officers receive personal benefits in addition to
salary and cash bonuses. The aggregate amount of the personal benefits,
however, does not exceed the lesser of $50,000 or 10% of the total of the
annual salary and bonus reported for the named executive officer and
accordingly has been excluded from the table.
(b) Mr. Bianchi joined the Company in June 1995.
(c) These bonuses were paid in fiscal 1997 for services rendered during the
Transition Period.
74
<PAGE> 77
Employment Agreements
In August 1996, the Company and Mr. Brackenridge entered into an employment
agreement which provides for an annual salary of $295,000 and terminates on
August 12, 1997. If Mr. Brackenridge's employment is terminated prior to the
term of the agreement, the Company is required to pay Mr. Brackenridge his
salary for the remaining term of the agreement plus an additional six months'
salary.
In June 1995, the Company and Mr. Bianchi entered into a one-year
employment agreement which provided for an annual salary of $200,000. In August
1996, the Company and Mr. Bianchi entered into a new employment agreement which
provides for an annual salary of $214,000 and terminates on August 12, 1997.
This employment agreement provides that if Mr. Bianchi's employment is
terminated prior to the term of the agreement, the Company is required to pay
Mr. Bianchi his salary for the remaining term of the agreement plus an
additional six months' salary.
Savings Plan
The Company maintains a long-term savings plan (the "Savings Plan") in
which eligible employees of the Company and certain of its affiliates may elect
to participate. Each employee becomes eligible to participate in the Savings
Plan on January 1 or July 1 following the completion of one year of service with
the Company or its participating affiliates and attainment of age 21. The
Savings Plan is intended to constitute a qualified plan under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and contains a salary
reduction arrangement described in Section 401(k) of the Code.
Each participant may elect to reduce his compensation by a percentage equal
to 2% to 15% and the Company will contribute that amount to the Savings Plan on
a pre-tax basis on behalf of the participant. The Code limits the annual amount
that a participant may elect to have contributed on his behalf on a pre-tax
basis to the Savings Plan. For 1997, this limit is $9,500. The Company presently
makes a matching contribution in an amount equal to 10%, 20%, or 50% of the
amount elected to be contributed by each participant on a pre-tax basis, up to a
maximum of 3% of each participant's compensation, depending on whether the
employee has been a participant in the Savings Plan for one year, two years, or
three years. Each participant also may elect to contribute up to 10% of his
compensation to the Savings Plan on an after-tax basis. The Code imposes
nondiscrimination tests on contributions made to the Savings Plan pursuant to
participant elections and on the Company's matching contributions, and limits
amounts which may be allocated to a participant's Savings Plan account each
year. In order to satisfy the nondiscrimination tests, contributions made on
behalf of certain highly compensated employees (as defined in the Code) may be
limited. Contributions made to the Savings Plan pursuant to participant
elections and matching contributions are at all times 100% vested. Contributions
to the Savings Plan are invested, according to specified investment options
selected by the participants, in investment funds maintained by the trustee of
the Savings Plan. Generally, a participant's vested benefits will be distributed
from the Savings Plan as soon as administratively practicable following a
participant's retirement, death, disability, or other termination of employment.
In addition, a participant may elect to withdraw his after-tax contributions
from the Savings Plan prior to his termination of employment, and subject to
strict limitations and exceptions, the Savings Plan provides for withdrawals of
a participant's pre-tax contributions prior to a participant's termination of
employment, in the event of the participant's severe financial hardship or
attainment of age 59 1/2. The Savings Plan may be amended or terminated by the
Board of Directors of the Company. As of January 31, 1997, approximately 1,840
employees were eligible to participate in the Savings Plan, including Messrs.
Stanley, Brackenridge, Donahue, Bianchi and Drane.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed of Messrs. Lesch, McDade and Sykora.
During the fiscal year ended January 31, 1997, none of the members of the
Compensation Committee was an officer or employee of the Company or any of its
subsidiaries, and none had any relationship with the Company requiring
disclosure under Item 404 of Regulation S-K.
75
<PAGE> 78
Report of the Compensation Committee
The Compensation Committee of the Board of Directors has furnished the
following report on the Company's executive compensation program. The report
describes the Compensation Committee's policies applicable to the Company's
executive officers and provides specific information regarding the compensation
of the Company's Chief Executive Officer.
The Compensation Committee administers and oversees the Company's executive
compensation program. The Committee is responsible for the review of the
objectives, structure, cost and administration of the Company's compensation and
benefit policies and programs. The Committee was created in August 1993 and met
once during the fiscal year ended January 31, 1997.
The Committee's basic policy is to ensure that salary levels and
compensation incentives are designed to attract and retain qualified individuals
in key positions and are commensurate with the level of executive
responsibility, the type and scope of the Company's operations, and the
Company's financial condition and performance. The goal of the policy is to
promote the attainment of the financial and strategic objectives of the Company
and, thus, enhance stockholder value.
The Committee receives recommendations from the Company's Chief Executive
Officer with respect to salaries, bonuses and other compensation to be paid to
the Company's executive officers. The Committee reviews these recommendations
and takes such action as it deems appropriate.
Currently, the base salaries of the Company's executive officers may be
augmented at the discretion of the Compensation Committee by the award of
performance-based cash bonuses. The Compensation Committee has not followed a
formal policy with respect to the award of bonuses; however, the factors
enumerated above are considered in determining bonus awards. A formal policy may
be formulated in response to Section 162(m) of the Internal Revenue Code, which
limits the deductibility of executive compensation in excess of $1 million. The
Company does not currently grant stock options to any of its executive officers
or key employees. In fiscal 1997, the Committee determined to pay a cash bonus
to Messrs. Brackenridge and Donahue for services rendered by them during the six
month Transition Period ended January 31, 1996.
As described above, the Compensation Committee determines the pay level for
all executives, including the Chief Executive Officer. Mr. Stanley is paid a
base salary and is eligible for a performance-based cash bonus. Although Mr.
Stanley did not receive a bonus for services rendered during the fiscal year
ended January 31, 1997, future performance-based bonuses will be based upon
quantifiable objectives as to comply with Section 162(m) of the code.
This report shall not be deemed incorporated by reference by any general
statement incorporating by reference this Annual Report into any filing under
the Securities Act of 1933, as amended, or under the Securities Exchange Act of
1934, as amended, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
The Compensation Committee of the
Board of Directors
James R. Lesch
Thomas B. McDade
Donald D. Sykora
76
<PAGE> 79
Stock Performance Graph
The following graph compares the cumulative total stockholder return on the
Common Stock from March 10, 1994 to January 31, 1997, with the cumulative total
stockholder return on the Nasdaq Stock Market Index and a peer group (which
includes Anadarko Petroleum Corp., Apache Corp., Burlington Resources, Inc.,
Enron Oil & Gas Co., Mesa, Inc., Newfield Exploration Co., Noble Affiliates,
Inc., Seagull Energy Corp., and United Meridian Corp.) over the same period. The
comparison assumes a $100 investment on March 10, 1994 in the Common Stock, the
Nasdaq Stock Market Index, and the peer group, and assumes reinvestment of all
dividends and distributions.
[GRAPH]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD TRANSTEXAS GAS
(FISCAL YEAR COVERED) CORP. NASDAQ INDEX PEER GROUP
<S> <C> <C> <C>
10-MAR-94 100 100 100
MAR94 89 94 102
APR94 90 93 114
MAY94 84 93 108
JUN94 85 90 109
JUL94 81 92 101
AUG94 83 98 98
SEP94 81 97 99
OCT94 95 99 109
NOV94 86 96 93
DEC94 80 96 90
JAN95 75 97 86
FEB95 81 102 97
MAR95 80 105 106
APR95 95 108 101
MAY95 103 111 107
JUN95 108 120 99
JUL95 106 128 100
AUG95 127 131 108
SEP95 129 134 103
OCT95 114 133 96
NOV95 113 136 102
DEC95 96 136 111
JAN96 84 136 106
FEB96 77 141 108
MAR96 71 142 113
APR96 72 154 119
MAY96 64 161 115
JUN96 68 153 130
JUL96 63 140 119
AUG96 79 147 123
SEP96 82 159 127
OCT96 100 157 140
NOV96 96 167 147
DEC96 104 167 143
JAN97 121 178 138
</TABLE>
77
<PAGE> 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock, as of April 30, 1997, by (i) each
director, (ii) the Company's chief executive officer and the other executive
officers whose total salary and bonus exceeded $100,000 in the fiscal year ended
January 31, 1997, (iii) all current directors and executive officers of the
Company as a group, and (iv) each person known to the Company to beneficially
own more than five percent of the outstanding shares of Common Stock. Except as
otherwise indicated, each stockholder identified in the table has sole voting
and investment power with respect to its or his shares.
<TABLE>
<CAPTION>
SHARES OWNED
------------------------
NAME AND ADDRESS NUMBER PERCENTAGE
---------------- ---------- ----------
<S> <C> <C>
John R. Stanley(1).......................................... 59,357,600 80.21%
1300 North Sam Houston Parkway East, Suite 310
Houston, Texas 77032
TNGC Holdings Corporation(2)................................ 59,350,000 80.20%
1300 North Sam Houston Parkway East, Suite 310
Houston, Texas 77032
TransAmerican Natural Gas Corporation(3).................... 59,350,000 80.20%
1300 North Sam Houston Parkway East, Suite 300
Houston, Texas 77032
TransAmerican Energy Corporation(4)......................... 50,450,000 68.18%
1300 North Sam Houston Parkway East, Suite 200
Houston, Texas 77032
TransAmerican Refining Corporation.......................... 10,450,000 14.12%
1300 North Sam Houston Parkway East, Suite 320
Houston, Texas 77032
Thomas B. McDade............................................ 100,000 *
Arnold H. Brackenridge...................................... 3,500 *
Edwin B. Donahue............................................ 1,400 *
James R. Lesch(5)........................................... 1,000 *
Robert L. May............................................... 1,000 *
Donald D. Sykora(6)......................................... 1,000 *
Richard P. Bianchi.......................................... -- --
Alan E. Drane(7)............................................ 200 *
All directors and executive officers as a group (9
persons).................................................. 59,465,700 80.36%
</TABLE>
- - ---------------
* Less than 1% of the outstanding shares of the Company.
(1) Mr. Stanley owns 3,500 shares of Common Stock. Mr. Stanley is the sole
stockholder of TNGC Holdings, and may be deemed to beneficially own all of
the shares of Common Stock owned beneficially by TNGC Holdings. Mr. Stanley
is also deemed to beneficially own 4,100 shares held by his wife.
(2) TNGC Holdings owns all of the shares of common stock of TransAmerican, and
may be deemed to beneficially own all of the shares of Common Stock owned
beneficially by TransAmerican.
(3) TransAmerican owns 5,000,000 shares of Common Stock. TransAmerican also owns
all of the common stock of TEC, all of the common stock of TransAmerican
Exploration Corporation ("TEXC"), which owns 3,700,000 shares of Common
Stock, and all of the common stock of Southeast Marine, Inc., which
78
<PAGE> 81
owns 200,000 shares of Common Stock. TransAmerican may be deemed to
beneficially own all of the shares of Common Stock held and owned
beneficially by TEC, TEXC and Southeast Marine.
(4) TEC owns 40,000,000 shares of Common Stock. TEC also owns all of the common
stock of TARC, and may be deemed to beneficially own the 10,450,000 shares
of Common Stock held by TARC.
(5) The Lesch Family Limited Partnership, of which Mr. Lesch is the sole general
partner and also a limited partner, owns 1,000 shares of Common Stock;
therefore, Mr. Lesch may be deemed to beneficially own the 1,000 shares held
by The Lesch Family Limited Partnership.
(6) Sykora Interests Ltd., a limited partnership in which Mr. Sykora is a
managing general partner, owns 1,000 shares of Common Stock; therefore, Mr.
Sykora may be deemed to beneficially own the 1,000 shares held by Sykora
Interests Ltd.
(7) These shares are held of record by Mr. Drane's wife.
In connection with a public offering of debt securities by TARC, TEC and
TARC pledged the shares of Common Stock held by them to secure TARC's debt
securities and TEC's guarantee of TARC's debt securities. Under certain
circumstances, a sale of Common Stock upon foreclosure by the holders of the
TARC debt securities would constitute a "change of control" of the Company under
the Indenture governing the Company's Senior Secured Notes, which would allow
the holders thereof to require the Company to repurchase the Notes at a price
equal to 101% of the principal amount thereof plus accrued and unpaid interest.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1996, the Company purchased the building for its corporate
headquarters from TransAmerican for $4 million.
In December 1994, the Company entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $11.7
million, $21.4 million, $11.1 million, $4.4 million and $14.7 million for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
1995 and the year ended July 31, 1995, respectively. The receivable from
TransAmerican for natural gas sales totaled approximately $11.8 million at
January 31, 1997. Pursuant to this agreement, interest accrues on all unpaid
balances at a rate of prime plus 2% per annum.
The Company sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$2.7 million and $2.4 million, respectively, for the years ended January 31,
1997 and 1996, $2.2 million and $2.3 million, respectively, for the six months
ended January 31, 1996 and 1995 and $2.5 million and $2.3 million, respectively,
for the years ended July 31, 1995 and 1994. The receivable from TARC for natural
gas sales totaled approximately $2.7 million at January 31, 1997.
As of January 1996, the Company and TTEX entered into a Drilling Program,
as defined in the Indenture. Pursuant to the Program, TTEX received a portion of
revenues, in the form of a production payment, from certain of the Company's
wells. The production payment was transferred in consideration of a note payable
in the amount of $23.6 million issued by TTEX. In July 1996, TTEX transferred
this production payment to the Company in the form of a dividend, and the
Company forgave the $13.2 million remaining balance of the note payable.
In July 1996, TTEX loaned $9.5 million to TransAmerican pursuant to the
terms of a $25 million promissory note due July 31, 1998 that bears interest,
payable quarterly, at 15% per annum. TTEX has made further advances pursuant to
the note, subject to the same terms. The amount outstanding under this
promissory note totaled approximately $25 million at January 31, 1997. The
Company believes that the advances by TTEX to TransAmerican reduce the risk of
tax deconsolidation (and potential tax liability of the Company) that could be
caused by the sale of shares of the Company's common stock by TransAmerican or
79
<PAGE> 82
its affiliates. TransAmerican has not made its scheduled interest payment on
this note. TTEX has agreed to defer the interest payments on the note until
1998.
Pursuant to the terms of the Transfer Agreement, TransAmerican is obligated
to indemnify the Company for all future losses incurred in connection with
litigation or bankruptcy claims assumed in the Transfer. In order to facilitate
the settlement of the Terry/Penrod litigation in May 1996, the Company advanced
to TransAmerican $16.4 million of the settlement amount in exchange for a note
receivable. TransAmerican has not made its scheduled interest payments on this
note. The Company has agreed to defer the interest payments on the note until
1998. In addition, the Company transferred escrowed funds of approximately $22
million to TransAmerican. In connection with this settlement, the Company
received from Terry the reversionary interest in certain producing properties.
The Company and TransAmerican had intended that such interests would revert to
TransAmerican under the Transfer Agreement; however, the Company retained such
interests in partial satisfaction of TransAmerican's indemnity obligations.
In September 1996, the Company purchased from TransDakota Oil Corporation
("TDOC"), a subsidiary of TransAmerican, certain oil and gas leasehold interests
located in the Lodgepole area in North Dakota for approximately $20 million. The
Company believes that the combination of these interests, together with the
Company's other interests in the Lodgepole area, will produce a more marketable
property package. The purchase price was $3.9 million greater than TDOC's basis
in the properties. The properties have been recorded in the Company's financial
statements at carryover basis and the $3.9 million has been classified as a
reduction of retained earnings.
The Company provides accounting and legal services to TARC and TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement (the "Services Agreement"). The Company provides general commercial
legal services and certain accounting services (including payroll, tax, and
treasury services) to TARC and TEC for a fee of $26,000 per month. At
TransAmerican's request, the Company, at its election, may provide drilling and
workover services.
In September 1996, the Company and TransAmerican entered into an agreement
pursuant to which the Company obtained an $11.5 million dollar-denominated
production payment, subsequently increased to $19 million, bearing interest at
17% per annum, burdening certain oil and gas interests owned by TransAmerican as
a source of repayment for certain of the receivables from TransAmerican
discussed above. At January 31, 1997, $59 million of remaining related-party
receivables has been recorded as a contra-stockholder equity account due to
uncertainties regarding the repayment terms for such receivables. The Company
has agreed to defer any interest payments due from TransAmerican until 1998. On
January 31, 1997, TransAmerican conveyed at historical cost certain oil and gas
properties to the Company for a purchase price of $31.6 million. A portion of
the purchase price was used to offset obligations under the September 1996
production payment.
In January 1997, an affiliate of the Company contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC") with a
book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TransTexas Transmission Corporation ("TTC").
See Note 13 of Notes to Consolidated Financial Statements.
In January 1997, TransTexas contributed substantially all of its Lobo Trend
properties to TTC.
80
<PAGE> 83
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) Report of Independent Accountants.................. 40
Consolidated Balance Sheet........................ 41
Consolidated Statement of Operations.............. 42
Consolidated Statement of Cash Flows.............. 43
Consolidated Statement of Stockholders' Deficit... 44
Notes to Consolidated Financial Statements........ 45
(2) Financial Statement Schedules
Report of Independent Accountants................. 87
Schedule II -- Valuation and Qualifying
Accounts........................................... 88
Schedules other than those listed above are omitted for
the reason that they are not required or are not
applicable or the required information is included in the
financial statements or related notes.
</TABLE>
(3) Exhibits
The following instruments are included as exhibits to this Annual Report on
Form 10-K and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by parenthetical information.
<TABLE>
<C> <S>
3.1 -- Articles of Incorporation (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (33-75050),
and incorporated herein by reference)
3.2 -- By-laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-75050),
and incorporated herein by reference)
4.1 -- Indenture dated as of June 15, 1995, among the Company,
TTC and American Bank National Association, as Trustee
(the "Indenture Trustee"), with respect to the Notes
including the forms of Note and Senior Secured Guarantee
as exhibits (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference)
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement, effective as
of June 23, 1995, from the Company to James A. Taylor, as
trustee for the benefit of the Indenture Trustee
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission in June 1995, and incorporated herein by
reference)
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of June 20,
1995, from TTC to James A. Taylor, as trustee for the
benefit of the Indenture Trustee (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 20,
1995, and incorporated herein by reference)
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by the Company in favor of the
Indenture Trustee (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference)
</TABLE>
81
<PAGE> 84
<TABLE>
<S> <C>
4.5 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TTC in favor of the Indenture
Trustee (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission in June 1995, and incorporated herein
by reference)
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among the Company, the Indenture Trustee
and the Disbursement Agent (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference)
4.7 -- Pledge and Security Agreement dated as of September 19,
1996, between TransAmerican Exploration Corporation and
Fleet National Bank (previously filed as an exhibit to
the Company's Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
4.8 -- Registration Rights Agreement dated as of September 19,
1996, by and among TransTexas Gas Corporation,
TransAmerican Natural Gas Corporation, TransAmerican
Exploration Corporation and Fleet National Bank
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended October 31, 1996, and
incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, between
TransAmerican Energy Corporation and First Fidelity Bank,
National Association, as Trustee (previously filed as an
exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
4.10 -- Pledge Agreement dated as of February 23, 1995, between
TransAmerican Refining Corporation and First Fidelity
Bank, National Association, as Trustee (previously filed
as an exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
4.11 -- Registration Rights Agreement dated as of February 23,
1995, among TransTexas Gas Corporation, TransAmerican
Refining Corporation and TransAmerican Energy Corporation
(previously filed as an exhibit to Post-Effective
Amendment No. 5 to the Company's Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.12 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (previously filed as
an exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
4.13 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and RECO Industries, Inc. (previously filed
as an exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
4.14 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Frito-Lay, Inc. (previously filed as an
exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
</TABLE>
82
<PAGE> 85
<TABLE>
<S> <C>
4.15 -- Pledge Agreement dated as of February 23, 1995 among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and EM Sector Holdings, Inc. (previously
filed as an exhibit to Post-Effective Amendment No. 5 to
the Company's Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.16 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican Natural Gas Corporation and ITT Commercial
Corp. (previously filed as an exhibit to Post-Effective
Amendment No. 5 to the Company's Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.17 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican Natural Gas Corporation, TransTexas
Gas Corporation and ITT Commercial Finance Corp.
(previously filed as an exhibit to Post-Effective
Amendment No. 5 to the Company's Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas Gas Corporation and the Purchasers of 13 1/4%
Series A Senior Subordinated Notes due 2003 (previously
filed as an exhibit to Post-Effective Amendment No. 5 to
the Company's Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.19 -- Indenture dated December 13, 1996 between TransTexas Gas
Corporation and Bank One, Columbus, NA, as Trustee
(previously filed as an exhibit to Post-Effective
Amendment No. 5 to the Company's Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.20 -- Registration Rights Agreement dated December 13, 1996
between TransTexas Gas Corporation and each of the
Purchasers of the Subordinated Notes (previously filed as
an exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
10.1 -- Services Agreement dated August 24, 1993, by and among
TransTexas and TransAmerican (filed as Exhibit 3 to the
Company's Current Report on Form 8-K filed with the SEC
on October 4, 1993, and incorporated herein by
reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the other
subsidiaries of TransAmerican, as amended (filed as
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (33-75050), and incorporated herein by
reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between the
Company and TARC, as amended (previously filed as Exhibit
10.4 to TARC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group (previously
filed as Exhibit 4 to the Company's Current Report on
Form 8-K filed with the SEC on October 4, 1993, and
incorporated herein by reference).
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and between
TransAmerican and The Coastal Corporation, as amended by
the Amendment to Gas Purchase Agreement dated February
13, 1990, by and between TransAmerican and Texcol Gas
Services, Inc., as successor to The Coastal Corporation
(previously filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (33-62740), and
incorporated herein by reference).
</TABLE>
83
<PAGE> 86
<TABLE>
<S> <C>
10.6 -- Gas Purchase Agreement dated October 29, 1987, by and
between TransAmerican and The Coastal Corporation as
amended by the Amendment to Gas Purchase Agreement dated
February 13, 1990, by and between TransAmerican and
Texcol Gas Services, Inc., successor to The Coastal
Corporation (previously filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (33-62740),
and incorporated herein by reference).
10.7 -- Gas Transportation Agreement dated the Effective Date (as
therein defined), by and between TransAmerican and The
Coastal Corporation, as amended by the Amendment to Gas
Transportation Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (previously filed as
Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (33-62740), and incorporated herein by
reference).
10.8 -- Firm Natural Gas Sales Agreement dated September 30,
1993, by and between TransTexas and Associated Natural
Gas, Inc. (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the three
months ended October 31, 1993, and incorporated herein by
reference)
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (previously filed as
Exhibit 6 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on
October 4, 1993, and incorporated herein by reference).
10.10 -- Gas Purchase Agreement dated November 1, 1985, between
TransAmerican and Washington Gas and Light Company,
Frederick Gas Company, Inc., and Shenandoah Gas Company
(previously filed as Exhibit 10.13 to the Company's
Registration Statement (33-75050), and incorporated
herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(previously filed as Exhibit 10.1 to the Company's Form
10-Q for the quarter ended October 31, 1993, and
incorporated herein by reference).
10.12 -- Amendment Extending Gas Purchase Agreement between
TransTexas and Washington Gas Light Company, Inc., and
Shenandoah Gas Company, as amended, dated November 1,
1993 (previously filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended January 31, 1994, and
incorporated herein by reference).
10.13 -- Agreement for Purchase of Production Payment between the
Company and Southern States Exploration, Inc. dated April
1, 1994 (previously filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended April 30, 1994,
and incorporated herein by reference).
10.14 -- Assignment of Proceeds Production Payment between the
Company and Southern States Exploration, Inc. dated April
1, 1994 (previously filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended April 30, 1994,
and incorporated herein by reference).
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, Transmission, and John R.
Stanley (previously filed as Exhibit 1 to the Company's
Current Report on Form 8-K filed with the SEC on October
4, 1993, and incorporated herein by reference).
10.16 -- Amended and Restated Accounts Receivable Management and
Security Agreement between the Company and BNY Financial
Corporation (previously filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended October 31,
1995, and incorporated herein by reference).
</TABLE>
84
<PAGE> 87
<TABLE>
<S> <C>
10.17 -- Note Purchase Agreement, dated as of May 10, 1996, among
TransTexas Gas Corporation, TCW Shared Opportunity Fund
II, L.P. and Jefferies & Company, Inc. (previously filed
as an exhibit to the Company's Form 10-Q for the quarter
ended April 30, 1996, and incorporated herein by
reference).
10.18 -- Master Swap Agreement, dated June 6, 1996, between
TransTexas Gas Corporation and AIG Trading Corporation
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.19 -- Purchase Agreement, dated January 30, 1996, between
TransTexas Gas Corporation and Sunflower Energy Finance
Company (previously filed as an exhibit to the Company's
Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.20 -- Production Payment Conveyance, executed on January 30,
1996, from TransTexas Gas Corporation to Sunflower Energy
Finance Company (previously filed as an exhibit to the
Company' Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference).
10.21 -- First Supplement to Purchase Agreement, dated as of
February 12, 1996, among TransTexas Gas Corporation,
Sunflower Energy Finance Company and TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. (previously filed
as an exhibit to the Company's Form 10-Q for the quarter
ended April 30, 1996, and incorporated herein by
reference).
10.22 -- First Supplement to Production Payment Conveyance,
executed February 12, 1996, among TransTexas Gas
Corporation, Sunflower Energy Finance Company and TCW
Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.23 -- Purchase Agreement, dated May 14, 1996, among TransTexas
Gas Corporation, TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. and Sunflower Energy Finance Company
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.24 -- Production Payment Conveyance, executed May 14, 1996,
from TransTexas Gas Corporation to TCW Portfolio No. 1555
Dr V Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (previously filed as an exhibit to the
Company's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference).
10.25 -- Employment Agreement between the Company and Richard
Bianchi dated August 12, 1996 (previously filed as an
exhibit to the Company's Form 10-Q for the quarter ended
October 31, 1996, and incorporated herein by reference).
10.26 -- Employment Agreement between the Company and Arnold
Brackenridge dated August 12, 1996 (previously filed as
an exhibit to the Company's Form 10-Q for the quarter
ended October 31, 1996, and incorporated herein by
reference).
*21.1 -- Schedule of Subsidiaries of the Company.
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Netherland, Sewell & Associates, Inc
</TABLE>
- - ---------------
* filed herewith
85
<PAGE> 88
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) 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, on May 1, 1997.
TRANSTEXAS GAS CORPORATION
By: /s/ JOHN R. STANLEY
----------------------------------
John R. Stanley,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on May 1, 1997.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ JOHN R. STANLEY Director and Chief Executive Officer (Principal
- - ----------------------------------------------------- Executive Officer)
John R. Stanley
/s/ THOMAS B. MCDADE Director and Chairman of the Board
- - -----------------------------------------------------
Thomas B. McDade
Director
- - -----------------------------------------------------
James R. Lesch
/s/ ROBERT L. MAY Director
- - -----------------------------------------------------
Robert L. May
/s/ DONALD D. SYKORA Director
- - -----------------------------------------------------
Donald D. Sykora
/s/ EDWIN B. DONAHUE Vice President and Chief Financial Officer (Principal
- - ----------------------------------------------------- Financial and Accounting Officer)
Edwin B. Donahue
</TABLE>
86
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransTexas Gas Corporation:
Our report on the consolidated financial statements of TransTexas Gas
Corporation is included on page 40 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 81 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 1, 1997
87
<PAGE> 90
SCHEDULE II
TRANSTEXAS GAS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING ADDITIONS OTHER BALANCE AT
DESCRIPTION OF PERIOD AT COSTS RETIREMENTS CHANGES END OF PERIOD
----------- ---------- --------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1995:
Valuation allowance -- long-term
receivables....................... $ 531 $421 $ -- $ -- $ 952
====== ==== ====== ====== ======
Transition Period ended January 31,
1996:
Valuation allowance -- long-term
receivables....................... $ 952 $278 $ -- $ -- $1,230
====== ==== ====== ====== ======
Year ended January 31, 1997:
Valuation allowance -- long-term
receivables....................... $1,230 $516 $1,746 $ -- $ --
====== ==== ====== ====== ======
</TABLE>
88
<PAGE> 91
INDEX TO EXHIBITS
The following instruments are included as exhibits to this Annual Report on
Form 10-K and are filed herewith unless otherwise indicated. Exhibits
incorporated by reference are so indicated by parenthetical information.
<TABLE>
<C> <S>
3.1 -- Articles of Incorporation (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (33-75050),
and incorporated herein by reference)
3.2 -- By-laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-75050),
and incorporated herein by reference)
4.1 -- Indenture dated as of June 15, 1995, among the Company,
TTC and American Bank National Association, as Trustee
(the "Indenture Trustee"), with respect to the Notes
including the forms of Note and Senior Secured Guarantee
as exhibits (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference)
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement, effective as
of June 23, 1995, from the Company to James A. Taylor, as
trustee for the benefit of the Indenture Trustee
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission in June 1995, and incorporated herein by
reference)
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of June 20,
1995, from TTC to James A. Taylor, as trustee for the
benefit of the Indenture Trustee (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference)
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by the Company in favor of the
Indenture Trustee (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission in June 1995, and
incorporated herein by reference)
4.5 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TTC in favor of the Indenture
Trustee (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission in June 1995, and incorporated herein
by reference)
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among the Company, the Indenture Trustee
and the Disbursement Agent (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission in June 1995,
and incorporated herein by reference)
4.7 -- Pledge and Security Agreement dated as of September 19,
1996, between TransAmerican Exploration Corporation and
Fleet National Bank (previously filed as an exhibit to
the Company's Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
4.8 -- Registration Rights Agreement dated as of September 19,
1996, by and among TransTexas Gas Corporation,
TransAmerican Natural Gas Corporation, TransAmerican
Exploration Corporation and Fleet National Bank
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended October 31, 1996, and
incorporated herein by reference).
</TABLE>
<PAGE> 92
<TABLE>
<S> <C>
4.9 -- Pledge Agreement dated as of February 23, 1995, between
TransAmerican Energy Corporation and First Fidelity Bank,
National Association, as Trustee (previously filed as an
exhibit to the Company's Registration Statement on Form
S-3 (33-91494), and incorporated herein by reference).
4.10 -- Pledge Agreement dated as of February 23, 1995, between
TransAmerican Refining Corporation and First Fidelity
Bank, National Association, as Trustee (previously filed
as an exhibit to the Company's Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.11 -- Registration Rights Agreement dated as of February 23,
1995, among TransTexas Gas Corporation, TransAmerican
Refining Corporation and TransAmerican Energy Corporation
(previously filed as an exhibit to the Company's
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.12 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (previously filed as
an exhibit to the Company's Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.13 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and RECO Industries, Inc. (previously filed
as an exhibit to the Company's Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.14 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Frito-Lay, Inc. (previously filed as an
exhibit to the Company's Registration Statement on Form
S-3 (33-91494), and incorporated herein by reference).
4.15 -- Pledge Agreement dated as of February 23, 1995 among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and EM Sector Holdings, Inc. (previously
filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-91494), and incorporated herein
by reference).
4.16 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican Natural Gas Corporation and ITT Commercial
Corp. (previously filed as an exhibit to the Company's
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.17 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican Natural Gas Corporation, TransTexas
Gas Corporation and ITT Commercial Finance Corp.
(previously filed as an exhibit to the Company's
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.18 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas Gas Corporation and the Purchasers of 13 1/4%
Series A Senior Subordinated Notes due 2003 (previously
filed as an exhibit to the Company's Registration
Statement on Form S-3 (33-91494), and incorporated herein
by reference).
4.19 -- Indenture dated December 13, 1996 between TransTexas Gas
Corporation and Bank One, Columbus, NA, as Trustee
(previously filed as an exhibit to Post-Effective
Amendment No. 5 to the Company's Registration Statement
on Form S-3 (33-91494), and incorporated herein by
reference).
4.20 -- Registration Rights Agreement dated December 13, 1996
between TransTexas Gas Corporation and each of the
Purchasers of the Subordinated Notes (previously filed as
an exhibit to Post-Effective Amendment No. 5 to the
Company's Registration Statement on Form S-3 (33-91494),
and incorporated herein by reference).
</TABLE>
<PAGE> 93
<TABLE>
<S> <C>
10.1 -- Services Agreement dated August 24, 1993, by and among
TransTexas and TransAmerican (filed as Exhibit 3 to the
Company's Current Report on Form 8-K filed with the SEC
on October 4, 1993, and incorporated herein by
reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the other
subsidiaries of TransAmerican, as amended (filed as
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 (33-75050), and incorporated herein by
reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between the
Company and TARC, as amended (previously filed as Exhibit
10.4 to TARC's Registration Statement on Form S-1
(33-82200), and incorporated herein by reference).
10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group (previously
filed as Exhibit 4 to the Company's Current Report on
Form 8-K filed with the SEC on October 4, 1993, and
incorporated herein by reference).
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and between
TransAmerican and The Coastal Corporation, as amended by
the Amendment to Gas Purchase Agreement dated February
13, 1990, by and between TransAmerican and Texcol Gas
Services, Inc., as successor to The Coastal Corporation
(previously filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (33-62740), and
incorporated herein by reference).
10.6 -- Gas Purchase Agreement dated October 29, 1987, by and
between TransAmerican and The Coastal Corporation as
amended by the Amendment to Gas Purchase Agreement dated
February 13, 1990, by and between TransAmerican and
Texcol Gas Services, Inc., successor to The Coastal
Corporation (previously filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (33-62740)
and incorporated herein by reference).
10.7 -- Gas Transportation Agreement dated the Effective Date (as
therein defined), by and between TransAmerican and The
Coastal Corporation, as amended by the Amendment to Gas
Transportation Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (previously filed as
Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (33-62740), and incorporated herein by
reference).
10.8 -- Firm Natural Gas Sales Agreement dated September 30,
1993, by and between TransTexas and Associated Natural
Gas, Inc. (previously filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the three
months ended October 31, 1993, and incorporated herein by
reference)
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (previously filed as
Exhibit 6 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on
October 4, 1993, and incorporated herein by reference).
10.10 -- Gas Purchase Agreement dated November 1, 1985, between
TransAmerican and Washington Gas and Light Company,
Frederick Gas Company, Inc., and Shenandoah Gas Company
(previously filed as Exhibit 10.13 to the Company's
Registration Statement (33-75050), and incorporated
herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(previously filed as Exhibit 10.1 to the Company's Form
10-Q for the quarter ended October 31, 1993, and
incorporated herein by reference).
</TABLE>
<PAGE> 94
<TABLE>
<S> <C>
10.12 -- Amendment Extending Gas Purchase Agreement between
TransTexas and Washington Gas Light Company, Inc., and
Shenandoah Gas Company, as amended, dated November 1,
1993 (previously filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended January 31, 1994, and
incorporated herein by reference).
10.13 -- Agreement for Purchase of Production Payment between the
Company and Southern States Exploration, Inc. dated April
1, 1994 (previously filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended April 30, 1994,
and incorporated herein by reference).
10.14 -- Assignment of Proceeds Production Payment between the
Company and Southern States Exploration, Inc. dated April
1, 1994 (previously filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended April 30, 1994,
and incorporated herein by reference).
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, Transmission, and John R.
Stanley (previously filed as Exhibit 1 to the Company's
Current Report on Form 8-K filed with the SEC on October
4, 1993, and incorporated herein by reference).
10.16 -- Amended and Restated Accounts Receivable Management and
Security Agreement between the Company and BNY Financial
Corporation (previously filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended October 31,
1995, and incorporated herein by reference).
10.17 -- Note Purchase Agreement, dated as of May 10, 1996, among
TransTexas Gas Corporation, TCW Shared Opportunity Fund
II, L.P. and Jefferies & Company, Inc. (previously filed
as an exhibit to the Company's Form 10-Q for the quarter
ended April 30, 1996, and incorporated herein by
reference).
10.18 -- Master Swap Agreement, dated June 6, 1996, between
TransTexas Gas Corporation and AIG Trading Corporation
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.19 -- Purchase Agreement, dated January 30, 1996, between
TransTexas Gas Corporation and Sunflower Energy Finance
Company (previously filed as exhibit to the Company's
Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.20 -- Production Payment Conveyance, executed on January 30,
1996, from TransTexas Gas Corporation to Sunflower Energy
Finance Company (previously filed as exhibit to the
Company's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference).
10.21 -- First Supplement to Purchase Agreement, dated as of
February 12, 1996, among TransTexas Gas Corporation,
Sunflower Energy Finance Company and TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. (previously filed
as an exhibit to the Company's Form 10-Q for the quarter
ended April 30, 1996, and incorporated herein by
reference).
10.22 -- First Supplement to Production Payment Conveyance,
executed February 12, 1996, among TransTexas Gas
Corporation, Sunflower Energy Finance Company and TCW
Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
</TABLE>
<PAGE> 95
<TABLE>
<S> <C>
10.23 -- Purchase Agreement, dated May 14, 1996, among TransTexas
Gas Corporation, TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. and Sunflower Energy Finance Company
(previously filed as an exhibit to the Company's Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.24 -- Production Payment Conveyance, executed May 14, 1996,
from TransTexas Gas Corporation to TCW Portfolio No. 1555
Dr V Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (previously filed as an exhibit to the
Company's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference).
10.25 -- Employment Agreement between the Company and Richard
Bianchi dated August 12, 1996 (previously filed as an
exhibit to the Company's Form 10-Q for the quarter ended
October 31, 1996, and incorporated herein by reference).
10.26 -- Employment Agreement between the Company and Arnold
Brackenridge dated August 12, 1996 (previously filed as
an exhibit to the Company's Form 10-Q for the quarter
ended October 31, 1996, and incorporated herein by
reference).
*21.1 -- Schedule of Subsidiaries of the Company.
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Netherland, Sewell & Associates, Inc
</TABLE>
- - ---------------
* filed herewith
<PAGE> 1
EXHIBIT 21.1
SCHEDULE OF SUBSIDIARIES
OF
TRANSTEXAS GAS CORPORATION
<TABLE>
<CAPTION>
STATE OF INCORPORATION
NAME ----------------------
<S> <C>
TransTexas Transmission Corporation......................... Delaware
TransTexas Exploration Corporation.......................... Delaware
TransTexas Drilling Services, Inc........................... Delaware
Signal Capital Holdings Corporation......................... Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Company's registration
statement on Form S-3 (File No. 33-41494) of our report dated April 30, 1997 on
our audits of the financial statements and financial statement schedule as of
January 31, 1997 and 1996 and July 31, 1995 and for the year ended January 31,
1997, the six month period ended January 31, 1996 and each of the two years in
the period ended July 31, 1995, which report is included in this annual report
on Form 10-K.
Coopers & Lybrand L.L.P.
Houston, Texas
May 1, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the incorporation by reference in the Registration Statement
of TransTexas Gas Corporation ("Company") on Form S-3 (File No. 33-91494) of our
reserve report dated February 1, 1997 ("Reserve Report"), and to the references
to our name under the caption "Experts" and elsewhere in the form and context in
which it appears in such Registration Statement. We also consent to the
references to our Reserve Report and to our name in the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1997 in the form and context
in which they appear.
NETHERLAND, SEWELL & ASSOCIATES, INC.
Houston, Texas
May 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JANUARY 31, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 69,561
<SECURITIES> 0
<RECEIVABLES> 81,908
<ALLOWANCES> 0
<INVENTORY> 12,481
<CURRENT-ASSETS> 188,934
<PP&E> 2,280,880
<DEPRECIATION> 1,434,487
<TOTAL-ASSETS> 1,053,152
<CURRENT-LIABILITIES> 117,348
<BONDS> 936,135
<COMMON> 740
0
0
<OTHER-SE> (151,535)
<TOTAL-LIABILITY-AND-EQUITY> 1,053,152
<SALES> 397,882
<TOTAL-REVENUES> 406,347
<CGS> 114,453
<TOTAL-COSTS> 219,068
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,007
<INCOME-PRETAX> 95,816
<INCOME-TAX> 12,491
<INCOME-CONTINUING> 83,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,325
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 0
</TABLE>
