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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, 1998
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
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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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, 1998, was $126,711,530.
The number of shares of common stock of the registrant outstanding on April
30, 1998, was 57,515,566.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) are
incorporated by reference from the registrant's definitive proxy statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Form 10-K in connection with the registrant's 1998 annual
meeting of stockholders.
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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.................................................. 7
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 23
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 55
Item 13. Certain Relationships and Related Transactions.............. 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 55
Signatures............................................................. 62
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PART I
ITEM 1. BUSINESS
GENERAL
TransTexas Gas Corporation (the "Company" or "TransTexas") is engaged in
the exploration for and development and production of natural gas, primarily in
south and coastal Texas. Since 1973, TransTexas has drilled over 1,700 wells and
discovered over 3.5 Tcfe of natural gas. TransTexas' 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.
TransTexas was organized in May 1993 to facilitate the refinancing of
TransAmerican Natural Gas Corporation ("TransAmerican"). TransTexas is a
subsidiary of TransAmerican Energy Corporation ("TEC"), which is wholly owned by
TransAmerican. TransTexas' operations currently consist of the natural gas
exploration and production and businesses of TransAmerican, which were
transferred to TransTexas in August 1993 (the "Transfer") pursuant to an
agreement among TransAmerican, TransTexas and John R. Stanley (the "Transfer
Agreement").
In 1994, as part of its strategy to expand its productive reserves beyond
the Lower Wilcox Lobo Trend (the "Lobo Trend") in Webb and Zapata counties in
South Texas, TransTexas began evaluating prospects that exhibited the potential
to add proved reserves of at least 50 Bcfe of natural gas per development area.
Since that time, TransTexas' development of certain of these areas has resulted
in substantial new reserves and production.
In May 1997, TransTexas consummated a stock purchase agreement with an
unaffiliated buyer (the "Lobo Sale Agreement"), with an effective date of March
1, 1997, to effect the sale (the "Lobo Sale") of the stock of TransTexas
Transmission Corporation ("TTC"), its subsidiary that owned substantially all of
TransTexas' Lobo Trend producing properties and related pipeline transmission
system, for an adjusted sales price of approximately $1.1 billion. With proceeds
from the Lobo Sale, TransTexas repaid certain indebtedness and other
obligations, including production payments. The remaining net proceeds were used
for the repurchase or redemption of TransTexas' 11 1/2% Senior Secured Notes due
2002 (the "TransTexas Senior Secured Notes") and for general corporate purposes.
As of February 1, 1998, TransTexas' net proved reserves in properties
remaining after the Lobo Sale, as estimated by Netherland, Sewell & Associates,
Inc., were 444 Bcfe. As of January 31, 1998, TransTexas owned approximately
649,000 gross (447,000 net) acres of mineral interests. TransTexas' average net
daily natural gas production for the year ended January 31, 1998 from properties
remaining after the Lobo Sale, was approximately 132 MMcfd, for a total net
production of 48.3 Bcf of natural gas.
In November 1997, TransTexas engaged an investment banking firm to examine
the feasibility of the sale of certain of TransTexas' producing properties in
Webb, Zapata, Jim Hogg and Starr Counties, Texas. The conclusion of any such
sale will be dependent upon, among other things, the ongoing success of
TransTexas' Galveston Bay development drilling program and the terms of such
transaction. TransTexas has also engaged an investment banking firm to assist it
in the sale of certain assets comprising its drilling services division.
TransTexas' principal executive office is located at 1300 North Sam Houston
Parkway East, Suite 310, Houston, Texas 77032, and its telephone number at that
address is (281) 987-8600.
OPERATING AREAS
TransTexas' primary areas of operations as of January 31, 1998 are
discussed below:
Eagle Bay. In November 1996, TransTexas reached agreement with an
unaffiliated third party to jointly conduct exploration of geological prospects
in the Galveston Bay area. The parties have drilled three out of seven prospects
identified in the area.
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On January 8, 1998, TransTexas announced that it had successfully drilled,
completed and flow-tested its first well, the State Tract 331#1, located
approximately one mile off the coast of San Leon, Texas, in a water depth of
less than 10 feet. This discovery well flow tested at a gross rate of 76.4 MMcfd
of natural gas and 11,002 Bpd of condensate and oil.
TransTexas has successfully drilled, completed and flow-tested a second
well, the State Tract 331#3, located approximately one-half mile northeast of
the discovery well. This confirmation well flow-tested at a gross rate of 41
MMcfd of natural gas and 10,700 Bpd of condensate and oil. A third well, the
State Tract 352 #1, located approximately one-half mile southwest of the
discovery well is currently being drilled.
As of April 15, 1998, the Eagle Bay field was producing at a rate of 8.3
MMcfd of natural gas and 1,560 Bpd of condensate and oil. Current production
rates are constrained by temporary production facilities. TransTexas expects the
rate to increase substantially in the second half of fiscal 1999, after
additional production facilities are installed. As of January 31, 1998,
TransTexas owned a 75% working interest covering approximately 5,002 gross
(4,803 net) acres in the Eagle Bay area.
TransTexas has also drilled two exploratory wells on two other prospects in
Galveston Bay. These wells, the Doornbos #1 and State Tract 88A#1, were
unsuccessful although the acquisition of additional seismic data covering these
prospects is under consideration. TransTexas intends to drill four additional
prospects in Galveston Bay. As of January 31, 1998, TransTexas owned a 75%
working interest covering approximately 16,524 gross (13,628 net) acres in the
Galveston Bay area prospects including Eagle Bay.
Bob West North. In late 1994, TransTexas made a natural gas discovery in
the Bob West North area of southern Zapata County, Texas. As of January 31,
1998, TransTexas had drilled 53 wells and completed 51 wells in the area. As of
January 31, 1998, TransTexas' mineral interests in Bob West North consisted of a
98% working interest in 17,300 gross (14,200 net) acres and a 90% net profits
interest in 660 gross acres. In April 1998, TransTexas sold the net profits
interest. On January 31, 1998, TransTexas was in the process of completing one
well in Bob West North. For the fiscal year ended January 31, 1998, TransTexas
produced 46.8 Bcf (33.9 Bcf net) from the Bob West North area at an average net
daily rate of 93 MMcfd. Recently obtained 3-D seismic data indicates the
potential for additional drilling locations to further develop productive
reservoirs in the area.
Fandango South. TransTexas is developing a natural gas discovery located in
reservoirs in Jim Hogg County, Texas known as the Fandango South area. As of
January 31, 1998, TransTexas had drilled nine wells, had completed eight wells
and was drilling two additional wells to develop the lower Wilcox sandstone. For
the fiscal year ended January 31, 1998, TransTexas produced 4.2 Bcf (2.9 Bcf
net) of natural gas from this field, at an average net daily rate of 8 MMcfd. As
of January 31, 1998, TransTexas held a 97% working interest in approximately
5,500 gross (5,500 net) acres in Fandango South.
Goliad and Victoria Counties. As of January 31, 1998, TransTexas had
drilled eight wells in prospects in Goliad and Victoria Counties, Texas, six of
which had been completed. For the fiscal year ended January 31, 1998, TransTexas
produced 1.5 Bcf (1.1 Bcf net) of natural gas from the development area, at an
average net daily rate of 3 MMcfd. As of January 31, 1998, TransTexas owned a
100% working interest in approximately 8,412 gross (7,329 net) acres in Goliad
and Victoria Counties.
Wharton County. In 1995, TransTexas entered into an agreement with an
unaffiliated third party, that acts as operator, to jointly develop the mineral
rights in the shallow Frio and Miocene sands in Wharton County, Texas. As of
January 31, 1998, 60 wells had been drilled in shallow formations in the area,
26 of which had been completed.
TransTexas also acquired mineral rights covering deeper Wilcox formations
in Wharton County. TransTexas has drilled and completed four deeper wells in the
area. The first such well, the Joel Hudgins #1, commenced production from the
area on August 25, 1997 at a rate of 4 MMcfd.
For the fiscal year ended January 31, 1998, TransTexas' Wharton County
properties produced 3.7 Bcf (2.6 Bcf net) of natural gas, at an average net
daily rate of 7 MMcfd. As of January 31, 1998, TransTexas held a 75% working
interest in the shallow mineral rights in approximately 43,956 gross (22,049
net) acres in
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Wharton County and a 100% working interest in the deep mineral rights in
approximately 3,123 gross (2,747 net) acres.
Lodgepole, North Dakota. In late 1996, TransTexas announced the discovery
of a Lodgepole formation oil field in Dickinson, North Dakota. As of January 31,
1998, TransTexas had drilled a total of 11 wells in the Lodgepole, three of
which had been completed. For the fiscal year ended January 31, 1998,
TransTexas' Lodgepole properties produced 684,007 barrels of crude oil (437,764
barrels net) at an average net daily rate of 1,199 Bpd. In January 1998,
TransTexas sold its Lodgepole producing properties for a sales price of $19.1
million. As of January 31, 1998, TransTexas held an 80% average working interest
in approximately 210,540 gross (96,111 net) acres in the Lodgepole trend.
Other Areas. TransTexas has also made discoveries of natural gas and oil in
other prospects in Texas, Louisiana and Mississippi that, as of January 31,
1998, are in the preliminary stages of development drilling but which management
believes have the potential to add material reserves and production.
TransTexas has entered into a separate venture with its Galveston Bay
co-venturer covering prospects in South Louisiana. TransTexas owns a 25% working
interest in a discovery well in Vermilion Parish that is currently being
completed for production. TransTexas expects eventually to participate in more
than 350 square miles of 3-D seismic data. As of January 31, 1998, TransTexas
had identified eight individual exploration prospects in South Louisiana that it
intends to drill and, as of January 31, 1998, owned a 50% working interest in
14,202 gross (10,094 net) acres.
TransTexas owns an 82% working interest in 1,509 gross (1,407 net) acres in
Brazoria County, Texas. As of January 31, 1998, TransTexas had drilled and was
completing the initial test well and drilling a second well in an area adjacent
to existing production areas.
TransTexas owns a 100% working interest in 5,189 gross (2,691 net) acres in
Chambers County, Texas. As of January 31, 1998, TransTexas had drilled five
wells and completed three wells in Chambers County. TransTexas has conducted a
3-D seismic survey covering approximately 32 square miles that indicates
multiple prospective drilling locations.
TransTexas holds a 92% working interest in approximately 19,652 gross
(19,409 net) acres in the Cuba Libre area of Webb County, Texas. For the fiscal
year ended January 31, 1998, TransTexas produced 3.5 Bcf (2.5 Bcf net) at an
average net daily rate of 7 MMcfd from a total of 20 wells drilled in Cuba
Libre, of which 11 wells had been completed.
TransTexas holds a 95% working interest in approximately 81,512 gross
(58,216 net) acres in the La Grulla area of Starr County, Texas. As of January
31, 1998, TransTexas had drilled a total of 38 wells in La Grulla, of which 17
wells had been completed. For the fiscal year ended January 31, 1998,
TransTexas' La Grulla properties produced 2.2 Bcf (1.6 Bcf net) at an average
net daily rate of 4 MMcfd.
EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of TransTexas consist of
geological evaluation of current and prospective properties, the acquisition of
mineral interests in prospects and the development and operation of leased
properties for the production and sale of natural gas, condensate and crude oil.
TransTexas focuses on adding proved reserves of at least 50 Bcfe per development
area. TransTexas' technical staff consists of geologists, geophysicists and
engineers whose assessment of drilling locations may be enhanced with the use of
3-D seismic workstations, which TransTexas owns and operates at its Houston
headquarters. TransTexas' technical staff selects drilling locations based on
the interpretation of available well data and 3-D and 2-D seismic data.
TransTexas operates substantially all of its producing properties. TransTexas
believes that this experience is especially important in south and coastal
Texas, which are geologically complex.
During the five years ended January 31, 1998, TransTexas completed
approximately 72% of 613 wells drilled at an average finding cost of
approximately $0.76 per Mcfe. As of January 31, 1998, TransTexas was drilling
nine gross (nine net) wells. As of January 31, 1998, TransTexas had a total of
157 productive wells.
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TransTexas had a working interest in the following numbers of wells that were
drilled during the periods indicated:
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SIX MONTHS
YEAR ENDED JANUARY 31, ENDED YEAR ENDED
------------------------- JANUARY 31, JULY 31,
1998* 1997 1996 1995
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GROSS NET GROSS NET GROSS NET GROSS NET
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Exploratory Wells(1):
Productive(2)................................ 13 11 36 33 12 11 13 13
Non-Productive............................... 16 14 45 41 13 12 7 6
% Productive................................. 45% 44% 44% 45% 48% 48% 65% 68%
Development Wells(1):
Productive(2)................................ 47 43 67 66 36 36 63 63
Non-Productive............................... 31 27 3 3 4 4 15 15
% Productive................................. 60% 61% 96% 96% 90% 90% 81% 81%
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* Results for 1998 include the effect of the Lobo Sale.
(1) The number of net wells is the sum of the fractional working interests owned
in gross wells.
(2) 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.
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
ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------ --------------- JULY 31,
1998* 1997 1996 1996 1995 1995
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Production:
Gas (Bcf)(1).............................. 72.4 153.6 137.9 66.8 76.9 147.9
NGLs (MMgals)............................. 62.4 174.2 169.2 65.3 121.3 225.3
Condensate and oil (MBbls)................ 619 604 543 258 354 638
Average sales prices:
Gas (dry) (per Mcf)(2).................... $ 2.09 $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40
NGLs (per gallon)......................... .29 .36 .27 .30 .27 .26
Condensate and oil (per Bbl).............. 19.20 21.54 17.76 17.39 16.50 17.22
Average lifting cost per Mcfe(3)............ .34 .29 .23 .23 .21 .21
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* Results for 1998 include the effect of the Lobo Sale.
(1) Net gas production volumes for the years ended January 31, 1998 and 1997,
include 7.3 Bcf and 32.0 Bcf delivered under volumetric production payments.
(2) Average prices for the years ended January 31, 1998 and 1997, include
amounts delivered under volumetric production payments. The average gas
price for TransTexas' undedicated production for these periods was $2.10 per
Mcf and $2.39 per Mcf, respectively. Gas prices do not include the effect of
hedging.
(3) Condensate and oil are converted to a common unit of measure 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, 1998, includes volumes
delivered to third parties under volumetric production payments.
DRILLING SERVICES DIVISION
For the past 12 years, TransTexas has performed substantially all of its
own drilling and oil field services through its drilling services division
located in Laredo, Texas. Drilling services include drilling, workover and
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completion, as well as a variety of other support services required for the
exploration and production of natural gas.
Subsequent to the Lobo Sale, TransTexas' exploration and production
activities are no longer concentrated in the Laredo area nor are they comparable
to those historically conducted. Therefore, the utilization of a
centrally-located drilling services operation in Laredo is no longer as
efficient or cost-effective. Accordingly, TransTexas has engaged an investment
banking firm to assist in the sale of the drilling services assets. TransTexas
anticipates selling its oilfield stimulation, cementing and coiled tubing
equipment and related facilities on or about April 30, 1998. TransTexas has also
entered into a letter of intent to sell its drilling rigs. Discussions regarding
the sale of TransTexas' remaining drilling services assets are being conducted.
As of January 31, 1998, the assets of this division included 25 land
drilling rigs, nine workover rigs and two fracture stimulation fleets.
Complementary drilling, completion and workover 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. During the year ended
January 31, 1998, TransTexas drilled 107 wells, substantially all of which were
drilled by this division.
NATURAL GAS TRANSPORTATION AND PROCESSING
As part of the Lobo Sale, TransTexas divested the majority of its pipeline
assets. Effective March 1, 1997, TransTexas entered into two agreements with
Lobo Pipeline Company for intrastate and interstate gas transportation from its
Bob West North field to the Agua Dulce marketing hub or to the Exxon King Ranch
Gas Plant for gas processing. The agreements are for a term of approximately 10
years and allow for the transportation of up to a combined total of 400 MMcfd.
TransTexas has retained ownership of its pipeline systems within the Bob West
North and Fandango South fields.
TransTexas intends to enter into agreements for the gathering,
transportation, processing and sale of natural gas produced from its Galveston
Bay prospects. TransTexas has constructed approximately 3.2 miles of 20-inch
pipeline from a platform located at State Tract 331 to interconnect with an
existing 18-inch pipeline owned by Tejas Gas Pipeline, L.L.C. ("Tejas") in Texas
State Tract Block 327. TransTexas and Tejas are currently negotiating gathering,
transportation and purchase agreements.
In 1996, TransTexas built a 24-inch pipeline for MidCon Texas Pipeline
Corp. ("MidCon") that spans approximately 68 miles from the Bob West North field
to MidCon's 30-inch pipeline in Webb County, Texas. Pursuant to a related
agreement, TransTexas will earn a 37.5% interest in a 28-mile segment of the
pipeline after five years.
TransTexas believes that there is currently adequate pipeline
transportation capacity for its hydrocarbon production in all of its operating
areas. TransTexas intends to build additional pipeline capacity as future needs
require. However, there can be no assurance that TransTexas will have funds
available to build additional pipeline capacity.
On June 23, 1997, TransTexas and Shell Midstream Enterprises, Inc.
("Shell") entered into a five-year gas processing agreement for the treatment of
natural gas at Shell's Fandango Gas Plant which is expected to be operational by
May 1, 1998. Pursuant to this agreement, TransTexas has committed to deliver 75
MMcfd for processing. The agreement also allows TransTexas to assign one-third
of its commitment to a third party. A treating fee of $0.12 per Mcf will be paid
by TransTexas subject to adjustment in certain circumstances.
NATURAL GAS MARKETING
TransTexas sells its natural gas on the spot market on an interruptible
basis or pursuant to long-term contracts at market prices. For the year ended
January 31, 1998, three purchasers accounted for a total of 65% of the
consolidated natural gas, condensate, NGLs and transportation revenues of
TransTexas. TransTexas believes that the loss of any single purchaser would not
have a material adverse effect on TransTexas due to the availability of other
purchasers for TransTexas' production at comparable prices.
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In January 1997, TransTexas and Koch Energy Trading Inc. entered into a gas
purchase contract pursuant to which TransTexas is required to deliver 25,000
MMBtu per day to a specified delivery point. The purchase price is determined by
an industry index less $0.08 per MMBtu. Deliveries commenced on June 1, 1997 and
are to continue through August 31, 1999.
HEDGING
From time to time, TransTexas has entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. For the fiscal year ended January 31, 1998,
TransTexas made net settlement payments totaling approximately $7.4 million to
the counterparty pursuant to the Hedge Agreements. As of January 31, 1998,
TransTexas had no outstanding Hedge Agreements or other derivative instruments.
The Hedge Agreements were accounted for as hedges and, accordingly, any gains
and losses were deferred and recognized in the respective month as physical
volumes were sold.
COMPETITION
TransTexas encounters significant 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 TransTexas' and which, in many instances, have
been engaged in the energy business for a much longer time than TransTexas.
The primary bases for competition in the natural gas and oil exploration
and production businesses are available capital and the costs involved in
finding and developing gas and oil resources combined with commodity sales
prices and market access.
EMPLOYEES
As of January 31, 1998, TransTexas had approximately 2,500 employees,
including approximately 2,300 field employees related to its natural gas
exploration, production and drilling services businesses. TransTexas may engage
the services of independent geological, engineering, land and other consultants
from time to time. None of TransTexas' employees are parties to a collective
bargaining agreement.
GOVERNMENTAL REGULATION
TransTexas' 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 TransTexas' cost
of doing business and affects its profitability. Because such rules and
regulations are frequently amended or reinterpreted, TransTexas 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 require permits for drilling operations, drilling bonds and reports
concerning operations, and impose other requirements related to the exploration
and production of natural 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
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
natural gas can be produced from TransTexas' properties. Management believes
that 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
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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 TransTexas of these complex
and overlapping rules and regulations, many of which are repeatedly subjected to
judicial challenge and interpretation, cannot be predicted.
ENVIRONMENTAL MATTERS
See Note 13 of Notes to Consolidated Financial Statements for a discussion
of environmental matters affecting TransTexas.
ITEM 2. PROPERTIES
ACREAGE
The following table sets forth TransTexas' total developed and undeveloped
acreage and productive wells as of January 31, 1998:
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DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)
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Gross............................................ 18,700 630,384 157
Net(2)........................................... 15,932 430,618 134
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(1) Of the total productive wells, 149 gross (132 net) were gas wells and 8
gross (2 net) were oil wells. As of January 31, 1998, TransTexas had
interests in 6 productive wells which had multiple completions.
(2) The number of net acres and net wells is the sum of the fractional working
interests owned in gross acres and gross wells, respectively.
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RESERVES
The following table sets forth certain information with respect to
TransTexas' 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"), TransTexas' independent
petroleum engineers, as of the dates indicated. See Note 17 of Notes to
Consolidated Financial Statements for additional information regarding
TransTexas' proved reserves at February 1, 1998.
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FEBRUARY 1,
------------------------------------
1998* 1997 1996
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(DOLLARS IN THOUSANDS)
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Proved Developed Reserves:
Gas (MMcf)(1)............................... 134,258 381,527 425,317
Condensate and oil (MBbls).................. 4,230 2,388 880
Estimated future net revenues(2)............ $228,932 $ 951,435 $ 572,882
Present value of estimated future net
revenues discounted at 10%(2)............ $173,832 $ 683,282 $ 416,205
Proved Undeveloped Reserves:
Gas (MMcf).................................. 214,430 538,191 713,810
Condensate and oil (MBbls).................. 11,680 3,350 2,023
Estimated future net revenues(2)............ $316,420 $1,133,754 $ 686,423
Present value of estimated future net
revenues discounted at 10%(2)............ $221,841 $ 765,786 $ 391,857
Total Proved Reserves:
Gas (MMcf)(1)............................... 348,688 919,718 1,139,127
Condensate and oil (MBbls).................. 15,910 5,738 2,903
Estimated future net revenues(2)............ $545,352 $2,085,187 $1,259,305
Present value of estimated future net
revenues discounted at 10%(2)............ $395,673 $1,449,068 $ 808,062
</TABLE>
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* Results for 1998 include the effect of the Lobo Sale.
(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 TransTexas' proved reserves and future net revenues
are made using gas, condensate and oil sales prices in effect as of the date of
such reserve estimates and are held constant 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 are
affected by changes in gas, condensate and oil prices, which have fluctuated
widely in recent years. From time to time, TransTexas enters into hedging
transactions to mitigate a portion of such natural gas price volatility. As of
February 1, 1998, 1997 and 1996, the period end sales prices used for purposes
of estimating TransTexas' proved reserves and the future net revenues from those
reserves were $1.96, $3.17 and $1.95 per Mcf of gas, respectively, and $13.54,
$23.99 and $18.34 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.
8
<PAGE> 11
Accordingly, estimates of reserves are often materially different from the
quantities of natural gas, condensate and oil 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.
In computing this data, assumptions and estimates have been used, and
TransTexas 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. Such costs exclude 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 TransTexas' properties.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, TransTexas performs only a
preliminary title investigation before leasing undeveloped properties.
Accordingly, working interest percentages and gross and net acreage amounts 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. TransTexas believes that it has satisfactory title to developed
properties in accordance with standards generally accepted in the oil and gas
industry. TransTexas' properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens, which TransTexas believes do not materially interfere with the use of
or affect the value of such properties. In addition, several litigants against
TransTexas have filed claims that affect certain of TransTexas' properties.
TransTexas 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 13 and 15 of Notes to Consolidated Financial Statements for
information about TransTexas' legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three months ended January 31, 1998.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TransTexas' common stock has traded on the New York Stock Exchange ("NYSE")
under the symbol "TTG" since October 30, 1997. Prior thereto, TransTexas' common
stock traded 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 sales prices for TransTexas'
common stock as reported by the NYSE and NNM.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ended January 31, 1998:
Fourth Quarter............................................ $20.375 $13.500
Third Quarter............................................. 19.375 13.250
Second Quarter............................................ 17.250 13.250
First Quarter............................................. 17.500 12.000
Fiscal year ended January 31, 1997:
Fourth Quarter............................................ $17.250 $13.000
Third Quarter............................................. 14.250 8.500
Second Quarter............................................ 10.250 7.250
First Quarter............................................. 13.000 10.000
</TABLE>
As of April 14, 1998, there were approximately 71 record holders of
TransTexas' common stock.
TransTexas 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 in March 1994. TransTexas' ability
to pay dividends in the future is restricted by TransTexas' existing debt
instruments and will depend on TransTexas' 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 TransTexas' capital requirements and financial condition.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------------------- ----------------------- ---------------------------------
1998 1997 1996 1996 1995 1995 1994 1993
--------- --------- ----------- --------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate and natural
gas liquids revenue....... $ 164,538 $ 363,459 $ 256,986 $ 124,663 $ 143,304 $ 275,627 $ 302,522 $ 294,753
Transportation revenues..... 12,055 34,423 33,518 15,892 19,161 36,787 33,240 30,816
Gain on the sale of
assets.................... 543,365 7,865 474 474 -- -- -- --
Other revenues.............. 3,313 600 360 127 52 285 157 247
--------- --------- --------- --------- --------- --------- --------- ---------
723,271 406,347 291,338 141,156 162,517 312,699 335,919 325,816
Operating costs and
expenses.................. 62,356 137,019 94,046 45,629 50,893 99,310 103,459 99,982
Depreciation, depletion, and
amortization.............. 82,659 132,453 120,513 60,894 70,345 129,964 113,858 95,016
General and administrative
expenses.................. 48,156 45,596 33,025 13,685 12,595 31,935 40,311 23,613
Litigation settlements...... -- (96,000) (18,300) (18,300) -- -- (1,000) --
Operating income............ 530,100 187,279 62,054 39,248 28,684 51,490 79,291 107,205
Net interest expense........ 68,187 91,463 77,174 40,436 29,059 65,797 50,155 2,442
Income taxes and other...... 161,669 12,491 (2,700) (416) (131) (2,415) 5,380 11,146
Extraordinary loss, net of
taxes..................... 72,043 -- 56,637 -- -- 56,637 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)..... $ 228,201 $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529) $ 23,756 $ 93,617
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) per
share:(1)
Income (loss) before
extraordinary item...... $ 4.49 $ 1.13 $ (0.17) $ (0.01) $ -- $ (0.16) $ 0.33
Extraordinary item........ (1.08) -- (0.77) -- -- (0.77) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)..... $ 3.41 $ 1.13 $ (0.94) $ (0.01) $ -- $ (0.93) $ 0.33
========= ========= ========= ========= ========= ========= =========
Dividends declared per
common share(2)........... -- -- -- -- -- -- --
OTHER FINANCIAL DATA:
Cash provided by operating
activities................ $ 21,953 $ 221,061 $ 72,152 $ 52,172 $ 74,332 $ 94,312 $ 136,243 $ 184,466
Cash provided (used) by
investing activities...... 696,021 (272,883) (340,753) (136,664) (105,326) (309,415) (237,781) (142,848)
Cash provided (used) by
financing activities...... (703,033) 64,135 279,030 13,055 18,249 284,224 484,631 507
Ratio of earnings to fixed
charges(3)................ 5.6x 1.7x -- -- -- -- 1.5x 34.9x
EBITDA(4)................... 626,209 325,962 187,884 103,413 100,224 184,695 195,044 208,635
Consolidated fixed
charges................... 97,409 113,581 90,755 51,088 30,254 69,921 52,760 3,256
Capital expenditures........ 426,179 358,814 373,136 205,488 110,842 278,490 241,268 147,202
OPERATING DATA:
Sales volumes:
Gas (average daily)
(MMcfd)................. 198.9 419.6 376.8 363.4 417.7 405.2 358.8 326.8
Gas (Bcf)(6).............. 72.4 153.6 137.9 66.9 76.9 147.9 130.9 119.3
NGLs (MMgal).............. 62.4 174.2 169.2 65.3 121.3 225.3 164.0 183.8
Condensate (MBbls)........ 619 604 543 259 354 638 650 617
Total production (Bcfe)... 76.1 157.2 141.1 68.5 79.0 151.7 134.8 123.0
Average prices:
Gas (dry) (per Mcf)(6).... $ 2.09 $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96 $ 1.98
NGLs (per gallon)......... .29 .36 .27 .30 .27 .26 .27 .30
Condensate (per Bbl)...... 19.20 21.54 17.76 17.39 16.50 17.22 15.13 18.65
Average lifting costs (per
Mcfe)..................... .34 .29 .23 .23 .21 .21 .24 .22
Proved reserves (net) (end
of period):
Gas (Bcf)................. 348.7 919.7 1,139.1 1,139.1 943.4 1,122.6 717.4 695.0
Condensate (MBbls)........ 15,910 5,738 2,903 2,903 2,637 3,049 1,935 1,968
Number of gross wells
drilled................... 107 151 102 65 60 97 140 103
Percentage of wells drilled
completed................. 56% 68% 75% 74% 78% 77% 83% 85%
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
-------------------------------------------- --------------------------------
1998 1997 1996 1995 1995 1994 1993
-------- ---------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(5).................. $(22,122) $ 71,586 $ 43,602 $(56,749) $ 106,836 $ (8,865) $ (56,949)
Net property and equipment.................... 701,598 846,393 715,340 498,165 601,460 462,340 341,976
Total assets.................................. 816,635 1,053,152 938,829 594,738 826,570 583,591 360,241
Total debt.................................... 630,103 941,922 824,241 518,701 800,000 500,000 8,270
Stockholders' equity (deficit)................ 24,637 (150,795) (154,440) (85,383) (153,668) (85,139) (204,575)
</TABLE>
- ---------------
(1) Net income per share for the year ended July 31, 1994 gives effect to
69,000,000 shares of common stock outstanding after a 69,000-for-1 stock
split which was effective in February 1994. Per share data for 1993 is
omitted because TransTexas' predecessor was not a separate entity with its
own capital structure.
(2) TransTexas' existing debt instruments contain certain restrictions with
respect to the payment of dividends on TransTexas' common stock.
(3) For the purposes of determining the ratio of earnings to consolidated fixed
charges, earnings are defined as pre-tax income plus consolidated fixed
charges. Consolidated fixed charges consist of interest expense on all
indebtedness and the portion of operating lease rental expense that
represents the interest component. Earnings for the year ended January 31,
1996, six months ended January 31, 1996 and 1995 and 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, 1998 includes a $543.4 million gain on
the sale of assets. EBITDA for the year ended January 31, 1997 includes a
gain on a litigation settlement of $96.0 million and a gain on the sale of
assets of $7.9 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 litigation accruals of $15.0 million, $15.5 million
and $7.0 million for the years ended January 31, 1998, 1997 and 1996,
respectively. EBITDA includes litigation accruals of $7.0 million, $13.0
million and $10.0 million for the years ended July 31, 1995, 1994 and 1993,
respectively. EBITDA is not presented in accordance with GAAP and should not
be used in lieu of GAAP presentations of results of operations and cash
flows.
(5) Working capital for 1993 excludes all cash and accounts receivable because
those assets were not transferred to TransTexas 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, of cash restricted
for the payment of interest.
(6) Sales volumes include amounts delivered pursuant to volumetric production
payments.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with TransTexas'
Consolidated Financial Statements and Notes thereto included under Item 8 of
this report.
RESULTS OF OPERATIONS
TransTexas' results of operations are dependent upon natural gas production
volumes and unit prices from sales of natural gas, condensate and NGLs. The
profitability of TransTexas also depends on its ability to minimize finding and
lifting costs and maintain its reserve base while maximizing production. On May
29, 1997, TransTexas entered into and consummated a stock purchase agreement
with an unaffiliated buyer (the "Lobo Sale Agreement"), with an effective date
of March 1, 1997, to effect the sale (the "Lobo Sale") of the stock of
TransTexas Transmission Corporation ("TTC"), its subsidiary that owned
substantially all of TransTexas' Lobo Trend producing properties and related
pipeline transmission system, for an adjusted sales price of approximately $1.1
billion. Accordingly, TransTexas' reported results for the fiscal year ended
12
<PAGE> 15
January 31, 1998 include the effect of reduced volumes attributable to the
divestiture of the Lobo Trend producing properties. TransTexas recorded a gain
of $543.4 million on the Lobo Sale.
TransTexas' operating data for the years ended January 31, 1998, 1997 and
1996, the six months ended January 31, 1996 and 1995 and the year ended July 31,
1995 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------ --------------- JULY 31,
1998 1997 1996 1996 1995 1995
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf)(1)...................... 72.4 153.6 137.9 66.9 76.9 147.9
NGLs (MMgals)..................... 62.4 174.2 169.2 65.3 121.3 225.3
Condensate and oil (MBbls)........ 619 604 543 259 354 638
Average prices:
Gas (dry) (per Mcf)(2)............ $ 2.09 $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40
NGLs (per gallon)................. .29 .36 .27 .30 .27 .26
Condensate and oil (per Bbl)...... 19.20 21.54 17.76 17.39 16.50 17.22
Number of gross wells drilled....... 107 151 102 65 60 98
Percentage of wells completed....... 56% 68% 75% 74% 78% 78%
</TABLE>
- ---------------
(1) Sales volumes for the years ended January 31, 1998 and 1997 include 7.3 Bcf
and 32.0 Bcf, respectively, delivered pursuant to volumetric production
payments.
(2) Average prices for the years ended January 31, 1998 and 1997 include amounts
delivered under volumetric production payments. The average gas prices for
TransTexas' undedicated production for these periods were $2.10 per Mcf and
$2.39 per Mcf, respectively. Gas prices do not include the effect of
hedging.
TransTexas 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. As of January 31, 1998, the TransTexas' net capitalized costs of gas
and oil properties exceeded the cost center ceiling. TransTexas did not adjust
its net capitalized costs because, subsequent to year-end, prices for gas and
oil increased such that TransTexas' net capitalized costs did not exceed the
recalculated cost center ceiling. A summary of TransTexas' operating expenses is
set forth below (in millions of dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
---------------------------- ------------------- JULY 31,
1998 1997 1996 1996 1995 1995
----- ------ ----------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Lease......................... $15.2 $ 27.5 $18.7 $ 9.4 $10.3 $19.6
Pipeline and gathering........ 18.1 37.2 24.4 13.0 9.8 21.2
Natural gas liquids........... 14.5 49.3 35.5 15.6 24.5 44.4
Drilling services............. 3.1 .4 .2 .1 -- .1
----- ------ ----- ----- ----- -----
50.9 114.4 78.8 38.1 44.6 85.3
Taxes other than income
taxes(1)...................... 11.4 22.6 15.2 7.5 6.3 14.0
----- ------ ----- ----- ----- -----
$62.3 $137.0 $94.0 $45.6 $50.9 $99.3
===== ====== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Taxes other than income taxes include severance, property and other taxes.
13
<PAGE> 16
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
-------------------------- ------------------ JULY 31,
1998 1997 1996 1996 1995 1995
----- ---- ----------- ---- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Depletion rates (per Mcfe)......... $1.11 $.96 $.79 $.82 $.84 $.81
===== ==== ==== ==== ==== ====
</TABLE>
Year Ended January 31, 1998, Compared with the Year Ended January 31, 1997
Gas, condensate and NGL revenues for the year ended January 31, 1998
decreased by $198.9 million from the prior year, primarily due to decreases in
gas, condensate and NGLs sales prices and gas sales volumes, offset in part by
increases in condensate sales volumes. The average prices received per Mcf of
gas, excluding amounts dedicated to volumetric production payments, ranged from
$1.49 to $3.01 in the year ended January 31, 1998, compared to a range of $1.71
to $3.74 in the prior year. The increase in condensate sales volumes is due
primarily to increased production from TransTexas' new development areas, offset
in part by the divestiture of producing properties as a result of the Lobo Sale.
NGLs sales volumes decreased as a result of decreases in the volumes of natural
gas processed. Transportation revenues decreased by $22.4 million for the year
ended January 31, 1998, due primarily to the divestiture of the pipeline system
as a result of the Lobo Sale. Drilling service revenues increased by $2.7
million for the year ended January 31, 1998, due primarily to an increase in
services provided to third parties.
Lease operating expenses for the year ended January 31, 1998 decreased by
$12.3 million from the prior year due primarily to the Lobo Sale and the
resulting decrease in the number of producing wells. Pipeline and gathering
expenses decreased by $19.1 million due primarily to the divestiture of the
pipeline system, offset partially by an increase of $2.3 million attributable to
contractual transportation charges. NGLs cost decreased by $34.8 million from
the prior year primarily due to the Lobo Sale and the resulting decrease in
volumes of natural gas processed. Drilling service expenses for the year ended
January 31, 1998 increased $2.7 million as compared to the prior year primarily
due to increased costs related to providing services to the new operator of the
Lobo Trend properties. Depreciation, depletion and amortization expense for the
year ended January 31, 1998 decreased by $49.8 million due to the Lobo Sale and
the resulting decrease in TransTexas' undedicated natural gas production as a
result of the Lobo Sale, partially offset by a $0.15 increase in the depletion
rate. The depletion rate increased primarily as a result of the inclusion of
approximately $48 million of properties previously not subject to depletion, and
a reduction in TransTexas' proved reserves as a result of the Lobo Sale. General
and administrative expenses increased by $2.6 million due primarily to an
increase in professional services related to amendments to debt agreements
offset partially by a decrease in litigation expense. Taxes other than income
taxes decreased by $11.2 million over the prior year due primarily to decreases
in ad valorem, severance and excise taxes associated with the Lobo Sale and the
resulting decrease in the number of producing wells.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests classified as unevaluated properties. As a result of
exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $17 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the cost center, which could result in continued increases in
the depletion rate or a writedown of TransTexas' net capitalized costs of gas
and oil properties. The majority of unevaluated properties will be evaluated
over the next two years.
Interest income for the year ended January 31, 1998 increased by $6.8
million as compared to the prior year due to higher cash balances available for
investment. TransTexas does not expect to earn significant interest income
during fiscal 1999. Interest expense decreased by $16.4 million primarily as a
result of the retirement of the Senior Secured Notes offset in part by accretion
of interest on the Old Subordinated Notes (as defined) retired by TransTexas on
June 19, 1997.
14
<PAGE> 17
Cash flow from operating activities for the year ended January 31, 1998
decreased by approximately $199.1 million from the prior year due primarily to
lower net income from gas and oil production activities and cash settlement of
volumetric production payments in connection with the Lobo Sale and reduction of
current liabilities partially offset by collections of receivables and advances
to affiliates. During fiscal 1997, TransTexas collected $58.6 million from the
sale of volumetric production payments.
Cash provided by investing activities increased by $968.9 million due to
proceeds primarily from the Lobo Sale, offset in part by an increase in capital
expenditures.
Cash flow used by financing activities increased by $767.2 million due
primarily to the retirement of the Senior Secured Notes and purchases by
TransTexas of its common stock pursuant to the share repurchase program, offset
in part by proceeds from the TransTexas Intercompany Loan.
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 TransTexas' Bob West North development
area, offset in part by the normal decline in natural gas production from
TransTexas' Lobo Trend wells and the sale of approximately 207 Bcfe of
TransTexas' 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 TransTexas' 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
TransTexas' 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
TransTexas' undedicated natural gas production. The depletion rate increased for
the year ended January 31, 1997 primarily due to higher costs associated with
TransTexas' 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 $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 TransTexas Senior Secured 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
TransTexas' 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.
15
<PAGE> 18
Income tax expense for the year ended January 31, 1997, was $12.5 million
compared to an 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 $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 207 Bcfe of TransTexas' reserves, offset in part by
advances to an affiliate and increased capital spending. Capital expenditures
for fiscal 1997 included $47.7 million for purchases of oil and gas properties
from TransAmerican.
Cash flow from financing activities decreased by $214.9 million from the
year ended January 1, 1996 due primarily to the issuance of the TransTexas
Senior Secured Notes in June 1995, offset in part by the issuance of the Old
Subordinated Notes (as defined) 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 TransTexas'
Lobo Trend wells, offset in part by production from TransTexas' 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 expenses 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 due primarily
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 TransTexas to remove carbon dioxide from natural gas
produced from certain of TransTexas' new development areas. NGL costs 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 TransTexas' 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 $2
million over the comparable period of the prior year due to increased cash
balances resulting from the issuance of the TransTexas Senior Secured Notes.
Interest expense increased by $13.4 million primarily as a result of interest
accrued on the TransTexas Senior Secured Notes and a dollar-denominated
production payment, offset in part by the capitalization of $7.4 million of
interest in connection with the acquisition of TransTexas' unevaluated gas and
oil properties.
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<PAGE> 19
Cash flow from operating activities for the six months ended January 31,
1996, decreased by $21.2 million from the prior year period primarily due 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
TransTexas' new discovery areas. These increases were offset by cash proceeds
from the sale of a portion of TransTexas' Lodgepole properties and a
sale-leaseback of drilling equipment.
Cash flow from financing activities decreased by $5.2 million due primarily
to repayments of TransTexas' dollar-denominated production payment, offset in
part by increases in long-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is sensitive to the prices TransTexas receives
for its natural gas. TransTexas from time to time enters into commodity price
swap agreements to reduce its exposure to price risk in the spot market for
natural gas. Proceeds from natural gas sales are received at approximately the
same time that production-related burdens, such as royalties, production taxes
and drilling program obligations, are payable.
TransTexas makes substantial capital expenditures for the exploration,
development and production of natural gas. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements from
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, an accounts receivable
revolving credit facility and other financings. TransTexas' debt covenants may
limit its ability to obtain additional financings or to sell properties, and
there is no assurance that cash flow from operations will be sufficient to fund
capital and debt service requirements.
For the year ended January 31, 1998, total capital expenditures were $424
million, including $56 million for lease acquisitions, $296 million for drilling
and development and $72 million for TransTexas' gas gathering and pipeline
system and other equipment and seismic acquisitions. During fiscal 1998,
TransTexas accelerated its exploration program and development drilling program,
which included the successful exploration efforts in Galveston Bay, Goliad
County and Brazoria County and, as a result, its capital expenditures for fiscal
1998 significantly exceeded its original anticipated amount of $220 million.
Subject to cash availability, capital expenditures for fiscal 1999 are estimated
to be approximately $180 million, which amount is in excess of projected cash
flow from operations for fiscal 1999. A reduction in planned capital spending
could result in less than anticipated cash flow from operations in fiscal 1999
and future years which could have a material adverse effect on TransTexas. To
finance these capital expenditure requirements and reduce its working capital
deficit, TransTexas will be required to supplement its anticipated cash flow
from operations with a combination of asset sales, including assets of the
drilling services division, and financings which may include borrowings or
production payments. There is no assurance that adequate funds can be obtained
on a timely basis from such sources.
In March 1988, TransTexas executed an amended and restated note in the
principal amount of approximately $14.9 million evidencing debt previously
incurred. Concurrently, TransTexas incurred an additional $14 million in debt,
evidenced by a promissory note. Both notes are secured by a lien on equipment.
The notes bear interest at a rate of 13.87%, with monthly installments and a
final installment payable on April 1, 2001.
On May 29, 1997, TransTexas consummated the Lobo Sale for an adjusted sales
price of approximately $1.1 billion. With proceeds from the Lobo Sale,
TransTexas repaid certain indebtedness and other obligations, including
production payments, in an aggregate amount of approximately $84 million. The
remaining net proceeds were used for the redemption or repurchase of the Senior
Secured Notes and for general corporate purposes.
On June 13, 1997, TEC, completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
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<PAGE> 20
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.
With the proceeds of the TEC Notes Offering, TEC made intercompany loans to
TransTexas in the principal amount of $450 million (the "TransTexas Intercompany
Loan") and to TARC in the original amount of $676 million (the "TARC
Intercompany Loan" and, together with the TransTexas Intercompany Loan, the
"Intercompany Loans"). The promissory note evidencing the TransTexas
Intercompany Loan (i) bears interest at a rate of 10 7/8% per annum, payable
semi-annually in cash in arrears and (ii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than inventory,
receivables and equipment. The promissory note evidencing the TARC Intercompany
Loan (i) accretes principal at the rate of 16% per annum, compounded
semi-annually, until June 15, 1999 to a final accreted value of $920 million,
and thereafter pays interest semi-annually in cash in arrears on the accreted
value thereof, at a rate of 16% per annum and (ii) is secured initially by a
security interest in substantially all of TARC's assets other than inventory,
receivables and equipment. The Intercompany Loans will mature on June 1, 2002.
The Intercompany Loan Agreements contain certain restrictive covenants
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates. Upon the occurrence of a Change of
Control (as defined), TEC will be required to make an offer to purchase all of
the outstanding TEC Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, or, in the case of
any such offer to purchase the TEC Senior Secured Discount Notes prior to June
15, 1999, at a price equal to 101% of the accreted value thereof, in each case,
to and including the date of purchase. Pursuant to the terms of the Intercompany
Loans, TEC may require TransTexas and TARC to pay a pro rata share of the
purchase price paid by TEC in an offer to purchase pursuant to a Change of
Control. See "Potential Effects of a Change of Control."
On June 13, 1997, TransTexas completed a tender offer (the "Tender Offer")
for its Senior Secured Notes for 111 1/2% of their principal amount (plus
accrued and unpaid interest). Approximately $785.4 million principal amount of
Senior Secured Notes were tendered and accepted by TransTexas. The Senior
Secured Notes remaining outstanding were called for redemption on June 30, 1997
pursuant to the terms of the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer (the "Subordinated
Notes Exchange Offer"), pursuant to which it exchanged approximately $115.8
million aggregate principal amount of its 13 3/4% Series C Senior Subordinated
Notes due 2001 (the "Series C Subordinated Notes") for all of its 13 1/4% Series
A Senior Subordinated Notes due 2003 (the "Old Subordinated Notes"). On October
10, 1997, TransTexas completed a registered exchange offer resulting in the
issuance of $115.8 million aggregate principal amount of its 13 3/4% Series D
Senior Subordinated Notes due 2001 (the "Subordinated Notes") in exchange for
all of its outstanding Series C Subordinated Notes. The Subordinated Notes pay
interest in cash semi-annually in arrears on each June 30 and December 31
commencing December 31, 1997. The indenture governing the Subordinated Notes
includes certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
As a result of the Tender Offer and Subordinated Notes Exchange Offer,
TransTexas recorded a $72 million after tax extraordinary charge.
In June 1997, TransTexas implemented a share repurchase program pursuant to
which it repurchased common stock from its public stockholders and from TEC and
TARC. The share repurchase program was originally funded by $399 million of
proceeds from the TransTexas Intercompany Loan. As of January 31, 1998,
approximately 3.9 million shares had been repurchased from public stockholders
for an aggregate purchase price of approximately $61.4 million, and
approximately 12.6 million shares had been repurchased from TEC and TARC for an
aggregate purchase price of approximately $201 million. In December 1997, the
share repurchase program was terminated.
In December 1997, TEC obtained consents from the holders of the TEC Series
A Notes to certain amendments to the indenture governing the TEC Notes (the "TEC
Notes Indenture") and related documents. These amendments, among other things,
allowed for the release to TransTexas of approximately $136.6 million in funds
remaining in the TransTexas Disbursement Account after termination of the share
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<PAGE> 21
repurchase program. TransTexas paid a fee of $14 million to holders of the TEC
notes in connection with the consent solicitation which was capitalized as debt
issue costs.
TransTexas and BNY Financial Corporation are parties to a Second Amended
and Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 14, 1997. As of January 31, 1998, outstanding
advances under the BNY Facility totaled approximately $7.9 million. Interest
accrues on advances at the rate of (i) the higher of (a) the prime rate of The
Bank of New York or (b) the Federal Funds Rate plus 1/2 of 1% plus (ii) 1/2 of
1%. Obligations under the BNY Facility are secured by liens on TransTexas'
receivables and inventory.
In September 1997, TEC advanced $3 million to TransTexas pursuant to a
non-interest-bearing note which matures on June 14, 2002. In November and
December 1997 and January 1998, TEC advanced an aggregate of approximately $34
million to TransTexas pursuant to promissory notes which mature on June 14,
2002. The notes bear interest in an amount equal to a fixed semi-annual interest
payment of $2.8 million, prorated based on the average outstanding balance of
all notes (other than the note evidencing the Intercompany Loans) between
TransTexas and TEC and the average outstanding balance of all notes (other than
the note evidencing the Intercompany Loans) between TARC and TEC.
In February 1998, TransTexas entered into a drilling program with unrelated
third parties, pursuant to which such parties have reimbursed or will reimburse
to TransTexas certain drilling costs with respect to recently drilled wells in
exchange for the assignment of a dollar denominated production payment in such
wells. The production payment is limited to repayment of the reimbursement plus
an amount equal to the interest that would accrue at 15% per year on the unpaid
balance of reimbursement amounts. Pursuant to the terms of the TransTexas
Intercompany Loan, the number of wells included in the program cannot exceed 30
per fiscal year. Pursuant to the terms of the drilling program, the maximum
aggregate reimbursement payments to TransTexas cannot exceed $75 million. As of
April 30, 1998, 13 wells were included in the drilling program and aggregate
reimbursement payments to TransTexas totaled $33 million. The program includes
wells in Galveston, Chambers, Jim Hogg, Webb and Wharton counties, Texas.
As discussed above in Item 1, TransTexas has engaged an investment banking
firm to assist in the sale of its drilling services assets. TransTexas expects
that its future general and administrative expenses and operating expenses will
be reduced as a result of the sale of its drilling services assets.
Contingent Liabilities
TransTexas has significant contingent liabilities, including liabilities
with respect to litigation matters as described in Note 13 of Notes to
Consolidated Financial Statements. These matters, individually and in the
aggregate, amount to potential liability which, if adjudicated in a manner
adverse to TransTexas in one reporting period, could have a material adverse
effect on TransTexas' cash flows or results of operations for that period.
Although the outcome of these contingencies or the probability of the occurrence
of these contingencies cannot be predicted with certainty, TransTexas does not
expect these matters to have a material adverse effect on its financial
position.
In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
TransTexas. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days. TransTexas has agreed to
issue up to 8.6 million shares of its common stock to the third party if this
contingent obligation to such third party becomes fixed and remains unpaid for
60 days. If the obligation becomes fixed, and alternative sources of capital are
not available, TransTexas could elect to sell shares of its common stock prior
to the maturity of the obligation and use the proceeds of such sale to repay the
third party. Based on TransTexas' current capitalization, the issuance of shares
of its common stock to satisfy this obligation would result in deconsolidation
of TransTexas for federal income tax purposes. TransTexas does not believe that
this contingency will occur.
Pursuant to the Lobo Sale Agreement, TransTexas is required to indemnify
the buyer for certain liabilities related to the assets previously owned by TTC.
Although TransTexas does not anticipate that it will
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incur any material indemnity liability, no assurance can be given that
TransTexas will have sufficient funds to satisfy any such indemnity obligation
or that any payment thereof will not have a material adverse effect on its
ability to fund its debt service, capital expenditure and working capital
requirements.
Potential Tax Liability
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will not
challenge this position, or that such challenge would not be upheld. Under an
agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such tax
would be offset in future years by alternative minimum tax credits and retained
loss and credit carryforwards to the extent recoverable from TransAmerican. As a
member of the TNGC Consolidated Group (defined below), each of TransTexas, TEC
and TARC will be severally liable for any tax liability resulting from the
above-described transactions. The IRS has commenced an audit of the consolidated
federal income tax returns of the TNGC Consolidated Group for its taxable years
ended July 31, 1995 and 1994. At this time, it is not possible to predict the
scope of the IRS' review or whether any tax deficiencies will be proposed by the
IRS as a result of its review.
Based upon independent legal advice, TransTexas has determined that it will
not report any significant federal income tax liability as a result of the Lobo
Sale. There are, however, significant uncertainties regarding TransTexas' tax
position and no assurance can be given that its position will be sustained if
challenged by the IRS. TransTexas is part of an affiliated group for tax
purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been or
will be obtained from the IRS regarding the Lobo Sale by any member of the TNGC
Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $250 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that TransAmerican
will be able to fund any such payment at the time due and the other members of
the TNGC Consolidated Group, thus, may be required to pay the tax. TransTexas
has reserved approximately $75 million with respect to the potential tax
liability for financial reporting purposes to reflect a portion of the federal
tax liability that TransAmerican might not be able to pay. If TransTexas were
required to pay this tax deficiency, it is likely that it would be required to
sell significant assets or raise additional debt or equity capital to fund the
payment.
Under certain circumstances, TransAmerican or TEC may sell or otherwise
dispose of shares of TransTexas common stock. If, as a result of any sale or
other disposition of TransTexas' common stock, the aggregate ownership of
TransTexas by members of the TNGC Consolidated Group (excluding TransTexas) is
less than 80% (measured by voting power and value), TransTexas will no longer be
a member of the TNGC Consolidated Group for federal tax purposes
("Deconsolidation") and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas'
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common stock could incur a substantial amount of federal income tax liability.
If such Deconsolidation occurred during the fiscal year ending January 31, 1999,
the aggregate amount of this tax liability is estimated to be approximately $100
million, assuming no reduction for tax attributes of the TNGC Consolidated
Group. However, such tax liability generally would be substantially reduced or
eliminated in the event that the IRS successfully challenged TransTexas'
position on the Lobo Sale. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable to the IRS for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that each TNGC Consolidated Group member will have the ability
to satisfy any tax obligation attributable to these transactions at the time due
and, therefore, other members of the group, including TEC, TransTexas or TARC,
may be required to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable) of
such losses in later years to the extent TransTexas has taxable income, remains
a member of the TNGC Consolidated Group and the other group members have the
ability to pay such taxes. If TransAmerican or TEC transfers shares of common
stock of TransTexas (or transfers options or other rights to acquire such
shares) and, as a result of such transfer, Deconsolidation of TransTexas occurs,
TransTexas would not thereafter receive any benefit pursuant to the Tax
Allocation Agreement for net operating losses of TransTexas used by other
members of the TNGC Consolidated Group prior to the Deconsolidation of
TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to transactions in prior years. As of January 31, 1998, TransTexas
had paid approximately $5.4 million of such tax and estimates that approximately
$6.0 million will be paid in fiscal 1999.
Potential Effects of a Change of Control
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Notes will have the right to
require TransTexas to repurchase such holder's Subordinated Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the terms
of the TransTexas Intercompany Loan, upon the occurrence of a Change of Control,
TEC would have the right to require TransTexas to repay the principal of the
TransTexas Intercompany Loan in an amount equal to a pro rata share of the
amount TEC is required to pay under the TEC Notes Indenture. Such pro rata share
would be calculated using the ratio of the outstanding principal amount of the
TransTexas Intercompany Loan to the sum of (i) the outstanding principal amount
of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan.
A Change of Control would be deemed to occur under the Subordinated Notes
Indenture in the case of certain changes or other events in respect of the
ownership of TransTexas, including any circumstances pursuant to which any
person or group other than John R. Stanley (or his heirs, his estate, or any
trust in which he or his immediate family members have, directly or indirectly,
a beneficial interest in excess of 50%) and his subsidiaries or the TEC
Indenture Trustee is or becomes the beneficial owner of more than 50% of the
total voting power of TransTexas' then outstanding voting stock, and during the
90 days thereafter, the rating of the Subordinated Notes is downgraded or
withdrawn. A Change of Control would be deemed to occur under the TransTexas
Intercompany Loan in the case of certain changes or other events in respect of
the ownership or control of TEC, TransTexas or TARC including any circumstance
pursuant to which (i) any person or group, other than John R. Stanley (or his
heirs, his estate, or any trust in which he or his immediate family members
have, directly or indirectly, a beneficial interest in excess of 50%) and his
subsidiaries or the TEC Indenture Trustee is or becomes the beneficial owner of
more than 50% of the total voting power of TEC's then outstanding voting stock,
or (ii) TEC or any of its subsidiaries own some of TransTexas' or TARC's capital
stock, respectively, but less than 50% of the total voting stock or economic
value of TransTexas or TARC, respectively, unless the TEC Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also
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includes a "group," which is defined as two or more persons acting as a
partnership, limited partnership or other group.
In addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the TEC
Notes Indenture may result in a "change of control" of TransTexas under the
terms of the BNY Facility and certain equipment financing. Such an occurrence
could create an obligation for TransTexas to repay such other indebtedness. As
of January 31, 1998, TransTexas had approximately $24.2 million of indebtedness
(excluding the Subordinated Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under the Subordinated Notes
Indenture or the TEC Notes Indenture or a "change of control" under the terms of
other outstanding indebtedness, there can be no assurance that TransTexas will
have sufficient funds to satisfy any such payment obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. These matters,
individually and in the aggregate, amount to significant potential liability
which, if adjudicated in a manner adverse to TransTexas in one reporting period,
could have a material adverse effect on TransTexas' cash flows or results of
operations for that period. Although the outcome of these contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position.
Inflation and Changes in Prices
TransTexas' results of operations and the value of its gas properties are
highly dependent upon the prices TransTexas receives for its natural gas.
Substantially all of TransTexas' sales of natural gas are made in the spot
market, or pursuant to long-term contracts at market prices. Accordingly, the
prices received by TransTexas for its natural gas production are dependent upon
numerous factors beyond the control of TransTexas, 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 the spring and fall, with
concomitant changes in price. Although certain of TransTexas' costs and expenses
are affected by the level of inflation, inflation has not had a significant
effect on TransTexas' results of operations during the year ended January 31,
1998.
Any significant decline in current prices for natural gas could have a
material adverse effect on TransTexas' financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Based on
an assumed average net daily production level of approximately 175 MMcfd,
TransTexas estimates that a $0.10 per MMBtu change in average gas prices
received would change annual operating income by approximately $6 million.
Impact of Year 2000
The year 2000 issue relates to computer programs or computer equipment
designed to use two digits rather than four digits to define the applicable
year. As a result, computer systems with time-sensitive software may not
accurately calculate, store or use a date subsequent to December 31, 1999. This
could result in system failures or miscalculations and disruptions of
operations, including among other things, a temporary inability to process
transactions or engage in other normal business activities.
In June 1997, management began a Company-wide program to prepare its
computer systems for year 2000 compliance. In January 1998, TransTexas began
implementation of new client/server based systems which are anticipated to be
completed by January 1999. TransTexas estimates the cost of upgrading its
computer systems to be approximately $2 million. There can be no assurance that
TransTexas will timely complete the implementation of the new systems. The year
2000 issue should not impact TransTexas' ability to continue exploration,
production or sales activities.
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Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, competition and the ultimate
resolution of litigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 25
Financial Statements:
Consolidated Balance Sheet................................ 26
Consolidated Statement of Operations...................... 27
Consolidated Statement of Stockholders' Equity
(Deficit).............................................. 28
Consolidated Statement of Cash Flows...................... 29
Notes to Consolidated Financial Statements................ 30
</TABLE>
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<PAGE> 27
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, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended January 31, 1998 and 1997, the six months ended January 31, 1996 and
the year ended July 31, 1995. These financial statements are the responsibility
of TransTexas' 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, 1998 and 1997, and the results of
its operations and its cash flows for the years ended January 31, 1998 and 1997,
the six months ended January 31, 1996 and the year ended July 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 30, 1998
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TRANSTEXAS GAS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 38,502 $ 23,561
Cash restricted for interest (Note 5)..................... -- 46,000
Accounts receivable....................................... 17,056 78,660
Receivable from affiliates................................ -- 3,248
Inventories............................................... 16,437 12,481
Other current assets...................................... 10,719 24,984
---------- ----------
Total current assets............................... 82,714 188,934
---------- ----------
Property and equipment...................................... 1,418,293 2,280,880
Less accumulated depreciation, depletion and amortization... 716,695 1,434,487
---------- ----------
Net property and equipment -- based on the full cost
method of accounting for gas and oil properties of which
$104,389 and $158,973 are excluded from amortization at
January 31, 1998 and 1997, respectively................. 701,598 846,393
---------- ----------
Due from affiliates......................................... 1,488 --
Other assets, net........................................... 30,835 17,825
---------- ----------
$ 816,635 $1,053,152
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt...................... $ 10,181 $ 5,787
Accounts payable.......................................... 52,075 28,150
Accrued interest payable to affiliate..................... 6,762 --
Accrued liabilities....................................... 35,818 83,411
---------- ----------
Total current liabilities.......................... 104,836 117,348
---------- ----------
Long-term debt, less current maturities..................... 9,199 8,775
Production payments, less current portion................... 4,121 11,931
Notes payable to affiliate.................................. 486,991 --
Senior secured notes........................................ -- 800,000
Subordinated notes.......................................... 115,815 101,092
Revolving credit agreement.................................. 7,917 26,268
Deferred revenue............................................ -- 54,554
Deferred income taxes....................................... 39,497 31,367
Payable to affiliates....................................... 3,002 19,621
Other liabilities........................................... 20,620 32,991
Commitments and contingencies (Note 13)..................... -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value, 100,000,000 shares
authorized, 57,515,566 shares and 74,000,000 shares
issued and outstanding at January 31, 1998 and 1997,
respectively............................................ 740 740
Additional paid-in capital (capital deficit).............. 26,834 (123,524)
Retained earnings......................................... 259,468 31,267
---------- ----------
287,042 (91,517)
Treasury stock, at cost, 16,484,434 shares................ (262,405) --
Advances to affiliates.................................... -- (59,278)
---------- ----------
Total stockholders' equity (deficit)............... 24,637 (150,795)
---------- ----------
$ 816,635 $1,053,152
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 29
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,
1998 1997 1996 1996 1995 1995
---------- ---------- ----------- ---------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas
liquids....................... $ 164,538 $ 363,459 $ 256,986 $ 124,663 $ 143,304 $ 275,627
Transportation.................. 12,055 34,423 33,518 15,892 19,161 36,787
Gain on the sale of assets...... 543,365 7,856 474 474 -- --
Other........................... 3,313 609 360 127 52 285
---------- ---------- ---------- ---------- ---------- ----------
Total revenues........... 723,271 406,347 291,338 141,156 162,517 312,699
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating....................... 50,957 114,453 78,812 38,145 44,605 85,272
Depreciation, depletion and
amortization.................. 82,659 132,453 120,513 60,894 70,345 129,964
General and administrative...... 48,156 45,596 33,025 13,685 12,595 31,935
Taxes other than income taxes... 11,399 22,566 15,234 7,484 6,288 14,038
Litigation settlements.......... -- (96,000) (18,300) (18,300) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses............... 193,171 219,068 229,284 101,908 133,833 261,209
---------- ---------- ---------- ---------- ---------- ----------
Operating income................ 530,100 187,279 62,054 39,248 28,684 51,490
---------- ---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income................. 12,393 5,544 4,733 2,934 912 2,711
Interest expense, net........... (80,580) (97,007) (81,907) (43,370) (29,971) (68,508)
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(expense).............. (68,187) (91,463) (77,174) (40,436) (29,059) (65,797)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes........................... 461,913 95,816 (15,120) (1,188) (375) (14,307)
Income tax expense (benefit)...... 161,669 12,491 (2,700) (416) (131) (2,415)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................ 300,244 83,325 (12,420) (772) (244) (11,892)
Extraordinary item -- loss on
early extinguishment of debt,
net of tax (Note 5)............. (72,043) -- (56,637) -- -- (56,637)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 228,201 $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529)
========== ========== ========== ========== ========== ==========
Basic and diluted net income
(loss)
per share:
Income (loss) before
extraordinary item............ $ 4.49 $ 1.13 $ (0.17) $ (0.01) $ -- $ (0.16)
Extraordinary item.............. (1.08) -- (0.77) -- -- (0.77)
---------- ---------- ---------- ---------- ---------- ----------
$ 3.41 $ 1.13 $ (0.94) $ (0.01) $ -- $ (0.93)
========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding for basic and
diluted net income (loss) per
share........................... 66,905,903 74,000,000 74,000,000 74,000,000 74,000,000 74,000,000
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE> 30
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS/ TOTAL
------------------- PAID-IN CAPITAL (ACCUMULATED) TREASURY ADVANCES STOCKHOLDERS'
SHARES AMOUNT (CAPITAL DEFICIT) DEFICIT STOCK TO AFFILIATES EQUITY (DEFICIT)
---------- ------ ----------------- ------------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
affiliate............ -- -- -- -- -- (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)
Purchase of treasury
stock, at cost,
16,484,434 shares.... -- -- -- -- (262,405) -- (262,405)
Advance to affiliate... -- -- (13,304) -- -- -- (13,304)
Contribution from
affiliate............ -- -- 21,513 -- -- -- 21,513
Assumption of tax
liability by
TransAmerican........ -- -- 129,549 -- -- -- 129,549
Contribution of debt
issue costs by TEC... -- -- 12,600 -- -- 12,600
Collection of advances
to affiliates........ -- -- -- -- -- 59,278 59,278
Net income............. -- -- -- 228,201 -- -- 228,201
---------- ---- --------- -------- --------- -------- ---------
Balance at January 31,
1998................... 74,000,000 $740 $ 26,834 $259,468 $(262,405) $ -- $ 24,637
========== ==== ========= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 31
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,
1998 1997 1996 1996 1995 1995
--------- --------- ----------- --------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)........................... $ 228,201 $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary item........................ 72,043 -- 56,637 -- -- 56,637
Depreciation, depletion and
amortization............................ 82,659 132,453 120,513 60,894 70,345 129,964
Amortization of debt issue costs.......... 2,030 8,387 3,558 1,295 1,524 3,787
Accretion on subordinated notes........... 4,941 1,647 -- -- -- --
Gain on litigation settlement............. -- -- (18,300) (18,300) -- --
Gain on the sale of assets................ (543,365) (7,856) (474) (474) -- --
Deferred income taxes..................... 161,670 (8,889) 6,263 (416) (1,483) 5,196
Proceeds from volumetric production
payments................................ -- 58,621 32,850 32,850 -- --
Repayment of volumetric production
payments................................ (45,134) -- -- -- -- --
Amortization of deferred revenue.......... (9,420) (36,917) -- -- -- --
Changes in assets and liabilities:
Accounts receivable..................... 61,604 (42,409) (5,604) (12,860) 7,859 15,115
Receivable from affiliates.............. 3,248 449 380 272 765 873
Inventories............................. (3,953) (1,060) (3,229) (3,185) 1,753 1,709
Other current assets.................... 10,265 (2,154) (3,210) (201) (2,193) (5,202)
Accounts payable........................ 18,451 9,900 (14,150) 3,677 3,006 (14,821)
Accrued interest payable to
affiliates............................ 6,762 -- -- -- -- --
Accrued liabilities..................... (50,966) 31,134 (21,420) (3,843) (6,982) (24,559)
Transactions with affiliates, net....... 31,223 (6,825) (17,788) (5,536) 265 (11,987)
Other assets............................ 65 21,428 20 699 (885) (1,564)
Other liabilities....................... (8,371) (20,173) 5,163 (1,928) 602 7,693
--------- --------- --------- --------- --------- ---------
Net cash provided by operating
activities.......................... 21,953 221,061 72,152 52,172 74,332 94,312
--------- --------- --------- --------- --------- ---------
Investing activities:
Capital expenditures........................ (423,915) (340,651) (318,800) (155,886) (106,170) (269,084)
Proceeds from the sale of assets............ 1,062,490 92,518 20,500 20,500 -- --
Withdrawals from cash restricted for
interest.................................. 46,000 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) -- --
Payment of advances by affiliate............ 24,750 -- 4,700 4,700 -- --
Contribution to affiliate................... (13,304) -- -- -- -- --
Production payment by affiliate............. -- -- 3,547 -- 844 4,391
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities.......................... 696,021 (272,883) (340,753) (136,664) (105,326) (309,415)
--------- --------- --------- --------- --------- ---------
Financing activities:
Issuance of long-term debt.................. 14,946 26,200 13,000 3,000 10,000 20,000
Principal payments on long-term debt........ (10,128) (19,135) (20,219) (219) -- (20,000)
Revolving credit agreement, net............. (18,351) 5,903 11,664 20,365 8,701 --
Issuance of production payments............. 20,977 28,598 49,500 -- -- 49,500
Principal payments on production payments... (29,504) (45,205) (16,699) (8,833) -- (7,866)
Issuance of note payable to affiliate....... 486,991 -- -- -- -- --
Issuance of senior secured notes............ -- -- 800,000 -- -- 800,000
Retirement of senior secured notes.......... (892,000) -- (542,500) -- -- (542,500)
Issuance of subordinated notes.............. -- 99,445 -- -- -- --
Debt issue costs............................ (13,559) (9,187) (15,716) (1,258) (452) (14,910)
Increase in cash restricted for share
repurchases............................... (399,284) -- -- -- -- --
Withdrawals from cash restricted for share
repurchases............................... 399,284 -- -- -- -- --
Purchases of treasury stock................. (262,405) -- -- -- -- --
Transfer of litigation escrow to
affiliate................................. -- (22,484) -- -- -- --
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities.......................... (703,033) 64,135 279,030 13,055 18,249 284,224
--------- --------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents......................... 14,941 12,313 10,429 (71,437) (12,745) 69,121
Beginning cash and cash equivalents........... 23,561 11,248 819 82,685 13,564 13,564
--------- --------- --------- --------- --------- ---------
Ending cash and cash equivalents.............. $ 38,502 $ 23,561 $ 11,248 $ 11,248 $ 819 $ 82,685
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 32
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 Delaware in May 1993 for the purpose of
owning and operating certain oil and gas and transmission assets previously
owned and operated by TransAmerican Natural Gas Corporation ("TransAmerican")
and certain of its subsidiaries. On August 24, 1993, certain of these operations
were transferred at predecessor basis pursuant to an agreement among TransTexas,
TransAmerican and certain of its subsidiaries, and TransAmerican's sole
stockholder (the "Transfer"). As a result of the Transfer, TransTexas 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.
TransTexas is a subsidiary of TransAmerican Energy Corporation ("TEC"),
which is a wholly owned subsidiary of TransAmerican. TransAmerican Refining
Corporation ("TARC") is a wholly owned subsidiary of TEC. Unless otherwise
noted, the term "TransTexas" refers to TransTexas Gas Corporation and its
subsidiaries.
Change in Fiscal Year
On January 12, 1996, the Board of Directors determined to change the fiscal
year end of TransTexas to January 31 from July 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.
Use of Estimates and Reclassifications
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). TransTexas' most significant financial estimates are based
on litigation, income taxes and remaining proved gas and oil reserves (see Notes
13 and 17). Actual results could differ from these estimates. Certain previously
reported financial information has been reclassified to conform with the current
presentation.
Cash and Cash Equivalents
TransTexas considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
TransTexas' inventories, consisting primarily of tubular goods, are stated
at the lower of average cost or market.
Gas and Oil Properties
TransTexas 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
30
<PAGE> 33
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. As of January 31, 1998, TransTexas' net capitalized costs of gas
and oil properties exceeded the cost center ceiling. TransTexas did not adjust
its net capitalized costs because, subsequent to year-end, prices for gas and
oil increased such that TransTexas' net capitalized costs did not exceed the
recalculated cost center ceiling.
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 gas and oil properties were $104 million and $159 million at
January 31, 1998 and 1997, respectively. The properties represented by these
costs were undergoing exploration activities at such date, or are properties on
which TransTexas intends to commence such activities in the future. TransTexas
believes that the unevaluated properties at January 31, 1998 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 event
of a redemption of long-term debt, the related debt issue costs will be charged
to income in the period of presentation.
31
<PAGE> 34
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Defined Contribution Plan
TransTexas, 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. TransTexas 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. TransTexas' contributions with respect to this plan
totaled $0.5 million, $0.5 million, $0.3 million, $0.2 million, $0.1 million and
$0.3 million for years ended January 31, 1998, 1997 and 1996, the six months
ended January 31, 1996 and 1995 and the year ended July 31, 1995, respectively.
All Company contributions are currently funded.
Treasury Stock
TransTexas uses the cost method to account for treasury stock. In June
1997, TransTexas implemented a share repurchase program pursuant to which it
repurchased approximately 3.9 million shares from public stockholders for an
aggregate purchase price of approximately $61.4 million, and approximately 12.6
million shares from TARC and TEC for an aggregate purchase price of
approximately $201 million. The share repurchase program was terminated in
December 1997.
Fair Value of Financial Instruments
TransTexas 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. TransTexas assumes 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, TransTexas uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
Revenue Recognition
TransTexas recognizes revenues from the sales of natural gas, condensate
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. Volumetric production is monitored to minimize these natural gas
imbalances. A natural gas imbalance liability is recorded in other liabilities
if TransTexas' excess sales of natural gas exceed its estimated remaining
recoverable reserves for such properties.
Concentration of Credit Risk
Financial instruments that potentially expose TransTexas 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, TransTexas has not
incurred any losses due to excess deposits in any financial institution. Trade
accounts receivable are generally from companies with significant natural gas
marketing activities, which would be impacted by conditions or occurrences
affecting that industry. TransTexas performs ongoing credit evaluations and,
generally, requires no collateral from its customers.
Hedging Agreements
From time to time, TransTexas enters into commodity price swap agreements
(the "Hedge Agreements") to reduce its exposure to price risk in the spot market
for natural gas. The Hedge Agreements are accounted for as hedges if the pricing
of the hedge agreement correlates with the pricing of the natural gas
32
<PAGE> 35
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
production hedged. Accordingly, gains or losses are deferred and recognized as
an increase or decrease in revenues in the respective month the physical volumes
are sold. For the years ended January 31, 1998 and 1997, TransTexas incurred net
settlement losses pursuant to the Hedge Agreements of approximately $7.4 million
and $37 million, respectively. TransTexas had no Hedge Agreements outstanding at
January 31, 1998. As of January 31, 1997, TransTexas had 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 had a
fixed price of $2.48 per MMBtu ($2.57 per Mcf) with no maximum floating price.
Income Taxes
TransTexas files a consolidated tax return with TransAmerican. Income taxes
are due from or payable to TransAmerican in accordance with a tax allocation
agreement, as amended, between TransTexas, TNGC Holdings
Corporation,TransAmerican and TransAmerican's other subsidiaries (the "Tax
Allocation Agreement"). It is TransTexas' policy to record income tax expense as
though TransTexas had filed separately. 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. Income taxes
include federal and state income taxes.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). This statement was adopted by TransTexas effective January 31, 1998. SFAS
128 simplifies the computation of earnings per share by replacing primary and
fully diluted presentations with the new basic and diluted disclosures. Net
income (loss) per share is calculated by dividing net income available for
common stockholders by the weighted average number of shares of common stock and
common stock equivalents.
Recently Issued Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for reporting information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement will
be adopted by TransTexas effective February 1, 1998. TransTexas believes that
adoption of this statement will not have a material impact on its financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
in financial statements. This statement will be adopted by TransTexas effective
February 1, 1998. TransTexas believes that adoption of this statement will not
have a material impact on its financial statements.
33
<PAGE> 36
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Prepayments:
Trade..................................................... $ 7,120 $ 9,580
Insurance................................................. 3,171 2,310
Deferred loss on commodity price swap agreements............ -- 8,276
Other....................................................... 428 4,818
------- -------
$10,719 $24,984
======= =======
</TABLE>
3. 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) 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Land.............................................. $ 1,373 $ 1,384
Gas and oil properties............................ 1,246,584 2,004,967
Gas gathering and transportation.................. 10 51,714 193,443
Equipment and other............................... 4-10 118,622 81,086
---------- ----------
$1,418,293 $2,280,880
========== ==========
</TABLE>
In May 1997, TransTexas consummated a stock purchase agreement with an
unaffiliated buyer (the "Lobo Sale Agreement"), to effect the sale (the "Lobo
Sale") of the stock of TransTexas Transmission Corporation ("TTC"), its
subsidiary that owned substantially all of TransTexas' Lobo Trend producing
properties and related pipeline transmission system, for an adjusted sales price
of approximately $1.1 billion. With proceeds from the Lobo Sale, TransTexas
repaid certain indebtedness and other obligations, including production
payments, in an aggregate amount of approximately $84 million. TransTexas
recorded a gain of $543.4 million on the Lobo Sale. Historical cost of the
properties sold was estimated based on relative fair market value.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests classified as unevaluated properties. As a result of
exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $17 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the cost center, which could result in continued increases in
the depletion rate or a writedown of TransTexas net capitalized costs of gas and
oil properties. The majority of unevaluated properties will be evaluated over
the next two years.
In January 1998, TransTexas sold a portion of its Lodgepole producing
properties for a sales price of $19.1 million. The proceeds from this sale were
credited to the full cost pool.
TransTexas anticipates selling its oilfield stimulation, cementing and
coiled tubing equipment and related facilities on or about April 30, 1998. In
addition, in April 1998 TransTexas entered into a letter of intent to sell its
drilling rigs.
34
<PAGE> 37
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Debt issue costs, net of accumulated amortization of $2,030
and $2,875 at January 31, 1998 and 1997, respectively..... $29,818 $14,645
Other....................................................... 1,017 3,180
------- -------
$30,835 $17,825
======= =======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revolving credit agreement.................................. $ 7,917 $ 26,268
11 1/2% Senior Secured Notes due 2002....................... -- 800,000
13 1/4% Senior Subordinated Notes due 2003.................. -- 101,092
13 3/4% Senior Subordinated Notes due 2001.................. 115,815 --
Notes payable, ranging from 9.43% to 14.41%, due through
2001...................................................... 19,380 14,562
-------- --------
Total long-term debt.............................. 143,112 941,922
Less current maturities................................... 10,181 5,787
-------- --------
$132,931 $936,135
======== ========
</TABLE>
TransTexas and BNY Financial Corporation ("BNY") are parties to a Second
Amended and Restated Accounts Receivable Management and Security Agreement (the
"BNY Facility"), dated as of October 14, 1997. As of January 31, 1998,
outstanding advances under the BNY Facility totaled approximately $7.9 million.
Interest accrues on advances at the rate of (i) the higher of (a) the prime rate
of The Bank of New York or (b) the Federal Funds Rate plus 1/2 of 1% plus (ii)
1/2 of 1%. Obligations under the BNY Facility are secured by liens on
TransTexas' receivables and inventory. The BNY Facility contains certain
financial covenants including a limitation on net losses. As of January 31,
1998, TransTexas was not in compliance with these covenants. BNY has agreed to
waive the noncompliance, and the BNY Facility has been amended with respect to
these covenants.
On June 20, 1995, TransTexas issued $800 million aggregate principal amount
of 11 1/2% Senior Secured Notes due 2002 (the "Senior Secured Notes").
TransTexas received net proceeds of approximately $787 million from the sale of
the Senior Secured Notes after deducting underwriting discounts, fees and
expenses. TransTexas used approximately $556 million of the net proceeds to
retire the entire principal amount of TransTexas' $500 million 10 1/2% Senior
Secured Notes due 2000 (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. TransTexas recorded
an extraordinary loss on the extinguishment of the Prior Notes of approximately
$56.6 million, net of an income tax benefit.
In December 1996, TransTexas issued $189 million in face amount of 13 1/4%
Series A Senior Subordinated Notes due 2003 (the "Old Subordinated Notes") to
unaffiliated third parties. The Old 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. Proceeds from
the issuance of the Old Subordinated Notes were used for working capital and
general corporate purposes.
35
<PAGE> 38
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 13, 1997, TransTexas completed a tender offer (the "Tender Offer")
for its Senior Secured Notes for 111 1/2% of their principal amount (plus
accrued and unpaid interest). Approximately $785.4 million principal amount of
Senior Secured Notes were tendered and accepted by TransTexas. The Senior
Secured Notes remaining outstanding were called for redemption on June 30, 1997
pursuant to the terms of the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer (the "Subordinated
Notes Exchange Offer"), pursuant to which it exchanged approximately $115.8
million aggregate principal amount of its 13 3/4% Series C Senior Subordinated
Notes due 2001 (the "Series C Subordinated Notes") for all of the Old
Subordinated Notes. On October 10, 1997, TransTexas completed a registered
exchange offer whereby it issued $115.8 million aggregate principal amount of
its 13 3/4% Series D Senior Subordinated Notes due 2001 (the "Subordinated
Notes") in exchange for all of the outstanding Series C Subordinated Notes. The
indenture governing the Subordinated Notes includes certain restrictive
covenants, including, among others, limitations on incurring additional debt,
asset sales, dividends and transactions with affiliates. The fair value of the
Subordinated Notes, based on quoted market prices as of January 31, 1998, was
$129.7 million.
As a result of the Tender Offer and the Subordinated Notes Exchange Offer,
TransTexas recorded a $72 million after tax extraordinary charge during the
fiscal year ended January 31, 1998.
As of January 31, 1998, TransTexas' had notes payable bearing interest at
rates ranging from 9.43% to 14.41% per annum and mature at various dates through
November 2001. These notes payable are collateralized by certain of TransTexas'
operating equipment. Aggregate principal payments on TransTexas' notes payable
at January 31, 1998 are expected to total $10.2 million, $6.4 million, $2.4
million and $0.4 million for the fiscal years ending January 31, 1999, 2000,
2001 and 2002, respectively.
In March 1998, TransTexas executed an amended and restated note in the
principal amount of approximately $14.9 million evidencing a portion of the
notes payable described above. Concurrently, TransTexas incurred an additional
$14 million in debt, evidenced by a promissory note. Both notes are secured by a
lien on equipment. The notes bear interest at a rate of 13.87%, with monthly
installments and a final installment payable on April 1, 2001.
6. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
TransTexas Intercompany Loan................................ $450,000 $ --
Notes payable to affiliates................................. 36,991 --
-------- --------
$486,991 $ --
======== ========
</TABLE>
On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Series A Senior Secured Notes") and $1.13 billion
aggregate principal amount of 13% Senior Secured Discount Notes due 2002 (the
"TEC Series A Senior Secured Discount Notes" and, together with the TEC Series A
Senior Secured Notes, the "TEC Series A Notes") for net proceeds of
approximately $1.3 billion. On January 16, 1998, TEC completed a registered
exchange offer whereby it issued $475 million aggregate principal amount of
11 1/2% Series B Senior Secured Notes due 2002 (the "TEC Senior Secured Notes")
and $1.3 billion aggregate principal amount of 13% Series B Senior Secured
Discount Notes due 2002 (the "TEC Senior Secured Discount Notes" and, together
with the TEC Series A Notes and TEC Senior Secured Notes, the "TEC Notes"). The
TEC Notes are senior obligations of TEC, secured by a lien on substantially all
its existing and future assets, including the intercompany loans described
below.
36
<PAGE> 39
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
With the proceeds of the TEC Notes Offering, TEC made an intercompany loan
to TransTexas (the "TransTexas Intercompany Loan") and also made an intercompany
loan to TARC (the "TARC Intercompany Loan" and, together with the TransTexas
Intercompany Loan, the "Intercompany Loans"). The TransTexas Intercompany Loan
(i) is in the principal amount of $450 million, (ii) bears interest at a rate of
10 7/8% per annum, payable semi-annually in cash in arrears and (iii) is secured
initially by a security interest in substantially all of the assets of
TransTexas other than inventory, receivables and equipment. The TARC
Intercompany Loan (i) is in the original amount of $676 million, (ii) accretes
principal at 16% per annum, compounded semi-annually, until June 15, 1999, to a
final accreted value of $920 million, and thereafter pays interest semi-annually
in cash in arrears on the accreted value thereof, at a rate of 16% per annum,
and (iii) is secured initially by a security interest in substantially all of
TARC's assets other than inventory, receivables and equipment. The Intercompany
Loans will mature on June 1, 2002. The Intercompany Loan Agreements contain
certain restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates. In
connection with the TEC Notes Offering, TEC allocated $24.9 million of debt
issuance costs to TARC and $12.6 million to TransTexas which are reflected as a
contribution of capital. Such costs are being amortized over the term of the
Intercompany Loans using the interest method. Upon the occurrence of a Change of
Control (as defined), TEC will be required to make an offer to purchase all of
the outstanding TEC Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, or, in the case of
any such offer to purchase the TEC Senior Secured Discount Notes prior to June
15, 1999, at a price equal to 101% of the accreted value thereof, in each case,
to and including the date of purchase. Pursuant to the terms of the Intercompany
Loans, TEC may require TransTexas and TARC to pay a pro rata share of the
purchase price paid by TEC in an offer to purchase pursuant to a Change of
Control. See "Potential Effects of a Change of Control" in Note 13.
In September, November and December 1997 and January 1998, TEC advanced an
aggregate of approximately $37 million to TransTexas pursuant to promissory
notes which mature on June 14, 2002. The notes bear interest in an amount equal
to a fixed semi-annual interest payment of $2.8 million, prorated based upon the
average outstanding balance of all notes (other than the notes evidencing the
Intercompany Loans) between TransTexas and TEC and the average outstanding
balance of all notes (other than the notes evidencing the Intercompany Loans)
between TARC and TEC. On January 31, 1998, the outstanding balance under notes
from TransTexas was $37 million.
Pursuant to a disbursement agreement (the "Disbursement Agreement") among
TransTexas, TEC, the TEC Indenture Trustee, and Firstar Bank of Minnesota, N.A.
as disbursement agent, approximately $399 million of the proceeds of the
TransTexas Intercompany Loan was placed in an account (the "Disbursement
Account") to be held and invested by the disbursement agent until disbursed for
use in the share repurchase program. As of January 31, 1998, approximately
$262.4 million had been disbursed for use in TransTexas' share repurchase
program.
In December 1997, TEC obtained consents from the holders of the TEC Series
A Notes to certain amendments to the indenture governing the TEC Notes (the "TEC
Notes Indenture") and related documents. These amendments, among other things,
allowed for the release to TransTexas of approximately $136.6 million in funds
remaining in the Disbursement Account after termination of the share repurchase
program in December 1997. TransTexas paid a fee of $14 million to holders of the
TEC Notes in connection with the consent solicitation which was capitalized as
debt issue costs and paid other fees and expenses of $5 million.
7. LIQUIDITY
Cash flow from operations is sensitive to the level of capital expenditures
and the prices TransTexas receives for its natural gas. TransTexas' debt
covenants may limit its ability to obtain additional financing or to
37
<PAGE> 40
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sell properties, and there is no assurance that cash flow from operations will
be sufficient to fund capital and debt service requirements.
TransTexas makes substantial capital expenditures for the exploration and
development of natural gas reserves. TransTexas historically has financed its
capital expenditures, debt service and working capital requirements with cash
from operations, public and private offerings of debt and equity securities, the
sale of production payments, asset sales, an accounts receivable revolving
credit facility and other financings.
During the fiscal year ended January 31, 1998, total capital expenditures
were $424 million, including $56 million for lease acquisitions, $296 million
for drilling and development and $72 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. During fiscal
1998, TransTexas accelerated its exploration program and development drilling
program, which included the successful exploration efforts in Galveston Bay,
Goliad County and Brazoria County and, as a result, its capital expenditures for
fiscal 1998 significantly exceeded its original anticipated amount of $220
million. Subject to cash availability, capital expenditures for fiscal 1999 are
estimated to be approximately $180 million, which amount is in excess of
projected cash flow from operations for fiscal 1999. A reduction in planned
capital spending could result in less than anticipated cash flow from operations
in fiscal 1999 and later years, which could have a material adverse effect on
TransTexas. To finance these capital expenditure requirements and reduce its
working capital deficit, TransTexas will be required to supplement its
anticipated cash flow from operations with a combination of asset sales,
including assets of the drilling services division, and financings which may
include borrowings or production payments. There is no assurance that adequate
funds can be obtained on a timely basis from such sources.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
-------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- ------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Assumption of tax
liability by
TransAmerican........... $129,549 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
Contribution from
affiliate............... $ 21,513 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
Seller financed
obligations incurred for
capital expenditures.... $ -- $ 3,621 $ 1,095 $ 1,095 $-- $--
======== ======= ======= ======= === ===
Accounts payable and long-
term liabilities for
property and
equipment............... $ 32,666 $27,192 $ 9,191 $ 9,191 $-- $--
======== ======= ======= ======= === ===
Exchange of Subordinated
Notes................... $115,815 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
Contribution of debt issue
costs from affiliate.... $ 12,600 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
</TABLE>
38
<PAGE> 41
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
------- ------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest................... $52,563 $85,254 $88,468 $41,052 $29,971 $75,863
======= ======= ======= ======= ======= =======
Income taxes (paid to
TransAmerican)........... $ -- $ 7,000 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= =======
</TABLE>
TransTexas incurred approximately $96.4 million, $112.9 million, $90.2
million, $50.8 million and $69.4 million of interest charges of which
approximately $15.8 million, $15.9 million, $8.3 million, $7.4 million and $0.9
million were capitalized for the years ended January 31, 1998, 1997 and 1996,
the six months ended January 31, 1996 and the year ended July 31, 1995,
respectively.
9. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Royalties................................................... $ 7,171 $27,607
Taxes other than income taxes............................... 2,562 10,136
Accrued interest............................................ 2,544 13,370
Payroll..................................................... 5,185 5,413
Litigation settlements and other............................ 1,387 1,263
Settlement values of commodity price swap agreements........ -- 13,276
Insurance................................................... 9,041 6,618
Other....................................................... 7,928 5,728
------- -------
$35,818 $83,411
======= =======
</TABLE>
10. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Litigation accrual.......................................... $15,008 $ 8,008
Litigation settlements...................................... -- 1,633
Short-term obligations expected to be refinanced:
Litigation settlements.................................... -- 2,500
Accrued capital expenditures.............................. -- 19,738
Other....................................................... 5,612 1,112
------- -------
$20,620 $32,991
======= =======
</TABLE>
During the months of April and May 1997, TransTexas obtained financings,
the proceeds of which were used to pay the obligations listed above under the
caption "Short-term obligations expected to be refinanced" at January 31, 1997
and for general corporate purposes.
39
<PAGE> 42
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
YEAR ENDED JANUARY 31, JANUARY 31, ENDED
-------------------------------- ------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- ------- ----------- ----- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal:
Current..................... $(21,380) $21,380 $(8,963) $ -- $1,352 $(7,611)
Deferred.................... 144,256 (8,889) 6,263 (416) (1,483) 5,196
Income tax expense (benefit)
before extraordinary item... -- 12,491 (2,700) (416) (131) (2,415)
Tax benefit of extraordinary
item........................ -- -- (1,491) -- -- (1,491)
-------- ------- ------- ----- ------ -------
$122,876 $12,491 $(4,191) $(416) $ (131) $(3,906)
======== ======= ======= ===== ====== =======
</TABLE>
Included in "Payable to affiliates" at January 31, 1998 and 1997 are income
taxes payable to TransAmerican totaling approximately $3.0 million and $14.4
million, respectively.
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>
SIX MONTHS ENDED YEAR
YEAR ENDED JANUARY 31, JANUARY 31, ENDED
--------------------------------- ------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- -------- ----------- ----- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
(benefit) at the statutory
rate.......................... $122,876 $ 33,536 $(25,637) $(416) $(131) $(25,352)
Increase (decrease) in tax
resulting from:
Tax rate change............... -- -- -- -- -- --
State income taxes, net of
federal income tax
benefit.................... -- -- -- -- -- --
Tight sands credit............ -- (7,441) 7,842 -- -- 7,842
Valuation allowance........... -- (13,604) 13,604 -- -- 13,604
-------- -------- -------- ----- ----- --------
$122,876 $ 12,491 $ (4,191) $(416) $(131) $ (3,906)
======== ======== ======== ===== ===== ========
</TABLE>
40
<PAGE> 43
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of TransTexas' tax attributes are as follows (in
thousand of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation, depletion and amortization.................. $ 36,314 $ 82,274
Tax assumption............................................ 75,000 --
Other, net................................................ -- 1,139
-------- --------
111,314 83,413
-------- --------
Deferred tax assets:
Investment in affiliates.................................. -- 275,540
Net operating loss carryforwards.......................... 63,712 --
Contingent liabilities.................................... 6,553 3,403
Alternative minimum tax credit carryforward............... -- 48,643
Other, net................................................ 1,552 --
-------- --------
71,817 327,496
Valuation allowance......................................... -- (275,450)
-------- --------
Net deferred tax assets..................................... 71,817 52,046
-------- --------
$ 39,497 $ 31,367
======== ========
</TABLE>
At January 31, 1997, TransTexas recorded a deferred tax asset and related
100% valuation allowance for the tax basis of certain assets of a subsidiary.
Those assets were sold in connection with the Lobo Sale and, for financial
reporting purposes, the tax asset and related valuation allowance were both
reversed resulting in no tax effect in the statement of operations.
Based upon independent legal advice, TransTexas has determined that it will
not report any significant federal income tax liability as a result of the Lobo
Sale. There are, however, significant uncertainties regarding TransTexas' tax
position and no assurance can be given that its position will be sustained if
challenged by the Internal Revenue Service (the "IRS"). TransTexas is part of an
affiliated group for tax purposes (the "TNGC Consolidated Group"), which
includes TNGC Holdings Corporation, the sole stockholder of TransAmerican. No
letter ruling has been or will be obtained from the IRS regarding the Lobo Sale
by any member of the TNGC Consolidated Group. If the IRS were to successfully
challenge TransTexas' position, each member of the TNGC Consolidated Group would
be severally liable under the consolidated tax return regulations for the
resulting taxes, in the estimated amount of up to $250 million (assuming the use
of existing tax attributes of the TNGC Consolidated Group), possible penalties
equal to 20% of the amount of the tax, and interest at the statutory rate
(currently 9%) on the tax and penalties (if any). The Tax Allocation Agreement
has been amended so that TransAmerican will become obligated to fund the entire
tax deficiency (if any) resulting from the Lobo Sale. There can be no assurance
that TransAmerican will be able to fund any such payment at the time due and the
other members of the TNGC Consolidated Group, thus, may be required to pay the
tax. TransTexas has reserved approximately $75 million with respect to the
potential tax liability for financial reporting purposes to reflect a portion of
the federal tax liability that TransAmerican might not be able to pay. If
TransTexas were required to pay this tax deficiency, it is likely that it would
be required to sell significant assets or raise additional debt or equity
capital to fund the payment.
TransTexas agreed to contribute to TransAmerican $48.6 million of
alternative minimum tax credit carryforwards in connection with the assumption
by TransAmerican of the aforementioned contingency. The assumption of the tax
contingency net of the alternative minimum tax credits and the $75 million
liability recorded by TransTexas was a credit to additional paid-in capital of
approximately $129.5 million.
41
<PAGE> 44
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and a contingent
liability for interest of $102 million owed by TransAmerican. TransAmerican has
taken the federal tax position that the entire amount of this debt cancellation
is excluded from its income under the cancellation of indebtedness provisions
(the "COD Exclusion") of the Internal Revenue Code of 1986, as amended, and has
reduced its tax attributes (including its net operating loss and credit
carryforwards) as a consequence of the COD Exclusion. No federal tax opinion was
rendered with respect to this transaction, however, and TransAmerican has not
obtained a ruling from the IRS regarding this transaction. TransTexas believes
that there is substantial legal authority to support the position that the COD
Exclusion applies to the cancellation of TransAmerican's indebtedness. However,
due to factual and legal uncertainties, there can be no assurance that the IRS
will not challenge this position, or that such challenge would not be upheld.
Under an agreement between TransTexas, TransAmerican and certain of
TransAmerican's subsidiaries (the "Tax Allocation Agreement"), TransTexas has
agreed to pay an amount equal to any federal tax liability (which would be
approximately $25.4 million) attributable to the inapplicability of the COD
Exclusion. Any such tax would be offset in future years by alternative minimum
tax credits and retained loss and credit carryforwards to the extent recoverable
from TransAmerican. As a member of the TNGC Consolidated Group (defined below),
each of TransTexas, TEC and TARC will be severally liable for any tax liability
resulting from the above-described transactions. The IRS has commenced an audit
of the consolidated federal income tax returns of the TNGC Consolidated Group
for its taxable years ended July 31, 1995 and 1994. At this time, it is not
possible to predict the scope of the IRS' review or whether any tax deficiencies
will be proposed by the IRS as a result of its review.
TNGC Holdings Corporation ("TNGC"), TransAmerican and its existing
subsidiaries, including TARC, TEC and TransTexas, entered into a tax allocation
agreement, as amended (the "Tax Allocation Agreement"), the general terms of
which require TransAmerican and all of its subsidiaries to file federal income
tax returns as members of a consolidated group to the extent permitted by law.
Filing on a consolidated basis allows income and tax of one member to be offset
by losses and credits of another and allows deferral of certain intercompany
gains; however, each member is severally liable for the consolidated federal
income tax liability of the consolidated group.
The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal income
tax liabilities among the members if the IRS or the courts ultimately
re-determine the group's regular tax or alternative minimum tax liability. In
the event of an IRS audit or examination, the Tax Allocation Agreement generally
gives TransAmerican the authority to compromise or settle disputes and to
control litigation, subject to the approval of TARC, TEC or TransTexas, as the
case may be, where such compromise or settlement affects the determination of
the separate tax liability of that company.
Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year except
that each subsidiary will be able to utilize net operating losses and credits of
TransAmerican and the other members of the consolidated group effectively to
defer payment of tax liabilities that it would have otherwise owed had it filed
a separate federal income tax return. Each subsidiary will essentially pay the
deferred taxes at the time TransAmerican (or the member whose losses or credits
are utilized by such subsidiary) begins generating taxable income or tax. This
will have the effect of deferring a portion of such subsidiary's tax liability
to future years. The parties to the Tax Allocation Agreement amended such
agreement in connection with the Lobo Sale to include additional affiliates as
parties, and further amended the Tax Allocation Agreement in connection with the
Transactions to allocate to TransAmerican, as among the parties, any tax
liability associated with the Lobo Sale.
42
<PAGE> 45
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under certain circumstances, TransAmerican or TEC may sell or otherwise
dispose of shares of TransTexas common stock. If, as a result of any sale or
other disposition of TransTexas' common stock, the aggregate ownership of
TransTexas by members of the TNGC Consolidated Group (excluding TransTexas) is
less than 80% (measured by voting power and value), TransTexas will no longer be
a member of the TNGC Consolidated Group for federal tax purposes
("Deconsolidation") and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred during
the fiscal year ending January 31, 1999, the aggregate amount of this tax
liability is estimated to be approximately $100 million, assuming no reduction
for tax attributes of the TNGC Consolidated Group. However, such tax liability
generally would be substantially reduced or eliminated in the event that the IRS
successfully challenged TransTexas' position on the Lobo Sale. Each member of a
consolidated group filing a consolidated federal income tax return is severally
liable to the IRS for the consolidated federal income tax liability of the
consolidated group. There can be no assurance that each TNGC Consolidated Group
member will have the ability to satisfy any tax obligation attributable to these
transactions at the time due and, therefore, other members of the group,
including TEC, TransTexas or TARC, may be required to pay the tax.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. As of January 31, 1998, TransTexas had
paid $5.4 million of these franchise taxes and estimates that it will pay
approximately $6.0 million during fiscal 1999.
12. TRANSACTIONS WITH AFFILIATES
From August 1993 to June 1997, TransTexas provided 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 fee to TARC and TEC for
general commercial legal services and certain accounting services (including
payroll, tax, and treasury services) was $26,000 per month. At TransAmerican's
request, TransTexas, at its election, has provided drilling and workover
services. In June 1997, the receivable from TransAmerican under the services
agreement was paid and the services agreement was terminated.
On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services agreement,
TransTexas will provide accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican will provide
advisory services to TransTexas, TARC and TEC. TARC will pay to TransTexas
approximately $300,000 per month for services rendered and for allocated
expenses paid by TransTexas on behalf of TARC. TransAmerican will pay to
TransTexas approximately $20,000 per month for such services. TEC and its
subsidiaries will pay $2.5 million in the aggregate per year to TransAmerican
for advisory services and benefits provided by TransAmerican. As of January 31,
1998, the receivable from TARC and TransAmerican for such services was $1.4
million.
In December 1994, TransTexas 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. TransAmerican did not
purchase any gas from TransTexas during the year ended January 31, 1998. All
amounts owed under the agreement were paid on June 13, 1997.
In July 1995, TransTexas acquired certain oil leases in the Lodgepole
Prospect in North Dakota from TransAmerican for approximately $6.3 million,
which amount represented TransAmerican's cost for such leases. TransTexas
continued to acquire additional leases in the area. In October 1995, TransTexas
sold an undivided interest in its Lodgepole leases to TransDakota Oil
Corporation ("TDOC"), a subsidiary of
43
<PAGE> 46
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TransAmerican. The sales price was approximately $16.1, which amount represented
the cost to TransTexas of the interest sold. In September 1996, TransTexas
purchased these and other oil and gas leasehold interests in the Lodgepole area
from TDOC for approximately $20.0 million. The purchase price was $3.9 million
greater than TDOC's basis in the properties. The properties were recorded in
TransTexas' financial statements at carryover basis and the $3.9 million was
classified as a reduction of retained earnings.
In October 1997, Mr. Stanley guaranteed TransTexas' $40 million line of
credit with BNY Financial Corporation.
In July 1996, TransAmerican executed a note payable to TransTexas
Exploration Corporation ("TTEX") in the original principal amount of $25 million
maturing on July 31, 1998. Advances by TTEX to TransAmerican under the note bore
interest at a rate of 15% per annum, payable quarterly. This note was repaid on
June 13, 1997.
During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February for 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital.
In order to facilitate the settlement of certain litigation in May 1996,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. All amounts outstanding under this note were
repaid on June 13, 1997.
TransTexas has made various advances to TransAmerican in an aggregate
amount of approximately $7 million for lease purchases and other corporate
expenses. This amount was repaid on June 13, 1997.
In September 1996, TransTexas and TransAmerican entered into an agreement
pursuant to which TransTexas 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 was recorded as a contra equity account due to uncertainties
regarding the repayment terms for such receivables. TransTexas agreed to defer
any interest payments due from TransAmerican until 1998. As of January 31, 1997,
TransAmerican conveyed at historical cost certain oil and gas properties to
TransTexas 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 TransTexas 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 TTC.
TransTexas sells natural gas to TARC under an interruptible long-term sales
contract. Revenues from TARC under this contract totaled approximately $1.1
million, $2.7 million and $2.4 million, respectively, for the years ended
January 31, 1998, 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 for the
year ended July 31, 1995.
In September 1995, TARC received an advance of $1 million from TransTexas
which TARC used to purchase feedstock. This advance was repaid by TARC without
interest. In December 1995, TARC advanced $1 million to TransTexas. This advance
was repaid to TARC with interest in December 1995.
13. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Alameda. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican in the 234th Judicial District Court, Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a 1990 settlement of litigation with El Paso
Natural Gas
44
<PAGE> 47
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company ("El Paso"), and that TransAmerican has been unjustly enriched by its
failure to share such proceeds with Alameda. On September 20, 1995, the jury
rendered a verdict in favor of TransAmerican. Alameda appealed to the Fourteenth
Court of Appeals, which affirmed the trial court judgment in favor of
TransAmerican. Alameda's motion for rehearing was denied and Alameda appealed to
the Texas Supreme Court. The Texas Supreme Court has refused to hear Alameda's
appeal. Alameda has filed a motion for rehearing.
Arabian Offshore Partners. On June 27, 1997, Arabian Offshore Partners
filed a lawsuit against TransTexas in the 14th Judicial District Court, Dallas
County, Texas, seeking $20 million in damages in connection with TransTexas'
refusal to proceed with the acquisition of two jack-up drilling rigs.
TransTexas' motion for summary judgment was granted on January 13, 1998. The
plaintiffs have appealed.
Finkelstein. On April 15, 1990, H.S. Finkelstein filed suit against
TransAmerican in the 49th Judicial District Court, Zapata County, Texas,
alleging that TransAmerican failed to pay royalties and improperly marketed oil
and gas produced from certain leases. On September 27, 1994, the plaintiff added
TransTexas as an additional defendant. On January 6, 1995, a judgment against
TransAmerican and TransTexas was entered for approximately $18 million in
damages, interest and attorneys' fees. TransTexas and TransAmerican appealed the
judgment to the Fourth Court of Appeals, San Antonio, Texas, which affirmed the
judgment on April 3, 1996. TransTexas and TransAmerican filed a motion for
rehearing. On August 14, 1996, the Fourth Court of Appeals reversed the trial
court judgment and rendered judgment in favor of TransAmerican and TransTexas.
On August 29, 1996, Finkelstein filed a motion for stay and a motion for
rehearing with the court. On October 9, 1996, the court denied Finkelstein's
rehearing request. In November 1996, Finkelstein filed an application for writ
of error with the Supreme Court of Texas. The Texas Supreme Court denied
Finkelstein's application; however, Finkelstein has filed a motion for
rehearing.
On April 22, 1991, Finkelstein filed a separate suit against TransAmerican
and various affiliates in the 49th Judicial District Court, Zapata County,
Texas, alleging an improper calculation of overriding royalties allegedly owed
to the plaintiff and seeking damages and attorneys' fees in excess of $33.7
million. On November 18, 1993, the plaintiff added TransTexas as an additional
defendant. The parties arbitrated this matter in January 1997. A partial
decision from the arbitration panel has been received, but a final judgment
amount has not yet been ascertained. TransTexas expects the final amount to be
substantially less than the amount originally claimed.
Hein Minerals. On April 3, 1998, Henry and Luz A. Hein Minerals, L.C.
("Hein") filed suit in the 49th Judicial District Court, Zapata County, Texas,
against TransAmerican, TransTexas, TTC and Conoco, Inc. Plaintiff alleges that a
1990 mineral lease from plaintiffs to TransAmerican, comprising approximately
2,000 acres, was breached by failure to release certain acreage from the lease.
Plaintiff alleges trespass, tortious interference, conversion, fraud, breach of
fiduciary duty, breach of contract, conversion and slander of title, and claim
damages including $10 per day per acre that was not released. TransTexas intends
to vigorously defend against these claims.
General. The resolution in any reporting period of one or more of the
foregoing matters in a manner adverse to TransTexas could have a material
adverse effect on TransTexas' results of operations and cash flows for that
period. TransTexas is also a named defendant in other ordinary course, routine
litigation incidental to its business. Although the outcome of these other
lawsuits cannot be predicted with certainty, TransTexas does not expect these
matters to have a material adverse effect on its financial position. At January
31, 1998, the possible range of estimated losses related to all of the
aforementioned claims, in addition to the estimates accrued by TransTexas is $0
to $20 million. Litigation expense, including legal fees, totaled approximately
$15 million, $19 million, $11 million, $3 million, $2 million and $11 million
for the fiscal years ended January 31, 1998, 1997 and 1996, the six months ended
January 31, 1996 and 1995 and the fiscal year ended July 31, 1995.
45
<PAGE> 48
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Matters
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
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. Certain aspects of TransTexas' operations may not be in
compliance with applicable environmental laws and regulations, and such
noncompliance may give rise to compliance costs and administrative penalties. It
is not anticipated that TransTexas will be required in the near future to expend
amounts that are material to the financial condition or operations of TransTexas
by reason of environmental laws and regulations, but because such laws and
regulations are frequently changed and, as a result, may impose increasingly
strict requirements, TransTexas is unable to predict the ultimate cost of
complying with such laws and regulations.
Potential Effects of a Change of Control
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Notes will have the right to
require TransTexas to repurchase such holder's Subordinated Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the terms
of the TransTexas Intercompany Loan, upon the occurrence of a Change of Control,
TEC would have the right to require TransTexas to repay the principal of the
TransTexas Intercompany Loan in an amount equal to a pro rata share of the
amount TEC is required to pay under the TEC Notes Indenture. Such pro rata share
would be calculated using the ratio of the outstanding principal amount of the
TransTexas Intercompany Loan to the sum of (i) the outstanding principal amount
of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan.
A Change of Control would be deemed to occur under the Subordinated Notes
Indenture in the case of certain changes or other events in respect of the
ownership of TransTexas, including any circumstances pursuant to which any
person or group other than John R. Stanley (or his heirs, his estate, or any
trust in which he or his immediate family members have, directly or indirectly,
a beneficial interest in excess of 50%) and his subsidiaries or the TEC
Indenture Trustee is or becomes the beneficial owner of more than 50% of the
total voting power of TransTexas' then outstanding voting stock, and during the
90 days thereafter, the rating of the Subordinated Notes is downgraded or
withdrawn. A Change of Control would be deemed to occur under the TransTexas
Intercompany Loan in the case of certain changes or other events in respect of
the ownership or control of TEC, TransTexas or TARC, including any circumstance
pursuant to which (i) any person or group, other than John R. Stanley (or his
heirs, his estate, or any trust in which he or his immediate family members
have, directly or indirectly, a beneficial interest in excess of 50%) and his
subsidiaries or the TEC Indenture Trustee is or becomes the beneficial owner of
more than 50% of the total voting power of TEC's then outstanding voting stock,
or (ii) TEC or any of its subsidiaries own some of TransTexas' or TARC's capital
stock, respectively, but less than 50% of the total voting stock or economic
value of TransTexas or TARC, respectively, unless the TEC Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also includes a "group," which is defined as two or more
persons acting as a partnership, limited partnership or other group.
In addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the
Subordinated Notes Indenture or the TEC Notes Indenture may
46
<PAGE> 49
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result in a "change of control" of TransTexas under the terms of the BNY
Facility and certain equipment financing. Such an occurrence could create an
obligation for TransTexas to repay such other indebtedness. At January 31, 1998,
TransTexas had approximately $24.2 million of indebtedness (excluding the
Subordinated Notes) subject to such right of repayment or repurchase. In the
event of a Change of Control under the Subordinated Notes Indenture or the TEC
Notes Indenture or a "change of control" under the terms of other outstanding
indebtedness, there can be no assurance that TransTexas will have sufficient
funds to satisfy any such payment obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. See Note 11. These
matters, individually and in the aggregate, amount to significant potential
liability which, if adjudicated in a manner adverse to TransTexas in one
reporting period, could have a material adverse effect on TransTexas' cash flow
or operations for that period. Although the outcome of these contingencies or
the probability of the occurrence of these contingencies cannot be predicted
with certainty, TransTexas does not expect these matters to have a material
adverse effect on its financial position.
Operating Leases
As of January 31, 1998, TransTexas had long-term leases covering land and
other property and equipment. Rental expense was approximately $2 million, $6
million and $4 million for the years ended January 31, 1998, 1997 and 1996,
respectively, $3 million for each of the six months ended January 31, 1996 and
1995 and $5 million for the fiscal year ended July 31, 1995. 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, 1998, are as
follows (in thousands of dollars):
<TABLE>
<S> <C>
1999...................................................... $1,521
2000...................................................... 1,423
2001...................................................... 1,090
2002...................................................... 640
2003...................................................... --
------
$4,674
======
</TABLE>
Gas Sales and Delivery Commitments
In January 1997, TransTexas and Koch Energy Trading Inc. entered into a gas
purchase contract pursuant to which TransTexas is required to deliver 25,000
MMBtu per day to a specified delivery point. The purchase price is determined by
an industry index less $0.08 per MMBtu. Deliveries commenced on June 1, 1997 and
are to continue through August 31, 1999.
TransTexas has entered into various contracts whereby TransTexas is
required to deliver approximately 425 MMcf per day to specified delivery points.
TransTexas will incur certain charges if it does not deliver specified
quantities under the contracts. Such charges totaled $3.1 million in 1998.
Letter of Credit
In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
TransTexas. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days. TransTexas has agreed to
issue up to 8.6 million shares of its common stock to the third party if this
contingent obligation becomes fixed and remains unpaid for 60 days. If the
obligation becomes fixed, and alternative sources of capital are not available,
TransTexas could elect to sell
47
<PAGE> 50
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of its 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 TransTexas, the issuance of shares to satisfy this obligation
would result in Deconsolidation for federal income tax purposes. TransTexas does
not believe that this contingency will occur. See Note 11.
Production Payments
In April 1997, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $20 million. The
production payment calls for the repayment of the primary sum plus an amount
equivalent to a 16% annual interest rate on the unpaid portion of such primary
sum. As of January 31, 1998, the remaining balance was $4.8 million.
Lobo Sale
Pursuant to the Lobo Sale, TransTexas is required to indemnify the buyer
for certain liabilities related to the assets previously 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.
14. BUSINESS SEGMENTS
TransTexas currently conducts its operations in one industry segment:
exploration and production ("E&P"). Prior to the Lobo Sale, TransTexas also
operated a gas transportation segment ("Transportation"). The E&P segment
explores for, develops, produces and markets natural gas, condensate and natural
gas liquids. The Transportation segment was engaged in intrastate natural gas
transportation and marketing. Prior to the Lobo Sale, all of TransTexas'
significant gas and oil operations were 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. TransTexas'
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. TransTexas 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, 1998, three customers provided approximately
$114 million in E&P and Transportation revenues. 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.
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, 1998
Exploration and production........ $164,538 $ 48,691 $ 62,933 $376,208 $ 715,592
Gas transportation................ 12,055 (16,601) 19,726 12,407 --
</TABLE>
48
<PAGE> 51
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Other............................. 546,678 498,010 -- 37,564 101,043
-------- -------- -------- -------- ----------
$723,271 $530,100 $ 82,659 $426,179 $ 816,635
======== ======== ======== ======== ==========
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
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
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
======== ======== ======== ======== ==========
</TABLE>
15. LITIGATION SETTLEMENTS
Aspen. TransAmerican brought suit on September 29, 1993 in the 215th
Judicial District Court, Harris County, Texas against Aspen Services, Inc.
("Aspen"), seeking an audit and accounting of drilling costs that Aspen had
charged while providing drilling services to TransAmerican. The parties'
drilling agreement provided, among other things, that Aspen would receive
payment for its drilling-related costs from the production and sale of gas from
the wells that were drilled, and that the revenues that TransAmerican would
otherwise receive from the wells would be reduced by the amounts received by
Aspen. On July 19, 1995, Aspen filed a counterclaim and third party claim
against TransAmerican, TransTexas, and affiliated entities, asserting, among
other things, that these entities failed to make certain payments and properly
market the gas from these wells. In April 1997, the trial court ruled against
Aspen on all of their counterclaims.
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 proceeds from a 1990 settlement with El
Paso Natural Gas Company, and an accounting of monies allegedly owed to them,
claiming
49
<PAGE> 52
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that TransAmerican produced gas that belonged to them without their knowledge
and that TransAmerican entered into an oral agreement with them which entitled
them to receive a portion of the El Paso settlement proceeds. This case was
settled in April 1997.
Briones. In an arbitration proceeding, Jesus Briones, a lessor, claimed
that one of TransTexas' wells on adjacent lands had been draining natural gas
from a portion of his acreage leased to TransTexas on which no well had been
drilled. On October 31, 1995, the arbitrator found that drainage had occurred.
On June 3, 1996, the arbitrator issued a letter indicating that drainage damages
would be awarded to Briones in the amount of approximately $1.4 million. The
arbitrator entered his award of damages on June 27, 1996. On July 3, 1996,
TransTexas filed a petition in the 49th Judicial District Court, Zapata County,
Texas, to vacate the arbitrator's award. Briones also filed a petition to
confirm the arbitrator's award. In April 1997, the court granted Briones' motion
for summary judgment. In August 1997, the court entered a final judgment for
Briones in the amount of approximately $1.6 million. TransTexas' motions for new
trial were denied. TransTexas executed a settlement agreement with Briones in
February 1998.
Coastal. On October 28, 1991, The Coastal Corporation ("Coastal") filed an
action against TransAmerican that was consolidated in the 49th Judicial District
Court, Webb County, Texas, alleging breach of contract and tortious interference
related to two gas sales contracts and a transportation agreement, seeking
unspecified actual and punitive damages and injunctive relief. On April 22,
1994, the court entered a judgment adverse to TransAmerican and TransTexas
requiring them to pay $1.3 million plus $0.7 million in attorneys' fees to
Coastal. On May 29, 1996, the Court of Appeals affirmed the judgment. In
December 1996, the Supreme Court of Texas declined to hear TransTexas' appeal.
The judgment was paid on May 27, 1997. Coastal executed a Release of Judgment
and Judgment Lien which was recorded in Webb and Zapata Counties.
Farias. On February 15, 1996, Celita Suzana Farias filed a wrongful death
action in the 93rd Judicial District Court, Hidalgo County, Texas, against
TransTexas and one of its contractors for fatal injuries suffered by the
plaintiff's husband at the Yzaguirre Heirs #3 Well on February 13, 1996. The
plaintiff sought unspecified damages and alleged that the defendants operated a
crane in such a manner that they were negligent and grossly negligent. On March
7, 1996, the mother of the deceased TransTexas employee filed a petition in
intervention also alleging negligence, gross negligence and malice and seeking
unspecified damages. This litigation was settled in August 1997.
Frost. On November 10, 1994, Frost National Bank filed suit against
TransTexas in the 111th Judicial District Court, Webb County, Texas, seeking a
declaratory judgment determination that TransTexas failed to properly and
accurately calculate royalties under a lease. The plaintiff had demanded $10
million plus interest. This case was settled in May 1997.
16. CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues................................. $ 82,351 $575,420 $37,233 $ 28,267
Operating income (loss).................. 1,298 531,425(1) 9,586 (12,209)
Net income (loss)........................ (14,538) 262,745 (1,249) (18,757)
Net income (loss) per share -- basic and
diluted................................ (0.20) 3.61 (0.02) (0.33)
</TABLE>
50
<PAGE> 53
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997
------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues.................................. $95,958 $ 86,732 $80,104 $143,553
Operating income.......................... 25,798 106,696(2) 5,858(3) 48,927
Net income (loss)......................... 3,020 71,561 (9,396) 18,140
Net income (loss) per share -- basic and
diluted................................. 0.04 0.97 (0.13) 0.25
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31, 1996
-------------------
1ST 2ND
QUARTER QUARTER
------- --------
<S> <C> <C>
Revenues.................................................... $66,336 $ 74,346
Operating income............................................ 30,893(4) 7,881
Net income (loss)........................................... 11,529 (12,301)
Net income (loss) per share -- basic and diluted............ .16 (.17)
</TABLE>
- ---------------
(1) Operating income for the second quarter of 1998 includes a $543 million gain
on the sale of assets.
(2) Operating income for the second quarter of 1997 includes a gain on
settlement of litigation of $96.0 million.
(3) Operating income for the third quarter of 1997 includes litigation expense
of $7.5 million.
(4) Operating income for the first quarter of 1996 includes a gain on settlement
of litigation of $18.3 million.
17. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning TransTexas' 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 TransTexas' 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 TransTexas. 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,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Proved properties........................................... $1,142,195 $1,845,994
Unproved properties......................................... 104,389 158,973
---------- ----------
Total............................................. 1,246,584 2,004,967
Less accumulated depletion.................................. 652,090 1,288,860
---------- ----------
$ 594,494 $ 716,107
========== ==========
</TABLE>
51
<PAGE> 54
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Property acquisitions................ $ 56,205 $ 50,963 $ 11,485 $124,956
Exploration.......................... 196,728 100,737 27,039 84,201
Development.......................... 123,273 162,313 115,812 50,032
-------- -------- -------- --------
$376,206 $314,013 $154,336 $259,189
======== ======== ======== ========
</TABLE>
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Revenues............................. $164,538 $363,459 $124,663 $275,627
-------- -------- -------- --------
Expenses:
Production costs................... 51,346 97,619 31,376 76,798
Depletion.......................... 62,933 122,570 56,543 121,625
General and administrative......... 1,568 8,710 3,601 14,349
Litigation settlement.............. -- (96,000) (18,300) --
-------- -------- -------- --------
Total operating expenses........... 115,847 132,899 73,220 212,772
-------- -------- -------- --------
Income before income taxes......... 48,691 230,560 51,443 62,855
Income taxes......................... 17,042 80,696 18,005 21,999
-------- -------- -------- --------
$ 31,649 $149,864 $ 33,438 $ 40,856
======== ======== ======== ========
Depletion rate per net equivalent
Mcf................................ $ 1.11 $ 0.96 $ 0.82 $ 0.81
======== ======== ======== ========
</TABLE>
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids which 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 methods. Natural gas quantities
represent gas volumes which include amounts that will be extracted
52
<PAGE> 55
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as natural gas liquids. TransTexas' 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>
YEAR ENDED JANUARY 31, SIX MONTHS YEAR ENDED
---------------------------- ENDED JULY 31,
1998 1997 1996 1995
------------- ------------ ------------- -------------
GAS OIL GAS OIL GAS OIL GAS OIL
------ ---- ------ --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year....................... 919.7 5.7 1,139.1 2.9 1,122.6 3.0 717.4 1.9
Increase (decrease) during the year
attributable to:
Revisions of previous estimates...... (103.8) (1.0) 6.5 .1 43.0 -- 143.5 .5
Extensions, discoveries and other
additions.......................... 123.7 15.1 90.3 3.6 73.8 .2 409.6 1.2
Litigation settlement................ -- -- -- -- 9.5 -- -- --
Sales of reserves.................... (525.8) (3.3) (204.9) (.4) (42.9) -- -- --
Purchase of reserves................. -- -- 11.3 .1 -- -- -- --
Production........................... (65.1) (.6) (122.6) (.6) (66.9) (.3) (147.9) (.6)
------ ---- ------ --- ------- --- ------- ---
End of year............................... 348.7 15.9 919.7 5.7 1,139.1 2.9 1,122.6 3.0
====== ==== ====== === ======= === ======= ===
Proved developed reserves:
Beginning of year....................... 381.5 2.4 425.3 .9 476.6 1.1 442.2 1.1
End of year............................. 134.3 4.2 381.5 2.4 425.3 .9 476.6 1.1
</TABLE>
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
TransTexas' 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 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>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
---------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
--------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Future cash inflows................. $ 898,257 $3,051,397 $2,269,585 $1,591,011
Future production costs............. (154,725) (506,882) (427,482) (316,055)
Future development costs............ (198,180) (459,326) (582,798) (461,471)
Future income taxes................. -- (563,812) (310,445) (196,942)
--------- ---------- ---------- ----------
Future net cash flows............... 545,352 1,521,377 948,860 616,543
Annual discount (10%) for estimated
timing of cash flows.............. (149,679) (464,121) (340,002) (201,479)
--------- ---------- ---------- ----------
Standardized measure of discounted
future net cash flows............. $ 395,673 $1,057,256 $ 608,858 $ 415,064
========= ========== ========== ==========
</TABLE>
53
<PAGE> 56
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 JANUARY 31, ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Beginning of year..................... $1,057,256 $ 608,858 $ 415,064 $ 395,574
Revisions:
Quantity estimates and production
rates............................ (215,564) 13,903 31,712 122,771
Prices, net of lifting costs........ (348,781) 665,054 331,936 (155,257)
Estimated future development
costs............................ (33,033) (75,622) (128,584) (13,631)
Additions, extensions, discoveries and
improved recovery................... 238,403 209,932 47,026 172,365
Net sales of production............... (124,498) (262,066) (92,139) (198,829)
Development costs incurred............ 119,944 156,430 115,812 49,873
Accretion of discount................. 144,907 80,806 27,382 54,439
Net changes in income taxes........... 391,812 (192,608) (66,622) (16,722)
Sale of a volumetric production
payment............................. -- (165,949) (77,879) --
Litigation settlement................. -- -- 5,150 4,481
Purchases (sales) of reserves......... (834,775) 18,518 -- --
---------- ---------- --------- ---------
End of year........................... $ 395,672 $1,057,256 $ 608,858 $ 415,064
========== ========== ========= =========
</TABLE>
Year-end wellhead prices received by TransTexas from sales of natural gas
including margins from natural gas liquids, were $1.96, $3.17, $1.95 and $1.37
per Mcf for 1998, 1997, 1996 and 1995, respectively. Year-end condensate prices
were $13.54, $23.99, $18.34 and $16.27 per barrel for 1998, 1997, 1996 and 1995,
respectively.
54
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) Financial Statements, Schedules and Exhibits
(1) Report of Independent Accountants........................... 25
Consolidated Balance Sheet.................................. 26
Consolidated Statement of Operations........................ 27
Consolidated Statement of Stockholders' Equity (Deficit).... 28
Consolidated Statement of Cash Flows........................ 29
Notes to Consolidated Financial Statements.................. 30
(2) Financial Statement Schedules:
Report of Independent Accountants........................... 63
Schedule II -- Valuation and Qualifying Accounts............ 64
</TABLE>
55
<PAGE> 58
(3)Exhibits
<TABLE>
<C> <S>
3.1 -- Articles of Incorporation (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
3.2 -- By-laws of TransTexas (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
4.1 -- Indenture dated as of June 15, 1995, among TransTexas,
TTC and American Bank National Association, as Trustee
(the "Indenture Trustee"), with respect to the Senior
Secured Notes including the forms of Senior Secured Note
and Senior Secured Guarantee as exhibits (filed as an
exhibit to TransTexas' current report on Form 8-K dated
June 20, 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 TransTexas to James A. Taylor, as
trustee for the benefit of the Indenture Trustee (filed
as an exhibit to TransTexas' current report on Form 8-K
dated June 20, 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 (filed as an exhibit to
TransTexas' current report on Form 8-K dated on June 20,
1995, and incorporated herein by reference).
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TransTexas in favor of the
Indenture Trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 20, 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 (filed as an exhibit to TransTexas' current
report on Form 8-K dated June 20, 1995, and incorporated
herein by reference).
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among TransTexas, the Indenture Trustee
and the Disbursement Agent (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 20,
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
TransTexas' 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, TransAmerican,
TransAmerican Exploration Corporation and Fleet National
Bank (filed as an exhibit to TransTexas' 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
TEC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.10 -- Pledge Agreement dated as of February 23, 1995, between
TARC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
</TABLE>
56
<PAGE> 59
<TABLE>
<C> <S>
4.11 -- Registration Rights Agreement dated as of February 23,
1995, among TransTexas, TARC and TEC (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, TransTexas and Halliburton Company (filed
as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' 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, TransTexas and RECO Industries, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' 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, TransTexas and Frito-Lay, Inc. (filed as
an exhibit to Post-Effective Amendment No. 5 to
TransTexas' 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, TransTexas and EM Sector Holdings, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.16 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican and ITT Commercial Corp. (filed as an
exhibit to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.17 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican, TransTexas and ITT Commercial
Finance Corp. (filed as an exhibit to Post-Effective
Amendment No. 5 to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas and the Purchasers of 13 1/4% Series A Senior
Subordinated Notes due 2003 (filed as an exhibit to
Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.19 -- Indenture dated December 13, 1996 between TransTexas and
Bank One, Columbus, NA, as Trustee (filed as an exhibit
to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.20 -- Registration Rights Agreement dated December 13, 1996
between TransTexas and each of the Purchasers of the
Subordinated Notes (filed as an exhibit to Post-
Effective Amendment No. 5 to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein
by reference).
4.21 -- First Supplemental Indenture dated May 29, 1997 by and
among TransTexas, TTC and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated May 29, 1997, and
incorporated herein by reference).
4.22 -- Second Supplemental Indenture dated June 13, 1997 between
TransTexas, as issuer, and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
</TABLE>
57
<PAGE> 60
<TABLE>
<C> <S>
4.23 -- Indenture dated June 13, 1997 governing TransTexas'
Senior Subordinated Notes due 2001 between TransTexas, as
issuer, and Bank One, N.A., as trustee (filed as an
exhibit to TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.24 -- Registration Rights Agreement dated June 13, 1997 between
TransTexas and the holders of TransTexas' Senior
Subordinated Notes due 2001 (filed as an exhibit
TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.25 -- Loan Agreement dated June 13, 1997 between TransTexas and
TEC (filed as an exhibit to TransTexas' current report on
Form 8-K dated June 13, 1997, and incorporated herein by
reference).
4.26 -- Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of TEC (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.27 -- Disbursement Agreement dated June 13, 1997 among
TransTexas, TEC and Firstar Bank of Minnesota, as
disbursement agent and Trustee (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.28 -- Forms of Mortgage dated June 13, 1997 between TransTexas
and TransAmerican Energy Corporation, (filed as an
exhibit to TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.29 -- Intercreditor and Collateral Agency Agreement dated June
13, 1997 among Firstar Bank of Minnesota, TEC and
TransTexas (filed as an exhibit to TEC's Form 10-Q for
the quarter ended July 31, 1997, and incorporated herein
by reference).
4.30 -- Registration Rights Agreement dated August 12, 1997, by
and among TransTexas, Firstar Bank of Minnesota, N.A.,
TEC and TARC (filed as an exhibit to Post-Effective
Amendment No. 6 to TransTexas' Registration Statement on
Form S-4 (33-91494) and incorporated herein by
reference).
4.31 -- First Supplemental Indenture dated as of September 2,
1997, between TransTexas, as issuer, and Bank One, N.A.,
as trustee (filed as an exhibit to TransTexas'
Registration Statement on Form S-4 (333-33803), and
incorporated herein by reference).
*4.32 -- First Amendment to Loan Agreement dated December 30, 1997
between TransTexas and TEC.
*4.33 -- First Amendment to Disbursement Agreement dated December
30, 1997 between TransTexas, TEC and Firstar Bank of
Minnesota, as disbursement agent and Trustee.
10.1 -- Services Agreement dated August 24, 1993, by and among
TransTexas and TransAmerican (filed as an exhibit to
TransTexas' current report on Form 8-K dated August 24,
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 an
exhibit to TransTexas' Registration Statement on Form S-1
(No. 33-75050), and incorporated herein by reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between
TransTexas and TARC, as amended (filed as an exhibit to
TARC's Registration Statement on Form S-1 (No. 33-82200),
and incorporated herein by reference).
</TABLE>
58
<PAGE> 61
<TABLE>
<C> <S>
10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group (filed as
an exhibit to TransTexas' current report on Form 8-K
dated August 24, 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
(filed as an exhibit to TransTexas' Registration
Statement on Form S-1 (No. 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 (filed as an exhibit to TransTexas'
Registration Statement on Form S-1 (No. 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 (filed as an exhibit
to TransTexas' Registration Statement on Form S-1 (No.
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. (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended October 31, 1993, and incorporated
herein by reference).
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (filed as an exhibit
to TransTexas' current report on Form 8-K dated August
24, 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
(filed as an exhibit to TransTexas' Registration
Statement on Form S-1 (No. 33-75050), and incorporated
herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(filed as an exhibit to TransTexas' 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 (filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended January 31, 1994, and incorporated
herein by reference).
10.13 -- Agreement for Purchase of Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
10.14 -- Assignment of Proceeds Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' 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, TTC, and John R. Stanley
(filed as an exhibit to TransTexas' current report on
Form 8-K dated August 24, 1993, and incorporated herein
by reference).
</TABLE>
59
<PAGE> 62
<TABLE>
<C> <S>
10.16 -- Amended and Restated Accounts Receivable Management and
Security Agreement between TransTexas and BNY Financial
Corporation (filed as an exhibit to TransTexas' 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, TCW Shared Opportunity Fund II, L.P. and
Jefferies & Company, Inc. (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 and AIG Trading Corporation (filed as an
exhibit to TransTexas' 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 and Sunflower Energy Finance Company (filed as
an exhibit to TransTexas' 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 to Sunflower Energy Finance Company
(filed as an exhibit to TransTexas' 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, Sunflower Energy
Finance Company and TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. (filed as an exhibit to
TransTexas' 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, Sunflower
Energy Finance Company and TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. (filed as an exhibit to
TransTexas' 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,
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
and Sunflower Energy Finance Company (filed as an exhibit
to TransTexas' 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 to TCW Portfolio No. 1555 Dr V
Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.25 -- Employment Agreement between TransTexas and Richard
Bianchi dated August 12, 1996 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
10.26 -- Employment Agreement between TransTexas and Arnold
Brackenridge dated August 12, 1996 (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended October
31, 1996, and incorporated herein by reference).
10.27 -- Stock Purchase Agreement dated as of May 29, 1997 by and
between TransTexas and First Union Bank of Connecticut,
as trustee (filed as an exhibit to TransTexas' current
report on Form 8-K dated May 29, 1997, and incorporated
herein by reference.
10.28 -- Interruptible Gas Transportation Agreement dated
Effective March 1, 1997 between TransTexas, as shipper,
and Lobo Pipeline Company, as transporter (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
July 31, 1997, and incorporated herein by reference).
</TABLE>
60
<PAGE> 63
<TABLE>
<C> <S>
10.29 -- Intrastate Firm Gas Transportation Agreement dated effective March 1, 1997 between
TransTexas, as shipper, and Lobo Pipeline Company, as transporter (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein
by reference).
10.30 -- Master Services Contract dated May 30, 1997 between Conoco Inc. and TransTexas (filed
as an exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.31 -- Agreement for Services dated effective March 1, 1997 between Conoco Inc. and TransTexas
(filed as an exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.32 -- Services Agreement dated June 13, 1997 among TNGC Holdings Corporation, TransAmerican,
TEC, TARC, TransTexas and TTXD (filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by reference).
10.33 -- Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.34 -- Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.35 -- Amendment No. 2 to Transfer Agreement dated May 29, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.36 -- Amendment No. 3 to Transfer Agreement dated June 13, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.37 -- Second Amended and Restated Accounts Receivable Management Agreement dated October 14,
1997 between TransTexas and BNY Financial Corporation (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended October 31, 1997, and incorporated herein
by reference).
*10.38 -- Employment Agreement dated December 1, 1997 between TransTexas and Arnold Brackenridge.
*10.39 -- Employment Agreement Settlement dated April 28, 1998 between TransTexas and Richard
Bianchi.
*10.40 -- Severance Agreement dated November 21, 1997 between TransTexas and Lee Muncy.
*10.41 -- Purchase Agreement dated February 23, 1998 between TransTexas and TCW.
*10.42 -- Production Payment Conveyance dated February 23, 1998 between TransTexas and TCW.
*21.1 -- Schedule of Subsidiaries of TransTexas.
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Netherland, Sewell & Associates, Inc
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* filed herewith
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
January 31, 1998.
61
<PAGE> 64
SIGNATURES
Pursuant to the requirements of 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 April 30, 1998.
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 April 30, 1998.
<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
/s/ JAMES R. LESCH 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>
62
<PAGE> 65
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 25 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 55 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
April 30, 1998
63
<PAGE> 66
SCHEDULE II
TRANSTEXAS GAS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER END
DESCRIPTION OF PERIOD AT COSTS RETIREMENTS CHANGES 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 $-- $ --
====== ==== ====== == ======
Year ended January 31, 1998:
Valuation allowance -- long-term
receivables....................... $ -- $ -- $ -- $-- $ --
====== ==== ====== == ======
</TABLE>
64
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 -- Articles of Incorporation (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
3.2 -- By-laws of TransTexas (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
4.1 -- Indenture dated as of June 15, 1995, among TransTexas,
TTC and American Bank National Association, as Trustee
(the "Indenture Trustee"), with respect to the Senior
Secured Notes including the forms of Senior Secured Note
and Senior Secured Guarantee as exhibits (filed as an
exhibit to TransTexas' current report on Form 8-K dated
June 20, 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 TransTexas to James A. Taylor, as
trustee for the benefit of the Indenture Trustee (filed
as an exhibit to TransTexas' current report on Form 8-K
dated June 20, 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 (filed as an exhibit to
TransTexas' current report on Form 8-K dated on June 20,
1995, and incorporated herein by reference).
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TransTexas in favor of the
Indenture Trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 20, 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 (filed as an exhibit to TransTexas' current
report on Form 8-K dated June 20, 1995, and incorporated
herein by reference).
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among TransTexas, the Indenture Trustee
and the Disbursement Agent (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 20,
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
TransTexas' 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, TransAmerican,
TransAmerican Exploration Corporation and Fleet National
Bank (filed as an exhibit to TransTexas' 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
TEC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.10 -- Pledge Agreement dated as of February 23, 1995, between
TARC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.11 -- Registration Rights Agreement dated as of February 23,
1995, among TransTexas, TARC and TEC (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, TransTexas and Halliburton Company (filed
as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' 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, TransTexas and RECO Industries, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' 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, TransTexas and Frito-Lay, Inc. (filed as
an exhibit to Post-Effective Amendment No. 5 to
TransTexas' 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, TransTexas and EM Sector Holdings, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.16 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican and ITT Commercial Corp. (filed as an
exhibit to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.17 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican, TransTexas and ITT Commercial
Finance Corp. (filed as an exhibit to Post-Effective
Amendment No. 5 to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas and the Purchasers of 13 1/4% Series A Senior
Subordinated Notes due 2003 (filed as an exhibit to
Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.19 -- Indenture dated December 13, 1996 between TransTexas and
Bank One, Columbus, NA, as Trustee (filed as an exhibit
to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.20 -- Registration Rights Agreement dated December 13, 1996
between TransTexas and each of the Purchasers of the
Subordinated Notes (filed as an exhibit to Post-
Effective Amendment No. 5 to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein
by reference).
4.21 -- First Supplemental Indenture dated May 29, 1997 by and
among TransTexas, TTC and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated May 29, 1997, and
incorporated herein by reference).
4.22 -- Second Supplemental Indenture dated June 13, 1997 between
TransTexas, as issuer, and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.23 -- Indenture dated June 13, 1997 governing TransTexas'
Senior Subordinated Notes due 2001 between TransTexas, as
issuer, and Bank One, N.A., as trustee (filed as an
exhibit to TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.24 -- Registration Rights Agreement dated June 13, 1997 between
TransTexas and the holders of TransTexas' Senior
Subordinated Notes due 2001 (filed as an exhibit
TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.25 -- Loan Agreement dated June 13, 1997 between TransTexas and
TEC (filed as an exhibit to TransTexas' current report on
Form 8-K dated June 13, 1997, and incorporated herein by
reference).
4.26 -- Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of TEC (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.27 -- Disbursement Agreement dated June 13, 1997 among
TransTexas, TEC and Firstar Bank of Minnesota, as
disbursement agent and Trustee (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.28 -- Forms of Mortgage dated June 13, 1997 between TransTexas
and TransAmerican Energy Corporation, (filed as an
exhibit to TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.29 -- Intercreditor and Collateral Agency Agreement dated June
13, 1997 among Firstar Bank of Minnesota, TEC and
TransTexas (filed as an exhibit to TEC's Form 10-Q for
the quarter ended July 31, 1997, and incorporated herein
by reference).
4.30 -- Registration Rights Agreement dated August 12, 1997, by
and among TransTexas, Firstar Bank of Minnesota, N.A.,
TEC and TARC (filed as an exhibit to Post-Effective
Amendment No. 6 to TransTexas' Registration Statement on
Form S-4 (33-91494) and incorporated herein by
reference).
4.31 -- First Supplemental Indenture dated as of September 2,
1997, between TransTexas, as issuer, and Bank One, N.A.,
as trustee (filed as an exhibit to TransTexas'
Registration Statement on Form S-4 (333-33803), and
incorporated herein by reference).
*4.32 -- First Amendment to Loan Agreement dated December 30, 1997
between TransTexas and TEC.
*4.33 -- First Amendment to Disbursement Agreement dated December
30, 1997 between TransTexas, TEC and Firstar Bank of
Minnesota, as disbursement agent and Trustee.
10.1 -- Services Agreement dated August 24, 1993, by and among
TransTexas and TransAmerican (filed as an exhibit to
TransTexas' current report on Form 8-K dated August 24,
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 an
exhibit to TransTexas' Registration Statement on Form S-1
(No. 33-75050), and incorporated herein by reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between
TransTexas and TARC, as amended (filed as an exhibit to
TARC's Registration Statement on Form S-1 (No. 33-82200),
and incorporated herein by reference).
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group (filed as
an exhibit to TransTexas' current report on Form 8-K
dated August 24, 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
(filed as an exhibit to TransTexas' Registration
Statement on Form S-1 (No. 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 (filed as an exhibit to TransTexas'
Registration Statement on Form S-1 (No. 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 (filed as an exhibit
to TransTexas' Registration Statement on Form S-1 (No.
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. (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended October 31, 1993, and incorporated
herein by reference).
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (filed as an exhibit
to TransTexas' current report on Form 8-K dated August
24, 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
(filed as an exhibit to TransTexas' Registration
Statement on Form S-1 (No. 33-75050), and incorporated
herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(filed as an exhibit to TransTexas' 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 (filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended January 31, 1994, and incorporated
herein by reference).
10.13 -- Agreement for Purchase of Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
10.14 -- Assignment of Proceeds Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, TTC, and John R. Stanley
(filed as an exhibit to TransTexas' current report on
Form 8-K dated August 24, 1993, and incorporated herein
by reference).
10.16 -- Amended and Restated Accounts Receivable Management and
Security Agreement between TransTexas and BNY Financial
Corporation (filed as an exhibit to TransTexas' 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, TCW Shared Opportunity Fund II, L.P. and
Jefferies & Company, Inc. (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 and AIG Trading Corporation (filed as an
exhibit to TransTexas' 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 and Sunflower Energy Finance Company (filed as
an exhibit to TransTexas' 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 to Sunflower Energy Finance Company
(filed as an exhibit to TransTexas' 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, Sunflower Energy
Finance Company and TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. (filed as an exhibit to
TransTexas' 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, Sunflower
Energy Finance Company and TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. (filed as an exhibit to
TransTexas' 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,
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
and Sunflower Energy Finance Company (filed as an exhibit
to TransTexas' 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 to TCW Portfolio No. 1555 Dr V
Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.25 -- Employment Agreement between TransTexas and Richard
Bianchi dated August 12, 1996 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
10.26 -- Employment Agreement between TransTexas and Arnold
Brackenridge dated August 12, 1996 (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended October
31, 1996, and incorporated herein by reference).
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.27 -- Stock Purchase Agreement dated as of May 29, 1997 by and
between TransTexas and First Union Bank of Connecticut,
as trustee (filed as an exhibit to TransTexas' current
report on Form 8-K dated May 29, 1997, and incorporated
herein by reference.
10.28 -- Interruptible Gas Transportation Agreement dated
Effective March 1, 1997 between TransTexas, as shipper,
and Lobo Pipeline Company, as transporter (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
July 31, 1997, and incorporated herein by reference).
10.29 -- Intrastate Firm Gas Transportation Agreement dated
effective March 1, 1997 between TransTexas, as shipper,
and Lobo Pipeline Company, as transporter (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
July 31, 1997, and incorporated herein by reference).
10.30 -- Master Services Contract dated May 30, 1997 between
Conoco Inc. and TransTexas (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31,
1997, and incorporated herein by reference).
10.31 -- Agreement for Services dated effective March 1, 1997
between Conoco Inc. and TransTexas (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended July 31,
1997, and incorporated herein by reference).
10.32 -- Services Agreement dated June 13, 1997 among TNGC
Holdings Corporation, TransAmerican, TEC, TARC,
TransTexas and TTXD (filed as an exhibit to TransTexas'
Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.33 -- Amendment No. 3 to Tax Allocation Agreement dated May 29,
1997 (filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended July 31, 1997, and incorporated herein
by reference).
10.34 -- Amendment No. 4 to Tax Allocation Agreement dated June
13, 1997 (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended July 31, 1997, and incorporated
herein by reference).
10.35 -- Amendment No. 2 to Transfer Agreement dated May 29, 1997
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by
reference).
10.36 -- Amendment No. 3 to Transfer Agreement dated June 13, 1997
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by
reference).
10.37 -- Second Amended and Restated Accounts Receivable
Management Agreement dated October 14, 1997 between
TransTexas and BNY Financial Corporation (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
October 31, 1997, and incorporated herein by reference).
*10.38 -- Employment Agreement dated December 1, 1997 between
TransTexas and Arnold Brackenridge.
*10.39 -- Employment Agreement Settlement dated April 28, 1998
between TransTexas and Richard Bianchi.
*10.40 -- Severance Agreement dated November 21, 1997 between
TransTexas and Lee Muncy.
*10.41 -- Purchase Agreement dated February 23, 1998 between
TransTexas and TCW.
*10.42 -- Production Payment Conveyance dated February 23, 1998
between TransTexas and TCW.
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*21.1 -- Schedule of Subsidiaries of TransTexas.
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Netherland, Sewell & Associates, Inc
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* filed herewith
<PAGE> 1
EXHIBIT 4.32
- --------------------------------------------------------------------------------
TRANSTEXAS GAS CORPORATION
------------------------
FIRST AMENDMENT TO LOAN AGREEMENT
Dated as of December 30, 1997
--------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
This First Amendment to Loan Agreement (this "First Amendment") is made
as of December 30, 1997, by and between TransAmerican Energy Corporation, a
Delaware corporation ("TEC"), and TransTexas Gas Corporation, a Delaware
corporation ("TransTexas").
WHEREAS, TEC and Firstar Bank of Minnesota, N.A., as Trustee, have
entered into an Indenture dated as of June 13, 1997 (the "Indenture"), pursuant
to which TEC issued $475,000,000 aggregate principal amount of its 11 1/2%
Senior Secured Notes due 2002 and $1,130,000,000 aggregate principal amount of
its 13% Senior Secured Discount Notes due 2002 (collectively, the "Notes"); and
WHEREAS, TEC and TransTexas have entered into a Loan Agreement dated as
of June 13, 1997 (the "TransTexas Intercompany Loan Agreement"), pursuant to
which TEC agreed to loan to TransTexas an aggregate of $450,000,000 out of the
proceeds of the issuance of the Notes; and
WHEREAS, TEC and TransTexas have agreed to an amendment to the
TransTexas Intercompany Loan Agreement as hereinafter set forth (the "Proposed
Amendment"); and
WHEREAS, pursuant to Section 9.2 of the Indenture, the holders of not
less than 66-2/3% in aggregate Value (as defined in the Indenture) of the Notes
have consented to the Proposed Amendment to the TransTexas Intercompany Loan
Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this First
Amendment hereby agree as follows:
ARTICLE I
AMENDMENT TO THE TRANSTEXAS INTERCOMPANY LOAN AGREEMENT
Section 1.01. Amendment to Section 1.1. The following definition in
Section 1.1 of the TransTexas Intercompany Loan Agreement is hereby amended to
read in its entirety as follows:
"Indenture" shall mean that certain Indenture dated as of the
date hereof between the Lender and the Indenture Trustee, as
supplemented or amended from time to time.
ARTICLE II
MISCELLANEOUS
Section 2.01. Ratification and Confirmation. As amended and modified by
this First Amendment, the terms and provisions of the TransTexas Intercompany
Loan Agreement are hereby ratified and confirmed and shall continue in full
force and effect.
Section 2.02. Reference to TransTexas Intercompany Loan Agreement. The
TransTexas Intercompany Loan Agreement and any and all other agreements,
documents or instruments now or hereafter executed and delivered pursuant to the
terms of the TransTexas Intercompany Loan Agreement, are hereby amended so that
any reference therein to the TransTexas Intercompany Loan Agreement shall mean a
reference to the TransTexas Intercompany Loan Agreement as amended hereby.
<PAGE> 3
Section 2.03. Counterparts. This First Amendment may be executed in one
or more counterparts, each of which when executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 2.04. Headings. The headings, captions and arrangements used
in this First Amendment are for convenience only and shall not affect the
interpretation of this First Amendment.
Section 2.05. Governing Law. THIS FIRST AMENDMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date of first written above.
TRANSTEXAS GAS CORPORATION
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
TRANSAMERICAN ENERGY CORPORATION
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
2
<PAGE> 1
EXHIBIT 4.33
- --------------------------------------------------------------------------------
TRANSTEXAS GAS CORPORATION
------------------------
FIRST AMENDMENT TO DISBURSEMENT AGREEMENT
Dated as of December 30, 1997
--------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
This First Amendment to Disbursement Agreement (this "First Amendment")
is made as of December 30, 1997, by and between TransAmerican Energy
Corporation, a Delaware corporation ("TEC"), TransTexas Gas Corporation, a
Delaware corporation ("TransTexas"), Firstar Bank of Minnesota, N.A. (the
"Trustee") and Firstar Bank of Minnesota, N.A., as security intermediary and
disbursement agent (the "Disbursement Agent").
WHEREAS, TEC and the Trustee have entered into an Indenture dated as of
June 13, 1997 (the "Indenture"), pursuant to which TEC issued $475,000,000
aggregate principal amount of its 11 1/2% Senior Secured Notes due 2002 and
$1,130,000,000 aggregate principal amount of its 13% Senior Secured Discount
Notes due 2002 (collectively, the "Notes"); and
WHEREAS, TEC and TransTexas have entered into a Loan Agreement dated as
of June 13, 1997 (the "TransTexas Intercompany Loan Agreement"), pursuant to
which TEC agreed to lend to TransTexas an aggregate of $450,000,000 out of the
proceeds of the issuance of the Notes; and
WHEREAS, in connection with the TransTexas Intercompany Loan Agreement,
TEC, TransTexas, the Trustee and the Disbursement Agent have entered into a
Disbursement Agreement dated as of June 13, 1997 (the "TransTexas Disbursement
Agreement"); and
WHEREAS, TEC, TransTexas, the Trustee and the Disbursement Agent have
agreed to an amendment to the TransTexas Disbursement Agreement as hereinafter
set forth (the "Proposed Amendment"); and
WHEREAS, pursuant to Section 9.2 of the Indenture, the holders of not
less than 66-2/3% in aggregate Value (as defined in the Indenture) of the Notes
have consented to the Proposed Amendment to the TransTexas Disbursement
Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this First
Amendment hereby agree as follows:
ARTICLE I
AMENDMENTS TO THE TRANSTEXAS DISBURSEMENT AGREEMENT
Section 1.01. Section 4.2 of the TransTexas Disbursement Agreement.
Section 4.2 of the TransTexas Disbursement Agreement is hereby amended by adding
the following clauses after clause (c):
(d) Funds in the Disbursement Account shall be disbursed at
any time for the account of TransTexas; provided that TransTexas shall
certify to the Disbursement Agent that the funds disbursed shall be
used to pay to TEC a consent fee in connection with the amendment of
this Agreement and the Intercompany Loan Agreement as such amendments
are approved by the Holders.
(e) Funds in the Disbursement Account shall be disbursed at
any time and from time to time for the account of TransTexas; provided
that TransTexas shall certify to the Disbursement Agent that, after
giving effect to the disbursement requested, the balance of funds
remaining in the Disbursement Account shall be sufficient to fund
repurchases under the TransTexas Dividend/Share
<PAGE> 3
Repurchase Program in an amount necessary to produce proceeds of such
repurchases to TARC or TEC of at least $119 million less any amounts
deposited in the accounts governed by the TARC Disbursement Agreement
after December 29, 1997.
ARTICLE II
MISCELLANEOUS
Section 2.01. Ratification and Confirmation. As amended and modified by
this First Amendment, the terms and provisions of the TransTexas Disbursement
Agreement are hereby ratified and confirmed and shall continue in full force and
effect.
Section 2.02. Reference to TransTexas Disbursement Agreement. The
TransTexas Disbursement Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms of the
TransTexas Disbursement Agreement, are hereby amended so that any reference
therein to the TransTexas Disbursement Agreement shall mean a reference to the
TransTexas Disbursement Agreement as amended hereby.
Section 2.03. Counterparts. This First Amendment may be executed in one
or more counterparts, each of which when executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the same
instrument.
Section 2.04. Headings. The headings, captions and arrangements used in
this First Amendment are for convenience only and shall not affect the
interpretation of this First Amendment.
Section 2.05. Governing Law. THIS FIRST AMENDMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
Section 2.06. Certificate and Opinion as to Conditions Precedent.
Simultaneously with and as a condition to the execution of this First Amendment,
TEC is delivering to the Trustee:
(a) an Officers' Certificate in the form attached hereto
as Exhibit A; and
(b) an Opinion of Counsel covering the matters described
in Exhibit B attached hereto.
2
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date of first written above.
TRANSTEXAS GAS CORPORATION
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
TRANSAMERICAN ENERGY CORPORATION
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
FIRSTAR BANK OF MINNESOTA, N.A.,
as Disbursement Agent
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
FIRSTAR BANK OF MINNESOTA, N.A.,
as Trustee
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
3
<PAGE> 1
EXHIBIT 10.38
EMPLOYMENT AGREEMENT
This agreement is made and entered into as of the 1st day of December, 1997, by
and between TRANSTEXAS GAS CORPORATION, hereinafter called "COMPANY" and ARNOLD
BRACKENRIDGE , hereinafter called "EMPLOYEE".
1. The term of this Agreement is for one year commencing on December 01, 1997,
and ending on December 1 , 1998. Thereafter EMPLOYEE shall be considered an "at
will" Employee subject to termination for any cause at any time. This agreement
may be terminated prior to the end of the term pursuant to paragraph 6,7,or 8
hereof.
2. The COMPANY agrees to employ EMPLOYEE for the term of this Agreement, and
EMPLOYEE shall have and fulfill such duties, responsibilities and obligations as
are usual and customary for the Vice President and Chief Operating Officer,
subject to the direction and control of the Board of Directors and the Chief
Executive Officer.
3. EMPLOYEE agrees EMPLOYEE will faithfully and diligently serve the COMPANY to
the best of his ability.
4. During his service hereunder, EMPLOYEE'S salary shall be $500,000.00 per
year payable in installments in accordance with the COMPANY'S regular payroll
practices. EMPLOYEE shall also receive a $250,000 guaranteed annual bonus with
1/2 of this amount paid upon notification by Arnold Brackenridge.
5. At such costs and eligibility restrictions applicable to all employees,
EMPLOYEE shall participate in all plans and benefits generally applicable or
available to employees of the COMPANY, including but not limited to health,
hospital and surgical benefits, disability, life insurance plans, and AD & D
insurance.
a. During his service hereunder, EMPLOYEE shall receive FOUR WEEKS (4)
of vacation per calendar year.
6. This agreement shall be terminable by the COMPANY for "cause" without advance
notice. In the event of such termination properly for cause, the salary set
forth above shall cease on the effective date of termination, however, benefits
earned to date shall be paid in full. "Cause" shall mean:
a. Neglect or mismanagement by EMPLOYEE of his duties, responsibilities
and obligations which either significantly damages or could have
significantly damaged the property or interest of the COMPANY; or
b. Material breach of this Agreement by EMPLOYEE; or
c. Inability of EMPLOYEE to perform his duties, responsibilities and
obligations by reason of illness, accident or other incapacity for a
continuous period of six months.
7. This Agreement shall be terminable by EMPLOYEE for cause. In the event that
EMPLOYEE terminates this Agreement properly for cause within thirty days after
he knows or should have known of the existence of such cause, the COMPANY shall
be obligated to pay EMPLOYEE his salary up to the effective date of such
termination and severance as hereinafter provided.
"Cause" shall mean:
a. Wrongful behavior or willful neglect by the COMPANY, not caused by
EMPLOYEE; or
<PAGE> 2
b. Material breach of its obligations under this Agreement by the
COMPANY; or
c. Sale, reorganization or merger of the COMPANY resulting in a change
in the actual control of the COMPANY.
8. The COMPANY shall have the right to terminate this Agreement without cause by
giving EMPLOYEE written notice of such termination and paying him severance as
set forth in paragraph 9.
9. In the event that the COMPANY terminates EMPLOYEE other than for cause before
the end of the term of this Agreement, or EMPLOYEE terminates this Agreement for
cause before the end of the term of this Agreement, The COMPANY shall pay to
EMPLOYEE his salary for the remaining term of this Agreement plus an additional
six months salary ($ ).
10. The entire understanding and agreement between the parties has been
incorporated into this Agreement. This Agreement shall inure to the benefit of,
and shall be binding upon the COMPANY, its successors and assigns and upon
EMPLOYEE and his heirs, successors, and assigns. EMPLOYEE agrees that this
Agreement may be assigned by the COMPANY to a subsidiary, affiliate, or
successor of the COMPANY; such assignments, however, shall not relieve the
COMPANY of any of its obligations hereunder except to the extent that such
obligations are actually paid and discharged by such subsidiary, affiliate, or
successor. This agreement may not otherwise be assigned without the prior
written approval of the other party.
11. This agreement shall be renewable on an annual basis; however, in the event
that the Company terminates Employee other than for cause before the end of the
term of the renewed agreement, or Employee terminates this Agreement for cause
before the end of the term of the renewed agreement, the Company shall pay to
Employee his salary to the date of his termination plus an additional six months
salary ($ ).
12. Any disputes concerning or arising out of interpretation or application of
this Agreement shall be determined by final and binding arbitration under and in
accordance with the rules and procedures of the American Arbitrations
Association provided that the dispute is submitted to arbitration by written
demand therefor delivered to and received by the other party within sixty days
after occurrence of the event giving rise to the dispute.
13. If there is a conflict between the COMPANY personnel policies and this
Agreement, this Agreement shall prevail.
TRANSTEXAS GAS CORPORATION MR. ARNOLD BRACKENRIDGE
BY BY
------------------------------------ ----------------------------------
DATE DATE
---------------------------------- --------------------------------
<PAGE> 1
EXHIBIT 10.39
EMPLOYMENT AGREEMENT SETTLEMENT
This Agreement is effective on the 28th day of April 1998, and is
between TransTexas Gas Corporation and Richard P. Bianchi.
1. Prior to the effective date of this Agreement, TransTexas and
Bianchi were parties to an Employment Agreement effective as of the 2nd day of
December 1997. That Agreement is terminated upon the effectiveness of this
Agreement.
2. For valuable consideration which each party acknowledges receiving,
and for the additional promises set out in this Agreement, the parties enter
into this Employment Agreement Settlement.
3. As provided for in the Employment Agreement of December 2, 1997,
TransTexas shall pay to Bianchi as severance pay 16 months salary at the level
of salary Bianchi was receiving as an employee of TransTexas on August 12, 1997.
Payments under the 16-month payout began on December 1, 1997 and continues on a
month to month basis. This severance is being paid to employee in connection
with the settlement of the disposition of any rights of Bianchi or obligations
of TransTexas under the Employment Agreements dated August 13, 1997 and December
2, 1997. TransTexas agrees that this severance pay will be paid to Bianchi
regardless of any claims that TransTexas might later assert as offsets. This
severance shall be paid in monthly installments in accordance with TransTexas
regular payroll practices, on the basis of an annual salary of $214,000.00 per
year.
4. This Agreement shall inure to the benefit of, and shall be binding
upon TransTexas, its successors, and assigns, and upon Bianchi and his heirs,
successors, and assigns. Bianchi agrees that his Agreement may be assigned by
TransTexas to a subsidiary, affiliate, or successor of TransTexas. Such
assignment, however, shall not relieve TransTexas of any of its obligations
hereunder except
<PAGE> 2
EMPLOYMENT AGREEMENT SETTLEMENT
PAGE 2
to the extent that such obligations are actually paid and discharged by such
subsidiary, affiliate, or successor. This Agreement may not otherwise be
assigned without the prior written approval of the other party.
5. Any disputes concerning or arising out of interpretation or
application of this Agreement shall be determined by final and binding
arbitration under and in accordance with the Rules and Procedures of the
American Arbitration Association if the dispute is submitted to arbitration by
written demand therefor, delivered to and received by the other party within
sixty (60) days after occurrence of the event giving rise to the dispute.
TRANSTEXAS GAS CORPORATION RICHARD P. BIANCHI
By: John R. Stanley By: Richard P. Bianchi
------------------------------- -------------------------------
Date: 4-29-98 Date: 4-28-98
----------------------------- -----------------------------
<PAGE> 3
CONTRACT FOR LEGAL SERVICES
Effective this ___ day of April, 1998, Richard P. Bianchi will be
retained to provide legal services as described hereinafter;
1. This agreement is at will. Either TransTexas or Bianchi may
terminate this independent contractor working relationship for any reason or for
no reason at anytime, upon notice to the other party.
2. Bianchi shall serve as outside general counsel of TransTexas.
Bianchi shall have and fulfill such duties, responsibilities and obligations as
are usual and customary for general counsel, subject to the direction and
control of the board of directors and the chief executive officer, and subject
to the limitations below.
3. Employee will supervise litigation, claims and government relations
involving the company, it's parent and affiliates. Bianchi shall not be involved
in SEC matters other than to provide information as to litigation, claims and
government relations matters with which Bianchi is personally and specifically
involved.
4. Bianchi is not an employee of TransTexas and shall continue his
affiliation with Bianchi & Lagarde, P.C.
5. Bianchi shall provide TransTexas a general description of the time
spent providing services to TransTexas and a general description of the services
provided. TransTexas will pay Bianchi a flat monthly fee of $16,000.00 based
upon the expectation that Bianchi shall commit a
<PAGE> 4
EMPLOYMENT AGREEMENT
PAGE 2
minimum of (20) hours per week to TransTexas. In addition, TransTexas will pay
Bianchi's out-of-pocket expenses paid to third-parties in the course of
Bianchi's representation of TransTexas.
TRANSTEXAS GAS CORPORATION
By: John R. Stanley
--------------------------------
<PAGE> 1
EXHIBIT 10.40
SEVERANCE AGREEMENT
This agreement is made between TransTexas Gas Corporation and Harold Lee Muncy.
1. In the event of a termination for cause, salary shall cease on the
effective date of termination. Salary and benefits earned to the date of
termination will be paid in full. "Cause" shall mean:
a. Willful neglect or mismanagement by Harold Lee Muncy of his
reasonable duties, responsibilities, and obligations which results in
significant material damage to the property or interest of TransTexas
Gas Corporation; or
b. Material breach of this agreement or the policies set forth in the
Employee Handbook by Harold Lee Muncy; or
c. Inability of Harold Lee Muncy to perform his duties,
responsibilities and obligations by reason of illness, accident or
other incapacity for a continuous period of six months.
2. Termination is without cause unless TransTexas Gas Corporation details
the cause for termination in writing, meeting the definition of paragraph 1, at
the time of termination. TransTexas Gas Corporation may terminate Harold Lee
Muncy's employment without cause by giving Harold Lee Muncy written notice of
termination. However, in the event that TransTexas Gas Corporation terminates
Harold Lee Muncy other than for cause, TransTexas Gas Corporation shall pay
Harold Lee Muncy his salary for six (6) months past the termination of
employment.
3. This agreement may not be assigned without the prior written approval
of the other party.
4. Any disputes concerning or arising out of interpretation or application
of this agreement shall be determined by final and binding arbitration under and
in accordance with the rules and procedures of the American Arbitrations
Association provided that the dispute is submitted to arbitration by written
demand therefor delivered to and received by the other party within sixty days
after occurrence of the event giving rise to the dispute.
5. If there is a conflict between TransTexas Gas Corporation personnel
policies and this agreement, this agreement shall prevail.
Date: 11/17/97 Date: 11/21/97
-------------------- -----------------
TransTexas Gas Corporation
/s/ H. LEE MUNCY
---------------------------
Harold Lee Muncy
By: /s/ GERALD BARKLEY
--------------------------------
Gerald Barkley, Corporate Personnel Director
<PAGE> 1
EXHIBIT 10.41
- --------------------------------------------------------------------------------
PURCHASE AGREEMENT
---------------------------------------------------
PRODUCTION PAYMENT
DRILLING PROGRAM
between
TRANSTEXAS GAS CORPORATION
and
TCW PORTFOLIO NO. 1555 DR V SUB-CUSTODY PARTNERSHIP, L.P.,
TCW DR VI INVESTMENT PARTNERSHIP, L.P.
AND
TCW ASSET MANAGEMENT COMPANY, AS AGENT
---------------------------------------------------
$75,000,000
February 23, 1998
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - Definitions and References............................................................................1
Section 1.1. Defined Terms and References...............................................................1
Section 1.2. Rules of Construction......................................................................6
ARTICLE II - Purchase and Sale....................................................................................6
Section 2.1. Agreement of Purchase and Sale.............................................................6
Section 2.2. Initial Closing............................................................................6
Section 2.3. Subsequent Closings........................................................................7
Section 2.4. Payment of ................................................................................8
Section 2.5. Expenses...................................................................................9
Section 2.6. Payments to Grantee........................................................................9
ARTICLE III - Closing Dates and Closings.........................................................................10
Section 3.1. Times and Places of Closings..............................................................10
Section 3.2. Conditions to Initial Closing.............................................................10
Section 3.3. Conditions to Subsequent Closings.........................................................11
Section 3.4. Other Conditions to All Closings..........................................................12
ARTICLE IV - Representations and Covenants.......................................................................13
Section 4.1. Representations and Warranties of Grantor.................................................13
Section 4.2. Representations, Warranties and Disclosures by Grantee....................................18
Section 4.3. Covenants of Grantor......................................................................19
Section 4.4. Reporting Covenants of Grantor............................................................22
Section 4.5. Reporting Covenants of Grantee............................................................24
Section 4.6. Additional Remedies Upon Designated Event.................................................25
Section 4.7. Confidentiality...........................................................................25
Section 4.8. Future Processing Plant Arrangements......................................................26
ARTICLE V - Adjustment of Dedication Percentage..................................................................26
Section 5.1. Reserve Reports...........................................................................26
Section 5.2. Adjustment to Dedication Percentage.......................................................27
ARTICLE VI - Miscellaneous.......................................................................................28
Section 6.1. Waivers and Amendments....................................................................28
Section 6.2. Survival of Agreements; Cumulative Nature.................................................29
Section 6.3. Notices...................................................................................29
Section 6.4. Parties in Interest.......................................................................29
Section 6.5. Governing Law.............................................................................29
Section 6.6. Limitation on Interest....................................................................30
Section 6.7. Termination; Limited Survival.............................................................30
Section 6.8. Severability..............................................................................30
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
Section 6.9. Arbitration...............................................................................31
Section 6.10. Agent....................................................................................32
Section 6.11. Counterparts.............................................................................35
SCHEDULE 1 - Litigation Summary
SCHEDULE 2 - Abstracts of Judgment
SCHEDULE 3 - Example Calculation of Unliquidated Balance of Primary Sum
EXHIBIT A - Legal Opinion
EXHIBIT B - Partial Release and Subordination
EXHIBIT C - Guaranty
EXHIBIT D - Purchase Agreement Supplement
EXHIBIT E - Conveyance Supplement
EXHIBIT F - Gas Sales Agreement
EXHIBIT G - Oil Sales Agreement
EXHIBIT H - Conveyance
</TABLE>
ii
<PAGE> 4
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT dated as of February 23, 1998 (herein, as from
time to time amended or supplemented, called this "Agreement") is made by:
o TransTexas Gas Corporation, a Delaware corporation (herein
called "Grantor"),
o TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and
TCW DR VI Investment Partnership, L.P. (herein collectively
called "Grantee"), and
o TCW Asset Management Company, as Agent on behalf of Grantee
(in such capacity, "Agent").
RECITALS
1. Grantor is the owner of interests in certain oil and gas
leases.
2. Pursuant to the Trust Indenture described below, Grantor is
permitted, under certain circumstances, to enter into drilling programs to
obtain funds to reimburse it for certain costs it has paid in connection with
the drilling and completing of oil and gas wells. Grantor desires to sell and
assign to Grantee upon the terms and conditions herein set forth, a production
payment under a production payment conveyance to be made by Grantor to Grantee,
in order to obtain such funds.
3. Grantee desires to purchase such production payment upon the
terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, Grantor, Grantee and Agent hereby
agree as follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms and References. As used herein, the terms
"Agreement", "Grantor", and "Grantee" have the meanings given them above
(provided that references to Grantor and Grantee also refer to the successors
and assigns of such Persons). Reference is also made to the "Conveyance", as
defined below, for the meaning of various terms defined therein, all of which
shall when used herein (unless otherwise expressly defined herein) have the
meanings given them in the Conveyance. For purposes of this Agreement, unless
the context otherwise requires, the following additional terms shall have the
following meanings:
"Agent" has the meaning given such term in Section 6.10(a).
"Closing" means the Initial Closing or any Subsequent Closing, and
"Closing Date" means the Initial Closing Date or any Subsequent Closing Date.
1
<PAGE> 5
"Conveyance" means the Production Payment Conveyance made by Grantor to
Grantee, substantially in the form of Exhibit H to this Agreement (appropriately
completed), as from time to time supplemented by Conveyance Supplements or
otherwise amended or supplemented.
"Conveyance Supplement" means a Supplement to Production Payment
Conveyance executed by Grantor and Grantee (acting through Agent), substantially
in the form of Exhibit E to this Agreement.
"Designated Event" means any of the following:
(a) any representation or warranty made by Grantor or any
Purchasing Subsidiary in the Conveyance, either Sales Agreement, this
Purchase Agreement or any other Production Payment Document is false or
incorrect in any material respect as of the time when made;
(b) Grantor or any Purchasing Subsidiary fails to pay or
perform any obligation, covenant or duty owed by it under the
Conveyance, either Sales Agreement, this Purchase Agreement or any
other Production Payment Document, and such failure is not fully
remedied, in the case of an obligation to pay money or to perform (or
cause to be performed) Delivery Services, within five days after it
occurs or, in the case of any other obligation, covenant, or duty,
within thirty days after it occurs;
(c) any representation or warranty made by TEC or the Trustee
in any Partial Release, or by John R. Stanley in the Guaranty, or by
any of them in any other Production Payment Document to which any of
them may hereafter become a party, is false or incorrect in any
material respect as of the time when made;
(d) the Trustee or TEC fails to provide any further assurances
requested under Section 2(d) of any Partial Release within forty-five
days after such request is first made;
(e) John R. Stanley fails to pay and perform any obligation,
covenant or duty owed by him under the Guaranty or any other Production
Payment Document to which he may hereafter become a party, and such
failure is not fully remedied, in the case of an obligation to pay
money within five days after it occurs or, in the case of any other
obligation, covenant, or duty, within thirty days after it occurs;
(f) the occurrence of an "Event of Default" under the Trust
Indenture; and
(g) the validity or enforceability of any Production Payment
Document is challenged by Grantor, any Affiliate of Grantor, the
Trustee, or John R. Stanley in any court, arbitration, or regulatory
proceeding of any kind, or any Production Payment Document is held to
be unenforceable in any material respect in any court, arbitration, or
regulatory proceeding of any kind.
2
<PAGE> 6
"Drilling Costs" means, with respect to any Program Well, the costs to
Grantor of drilling and completing such Program Well.
"Estimated Drilling Costs" has the meaning given such term in Section
2.3(f).
"Gas Sales Agreement" means the Natural Gas Sales Agreement of even
date herewith between Grantor and Grantee, as from time to time supplemented and
amended, which is being executed concurrently herewith substantially in the form
of Exhibit F hereto and under which Grantee is agreeing to sell, and Grantor is
agreeing to buy, all of the Gas included in the PP Hydrocarbons.
"Guaranty" means that certain Guaranty, dated of even date herewith,
executed by John R. Stanley substantially in the form of Exhibit C hereto.
"Hazardous Substance" means any "hazardous waste", "hazardous
substance", "extremely hazardous substance", "toxic chemical", "hazardous
chemical", "toxic pollutants", contaminants", "chemical", "chemical substance",
or "asbestos", as such terms are defined in any Environmental Law, or related
substances, in such quantities or concentrations as are prohibited by (or
require remediation under) any Environmental Law or other applicable law, or
which may be declared to constitute a material threat to human health or to the
environment.
"Initial Closing" and "Initial Closing Date" have the meanings given
them in Section 3.1.
"Initial Reimbursement/Installment Payment" means the first
Reimbursement/Installment Payment made hereunder, which shall be the lesser of
(a) the actual Drilling Costs for the Initial Wells, and (b) $27,701,170.
"Initial Wells" means Grantor's:
Rosario Cattle Co. #1 well, Acom Estate Gas Unit #5 well, Frost-Acom #1
well, Lauro Lopez #6-R and #8 wells, Barrow Ranch #1 well, Rees-Gifford
#1 well, Doornbos #1 well, and State Tract 331 #1 and #3 wells.
"Oil Sales Agreement" means the Oil Sales Agreement of even date
herewith between Grantor and Grantee, as from time to time supplemented and
amended, which is being executed concurrently herewith substantially in the form
of Exhibit G hereto and under which Grantee is agreeing to sell, and Grantor is
agreeing to buy, all of the Oil included in the PP Hydrocarbons.
3
<PAGE> 7
"Partial Release" means a Partial Release and Subordination executed by
the Trustee, TEC and Grantor substantially in the form of Exhibit B hereto.
"Permitted Encumbrances" has the meaning given such term in Section
4.1(i).
"PPNPV" has the meaning given such term in Section 5.1(c).
"Preferential Right" has the meaning given such term in Section 4.1(p).
"Production Payment Documents" means this Agreement, the Purchase
Agreement Supplements, the Conveyance, the Conveyance Supplements, the Partial
Releases, the Guaranty, the Sales Agreements, and each certificate, agreement,
document, or instrument now or hereafter delivered to Grantee or Agent in
connection with any thereof by or on behalf of Grantor, John R. Stanley, or TEC.
"Production Unit" means a tract of at least 40 acres (or, in the case
of State Tract 331, the easternmost 320 acres of such tract), specified as to
both area and depths, meeting the following conditions:
(a) Grantor owns good and defensible title (subject only to
Permitted Encumbrances) to an undivided fee or leasehold interest in
and to the oil, gas, and all other liquid and gaseous hydrocarbons
which may be produced from such tract, including the right to produce,
save and market production from any Program Well located thereon.
(b) Such tract satisfies all drilling and spacing regulations
of the Railroad Commission of Texas, or any other governmental
authority having jurisdiction and is of sufficient size to afford a
well thereon the maximum applicable allowable.
"Program Period" means the period beginning six months prior to the
date hereof through and including the earliest of (a) January 31, 1999, (b) the
date on which thirty Program Wells become subject to the Conveyance, and (c) the
date on which Grantee has paid $75,000,000 in aggregate
Reimbursement/Installment Payments to Grantor.
"Program Well" means:
(a) each of the Initial Wells,
(b) each well not already subject to the Conveyance that is
drilled within the Program Period and that both (i) is within one mile
of any well (other than a well on State Tract 331) that has, at such
time, been made subject to the Conveyance, and (ii) penetrates a zone
produced by (or intended to be produced by) any such well, and
(c) each other well, if any, which Grantor chooses to offer to
Grantee under Section 2.3 during the Program Period.
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"Purchase Agreement Supplement" means a Supplement to Purchase
Agreement executed by Grantor, Grantee (acting through Agent), and Agent (and
consented to by John R. Stanley), substantially in the form of Exhibit D to this
Agreement and appropriately completed.
"Purchasing Subsidiary" means any Subsidiary of Grantor that, with the
consent of Grantee, hereafter assumes the obligations of Grantor under either or
both of the Sales Agreements.
"Regular Evaluation Date" means each February 1, beginning with
February 1, 1999, and each August 1, beginning with August 1, 1998.
"Reimbursement/Installment Payment" means a payment to be made by
Grantee to Grantor under Section 2.2 or 2.3 in consideration of the Conveyance
or a Conveyance Supplement.
"Reserve Engineers" means Netherland, Sewell & Associates (or other
independent petroleum engineers of recognized standing selected by Grantor and
acceptable to Agent in the reasonable exercise of its discretion).
"Reserve Report" has the meaning given such term in Section 5.1.
"Sales Agreements" means the Gas Sales Agreement and the Oil Sales
Agreement.
"Senior Notes" means the 11 1/2% Senior Secured Notes due 2002 and the
13% Senior Secured Discount Notes due 2002 which have been issued by TEC
pursuant to the Trust Indenture.
"Special Evaluation Date" means that day which Grantee or Grantor, by
notice to the other, first designates as the Special Evaluation Date, provided
that such day must be the first day of a calendar month and must be at least six
months (and no more than twelve months) after the commencement of production
from the last Program Well to be made subject to the Conveyance. Only one
designation of a Special Evaluation Date may be made, and no such designation is
required to be made. The Special Evaluation Date may be, but need not be, a
Regular Evaluation Date.
"Subsequent Closing" and "Subsequent Closing Date" have the meanings
given them in Section 3.1.
"Tamco" means TCW Asset Management Company, a California corporation.
"TEC" means TransAmerican Energy Corporation, a Delaware corporation.
"TransAmerican" means TransAmerican Natural Gas Corporation, a Texas
corporation.
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"TransAmerican Company" means TransAmerican, Grantor, TEC,
TransAmerican Refining Corporation, and each other subsidiary of TransAmerican.
"Trust Indenture" means that certain Indenture dated as of June 13,
1997, made in connection with the Senior Notes by TEC (as Issuer) and Firstar
Bank of Minnesota, N.A. (as Trustee), as supplemented or amended from time to
time, together with any other indenture governing any issue of bonds or notes
which hereafter refinances the Senior Notes in whole or in part.
"Trustco" means Trust Company of the West.
"Trustee" means, at the time in question, the Person serving as Trustee
under the Trust Indenture. Firstar Bank of Minnesota, N. A. is the Trustee on
the date hereof.
Section 1.2. Rules of Construction. All references in this Agreement to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Agreement unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement, "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly so
limited. Unless the context otherwise requires: "including" (and its grammatical
variations) means "including without limitation"; "or" is not exclusive; words
in the singular form shall be construed to include the plural and vice versa;
words in any gender include all other genders; references herein to any
instrument or agreement refer to such instrument or agreement as it may be from
time to time supplemented or amended; and references herein to any Person
include such Person's successors and assigns. All references in this Agreement
to exhibits and schedules refer to the exhibits and schedules to this Agreement
unless expressly provided otherwise, and all such exhibits and schedules are
hereby incorporated herein by reference and made a part hereof for all purposes.
ARTICLE II - Purchase and Sale
Section 2.1. Agreement of Purchase and Sale. Upon the terms and
conditions of this Agreement, Grantor agrees to sell the first component of the
Production Payment to Grantee pursuant to the Conveyance, and Grantee agrees to
purchase the same from Grantor and to pay the Initial Reimbursement/Installment
Payment as the purchase price therefor.
Section 2.2. Initial Closing. On the Initial Closing Date, Grantor
shall deliver the Conveyance to Grantee, making the properties described therein
(including the Initial Wells) subject to the Production Payment, and shall
satisfy all of the conditions set out in Sections 3.2 and 3.4. Thereupon Grantee
shall pay the Initial Reimbursement/Installment Payment to Grantor, with:
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<PAGE> 10
$18,467,446.67 being paid by TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P., and
$9,233,723.33 being paid by TCW DR VI Investment Partnership, L.P.
Section 2.3. Subsequent Closings. Throughout the Program Period (but no
more frequently than one time per month), Grantor shall present to Grantee all
logs which it has made or received with respect to any Program Well that has not
previously been offered to Grantee, together with a written description of:
(a) the interval or intervals which Grantor intends to
complete, together with (i) production information about offsetting
wells, and (ii) any relevant geological and geophysical maps (or access
thereto),
(b) the Production Unit on which such Program Well is located,
and whether or not such Production Unit contains acreage sufficient (i)
to afford such well its maximum allowable production (if any), as
determined in accordance with the rules and regulations of the Railroad
Commission of Texas or any other governmental authority having
jurisdiction, and (ii) to reasonably protect such Program Well from
drainage,
(c) the pipeline system or systems by means of which
production from such Program Well will be transported, the present
total capacity of such pipeline(s), and Grantor's expectations as to
how much of such capacity will be contractually committed to Grantor or
to other Persons who may have priority rights with respect to such
capacity,
(d) the gathering system to which such Program Well will be
connected, the time needed to make such connection, and whether or not
such gathering system has sufficient capacity and pressure to permit
the continuing delivery of all Hydrocarbons reasonably expected to be
able to be produced from such Program Well,
(e) Grantor's expectation as to whether production from such
Program Well will be exempt from severance tax pursuant to the Texas
Tax Code,
(f) Grantor's reasonable estimate of the Drilling Costs for
such Program Well (herein called the "Estimated Drilling Costs" for
such Program Well) and any request that Grantee (i) as contemplated in
Section 3.1(e) of the Conveyance, consent to such Program Well (if it
becomes a Subject Well) not being completed or (ii) as contemplated in
Section 3.2(a) of the Conveyance, consent to such Program Well (if it
becomes a Subject Well) being allowed to be abandoned, and
(g) such other matters, including environmental information,
as Grantee shall from time to time request be disclosed in connection
with Program Wells and Production Units.
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<PAGE> 11
Each such presentation by Grantor shall be deemed an offer and request by
Grantor to Grantee that such Production Unit be made subject to the Conveyance
in consideration of Grantee's payment of a Reimbursement/Installment Payment
specified by Grantor which does not exceed the lesser of such Estimated Drilling
Costs and Grantor's actual Drilling Costs for such Program Well. Grantee has no
obligation to accept any such offer. If Grantee in its discretion agrees to make
any additional Production Unit subject to the Conveyance and to pay such
Reimbursement/Installment Payment as an installment of purchase price for the
Production Payment:
(i) Grantor, Grantee (acting through Agent) and Agent shall in
connection therewith execute and deliver a Purchase Agreement
Supplement, which shall specify the amount of the
Reimbursement/Installment Payment which they have agreed upon for such
Program Well and the portion of such Reimbursement/Installment Payment
which Grantor then desires to receive and which shall contain any
exceptions to representations and warranties, or additional
representations, warranties, covenants or other matters, as Grantor and
Grantee may agree upon;
(ii) Grantee shall prepare a Conveyance Supplement which shall
contain a legal description for such Production Unit, a Delivery Point
for the field in which such Production Unit is located (if the same has
not already been designated for such field), and set out Grantor's net
revenue interest and working interest therein and the amount (equal to
the portions of any Reimbursement/Installment Payments which Grantor
will concurrently receive) by which the Primary Sum is to be increased;
(iii) Grantee shall prepare a supplement to the Gas Sales
Agreement and the Oil Sales Agreement, if production from new fields is
to be sold thereunder, which shall contain a delivery point and a sales
price for production from such field; and
(iv) On such Subsequent Closing Date, Grantor will execute and
deliver such Conveyance Supplement to Grantee and satisfy all other
conditions in Sections 3.3 and 3.4, Grantee (acting through Agent)
shall execute and deliver such Conveyance Supplement to Grantor, and
Grantee shall pay such portion of such Reimbursement/Installment
Payment to Grantor.
Section 2.4. Payment of Reimbursement/Installment Payments.
(a) Grantor will not at any time request payment of a
Reimbursement/Installment Payment (or any portion thereof) for any Program Well
in an amount that exceeds the actual Drilling Costs which Grantor has at such
time accrued for such Program Well. As Grantor accrues actual Drilling Costs,
however, Grantor may make requests from time to time for additional portions of
such Reimbursement/Installment Payment that do not exceed such limit. As
provided in Section 2.3(ii) above, the aggregate amount of all such portions of
Reimbursement/Installment Payments properly requested by Grantor shall be set
out in Conveyance Supplements as additions to the unliquidated balance of the
Primary Sum. If in any calendar month:
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<PAGE> 12
(i) Grantor properly requests payments of portions of
Reimbursement/Installment Payments, but
(ii) Grantor and Grantee are not otherwise executing a
Conveyance Supplement under Section 2.3(ii),
then, if Grantor so requests, Grantor and Grantee will nonetheless execute a
Conveyance Supplement to increase the unliquidated balance of the Primary Sum by
the amount of such portions of Reimbursement/Installment Payments so requested
by Grantor.
(b) Grantee will make each payment of Reimbursement/Installment
Payments to Grantor by wire transfer of immediately available funds to such
banks and bank accounts as Grantor shall specify in the certificate delivered in
connection therewith pursuant to Section 3.2(d) or Section 3.3(c), as
appropriate.
(c) Under no circumstances shall the aggregate amount of the Initial
Reimbursement/Installment Payment paid under Section 2.2 and of any other
Reimbursement/Installment Payments paid under Section 2.3 exceed $75,000,000.
(d) Under no circumstances shall Grantee be liable to Grantor or any
third party for the payment of any Drilling Costs. It is the agreement of the
parties hereto that Grantee shall (to the extent otherwise specified hereunder)
purchase the Production Payment by making Reimbursement/Installment Payments in
amounts which are determined, among other things, by reference to Drilling Costs
and Estimated Drilling Costs, but that Grantor (and not Grantee) is responsible
for paying all Drilling Costs.
Section 2.5. Expenses. Grantor will pay to Grantee (or directly to
Grantee's attorneys and other consultants) all Reimbursable Expenses as they are
billed. Grantor has heretofore deposited $50,000 with Grantee, to be applied to
Reimbursable Expenses, and these funds will be applied toward the Reimbursable
Expenses before Grantor is asked to make any additional payments of Reimbursable
Expenses. To the extent that any such deposited funds are not needed to pay
Reimbursable Expenses (or other amounts which may be agreed to by Grantor),
Grantee will return the remainder to Grantor, but Grantor will thereafter remain
liable to pay all Reimbursable Expenses as billed. To the extent that such
deposited funds are insufficient to pay all Reimbursable Expenses, Grantor will
thereafter make additional deposits of $25,000 each with Grantee (or Grantee's
counsel), which will be used to pay all additional Reimbursable Expenses as
billed.
Section 2.6. Payments to Grantee. Grantor will pay any amounts owing to
Grantee under the Production Payment Documents by wire transfer of immediately
available funds to such banks and accounts as Grantee or Agent shall from time
to time specify in writing at least five Business Days prior to the effective
date for any such change of accounts. Until further notice, two-thirds of all
amounts payable to Grantee hereunder shall be sent as follows for TCW Portfolio
No. 1555 DR V Sub-Custody Partnership, L.P. to:
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<PAGE> 13
Boston Safe Deposit
ABA #011001234
Real Estate Wiring #039624
Cost Center #3137
Re: Mellon Bank/Morgan Stanley/Fund V-TGC(3)
Account #CPFF 873-3072
and one third of all amounts payable to Grantee hereunder (as well as all
amounts, if any, payable to Agent hereunder) shall be sent as follows for TCW DR
VI Investment Partnership, L.P. (and for Agent) to:
Sanwa Bank California
1977 Saturn
Monterey Park, CA 91754
Trust Operations
Attn: Charles McKinley
ABA #122003516
Account #76T02327-4
TCW Debt & Royalty Funds VI-TGC
If the Production Payment ever becomes owned by more than three Persons in
compliance with Section 6.4, then Grantor shall not be required to make wire
transfers to more than three such Persons. If Grantor chooses not to make wire
transfers to more than three such Persons, then any additional Person owning a
partial interest in the Production Payment in compliance with Section 6.4 may by
notice to Grantor request that payments to such owner be thereafter sent
directly to such owner by check, whereupon Grantor will do so.
ARTICLE III - Closing Dates and Closings
Section 3.1. Times and Places of Closings. The closing for the
consummation of the sale and purchase of the first component of the Production
Payment (herein called the "Initial Closing") shall take place at such place (or
places) and on such date as may be agreed to by Grantor and Grantee (herein
called the "Initial Closing Date"). The closing for the consummation of the sale
and purchase of each subsequent component, if any, of the Production Payment
(each herein called a "Subsequent Closing") shall take place at such place (or
places) and on such date as may be agreed to by Grantor and Grantee (each herein
called a "Subsequent Closing Date").
Section 3.2. Conditions to Initial Closing. The obligation of Grantee
to pay the Initial Reimbursement/Installment Payment is subject to Grantee's
receipt of each of the following, in form, substance, and date satisfactory to
Grantee:
(a) An "Omnibus Certificate" of the Secretary or Assistant
Secretary of Grantor, which shall contain the names and signatures of
the officers of Grantor authorized to execute the Production Payment
Documents and which shall certify to the
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truth, correctness and completeness of the following exhibits attached
thereto: (i) a copy of resolutions duly adopted by the Board of
Directors of Grantor and in full force and effect at the time this
Agreement is entered into, authorizing the execution of the Production
Payment Documents and the consummation of the transactions contemplated
therein, (ii) a copy of the charter documents of Grantor and all
amendments thereto, certified by the appropriate official of Grantor's
state of incorporation, and (iii) a copy of the bylaws of Grantor.
(b) An Omnibus Certificate for TEC, similar to that required
for Grantor under the preceding subsection (a).
(c) A certificate (or certificates) of the due formation,
valid existence and good standing of each of Grantor and TEC in its
state of incorporation, issued by the appropriate authorities of such
state, and certificates of Grantor's and TEC's good standing and due
qualification to do business in Texas.
(d) A Compliance Certificate of the Chief Financial Officer of
Grantor, dated as of the Initial Closing Date, in which such officer
shall certify to the satisfaction of the conditions set out in Section
3.4 and shall give the wiring instructions referred to in Section 2.4.
(e) Any assurances of title requested by Grantee concerning
the Production Payment, including the recording and filing of the
Conveyance and the updating of any specified title opinions through
such recording (it being understood that Grantee may require these to
be given after, as well as at, the Initial Closing, and that no title
deficiencies learned of by Grantee at any time shall in any way be
deemed to qualify any of Grantor's warranties of title or indemnities
with respect to title in any of the Production Payment Documents).
(f) Certificates from Grantor's insurance brokers or advisors
confirming that Grantor is in compliance with the requirements of
Section 3.5 of the Conveyance.
(g) A legal opinion of Gardere & Wynne, L.L.P., as counsel to
Grantor, dated the Initial Closing Date and substantially in the form
of Exhibit A hereto.
(h) The Conveyance, the Gas Sales Agreement, and the Oil Sales
Agreement.
(i) A Partial Release executed by the Trustee and TEC, and
related UCC-3 financing statement changes.
(j) The Guaranty.
Section 3.3. Conditions to Subsequent Closings. The obligation of
Grantee to pay each Reimbursement/Installment Payment in connection with a
Subsequent Closing on the
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related Subsequent Closing Date is subject to Grantee's receipt of each of the
following, in form, substance, and date satisfactory to Grantee:
(a) Supplements to the "Omnibus Certificates" of Grantor and
TEC delivered under Section 3.2(a) and (b), confirming the matters
specified therein and containing any amendments or supplements to the
resolutions, charter documents and bylaws attached thereto.
(b) To the extent, if any, requested by Grantee, certificates
of the valid existence and good standing of Grantor in its state of
incorporation, issued by the appropriate authorities of such state, and
certificates of Grantor's good standing and due qualification to do
business in Texas.
(c) A Compliance Certificate of the Chief Financial Officer of
Grantor, dated as of such Closing Date, in which such officer shall
certify to the satisfaction of the conditions set out in Section 3.4
and shall give the wiring instructions referred to in Section 2.4.
(d) Any assurances of title requested by Grantee concerning
the Production Payment, including the recording and filing of the
Conveyance and the Conveyance Supplements and the updating of any
specified title opinions through such recording (it being understood
that Grantee may require these to be given after, as well as at, the
various Closings, and that no title deficiencies learned of by Grantee
at any time shall in any way be deemed to qualify any of Grantor's
warranties of title or indemnities with respect to title in any of the
Production Payment Documents).
(e) A legal opinion of Gardere & Wynne, L.L.P., as counsel to
Grantor, dated as of such Closing Date and in form and substance
acceptable to Grantee and its counsel.
(f) A Purchase Agreement Supplement, and any documents called
for thereunder (including any supplements required for the Gas Sales
Agreement and the Oil Sales Agreement).
(g) A Conveyance Supplement.
(h) A Partial Release executed by the Trustee and TEC, and
related UCC-3 financing statement changes.
Section 3.4. Other Conditions to All Closings. In addition to the
receipt of the foregoing documents and instruments under Section 3.2 or 3.3, as
appropriate, the obligation of Grantee to pay any Reimbursement/Installment
Payment on the related Closing Date is subject to the satisfaction (or waiver by
Grantee) of the following conditions precedent:
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(a) All representations and warranties made by Grantor, John R. Stanley
or TEC in any Production Payment Document then or previously delivered shall be
true and correct as of such Closing Date (unless such representations and
warranties are expressly limited to an earlier date, in which case such
representations and warranties shall be true and correct as of such earlier
date).
(b) Grantor, John R. Stanley, and TEC shall have performed and
satisfied all agreements, covenants, and conditions which each is required by
any Production Payment Document to perform or satisfy on or prior to such
Closing Date.
(c) The consummation of the Closing on such Closing Date shall not (i)
be prohibited by any law or any regulation or order of any court or governmental
agency or authority applicable to Grantor, TEC, John R. Stanley, or Grantee or
(ii) subject any of them to any penalty or other onerous condition under or
pursuant to any such law, regulation or order.
ARTICLE IV - Representations and Covenants
Section 4.1. Representations and Warranties of Grantor. To induce
Grantee to enter into this Agreement and to pay the Reimbursement/Installment
Payments, Grantor hereby represents and warrants to Grantee that:
(a) Each of Grantor and TEC is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and duly
qualified to do business and in good standing as a foreign corporation in the
State of Texas. Each has all requisite power and authority, corporate or
otherwise, to own and operate its assets in Texas and to execute and deliver,
and perform all of its obligations under, the Production Payment Documents.
Grantor is not a "foreign person" within the meaning of Sections 1445 and 7701
of the Internal Revenue Code of 1986, as amended (i.e., Grantor is not a
non-resident alien, foreign corporation, foreign partnership, foreign trust or
foreign estate as those terms are defined in the Code and any regulations
promulgated thereunder).
(b) The execution, delivery and performance by Grantor of the
Production Payment Documents to which it is a party, the execution, delivery and
performance by TEC of the Partial Release, and the consummation of the
transactions contemplated herein and in the other Production Payment Documents,
have been duly authorized by all necessary corporate action and do not and will
not (i) violate any material provision of any law, rule, regulation, order,
writ, judgment, decree, determination or award presently in effect having
applicability to Grantor or TEC or of the Certificate of Incorporation or
By-laws of Grantor or TEC, or (ii) result in a breach of, or constitute a
default under, any material contract, indenture, instrument, or agreement to
which either Grantor or TEC is a party or by which it or its property may be
presently bound or affected (including the leases under which Grantor holds the
Subject Interests), or result in or require the creation or imposition of any
lien or encumbrance on any assets of Grantor or TEC. Grantor has obtained or has
caused to be obtained all consents, authorizations and waivers necessary under
any such contract, indenture, instrument or agreement or under any such material
provision of law, rule, regulation, order,
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<PAGE> 17
writ, judgment, decree, determination or award in order to permit the valid
execution, delivery and performance by Grantor and TEC of the Production Payment
Documents.
(c) The Production Payment Documents have been duly executed and
delivered by Grantor (to the extent it is a party thereto) and constitute the
legal, valid and binding acts and obligations of Grantor, enforceable against
Grantor in accordance with their respective terms except as such enforcement may
be limited by bankruptcy, insolvency, moratorium and other similar laws
applicable to creditors' rights generally or by general principles of equity.
(d) No event or state of affairs which would, upon delivery of the
Conveyance, be a Designated Event has occurred and is continuing. No material
"Default" and no "Event of Default" exists under the Trust Indenture. Except as
may have been disclosed to Grantee or Agent, there is no other trust indenture
to which any TransAmerican Company is a party with respect to which the
occurrence of a default by a TransAmerican Company, or the exercise of remedies
after such default, might reasonably be expected to cause a material adverse
effect upon Grantor, its financial condition, or its ability to perform the
Production Payment Documents. No bankruptcy or insolvency proceeding is
presently pending (or, to Grantor's best knowledge, threatened or contemplated)
by or against any TransAmerican Company under any applicable bankruptcy,
insolvency or other similar law of any jurisdiction, and no such Person has made
a general assignment for the benefit of creditors.
(e) Each Partial Release given by the Trustee and by TEC constitutes
the legal, valid and binding act and obligation of the Trustee and of TEC,
enforceable against the Trustee, TEC and the holders of the Senior Notes in
accordance with the terms thereof, except as such enforcement may be limited by
bankruptcy, insolvency, moratorium and other similar laws applicable to
creditors' rights generally or by general principles of equity.
(f) The data, information, exhibits, memoranda and reports furnished by
or on behalf of Grantor to Grantee or Agent in connection with the negotiation
of the Production Payment Documents (taken as a whole, and taking into account
all corrections and supplements to such information heretofore delivered) do not
contain any material misstatement of fact relevant to the transactions
contemplated hereby or omit to state a material fact relevant to the
transactions contemplated hereby or any fact necessary to make the statements
contained therein that are relevant to the transactions contemplated hereby not
misleading. There is no fact known to Grantor that has not been disclosed to
Grantee or Agent which might reasonably be expected to materially and adversely
affect the value of the Production Payment. (The data and information referred
to in the above representations and warranties include any factual information
furnished by Grantor for incorporation or use in any reserve or production
reports or estimates furnished by Grantor or the Reserve Engineers in connection
herewith, but Grantor is not representing and warranting that any reserve or
production estimates made by Grantor or such engineers will ultimately prove to
have been accurate.) Except for production from the Subject Wells in the
ordinary course of business or for matters disclosed to Agent or Grantee in
writing, no material adverse change in the financial condition of Grantor or TEC
or in the condition or aggregate value of the Subject Wells or Subject Interests
has occurred since the date of the last financial statements delivered by
Grantor to Grantee.
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(g) Except for matters described on Schedule 2 hereto or matters
disclosed to Agent or Grantee in writing, there is no litigation or
administrative proceeding pending against any TransAmerican Company which
involves (i) a dispute or claim concerning title to any of the Subject
Interests, (ii) any actual or purported lien, security interest, charge or
burden upon any of the Subject Interests or any lease making up any part of the
Subject Interests, or (iii) any other claim which would affect a transferee of
any such lease or any of the Subject Interests. Except for matters described on
Schedule 1 hereto or matters disclosed to Agent or Grantee in writing, there is
no other litigation or proceeding pending or, to the best knowledge of Grantor,
threatened against any TransAmerican Company which, if determined adversely to
such TransAmerican Company, might reasonably be expected to have a material
adverse effect on the financial condition of Grantor or TEC, the value of the
Production Payment, the ability of Grantor to convey the Production Payment
pursuant to the Production Payment Documents, the enforceability of any Partial
Release, or the ability of Grantor to perform its obligations under the
Production Payment Documents.
(h) Schedule 2 (as amended and supplemented from time to time by any
Purchase Agreement Supplements) contains a complete and accurate list of all
abstracts of judgment and notices of lis pendens on file against any of the
Subject Interests. Grantor has posted supersedeas bonds in the amounts
sufficient in all respects to stay execution of (and pay, if necessary) any such
judgment.
(i) Grantor has good and defensible title to the Subject Interests,
free and clear of all liens, security interests, and encumbrances except for:
(i) the contracts, agreements, burdens, encumbrances and other
matters set forth as being applicable to certain of the Subject
Interests in the descriptions of such Subject Interests on Exhibit A to
the Conveyance (as such Exhibit A is amended and supplemented from time
to time by any Conveyance Supplements),
(ii) statutory liens for taxes which are not yet delinquent or
which (in the case of taxes hereafter coming due) are being contested
in good faith by appropriate proceedings and for the payment of which
Grantor has reserved adequate funds,
(iii) liens under operating agreements, pooling orders and
unitization agreements, and mechanics' and materialmen's liens, with
respect to obligations incurred in the ordinary course of business
which are not yet due or which (in the case of obligations hereafter
coming due) are being contested in good faith by appropriate
proceedings for the payment of which Grantor has reserved adequate
funds,
(iv) easements, rights-of-way, zoning, similar restrictions
and other similar encumbrances incurred in the ordinary course of
business which do not in any case materially detract from the value or
use of the property subject thereto,
(v) judgment liens and lis pendens (which, except for the
judgment liens and lis pendens listed in Schedule 2, do not burden the
Production Payment), but only for so
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long as enforcement thereof is stayed or otherwise prevented, and
(vi) liens in favor of TEC or the Trustee burdening the
Retained Interests but not the Production Payment, and security
interests in favor of any Person burdening the proceeds of that portion
of the Subject Hydrocarbons which is attributable to the Retained
Interests but not the PP Hydrocarbons.
The matters described in the foregoing clauses (i), (ii), (iii), (iv), (v) and
(vi) are herein called the "Permitted Encumbrances". The listing of Permitted
Encumbrances is made for the purpose of limiting the warranties of Grantor made
herein, and is not intended to restrict the description of the Subject
Interests, nor is it intended that the listing herein of any Permitted
Encumbrances shall subordinate the Production Payment to such Permitted
Encumbrance or otherwise cause the Conveyance, any Conveyance Supplement, or any
rights of Grantee or Agent thereunder to be made subject to, or encumbered by,
such Permitted Encumbrance. As provided above, no judgment lien or lis pendens
referred to in clause (v) above shall be considered to be a Permitted
Encumbrance (for the purposes of Section 4.1 of the Conveyance or for any other
purpose) after enforcement thereof ceases to be stayed or otherwise prevented.
(j) The oil, gas or mineral leases, contracts, servitudes and other
agreements forming a part of the Subject Interests, to the extent the same cover
or otherwise relate to the Subject Interests, are in full force and effect, and
Grantor agrees to so maintain them in full force and effect. All rents,
royalties and other payments due and payable under such leases, contracts,
servitudes and other agreements, or under the Permitted Encumbrances, or
otherwise attendant to the ownership or operation of the Subject Interests, have
been, and will continue to be, properly and timely paid. Grantor is not in
default with respect to Grantor's obligations (and Grantor is not aware of any
default by any third party with respect to such third party's obligations) under
such leases, contracts, servitudes and other agreements, or under the Permitted
Encumbrances, or otherwise attendant to the ownership or operation of any part
of the Subject Interests, where such default could materially and adversely
affect the ownership or operation of any of the Subject Interests; Grantor will
fulfill all such obligations coming due in the future.
(k) Except for (i) the Gas Purchase and Sale Agreement dated December
12, 1996 by and between PanEnergy Marketing Company and TransAmerican
(predecessor in interest to Grantor) and the Gas Processing Agreement dated the
same date between the same parties (both of which relate to the Acom Estate Gas
Unit #5 well and the Frost-Acom #1 well), (ii) the Gas Purchase Agreement dated
December 1, 1997, by and between HPL Resources Company and Grantor (which
relates to the Rees-Gifford #1 well), and (iii) any contracts or arrangements
expressly mentioned in any Purchase Agreement Supplement, no Subject Interest is
dedicated or otherwise subject to any contract or other arrangement for the
sale, processing or transportation of Hydrocarbons produced therefrom (or
otherwise related to the marketing of such Hydrocarbons) which would bind
Grantee as owner of the PP Hydrocarbons or would otherwise restrict the rights
of Grantee under the Conveyance to take possession of and market PP
Hydrocarbons. Neither Grantor, nor any of its predecessors in title, has
received prepayments (including payments for gas not taken pursuant to "take or
pay" or other similar
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arrangements) for any Hydrocarbons produced or to be produced from the Subject
Interests. There is no Subject Interest with respect to which Grantor, or its
predecessors in title, has, prior to the date hereof, taken more
("overproduction"), or less ("underproduction"), Hydrocarbons than its (or its
predecessor's in title's) ownership interest in such Subject Interest would
entitle it to take, which overproduction or underproduction has not been
recouped as of the date hereof. No Subject Interest is subject to any production
balancing arrangement under which one or more third Persons may take a portion
of the production attributable to such Subject Interest without payment (or
without full payment) therefor as a result of production having been taken from,
or as a result of other actions or inactions with respect to, other properties.
No Subject Interest is subject on the date hereof to any regulatory refund
obligation and, to the best of Grantor's knowledge, no facts exist which might
cause the same to be imposed.
(l) The Subject Interests (and properties unitized therewith) are being
(and, to the extent the same could materially and adversely affect the ownership
or operation of the Subject Interests after the date hereof, have in the past
been) maintained, operated and developed in a good and workmanlike manner, in
accordance with prudent industry standards and in conformity in all material
respects with all applicable laws and all rules, regulations and orders of all
duly constituted authorities having jurisdiction and in conformity with all oil,
gas or other mineral leases and other contracts and agreements forming a part of
the Subject Interests and in conformity with the Permitted Encumbrances. No
Subject Interest is subject to having allowable production after the date hereof
reduced below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the date hereof. None of the wells located on
the Subject Interests (or properties unitized therewith) is deviated from the
vertical more than the maximum permitted by applicable laws, regulations, rules
and orders; no portion of any well bore for any such well is located outside of
the Subject Interests (or properties unitized therewith); and no such well is
bottomed under or producing from outside the Subject Interests (or properties
unitized therewith). Grantor has all governmental licenses and permits necessary
to own and operate the Subject Interests, and Grantor has not received notice of
any material violations in respect of any such licenses or permits.
(m) All expenses and liabilities (including all bills for labor,
materials and supplies used or furnished for use in connection with the Subject
Interests and all Direct Taxes and Current Ad Valorem Taxes relating to the
ownership or operation of the Subject Interests) have been, or are being, paid
(timely, and before the same become delinquent) by Grantor (and, as to
properties operated by third parties, by such third parties, to the best of
Grantor's knowledge) or are being contested in good faith by appropriate
proceedings for the payment of which Grantor has reserved adequate funds.
(n) The Subject Lands, and Grantor's present and proposed operations
thereon, are in compliance in all material respects with all applicable federal,
state or local laws, including all Environmental Laws. Grantor has taken all
steps necessary to determine and has determined that no Hazardous Substance has
been disposed of or otherwise released on or to the Subject Lands (except for
dispositions and releases done in material compliance with all applicable
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<PAGE> 21
laws and for which Grantor otherwise has no material remedial obligations), and
the use which Grantor makes and intends to make of the Subject Lands will not
result in any such disposal or release. None of such operations of Grantor, and
none of the Subject Lands, is the subject of any federal, state or local
investigation evaluating whether any remedial action is needed to respond to a
release of any Hazardous Substance into the environment or to the improper
storage or disposal (including storage or disposal at offsite locations) of any
Hazardous Substance. Neither Grantor nor, to the best knowledge of Grantor, any
other Person has filed any notice under any Environmental Law indicating that
Grantor is responsible for the release into the environment, or the improper
storage or disposal, of any Hazardous Substance that is now located on, was
removed from, or is in any way related to any Subject Lands, or that any
Hazardous Substance has been released (other than atmospheric emissions from
compressor stations, which emissions are now in compliance and permitted under
applicable Environmental Laws), or is improperly stored or disposed of, upon any
Subject Lands or upon any property of Grantor located near to any Subject Lands.
No TransAmerican Company otherwise has any material contingent liability in
connection with its operations or properties in or near any Subject Lands for
the release into the environment, or the improper storage or disposal, of any
such pollutant, waste, substance or constituent.
(o) No Subject Interest is subject to any tax or common law partnership
or to any joint venture (other than a Permitted Encumbrance).
(p) No Subject Interest is subject to a preferential right to purchase
(herein called a "Preferential Right") or subject to the requirement that a
consent to assignment (other than a Partial Release) be obtained from a third
party, which Preferential Right or requirement for consent might apply to or
otherwise affect the transfer of the Production Payment to Grantee or any
subsequent transfer of the Production Payment by Grantee.
(q) Grantor has incurred no obligation or liability, contingent or
otherwise, for broker's or finder's fees in respect of any of the matters
provided for in this Agreement.
(r) Grantor believes that it will be able to transport production from
the State Tract 331, No. 1 well to one or more points of sale by June 1, 1998
and that it will be able to transport production from the State Tract 331, No. 3
well to one or more points of sale by the latter of such date or the completion
of such well. Grantor believes that it will be able to transport production from
each other Subject Well to the applicable Delivery Point, promptly upon
completion of such Subject Well.
Section 4.2. Representations, Warranties and Disclosures by Grantee.
Each Person included within Grantee hereby represents and warrants to Grantor
that: (a) such Person has incurred no obligation or liability, contingent or
otherwise, for broker's or finder's fees in respect of any of the matters
provided for in this Agreement for which fees Grantor might be liable; (b) this
Agreement constitutes the legal, valid and binding act and obligation of such
Person, enforceable against such Person in accordance with its terms except as
such enforcement may be limited by bankruptcy, insolvency, moratorium and other
similar laws applicable to creditors' rights generally or by general principles
of equity; (c) no bankruptcy
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<PAGE> 22
or insolvency proceeding is presently pending (or, to such Person's best
knowledge, threatened) by or against such Person under any applicable
bankruptcy, insolvency or other similar law of any jurisdiction; (d) such Person
has not made a general assignment for the benefit of creditors; (e) such Person
is acquiring the Production Payment for its own account and not with any
intention to transfer all or any part of the Production Payment to others in
violation of the Securities Act of 1933, as amended, or any other applicable
securities laws, and (f) such Person is a "United States person", within the
meaning of Section 7701 of the Internal Revenue Code of 1986, as amended.
Section 4.3. Covenants of Grantor. To induce Grantee to enter into this
Agreement and to pay the Reimbursement/Installment Payments, Grantor covenants
and agrees that until the full and final payment of all payments due under the
Production Payment Documents and the termination of this Agreement and the
Production Payment, unless Grantee has previously agreed otherwise:
(a) Grantor will perform all of its covenants and duties under the
Production Payment Documents, all as fully as if they were set out in full
herein.
(b) In addition to any reports and information specifically required by
the terms of this Agreement or the Conveyance, Grantor agrees to furnish to
Grantee full information, at all reasonable times, which Grantee may request
concerning any covenant, provision or condition of the Production Payment
Documents or any matter or records in connection with such documents or with the
operation of, reserve engineering for, production from, or accounting for the
Subject Interests. Subject to any restrictions on Grantor's right to do so under
applicable operating agreements or similar contracts, Grantor will permit
representatives designated by Grantee, including independent accountants,
agents, attorneys, and other Persons, to visit and inspect the Subject Interests
and Grantor's books and records pertaining to the Subject Interests (and to make
copies and photocopies from such records and to write down and record such
information as such representatives may request, provided that no copies may be
made of geological or seismic data), and Grantor shall permit Grantee and its
designated representatives reasonably to investigate and verify the accuracy of
information furnished to Grantee hereunder or in connection herewith and to
discuss all such matters with its officers, employees and representatives.
(c) If any Person ever challenges or attacks (i) the validity or
priority of any Production Payment Document or of any rights, titles, or
interests created or evidenced thereby or (ii) the title of Grantor to any
Subject Interest or of Grantee to any part of the Production Payment, then upon
learning thereof Grantor will give prompt written notice thereof to Grantee and
at Grantor's own cost and expense will diligently endeavor to defeat such
challenge or attack and to cure any defect that may be developed or claimed, and
Grantor will take all necessary and proper steps for the defense of any legal
proceedings with respect thereto, including the employment of counsel (at
reasonable fees) to represent Grantor, the prosecution or defense of litigation,
and the release or discharge of all adverse claims. Each of Grantee and Agent
(whether or not named as a party to legal proceedings with respect thereto) is
hereby authorized and empowered to take such additional steps as in its judgment
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<PAGE> 23
and discretion may be necessary or proper for the defense of any such legal
proceedings or the protection of the validity or priority of the Production
Payment Documents and the rights, titles, and interests created or evidenced
thereby, including the employment of independent counsel at reasonable fees to
represent Grantee and Agent, the prosecution or defense of litigation, the
compromise or discharge of any adverse claims made with respect to the
Production Payment, the purchase of any tax title and the removal of prior liens
or security interests, and all expenditures so made of every kind and character
shall be a Reimbursable Expense (which obligation Grantor hereby expressly
promises to pay on demand) owing by Grantor to Grantee or Agent and shall bear
interest from the date demanded until paid at the Agreed Rate.
(d) Grantor will, on request of Grantee, (i) promptly correct any
defect, error or omission which may be discovered in the contents, execution or
acknowledgment of any Production Payment Document, (ii) execute, acknowledge,
deliver and record or file such further instruments and do such further acts as
may be necessary, desirable or proper to carry out more effectively the purposes
of the Production Payment Documents and to more fully identify and make subject
to the Conveyance any property intended to be covered thereby, including any
renewals, additions, substitutions, replacements, or appurtenances to the
Subject Interests; and (iii) execute, acknowledge, deliver, and file or record
any document or instrument reasonably requested by Grantee to protect its
rights, title and interests under the Production Payment Documents against the
rights or interests of third Persons. Grantor shall pay all reasonable costs
connected with any of the foregoing.
(e) Without limitation of Grantee's remedies for breach of the
representations or warranties contained in Section 4.1(p), if a third party
properly exercises a Preferential Right after any Closing, Grantee will, in its
sole and absolute discretion, either (i) join in any required conveyance of the
affected Subject Interest to such third party, or (ii) make a conveyance of the
Production Payment insofar as it covers the affected Subject Interest to Grantor
in order that Grantor may make the necessary conveyance to such third party.
Upon making a conveyance in accordance with (i) or (ii), above, Grantee shall
(without limitation of its remedies for breach of the representations or
warranties contained in Section 4.1(p) hereof) be entitled to receive (and shall
thereafter apply in the same manner as PP Proceeds) -- either from the
exercising third party, assuming that Grantee exercised option (i), or from
Grantor, assuming that Grantee exercised option (ii) -- the entire amount of
consideration attributable to Grantee's interest in the particular Subject
Interest covered by such Preferential Right. In addition, Grantor shall, if
requested to do so by Grantee, repurchase the entire Production Payment from
Grantee for a price equal to the then unliquidated balance of the Primary Sum as
determined after the application of all PP Proceeds on such date or the next
occurring Application Date. Grantee and Agent shall not incur any liabilities
with respect to any reconveyance of properties that may be required in
accordance with this subsection or otherwise with respect to any exercise of a
Preferential Right, and Grantor shall indemnify and hold harmless Grantee and
Agent from any liabilities (including reasonable attorneys' fees) with respect
thereto.
(f) Grantor will not cause or permit the Subject Lands or Grantor to be
in material
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<PAGE> 24
violation of any Environmental Laws with respect to the Subject Lands or do
anything or permit anything to be done which will subject Grantor or the Subject
Lands to any material remedial obligations under any Environmental Laws
pertaining to the Subject Lands, assuming in each case disclosure to the
applicable governmental authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the Subject Lands, and Grantor will
promptly notify Grantee in writing of any existing, pending or, to the best
knowledge of Grantor, threatened investigation or inquiry by any private party
or governmental authority in connection with any Environmental Laws. Grantor
will take all steps necessary to determine that no Hazardous Substances are
disposed of or otherwise released or being released on or to the Subject Lands
in violation of any Environmental Laws. Grantor will not cause or permit the
disposal or other release of any Hazardous Substance on or to the Subject Lands
in violation of any Environmental Law and covenants and agrees to remove or
remediate any Hazardous Substance on the Subject Lands.
(g) Grantor will ensure that no Event of Default occurs under the Trust
Indenture. Grantor will use all of the Reimbursement/Installment Payments in
compliance with the Trust Indenture.
(h) Grantor will provide to Grantee any assurances of title which
Grantee may from time to time reasonably request concerning the Production
Payment, including the recording and filing of the Conveyance and the Conveyance
Supplements and the updating of any specified title opinions through such
recording (it being understood that no title deficiencies learned of by Grantee
shall in any way be deemed to qualify any of Grantor's warranties of title or
indemnities with respect to title in any of the Production Payment Documents).
(i) Grantor will fully bond (or pay) any judgment entered in any
lawsuit listed in Schedule 1 or Schedule 2 so that such judgment can be fully
paid by proceeding against such bond without enforcement of any judgment lien or
rights relating to any lis pendens and without otherwise affecting the
Production Payment.
(j) If for any reason any well located on Subject Lands in State Tract
331 is not completed so that it becomes mechanically capable (or if for any
reason such well ceases to remain mechanically capable) of production from the
intervals previously identified to Grantee on the logs for such well, then
Grantor shall promptly cause such well to become mechanically capable of
production or shall promptly redrill such well, or a satisfactory substitute
well, on the same lands and to the same intervals, in either case at no cost to
Grantee and without any payment by Grantee of additional
Reimbursement/Installment Payments in connection therewith (provided that
Grantor may recomplete such well at other intervals if in so doing Grantor
would be able to increase production from such well over the remaining expected
term of the Production Payment, from that which would reasonably be
accomplished as a result of such drilling).
(k) Grantor will at all times be a corporation validly existing and in
good standing under the laws of its state of incorporation and duly qualified to
do business and in good standing in the State of Texas.
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(l) Grantor will at all times obtain and possess (or cause to be
obtained and possessed) all consents, authorizations and waivers necessary under
any material contract, indenture, instrument or agreement binding on or
affecting Grantor or any of Grantor's assets or under any material provision of
law, rule, regulation, order, writ, judgment, decree, determination or award
binding on or affecting Grantor or any of Grantor's assets, in order to permit
the performance by Grantor of the Production Payment Documents.
(m) Grantor will maintain good and defensible title to the Retained
Interests, free and clear of all liens, security interests, and encumbrances
except for Permitted Encumbrances, provided that Grantor may hereafter assign or
mortgage any Assignable 331 Retained Interest to the extent permitted under
Section 6.1 of the Conveyance.
Section 4.4. Reporting Covenants of Grantor. To induce Grantee to enter
into this Agreement and to pay the Reimbursement/Installment Payments, Grantor
covenants and agrees that until the full and final payment of all payments due
under the Production Payment Documents and the termination of this Agreement,
unless Grantee has previously agreed otherwise, Grantor will furnish the
following statements and reports, at Grantor's expense, to Agent and to each
Person included within Grantee which has requested separate payment under
Section 2.6:
(a) Monthly, within 25 days after the end of the month to
which each report applies, Grantor shall furnish a report (in a form
reasonably acceptable to Grantee) showing:
-- in Part I thereof: (i) the name of each Subject Well, (ii)
the portion of gross production of Gas from each Subject Well (measured
in Mcfs) which is attributable to Subject Interests as metered at the
well (and, if requested, the size of choke applied to such well, the
flowing tubing pressure of such well, the suction and discharge
pressure of any compression, and the operating pressure of the gas
sales line), (iii) the quantity of Gas PP Hydrocarbons (measured in
Mcfs) produced from each Subject Well, (iv) the number of MMBTUs in
each Mcf of Gas PP Hydrocarbons produced, as measured at the well, (v)
the quantity of Gas PP Hydrocarbons (measured in MMBTUs) produced from
each Subject Well, (vi) if known by Grantor, the aggregate amounts
received by Grantee from such sales of Gas PP Hydrocarbons, as
determined pursuant to the Conveyance and before deductions for
severance taxes withheld, and (vii) if known by Grantor, the PP
Severance Taxes for such Application Period with respect to Gas PP
Hydrocarbons, and
-- in Part II thereof: (i) the name of each Subject Well, (ii)
the portion of gross production of Oil from each Subject Well (measured
in barrels) which is attributable to Subject Interests as measured at
the well, (iii) the quantity of Oil PP Hydrocarbons (measured in
barrels) produced from each Subject Well, (iv) if known by Grantor, the
aggregate amounts received by Grantee from sales of Oil PP
Hydrocarbons, as determined pursuant to the Conveyance and before
deductions for severance taxes withheld, and (v) if known by Grantor,
the PP Severance Taxes for such Application
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Period with respect to Oil PP Hydrocarbons.
(As used in this subsection (a), "Gas PP Hydrocarbons" means PP
Hydrocarbons consisting of Gas and "Oil PP Hydrocarbons" means PP
Hydrocarbons consisting of Oil.) Such report shall be supplemented, if
and when requested by Agent, to show: (i) the gross production of
Hydrocarbons from each Subject Well, (ii) the quantities thereof, if
any, used in lease operations, (iii) the most recent status of any Gas
imbalances, if any, affecting the Subject Interests, (iv) the number of
wells operated, wells drilled and wells abandoned on the Subject
Interests, and (v) if requested, the costs to Grantor of operating the
Subject Interests. To the extent that any of such information is not
available to Grantor (despite all reasonable efforts to obtain same) at
the time any monthly report is furnished, it shall be supplied promptly
after receipt.
(b) Within 60 days after each Regular Evaluation Date or
Special Evaluation Date, Grantor shall furnish a Reserve Report
covering the Subject Interests and prepared in accordance with the
terms of Section 5.1 hereof.
(c) Quarterly, within 60 days after the end of the first three
fiscal quarters in each fiscal year of Grantor, and annually, within
105 days after the end of each fiscal year of Grantor, Grantor's
consolidated financial statements as of the end of and for such period,
including a balance sheet and statements of income, cash flows, and
stockholder's equity, prepared in accordance with generally accepted
accounting principles and, with respect to the annual financial
statements, accompanied by a report of the Grantor's independent
certified public accountants stating that their examination was made in
accordance with generally accepted auditing standards and that in their
opinion such financial statements fairly present the matters reported
on in accordance with generally accepted accounting principles
consistently applied. For so long as Grantor files Forms 10-Q and 10-K
with the Securities and Exchange Commission, Grantor may satisfy the
reporting requirements in this subsection (c) by sending a copy of each
such form 10-Q and 10-K within fifteen days after filing the same with
such Commission, and whenever Grantor or any Affiliate of Grantor files
any Form 10-Q or 10-K with such Commission or Grantor files any Form
8-K, Grantor shall obtain and send a copy of such form to Agent (and
each other Person then entitled to receive reports under this section)
within fifteen days after such form is so filed.
(d) As each Subject Well is drilled, completed, and put onto
production, copies of: (i) well logs across all pay zones, (ii) all
test information, and (iii) reports detailing completion and response
to stimulation.
(e) Upon request of Agent, but not more often than quarterly,
Grantor shall furnish reports, in detail reasonably acceptable to
Agent, concerning any change in methods of operation of all or any
Subject Wells, any new drilling or development, any method of secondary
recovery by repressuring or otherwise, or any other action with respect
to the Subject Interests, the decision as to which may increase or
reduce the quantity of Hydrocarbons ultimately recoverable from the
Subject Interests, or the rate
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<PAGE> 27
of production therefrom, or which may shorten or prolong the period of
time required for liquidation of the Production Payment.
(f) Upon request of Agent, Grantor shall furnish copies of
surface maps showing property lines and well locations, flow and
pressure tests, natural gas analysis and casing programs and other
similar information related to the Subject Interests, the Subject Wells
and the production therefrom.
(g) Upon request of Agent, at any time and from time to time
(but not more frequently than once in any period of twelve consecutive
months, unless there has occurred a Designated Event that is not cured
within the applicable grace period) Grantor will provide at Grantor's
sole expense an inspection or audit of the Subject Interests and the
Subject Lands from an engineering or consulting firm approved by
Grantee, indicating compliance or non-compliance with Environmental
Laws. Except for reports requested during the continuance of a
Designated Event, Grantor shall be responsible to pay for the costs of
only ONE such report during the term of the Production Payment (which
report shall be specified by Agent), and Grantee shall be responsible
for the costs of all others.
(h) Promptly (and in any event within five days) after
learning of the occurrence of any Designated Event or of the making of
any claim by any Person which allegedly affects the rights of Grantor
or Grantee in and to the Subject Interests, Grantor will give Agent
written notice thereof.
Section 4.5. Reporting Covenants of Grantee. Grantee covenants and
agrees that until the full and final payment of all payments due under the
Production Payment Documents and the termination of this Agreement, unless
Grantor has previously agreed otherwise:
(a) Monthly, within 30 days after the end of the month to
which such report applies, Grantee or Agent will furnish to Grantor a
report, in the form of Schedule 3, showing the unliquidated balance of
the Primary Sum, as calculated by Grantee or Agent. To the extent that
these reports show applications of PP Proceeds to any Direct Taxes
(other than PP Severance Taxes), Reimbursable Expenses or Delivery
Charges paid by Grantee or Agent, Grantee or Agent will on request by
Grantor furnish an itemized breakout of such deductions.
(b) Monthly, within 20 days after the end of each month, (if
and to the extent required to determine PP Proceeds), Grantee or Agent
will furnish to Grantor information on the actual prices received by
Grantee for any sales which Grantee may make of PP Hydrocarbons to any
Person other than a TransAmerican Company.
Section 4.6. Additional Remedies Upon Designated Event. Upon the
occurrence of a Designated Event, and provided the breach giving rise to such
Designated Event has not been cured within 30 days after Grantee or Agent gives
notice of such breach to Grantor, Grantee shall, in addition to its other rights
and remedies, have the right, but not the obligation, to:
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(a) remove Grantor as the operator of any or all of the
Subject Interests in which 100% of the working interest is owned by
Grantor (in this section, a "100% Property"), or
(b) instruct Grantor to resign as the operator of any Subject
Interest (in this section, a "Third Party Property") that is subject to
a joint operating agreement between Grantor and any third party working
interest owner other than Grantor (in this section, a "Third Party
JOA").
In the event Grantor is removed by Grantee or Agent as the operator of any
particular 100% Property, Grantee or Agent may appoint any reputable third party
(which may be an Affiliate of Grantee or Agent but which may not otherwise be
any of the Persons described in clauses (ii) or (iii) of Section 6.2(b) of the
Conveyance, or any Affiliate of any such Person) who is experienced in operating
Gas properties, as the operator of any particular 100% Property, and Grantee or
Agent may negotiate with such third party a substitute operating agreement
containing such terms and conditions as are commercially reasonable in a
transaction involving a contract operator with no ownership interest in the
contract area covered by an operating agreement. All costs, expenses and fees
billed or invoiced under any such substitute operating agreement shall be borne
and timely paid by Grantor. In the event Grantee or Agent requests in accordance
herewith that Grantor resign as the operator of any Third Party Property (or in
the event Grantor is otherwise removed as operator under the terms of an
applicable Third Party JOA, in which case Grantor shall immediately so notify
Grantee and Agent), Grantor shall consult with Grantee and Agent prior to
casting any vote it may have to name a substitute operator and shall cast such
vote as directed by Grantee or Agent.
Section 4.7. Confidentiality. Each party hereto shall hold in
confidence any confidential information it has obtained from another party
hereto, provided that disclosure thereof shall be permitted: (a) to the
Affiliates, investors, officers and employees of any party hereto (provided that
such Persons are made aware that such information is required to be held in
confidence), (b) to the auditors, counsel, and other professional advisors of
any party hereto (provided that such Persons are made aware that such
information is required to be held in confidence), (c) in the course of any
arbitration, trial or other legal proceeding between any of the parties hereto
or any of their Affiliates, (d) as required by any applicable securities law or
other law (including any subpoena, interrogatory, or other similar requirement
for such information to be disclosed), and (e) in connection with any assignment
or potential assignment of such party's rights hereunder which is or would be
permitted under Section 6.4 (provided that each such assignee or potential
assignee is made aware that such information is required to be held in
confidence).
Section 4.8. Future Processing Plant Arrangements. Grantor has informed
Grantee that one possible way to market the Subject Hydrocarbons from State
Tract 331 involves the construction of a gas processing plant near the landfall
of the pipeline connecting the State Tract 331 wells to shore and that it may be
necessary to commit the Subject Hydrocarbons to such plant in order to induce a
third party to build and operate such plant. Grantor has further informed
Grantee that such third party may ask Grantee to commit the PP Hydrocarbons to
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such plant in the event that the Gas Sales Agreement is for any reason
terminated or suspended. Grantee agrees to consider any such request in good
faith and to cooperate with Grantor in any negotiations with such a third party,
but it is understood by Grantor and Grantee that each reserves the right to
agree or disagree with the terms of any agreements that are ultimately proposed
with respect to the Subject Hydrocarbons and any such gas plant.
ARTICLE V - Adjustment of Dedication Percentage
Section 5.1. Reserve Reports. Within 60 days after each Regular
Evaluation Date or Special Evaluation Date, Grantor shall furnish to Agent (and
to each Person included within Grantee which has requested separate payment
under Section 2.6) a reserve engineering report prepared as of such date by the
Reserve Engineers with respect to the Subject Interests. Each such report is
herein called a "Reserve Report". Each such Reserve Report shall be prepared and
furnished at the cost of Grantor. Each Reserve Report shall be prepared in
accordance with the standards of the Society of Petroleum Engineers and the
Reserve Engineers' customary professional practices, provided that each Reserve
Report shall:
(a) separately address proved developed producing reserves
from other reserves.
(b) separately address the anticipated production of proved
developed producing reserves accruing to (i) the Production Payment and
(ii) the total Subject Interests.
(c) separately calculate the future net revenues allocable to
the Production Payment and the future net revenues allocable to the
total Subject Interests from anticipated sales of production from
proved developed producing reserves and, using a discount factor of ten
percent (10%) per annum, the present value of each on the date as of
which such report is prepared. In calculating the future net revenues
attributable to the Production Payment the Reserve Engineers shall take
into account all factors used in the calculation of PP Proceeds and
shall deduct any PP Severance Taxes. As used herein, "PPNPV" means such
discounted present value of the future net revenues accruing to the
Production Payment from anticipated sales of production from proved
producing reserves.
(d) in making such calculations, use pricing for anticipated
sales of MMBTUs of Gas equal to the lesser of:
(i) the weighted average price received by Grantee
for all sales of PP Hydrocarbons made up of Gas during the
preceding twelve months (or, during the first twelve months of
the term of the Production Payment, since the beginning of
such term), determined by dividing the aggregate amount of PP
Proceeds received by Grantee during such period from the sale
of such PP Hydrocarbons by the aggregate MMBTUs of such PP
Hydrocarbons which were sold to generate such PP Proceeds, and
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<PAGE> 30
(ii) twenty-seven cents ($0.27) less than the average
of the prices per MMBTU on the New York Mercantile Exchange
(or any successor organization) for Henry Hub gas, as reported
in the Wall Street Journal for the date as of which such
report is prepared (or, if such date is not a Business Day,
for the first Business Day thereafter), under the twelve
forward contracts which are listed therein as the first to
mature after such date,
which price shall be escalated at three percent per year for each year
after the first year.
(e) in making such calculations, use pricing for anticipated
sales of Barrels of Oil equal to the lesser of:
(i) the weighted average price received by Grantee
for all sales of PP Hydrocarbons made up of Oil during the
preceding twelve months (or, during the first twelve months of
the term of the Production Payment, since the beginning of
such term), determined by dividing the aggregate amount of PP
Proceeds received by Grantee during such period from the sale
of such PP Hydrocarbons by the aggregate Barrels of such PP
Hydrocarbons which were sold to generate such PP Proceeds, and
(ii) two dollars ($2.00) less than the average of the
prices per Barrel on the New York Mercantile Exchange (or any
successor organization) for West Texas Intermediate light
sweet crude oil, as reported in the Wall Street Journal for
the date as of which such report is prepared (or, if such date
is not a Business Day, for the first Business Day thereafter),
under the twelve forward contracts which are listed therein as
the first to mature after such date,
which price shall be escalated at three percent per year for each year
after the first year.
Section 5.2. Adjustment to Dedication Percentage. Using the Reserve
Report prepared as of each Regular Evaluation Date or Special Evaluation Date
and the PPNPV as calculated therein, Agent shall calculate the ratio, as of such
date, of (a) such PPNPV to (b) the "unliquidated balance of the Primary Sum" (as
defined in the Conveyance) as of such date. If such ratio is equal to or greater
than one hundred forty percent (140%) then, as provided in the Conveyance in the
definition of "Dedication Percentage", the Dedication Percentages thereunder
shall remain unchanged. If, however, this ratio is not equal to or greater than
140%, then Agent (working with the Reserve Engineers who prepared such Reserve
Report, and increasing the Dedication Percentage for State Tract 331 and the
Dedication Percentage for the other Subject Interests proportionately, unless
restricted by the maximum percentages set out below) shall calculate the
Dedication Percentages (herein called the "Calculated Percentages") which would
be required in order to cause such ratio to equal 140%. As provided in the
Conveyance in the definition of "Dedication Percentage", the new Dedication
Percentage to take effect as of the Adjustment Time with respect to State Tract
331 shall then
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<PAGE> 31
be the lesser of the Calculated Percentage applicable thereto and a maximum
percentage of sixty-five percent (65%) and the new Dedication Percentage to take
effect as of the Adjustment Time with respect to all other Subject Interests
shall then be the lesser of the Calculated Percentage applicable thereto and a
maximum percentage of ninety percent (90%).
ARTICLE VI - Miscellaneous
Section 6.1. Waivers and Amendments. No failure or delay (whether by
course of conduct or otherwise) by Grantee in exercising any right, power or
remedy which Grantee may have under any of the Production Payment Documents
shall operate as a waiver thereof or of any other right, power or remedy, nor
shall any single or partial exercise by Grantee of any such right, power or
remedy preclude any other or further exercise thereof or of any other right,
power or remedy. No waiver of any provision of any Production Payment Document
and no consent to any departure therefrom shall ever be effective unless it is
in writing and signed by Grantee, and then such waiver or consent shall be
effective only in the specific instances and for the purposes for which given
and to the extent specified in such writing. No notice to or demand on Grantor
shall in any case of itself entitle Grantor to any other or further notice or
demand in similar or other circumstances. This Agreement and the other
Production Payment Documents set forth the entire understanding and agreement of
the parties hereto and thereto with respect to the transactions contemplated
herein and therein and supersede all prior discussions and understandings with
respect to the subject matter hereof and thereof, and no modification or
amendment of or supplement to this Agreement or the other Production Payment
Documents shall be valid or effective unless the same is in writing and signed
by the party against whom it is sought to be enforced.
THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 6.2. Survival of Agreements; Cumulative Nature. All of the
various representations, warranties, indemnities, covenants and agreements in
the Production Payment Documents shall survive the execution and delivery of
this Agreement and the other Production Payment Documents and the performance
hereof and thereof, including the granting of the Production Payment and the
delivery of the Conveyance and the Conveyance Supplements. The representations,
warranties, indemnities, and covenants made by the parties in the Production
Payment Documents, and the rights, powers, and privileges granted to the parties
in the Production Payment Documents, are cumulative, and, except for expressly
specified waivers and consents, no Production Payment Document shall be
construed in the
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<PAGE> 32
context of another to diminish, nullify, or otherwise reduce the benefit to
either party of any such representation, warranty, indemnity, covenant, right,
power or privilege. In particular and without limitation, no exception set out
in this Agreement to any representation, warranty, indemnity, or covenant herein
contained shall apply to any similar representation, warranty, indemnity, or
covenant contained in any other Production Payment Document, and each such
similar representation, warranty, indemnity, or covenant shall be subject only
to those exceptions which are expressly made applicable to it by the terms of
the various Production Payment Documents.
Section 6.3. Notices. All notices, requests, consents, demands and
other communications (in this section, collectively called "notices") which are
required or permitted under any Production Payment Document shall be in writing,
unless otherwise specifically provided in such Production Payment Document, and
shall be deemed sufficiently given or furnished if delivered by personal
delivery, by telecopy, by delivery service with proof of delivery, or by
registered or certified United States mail, postage prepaid, to Grantor, Grantee
or Agent at its address specified on the signature pages hereto. Any such notice
shall be deemed to have been given (a) in the case of personal delivery or
delivery service, as of the date of first attempted delivery at the address and
in the manner provided herein, (b) in the case of telecopy, upon receipt, or (c)
in the case of registered or certified United States mail, three days after
deposit in the mail. Each of Grantor, Grantee and Agent may change its address
from time to time by sending a notice of the new address, in the manner provided
for in this section, to the other parties hereto.
Section 6.4. Parties in Interest. All grants, covenants and agreements
contained in the Production Payment Documents shall bind and inure to the
benefit of the parties thereto and their respective successors and assigns;
provided that any assignment of any party's rights and duties hereunder must be
made in accordance with Article VI of the Conveyance.
Section 6.5. Governing Law. Except to the extent that the law of
another jurisdiction may be expressly elected in a Production Payment Document,
the Production Payment Documents shall be deemed contracts and instruments made
under the laws of the State of Texas and shall be construed and enforced in
accordance with and governed by the laws of the State of Texas and the laws of
the United States of America, without regard to principles of conflicts of law.
Section 6.6. Limitation on Interest. Although the Production Payment
Documents provide for the sale and purchase of a real property interest and not
a loan (except under federal income tax law), there are certain provisions (such
as Section 5.1(a) of the Conveyance) of the Production Payment Documents which
provide for the charging and payment of interest. Grantee and Grantor intend to
contract in strict compliance with applicable usury law from time to time in
effect. In furtherance thereof they hereby stipulate and agree that none of the
terms and provisions contained in the Production Payment Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by applicable law from time to time in effect. No party to any
Production Payment
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<PAGE> 33
Document shall ever be liable for unearned interest or shall ever be required to
pay interest in excess of the maximum amount that may be lawfully charged under
applicable law from time to time in effect, and the provisions of this section
shall control over all other provisions of the Production Payment Documents
which may be in conflict or apparent conflict herewith. In determining whether
or not the interest paid or payable, under any specific circumstance, exceeds
the maximum amount permitted under applicable law, the parties to the Production
Payment Documents shall to the greatest extent permitted under applicable law:
(a) characterize any non-principal payment as an expense, fee or premium rather
than as interest, (b) exclude voluntary prepayments and the effects thereof, and
(c) amortize, prorate, allocate, and spread the total amount of interest
throughout the entire contemplated term of the interest bearing obligation in
accordance with the amounts thereof outstanding from time to time and the
maximum legal rate of interest from time to time in effect under applicable law
in order to lawfully charge the maximum amount of interest permitted under
applicable law. In the event applicable law provides for an interest ceiling
under ss.303 of the Texas Finance Code and Chapter 1D of Title 79, Texas Revised
Civil Statutes Annotated, that ceiling shall be the "indicated rate ceiling" or
"weekly ceiling" as defined in the Texas Finance Code or such Chapter 1D. As
used in this section the term "applicable law" means the laws of the State of
Texas or the laws of the United States of America, whichever laws allow the
greater interest, as such laws now exist or may be changed or amended or come
into effect in the future.
Section 6.7. Termination; Limited Survival. As provided in the
Conveyance, the Production Payment will terminate at the Termination Time
referred to therein. Notwithstanding the foregoing or anything to the contrary
in any Production Payment Document, all waivers or admissions made by Grantor in
any Production Payment Document and all obligations which any Person may have to
indemnify or compensate Grantee shall survive any termination of this Agreement
or any other Production Payment Document. At the request and expense of Grantor,
Grantee shall prepare, execute and deliver all necessary instruments to reflect
and effect such termination of the Production Payment and limited survival of
the Production Payment Documents.
Section 6.8. Severability. If any term or provision of any Production
Payment Document shall be determined to be illegal or unenforceable, all other
terms and provisions of the Production Payment Documents shall nevertheless
remain effective and shall be enforced to the fullest extent permitted by
applicable law.
Section 6.9. Arbitration.
(a) As used in this section:
(i) "AAA" means the American Arbitration Association (or any
successor thereto),
(ii) "Claims" means all claims by either party hereto against
the other with respect to the Production Payment or any of the
Production Payment Documents (including among others any claims with
respect to the interpretation or validity of any
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<PAGE> 34
Production Payment Document, the existence or scope of any duties owed
thereunder, whether or not any such duties have been performed or
breached in any circumstances, or the extent or enforcement of any
property rights created thereunder or subject thereto), and
(iii) Disputed Matters" means all Claims, all defenses against
any Claims, and all controversies relating thereto.
(b) If either party hereto ever desires to assert a Claim against the
other party, the party asserting such Claim will give written notice thereof to
the other party. During the thirty day period following receipt of such notice
by the other party, both parties will discuss such Claim and the validity
thereof. If the parties hereto cannot come to agreement about such Claim by the
end of such thirty day period (as such period may be extended by mutual
agreement), then within fifteen days after the end of such period either party
may by written notice to the other invoke the arbitration provisions of this
Agreement, whereupon Grantee and Grantor shall submit such Claim and all
Disputed Matters in any way related thereto to arbitration under the procedures
in the next following subsection (c).
(c) All Disputed Matters shall be resolved by arbitration conducted by
three arbitrators in accordance with this Section 6.9 and, to the extent not in
conflict herewith, the Commercial Arbitration Rules of the AAA then in effect.
Each such arbitrator must be independent and impartial and a person with at
least ten years' experience in the financing and valuation of oil and gas
properties. Within ten days after the sending and receipt of a notice invoking
arbitration as provided in subsection (b) above, each of Grantor and Grantee
shall specify (by notice to the other) the name and address of an arbitrator
appointed by it. At the end of such ten days, if one party has made a
specification of its appointed arbitrator but has not received notice of a
similar specification by the other party, then the party which has made a
specification shall give notice to the other party that it has not received a
specification from the other party. If the other party does not act to specify
its arbitrator within an additional seven days after the giving of such notice,
the party who has made its specification may appoint the second arbitrator in
place of the party who has failed to do so. Within fifteen days after the first
two arbitrators have been appointed, they shall select the third arbitrator. If
a third arbitrator has not been selected within such period, either party hereto
may petition the Administrative Judge presiding over the State District Courts
of Dallas County, Texas to appoint such third arbitrator, whereupon such judge
(or any person designated by such judge to make such appointment) may make such
appointment unless the first two arbitrators have come to agreement on the third
arbitrator. Consistent with the expedited nature of arbitration, each party
will, upon the written request of the other party, provide the other with copies
of documents relevant to the issues raised by the Disputed Matter. Other
discovery may be ordered by the arbitrators to the extent they deem relevant and
appropriate, and any dispute regarding discovery, including disputes as to the
need thereof or the relevance or scope thereof, shall be determined by the
arbitrators, whose determination shall be conclusive. Unless Grantee and Grantor
agree otherwise, all arbitrations hereunder shall be held in Los Angeles,
California at the offices of Trust Company of the West. Grantee and Grantor
shall proceed expeditiously with any such arbitration and shall conclude all
proceedings thereunder,
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<PAGE> 35
including any hearing, in order to allow a decision based on applicable law to
be rendered within ninety days after the appointment of the third arbitrator.
The decision of any two such arbitrators on the issues before them shall be
final, and any award or order so decided may be enforced in any court having
personal jurisdiction over the party against whom enforcement is sought. Grantor
shall bear its own expenses, including attorneys' fees and expenses of
arbitration, in connection with any such arbitration, but all expenses of
Grantee shall be considered Reimbursable Expenses to be paid or reimbursed by
Grantor. Although the foregoing arbitrations shall be conducted under the rules
of the AAA, the AAA itself shall not conduct such arbitrations, nor shall such
arbitrations be considered under the auspices of the AAA, nor shall any fee be
due the AAA. The arbitrators shall honor Grantor's and Grantee's election of the
laws of the State of Texas as set out in the various Production Payment
Documents, provided that each arbitration proceeding shall also be subject to
the United States Arbitration Act, 9 U.S.C., Chapter 1, Sections 1 et seq, to
the extent applicable. The arbitrators are not empowered to award punitive or
exemplary damages on any Claim (but are empowered to award Reimbursable
Expenses to Grantee and pre-award interest to either party), and EACH OF
GRANTOR AND GRANTEE HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO RECOVER
PUNITIVE OR EXEMPLARY DAMAGES ON ANY CLAIM.
(d) All applicable statutes of limitations and defenses based on the
passage of time shall be tolled during the period in which arbitration has been
invoked as set forth in this section. Each of Grantor and Grantee is required to
continue to perform its obligations under the Production Payment Documents
pending final resolution of any Disputed Matter.
Section 6.10. Agent.
(a) Agent. Grantee, for itself and for its successors and assigns as
Grantee, hereby appoints Tamco as its agent (together with its successors in
such capacity, herein called "Agent") to act for and on behalf of Grantee under
and pursuant to this Agreement and the other Production Payment Documents, and
Tamco hereby accepts such appointment. Agent is authorized to act on behalf of
Grantee in (i) exercising rights and remedies with respect to any matter under
any of the Production Payment Documents, (ii) giving notices or instructions to
Grantor, (iii) receiving information from or notices by Grantor, (iv)
communicating to Grantor determinations required or permitted to be made under
this Agreement or any other Production Payment Document, and (v) agreeing to,
and executing and delivering, all Conveyance Supplements and Purchase Agreement
Supplements, the Gas Sales Agreement, the Oil Sales Agreement and any other
agreements for the sale of PP Hydrocarbons or amendments or supplements to any
Production Payment Documents. Agent may, on behalf of Grantee, take any other
action which Grantee is entitled to take hereunder or under any of the
Production Payment Documents. Grantor may rely on any action of Agent as binding
upon Grantee. Such appointment of Tamco as Agent shall not, however, impair or
modify any rights, obligations or duties which Tamco or any Affiliate of Tamco
otherwise has with respect to Grantee. In its administration of this Agreement
and the other Production Payment Documents, except to the extent to which
another standard applies to Tamco by reason of any
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Grantee Governing Document or other document or relationship between Tamco and
any Person making up Grantee, Agent will exercise the same care that it
exercises in the administration or handling of transactions for its own account.
(b) Definitions. As used in this Section 6.10:
"Grantee Governing Documents" means all documents and
instruments (other than the Production Payment Documents) under which
Tamco and its Affiliates have undertaken to act for the Beneficiaries.
"Holder" means each Person at any time owning an interest in
the Production Payment.
"Requisite Holders" means, at any time, Holders owning at
least sixty-six and two-thirds percent (66-2/3%) of the Production
Payment.
(c) Requisite Holders. All powers of Agent shall be exercised for the
benefit of Holders. Any action, decision or consent taken or given by the
Requisite Holders shall be binding upon all the Holders. Except as may be
otherwise provided by the Grantee Governing Documents, the Requisite Holders
may, in their reasonable discretion, remove Tamco from its appointment as Agent
and then select a new party to fulfill, in accordance with the terms hereof,
such position. If any Person other than the Holders which are original parties
to this Agreement or the Grantee Governing Documents ever acquires any interest
in the Production Payment, Agent may insist on the execution of an agency
agreement by such Person, in form satisfactory to Agent and providing for
satisfactory indemnification, before carrying out any further actions under the
Production Payment Documents on behalf of such Person. Until any such agency
agreement is executed: (i) Tamco shall have the right to withdraw as Agent,
subject, however, to its rights and duties under any Grantee Governing
Documents, and (ii) any action of Agent under any Production Payment Document
shall be binding on such Person.
(d) Distribution of Proceeds. The Holders shall share in the proceeds
and other benefits obtained by Agent under the Production Payment Documents in
the relative proportions of their interests in the Production Payment; provided
that Agent shall first be reimbursed for all of its costs and expenses incurred
on behalf of all Holders to the extent permitted by the Grantee Governing
Documents.
(e) Agents and Attorneys. Agent may execute any of its respective
duties under this Agreement and the other Production Payment Documents by or
through agents or attorneys selected by it using reasonable care. Agent shall be
entitled to the advice of counsel concerning all matters pertaining to its
duties hereunder.
(f) No Liability for Grantor. Agent and its officers, directors,
employees, agents, attorneys-in-fact and affiliates shall not be responsible in
any manner to any Holder or any other Person for any failure of Grantor or any
other Person to perform its obligations under
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this Agreement or any other Production Payment Document.
(g) Reliance upon Documentation. Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or
teletype message, statement, order or other document or any telephone
conversation believed by it to be genuine and correct and to have been signed,
sent, made or spoken by the proper Person or Persons, and upon the advice and
statements of legal counsel, independent accountants and other experts selected
by Agent.
(h) Reliance by Grantor. Grantee and each other Holder agree that,
prior to the delivery to Grantor of a notice of the removal or termination of
Tamco (or any subsequent Agent) as Agent as set forth below, Grantor shall be
entitled to rely on Tamco's (or any subsequent Agent's) authority to act on
behalf of Grantee and each Holder in all dealings with Tamco (or any such
subsequent Agent) with respect to the Production Payment Documents; Grantor
shall be protected in relying on actions, communications, notices and
terminations relating thereto or required or permitted thereunder by Agent; and
Grantor shall discharge its obligations under this Agreement and the Production
Payment Documents by delivering payments, notices and other information to
Agent. In the event of the removal of Agent and the appointment of a successor
Agent by Holders, Grantor shall not be required to recognize any such removal or
appointment unless and until Grantor shall have received a writing setting forth
such removal and appointment executed by the Requisite Holders, and Grantor
shall be entitled to rely on such writing as being genuine and what it purports
to be without any necessity of any investigation whatsoever.
(i) ACKNOWLEDGMENT, WAIVER AND RELEASE BY GRANTOR. GRANTOR HAS BEEN
INFORMED, AND HEREBY ACKNOWLEDGES AND AGREES, THAT ALL ACTS BY TAMCO AS AGENT IN
CONNECTION WITH THE PRODUCTION PAYMENT DOCUMENTS ARE DONE ON BEHALF OF GRANTEE
AND THE BENEFICIARIES, AND THAT TAMCO AND ITS AFFILIATES (EXCLUDING GRANTEE, BUT
WITHOUT LIMITING ANY WAIVERS, RELEASES AND INDEMNITIES IN THE PRODUCTION PAYMENT
DOCUMENTS OTHERWISE BENEFITTING GRANTEE) AND ITS AND THEIR SHAREHOLDERS,
REPRESENTATIVES, TRUSTEES, AGENTS, EMPLOYEES, OFFICERS, DIRECTORS, AND ATTORNEYS
(COLLECTIVELY, THE "TCW ENTITIES") SHALL NOT BE PERSONALLY LIABLE TO ANY PERSON
(OTHER THAN THE BENEFICIARIES) WITH RESPECT TO ANY ACTIONS TAKEN (OR NOT TAKEN)
BY AGENT IN ITS CAPACITY AS AGENT UNDER THIS AGREEMENT AND THE OTHER PRODUCTION
PAYMENT DOCUMENTS. IN FURTHERANCE OF THE FOREGOING, GRANTOR HEREBY WAIVES AND
RELEASES (FOR ITSELF AND ON BEHALF OF ITS SHAREHOLDERS, AFFILIATES,
REPRESENTATIVES, TRUSTEES, AGENTS, EMPLOYEES, OFFICERS, DIRECTORS, AND
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<PAGE> 38
ATTORNEYS) THE TCW ENTITIES FROM ANY AND ALL SUCH LIABILITIES.
Section 6.11. Counterparts. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
GRANTOR: TRANSTEXAS GAS CORPORATION
By: /s/ ED DONAHUE
-------------------------------------
Ed Donahue
Vice President
Grantor's address: 1300 North Sam Houston Parkway East,
Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue, Vice President
Telephone: 281/987-8600
Telecopy: 281/986-8865
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<PAGE> 39
GRANTEE: TCW PORTFOLIO NO. 1555 DR V SUB-CUSTODY
PARTNERSHIP, L.P.
By: TCW Royalty Company V, as managing general
partner
By: /s/ ARTHUR R. CARLSON
-------------------------------------------
Arthur R. Carlson, Vice President
By: /s/ THOMAS F. MEHLBERG
-------------------------------------------
Thomas F. Mehlberg, Vice President
TCW DR VI INVESTMENT PARTNERSHIP, L.P.
By: TCW DR VI Royalty Partnership, L.P., as
general partner
By: TCW Royalty Company VI, as managing
general partner
By: /s/ ARTHUR R. CARLSON
-------------------------------------
Arthur R. Carlson, Vice President
By: /s/ THOMAS F. MEHLBERG
-------------------------------------
Thomas F. Mehlberg, Vice President
Grantee's address: c/o Trust Company of the West
865 South Figueroa
Los Angeles, California 90017
Attention: Thomas F. Mehlberg
Telephone: 213/244-0702
Telecopy: 213/244-0604
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AGENT: TCW ASSET MANAGEMENT COMPANY, as Agent
By: /s/ ARTHUR R. CARLSON
------------------------------------------
Arthur R. Carlson
Managing Director
By: /s/ THOMAS F. MEHLBERG
------------------------------------------
Thomas F. Mehlberg
Managing Director
Agent's address: 1000 Louisiana
Suite 2175
Houston, Texas 77002
Attention: Kurt Talbot
Telephone: 713/615-7413
Telecopy: 713/615-7460
37
<PAGE> 1
EXHIBIT 10.42
PRODUCTION PAYMENT CONVEYANCE
(DRILLING PROGRAM)
THIS PRODUCTION PAYMENT CONVEYANCE (this "Conveyance"), dated as of
the date set out at the end hereof, is made from and by TransTexas Gas
Corporation, a Delaware corporation (herein called "Grantor") to and in favor of
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and TCW DR VI
Investment Partnership, L.P. (herein collectively called "Grantee").
ARTICLE I
Section 1.1. Defined Terms. When used in this Conveyance or in any
exhibit or schedule hereto (unless otherwise defined in any such exhibit or
schedule), the following terms have the respective meanings assigned to them in
this section or in the sections, subsections, exhibits and schedules referred to
below:
"Affiliate" means, with respect to any Person: (a) any other Person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of such Person, (b) any other Person
10% or more of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote by such Person, and (c) any other
Person directly or indirectly controlling, controlled by or under common control
with such Person; provided that, "Affiliate" also means, with respect to
Grantee, (a) any of the Beneficiaries, (b) any trustee, general partner,
investment manager, custodian, custodial agent, or other fiduciary of or for
Fund V LP, Fund VI LP, or any Beneficiary, (c) Trust Company of the West, a
California trust company, and (d) TCW Asset Management Company, a California
corporation, whether acting as Agent or in any other capacity.
"Agent" means the Person named as Agent in Section 8.7, acting in such
capacity, together with its successors and assigns in such capacity.
"Agreed Rate" means a rate of interest of fifteen percent (15.0%) per
year, calculated on the basis of actual days elapsed and a year of 360 days.
"Application Date" means the next-to-last Business Day of each calendar
month, starting with April 29, 1998. As used herein with respect to any
Application Period, the "related Application Date" means the Application Date
that occurs approximately one month after the end of such Application Period.
For example, if an Application Period ends at 7:00 a.m., Texas time, on March 1
and the next-to-last Business Day of such March is March 30, the related
Application Date is such March 30.
"Application Period" means a period of time beginning at 7:00 a.m.,
Texas time, on the first day of any calendar month and ending at 7:00 a.m.,
Texas time, on the first day of the next succeeding calendar month. The first
Application Period will begin at the Initial Time and will end at 7:00 a.m.,
Texas time, on April 1, 1998. As used herein with respect to any
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<PAGE> 2
Application Date, the "related Application Period" means the Application Period
immediately preceding (but not including) such Application Date. For example, if
an Application Date occurs on February 27, the related Application Period is the
one which ended at 7:00 a.m., Texas time, on the preceding February 1.
"Assignable 331 Retained Interest" has the meaning given to such term
in Section 6.1.
"Barrel" means 42 United States standard gallons of 231 cubic inches
per gallon at 60 degrees Fahrenheit.
"Beneficiary" means any Person that at any time is a general or limited
partner in Fund V LP or in Fund VI LP or for whom any Person included within
Grantee is acting as investment manager, custodian or custodial agent.
"British Thermal Unit" or "BTU" means the amount of energy required to
raise the temperature of one pound of pure water one degree Fahrenheit from 58.5
degrees Fahrenheit to 59.5 degrees Fahrenheit, as defined in the American Gas
Association Gas Measurement Manual and any subsequent revisions.
"Business Day" means a day that is not a Saturday, a Sunday, a legal
holiday in Houston, Texas, or a legal holiday in Los Angeles, California.
"Commercial Well" has the meaning given such term in Section 3.2(c).
"Dedication Percentage" means (i) fifty-seven percent (57%) with
respect to the NRI Percentage for State Tract 331 and (ii) eighty percent (80%)
with respect to the NRI Percentage for each other portion of Subject Lands;
provided that the Dedication Percentage shall be adjusted upward (automatically,
without any need for an amendment hereto) from time to time as follows:
(a) from time to time, within ninety days after the then
most-recent Regular Evaluation Date, but effective as of such then
most-recent Regular Evaluation Date, the Dedication Percentage shall be
adjusted upward in the event that the Reserve Report prepared as of
such then most-recent Regular Evaluation Date reflects that the PPNPV
of the proved developed producing reserves attributable to the
Production Payment is less than 140% of the unliquidated balance of the
Primary Sum as of such then most-recent Regular Evaluation Date, and
the new Dedication Percentage (in this definition, the "Adjusted
Dedication Percentage") shall, in the case of State Tract 331, be that
percentage between 57% and a maximum of sixty-five percent (65%) and,
in the case of all other Subject Lands, be that percentage between 80%
and a maximum of ninety percent (90%), necessary to achieve, to the
maximum extent possible, the level of 140% of the unliquidated balance
of the Primary Sum, all as more particularly described in Section 5.2
of the Purchase Agreement;
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<PAGE> 3
(b) on and as of 7:00 a.m., Houston, Texas time, on January 1,
2002, the Dedication Percentage shall be adjusted upward (assuming the
Adjusted Dedication Percentage is then less than 65% for State Tract
331 or less than 90% for all other Subject Lands) to 65% for State
Tract 331 and 90% for all other Subject Lands, which shall remain the
Dedication Percentage for the balance of the Production Payment Period;
and
(c) the Dedication Percentage may be adjusted from time to
time pursuant to Section 3.6 (but no such adjustment shall result in a
Dedication Percentage in excess of 65% for State Tract 331 or in excess
of 90% for all other Subject Lands).
"Delivery Charges" means the actual costs, if any, incurred by Grantee
for separating, gathering, compressing, treating, or Processing PP Hydrocarbons
prior to a Delivery Point or of transporting PP Hydrocarbons to a Delivery Point
in a condition satisfactory to meet pipeline specifications and qualifications
at such Delivery Point (net of any revenues received by Grantee in connection
with any such Processing, to the extent that such revenues are not included in
PP Proceeds).
"Delivery Point" means (a) as of the Initial Time, for each field
listed on Schedule 2 hereto, the Delivery Point specified for such field on such
Schedule, or (b) such other delivery point or points in the vicinity of such
field hereafter from time to time designated by Grantee at which Gas from the
Subject Interests in such field is (or reasonably could be, without any
additional capital expenditures) sold to a third party or delivered into a
pipeline for transportation to a market point. Unless otherwise agreed by
Grantor, any designation by Grantee of a new Delivery Point shall become
effective one month after the first day of the next succeeding Application
Period.
"Delivery Services" has the meaning given such term in Section 2.5.
"Designated Event" has the meaning given such term in the Purchase
Agreement.
"Direct Taxes" means all ad valorem, property, gathering,
transportation, pipeline regulating, gross receipts, severance, production,
excise, heating content, carbon, value, value added, environmental, occupation,
franchise, sales, use, fuel, and other taxes and governmental charges and
assessments imposed on or as a result of all or any part of the Subject
Interests, the Hydrocarbons produced from Subject Interests or the proceeds
thereof, the Production Payment, or the PP Hydrocarbons or the proceeds thereof,
regardless of the point at which or the manner in which such taxes, charges or
assessments are charged, collected, levied or otherwise imposed. The only taxes
which are not Direct Taxes are federal income taxes, state income taxes, and
franchise taxes levied against Grantee or the Beneficiaries and any other taxes
levied against the overall net income of Grantee or the Beneficiaries (including
interest, penalties and withholding obligations owing to governmental
authorities with respect to such income or franchise taxes). Interest, penalties
and withholding obligations owing to governmental authorities with respect to
any Direct Taxes shall constitute "Direct Taxes".
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<PAGE> 4
"economically feasible" has the meaning given such term in Section
3.2(c).
"Environmental Laws" means all applicable local, state or federal laws,
rules, regulations, or orders regulating or otherwise pertaining to (a) the use,
generation, migration, storage, removal, treatment, remedy, discharge, release,
transportation, disposal or cleanup of pollutants, contamination, hazardous
wastes, hazardous substances, hazardous materials, toxic substances or toxic
pollutants, (b) the soil, surface waters, groundwater, land, stream sediments,
surface or subsurface strata, ambient air and any other environmental medium on
or off any Subject Interest, or (c) the environment or health and safety-related
matters; including the following as from time to time amended and all others
whether similar or dissimilar and whether now existing or hereinafter enacted:
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,
the Resource observation and Recovery Act of 1976, as amended by the Used Oil
Recycling Act of 1980, the Solid Waste Disposal Act amendments of 1980, and the
Hazardous and Solid Waste Amendments of 1984, the Hazardous Materials
Transportation Act, as amended, the Toxic Substance Control Act, as amended, the
Clean Air Act, as amended, the Clean Water Act, as amended, and all regulations
promulgated pursuant thereto.
"Expense Components" shall have the meaning given such term in Section
2.2.
"Force Majeure" means (a) unavoidable interruption of Delivery Services
caused by catastrophic circumstances (such as freezing of wells or lines of
pipe) or (b) unavoidable or sudden mechanical difficulties relating to
performance of the Delivery Services; provided that Grantor shall not be
authorized as a reason for nonperformance, in part or in full, of the Delivery
Services, to claim an event of Force Majeure to the extent and beginning 24
hours after such time as Grantee has designated a new Delivery Point or Delivery
Points that allow Grantor the ability to perform or cause to be performed the
Delivery Services despite the event of Force Majeure.
"Fund V LP" means TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P. and, unless the context in which used shall otherwise require, such term
shall also include any successor to it as owner at the time in question of any
or all of the Production Payment.
"Fund VI LP" means TCW DR VI Investment Partnership, L.P. and, unless
the context in which used shall otherwise require, such term shall also include
any successor to it as owner at the time in question of any or all of the
Production Payment.
"Gas" means natural gas and all other gaseous hydrocarbons, including
casinghead gas, whether or not such natural gas and other gaseous hydrocarbons
are Processed.
"Grantee" means the Persons named in the preamble to this Conveyance as
the Grantee, and, unless the context in which used shall otherwise require, such
term shall also include any successor to any such Person as owner at the time in
question of any or all of the Production Payment.
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<PAGE> 5
"Grantor" means the Person named in the preamble of this Conveyance as
Grantor, and, unless the context in which used shall otherwise require, such
term means any successor-owner at the time in question of any or all of the
Subject Interests (other than the Production Payment or the Assignable 331
Retained Interests).
"Guaranty" has the meaning given such term in the Purchase Agreement.
"Hydrocarbons" means Oil and Gas.
"Imbalance Charges" has the meaning given such term in Section 2.6(c).
"Initial Time" means 7:00 a.m., Texas time, on the date hereof.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute or statutes.
"Lease Measuring Point" means, with respect to any particular Subject
Well, the point at which the BTU content of Gas included in PP Hydrocarbons
produced from such Subject Well is initially measured.
"Mcf" means one thousand cubic feet.
"MMBTU" means one million BTUs.
"Non-Affiliate" means, with respect to any Person, any Person who is
not an Affiliate of such Person.
"NRI Percentage" means, with respect to each portion of Subject Lands
described on Exhibit A, the percentage shown on Exhibit A as the "Net Revenue
Interest" for such portion of Subject Lands.
"Oil" means crude oil, condensate, and other liquid hydrocarbons,
specifically to include condensate or other liquid hydrocarbons separated at the
surface (e.g., using conventional separators) but not to include the products of
Processing.
"Percentage Share" means, with respect to each Person making up
Grantee, the fractional undivided interest which it owns in the Production
Payment at the time in question. At the initial grant of the Production Payment,
the Percentage Share of each Person making up Grantee is as follows:
<TABLE>
<S> <C>
Funds V LP 66 2/3%
Funds VI LP 33 1/3%
</TABLE>
"Permitted Assigns" has the meaning given such term in Section 6.2.
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<PAGE> 6
"Permitted Encumbrances" has the meaning given such term in the
Purchase Agreement.
"Person" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture, court
or governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.
"PP Hydrocarbons" means the Dedication Percentage of the NRI Percentage
of all Hydrocarbons in and under and that may be produced from (or, to the
extent pooled or unitized, allocated to) any Subject Lands between the Initial
Time and the Termination Time.
"PPNPV" has the meaning given such term in the Purchase Agreement.
"PP Proceeds" means, for any particular Application Period, the total
dollar amount received by Grantee during or (to the extent not previously
applied) prior to such Application Period from sales of PP Hydrocarbons,
determined after deduction of all PP Severance Taxes (whether paid before or
after receipt by Grantee).
"PP Severance Taxes" means all severance taxes actually attributable to
the PP Hydrocarbons, taking into account any applicable credits, rebates and
other factors.
"Primary Sum" means the sum of $27,701,170 (as such sum may be
increased from time to time by amendments or supplements hereto), and at any
time the "unliquidated balance of the Primary Sum" shall be the Primary Sum plus
the aggregate amounts which have been added thereto pursuant to Section 2.3(a),
less the aggregate amount of PP Proceeds which have been applied thereto at or
before such time pursuant to Section 2.3(a)(ii), and less any reductions under
Section 2.3(b).
"Processing" or "Processed" means to manufacture, fractionate or refine
Subject Hydrocarbons or otherwise to engage in any process designed to remove
elements (hydrocarbons or nonhydrocarbons) from Gas, but such terms do not mean
or include natural pressure reduction, the use of normal lease or well equipment
or other normal operations on or near any of the Subject Interests (such as the
use on or near the lease -- or, in the case of any offshore or near-shore wells,
at or near the landfall of the connecting pipeline -- of dehydrators, gas
treating facilities, separators, heater-treaters, lease compression facilities,
injection or recycling equipment, tank batteries, field gathering systems,
pipelines and equipment and so forth). References to Hydrocarbons which are
"Processed" (including the reference thereto contained in the definition of Gas)
refer both to the natural gas liquids and other products of Processing and to
the residue gas and other hydrocarbons remaining after such operations.
"Production Payment" means the term overriding royalty which is granted
herein to Grantee, and all other rights, titles, interests, estates, remedies,
powers and privileges appurtenant or incident to such term overriding royalty,
whether hereunder, under the Purchase Agreement, by operation of law, or
otherwise.
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<PAGE> 7
"Production Payment Documents" has the meaning given such term in the
Purchase Agreement.
"Production Payment Period" means the period from and after the Initial
Time until the Termination Time.
"Purchase Agreement" means the Purchase Agreement of even date herewith
between Grantor and Grantee, as from time to time amended or supplemented.
"Regular Evaluation Date" has the meaning given such term in the
Purchase Agreement.
"Reimbursable Expenses" means all costs and expenses paid or incurred
by or on behalf of Grantee or its Affiliates which are in any way related to:
(a) the negotiation, acquisition, ownership, enforcement, or termination of the
Production Payment, this Conveyance, the other Production Payment Documents, or
any waivers or amendments hereto or thereto, or (b) any litigation, contest,
release or discharge of any adverse claim or demand made or proceeding
instituted by any Person affecting in any manner whatsoever the Production
Payment, any PP Hydrocarbons or PP Proceeds, this Conveyance or the other
Production Payment Document, or the enforcement or defense hereof or thereof, or
the defense of Grantee's and its Affiliates' exercise of their rights hereunder
or thereunder. Included among the Reimbursable Expenses are (i) all recording
and filing fees, (ii) all reasonable fees and expenses of counsel, engineers,
accountants and other consultants, experts and advisors for Grantee and its
Affiliates, (iii) all reasonable travel and other out of pocket expenses of the
consultants, experts and advisors of Grantee and its Affiliates, and (iv) all
amounts which Grantee is entitled to receive under Section 4.1 or 5.1 hereof.
Notwithstanding the foregoing, Reimbursable Expenses shall not include expenses
associated with third party claims (1) relating to title to the Production
Payment, to the extent such claims arise solely due to the actions of Grantee or
its Affiliates, or (2) that arise solely out of the failure by Grantee to
perform its obligations under any contractual arrangement entered into directly
by Grantee pursuant to Section 2.6 (a) hereof.
"Reserve Report" means each reserve report to be delivered by Grantor
pursuant to Section 5.1 of the Purchase Agreement.
"Retained Interests" means the interests retained by Grantor in the
Subject Interests after conveyance of the Production Payment hereunder.
"Separation Point" means the point at which lease level separation of
Oil takes place.
"State Tract 331" means the State of Texas' Galveston Bay Tract 331
that is subject to the State of Texas Oil and Gas Lease No. M-97211 that is
described in Exhibit A hereto.
"Subject Hydrocarbons" means that portion of the Hydrocarbons in and
under and that may be produced from (or, to the extent pooled or unitized,
allocated to) Subject Lands which is attributable (after deducting all
royalties, overriding royalties, production payments and
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<PAGE> 8
similar burdens, excluding only the Production Payment, which both burden the
Subject Interests at the Initial Time and are reflected in the Net Revenue
Interest figures set out on Exhibit A) to the Subject Interests.
"Subject Interests" means:
(a) All of the leasehold interests and other property
interests described in Exhibit A attached hereto; and
(b) Without limitation of the foregoing, all other right,
title and interest (of whatever kind or character, whether legal or
equitable and whether vested or contingent) of Grantor in and to the
oil, gas and other minerals in and under or that may be produced from
Subject Lands (including interests in oil, gas or mineral leases to the
extent the same cover such lands, overriding royalties, production
payments and net profits interests in such lands or such leases, and
fee mineral interests, fee royalty interests and other interests in
such oil, gas and other minerals) even though Grantor's interest in
such oil, gas and other minerals may be incorrectly described in, or
omitted from, Exhibit A; and
(c) All rights, titles and interests of Grantor in and to, or
otherwise derived from, all presently existing and valid oil, gas or
mineral unitization, pooling, or communitization agreements,
declarations or orders and in and to the properties covered and the
units created thereby (including all units formed under orders, rules,
regulations, or other official acts of any federal, state, or other
authority having jurisdiction, voluntary unitization agreements,
designations or declarations, and so-called "working interest units"
created under operating agreements or otherwise) relating to the
properties described in subsections (a) or (b) above in this
definition.
"Subject Lands" means the lands and depths described in Exhibit A
(where no depth limit is specified, Subject Lands shall include all depths).
"Subject Wells" means all wells now located on the Subject Lands
(whether fully drilled and completed or not) or hereafter drilled on the Subject
Lands, and (unless production therefrom is expressly excluded by the terms of
the descriptions on Exhibit A) any other wells now or hereafter located on lands
or leases pooled, communitized or unitized with the Subject Interests.
"Termination Time" has the meaning assigned to it in Section 2.9.
"Total Sum" has the meaning assigned to it in Section 2.2.
Section 1.2. Rules of Construction. All references in this Conveyance
to articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Conveyance unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the
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<PAGE> 9
language contained in such subdivisions. The words "this Conveyance", "this
instrument", "herein", "hereof", "hereunder"' and words of similar import refer
to this Conveyance as a whole and not to any particular subdivision unless
expressly so limited. Unless the context otherwise requires: "including" and its
grammatical variations mean "including without limitation"; "or" is not
exclusive; words in the singular form shall be construed to include the plural
and vice versa; words in any gender include all other genders; references herein
to any instrument or agreement refer to such instrument or agreement as it may
be from time to time amended or supplemented; and references herein to any
Person include such Person's successors and assigns. All references in this
Conveyance to exhibits and schedules refer to exhibits and schedules to this
Conveyance unless expressly provided otherwise, and all such exhibits and
schedules are hereby incorporated herein by reference and made a part hereof for
all purposes.
ARTICLE II
Section 2.1. Conveyance. Grantor does hereby GRANT, BARGAIN, SELL,
CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER unto Grantee, as a production
payment, to be held in undivided interests in proportion to their Percentage
Shares, a term overriding royalty interest carved out of and burdening the
Subject Interests equal to and measured by all PP Hydrocarbons in and under and
that may be produced from (or, to the extent pooled or unitized, allocated to)
the Subject Lands, with such production payment to terminate as of the
Termination Time.
TO HAVE AND TO HOLD the Production Payment unto Grantee, its successors
and Permitted Assigns, until the Termination Time.
Section 2.2. Amount and Term. The Production Payment shall continue and
remain in full force and effect until the receipt and realization by Grantee
from PP Proceeds of the aggregate sum of the amounts specified in the following
subsections of this Section 2.2 (herein collectively called the "Total Sum"):
(a) the full amount of the Primary Sum; plus
(b) an amount equal to the interest which would accrue at the
Agreed Rate on the unliquidated balance of the Primary Sum outstanding
during the period from the Initial Closing Date (as defined in the
Purchase Agreement) to but not including the first Application Date,
and thereafter during each period from and including one Application
Date to but not including the next occurring Application Date, if the
unliquidated balance of the Primary Sum were to bear such interest;
plus
(c) an amount equal to all Direct Taxes (other than PP
Severance Taxes), to the extent such Direct Taxes are paid by Grantee
or Beneficiaries should Grantor fail to promptly pay the same as
required by Section 2.4, together with an additional amount equal to
interest on the amount so paid computed at the Agreed Rate from and
including the date Grantee or Beneficiaries pay such Direct Taxes to
but not including the earlier of the date such Direct Taxes are either
reimbursed by Grantor or paid by
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<PAGE> 10
the application of PP Proceeds under Section 2.3(a) or added to the
unliquidated balance of the Primary Sum under Section 2.3(a); plus
(d) an amount equal to all Reimbursable Expenses to the extent
paid by Grantee or Beneficiaries should Grantor fail to promptly pay
the same as required by Section 2.4, together with an additional amount
equal to interest on the amount so paid computed at the Agreed Rate
from and including the date Grantee or Beneficiaries pay such
Reimbursable Expenses to but not including the earlier of the date such
Reimbursable Expenses are either reimbursed by Grantor or paid by the
application of PP Proceeds under Section 2.3(a) or added to the
unliquidated balance of the Primary Sum pursuant to Section 2.3(a);
plus
(e) an amount equal to all Delivery Charges to the extent paid
by Grantee or Beneficiaries should Grantor fail to promptly pay same as
required by Section 2.4, together with an additional amount equal to
interest on the amount so paid, computed at the Agreed Rate from and
including the date Grantee or Beneficiaries pay such Delivery Charges
to but not including the earlier of the date such Delivery Charges are
either reimbursed by Grantor or paid by the application of PP Proceeds
under Section 2.3(a) or added to the unliquidated balance of the
Primary Sum pursuant to Section 2.3(a).
The amounts (including interest) referred to in subsections (c), (d) and (e) of
this section are herein collectively called the "Expense Components".
Section 2.3. Application of PP Proceeds.
(a) On each Application Date, all PP Proceeds that have actually been
received by Grantee (whether from the purchasers of PP Hydrocarbons or from
Grantor as provided in Section 2.10) in immediately available funds prior to
noon, Los Angeles time, on such Application Date, shall, to the extent not
previously applied, be applied as follows to the Total Sum:
(i) First, to the amounts described in subsections (b), (c),
(d) and (e) of Section 2.2; and
(ii) Second, to the reduction of the unliquidated balance of
the Primary Sum.
If PP Proceeds applied on any Application Date are insufficient to cover the
full amounts specified in the foregoing subsection (i) of this subsection (a),
then such unrecovered amounts shall be added to the unliquidated balance of the
Primary Sum.
(b) Neither the actual or potential application of PP Proceeds to
Expense Components shall release Grantor from its obligations to make any
payments or reimbursements of Expense Components required under Section 2.4, but
if any PP Proceeds are actually applied to Expense Components or added to the
unliquidated balance of the Primary Sum pursuant to the preceding subsection (a)
and if such Expense Components (including interest thereon) are
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<PAGE> 11
thereafter paid or reimbursed by Grantor, then on the next occurring Application
Date the unliquidated balance of the Primary Sum shall be reduced by the amounts
so paid or reimbursed by Grantor.
Section 2.4. Non-Cost-Bearing Interest. The Production Payment shall be
free and clear of (a) all Direct Taxes, other than PP Severance Taxes, (b) all
costs and expenses associated with acquiring, exploring, developing,
maintaining, producing, operating, reworking, recompleting, and remediating the
Subject Interests, and (c) all Delivery Charges. All Direct Taxes (other than PP
Severance Taxes), all such other costs and expenses, and all Delivery Charges
shall be borne by the Retained Interests and paid by Grantor promptly, on or
before the dates the same become due and owing. In addition, Grantor will
promptly (and in any event within 30 days after receiving any notice or
statement for the same) pay all Reimbursable Expenses which have been incurred
and are unpaid and reimburse Grantee or Beneficiaries for any Reimbursable
Expenses which have been paid by Grantee or Beneficiaries. Each amount which is
to be paid by Grantor pursuant to this Section 2.4 which is instead paid by
Grantee or Beneficiaries shall bear interest at the Agreed Rate on each day from
and including the date of such payment until but not including the date repaid
by Grantor.
Section 2.5. Delivery Services.
(a) Expected Deliveries. To the extent not prevented by Force Majeure,
Grantor shall deliver, or cause to be delivered, all PP Hydrocarbons
constituting Gas to the relevant Delivery Point in a condition satisfactory to
meet or exceed pipeline specifications and qualifications at such Delivery Point
and will deliver all PP Hydrocarbons constituting Oil at the points at which the
Grantor delivers Oil from the same Subject Interests into third party pipelines
or to third party transporters or, if requested by Grantee, at one or more other
points of sale reasonably convenient to both Grantor and Grantee. All tasks
required to make such delivery (whether gathering, treating, separating,
compressing, Processing, transporting, or otherwise) are herein called the
"Delivery Services". All Delivery Services, whether performed by Grantor or by
any other Person, shall be performed without any cost or charge to Grantee,
whether incurred or assessed by Grantor or any other Person, and all costs so
incurred or assessed shall be borne and paid by Grantor as provided in Section
2.4. The Delivery Services shall be provided to Grantee on a first priority
basis, to the extent permitted by law and applicable contracts (meaning, for
example, that (A) pipeline and compressor capacity, if owned or controlled by
Grantor or any Affiliate of Grantor, shall be afforded to Subject Hydrocarbons
prior to affording any such capacity to Grantor, any Affiliates of Grantor or
any other Person with respect to any other Hydrocarbons, and (B) pipeline and
compressor capacity owned or controlled by any Person other than Grantor or any
Affiliate of Grantor shall be afforded to Subject Hydrocarbons prior to
affording any such capacity to Grantor or any Affiliate of Grantor with respect
to any other Hydrocarbons), and Grantor hereby expressly subordinates any
capacity rights it may now or hereafter have to the PP Hydrocarbons. Grantor
shall, to the extent permitted by law and applicable contracts, take whatever
action is appropriate to cause any Affiliate of Grantor or any other Person to
afford Subject Hydrocarbons the priority capacity described in this subsection
(a), including assigning to Grantee, upon Grantee's request following failure by
Grantor to provide Delivery Services
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<PAGE> 12
as required hereunder, any capacity rights Grantor may have under assignable
contracts or other arrangements with an Affiliate or any other Person as may be
necessary or useful to facilitate delivery of PP Hydrocarbons to each Delivery
Point in a condition satisfactory to meet or exceed pipeline specifications or
qualifications at such Delivery Point.
(b) Excess Deliveries. If at any time Grantor delivers to Grantee PP
Hydrocarbons in excess of the amount of PP Hydrocarbons required to be delivered
to Grantee hereunder, the amount of such excess delivery shall not be returned
by Grantee but shall instead be deemed an early delivery by Grantor of future PP
Hydrocarbons and shall be considered as fully and finally delivered to Grantee
for all purposes hereunder on the date received by Grantee; provided that if any
Hydrocarbons are delivered hereunder to Grantee following the termination hereof
the proceeds of such Hydrocarbons shall be paid to Grantor.
Section 2.6. Marketing of PP Hydrocarbons by Grantee.
(a) Marketing by Grantee. Grantee shall take possession of all of the
PP Hydrocarbons at the applicable Delivery Points and shall thereafter market
and sell such PP Hydrocarbons for its own account. Grantor shall take such
actions (including executing all division orders, transfer orders, instructions
in lieu thereof and other additional instruments) as are necessary or
appropriate to achieve such results, and Grantor will cooperate with Grantee in
instructing all purchasers of such PP Hydrocarbons to pay the proceeds thereof
directly to Grantee and shall execute such additional instruments (including
division orders, transfer orders and instructions in lieu thereof) as may be
requested by Grantee in connection therewith. If payment for any PP Hydrocarbons
is nonetheless made to Grantor for any reason, all amounts so paid to Grantor
shall be held in trust by Grantor for Grantee and Grantor shall immediately pay
over such proceeds, in the form received, to Grantee (but without recourse to
Grantor on any proper endorsement by Grantor to Grantee). Grantor shall not
enter into any contracts or other arrangements for the sale, transportation,
gathering, Processing or other marketing of Subject Hydrocarbons which would
interfere with Grantee's rights under this Section 2.6 to take possession of and
market the PP Hydrocarbons, free and clear of such contracts or other
arrangements.
(b) Cooperation and Assistance. Grantee and Grantor will each be taking
quantities of Hydrocarbons from the Subject Interests, and Grantor and Grantee
recognize that coordination between Grantee and Grantor will be required with
respect thereto. Grantor agrees to cooperate with, and assist, Grantee in
connection with Grantee's receipt and sale of PP Hydrocarbons. Without
limitation of the foregoing:
(i) Not less than 10 days prior to the first day of each
Application Period, Grantor will notify Grantee or its authorized
representatives or direct purchasers, in writing, of the total amounts
and average daily amounts of Gas and Oil which Grantor expects to be
produced from the Subject Interests during such Application Period and
the portion thereof which Grantor projects will be PP Hydrocarbons.
(ii) To the extent reasonably practicable, Grantor shall
thereafter immediately (but in no event more than once weekly) notify
Grantee or its authorized
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<PAGE> 13
representatives or direct purchasers, in writing, of any change in the
rate of delivery of PP Hydrocarbons from the Subject Interests that has
come to the attention of Grantor.
(iii) Grantor and Grantee will cooperate to ensure that
nominations to transporters and purchasers are timely made and that
such nominations reflect expected deliveries from the various Subject
Interests, and Grantee and its authorized representatives shall be
entitled to rely upon Grantor's projections for the purpose of
scheduling deliveries with transporters and purchasers. In no event
shall Grantor be responsible for the failure, through no fault of
Grantor, of such transporters or purchasers to fulfill their
obligations under the relevant arrangements.
Should Grantee so request, Grantor will furnish the information provided for
above and will make nominations and schedule deliveries in conjunction with
Grantee (and make any revisions to such nominations and reschedule deliveries in
conjunction with Grantee) for PP Hydrocarbons (in the form and at the times
required by such Persons), directly to the Persons purchasing or transporting PP
Hydrocarbons for Grantee. Grantor and Grantee acknowledge to each other that
concurrently herewith Grantee and Grantor are entering into the Gas Sales
Agreement and the Oil Sales Agreement referred to in the Purchase Agreement,
under which Grantor is Grantee's purchaser of PP Hydrocarbons, and that to the
extent Grantor (or any future Purchasing Subsidiary of Grantor) is the purchaser
of PP Hydrocarbons there is no need for Grantor to furnish information and make
or revise nominations to itself (or such Purchasing Subsidiary).
(c) Responsibility. If, after the foregoing Gas Sales Agreement and Oil
Sales Agreement have terminated, any charges, costs, penalties or expenses are
incurred or payable to any Person solely as a result of Grantee's failure to
adjust nominations or scheduled deliveries in accordance with (i) a notification
from Grantor to Grantee of any increase or decrease in quantities to be
delivered from any Subject Well, or (ii) a notification from Grantee's direct
purchaser of any increase or decrease in quantities to be delivered at Delivery
Points, where it was reasonably possible for Grantee to make such adjustment
without penalty, then, as between the parties hereto, Grantee shall be liable
for and shall hold Grantor harmless from any such charges, costs, penalties or
expenses. If any such charges, costs, penalties or expenses (the "Imbalance
Charges") are incurred or payable to any Person other than in the circumstances
provided for in the preceding sentence (including charges, costs, penalties or
expenses caused by failure to deliver projected quantities or failure to provide
notice of changes in deliveries, or charges, costs, penalties or expenses
incurred when Grantor is making nominations, or revisions to nominations, on
behalf of Grantee, as provided for in the next-to-last sentence of Section
2.6(b)), then, as between the parties hereto, Grantor shall be liable for and
shall indemnify and hold Grantee harmless for such Imbalance Charges. Each of
Grantor and Grantee shall promptly notify the other of any notice received by it
from any third party which indicates that an imbalance in deliveries exists or
is occurring that may give rise to any such Imbalance Charges.
Section 2.7. Measurement: Hydrocarbons Lost or Used. As used in this
Conveyance, the term "Hydrocarbons" shall not include Oil or Gas produced from
any particular Subject Well which are unavoidably lost in the production thereof
or in the compression or
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transportation thereof prior to the Lease Measuring Point for such Subject Well,
or which are used by Grantor or the operator of any Subject Well for the
production of Subject Hydrocarbons or for the compression or transportation of
Subject Hydrocarbons prior to the Lease Measuring Point for such Subject Well,
in each case only to the extent the same are lost or used in the course of
operations which are being conducted prudently and in a good and workmanlike
manner. Grantor hereby represents, warrants and covenants to Grantee as follows:
(a) the Lease Measuring Point applicable to each Subject Well is and will
continue to be located at a point prior to any point where Gas from such Subject
Well is commingled with Gas or any other Hydrocarbons from any other well or
wells, (b) Grantor currently meters, and will continue to meter, Gas from each
Subject Well separately (i.e., on a well-by-well basis), (c) the volumes
(measured in Mcfs) of PP Hydrocarbons constituting Gas produced from or out of
any particular Subject Well are measured and determined, and will continue to be
measured and determined at the Lease Measuring Point applicable to such Subject
Well, and (d) the Separation Point for each Subject Well is and will continue to
be upstream of the Lease Measuring Point for such Subject Well. Grantor
covenants and agrees to determine the number of MMBTUs in each Mcf of Gas
included in PP Hydrocarbons at the Lease Measuring Points.
Section 2.8. No Proportionate Reduction. It is understood and agreed
that, though the Production Payment is conveyed by Grantor to Grantee out of the
Subject Interests, the Production Payment shall be equal to the full Dedication
Percentage in effect from time to time of the NRI Percentage of the Hydrocarbons
produced from (or, to the extent pooled or unitized, allocated to) the various
Subject Lands and shall not be reduced for any reason. Among other things, the
Production Payment and the PP Hydrocarbons shall not be reduced due to (a) the
undivided interest owned by Grantor in a lease constituting any Subject
Interests being less than the entire interest in such lease, or (b) the interest
in Oil, Gas or other minerals underlying any portion of the Subject Lands which
is covered by a particular lease (or group of leases) being less than the entire
interest in the oil, gas and other minerals underlying such portion of the
Subject Lands, or (c) the share of production from (or, to the extent pooled or
unitized, allocated to) any portion of Subject Lands which is attributable to
the Subject Interests being less than the NRI Percentage set forth on Exhibit A
for such portion of the Subject Lands, or (d) Grantor's failure to own, or
otherwise have good title to, all or any part of the Subject Interests as
described on Exhibit A.
Section 2.9. Termination. The Production Payment shall remain in full
force and effect until the time (herein called the "Termination Time") when the
full aggregate amount of the Total Sum, together with all reimbursements,
indemnities, restitutions, and other payments required hereunder, have been
received by Grantee as provided herein. At the Termination Time, all rights,
titles and interests herein conveyed in and to any Hydrocarbons thereafter
produced shall automatically terminate and vest in Grantor, and, upon request by
Grantor, Grantee shall execute and deliver such instrument or instruments (in
proper recordable form, if applicable) as may be necessary to evidence such
termination of the Production Payment; provided that, notwithstanding the
foregoing or anything herein to the contrary, any and all obligations which any
Person may have to indemnify or reimburse Grantee or its Affiliates for any
reason, or to make payments to Grantee or its Affiliates on account of PP
Hydrocarbons produced before the Termination Time, shall survive any termination
of the Production
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Payment. No pipeline company or other Person purchasing, taking, or processing
PP Hydrocarbons shall ever be required to take notice of, or keep informed
concerning, the termination of the Production Payment, until actual receipt of
written notice from Grantee confirming that such termination has occurred, which
Grantee agrees to deliver with reasonable promptness upon request of Grantor.
Section 2.10. Payment Mechanics. All PP Proceeds received by Grantor
(instead of directly by Grantee) in any Application Period shall be paid by
Grantor to Grantee, prior to noon, Los Angeles time, on the related Application
Date. No PP Proceeds (whether paid by Grantor or any other Person) shall be
deemed received by Grantee or applied to the Production Payment until such PP
Proceeds have been so received by Grantee's bank or collection agent in
immediately available funds for the account of Grantee. Grantor will make each
payment which it owes under this Conveyance (except for payments made pursuant
to Section 2.6(a), which shall be made as provided therein) in immediately
available funds received at or before noon, Los Angeles time, on the date
specified for the payment thereof, and all such payments by Grantor will
otherwise be made in accordance with the procedures set out in Section 2.6 of
the Purchase Agreement.
ARTICLE III
Section 3.1. Operations. As between Grantee and Grantor, Grantor shall
have exclusive charge, management and control of all operations to be conducted
on the Subject Interests. Grantor shall take or cause to be taken any and all
actions that a prudent operator would deem necessary in the operation,
maintenance and management thereof and in the production, handling, treating and
transportation of Hydrocarbons produced therefrom and shall otherwise act in
accordance with its customary practices; in doing the foregoing Grantor shall
not take into account the diminution in Grantor's share of production from the
Subject Interests caused by the granting of the Production Payment and Grantor
shall make its economic decisions as if Grantor owned the full interest in the
Subject Interests undiminished by the Production Payment. Except as expressly
provided in subsection (e) below or as provided in Section 4.3(j) of the
Purchase Agreement, and notwithstanding any other provision hereof to the
contrary, during the Production Payment Period Grantor shall not conduct any
exploratory activities, development drilling of new wells, or redrilling or
deepening of existing wells on the Subject Lands and nothing in this Conveyance
shall impose upon Grantor any express or implied obligation to conduct any
exploration activities, development drilling of new wells or redrilling or
deepening of Existing Wells on the Subject Lands. Without limitation of the
foregoing, Grantor shall:
(a) operate and maintain the Subject Interests in material
conformity with all applicable laws and all rules, regulations and
orders of all duly constituted authorities having jurisdiction
(including all Environmental Laws) and in conformity with all leases
and other contracts and agreements forming a part of or relating to the
Subject Interests;
(b) promptly pay all costs and expenses (including all Direct
Taxes and all costs, expenses and liabilities for labor, materials and
equipment incurred in connection
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with the Subject Interests and all obligations to the holders of
lessors' interests, royalty interests and other interests affecting the
Subject Interests) incurred in exploring, developing, operating and
maintaining the Subject Interests or in producing, handling, treating
and transporting Hydrocarbons produced therefrom, (except to the extent
that (i) Grantor is contesting any such costs and expenses in good
faith by appropriate proceedings, (ii) Grantor has reserved adequate
funds for the payment thereof, and (iii) if any such costs and expenses
are owed to any lessor of any lease under which any of the Subject
Interests are held, failure to win such contest would not result in
termination or cancellation of such lease);
(c) maintain in full force and effect, free of any right of
cancellation, forfeiture or termination, the Subject Interests, as well
as all material permits, licenses, easements, servitudes and other
rights necessary or useful in connection with the operation or
management of the Subject Interests or providing the Delivery Services;
(d) maintain in good working order and, to the extent
necessary, repair and replace, each Subject Well and the equipment
needed for production therefrom, and all separation, metering and
related facilities that are located on each Lease Measuring Point or
Separation Point; and
(e) except for the Doornbos #1 well and the Barrow Ranch #1
well or as otherwise agreed in writing by Grantee, complete each
Subject Well and properly equip it for production (as used herein, the
term "complete" includes, without limitation, casing, testing,
perforating, fracturing, shooting, acidizing or otherwise stimulating
and, if testing indicates that such Subject Well would constitute a
Commercial Well, physically connecting such Subject Well to a pipeline
or other outlet).
As to any of the Subject Interests of which Grantor is now, or hereafter
becomes, the operator, Grantor will not resign, or otherwise voluntarily
relinquish, its position as operator, except when an assignee of Grantor under a
transaction authorized under subsection 6.1(c) becomes operator. As to any
matters which Grantor does not control because Grantor is not at that time the
operator of a part of Subject Interests, Grantor shall exercise its full
contractual rights to cause the operator of such part of the Subject Interests
to take any and all actions as are required above.
Section 3.2. Shut-in or Abandonment of Subject Wells; Abandonment of
Subject Interests.
(a) Need for Consent. Until the termination of the Production Payment,
Grantor shall not, without first obtaining the consent of Grantee:
(i) abandon (or propose or consent to the abandonment of) any
Subject Well (other than the Doornbos #1 well and the Barrow Ranch #1
well), or surrender, abandon or release (or propose or consent to the
surrender, abandonment or release of) any Subject Interest; provided,
however, that after any Subject Well becomes a Commercial Well, Grantor
may, without the consent of Grantee, abandon such Subject
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Well if and when such Subject Well ceases to be a Commercial Well and
it would not be economically feasible (without regard to the burden of
the Production Payment) to restore the productivity of such well by
reworking, reconditioning, plugging back, or otherwise conducting
operations with respect to such well (not to include redrilling or
deepening of the well except as required in Section 4.3(j) of the
Purchase Agreement).
(ii) voluntarily shut-in or restrict the flow from a Subject
Well (or propose or consent to such a shut-in or restriction); provided
that (1) a shut-in of, or restriction of flow from, a well shall not be
deemed to be voluntarily made if it is caused by or results from
governmental requirements, operation and maintenance requirements
(which cannot be satisfied by actions taken with respect to other
wells, which actions do not violate other contractual duties of
Grantor), or sound reservoir management requirements, or from an act or
event of Force Majeure which act or event is not reasonably within the
control of and not caused by the fault or negligence of Grantor and
which by the exercise of due diligence Grantor is unable to prevent or
overcome, and (2) a Subject Well which has ceased to be a Commercial
Well and can be abandoned under subsection (i) above may be shut-in
pending such abandonment.
(b) Reworking. Grantor shall comply with its redrilling obligations
under Section 4.1(j) of the Purchase Agreement. In addition, if, prior to the
termination of the Production Payment, a Subject Well that has become a
Commercial Well then ceases to be a Commercial Well and it would be economically
feasible (without regard to the burden of the Production Payment) to restore or
enhance the productivity of such well by reworking, reconditioning, plugging
back, or otherwise conducting operations relative to such well (not to include
redrilling or deepening of the well except as required in Section 4.3(j) of the
Purchase Agreement), Grantor shall take such action to restore or enhance the
productivity of such well.
(c) Definitions of "Commercial Well" and "economically feasible". For
all purposes of this Conveyance:
(i) A well shall be deemed to be a "Commercial Well" unless
and until there arises a condition, which reasonably appears to be
permanent, such that the aggregate value of the Hydrocarbons which are
being produced or which it reasonably appears will be produced from
such well -- net of Direct Taxes and of royalties, overriding royalties
and similar burdens reflected in the Net Revenue Interest figures set
out on Exhibit A, but without regard to the burden of the Production
Payment -- no longer exceeds the costs and expenses directly related to
the operation and maintenance of such well.
(ii) The restoration of the productivity of a well shall be
deemed to be "economically feasible" whenever the net present value,
discounted at ten percent per annum, of the Hydrocarbons which it
reasonably appears will be produced from such well -- net of Direct
Taxes, of the costs of operating and maintaining such well (other than
overhead charges), and of royalties, overriding royalties and similar
burdens reflected in the Net Revenue Interest figures set out on
Exhibit A, but without regard to
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the burden of the Production Payment -- exceeds the costs and expenses
directly related to such restoration.
Section 3.3. Renewals and Extensions and New Leases. This Conveyance
and the Production Payment shall apply to all renewals, extensions and other
similar arrangements of the leases (or other determinable interests) which are
included in the Subject Interests, whether such renewals, extensions or
arrangements have heretofore been obtained by Grantor or are hereafter obtained
by or for Grantor or any Affiliate thereof and whether or not the same are
described in Exhibit A. For the purposes of the preceding sentence, a new lease
that covers the same interest (or any part thereof) covered by a prior lease,
and which is acquired within one year after the expiration, termination, or
release of such prior lease, shall be treated as a renewal or extension of such
prior lease.
Section 3.4. Adverse Claims. Grantor will, immediately after discovery
of such claim or demand, cause written notice to be given to Grantee of every
adverse claim or demand overtly threatened by any Person affecting the Subject
Interests or the Hydrocarbons produced therefrom in any manner whatsoever, or of
any proceedings instituted or threatened with respect thereto; and Grantor will
cause all necessary and proper steps to be diligently taken to protect and
defend the Subject Interests and such Hydrocarbons against any such adverse
claim or demand.
Section 3.5. Insurance and Replacement. Grantor shall maintain or cause
to be maintained, at its sole cost and expense and with financially sound and
reputable insurers reasonably satisfactory to Grantee, insurance covering the
Subject Interests and all wells, equipment and facilities located thereon,
against such liabilities, casualties, risks and contingencies and in such types,
as is customary in the case of companies engaged in similar operations and
having similar property. Such insurance shall in any event include the types and
coverages described in Schedule 1, with limits of coverage no less than those
set out in such Schedule. All liability insurance shall name Grantee (and, if
Grantee so requests, each Beneficiary) as an additional insured. Grantor shall
furnish annual certificates of such insurance to Grantee not less than 30 days
prior to the expiration or termination of such policy of insurance. In the event
of any damage to or loss of any well, equipment or facility on the Subject
Interests, Grantor (at no cost to Grantee, and without regard to whether
insurance proceeds are available to Grantor) shall promptly redrill, rebuild,
reconstruct, repair, restore or replace such damaged or lost property, if such
action is economically feasible, as defined in Section 3.2(c).
Section 3.6. Government Regulation. The obligations of Grantor
hereunder shall be subject to all applicable federal, state and local laws,
rules, regulations and orders (including those of any applicable agency, board,
official or commission having jurisdiction). Grantor shall timely make all
material filings with all applicable agencies, boards, officials and commissions
having jurisdiction with respect to the Subject Interests or the operation
thereof prior to or at the time any such filing becomes due. Should any statute,
or any rules or regulations of any governmental body, or any provisions in
private contracts (including those limiting the size of overriding royalties and
similar interests but excluding any contracts directly entered into by Grantee)
become applicable to the Subject Interests so as to limit the
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portion of the Hydrocarbons produced from the lands covered by a particular
Subject Interest which may be attributable to the Production Payment, the
Production Payment shall, as to such Subject Interest and for the period of time
during which such statute, rule, regulation or contractual provision is
applicable, be limited to the maximum amount of production from such lands which
can be attributed to the Production Payment under such statute, rule, regulation
or contractual provision; provided, however, should such limitation come into
effect as to one or more Subject Interests, then (without prejudice to other
rights Grantee may have) the Dedication Percentage applicable to that portion of
production from (or, to the extent pooled or unitized, allocated to) Subject
Lands covered by other Subject Interests which would be attributable to the
Production Payment in the absence of the provisions of this subsection shall be
increased, up to a maximum of 65% in the case of State Tract 331 and up to a
maximum of 90% in each other case, so as to cause, to the maximum extent
possible, Grantee to receive, by virtue of ownership of the Production Payment,
the same amount of Hydrocarbons which Grantee would have received had the
aforementioned statute, rule, regulation or contractual provision not reduced
the share of production from the aforementioned Subject Interest with respect to
which the Production Payment could be paid. Unless and until the Dedication
Percentages are otherwise increased as provided herein and in the Purchase
Agreement, the foregoing increase in the Dedication Percentages shall remain in
effect only for so long as such limitation applies, and thereafter until Grantee
has received PP Hydrocarbons sufficient to reduce the unliquidated balance of
the Primary Sum to what it would have been had such limitation never existed.
Section 3.7. Pooling and Unitization. Certain of the Subject Interests
may have been pooled or unitized for the production of Hydrocarbons prior to the
date hereof, and may, after the date hereof, be pooled or unitized (a) pursuant
to any law, rule, regulation or order of any governmental body or official, or
(b) voluntarily by Grantor with the consent of Grantee. To the extent certain
Subject Interests are so pooled or unitized, such Subject Interests are and
shall be subject to the terms and provisions of such pooling and unitization
agreements or orders.
Section 3.8. Non-Consent Operations. Without the prior consent of
Grantee, Grantor shall not elect to be a non-participating party with respect to
any plugging back, reworking, sidetracking, completion, or other operation on
any Subject Interest (or lands pooled therewith), or (except in instances where
abandonment of such well would be permitted without Grantee's consent hereunder)
elect to be an abandoning party with respect to a well located on any Subject
Interest (or lands pooled therewith), if the consequence of such election is
that Grantor's interest in such Subject Interest or any part thereof is
temporarily (e.g., during a recoupment period) or permanently forfeited to the
parties participating in such operations or electing not to abandon such well.
Upon any such election by Grantor that is consented to by Grantee, such election
shall also be binding on the Production Payment as to the interest so
temporarily or permanently forfeited. Any additional interests acquired by
Grantor by virtue of electing to pay for or acquire the interest of a
non-consenting or abandoning party in a situation of the type described in the
preceding sentence shall not become a part of the Subject Interests or be
subject to the Production Payment.
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Section 3.9. Future Gas Imbalances.
(a) No Undertakes Without Consent. Without the prior consent of
Grantee, Grantor will not deliberately take (for itself and for Grantee) a
lesser share of Gas produced from a Subject Well than the share of Gas which
Grantor and Grantee are collectively entitled to take by virtue of ownership of
the Subject Interests (without regard to any rights to take a lesser share under
any production balancing agreement or other arrangement or any rights under
common law with respect to production balancing), except as a result of Grantor
and Grantee, or any predecessor in title to such Subject Interest, having
previously taken from such Subject Well or other wells located on Subject
Interests more Gas than such parties would be entitled to receive by virtue of
their ownership ("previous overproduction"), but only to the extent that the
amount of such previous overproduction occurred after the Initial Time or
occurred prior to the Initial Time and is disclosed in the Purchase Agreement.
If any such deliberate undertakes by Grantor occur in violation of this Section
3.9, the PP Hydrocarbons shall be determined (to the maximum extent allowed
under applicable law and any applicable Permitted Encumbrances) without regard
thereto. It is recognized, however, that due to differences between the
nominations by Grantor and its (and Grantee's) share of actual production and
differences between nominations by other owners of production and their shares
of actual production, minor instances of overproduction or underproduction will
frequently occur, and any such instances will not be deemed violations of this
Section 3.9.
(b) Proportional Sharing in Overtakes. If, as permitted by applicable
contracts and laws, Grantor takes a greater share of the Gas produced from a
Subject Well than the share of Gas which Grantor is entitled to take by virtue
of ownership of the Subject Interests (such shares determined without regard to
the existence of the Production Payment), then Grantee shall be entitled to
share in such overproduction with Grantor in the same percentages that they
share in the normal production from such well (i.e., the production to which
they are entitled without regard to such overproduction).
(c) No Balancing From Other Properties. Except to the extent, if any,
that a Subject Interest is subject to such a balancing arrangement before it
becomes subject to this Conveyance and such fact is disclosed to (and accepted
by) Grantee as an express exception to Section 4.1(k) of the Purchase Agreement,
Grantor will not allow any Subject Interest to be subject to any production
balancing arrangement under which one or more third Persons may take a portion
of the production attributable to such Subject Interest without payment (or
without full payment) therefor as a result of production having been taken from,
or as a result of other actions or inactions with respect to, properties other
than such Subject Interest.
ARTICLE IV
SECTION 4.1. NO LIABILITY OF GRANTEE; INDEMNITY. EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED IN THIS CONVEYANCE WITH RESPECT TO PP SEVERANCE TAXES,
GRANTEE SHALL NEVER BE RESPONSIBLE FOR ANY PART OF THE COSTS, EXPENSES OR
LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING, DEVELOPING, OPERATING,
OWNING, MAINTAINING, REWORKING OR RECOMPLETING OF THE SUBJECT INTERESTS OR
SUBJECT LANDS, THE PHYSICAL CONDITION
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OF THE SUBJECT INTERESTS OR THE SUBJECT LANDS, OR THE HANDLING, TREATING OR
TRANSPORTING OF HYDROCARBONS PRODUCED FROM THE SUBJECT LANDS (INCLUDING ANY
COSTS, EXPENSES, LOSSES OR LIABILITIES RELATED TO VIOLATION OF AN ENVIRONMENTAL
LAW OR OTHERWISE RELATED TO DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT, WHETHER
THE SAME ARISE OUT OF GRANTEE'S OWNERSHIP OF AN INTEREST IN PROPERTY OR OUT OF
THE ACTIONS OF GRANTOR OR GRANTEE OR OF THIRD PARTIES OR ARISE OTHERWISE), OR
THE FAILURE BY GRANTOR TO HAVE GOOD AND DEFENSIBLE TITLE TO THE SUBJECT
INTERESTS FREE AND CLEAR OF ALL BURDENS, ENCUMBRANCES, LIENS AND TITLE DEFECTS
OTHER THAN PERMITTED ENCUMBRANCES (INCLUDING ANY COSTS, EXPENSES, LOSSES OR
LIABILITIES SUFFERED BY GRANTEE AS A RESULT OF ANY CLAIM THAT GRANTEE MUST PAY
OVER TO ANY PERSON ANY PART OF THE PP PROCEEDS AT ANY TIME PREVIOUSLY RECEIVED
OR THEREAFTER TO BE RECEIVED BY GRANTEE), AND GRANTOR AGREES TO INDEMNIFY AND
HOLD GRANTEE HARMLESS FROM AND AGAINST ALL COSTS, EXPENSES, LOSSES AND
LIABILITIES INCURRED BY GRANTEE IN CONNECTION WITH ANY OF THE FOREGOING OR IN
CONNECTION WITH THE PRODUCTION PAYMENT, THE PURCHASE AGREEMENT, THIS CONVEYANCE,
ANY OTHER PRODUCTION PAYMENT DOCUMENT, OR THE TRANSACTIONS AND EVENTS (INCLUDING
THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF) AT ANY TIME ASSOCIATED WITH OR
CONTEMPLATED IN ANY OF THE FOREGOING. SUCH INDEMNITY SHALL ALSO COVER ALL COSTS
AND EXPENSES OF GRANTEE, INCLUDING REASONABLE LEGAL FEES AND EXPENSES, WHICH ARE
INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST. AS USED IN THIS SECTION,
"GRANTEE" REFERS BOTH TO THE PERSONS NAMED AS GRANTEE AT THE BEGINNING OF THIS
CONVEYANCE AND TO AGENT AND THE BENEFICIARIES, AND THE FOREGOING INDEMNIFICATION
SHALL EXTEND TO AND BENEFIT GRANTEE AND GRANTEE'S SUCCESSORS AND ASSIGNS, ALL
THEIR RESPECTIVE AFFILIATES, AND ALL THE RESPECTIVE OFFICERS, DIRECTORS, AGENTS,
BENEFICIARIES, TRUSTEES, ATTORNEYS AND EMPLOYEES OF THEMSELVES AND THEIR
AFFILIATES.
THE FOREGOING INDEMNITY SHALL APPLY WHETHER OR NOT ARISING OUT OF THE SOLE,
JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF GRANTEE OR ANY
OTHER PERSON INDEMNIFIED
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HEREUNDER AND SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY
PERSON INDEMNIFIED HEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION,
THEORY OF STRICT LIABILITY OR OTHERWISE.
The foregoing indemnity shall not, however, apply to any costs, expenses, losses
or liabilities which are proximately caused solely by the gross negligence or
willful misconduct of Grantee. The foregoing indemnity shall survive the
termination of the Production Payment and of this Conveyance.
ARTICLE V
Section 5.1. Remedies. If a Designated Event occurs then Grantee may,
either on its own behalf or through any agent or representative and in addition
to all other rights and remedies available to Grantee at law and in equity
(including the right to sue for damages, which right of Grantee is specifically
acknowledged), exercise any one or more of the following remedies (it being
agreed that the exercising of any one remedy shall not preclude the exercising
of any other remedy):
(a) If Grantor has failed to perform any act or to take any action
which Grantor is required hereunder to perform or take or to pay any money which
Grantor is required hereunder to pay, then, upon written notice to Grantor,
Grantee may, but shall not be obligated to, perform or cause to be performed
such act or take such action or pay such money, all in Grantor's name or in
Grantee's own name. Any expenses so incurred by Grantee and any money so paid by
Grantee shall be a demand obligation owing by Grantor to Grantee (which
obligation Grantor hereby expressly promises to pay) and Grantee, upon making
such payment, shall be subrogated to all of the rights of the Person receiving
such payment. Each amount due and owing by Grantor to Grantee pursuant to this
subsection shall bear interest each day, from the date of such expenditure or
payment until paid, at the Agreed Rate, which interest shall be payable on the
first day of each month and shall itself bear interest at the same rate if not
timely paid.
(b) Grantee shall be entitled to apply to a court of competent
jurisdiction for the specific performance or observance of any covenant or
agreement or in aid of the execution of any power herein granted and for the
appointment of a receiver for the Subject Interests but no such appointment
shall prejudice or affect the rights of Grantee to receive all PP Hydrocarbons,
all PP Proceeds, and any amounts due hereunder.
Section 5.2. Termination of Remedies. The specific remedies to which
Grantee may become entitled under Sections 5.1(a) and (b) shall cease to be
exercisable when all Designated Events have been fully cured or otherwise ceased
to exist (provided that the effecting of performance or observation of any
unperformed covenant or agreement, or other resolution of a Designated Event, by
Grantee or Grantee's agent or representative shall not be deemed to cure such
Designated Event), without prejudice, however, to the exercise of any such
remedies upon any subsequent occurrence of a Designated Event. Nothing in this
section shall impose
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limitations or otherwise inhibit the exercise of any other rights or remedies
which Grantee may have.
ARTICLE VI
Section 6.1. Assignments by Grantor. Without the prior consent of
Grantee (which consent may be granted or withheld in the sole and absolute
discretion of Grantee), Grantor shall not assign, sell, transfer, convey,
exchange, mortgage or pledge all or any part of the Subject Interests or create
any lien thereon or security interest therein, except that, without the prior
consent of Grantee, Grantor may:
(a) permit Permitted Encumbrances to exist against all or any part of
the Subject Interests;
(b) transfer or mortgage the Assignable 331 Retained Interest to any
Person; and
(c) transfer and convey all, but not less than all, of Grantor's
interests in the Retained Interests to any corporate entity, the stock in which
is directly and wholly owned by Grantor, provided that, in the case of any
transfer, mortgage or conveyance described in subsections (b) or (c) above, (i)
such Person or entity must expressly acknowledge the Production Payment as
carved out of and burdening the Subject Interests, including the Subject
Interests transferred to it, (ii) such entity (in the case of subsection (c)
only) must assume in writing for the benefit of Grantee all of the liabilities
and obligations of Grantor hereunder and under the Purchase Agreement, (iii)
such entity (in the case of subsection (c) only) must succeed Grantor as the
operator of the Subject Interests, or Grantor (in the case of subsection (b)
only) must remain the operator of the Subject Interests, (iv) John R. Stanley
must ratify and confirm the Guaranty, and shall expressly recognize that such
Guaranty shall continue in force and effect, the same as if no transfer or
conveyance had taken place, and (v) the transfer, mortgage, or conveyance shall
not constitute or precipitate a breach or event of default under any trust
indenture or other material agreement of Grantor or otherwise directly relating
to the Subject Interests. Notwithstanding the foregoing, TransTexas Gas
Corporation shall, from and after any such transfer, mortgage, or conveyance,
continue to remain jointly and severally liable for all of the liabilities and
obligations of Grantor under this Conveyance or the Purchase Agreement or the
other Production Payment Documents. As used herein, "Assignable 331 Retained
Interest" means any portion of Grantor's Retained Interest in the Subject
Interests in State Tract 331 (but not in any other Subject Interests) that, if
such portion were assigned by Grantor to a third Person, would leave Grantor as
the owner of a Retained Interest in such Subject Interests (calculated after
giving effect to such assignment and to the Production Payment and all other
royalties and burdens, and free and clear of all claims of such third Person
and all Liens other than Permitted Liens), with a net revenue interest of at
least 5.3625%, calculated on an 8/8ths basis.
Section 6.2. Assignments by Grantee. Grantee's interest in the
Production Payment may not be transferred except in compliance with this
section. Grantee and each Permitted Assign (as hereinafter defined) shall have
the right to assign or convey its interest in the
23
<PAGE> 24
Production Payment, in whole or in part (and either absolutely or by mortgage or
other security instrument), at any time; provided that:
(a) no change of ownership or right to receive payment of the
Production Payment or of any part thereof, however accomplished, shall
be effective or binding upon Grantor until notice thereof shall have
been registered with Grantor by the transferor and by the transferee
(which transferee must make to Grantor the representations and
warranties in Section 4.2 of the Purchase Agreement), and then only
with respect to payments made after receipt of such notice, and
(b) neither Grantee nor any Permitted Assign shall assign or
convey any rights under or any interest in the Production Payment
Documents or the Production Payment to (i) any Person which at the time
of such assignment or conveyance is conducting material exploration or
production operations in Railroad Commission Districts 2, 4 or 5, (ii)
Enron Oil & Gas Company, Coastal Oil & Gas Corporation, Tennessee Gas
Pipeline, or Terry Oilfield Supply Co., (iii) any party adverse to
Grantor in any proceeding set forth on Schedule 1 to the Purchase
Agreement or in any litigation or proceeding subsequently filed, or any
successor to the rights or interests of any of the foregoing in such
proceedings or litigation, any party named as a defendant in the case
styled "TransAmerican Natural Gas Corporation v. El Paso Natural Gas
Company, et al.", No. 94-63464, 206th Judicial District Court, Hidalgo
County, Texas or (iv) any Affiliate of any of the foregoing that is not
an Affiliate of Grantee.
Any Person to whom all or any interest in the Production Payment is assigned or
conveyed in accordance with the foregoing requirements is herein called a
"Permitted Assign". Grantor shall keep records of all Permitted Assigns, their
Percentage Shares, and their addresses, and shall give notice thereof to the
other Persons, if any, from time to time holding the interests of Grantee
hereunder. If the interests of Grantee under this Conveyance are ever owned by
more than one Person, all Persons owning interests hereunder shall designate one
Person as their agent to deliver and receive all communications (including
consents) and exercise the discretion of Grantee hereunder on their behalf.
Section 6.3. Binding Effect. All the covenants and agreements of the
respective parties herein contained shall be deemed to be covenants running with
the Subject Interests and the lands covered thereby or included therein. All of
the provisions hereof shall be binding upon and shall inure to the benefit of
the parties hereto, and their respective successors and assigns.
ARTICLE VII
Section 7.1. Warranty. Grantor hereby binds itself to warrant and
forever defend all and singular title to the Production Payment unto Grantee,
its successors and Permitted Assigns, against every person lawfully claiming or
to claim the same or any part thereof, subject, however, to the Permitted
Encumbrances. Without limitation of the generality of the foregoing, Grantor
represents and warrants to Grantee that the ownership of Grantor of the
24
<PAGE> 25
Subject Interests does and will, with respect to each tract of land identified
in Exhibit A hereto, subject only to the Permitted Encumbrances:
(a) entitle Grantor to receive (subject to and before giving effect to
the Production Payment), free and clear of liens and encumbrances (except the
Permitted Encumbrances), a decimal or percentage net revenue interest share of
the Hydrocarbons produced from, or allocated to, such well or unit equal to not
less than the decimal or percentage interest set forth in Exhibit A in
connection with such tract of land in the column headed "Net Revenue Interest",
and
(b) cause Grantor to be obligated to bear a decimal or percentage share
of the costs associated with wells or operation on such tract of land not
greater than the decimal or percentage share set forth in Exhibit A in
connection with such tract of land in the column headed "Working Interest",
without a corresponding increase in net revenue interest.
Grantor further represents and warrants to Grantee that such shares of
production which Grantor is entitled to receive, and shares of expenses which
Grantor is obligated to bear, are not and will not be subject to change except,
and only to the extent that, such changes are reflected on Exhibit A. This
Conveyance is made with full substitution and subrogation of Grantee in and to
all covenants, representations and warranties by others heretofore given or made
with respect to the Subject Interests.
ARTICLE VIII
Section 8.1. Choice of Law. This Conveyance shall be construed and
enforced in accordance with and governed by the laws of the State of Texas
(without regard to conflicts of law principles thereof that would cause another
state's law to apply) and the laws of the United States of America.
Section 8.2. Intentions of the Parties. Nothing herein contained shall
be construed to constitute either party hereto (under state law or for tax
purposes) in partnership with the other party. In addition, the parties hereto
intend that the Production Payment shall at all times be treated (and all
provisions of this Conveyance shall be construed and treated accordingly): (a)
as a production payment (i.e., a term overriding royalty) and an interest in
real property under the laws of each state in which Subject Interests are
located; and (b) for federal income tax purposes only, as a mortgage loan in
registered form (and not a "royalty" or other "economic interest" in
Hydrocarbons) within the meaning of the Internal Revenue Code and the
regulations and judicial authority relating thereto.
Section 8.3. Ownership of Equipment. The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests, and the interest herein conveyed to
Grantee is exclusively a production payment (i.e., a term overriding royalty).
25
<PAGE> 26
Section 8.4. Further Assurances. Grantor agrees to execute and deliver
to Grantee all such other and additional instruments, notices, division orders,
transfer orders and other documents and to do all such other and further acts
and things as may be necessary to more fully and effectively grant, convey and
assign to Grantee the rights, titles, interest and estates conveyed to Grantee
hereby or intended to be so conveyed.
Section 8.5. Partition. Grantor and Grantee acknowledge that neither
has any right or interest that would permit it to partition any portion of the
Subject Interests as against the other, and each waives any such right.
Section 8.6. Notices and Addresses. All notices and other
communications required or permitted under this Conveyance shall be in writing
and, unless otherwise specifically provided, shall be delivered personally or by
telecopier or by registered or certified mail, postage prepaid, or by delivery
service with proof of delivery, at the respective addresses shown below, and
shall be deemed delivered on the date of receipt. Either party may specify as
its proper address any other street address within the continental limits of the
United States by giving notice to the other party, in the manner provided in
this Section, at least fifteen (15) days prior to the effective date of such
change of address.
Grantor's address:
1300 North Sam Houston Parkway East
Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue
Telephone: 281/987-8600
Telecopy: 281/986-8865
Grantee's address:
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. and
TCW DR VI Investment Partnership, L.P.
c/o Trust Company of the West
865 South Figueroa
Los Angeles, California 90017
Telephone: 213/244-0702
Telecopy: 213/244-0604
Attention: Thomas F. Mehlberg
26
<PAGE> 27
with a copy to the Agent at its address:
TCW Asset Management Company
1000 Louisiana
Suite 2175
Houston, Texas 77002
Attention: Kurt Talbot
Telephone: 713/615-7413
Telecopy: 713/615-7460
Section 8.7. Grantee's Agent; Consents, Waivers, Supplements and
Amendments.
(a) Grantee has, pursuant to the Purchase Agreement, appointed TCW
Asset Management Company as its agent (herein called the "Agent") to administer
the Production Payment and to act on Grantee's behalf in giving any consents or
waivers under this Conveyance, in making any amendments or supplements hereto,
and in arranging for the marketing of the PP Hydrocarbons. Unless and until this
Conveyance is supplemented to reflect the termination of such agency or the
appointment of a replacement or successor Agent (which supplement may be
executed by Grantee without the joinder of Grantor), all Persons dealing with
Grantor or Grantee in connection with the Production Payment shall be entitled
to rely upon the authority of TCW Asset Management Company to act as Agent for
Grantee in connection herewith.
(b) No consent, waiver, supplement or amendment given by Grantee or by
Agent in connection with this Conveyance or the Production Payment shall be
valid or effective unless given be in writing and signed by Grantee or Agent.
Section 8.8. Counterparts. This Conveyance is being executed in
multiple counterparts, all of which are identical, except that, (i) to
facilitate recordation, in certain counterparts hereof only those portions of
Exhibit A which contain descriptions of properties located in the recording
jurisdiction in which the particular counterpart is to be recorded are included,
and (ii) Schedule l may be omitted from counterparts hereof which are being
recorded. All of such counterparts shall constitute one and the same instrument.
Complete copies of this Conveyance containing the entirety of Exhibit A, and all
schedules hereto, have been retained by Grantor and Grantee.
27
<PAGE> 28
This Conveyance is executed on the 23rd day of February, 1998, and is
made effective as to runs of Oil and deliveries of Gas as of the Initial Time.
TRANSTEXAS GAS CORPORATION
By: /s/ ED DONAHUE
---------------------------
Name: Ed Donahue
Title: Vice President
STATE OF TEXAS )
)
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me on this 23rd day of
February, 1998, by Ed Donahue as Vice President of TransTexas Gas Corporation, a
Delaware corporation, on behalf of such corporation.
-----------------------------------
Notary Public, State of Texas
28
<PAGE> 1
Exhibit 21.1
SCHEDULE OF SUBSIDIARIES
OF
TRANSTEXAS GAS CORPORATION
<TABLE>
<CAPTION>
State or Other Jurisdiction
Name of Incorporation
---- ----------------------------
<S> <C>
TransTexas Exploration Corporation Delaware
TransTexas Drilling Services, Inc. Delaware
PetroAmerican Services Corporation Delaware
TransTexas Gas Corporation - Liberia Liberia
TransTexas Energia de Mexico, S.A. de C.V. Mexico
PetroAmerican Offshore, Inc. Delaware
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of TransTexas Gas Corporation (the "Company") on Form S-3 (33-91494)
of our report dated April 30, 1998 on our audits of the Company's financial
statements and financial statement schedules as of January 31, 1998 and 1997 and
for the years ended January 31, 1998 and 1997, the six months ended January 31,
1996 and the year ended July 31, 1995, which report is included in the Company's
annual report on Form 10-K.
Coopers & Lybrand, L.L.P.
Houston, Texas
April 30, 1998
<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 (the "Company") on Form S-3 (33-91494)
of, and the references to, our reserve report dated February 1, 1998 ("Reserve
Report"), and to the use of our name under the caption "Experts" and elsewhere
therein in the form and context in which they appear. We also consent to the
references to our Reserve Report and to the use of our name in the Company's
Annual Report on Form 10-K for the year ended January 31, 1998 in the form and
context in which they appear.
Netherland, Sewell & Associates, Inc.
By: /s/ DANNY SIMMONS
----------------------------------------
Houston, Texas
April 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 38,502
<SECURITIES> 0
<RECEIVABLES> 17,056
<ALLOWANCES> 0
<INVENTORY> 16,437
<CURRENT-ASSETS> 82,714
<PP&E> 1,418,293
<DEPRECIATION> 716,695
<TOTAL-ASSETS> 816,635
<CURRENT-LIABILITIES> 104,836
<BONDS> 619,922
0
0
<COMMON> 740
<OTHER-SE> 23,897
<TOTAL-LIABILITY-AND-EQUITY> 24,637
<SALES> 164,538
<TOTAL-REVENUES> 723,271
<CGS> 0
<TOTAL-COSTS> 193,171
<OTHER-EXPENSES> (12,393)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,580
<INCOME-PRETAX> 461,913
<INCOME-TAX> 161,669
<INCOME-CONTINUING> 300,244
<DISCONTINUED> 0
<EXTRAORDINARY> 72,043
<CHANGES> 0
<NET-INCOME> 228,201
<EPS-PRIMARY> 3.41
<EPS-DILUTED> 3.41
</TABLE>
