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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1998
Commission File Number 1-12204
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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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(281) 987-8600
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock of the registrant outstanding on
December 15, 1998 was 57,515,566.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
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PAGE
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements:
Report of Independent Accountants............................................................ 2
Condensed Consolidated Balance Sheet as of October 31, 1998 and January 31, 1998............. 3
Condensed Consolidated Statement of Operations for the three and nine months ended
October 31, 1998 and 1997................................................................ 4
Condensed Consolidated Statement of Cash Flows for the nine months ended
October 31, 1998 and 1997................................................................ 5
Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 21
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 22
Item 6. Exhibits and Reports on Form 8-K................................................................ 22
Signature.................................................................................................. 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of October 31, 1998 and the related condensed
consolidated statements of operations for the three and nine months ended
October 31, 1998 and 1997 and the condensed consolidated statement of cash flows
for the nine months ended October 31, 1998 and 1997. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year then ended (not presented herein); and in our report
dated April 30, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
December 15, 1998
2
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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OCTOBER 31, JANUARY 31,
1998 1998
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ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 2,613 $ 38,502
Accounts receivable ............................................................ 20,097 17,056
Inventories .................................................................... 9,358 16,437
Other .......................................................................... 4,786 10,719
----------- -----------
Total current assets ...................................................... 36,854 82,714
----------- -----------
Property and equipment ............................................................ 1,465,419 1,418,293
Less accumulated depreciation, depletion and amortization ......................... 883,878 716,695
----------- -----------
Net property and equipment -- based on the full cost method of accounting for
gas and oil properties of which $69,419 and $120,694 was excluded from
amortization at October 31, 1998 and January 31, 1998, respectively .......... 581,541 701,598
----------- -----------
Due from affiliates ............................................................... 6,879 1,488
Other assets, net ................................................................. 26,354 30,835
----------- -----------
$ 651,628 $ 816,635
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................................... $ 622 $ 10,181
Accounts payable ............................................................... 68,775 52,075
Accrued interest payable to affiliate .......................................... 19,772 6,762
Accrued liabilities ............................................................ 44,066 35,818
----------- -----------
Total current liabilities ................................................. 133,235 104,836
----------- -----------
Long-term debt, less current maturities ........................................... 1,344 9,199
Production payments, less current portion ......................................... 54,464 4,121
Notes payable to affiliate ........................................................ 452,533 486,991
Subordinated notes ................................................................ 115,815 115,815
Revolving credit agreement ........................................................ 5,050 7,917
Deferred income taxes ............................................................. -- 39,497
Payable to affiliates ............................................................. 449 3,002
Other liabilities ................................................................. 19,473 20,620
Commitments and contingencies (Note 4) ............................................ -- --
Stockholders' equity:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 57,515,566 shares .............................. 740 740
Additional paid-in capital ..................................................... 26,834 26,834
Retained earnings .............................................................. 104,096 259,468
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131,670 287,042
Treasury stock, at cost, 16,484,434 shares ..................................... (262,405) (262,405)
----------- -----------
Total stockholders' equity ............................................. (130,735) 24,637
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$ 651,628 $ 816,635
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------ ------------------------------
1998 1997 1998 1997
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Revenues:
Gas, condensate and natural gas liquids ............ $ 27,213 $ 28,347 $ 67,081 $ 140,517
Transportation ..................................... -- -- -- 12,055
Gain on the sale of assets ......................... 5,813 7,482 65,833 540,411
Other .............................................. (233) 1,404 4,785 2,021
------------ ------------ ------------ ------------
Total revenues ................................... 32,793 37,233 137,699 695,004
------------ ------------ ------------ ------------
Costs and expenses:
Operating .......................................... 4,521 7,113 17,094 45,938
Depreciation, depletion and amortization ........... 19,493 13,247 45,209 67,219
General and administrative ......................... 4,209 5,170 15,986 29,693
Taxes other than income taxes ...................... 2,345 2,117 5,795 9,845
Impairment loss .................................... 164,899 -- 186,742 --
------------ ------------ ------------ ------------
Total costs and expenses ......................... 195,467 27,647 270,826 152,695
------------ ------------ ------------ ------------
Operating income (loss) .......................... (162,674) 9,586 (133,127) 542,309
------------ ------------ ------------ ------------
Other income (expense):
Interest income .................................... 105 3,999 1,132 11,286
Interest expense, net .............................. (20,593) (15,620) (61,117) (62,823)
------------ ------------ ------------ ------------
Total other income (expense) ..................... (20,488) (11,621) (59,985) (51,537)
------------ ------------ ------------ ------------
Income (loss) before income taxes ................ (183,162) (2,035) (193,112) 490,772
Income taxes (benefit) ................................ (35,399) (712) (38,882) 171,771
------------ ------------ ------------ ------------
Net income (loss) before extraordinary item ...... (147,763) 1,323 (154,230) 319,001
Extraordinary item - early extinguishment
of debt (net of income tax benefit) .............. -- 74 (1,142) (72,043)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (147,763) $ (1,249) $ (155,372) $ 246,958
============ ============ ============ ============
Basic and diluted net income (loss) per share:
Income (loss) before extraordinary item .......... $ (2.57) $ (0.02) $ (2.68) $ 4.55
Extraordinary item ............................... -- -- (0.02) (1.03)
------------ ------------ ------------ ------------
Basic and diluted net income (loss) per share .. $ (2.57) $ (0.02) $ (2.70) $ 3.52
============ ============ ============ ============
Weighted average number of shares outstanding
for basic and diluted net income (loss) per share ... 57,515,566 63,404,675 57,515,566 70,082,047
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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NINE MONTHS ENDED
OCTOBER 31,
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1998 1997
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Operating activities:
Net income (loss) ................................................... $ (155,372) $ 246,958
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary item ................................................ 1,142 72,043
Depreciation, depletion and amortization .......................... 45,209 67,219
Impairment loss ................................................... 186,742 --
Amortization of debt issue costs .................................. 3,904 1,879
Accretion on subordinated notes ................................... -- 4,941
Gain on the sale of assets ........................................ (65,833) (540,411)
Deferred income taxes ............................................. (38,882) 171,771
Repayment of volumetric production payments ....................... -- (45,134)
Amortization of deferred revenue .................................. -- (9,420)
Changes in assets and liabilities:
Accounts receivable ........................................... (3,041) 48,122
Receivable from affiliates .................................... -- 3,248
Inventories ................................................... 7,079 (4,300)
Other current assets .......................................... 5,933 9,954
Accounts payable .............................................. 17,614 23,826
Accrued interest payable to affiliate ......................... 13,010 18,759
Accrued liabilities ........................................... 5,582 (47,924)
Accounts receivable from affiliates ........................... (7,944) (811)
Other assets .................................................. 568 255
Other liabilities ............................................. (1,147) 4,680
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Net cash provided by operating activities ................. 14,564 25,655
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Investing activities:
Capital expenditures ................................................ (182,085) (316,706)
Proceeds from the sale of assets .................................... 135,110 1,035,188
Advances to affiliates .............................................. -- (13,304)
Payment of advances by affiliate .................................... -- 56,354
Withdrawals from cash restricted for interest ....................... -- 46,000
Increase in cash restricted for share repurchases ................... -- (399,284)
Withdrawals from cash restricted for share repurchases .............. -- 262,405
----------- -----------
Net cash provided (used) by investing activities ........... (46,975) 670,653
----------- -----------
Financing activities:
Issuance of production payments ..................................... 62,214 20,977
Principal payments on production payments ........................... (9,205) (27,472)
Issuance of note payable to affiliate................................ 13,748 453,000
Principal payment on note payable to affiliate....................... (48,206) --
Issuance of long-term debt .......................................... 14,000 14,946
Principal payments on long-term debt ................................ (33,171) (7,767)
Revolving credit agreement, net ..................................... (2,867) (14,939)
Debt issue costs .................................................... 9 (696)
Retirement of senior secured notes .................................. -- (892,000)
Purchases of treasury stock ......................................... -- (262,405)
----------- -----------
Net cash used by financing activities ...................... (3,478) (716,356)
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Decrease in cash and cash equivalents ...................... (35,889) (20,048)
Beginning cash and cash equivalents .................................... 38,502 23,561
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Ending cash and cash equivalents ....................................... $ 2,613 $ 3,513
=========== ===========
Noncash operating and investing activities:
Accounts payable for property and equipment ......................... $ 31,752 $ 45,787
Exchange of Subordinated Notes ...................................... -- 115,815
Deferred financing costs from affiliates ............................ -- 12,228
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas" or the "Company")
as of October 31, 1998 and the results of its operations and cash flows for the
interim periods ended October 31, 1998 and 1997. The results of operations for
interim periods should not be regarded as necessarily indicative of results that
may be expected for the entire year. The financial information presented herein
should be read in conjunction with the consolidated financial statements and
notes included in TransTexas' annual report on Form 10-K for the year ended
January 31, 1998. Unless otherwise noted, the term "TransTexas" refers to
TransTexas Gas Corporation and its subsidiaries. TransTexas is a subsidiary of
TransAmerican Energy Corporation ("TEC"), which is a wholly owned subsidiary of
TransAmerican Natural Gas Corporation ("TransAmerican"). TransAmerican Refining
Corporation ("TARC") is a wholly owned subsidiary of TEC.
RECENTLY ISSUED PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
will adopt SFAS 133 effective February 1, 2000. TransTexas is uncertain as to
the impact on its financial statements of the adoption of SFAS 133.
2. LIQUIDITY
Cash flow from operations is sensitive to the level of capital
expenditures and the prices TransTexas receives for its natural gas and oil.
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
flow 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 nine months ended October 31, 1998, total capital expenditures
were $181 million, including $15 million for lease acquisitions, $156 million
for drilling and development, and $10 million for gas gathering, other equipment
and seismic acquisitions. Subject to cash availability, capital expenditures for
fiscal 1999 are estimated to be approximately $203 million, which is in excess
of projected cash flow from operations. TransTexas has reduced planned capital
expenditures for the remainder of fiscal year 1999 and for fiscal year 2000.
Capital expenditures for the fourth quarter of fiscal year 1999 and for fiscal
year 2000 are estimated to be $22 million and $95 million, respectively.
However, these amounts are still in excess of anticipated cash flows from
operating activities. A further reduction in planned capital spending or an
extended decline in gas and oil prices 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 its capital expenditure and
working capital requirements, TransTexas will be required to supplement its
anticipated cash flow from operations with a combination of asset sales and
financings which may include borrowings or production payments. TransTexas' debt
covenants may limit its ability to obtain additional financing or to sell
properties, and there is no assurance that adequate funds can be obtained on a
timely basis from such sources. TransTexas has substantial accounts payable
outstanding. The vendors under certain of such accounts payable have filed
liens against TransTexas' properties. TransTexas is currently assessing the
amount and validity of the obligations underlying such liens and believes that
such obligations are not material; however, if the total accounts payable are
not reduced and additional liens are filed, a default under TransTexas' debt
documents may result. Moreover, a foreclosure of such liens could negatively
affect the security interest of the TEC Indenture. TransTexas intends to
substantially reduce its accounts payable with the proceeds of asset sales and
additional financings, but there can be no assurance that such proceeds, if
any, will be sufficient. See Note 8.
3. GAIN ON THE SALE OF ASSETS
On April 30, 1998, TransTexas sold its oilfield stimulation, cementing and
coiled tubing equipment and related facilities to an unaffiliated third party
for a sales price of $30 million, subject to post-closing adjustments. For the
nine months ended October 31, 1998, TransTexas recorded a $10.9 million pre-tax
gain as a result of this sale including a $0.2 million pre-tax gain recorded
in the three months ended October 31, 1998 as a result of post-closing
adjustments.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
On June 26, 1998, TransTexas sold its drilling rigs and related facilities
to an unaffiliated third party for a sales price of $75 million. On August 17,
1998, TransTexas sold its remaining drilling services assets to an unaffiliated
third party for a sales price of $20.5 million. TransTexas recorded pre-tax
gains of $52.0 and $5.5 million, respectively, as a result of these sales.
Additional purchase price adjustments related to the Sale of a TransTexas
subsidiary, TransTexas Transmission Corporation (TTC), referred to herein as the
Lobo Sale, resulted in a pre-tax loss on the sale of assets of $2.6 million,
during the nine months ended October 31, 1998.
In December 1998, TransTexas sold certain gas and oil properties for net
proceeds of approximately $16.7 million.
4. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
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 22, 1991, H. S. Finkelstein filed a 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. In
May 1998, the arbitration panel awarded $13 million to plaintiff, and plaintiff
subsequently obtained a judgment against TransTexas for the awarded amount.
Pursuant to a settlement agreement, TransTexas will pay the amount awarded over
a 24-month period. If payments are not made, plaintiff will have the right to
enforce its judgment.
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, TransTexas Transmission Corporation ("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. In May 1998, TransTexas filed a motion to transfer
venue, if the motion is not granted, TransTexas intends to vigorously defend
against these claims.
ZURICH. On May 5, 1998, The Home Insurance Company and Zurich Insurance
Company filed suit against TransTexas in the United States District Court,
Southern District of New York, to enforce an arbitration award of approximately
$7.25 million relating to workers' compensation policies. TransTexas filed a
motion to dismiss on June 4, 1998, and intends to vigorously defend this claim.
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.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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. As of October 31, 1998, management's estimate of the
range of loss 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 $0.3 million and $0.5 million for
the three months ended October 31, 1998 and 1997, respectively, and
approximately $1.3 million and $11.9 million for the nine months ended October
31, 1998 and 1997, respectively.
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
that has been contaminated by the discharge or release of hazardous materials or
wastes into the environment. Governmental authorities have the power to enforce
compliance with their regulations, and violations are subject to fines or
injunctions, or both. 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.
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 called 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 October 31, 1998, the production payment had been paid in full.
In February 1998, TransTexas entered into a production payment drilling
program agreement with an unaffiliated third party for the reimbursement of
certain drilling costs with respect to wells drilled by TransTexas. Pursuant to
the agreement, upon the approval of the third party of a recently drilled or
currently drilling well for inclusion in the program, the third party will
commit to the reimbursement of all or a portion of the cost of such well, up to
an aggregate maximum for all such wells of $75 million. The program wells are
subject to a dollar-denominated production payment equal to the primary sum of
such reimbursed costs, plus an amount equivalent to a 15% annual interest rate
on the unpaid portion of such primary sum. As of October 31, 1998, the
outstanding balance of the production payment was $46.5 million.
In September 1998, 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 $10 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 October 31, 1998, the outstanding balance of the production payment
was $10 million.
8
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 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 the Tax Allocation Agreement (defined
below), 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 in part upon independent legal advice, TransTexas has taken the
position that it will not incur 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
("TNGC"), TransAmerican, TEC and TARC. 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 $270 million (assuming no reduction for 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 8%) on the
tax and penalties (if any). The Tax Allocation Agreement provides that
TransAmerican will be obligated to fund the entire tax deficiency (if any)
resulting from the Lobo Sale. There can be no assurance that TransAmerican would
be able to fund any such payment at the time due and the other members of the
TNGC Consolidated Group may be required to pay the tax. TransTexas has recorded
a liability of 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. See Note 2.
TNGC, TransAmerican and its existing subsidiaries, including TARC, TEC and
TransTexas, are parties to 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.
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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
redetermine 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 June 1997 to
allocate to TransAmerican, as among the parties, any tax liability associated
with the Lobo Sale.
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 were to occur
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 existing 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.
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
10
<PAGE> 12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 or TransTexas, 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' capital stock,
but less than 50% of the total voting stock or economic value of TransTexas,
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 TransTexas Intercompany Loan may result in a
"change of control" of TransTexas under the terms of the BNY Facility. Such an
occurrence could create an obligation for TransTexas to repay any amounts due
under the BNY Facility defined in Note 8. At October 31, 1998, TransTexas had
approximately $5.1 million of indebtedness subject to such right of repayment.
In the event of a Change of Control under the Subordinated Notes Indenture or
the TransTexas Intercompany Loan, or a "change of control" under the terms of
the BNY Facility, 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.
LOBO SALE
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 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 would not have a material adverse effect on its ability to fund its debt
service, capital expenditure and working capital requirements.
DELIVERY COMMITMENTS
TransTexas has entered into various contracts whereby TransTexas is
required to deliver approximately 125 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 $0.8 million and $1.1
million during the three and nine months ended October 31, 1998, respectively.
In August 1998, TransTexas entered into a settlement agreement whereby delivery
commitments of approximately 350 MMcf per day were released in exchange for
TransTexas' interest in a
11
<PAGE> 13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
pipeline, elimination of amounts due TransTexas pursuant to the Lobo Sale
Agreement and a cash payment by TransTexas of $2.7 million. In July 1998,
TransTexas reduced the gain on sale of assets by $3.4 million as a result of
this settlement.
5. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
<S> <C> <C>
Prepayments:
Trade............................................................ $ 1,703 $ 7,120
Insurance........................................................ 2,012 3,171
Other ........................................................... 1,071 428
----------- -----------
$ 4,786 $ 10,719
=========== ===========
</TABLE>
6. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
<S> <C> <C>
Royalties............................................................ $ 8,471 $ 7,171
Taxes other than income taxes ....................................... 5,799 2,562
Interest............................................................. 6,798 2,544
Payroll ............................................................. 1,638 5,185
Litigation settlements............................................... 4,067 1,387
Insurance............................................................ 8,668 9,041
Other ............................................................... 8,625 7,928
----------- -----------
$ 44,066 $ 35,818
=========== ===========
</TABLE>
7. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
----------- -----------
<S> <C> <C>
Litigation accrual................................................... $ 9,237 $ 15,008
Other ............................................................... 10,236 5,612
----------- -----------
$ 19,473 $ 20,620
=========== ===========
</TABLE>
8. CREDIT AGREEMENT
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 October 31, 1998,
outstanding advances under the BNY Facility totaled approximately $5.1 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
12
<PAGE> 14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 October 31, 1998, TransTexas was not in compliance with these covenants, and
BNY has agreed to waive the noncompliance. Additional waivers may be required
in the future.
9. TRANSACTIONS WITH AFFILIATES
On June 13, 1997, a services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the services agreement,
TransTexas provided accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican will provide
advisory services to TransTexas, TARC and TEC. As of October 31, 1998 and
January 31, 1998, the receivable from TARC and TransAmerican for such services
was $2.1 million and $1.4 million, respectively. In connection with a December
15, 1998 transaction pursuant to which TARC transferred its refinery assets to a
minority-owned subsidiary, TCR Holding Corporation, a Delaware corporation ("TCR
Holding"), and TCR Holding transferred such assets to its majority owned
subsidiary, TransContinental Refining Corporation, a Delaware corporation
("TransContinental"), TransTexas will enter into an Amended and Restated
Services Agreement with TransAmerican and its affiliates (other than TCR
Holding and TransContinental) and an Amended and Restated Services Agreement
(the "TCR Group Services Agreement") with TCR Holding and TransContinental.
Pursuant to the TCR Group Services Agreement, TransTexas expects to provide
accounting, legal, administrative and other services to the TCR Group through
December 15, 2000 and receive payment for such services, through February 28,
1999, in the amount of $200,000 per month. Subsequent to February 28, 1999, the
monthly fee will be adjusted based on an assessment of the cost to TransTexas
of providing such services.
TEC makes advances to TransTexas pursuant to a promissory note which
matures on June 14, 2002. The note bears 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 note evidencing the TransTexas
Intercompany Loan) between TransTexas and TEC and the average outstanding
balance of all notes (other than the note evidencing the TARC Intercompany Loan)
between TARC and TEC. During the nine months ended October 31, 1998, TEC
advanced an aggregate of approximately $13.8 million to TransTexas and
TransTexas repaid $48.2 million to TEC under the note. Interest payments are due
and payable each June 15 and December 15. As of October 31, 1998 and January 31,
1998, the outstanding balance of the note was $2.5 million and $37.0 million
respectively. As of October 31, 1998 and January 31, 1998, the accrued interest
was $1.3 million and $0.8 million, respectively. On December 15, 1998,
TransTexas borrowed an additional $6.0 million.
10. IMPAIRMENT LOSS
TransTexas uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, net capitalized costs of gas
and oil properties are limited to the lower of unamortized cost or the cost
center ceiling. As of October 31, 1998 and July 31, 1998, TransTexas' net
capitalized costs of gas and oil properties exceeded the cost center ceiling.
TransTexas adjusted its net capitalized costs resulting in a non-cash pre-tax
impairment loss of approximately $164.9 million for the three months ended
October 31, 1998 and $16.3 million for the three months ended July 31, 1998.
In July 1998, TransTexas evaluated the carrying value of a pipeline system
which was underutilized. Based on then existing production levels, TransTexas
determined that the pipeline would remain significantly underutilized and
recorded a non-cash pre-tax impairment loss of approximately $5.5 million
related to this pipeline.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto of TransTexas included
elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate and
natural gas liquids (NGLs). The profitability of TransTexas also depends on its
ability to minimize finding and lifting costs and maintain its reserve base
while maximizing production. On May 29, 1997, TransTexas consummated a stock
purchase agreement with an unaffiliated buyer (the "Lobo Sale Agreement"), with
an effective date of March 1, 1997, to effect the sale (the "Lobo Sale") of the
stock of TransTexas Transmission Corporation ("TTC"), its subsidiary that owned
substantially all of TransTexas' Lobo Trend producing properties and related
pipeline transmission system, for an adjusted sales price of approximately $1.1
billion. Accordingly, TransTexas' reported results for the three and nine months
ended October 31, 1998 reflect the effects of reduced sales volumes as a result
of the Lobo Sale.
TransTexas' operating data for the three and nine months ended October 31,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf) (1) .................. 10.2 10.3 26.7 63.5
NGLs (MMgal) ................... 5.6 -- 8.9 61.7
Condensate (MBbls) ............. 449 92 668 518
Average prices:
Gas (dry) (per Mcf) (2) ....... $ 1.94 $ 2.66 $ 2.11 $ 2.04
NGLs (per gallon) .............. .20 -- .21 .29
Condensate (per Bbl) ........... 12.22 18.45 12.36 19.52
Number of gross wells drilled .. 8 21 36 79
Percentage of wells completed .. 38% 76% 64% 63%
</TABLE>
- ----------------------
(1) Sales volumes for nine months ended October 31, 1997 include 7.3 Bcf
delivered pursuant to volumetric production payments.
(2) Average prices for the three and nine months ended October 31, 1997
include amounts delivered under volumetric production payments. The
average gas price for TransTexas' undedicated production for these periods
was $2.06 per Mcf and $1.91 per Mcf, respectively. Gas prices do not
include the effect of hedging agreements.
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Lease .............................. $ 2.1 $ 3.0 $ 8.8 $ 15.2
Pipeline and gathering ............. 1.7 2.7 5.4 14.1
Natural gas liquids ................ -- -- -- 14.5
Drilling services .................. 0.7 1.4 2.9 2.1
------- ------- ------- -------
4.5 7.1 17.1 45.9
Taxes other than income taxes (1) .. 2.3 2.1 5.8 9.8
------- ------- ------- -------
$ 6.8 $ 9.2 $ 22.9 $ 55.7
======= ======= ======= =======
</TABLE>
- -----------------------------
(1) Taxes other than income taxes include severance, property, and other taxes.
14
<PAGE> 16
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Depletion rates (per Mcfe) .. $ 1.43 $ 1.09 $ 1.38 $ 1.04
============= ============= ============= =============
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1998, COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1997
Gas, condensate and NGL revenues for the three months ended October 31,
1998 decreased $1.1 million from the prior period, due primarily to lower
natural gas and condensate price. The average monthly prices received per Mcf of
gas ranged from $1.86 to $2.02 in the three months ended October 31, 1998,
compared to a range of $2.30 to $2.94, excluding amounts dedicated to volumetric
production payments, in the prior period. As of October 31, 1998, TransTexas had
a total of 142 producing wells compared to 106 producing wells at October 31,
1997. Drilling services revenues decreased by $1.3 million for the three months
ended October 31, 1998, due to the sale of drilling service assets to an
unaffiliated third party. For the three months ended October 31, 1998,
TransTexas recognized a pre-tax gain of $5.8 million on the sale of certain
drilling services division assets.
Lease operating expenses for the quarter ended October 31, 1998 decreased
by $0.9 million from the prior period due primarily to the decrease in materials
and supplies and well service and testing. Pipeline and gathering expenses
decreased $1.0 million from the prior period due primarily to the settlement
agreement whereby delivery commitments were released. Drilling service expenses
for the three months ended October 31, 1998 decreased $0.7 million primarily due
to the sale of drilling service assets. Depreciation, depletion and amortization
expense for the three months ended October 31, 1998 increased $6.2 million due
to a $0.34 per Mcfe increase in the depletion rate resulting from higher cost
properties and unsuccessful drilling results. General and administrative
expenses decreased by $1.0 million primarily as a result of a decrease in
professional fees. Taxes other than income taxes increased $0.2 million over the
prior period due primarily to increases in franchise taxes. The impairment loss
relates to a write-down of $164.9 million of TransTexas' net capitalized costs
of gas and oil properties to the cost center ceiling in accordance with the full
cost method of accounting.
Interest income for the three months ended October 31, 1998 decreased by
$3.9 million as compared to the prior period due to lower cash balances
available for investment. TransTexas does not expect to earn significant
interest income during the remainder of fiscal year 1999. Interest expense
increased by $5.0 million primarily as a result of the issuance of
dollar-denominated production payments and a decrease in the amount of interest
capitalized in connection with the acquisition of undeveloped leasehold acreage.
NINE MONTHS ENDED OCTOBER 31, 1998, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1997
Gas, condensate and NGL revenues for the nine months ended October 31,
1998 decreased by $73.4 million from the prior period, due primarily to
decreases in gas and NGLs sales volumes attributable to the divestiture of
producing properties as a result of the Lobo Sale. The average monthly prices
received per Mcf of gas, ranged from $1.86 to $2.36 in the nine months ended
October 31, 1998, compared to a range of $1.49 to $2.94, excluding amounts
dedicated to volumetric production payments in the same period in the prior
year. As of October 31, 1998, TransTexas had a total of 142 producing wells
compared to 106 producing wells at October 31, 1997. Transportation revenues
decreased $12.1 million over the prior period due primarily to the divestiture
of the pipeline system in connection with the Lobo Sale. Drilling services
revenues increased by $2.8 million for the nine months ended October 31, 1998
due to an increase in services provided to third parties prior to the sale of
the drilling services division. TransTexas' net gain on the sale of assets
includes a pre-tax gain of $68.4 million for the sale of certain drilling
services division assets and a pre-tax loss of $2.6 million due to post-closing
adjustments to the Lobo Sale purchase price.
Lease operating expenses for the nine months ended October 31, 1998
decreased by $6.4 million from the prior period due primarily to the Lobo Sale.
Pipeline and gathering expenses decreased by $8.7 million from the prior
15
<PAGE> 17
period due primarily to the divestiture of the pipeline system. NGL costs
decreased by $14.5 million from the prior period due to the Lobo Sale and the
resulting decrease in the volumes of natural gas processed. Drilling service
expenses for the nine months ended October 31, 1998 increased $0.8 million
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 nine months ended October 31, 1998 decreased $22.0 million due
to the Lobo Sale and the resulting decrease in TransTexas' undedicated natural
gas production, partially offset by a $0.34 per Mcfe increase in the depletion
rate. General and administrative expenses decreased by $13.7 million primarily
as a result of a decrease in litigation expense. Taxes other than income taxes
decreased by $4.0 million over the prior period 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 offset partially by an
increase in franchise taxes. The impairment loss of $186.7 million for the nine
months ended October 31, 1998 relates to a write-down of $181.2 million of
TransTexas' net capitalized costs of gas and oil properties to the cost center
ceiling and a $5.5 million write-down of an underutilized pipeline system.
Interest income for the nine months ended October 31, 1998 decreased by
$10.2 million as compared to the prior period due to lower cash balances
available for investment. TransTexas does not expect to earn significant
interest income during the remainder of fiscal year 1999. Interest expense
decreased by $1.7 million primarily as a result of the retirement of the Senior
Secured Notes in June 1997, offset in part by an increase in interest
attributable to the issuance of dollar-denominated production payments agreement
and a decrease in the amount of interest capitalized in connection with the
acquisition of undeveloped leasehold acreage.
LIQUIDITY AND CAPITAL RESOURCES
TransTexas makes substantial capital expenditures for the exploration and
development of natural gas and oil reserves. TransTexas historically has
financed its capital expenditures, debt service and working capital requirements
with cash flow 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. Cash flow from operations is
sensitive to the prices TransTexas receives for its natural gas and oil.
Proceeds from natural gas and oil sales are received at approximately the same
time that production-related burdens, such as royalties, production taxes and
drilling program obligations, are payable.
For the nine months ended October 31, 1998, total capital expenditures
were $181 million, including $15 million for lease acquisitions, $156 million
for drilling and development, and $10 million for gas gathering, other equipment
and seismic acquisitions. Capital expenditures for fiscal year 1999 will exceed
the $177 million originally estimated, and have significantly exceeded cash flow
from operations. TransTexas has reduced planned capital expenditures for the
remainder of fiscal year 1999 and for fiscal year 2000. Capital expenditures for
the fourth quarter of fiscal year 1999 and for fiscal year 2000 are estimated to
be $22 million and $95 million, respectively. However, these amounts are still
in excess of anticipated cash flows from operating activities. A further
reduction in planned capital spending or an extended decline in gas and oil
prices could result in less than anticipated cash flow from operations in fiscal
year 1999 and later years which could have a material adverse effect on
TransTexas. To finance its capital expenditure and working capital requirements,
TransTexas will be required to supplement its anticipated cash flow from
operations with a combination of asset sales and financings which may include
borrowings or production payments. TransTexas' debt covenants may limit its
ability to obtain additional financing or to sell properties, and there is no
assurance that adequate funds can be obtained on a timely basis from such
sources. TransTexas has substantial accounts payable
outstanding. The vendors under certain of such accounts payable have filed
liens against TransTexas' properties. TransTexas is currently assessing the
amount and validity of the obligations underlying such liens and believes that
such obligations are not material; however, if the total accounts payable are
not reduced and additional liens are filed, a default under TransTexas' debt
documents may result. Moreover, a foreclosure of such liens could negatively
affect the security interest of the TEC Indenture. TransTexas intends to
substantially reduce its accounts payable with the proceeds of asset sales and
additional financings, but there can be no assurance that such proceeds, if
any, will be sufficient.
In March 1998, TransTexas executed an amended and restated note in the
principal amount of approximately $14.9 million consolidating equipment
financing debt previously incurred. Concurrently, TransTexas incurred an
additional $14 million in equipment financing debt, evidenced by a promissory
note. These notes were repaid in June 1998 with proceeds from the sale of
TransTexas' drilling rigs.
In February 1998, TransTexas entered into a production payment drilling
program agreement with an unaffiliated third party for the reimbursement of
certain drilling costs with respect to wells drilled by TransTexas. Pursuant to
the agreement, upon the approval of the third party of a recently drilled or
currently drilling well for inclusion in the
16
<PAGE> 18
program, the third party will commit to the reimbursement of all or a portion of
the cost of such well, up to an aggregate maximum for all such wells of $75
million. The program wells are subject to a dollar-denominated production
payment equal to the primary sum of such reimbursed costs, plus an amount
equivalent to a 15% annual interest rate on the unpaid portion of such primary
sum. As of October 31, 1998, the outstanding balance of the production payment
was $46.5 million.
In September 1998, 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 $10 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 October 31, 1998, the outstanding balance of the production payment
was $10 million
During the nine months ended October 31, 1998, TEC advanced an aggregate
of approximately $13.8 million to TransTexas pursuant to a $50 million
promissory note which matures on June 14, 2002. The note bears interest in an
amount equal to a fixed semi-annual interest payment of $2.8 million, prorated
based on the average outstanding balance of all notes (other than the note
evidencing the TransTexas Intercompany Loan) between TransTexas and TEC and the
average outstanding balance of all notes (other than the note evidencing the
TARC Intercompany Loan) between TARC and TEC. TransTexas repaid $48.2 million of
the advances resulting in an outstanding balance at October 31, 1998 of $2.5
million. On December 15, 1998, TransTexas borrowed an additional $6 million.
TransTexas and BNY Financial Corporation are parties to a Second Amended
and Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 14, 1997. As of October 31, 1998, outstanding
advances under the BNY Facility totaled approximately $5.1 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. As of October 31, 1998, TranTexas was not in
compliance with these covenants, and BNY has agreed to waive the noncompliance.
Additional waivers may be required in the future.
Subsequent to the Lobo Sale, TransTexas' exploration and production
activities were no longer concentrated in the Laredo, Texas area nor comparable
to those historically conducted. Therefore, the utilization of a centrally
located drilling services operation in Laredo was no longer as efficient or cost
effective. In April 1998, TransTexas sold its oilfield stimulation, cementing
and coiled tubing equipment and related facilities for a sales price of $30
million, subject to post-closing adjustments. In June 1998, TransTexas sold its
drilling rigs and related assets for a sales price of $75 million. TransTexas
sold its remaining drilling services assets in August 1998 for a sales price of
$20.5 million. TransTexas expects that its future general and administrative
expenses and operating expenses will be reduced as a result of these sales.
In December 1998, TransTexas sold certain gas and oil properties for net
proceeds of approximately $16.7 million.
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including liabilities
with respect to the litigation matters described in Note 3 of Notes to Condensed
Consolidated Financial Statements. These matters, individually and in the
aggregate, amount to significant potential liability which, if adjudicated in a
manner adverse to TransTexas in one reporting period, could have a material
adverse effect on TransTexas' cash flows or results of operations for that
period.
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 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.
TransTexas has entered into various contracts whereby TransTexas is
required to deliver approximately 125 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 $0.8 million and $1.1
million during the three and nine months
17
<PAGE> 19
ended October 31, 1998, respectively. In August 1998, TransTexas entered into a
settlement agreement whereby delivery commitments of approximately 350 MMcf per
day were released in exchange for TransTexas' interest in a pipeline,
elimination of amounts due TransTexas pursuant to the Lobo Sale Agreement and a
cash payment by TransTexas of $2.7 million. In July 1998, TransTexas reduced the
gain on sale of assets by $3.4 million as a result of this proposed settlement.
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 in part upon independent legal advice, TransTexas has taken the
position that it will not incur 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 8%) on the tax and penalties (if any). The Tax Allocation Agreement
provides that TransAmerican will be obligated to fund the entire tax deficiency
(if any) resulting from the Lobo Sale. There can be no assurance that
TransAmerican would be able to fund any such payment at the time due and the
other members of the TNGC Consolidated Group, thus, may be required to pay the
tax. TransTexas has reserved approximately $75 million with respect to the
potential tax liability for financial reporting purposes to reflect a portion of
the federal tax liability that TransAmerican might not be able to pay. If
TransTexas were required to pay this tax deficiency, it is likely that it would
be required to sell significant assets or raise additional debt or equity
capital to fund the payment.
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
18
<PAGE> 20
of federal income tax liability. If such Deconsolidation were to occur 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.
POTENTIAL EFFECTS OF 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 become the beneficial owner of more than 50% of the
total voting power of TransTexas' then outstanding voting stock, and during the
90 days thereafter, the rating of the 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 or TransTexas 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' capital stock,
but less than 50% of the total voting stock or economic value of TransTexas,
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 TransTexas Intercompany Loan may result in a
"change of control" of TransTexas under the terms of the BNY Facility. Such an
occurrence could create an obligation for TransTexas to repay any amounts due
under the BNY Facility. At October 31, 1998, TransTexas
19
<PAGE> 21
had approximately $5.1 million of indebtedness subject to such right of
repayment. In the event of a Change of Control under the Subordinated Notes
Indenture or the TransTexas Intercompany Loan or a "change of control" under the
terms of the BNY Facility, 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.
LACK OF COMPLETE YEAR 2000 COMPLIANCE
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
information technology ("IT") systems to malfunction in and around the Year
2000. Such malfunctions may lead to significant business delays in the U.S. and
internationally. The Year 2000 problem will potentially impact the normal
business activities because information necessary to monitor and control various
operations is controlled by computers. In addition to potential problems from
computer systems, potential problems could arise from equipment with embedded
chips.
TransTexas has defined a Year 2000-compliant system as one capable of
correct identification, manipulation and calculation when processing data in
connection with the year change from December 31, 1999 to January 1, 2000. A
Year 2000-compliant system is also capable of correct identification,
manipulation and calculation using leap years both alone and in conjunction with
other dates.
Not all of TransTexas' systems are compliant under the above definition.
However, TransTexas is addressing the issues associated with this problem in the
following manner.
o In the first stage, TransTexas commenced preparation of an inventory of
all IT and non-IT systems, as well as equipment that could have embedded
chips, whether or not critical to the operation of the business.
TransTexas also compiled a listing of material relationships with third
parties with which it conducts business. These relationships include
contractors, suppliers and financial institutions. The state of this
stage of the Year 2000 compliance process is approximately 95% complete.
o In stage two, the Company is assessing the results of the completed
portions of inventory done in the first stage to determine the Year 2000
impact and what actions need to be taken to obtain Year 2000 compliance.
For TransTexas' internal systems, actions needed include obtaining vendor
certification of Year 2000 compliance, remediating internal systems or
replacing systems and equipment that cannot be remediated. This stage is
approximately 85% complete with respect to internal systems. Major
outstanding items include receipt of vendor certifications and
installation of Year 2000 upgrades for certain non-critical systems.
TransTexas has determined a course of action for remediation or
replacement of all identified critical internal systems. TransTexas is
surveying and obtaining information about Year 2000 readiness of its
material third-party relationships. Contingency plans will be developed
for those third parties that cannot satisfactorily demonstrate Year 2000
compliance.
o The third stage includes the repair, replacement or retirement of systems.
This stage of the Year 2000 process is ongoing and is dependent upon the
availability of upgrades from TransTexas' IT vendors, technician time to
implement the upgrades and notification from other third parties of Year
2000 compliance. TransTexas has been upgrading packaged software
throughout the organization. TransTexas began implementation of a new
financial reporting system on December 1, 1998. Several operational
systems are in various stages of implementation, which should be completed
prior to June 1999. The vendors of these new systems have provided
certification that their respective software packages are Year 2000
compliant according to TransTexas' definition.
o The last stage of the implementation process, which is approximately 40%
complete, includes testing all of the changes implemented individually and
integrating those changes with all of the systems of TransTexas and its
suppliers and customers. Various forms of testing are used depending on
the type of change implemented. Each upgrade, to the extent economically
feasible, will be run through a test environment before it is implemented.
20
<PAGE> 22
It is then tested to see how well it integrates into TransTexas' overall IT
environment. Currently, TransTexas is not employing any independent verification
processes of its systems' tests.
As of October 31, 1998, TransTexas had incurred approximately $2 million
in direct costs with respect to its Year 2000 compliance program. TransTexas
anticipates spending an additional $0.5 million in direct costs to complete its
Year 2000 compliance program.
Despite TransTexas' best efforts to ready its systems and infrastructure
for the Year 2000, there are many factors outside of TransTexas' control that
could affect readiness for the Year 2000. Although TransTexas believes that Year
2000 compliance will be accomplished by the implementation of the program
described above, there could be operational issues with the new systems
implemented that prevent TransTexas from solving the Year 2000 compliance issue
in a timely manner. In such event, TransTexas could be required to implement a
contingency plan for Year 2000 compliance. Although TransTexas has not
completely finalized its contingency plans, TransTexas will select from several
alternative plans including remediation of its software, installation of other
third party vendor software or some combination of alternatives. Substantial
completion of these plans is expected by September 1999 with continual
refinement to the plans ongoing until all of TransTexas' critical systems and
all critical third-party relationships have demonstrated Year 2000 compliance.
The potential impact of the Year 2000 problem on TransTexas could be
material, as virtually every aspect of the business will be affected. TransTexas
may be adversely affected by this problem, depending on whether it and the
entities with which it does business address this issue successfully.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the condensed consolidated financial statements for a
discussion of TransTexas' legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended October
31, 1998.
22
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTEXAS GAS CORPORATION
(Registrant)
By: /s/ Ed Donahue
---------------------------------
Ed Donahue, Vice President
and Chief Financial Officer
December 21, 1998
23
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: TransTexas Gas Corporation
Registration Statements on Form S-3 and Form S-4
Ladies and Gentlemen:
We are aware that our report dated December 15, 1998 on our review of
interim condensed consolidated financial information of TransTexas Gas
Corporation for the three and nine months ended October 31, 1998 and 1997
included in this Form 10-Q for the quarter ended October 31, 1998 is
incorporated by reference in the Company's registration statements on Form S-3
(Registration No. 33-91494) and Form S-4 (Registration No. 333-33803), each as
filed with the Securities and Exchange Commission. Pursuant to Rule 436 under
the Securities Act of 1933, this report should not be a part of the registration
statements prepared or certified by us within the meaning of Sections 7 and 11
of that Act.
PricewaterhouseCoopers LLP
Houston, Texas
December 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from TranTexas
Gas Corporation's unaudited condensed consolidated balance sheet at October 31,
1998 and the unaudited condensed consolidated statement of operations for the
nine months ended October 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,613
<SECURITIES> 0
<RECEIVABLES> 20,097
<ALLOWANCES> 0
<INVENTORY> 9,358
<CURRENT-ASSETS> 36,854
<PP&E> 1,465,419
<DEPRECIATION> 883,878
<TOTAL-ASSETS> 651,628
<CURRENT-LIABILITIES> 133,235
<BONDS> 574,742
0
0
<COMMON> 740
<OTHER-SE> (131,475)
<TOTAL-LIABILITY-AND-EQUITY> 651,628
<SALES> 67,081
<TOTAL-REVENUES> 137,699
<CGS> 0
<TOTAL-COSTS> 270,826
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,117
<INCOME-PRETAX> (193,112)
<INCOME-TAX> (38,882)
<INCOME-CONTINUING> (154,230)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,142)
<CHANGES> 0
<NET-INCOME> (155,372)
<EPS-PRIMARY> (2.70)
<EPS-DILUTED> (2.70)
</TABLE>
