TRANSTEXAS GAS CORP, 10-Q, 1999-06-18

TRANSTEXAS GAS CORP
10-Q, 1999-06-18
CRUDE PETROLEUM & NATURAL GAS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 30, 1999

Commission File Number 0-23580

------------------------

TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)

(281) 987-8600
(Registrant's telephone number, including area code)

------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---

The number of shares of common stock of the registrant outstanding on
June 18, 1999 was 57,515,566.

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<PAGE> 2

TRANSTEXAS GAS CORPORATION

TABLE OF CONTENTS

PAGE
----
PART I.
FINANCIAL INFORMATION

<S> <C>
Item 1. Financial Statements:

Report of Independent Accountants............................................................ 2

Condensed Consolidated Balance Sheet as of April 30, 1999 and January 31, 1999............... 3

Condensed Consolidated Statement of Operations for the three months ended
April 30, 1999 and 1998.................................................................. 4

Condensed Consolidated Statement of Cash Flows for the three months ended
April 30, 1999 and 1998.................................................................. 5

Notes to Condensed Consolidated Financial Statements......................................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................... 13

Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 19

PART II.
OTHER INFORMATION

Item 1. Legal Proceedings............................................................................... 20

Item 3. Defaults Upon Senior Securities................................................................. 20

Item 6. Exhibits and Reports on Form 8-K................................................................ 20

Signature.................................................................................................. 21

</TABLE>

<PAGE> 3

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 (debtor-in-possession) as of April 30, 1999 and the
related condensed consolidated statements of operations and of cash flows for
the three months ended April 30, 1999 and 1998. 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, 1999, and the
related consolidated statements of operations, of stockholders' equity
(deficit), and of cash flows for the year then ended (not presented herein); and
in our report dated May 20, 1999, which contains an explanatory paragraph
regarding the Company's ability to continue as a going concern, 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, 1999, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.

PricewaterhouseCoopers LLP

Houston, Texas
June 17, 1999

<PAGE> 4

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>

APRIL 30, JANUARY 31,
1999 1999
------------- ------------

ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 8,761 $ 3,775
Accounts receivable...................................................... 18,592 16,091
Receivable from affiliates............................................... 1,250 1,286
Inventories.............................................................. 3,178 3,210
Other current assets..................................................... 3,247 3,693
------------ ------------
Total current assets................................................ 35,028 28,055
------------ ------------

Property and equipment...................................................... 1,461,278 1,459,630
Less accumulated depreciation, depletion and amortization................... 1,183,428 1,167,487
------------ ------------

Net property and equipment -- based on the full cost method
of accounting for gas and oil properties of which $20,109 and
$20,477 was excluded from amortization at April 30, 1999
and January 31, 1999 respectively...................................... 277,850 292,143
------------ ------------
Other assets, net........................................................... 22,738 25,169
------------ ------------

$ 335,616 $ 345,367
============ ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Note payable............................................................. $ 6,000 $ --
Accounts payable......................................................... 1,276 --
Accrued liabilities...................................................... 2,152 983
------------ ------------
Total current liabilities........................................... 9,428 983
------------ ------------

Liabilities subject to compromise........................................... 733,722 718,139
Production payments, less current portion................................... 56,189 56,260

Commitments and contingencies (Note 3)...................................... -- --

Stockholders' deficit:
Common stock, $0.01 par value, 100,000,000
shares authorized, 57,515,566 shares issued and outstanding
at April 30, 1999 and January 31, 1999.............................. 740 740
Additional paid-in capital............................................... 20,615 19,915
Accumulated deficit...................................................... (222,673) (188,265)
------------ ------------
(201,318) (167,610)
Treasury stock, at cost, 16,484,434 shares............................... (262,405) (262,405)
------------ ------------
Total stockholders' deficit...................................... (463,723) (430,015)
------------ ------------

$ 335,616 $ 345,367
============ ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE> 5

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED
APRIL 30,
-----------------------------------
1999 1998
------------ --------------

<S> <C> <C>
Revenues:
Gas, condensate and natural gas liquids................................ $ 18,393 $ 19,330
Gain (loss) on the sale of assets...................................... (502) 12,327
Other.................................................................. 1,174 1,810
----------- -------------
Total revenues....................................................... 19,065 33,467
----------- -------------

Costs and expenses:
Operating.............................................................. 6,880 6,512
Depreciation, depletion and amortization............................... 16,332 11,846
General and administrative............................................. 5,937 5,645
Taxes other than income taxes.......................................... 1,660 976
----------- -------------
Total costs and expenses............................................. 30,809 24,979
----------- -------------
Operating income (loss).............................................. (11,744) 8,488
----------- -------------

Other income (expense):
Interest income........................................................ 49 574
Interest expense, net.................................................. (22,713) (19,529)
----------- -------------
Total other income (expense)......................................... (22,664) (18,955)
----------- -------------
Loss before income taxes............................................. (34,408) (10,467)
Income taxes (benefit).................................................... -- (3,664)
----------- -------------
Net loss............................................................. $ (34,408) $ (6,803)
=========== =============

Basic and diluted net loss per share...................................... $ (0.60) $ (0.12)
=========== =============

Weighted average number of shares outstanding for basic
and diluted net loss per share......................................... 57,515,566 57,515,566
=========== =============

</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE> 6

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

THREE MONTHS ENDED
APRIL 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net loss ............................................................. $ (34,408) $ (6,803)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation, depletion and amortization.............................. 16,332 11,846
Amortization of debt issue costs...................................... 1,677 831
(Gain) loss on the sale of assets..................................... 502 (12,327)
Deferred income taxes................................................. -- (3,664)
Changes in assets and liabilities:
Accounts receivable................................................. (2,501) (4,857)
Receivable from affiliates.......................................... 36 --
Inventories......................................................... 32 (2,195)
Other current assets................................................ 446 5,097
Accounts payable.................................................... (219) (2,568)
Accrued interest payable to affiliates.............................. 14,722 13,255
Accrued liabilities................................................. 4,436 (194)
Transactions with affiliates, net................................... 700 (25)
Other assets........................................................ 878 62
Other liabilities................................................... (1,796) 622
----------- -----------
Net cash provided (used) by operating activities................. 837 (920)
----------- -----------

Investing activities:
Capital expenditures..................................................... (1,189) (61,359)
Proceeds from the sale of assets......................................... 550 22,112
----------- -----------
Net cash used by investing activities............................ (639) (39,247)
----------- -----------

Financing activities:
Issuance of production payments.......................................... -- 39,100
Principal payments on production payments................................ (1,054) (2,705)
Issuance of note payable................................................. 6,000 --
Issuance of long-term debt............................................... -- 14,000
Principal payments on long-term debt..................................... -- (2,466)
Issuance of note payable to affiliate.................................... -- 3,345
Revolving credit agreement, net.......................................... 29 18
Debt issue costs......................................................... (187) --
----------- -----------
Net cash provided by financing activities........................ 4,788 51,292
----------- -----------
Increase in cash and cash equivalents............................ 4,986 11,125
Beginning cash and cash equivalents......................................... 3,775 38,502
----------- -----------
Ending cash and cash equivalents............................................ $ 8,761 $ 49,627
=========== ===========

Noncash operating and investing activities:
Accounts payable for property and equipment.............................. $ 40,680 $ 38,318
=========== ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE> 7

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

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 April 30, 1999 and the results of its operations and cash flows for the
interim periods ended April 30, 1999 and 1998. The condensed consolidated
balance sheet as of January 31, 1999 was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. 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, 1999.
Unless otherwise noted, the terms "TransTexas" and the "Company" refer to
TransTexas Gas Corporation and its subsidiaries, including Galveston Bay
Processing Corporation. TransTexas is a subsidiary of TransAmerican Energy
Corporation ("TEC"), which is an indirect 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, 2001. TransTexas is uncertain as to
the impact that adoption of SFAS 133 will have on its financial statements.

2. CHAPTER 11 FILING AND LIQUIDITY

On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). On April 20, 1999, TEC and
TARC also filed voluntary petitions under Chapter 11. The bankruptcy cases are
being jointly administered. On May 20, 1999, the cases were transferred to the
Southern District of Texas, Corpus Christi Division. TransTexas, TEC and TARC
are operating their businesses and managing their properties as debtors-in-
possession. TransTexas' Chapter 11 filing does not include its subsidiaries,
including Galveston Bay Processing Corporation which had assets of approximately
$12.5 million at April 30, 1999. As a result of the Chapter 11 filings, absent
approval from the Bankruptcy Court, the Company is prohibited from paying, and
creditors are prohibited from attempting to collect, claims or debts arising
prior to the bankruptcy.

Pursuant to a Credit Agreement (the "DIP Facility") dated April 27, 1999
among TransTexas, as Borrower, various financial institutions, as Lenders,
Credit Suisse First Boston Management Corporation, as Administrative Agent, and
TEC and TARC, as Guarantors, the Lenders have agreed to provide up to $20
million in post-petition financing to the Company (with an additional $10
million potentially available). On April 28, 1999, $6 million was disbursed to
TransTexas under the Credit Agreement pursuant to an interim order of the
Bankruptcy Court. Additional advances may be made pursuant to a final order
dated June 16, 1999. Advances under the Credit Agreement bear interest at the
rate of 13% per annum. TransTexas' obligations are guaranteed by TEC and TARC
and are secured by a first priority senior priming lien (subject to certain
exceptions) on all property of TransTexas, TEC and TARC. Amounts outstanding
under the DIP Facility will mature on the earlier of October 20, 1999 or the
effective date of a plan of reorganization.

Pursuant to an order of the Bankruptcy Court, TransTexas can borrow up to
$10 million under the BNY Facility (defined in Note 4).

6
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TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

plan of reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of the interests of existing security holders as a result of the
issuance of securities to creditors or new investors. The consummation of a plan
of reorganization will require approval of the Bankruptcy Court.

As a result of the bankruptcy filing, a significant amount of the
Company's liabilities, including secured debt, are subject to compromise. As of
April 30, 1999 and January 31, 1999, liabilities subject to compromise included
the following (in thousands of dollars):
<TABLE>
<CAPTION>

APRIL 30, JANUARY 31,
1999 1999
----------- -------------

<S> <C> <C>
Long-term debt..............................$ 125,250 $ 125,170
Notes payable to affiliates................. 457,928 457,928
Accounts payable............................ 66,524 66,231
Accrued interest payable to affiliate....... 23,335 8,613
Accrued liabilities......................... 47,245 44,961
Other liabilities........................... 13,440 15,236
----------- -----------
$ 733,722 $ 718,139
=========== ===========
</TABLE>

The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. As a result
of the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of TransTexas to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop gas and oil reserves.

In the ordinary course of business, 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. A 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 2000 and later years which
could have a material adverse effect on TransTexas.

Management's plans are to continue to incur capital expenditures with the
goal of increasing production and reserves. To finance these planned capital
expenditures, TransTexas will be required to supplement its anticipated cash
flow from operations with a combination of asset sales, financings or other
capital-raising transactions. The ability to incur capital expenditures, sell
properties and obtain additional financing is subject to the approval and
ongoing supervision of the Bankruptcy Court, as well as the approval of the
lenders under the DIP Facility. There

7
<PAGE> 9

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

is no assurance that adequate funds can be obtained on a timely basis or that
the Bankruptcy Court will approve such transactions.

3. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Chapter 11 Bankruptcy. On April 19, 1999 (the "Petition Date"), TransTexas
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware. On
April 20, 1999, TEC and TARC also filed voluntary petitions under Chapter 11. On
May 20, 1999, the cases were transferred to the Southern District of Texas,
Corpus Christi Division. The bankruptcy cases are being jointly administered
under the caption "In re: TransTexas Gas Corporation, et al., Debtors," Case No.
99-21550-C-11. TransTexas, TEC and TARC are operating their businesses and
managing their properties as debtors-in-possession. As a result of the Chapter
11 filings, absent approval of the Bankruptcy Court, the Company is prohibited
from paying, and creditors are prohibited from attempting to collect, claims or
debts arising prior to the Petition Date.

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.

Blue Gulf. On July 14, 1998, Blue Gulf Seafood, an owner of oyster leases,
sued TransTexas in the U. S. District Court, Southern District of Texas,
Galveston Division. Blue Gulf is claiming damages in excess of $5 million as a
result of alleged economic injury to its oyster beds caused by TransTexas'
drilling and development activities in the Eagle Point Prospect in Galveston
Bay. In October 1998, TransTexas obtained a final judgment in its favor
principally on the grounds that Blue Gulf lacked standing. Blue Gulf has
appealed.

Finkelstein. On April 22, 1991, 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. TransAmerican, TransTexas and TTC's motion to
transfer venue was denied by the Court on April 1, 1999. The Court also set the
case for trial on November 1, 1999. On April 29, 1999, TransTexas removed the
case to the United States Bankruptcy Court for the Southern District of Texas,
Laredo Division. On May 28, 1999, plaintiffs filed a motion to remand the case
to the 49th Judicial District Court, Zapata County, Texas. 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

8
<PAGE> 10

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)0

approximately $7.25 million relating to additional collateral for payments under
workers' compensation policies. In January 1999, the court entered a judgment in
favor of Zurich and Home, confirming the arbitration award. Zurich has also, by
notice dated November 25, 1998, filed a second arbitration with respect to its
attempt to satisfy a disputed premium payment of approximately $4.2 million.
Zurich has also made claims on collateral to cover unpaid loss billings of over
$1 million. Zurich's notice of arbitration names only TransAmerican, but
TransTexas has provided significant collateral to Zurich and objected to any
draw on its collateral.

Vendor Claims. Numerous suppliers of goods and services have filed or
asserted liens against property of the Company and Galveston Bay Processing
Corporation to secure the payment of invoices. Many of these vendors have also
filed collection suits against the Company and Galveston Bay Processing
Corporation and/or suits to enforce their liens. The amount of claims as to
which liens have been asserted or filed against the Company and its
subsidiaries, including Galveston Bay Processing Corporation, was approximately
$37.2 million as of June 17, 1999.

Royalty Claims. Numerous royalty owners have made claims and filed suits
against the Company for payment of unpaid royalties under mineral leases and
other agreements. Unpaid royalties totaled approximately $8.2 million at June
17, 1999.

General. All of the foregoing claims are stayed as a result of the Chapter
11 filings. 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 April
30, 1999, the possible range of estimated losses related to litigation claims
(other than vendor claims and royalty claims), in addition to the estimates
accrued by TransTexas, is $0 to $20 million. Litigation expense, including legal
fees, totaled approximately $0.4 million and $0.1 million for the three months
ended April 30, 1999 and 1998, 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
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.

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

9
<PAGE> 11

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

determined by an industry index less $0.08 per MMBtu. Deliveries commenced on
June 1, 1997 and are to continue through August 31, 1999.

As of April 30, 1999, TransTexas had delivery commitments for an aggregate
of approximately 125 MMcf of natural gas per day pursuant to certain contracts.
These contracts require TransTexas to pay certain charges if it does not deliver
the specified quantities. Such charges totaled $0.6 million and $1.0 million for
the three months ended April 30, 1999 and 1998, respectively.

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 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 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 TNGC Holdings Corporation, the sole stockholder of
TransAmerican ("TNGC"), TransAmerican and its existing subsidiaries, including
TARC, TEC and TransTexas (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 could be offset in subsequent 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 determined
that it was not required to 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 also
includes 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 of 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 7%) on the tax and
penalties (if any). The

10
<PAGE> 12

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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; therefore, the other members of the TNGC Consolidated Group 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. As a result of subsequent net operating losses and the bankruptcy filing,
it is more likely than not that any claims against TransTexas as a result of the
Lobo Sale will be in the form of reduced net operating loss carryforwards.

If 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. A Deconsolidation could result
from the issuance of additional equity securities by TransTexas, or from the
sale or other disposal of shares of TransTexas by TEC or TransAmerican. 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, 2000, 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 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 by any member of the TNGC Consolidated
Group. As of April 30, 1999, TransTexas had paid $9.6 million of these franchise
taxes and estimates that it will pay approximately $0.6 million during fiscal
2000.

It is not possible to predict the impact of the bankruptcy filing on the
Tax Allocation Agreement, any obligations of TransTexas to the TNGC Consolidated
Group or the tax attributes of TransTexas, including its net operating loss
carryforwards. In addition, the utilization of any remaining net operating loss
carryforwards after discharge from bankruptcy may be limited. Net operating loss
carryforwards at April 30, 1999 were approximately $397 million.

4. CREDIT AGREEMENT

TransTexas and BNY Financial Corporation ("BNY") are parties to a Second
Amended and Restated Accounts Receivable Management and Security Agreement dated
as of October 14, 1997, as amended (the "BNY Facility"). As of April 30, 1999,
outstanding advances under the BNY Facility totaled approximately $0.4 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 and is guaranteed by Mr. Stanley. The BNY
Facility contains certain financial covenants. Pursuant to an order of the
Bankruptcy Court, TransTexas can borrow up to $10 million and access cash
collateral under the BNY Facility. The amounts that may be advanced under the
BNY Facility are based on a percentage of certain of the Company's receivables
and inventory.

11
<PAGE> 13

TRANSTEXAS GAS CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

5. TRANSACTIONS WITH AFFILIATES

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, Orion Refining Corporation, a
Delaware corporation ("Orion"), TransTexas entered into an Amended and Restated
Services Agreement with TransAmerican and its affiliates (other than TCR Holding
and Orion) and an Amended and Restated Services Agreement (the "TCR Group
Services Agreement") with TCR Holding and Orion. Pursuant to the TCR Group
Services Agreement, TransTexas will provide accounting, legal, administrative
and other services to the TCR Group through December 15, 2000. The fee for such
services, from December 15, 1998 through February 28, 1999, was $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. As of
April 30, 1999 and January 31, 1999, respectively, the receivable from Orion for
such services was $0.3 million.

During the year ended January 31, 1999, TEC made advances to TransTexas
pursuant to a $50 million promissory note which matures on June 14, 2002. The
note bears interest at a rate of 11.375% per annum. Interest payments are due
and payable each June 15 and December 15. As of April 30, 1999 and January 31,
1999, respectively, the outstanding principal balance of the note was $6.5
million and accrued interest was $0.3 million and $0.1 million.

In December 1998, TransTexas executed a note payable to TransAmerican in
the original principal amount of $1.4 million plus interest at a rate of 15% per
annum. The proceeds from this loan were used to pay a portion of the Company's
interest payment obligations on December 31, 1998. As of April 30, 1999 and
January 31, 1999, respectively, the balance due on the note was $1.4 million.
Accrued interest was $0.1 million as of April 30, 1999.

In April 1999, TEC made a cash contribution of $0.7 million to TransTexas.

In October 1998, TransTexas and Galveston Bay Processing Corporation
entered into a treating agreement. Pursuant to the agreement, Galveston Bay
Processing Corporation treats and dehydrates gas and separates and handles
condensate produced from TransTexas' Eagle Bay Field at its processing facility
located in Winnie, Texas.

12
<PAGE> 14

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.

TransTexas' operating data for the three months ended April 30, 1999 and
1998, is as follows:
<TABLE>
<CAPTION>

THREE MONTHS ENDED
APRIL 30,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Sales volumes:
Gas (Bcf)..................................................................... 7.1 7.8
NGLs (MMgal)................................................................ 8.4 2.0
Condensate (MBbls).......................................................... 458 72
Average prices:
Gas (dry) (per Mcf)......................................................... $ 1.86 $ 2.18
NGLs (per gallon)........................................................... .20 .23
Condensate and oil (per Bbl)................................................ 13.70 13.51
Number of gross wells drilled................................................. 3 14
Percentage of wells completed................................................. -- 64%

A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):

THREE MONTHS ENDED
APRIL 30,
-----------------------
1999 1998
---------- ----------
Operating costs and expenses:
Lease..................................................................... $ 4.1 $ 3.0
Pipeline and gathering.................................................... 2.8 2.8
Drilling services......................................................... -- 0.7
---------- ----------
6.9 6.5
Taxes other than income taxes (1)............................................... 1.7 1.0
---------- ----------
$ 8.6 $ 7.5
========== ==========
</TABLE>

- ----------------------------

(1) Taxes other than income taxes include severance, property and other taxes.

TransTexas' average depletion rates have been as follows:

THREE MONTHS ENDED
APRIL 30,
----------------------
1999 1998
--------- --------
<S> <C> <C>

Depletion rates (per Mcfe)................................................ $ 1.79 $ 1.32
========= ========
</TABLE>

13
<PAGE> 15

THREE MONTHS ENDED APRIL 30, 1999 COMPARED WITH THE THREE MONTHS ENDED APRIL
30, 1998

Gas, condensate and NGL revenues for the three months ended April 30, 1999
decreased $0.9 million from the prior period, due primarily to lower natural gas
prices and sales volumes offset in part by increases in condensate and NGLs
sales volumes. The average monthly prices received per Mcf of gas ranged from
$1.76 to $1.91 in the three months ended April 30, 1999, compared to a range of
$2.10 to $2.35, in the prior period. Drilling services revenues decreased by
$1.1 million for the three months ended April 30, 1999, due primarily to the
sale of certain drilling services division assets. For the three months ended
April 30, 1999, TransTexas recognized a pre-tax loss of $0.5 million on the sale
of certain vehicles and other equipment. For the three months ended April 30,
1998, TransTexas recognized a pre-tax gain of $10.3 million on the sale of
certain drilling services division assets and a pre-tax gain of $2.0 million due
to post-closing adjustments to the Lobo Sale purchase price.

Lease operating expenses for the three months ended April 30, 1999
increased by $1.1 million from the prior period due primarily to increases in
salt water disposal costs and workover expenses. Pipeline and gathering expenses
were unchanged from the prior period. Drilling service expenses for the three
months ended April 30, 1999 decreased $0.7 million primarily due to the sale of
certain drilling assets. Depreciation, depletion and amortization expense for
the three months ended April 30, 1999 increased $4.5 million due to an increase
in the depletion rate resulting from higher cost properties and unsuccessful
drilling results. General and administrative expenses increased by $0.3 million
primarily as a result of an increase in bad debt expense. Taxes other than
income taxes increased by $0.7 million over the prior period due primarily to
increases in property taxes.

Interest income for the three months ended April 30, 1999 decreased by
$0.5 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 fiscal 2000. Interest expense increased by $3.2 million
primarily as a result of the issuance of dollar-denominated production payments
in February and September 1998 and a decrease in the amount of interest
capitalized in connection with unevaluated leasehold acreage.

LIQUIDITY AND CAPITAL RESOURCES

On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware. On April 20, 1999, TEC and TARC also filed voluntary
petitions under Chapter 11. On May 20, 1999, the cases were transferred to the
Southern District of Texas, Corpus Christi Division. The bankruptcy cases are
being jointly administered. TransTexas, TEC and TARC are operating their
businesses and managing their properties as debtors-in-possession. As a result
of the Chapter 11 filings, absent approval from the Bankruptcy Court, the
Company is prohibited from paying, and creditors are prohibited from attempting
to collect, claims or debts arising prior to the bankruptcy.

The bankruptcy petitions were filed in order to preserve cash and to give
the Company the opportunity to restructure its debt. The consummation of a plan
of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise, and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of the interests of existing security holders as a result of the
issuance of securities to creditors or new investors. The consummation of a
plan of reorganization will require approval of the Bankruptcy Court.

14
<PAGE> 16

At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors, royalty owners or stockholders. There can be no
assurance that the plan of reorganization to be submitted by the Company will be
approved or that the Bankruptcy Court will permit TransTexas to continue to
operate as a debtor-in-possession. As a result, there is substantial doubt about
the Company's ability to continue as a going concern. See the Condensed
Consolidated Financial Statements of the Company included under Item 1 of this
report.

TransTexas makes substantial capital expenditures for the exploration and
development of natural gas and oil reserves in the normal course of business.
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. A 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 2000 and later years which could have a material
adverse effect on TransTexas. 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 three months ended April 30, 1999, total capital expenditures
incurred were $4 million, including $1 million for lease acquisitions and $3
million for gas gathering, other equipment and seismic acquisitions. Capital
expenditures for the remainder of fiscal 2000 are estimated to be approximately
$61 million which amount is in excess of anticipated cash flows from operating
activities. To finance these planned capital expenditures, TransTexas will be
required to supplement its anticipated cash flow from operations with a
combination of asset sales, financings or other capital-raising transactions.
The ability to incur capital expenditures, sell properties and obtain additional
financing is subject to the approval and ongoing supervision of the Bankruptcy
Court, as well as the approval of the lenders under the DIP Facility. There is
no assurance that adequate funds can be obtained on a timely basis or that the
Bankruptcy Court will approve such transactions.

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. 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 April 30,
1999, the outstanding balance of the production payment was $47.0 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 April 30, 1999, the outstanding balance of the production payment was
$9.2 million.

During the year ended January 31, 1999, TEC made advances to TransTexas
pursuant to a $50 million promissory note which matures on June 14, 2002. The
note bears interest at a rate of 11.375% per annum. At April 30, 1999, the
outstanding principal balance of the note was $6.5 million and accrued interest
was $0.3 million.

In December 1998, TransTexas borrowed $5.65 million from an unaffiliated
third party in order to meet a portion of its December 31, 1998 interest payment
obligations. This note bears interest at a rate of 18% per annum and is secured
by a pledge of the stock of Galveston Bay Processing Corporation, a mortgage on
the Winnie processing facility, a pledge by TransAmerican of five million shares
of TransTexas common stock and an interest in the proceeds from any sale of the
Company's office building. The Company also borrowed $1.4 million from
TransAmerican in December 1998.

In April 1999, TEC made a cash contribution of $0.7 million to TransTexas.

15
<PAGE> 17

TransTexas and BNY Financial Corporation are parties to a Second Amended
and Restated Accounts Receivable Management and Security Agreement dated as of
October 14, 1997, as amended (the "BNY Facility"). As of April 30, 1999,
outstanding advances under the BNY Facility totaled approximately $0.4 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. Pursuant to an order of the Bankruptcy
Court, the Company can borrow up to $10 million and access cash collateral under
the BNY Facility. The amounts that may be advanced under the BNY Facility are
based on a percentage of certain of the Company's receivables and inventory.

CONTINGENT LIABILITIES

TransTexas has significant contingent liabilities. 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. However, these
contingencies, individually and in the aggregate, amount to potential liability
which could have a material adverse effect on TransTexas' cash flows or results
of operations.

Pursuant to the Bankruptcy Code, the Company has the right to assume or
reject executory contracts.

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 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 TNGC Holdings
Corporation, the sole stockholder of TransAmerican ("TNGC"), TransAmerican and
its subsidiaries including TransTexas, TEC and TARC (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 could be offset in subsequent
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.

16
<PAGE> 18
includes 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 of 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 7%) 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; therefore, the other members of the TNGC
Consolidated Group may be required to pay the tax. TransTexas' obligations for
any liability arising from the Lobo Sale would likely be in the form of reduced
net operating losses.

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 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. Should
Deconsolidation occur, TransTexas would retain, as of April 30, 1999,
approximately $397 million of net operating loss carryforwards. However, such
net operating loss carryforwards could be reclaimed by the remaining members of
the TNGC Consolidated Group if certain events occur. Such events would include a
successful challenge to the tax treatment of the Lobo Sale.

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 by any member of the TNGC Consolidated Group in
prior years. As of April 30, 1999, TransTexas had paid approximately $9.6
million of these franchise taxes and estimates that it will pay approximately
$0.6 million during fiscal 2000.

It is not possible to predict the impact of the bankruptcy filing on the
Tax Allocation Agreement, any obligations to the TNGC Consolidated Group or
TransTexas' tax attributes, including its net operating loss carryforwards. In
addition, the amount of net operating loss carryforwards remaining after
discharge from the bankruptcy that may be used in any future year may be
limited.

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 Company's
normal business activities because information necessary to monitor

17
<PAGE> 19

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. This stage of the Year 2000 compliance process is
approximately 95% complete.

o In stage two, TransTexas 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 September 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. 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 April 30, 1999, 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

18
<PAGE> 20

combination of alternatives. Substantial completion of these plans is expected
by September 1999 with continual refinement 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 its 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

As of April 30, 1999, the Company did not have any market risk sensitive
instruments.

19
<PAGE> 21

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 3. DEFAULTS UPON SENIOR SECURITIES

On April 19, 1999, the Company filed a voluntary petition under
Chapter 11 of the U. S. Bankruptcy Code. This filing is an Event of Default
under the BNY Facility, the Subordinated Notes Indenture and the TransTexas
Intercompany Loan Agreement. See Note 2 to the condensed consolidated financial
statements.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 -- Post-Petition Amendment No. 1 to Financing Agreement dated as
of April 19, 1999 between TransTexas and BNY Financial
Corporation.

15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.

27.1 -- Financial Data Schedule

(b) Reports on Form 8-K

On April 27, 1999, the Company filed a Current Report on Form 8-K
to report under Item 3 the filing on April 19, 1999 of a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code.

20
<PAGE> 22

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

June 18, 1999

21
<PAGE> 23

INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C> <C>
10.1 -- Post-Petition Amendment No. 1 to Financing Agreement dated as of
April 19, 1999 between TransTexas and BNY Financial Corporation.

15.1 -- Letter of Independent Accountants regarding awareness of
incorporation by reference.

27.1 -- Financial Data Schedule
</TABLE>

<PAGE> 1

EXHIBIT 10.1

POST-PETITION AMENDMENT NO. 1 TO FINANCING AGREEMENT

THIS POST-PETITION AMENDMENT NO. 1 TO SECOND AMENDED ACCOUNTS
RECEIVABLE MANAGEMENT AND SECURITY AGREEMENT MADE AS OF OCTOBER 14, 1997, AS
AMENDED ("Amendment") dated as of April 19, 1999 by and between TRANSTEXAS GAS
CORPORATION, as Debtor and Debtor-in-Possession ("Borrower"), having its
principal place of business at 1300 North Sam Houston Parkway East, Suite 310,
Houston, Texas 77032-2949, and BNY FINANCIAL CORPORATION ("BNYFC"), having
offices at 1290 Avenue of the Americas, New York, New York 10104.

Borrower and BNYFC are parties to the Second Amended Accounts
Receivable Management and Security Agreement made as of October 14, 1997, as
amended by letter agreements dated October 21, 1997, April 21, 1998, June 2,
1998, July 13, 1998, October 1, 1998 and December 14, 1998 (collectively, the
"Financing Agreement"), pursuant to which, among other things, BNYFC made
loans, advances and/or other financial accommodations to Borrower.

On April 19, 1999 (the "Petition Date"), Borrower filed a
voluntary petition for reorganization pursuant to Chapter 11 of Title 11,
United States Code with the United States Bankruptcy Court for the District of
Delaware. On May 20, 1999, the Delaware Court transferred venue of the Debtor's
chapter 11 proceeding to the United States Bankruptcy Court for the Southern
District of Texas, Corpus Christi Division. As of April 19, 1999, Borrower
acknowledges indebtedness to BNYFC under the Financing Agreement in the
approximate aggregate principal sum of $4,352,327.89, consisting of (a) loans
and advances and related interest and fees of $382,274.98; and (b) contractual
termination fees of $800,000.00 subject to Termination Fee Rights Reservation
(as defined in the Court Order); (c) contingent letter of credit obligations of
$2,881,866.28.

NOW, THEREFORE, in consideration of any loan or advance or grant
of credit heretofore or hereafter made to or for the account of Borrower by
BNYFC, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:

1. All capitalized terms not otherwise defined herein shall have
the meanings given to them (a) in the interim and/or final order of the
Bankruptcy Court, in form and substance acceptable to BNYFC in its sole and
absolute discretion, as the same may be amended, modified or supplemented from
time to time with the express written consent of BNYFC, authorizing Borrower to
enter into this Amendment, among other things (the "Court Order"), or (b) to
the extent not defined therein, in the Financing Agreement.

2. The following defined terms of the Financing Agreement are
amended and restated in their entirety to provide as follows:

(a) "Maximum Loan Amount" at any time means $10,000,000.

(b) "Term" means the Closing Date through October 20, 1999
subject to acceleration upon the occurrence of an Event of Default
hereunder or other termination hereunder.

<PAGE> 2

(c) "Inventory Availability" means the amount of Revolving Credit
Advances against Eligible Inventory Lender may from time to time in its
sole and absolute discretion during the Term make available to Borrower
up to the lesser of (a) $1,000,000 or (b) 40% ("Inventory Advance Rate")
of the value of the Eligible Inventory (calculated on the basis of the
lower of cost or market, on a first-in first-out basis).

(d) "Receivable Availability" means 85% ("Receivables Advance
Rate") of the face amount of Eligible Receivables provided that in
calculating Receivables Availability there shall be deducted from the
face amount of Eligible Receivables an amount equal to the greater of
(a) with respect to Eligible Receivables arising from the sale of
Hydrocarbons, 38% of the face amount of such Eligible Receivables and
(b) such other and further reserves as Lender deems appropriate in its
sole and absolute discretion in connection with any material claim
asserted or threatened against Lender or of which Lender becomes aware
of material facts leading Lender to reasonably believe that an action or
claim may be asserted against Lender arising out of or relating to the
Financing Arrangement, including but not limited to, amounts which
lessors, royalty holders, working interest holders and other Persons
would be entitled to assert are secured by a UCC 9.319 Lien on the
Receivables or proceeds thereof, whether or not such lessors, royalty
holders, working interest holders or Persons, or any of them, have
asserted or claimed any such UCC 9.319 Lien; provided however, in no
event shall Receivables Availability arising from the sale of
Hydrocarbon exceed 50% (before any deduction) of the face amount of the
Eligible Receivables.

3. The following defined terms shall be added to the Financing
Agreement:

(a) "Chapter 11 Proceeding" means that proceeding under Chapter
11, title 11 of the United States Code commenced by the filing of a
voluntary petition thereunder by Borrower in the United States
Bankruptcy Court for the District of Delaware on April 19, 1999, as
presently pending in the United States Bankruptcy Court for the Southern
District of Texas, Corpus Christi Division.

(b) "Court Order" means the interim and/or final order of the
Bankruptcy Court, in form and substance acceptable to Lender in its sole
and absolute discretion, as the same may be amended, modified or
supplemented from time to time with the express written consent of
Lender, authorizing Borrower, inter alia, to enter into a post-petition
financing arrangement with Lender.

4. The definition of "Permitted Liens" shall be amended to delete
the period [.] at the conclusion thereof and insert the following:

; (l) Liens granted pursuant to the CSFB Financing Order (as
defined in the Court Order) and the Court Order.

5. Paragraph "5(b)(ii)" of the Financing Agreement is amended and
restated in its entirety to provide as follows:

-2-
<PAGE> 3

(b) (ii) Unused Line Fee. In the event the average of the sum of
closing daily unpaid balances of all Revolving Credit Advances hereunder
plus, without duplication, outstanding Letter of Credit Liabilities
during any calendar month is less than the Maximum Loan Amount, Borrower
shall pay to Lender a fee at a rate per annum equal to 1/2 of one
percent (0.500%) on the amount by which the Maximum Loan Amount exceeds
such average sum. Such fee shall be calculated on the basis of a year of
360 days and actual days elapsed, and shall be charged to Borrower's
account on the first day of each month with respect to the prior month.

6. Upon approval of the Financing Arrangement by the Court,
Borrower shall pay to BNYFC a closing fee in an amount equal to $200,000.

7. Paragraph "2(c)" of the Financing Agreement is amended and
restated in its entirety to provide as follows:

(c) Subject to the terms and conditions set forth herein and in
the Ancillary Agreements, Lender shall make revolving credit advances
(the "Revolving Credit Advances") to Borrower from time to time during
the Term which, in the aggregate at any time outstanding together
(without duplication) with the aggregate then outstanding Letter of
Credit Liabilities, will not exceed the lesser of (x) the Maximum Loan
Amount or (y) an amount equal to the difference of:

(i) Receivables Availability plus Inventory
Availability, minus

(ii) such reserves as Lender may in its sole and
absolute discretion deem proper and necessary from
time to time.

The difference of the foregoing (i) minus (ii) shall be referred
to as the "Formula Amount". To the extent Lender receives
proceeds of any Receivable which proceeds are not necessary to
maintain outstanding Obligations within the Formula Amount (after
giving effect to the application of such proceeds to the Formula
Amount), Lender agrees to advance such funds to the Borrower.
Notwithstanding the foregoing provisions of this Paragraph, prior
to remittance by Lender to Borrower of any Revolving Credit
Advances, Lender shall be entitled to segregate an amount equal
to: [a] the aggregate claims of each alleged O&G Lienor (as
defined in the Court Order) asserting a right to adequate
protection under the O&G Lienor Adequate Protection Provision (as
defined in the Court Order) such claims being herein defined as
the "O&G Lienor Claims"; [b] any severance or other similar tax
due in connection with any Receivables received by Lender; such
segregated funds to be released for payment of such O&G Lienor
Claims or tax or upon demonstration to Lender's sole and absolute
satisfaction that provision for payment of such O&G Lienor Claims
or tax has otherwise been made.

-3-
<PAGE> 4

8. Paragraph 13(d) of the Financing Agreement shall be amended to
add the following sentence at the end of such paragraph:

The limitations on Incurrences contained herein shall apply only
to Incurrences after April 19, 1999, and shall not apply to any
Incurrence permitted under the CSFB Financing Order.

9. Paragraph 13(l) of the Financing Agreement shall be amended
and restated in its entirety so as to provide as follows:

(A) The Borrower will not permit the Consolidated EBITDA
(i) at the end of any month to be less than $2,500,000;
and (ii) on a three month rolling average basis
(calculated as of the end of any month) to be less than
$5,000,000; and

(B) The Borrower will not permit Obligations to exceed the
Formula Amount unless Lender agrees to permit an
Overadvance.

For the purposes of determining Consolidated EBITDA and
for the purpose of Section 13(l)(A), Consolidated Net
Income and Consolidated Interest Expense shall exclude any
interest accrued (but not then due and payable) on
intercompany payables for taxes to the extent the
liability for such taxes has been assumed by TransAmerican
pursuant to the Tax Allocation Agreement.

10. It shall be a condition precedent to BNYFC's discretionary
right to make loans, advances, overadvances and/or other financial
accommodations to Borrower under the Financing Arrangement that BNYFC shall
receive a reaffirmation of guaranty from John R. Stanley.

11. Subject to the Termination Fee Rights Reservation, Borrower
hereby represents and warrants as follows:

(a) Subject to entry of the Court Order, this Amendment
and the Financing Agreement, as amended hereby, constitute legal,
valid and binding obligations of Borrower and are enforceable
against Borrower in accordance with their respective terms.

(b) Upon the effectiveness of this Amendment, Borrower
hereby reaffirms all covenants, representations and warranties
made in the Financing Agreement and all other documents,
instruments and agreements executed and/or delivered in
connection therewith, except to the extent that covenants,
representations and warranties have been breached (i) by reason
of the commencement of Chapter 11 Proceeding, or (ii) by
Borrower's insolvency or (iii) by Borrower's pre-petition
financial condition (but not as to any change in financial
condition occurring subsequent to the Petition Date) or (iv) by
Borrower's failure to pay pre-petition liabilities, and any such
breach shall not constitute an Incipient Event of Default nor an
Event of Default. Lender hereby waives any Event of Default or
Incipient Event of Default that has occurred or may occur under
paragraph 19(c) or 19(o) of the Financing Agreement to the extent
such Event of Default or

-4-
<PAGE> 5

Incipient Event of Default is based upon a default by Borrower
under a third party agreement, provided that any remedies
available to such third party are stayed by the Chapter 11
Proceeding. Borrower further agrees that all such covenants,
representations and warranties as amended hereby (including
without limitation, clauses (i), (ii), (iii) and (iv) of this
subparagraph) shall be deemed to have been remade and shall
continue in full force and effect after the Petition Date;
provided however, to the extent breach of any covenant,
representation or warranty whether occurring either before or
after the Petition Date results in any liability to Lender,
Lender shall not be deemed to have waived such breach, including
without limitation the specific provisions of Paragraph 2(f)
hereof, and Lender specifically herein reserves all such rights.

12. Upon the effectiveness of this Amendment, each reference in
the Financing Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import shall mean and be a reference to the Financing Agreement
as amended hereby. Except as specifically amended herein, the Financing
Agreement, and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed. The execution, delivery and effectiveness of
this Amendment shall not operate as a waiver of any right, power or remedy of
BNYFC, nor constitute a waiver of any provision of the Financing Agreement, or
any other documents, instruments or agreements executed and/or delivered under
or in connection therewith.

13. This Amendment shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns and shall be
governed by and construed in accordance with the laws of the State of New York.

14. This Agreement may be executed in any number of and by
different parties hereto on separate counterparts, all of which, when so
executed shall be deemed an original, but all such counterparts shall
constitute one and the same instrument. Any signature delivered by a party by
facsimile transmission shall be deemed an original signature hereto.

IN WITNESS WHEREOF, this Amendment has been duly executed as of
the day and year first written above.

BNY FINANCIAL CORPORATION

By: /s/
-------------------------------

Name:
-----------------------------

Title:
----------------------------

-5-
<PAGE> 6

TRANSTEXAS GAS CORPORATION.,
as Debtor and Debtor-in-Possession

By: /s/
-------------------------------

Name:
-----------------------------

Title:
----------------------------

<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 June 17, 1999 on our review of interim
condensed consolidated financial information of TransTexas Gas Corporation for
the three months ended April 30, 1999 and 1998 included in this Form 10-Q for
the quarter then ended 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(c) 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
June 17, 1999

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheet at April 30, 1999 and the
unaudited condensed consolidated statement of operations for the three months
ended April 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 8,761
<SECURITIES> 0
<RECEIVABLES> 19,842
<ALLOWANCES> 0
<INVENTORY> 3,178
<CURRENT-ASSETS> 35,028
<PP&E> 1,461,278
<DEPRECIATION> 1,183,428
<TOTAL-ASSETS> 334,806
<CURRENT-LIABILITIES> 9,428
<BONDS> 583,178
0
0
<COMMON> 740
<OTHER-SE> (464,463)
<TOTAL-LIABILITY-AND-EQUITY> 335,616
<SALES> 18,393
<TOTAL-REVENUES> 19,065
<CGS> 0
<TOTAL-COSTS> 30,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,713
<INCOME-PRETAX> (34,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,408)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,408)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)

</TABLE>