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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 July 31, 2000
Commission File Number 0-30475
----------
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
September 14, 2000 was 1,250,251, consisting of 1,002,751 shares of Class A
Common Stock and 247,500 shares of Class B Common Stock.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements:
Report of Independent Accountants ............................................................. 2
Condensed Consolidated Balance Sheet as of July 31, 2000 and January 31, 2000 ................. 3
Condensed Consolidated Statement of Operations for the three and six months ended
July 31, 2000 and 1999 ..................................................................... 4
Condensed Consolidated Statement of Cash Flows for the six months ended
July 31, 2000 and 1999 ..................................................................... 5
Notes to Condensed Consolidated Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................................... 21
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders .............................................. 22
Item 6. Exhibits and Reports on Form 8-K ................................................................. 22
Signature ................................................................................................... 23
</TABLE>
1
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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 (successor) as of July 31, 2000, the related
condensed consolidated statements of operations for the three-month and
six-month periods ended July 31, 2000, the related condensed consolidated
statement of cash flows for the six-month period ended July 31, 2000, and the
related condensed consolidated financial statements of TransTexas Gas
Corporation (predecessor) for the three-month and six-month periods ended July
31, 1999 (successor and predecessor are collectively referred to as the
"Company"). 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 interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
January 31, 2000, 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 1, 2000, 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, 2000, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
September 14, 2000
2
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
2000 2000
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 7,771 $ 18,288
Accounts receivable ......................................................... 36,399 19,592
Receivable from affiliates .................................................. 1,116 1,107
Inventories ................................................................. 1,357 1,741
Other current assets ........................................................ 2,868 926
---------- -----------
Total current assets ................................................... 49,511 41,654
---------- -----------
Property and equipment .......................................................... 375,630 327,087
Less accumulated depreciation, depletion and amortization ....................... 39,912 --
---------- -----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $96,966 and
$90,000 was excluded from amortization at July 31, 2000
and January 31, 2000, respectively ........................................ 335,718 327,087
---------- -----------
Other assets, net ............................................................... 2,907 513
---------- -----------
$ 388,136 $ 369,254
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt ........................................ $ 4,938 $ 6,934
Accounts payable ............................................................ 12,416 15,759
Accrued liabilities ......................................................... 28,795 10,061
---------- -----------
Total current liabilities .............................................. 46,149 32,754
---------- -----------
Long-term debt, less current maturities ......................................... 278,002 48,290
Production payments, less current portion ....................................... 27,011 32,460
Note payable to affiliate ....................................................... -- 196,346
Deferred income taxes ........................................................... 10,907 10,000
Other liabilities ............................................................... 24,382 49,404
Redeemable preferred stock ...................................................... 15,121 --
Commitments and contingencies (Note 6) .......................................... -- --
Stockholders' deficit:
Common stock, $0.01 par value, 100,247,500 shares and
100,000,000 shares authorized at July 31, 2000 and
January 31, 2000; 1,250,251 shares and 57,515,566 shares
issued and outstanding at July 31, 2000 and January 31, 2000 .............. 12 740
Additional paid-in capital .................................................. (12) (740)
Accumulated deficit ......................................................... (13,436) --
---------- -----------
Total stockholders' deficit ............................................ (13,436) --
---------- -----------
$ 388,136 $ 369,254
========== ===========
</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)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
------------ ------------ ------------ ------------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ | ------------ ------------ | ------------
<S> <C> | <C> <C> | <C>
Revenues: | |
Gas, condensate and natural gas liquids .............. $ 42,772 | $ 28,096 $ 80,674 | $ 46,489
Loss on the sale of assets ........................... -- | (29) -- | (531)
Other ................................................ 615 | 506 1,192 | 1,680
------------ | ------------ ------------ | ------------
Total revenues ................................... 43,387 | 28,573 81,866 | 47,638
------------ | ------------ ------------ | ------------
| |
Costs and expenses: | |
Operating ............................................ 4,957 | 4,662 8,161 | 11,542
Depreciation, depletion and amortization ............. 18,499 | 19,708 39,928 | 37,513
General and administrative ........................... 4,565 | 5,869 9,977 | 11,806
Taxes other than income taxes ........................ 2,160 | 2,450 3,645 | 4,110
------------ | ------------ ------------ | ------------
Total costs and expenses ......................... 30,181 | 32,689 61,711 | 64,971
------------ | ------------ ------------ | ------------
Operating income (loss) .......................... 13,206 | (4,116) 20,155 | (17,333)
------------ | ------------ ------------ | ------------
| |
Other income (expense): | |
Interest income ...................................... 147 | 87 320 | 136
Interest expense, net ................................ (8,529) | (2,006) (17,883) | (24,719)
------------ | ------------ ------------ | ------------
Total other income (expense) ..................... (8,382) | (1,919) (17,563) | (24,583)
------------ | ------------ ------------ | ------------
Income (loss) before reorganization items | |
and income taxes ............................... 4,824 | (6,035) 2,592 | (41,916)
Reorganization items ..................................... -- | (919) -- | (919)
Income taxes -- deferred ................................. 907 | -- 907 | --
------------ | ------------ ------------ | ------------
Net income (loss) ................................ $ 3,917 | $ (6,954) $ 1,685 | $ (42,835)
============ | ============ ============ | ============
Accretion of preferred stock ............................. $ 10,201 | $ -- $ 15,121 | $ --
============ | ============ ============ | ============
Net loss to common stockholders .................. $ (6,284) | $ (6,954) $ (13,436) | $ (42,835)
============ | ============ ============ | ============
Basic and diluted net loss per share ..................... $ (5.03) | $ (0.12) $ (10.75) | $ (0.74)
============ | ============ ============ | ============
Weighted average number of shares outstanding for | |
basic and diluted net loss per share ................ 1,250,251 | 57,515,566 1,250,251 | 57,515,566
============ | ============ ============ | ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------- -----------
SIX MONTHS ENDED
JULY 31,
------------------------
2000 1999
---------- | ----------
<S> <C> | <C>
Operating activities: |
Net income (loss) ............................................................ $ 1,685 | $ (42,835)
Adjustments to reconcile net income (loss) to net cash provided by |
operating activities: |
Depreciation, depletion and amortization ................................. 39,928 | 37,513
Accretion of discount on long-term debt .................................. 3,591 | --
Amortization of debt issue costs ......................................... 111 | 1,656
Loss on the sale of assets ............................................... -- | 531
Deferred income taxes .................................................... 907 | --
Changes in assets and liabilities: |
Accounts receivable ................................................... (16,807) | (8,096)
Receivable from affiliates ............................................ (9) | 211
Inventories ........................................................... 384 | 618
Other current assets .................................................. (1,942) | (1,317)
Accounts payable ...................................................... (3,700) | 2,470
Accrued interest payable to affiliates ................................ -- | 14,692
Accrued liabilities ................................................... 17,096 | (1,867)
Transactions with affiliates, net .................................... -- | 700
Other assets .......................................................... (169) | 605
Other liabilities ..................................................... (25,264) | (1,796)
---------- | ----------
Net cash provided by operating activities ........................... 15,811 | 3,085
---------- | ----------
|
Investing activities: |
Capital expenditures ....................................................... (47,378) | (7,109)
Proceeds from the sale of assets ........................................... 582 | 556
---------- | ----------
Net cash used by investing activities ............................... (46,796) | (6,553)
---------- | ----------
|
Financing activities: |
Issuance of production payments ............................................ 12,500 | --
Principal payments on production payments .................................. (16,723) | (5,107)
Issuance of note payable ................................................... -- | 20,000
Issuance of long-term debt ................................................. 32,500 | --
Principal payments on long-term debt ....................................... (13,379) | --
Revolving credit agreement, net ............................................ 7,949 | 1,470
Debt issue costs ........................................................... (2,379) | --
---------- | ----------
Net cash provided by financing activities ........................... 20,468 | 16,363
---------- | ----------
Increase (decrease) in cash and cash equivalents .................... (10,517) | 12,895
Beginning cash and cash equivalents ............................................. 18,288 | 3,775
---------- | ----------
Ending cash and cash equivalents ................................................ $ 7,771 | $ 16,670
========== | ==========
</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 July 31, 2000 and the results of its operations and cash flows for the
interim periods ended July 31, 2000 and 1999. The condensed consolidated balance
sheet as of January 31, 2000 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, 2000. Unless otherwise noted,
the terms "TransTexas" and the "Company" refer to TransTexas Gas Corporation and
its subsidiaries, including Galveston Bay Processing Corporation and Galveston
Bay Pipeline Company. Prior to March 17, 2000 (the "Effective Date"), TransTexas
was a subsidiary of TransAmerican Energy Corporation ("TEC"), which is an
indirect subsidiary of TransAmerican Natural Gas Corporation ("TransAmerican").
Recently Issued Pronouncements
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. In July
1999, the FASB issued SFAS 137, "Deferral of the Effective Date of FASB
Statement No. 133," which delays the effective date for one year, to fiscal
years beginning after June 15, 2000. TransTexas is evaluating the impact of the
provisions of SFAS 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Management of the Company believes that SAB No. 101 will not have a
material impact on the Company.
2. REORGANIZATION
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 its wholly owned
subsidiary, TransAmerican Refining Corporation ("TARC") also filed voluntary
petitions under Chapter 11. TransTexas' Chapter 11 filing did not include its
subsidiaries, including Galveston Bay Processing and Galveston Bay Pipeline.
TransTexas filed its bankruptcy petition in order to preserve cash and to give
the Company the opportunity to restructure its debt. The Company's Second
Amended, Modified and Restated Plan of Reorganization dated January 25, 2000
(the "Plan") was confirmed by the United States Bankruptcy Court on February 7,
2000. The Effective Date of the Plan is March 17, 2000.
The January 31, 2000 consolidated balance sheet is the opening balance
sheet of the reorganized TransTexas, the successor company. The January 31, 2000
consolidated balance sheet includes all adjustments necessary to reflect assets
at the reorganization value and the Plan's treatment of creditor claims and
previous equity interests. Since the January 31, 2000 consolidated balance sheet
was affected by fresh-start reporting, it is not comparable in certain material
respects to the consolidated balance sheets of any prior period. The
consolidated statements of operations and cash flows for the three and six
months ended July 31, 1999 reflect the activities of the predecessor reporting
entity and also are not comparable.
Pursuant to fresh-start reporting, the Company's reorganization value as
of January 31, 2000 was estimated by management and allocated to identified
assets based on their relative fair values. Postpetition liabilities were valued
at the present value of amounts to be paid. The present value of liabilities has
been adjusted for imputed interest at a rate of 15% for the period from
February 1, 2000 to the Effective Date of the Plan. The imputed interest was
charged to interest expense during the three months ended April 30, 2000.
6
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Based on the reorganization value of the Company, the fair value of the
Preferred Stock and Common Stock was estimated to be zero. The Senior Preferred
Stock and Junior Preferred Stock are mandatorily redeemable in 2006 and 2010,
respectively. As a result, the Company will accrete, in the form of a non-cash
dividend deducted to arrive at net income available to common stockholders and
charged to retained earnings, an amount equal to the combined redemption amount
totaling $243.2 million (initial liquidation value) over the period prior to
redemption. For the three and six months ended July 31, 2000, accretion of
preferred stock totaled $10.2 million and $15.1 million, respectively. In
addition, earnings available to common stockholders will be reduced by dividends
accrued on the Preferred Stock. Accrued preferred stock dividends will be
recorded at fair value. Any difference between the initial fair value and the
redemption value will be accreted in the same manner as described above.
3. LIQUIDITY
In order to maintain or increase proved oil and gas reserves, TransTexas
is required to make substantial capital expenditures for the exploration and
development of natural gas and oil reserves in the normal course of business.
TransTexas remains highly leveraged and a substantial portion of its cash
flow will be required for debt service. In addition, cash flow from operations
is dependent on the level of gas and oil prices, which are historically
volatile. Management's plans are to fund TransTexas' 2001 debt service and
planned capital expenditures with cash flows from existing producing properties
and certain identified relatively low risk exploratory prospects to be drilled
and completed during fiscal 2001. Expected reserves from these prospects will be
used to obtain additional production payment financing which, together with
excess cash flow from these prospects, is necessary to continue to fund debt
service and capital expenditure requirements. Should these prospects not be
productive or should prices decline for a prolonged period, absent other sources
of capital, the Company would substantially reduce its capital expenditures,
which would limit its ability to maintain or increase production and in turn
meet its debt service requirements. Asset sales and financings are restricted
under the terms of TransTexas' debt documents and Senior Preferred Stock. In
August 2000, TransTexas sold certain producing properties in Jim Hogg County,
Texas for a sales price of $6.5 million.
4. CREDIT AGREEMENT AND PRODUCTION PAYMENTS
Credit Agreement
On the Effective Date, The Company and GMAC Commercial Credit LLC
("GMACC") entered into a Third Amended and Restated Accounts Receivable
Management and Security Agreement, dated as of March 15, 2000 (the "Accounts
Receivable Facility"). The Accounts Receivable Facility is a revolving credit
facility secured by accounts receivable and inventory. The maximum loan amount
under the facility is $15 million, against which the Company may from time to
time, subject to the conditions of the Accounts Receivable Facility, borrow,
repay and reborrow. Advances under the facility bear interest at a rate per
annum equal to the higher of (i) the prime commercial lending rate of The Bank
of New York plus 1/2 of 1%, and (ii) the Federal Funds Rate plus 1% payable
monthly in arrears. As of July 31, 2000, the outstanding principal balance under
the Accounts Receivable Facility was $12.2 million with availability for
additional advances of approximately $1.2 million and will be due on March 14,
2005.
Production Payments
In February and September 1998, TransTexas entered into two production
payment agreements with an unaffiliated third party pursuant to which the
Company conveyed certain properties (the "Original Subject Interests") in the
form of a term overriding royalty interest. As of January 31, 2000, the
outstanding balance of these production payments was $35.1 million.
In March 2000, the Original Subject Interests were reconveyed to
TransTexas and a new production payment drilling program agreement was entered
into between TransTexas and two unaffiliated third parties in the form of a term
overriding royalty interest carved out of and burdening certain properties
including the Original Subject Interests (collectively, the "New Subject
Interests"). The Company has the right to offer additional properties ("Offered
Wells") to the production payment parties at a negotiated purchase price, up to
an aggregate maximum for all such wells, of up to $52 million. Upon acceptance
of the Offered Wells, one of the third parties would be committed to pay to the
Company either the drilling costs of the Offered Wells or, at the third party's
discretion, a higher, mutually agreed upon amount. The production payment calls
for the repayment of the primary sum plus an amount equivalent to a 15% annual
interest rate on the unpaid portion of such primary sum. In June 2000, the
Company offered an additional well (Offered
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Well) to the two unaffiliated third parties. One of the third parties agreed to
advance the Company an additional primary sum of $8.0 million for the additional
well. As of July 31, 2000, the outstanding balance of the production payment was
$30.9 million. The Oil and Gas Facility places certain restrictions on the
amount that may be outstanding under the production payment.
In September 2000, the Company closed the Second Supplement to the
production payments. In exchange for additional properties being made subject to
the production payment, the Company received $10 million.
In connection with the production payment, the Company entered into
various marketing and processing agreements with one of the third parties.
Pursuant to these agreements, the Company will pay a nominal marketing fee with
respect to the Company's production associated with the New Subject Interests.
In addition, the third party will pay a fee for certain processing services to
be provided by Galveston Bay Processing.
Pursuant to the terms of the Company's production payment agreement
entered into in March 2000, the production payment purchasers entered into the
following hedge arrangements with respect to a portion of the natural gas and
condensate production associated therewith and which effectively hedge a portion
of the Company's production:
<TABLE>
<CAPTION>
Contract Price
-----------------
Collar
Volumes in -----------------
Period MMBtus/Bbls Floor Ceiling
------- ----------- ------- -------
<S> <C> <C> <C>
Natural Gas:
April 2000 -- October 2000 ............. 3,745,000 $ 2.10 $ 3.40
November 2000 -- March 2001 ............ 1,887,500 2.35 3.95
Condensate:
April 2000 -- September 2000 ........... 228,750 18.50 32.50
October 2000 -- March 2001 ............. 182,000 18.50 29.95
</TABLE>
Under these contracts, the counterparty is required to make payment to the
production payment purchaser if the settlement price for the period is below the
floor, and the production payment purchaser is required to make payment to the
counterparty if the settlement price for any period is above the ceiling price.
As of July 31, 2000, the Company had recognized a loss of $1.1 million and had a
deferred loss of $0.7 million under these contracts.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------- -----------
SIX MONTHS ENDED
JULY 31,
-------------------------------
2000 1999
---------- | ---------
<S> <C> | <C>
INVESTING ACTIVITIES: |
|
Accounts payable for property and equipment .......... $ 7,375 | $ 44,610
========== | =========
FINANCING ACTIVITIES: |
Accretion of preferred stock ......................... $ 15,121 | $ --
========== | =========
Cancellation of old common stock ..................... $ 740 | $ --
========== | =========
Issuance of new common stock ......................... $ 12 | $ --
========== | =========
</TABLE>
8
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
TransTexas is a party to various claims and routine litigation arising in
the normal course of its business. Any obligations of the Company in respect of
such claims and litigation arising out of activities prior to the Petition Date
were discharged pursuant to the Plan. Recovery of these obligations, if any,
will be limited to any collateral held by the claimant and/or such claimant's
pro rata share of amounts available to pay general unsecured claims.
Environmental Matters
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. Certain aspects of TransTexas' operations may not be in
compliance with applicable environmental laws and regulations, and such
noncompliance may give rise to compliance costs and administrative penalties. It
is not anticipated that TransTexas will be required in the near future to expend
amounts that are material to the financial condition or operations of TransTexas
by reason of environmental laws and regulations, but because such laws and
regulations are frequently changed and, as a result, may impose increasingly
strict requirements, TransTexas is unable to predict the ultimate cost of
complying with such laws and regulations.
Potential Tax Liabilities
Based upon independent legal advice, including an opinion from a
nationally recognized law firm, TransTexas did not report any significant
federal income tax liability as a result of the Lobo Sale. There are, however,
significant uncertainties regarding TransTexas' tax position and no assurance
can be given that TransTexas' position will be sustained if challenged by the
Internal Revenue Service (the "IRS"). Prior to the bankruptcy, TransTexas was
part of an affiliated group for tax purposes (the "TNGC Consolidated Group"),
which included TNGC Holdings Corporation, the sole stockholder of TransAmerican
("TNGC"), TransAmerican, TEC, TransTexas and TARC. 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 the use of none of the available tax attributes of the TNGC
Consolidated Group), possible penalties equal to 20% of the amount of the tax,
and interest at the statutory rate (currently 9%) on the tax and penalties (if
any). Assuming the use of available tax attributes of the TNGC Consolidated
Group, primarily the carryback of net operating loss carryovers ("NOLs"), this
estimated tax would be reduced to approximately $10 million (with the NOL
carrybacks reducing interest as of the end of the tax year in which the
carryback arose and not reducing penalties). In this event, a substantial
portion of TransTexas' NOLs would be utilized and thus not available to
TransTexas after the bankruptcy. Pursuant to the tax allocation agreement among
the members of the TNGC Consolidated Group, TransAmerican is 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 make any such payment and the
other members of the TNGC Consolidated Group, including TransTexas as a former
member, may be required to pay the tax, penalties and interest. There can be no
assurance that TransTexas could pay this contingency.
9
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 provision (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended (the "Tax Code"), 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
any such challenge would not be upheld. Under 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 former member of the TNGC Consolidated Group, TransTexas will be
severally liable for any tax liability resulting from any transaction of the
TNGC Consolidated Group that occurred during any taxable year of the TNGC
Consolidated Group during which TransTexas was a member, including 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, 1994 and July 31, 1995. The Company has not been advised by the
IRS as to whether any tax deficiencies will be proposed by the IRS as a result
of its review.
TransTexas expects that a significant portion of its NOLs will be
eliminated and the use of those NOLs that are not eliminated will be severely
restricted as a consequence of the Plan. In addition, certain other tax
attributes of TransTexas may under certain circumstances be eliminated or
reduced as a consequence of the Plan. The elimination or reduction of NOLs and
such other tax attributes may substantially increase the amount of tax payable
by TransTexas following the consummation of the Plan as compared with the amount
of tax payable had no such attribute reduction or restriction been required.
Gas Delivery Commitments
In March 2000, TransTexas entered into firm and interruptible contracts
with Tejas Ship Channel LLC for transportation of its production from the Eagle
Bay field to the Winnie facilities at a fixed negotiated rate. Under the firm
agreement, the Company is committed to deliver a minimum of 75,000 MMBtu per day
of natural gas and condensate.
The Company also entered into a contract with Centana Intrastate Pipeline
Company for transportation of natural gas on a firm and interruptible basis from
the Winnie facility to natural gas liquids recovery facilities located in the
Beaumont/Port Arthur, Texas area, and residue gas from these facilities to
various distribution points. Under the agreement, the Company is committed to
deliver up to a maximum of 56,250 Mcf of natural gas and 19,500 MMBtu of residue
gas. Transportation fees for natural gas are based on a fixed negotiated rate.
Transportation fees for residue gas are based on a published industry index.
7. PREFERRED STOCK DIVIDENDS
On July 25, 2000, the Board of Directors of the Company authorized the
payment of quarterly dividends to the holders of the Company's Preferred Stock
of record on June 1, 2000. The quarterly dividends were paid in-kind on August
15, 2000 in additional shares of Preferred Stock of the same class at an annual
rate of $0.20 per share for each share of Series A Senior Preferred Stock and at
an annual rate of $0.10 per share for each share of Series A Junior Preferred
Stock in accordance with the Certificate of Designation for Series A Senior
Preferred Stock and the Certificate of Designation for Series A Junior Preferred
Stock, respectively. Fractional shares were not issued, but were settled in
cash.
10
<PAGE> 12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. SUPPLEMENTAL GUARANTOR INFORMATION
Galveston Bay Pipeline Company and Galveston Bay Processing Corporation
are guarantors of the Notes and the Oil and Gas Facility. Separate financial
statements of the Guarantors are not considered to be material to holders of the
Notes and GMACC. The following condensed consolidating financial statements
present supplemental information of the Guarantors as of and for the three and
six months ended July 31, 2000.
11
<PAGE> 13
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 7,622 $ 41 $ 108 $ -- $ 7,771
Accounts receivable, net ....................... 35,951 -- 448 -- 36,399
Receivables from affiliates .................... 9,146 -- -- (8,030) 1,116
Inventories .................................... 1,357 -- -- -- 1,357
Other current assets ........................... 2,859 5 4 -- 2,868
------------ ------------ ------------ ------------ ------------
Total current assets ......................... 56,935 46 560 (8,030) 49,511
------------ ------------ ------------ ------------ ------------
Property and equipment ............................ 363,892 1,534 10,204 -- 375,630
Less accumulated depreciation, depletion and
amortization .................................... 38,662 152 1,098 -- 39,912
------------ ------------ ------------ ------------ ------------
Net property and equipment ................... 325,230 1,382 9,106 -- 335,718
------------ ------------ ------------ ------------ ------------
Other assets, net ................................. 2,908 -- 1 (2) 2,907
------------ ------------ ------------ ------------ ------------
$ 385,073 $ 1,428 $ 9,667 $ (8,032) $ 388,136
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........... $ 3,621 $ 24 $ 1,293 $ -- $ 4,938
Accounts payable ............................... 12,318 29 69 -- 12,416
Accrued liabilities ............................ 28,667 16 112 -- 28,795
------------ ------------ ------------ ------------ ------------
Total current liabilities .................... 44,606 69 1,474 -- 46,149
------------ ------------ ------------ ------------ ------------
Payable to affiliates ............................. -- 378 7,652 (8,030) --
Long-term debt, less current maturities ........... 276,631 1,142 229 -- 278,002
Production payments, less current portion ......... 27,011 -- -- -- 27,011
Deferred income taxes ............................. 10,907 -- -- -- 10,907
Other liabilities ................................. 24,382 -- -- -- 24,382
Redeemable preferred stock ........................ 15,121 -- -- -- 15,121
Stockholders' equity (deficit):
Common stock ................................... 12 -- -- -- 12
Additional paid-in capital ..................... (12) 1 1 (2) (12)
Retained earnings (accumulated deficit) ........ (13,585) (162) 311 -- (13,436)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity (deficit) ......... (13,585) (161) 312 (2) (13,436)
------------ ------------ ------------ ------------ ------------
$ 385,073 $ 1,428 $ 9,667 $ (8,032) $ 388,136
============ ============ ============ ============ ============
</TABLE>
12
<PAGE> 14
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids ..... $ 42,772 $ -- $ -- $ -- $ 42,772
Other ....................................... 162 153 1,770 (1,470) 615
------------ ------------ ------------ ------------ ------------
Total revenues ............................ 42,934 153 1,770 (1,470) 43,387
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Operating ................................... 5,506 30 891 (1,470) 4,957
Depreciation, depletion and amortization .... 17,936 75 488 -- 18,499
General and administrative .................. 4,456 -- 109 -- 4,565
Taxes other than income taxes ............... 2,124 3 33 -- 2,160
------------ ------------ ------------ ------------ ------------
Total costs and expenses .................. 30,022 108 1,521 (1,470) 30,181
------------ ------------ ------------ ------------ ------------
Operating income .......................... 12,912 45 249 -- 13,206
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income ............................. 147 -- -- -- 147
Interest expense, net ....................... (8,425) (43) (61) -- (8,529)
------------ ------------ ------------ ------------ ------------
Total other income (expense) .............. (8,278) (43) (61) -- (8,382)
------------ ------------ ------------ ------------ ------------
Income before income taxes ................ 4,634 2 188 -- 4,824
Income taxes -- deferred ....................... 907 -- -- -- 907
------------ ------------ ------------ ------------ ------------
Net income ................................ $ 3,727 $ 2 $ 188 $ -- $ 3,917
============ ============ ============ ============ ============
</TABLE>
13
<PAGE> 15
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids .... $ 80,674 $ -- $ -- $ -- $ 80,674
Other ...................................... 198 368 3,886 (3,260) 1,192
------------ ------------ ------------ ------------ ------------
Total revenues ........................... 80,872 368 3,886 (3,260) 81,866
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Operating .................................. 9,346 31 2,044 (3,260) 8,161
Depreciation, depletion and amortization ... 38,678 152 1,098 -- 39,928
General and administrative ................. 9,640 123 214 -- 9,977
Taxes other than income taxes .............. 3,562 20 63 -- 3,645
------------ ------------ ------------ ------------ ------------
Total costs and expenses ................. 61,226 326 3,419 (3,260) 61,711
------------ ------------ ------------ ------------ ------------
Operating income ......................... 19,646 42 467 -- 20,155
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income ............................ 320 -- -- -- 320
Interest expense, net ...................... (17,523) (204) (156) -- (17,883)
------------ ------------ ------------ ------------ ------------
Total other income (expense) ............. (17,203) (204) (156) -- (17,563)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ........ 2,443 (162) 311 -- 2,592
Income taxes -- deferred ...................... 907 -- -- -- 907
------------ ------------ ------------ ------------ ------------
Net income (loss) ........................ $ 1,536 $ (162) $ 311 $ -- $ 1,685
============ ============ ============ ============ ============
</TABLE>
14
<PAGE> 16
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 2000
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
GALVESTON GALVESTON
BAY BAY CONSOLIDATED
TRANSTEXAS PIPELINE PROCESSING ELIMINATIONS TRANSTEXAS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) ............................... $ 1,536 $ (162) $ 311 $ -- $ 1,685
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation, depletion and amortization ...... 38,678 152 1,098 -- 39,928
Accretion of discount on long-term debt ....... 3,455 38 98 -- 3,591
Amortization of debt issue costs .............. 111 -- -- -- 111
Deferred income taxes ......................... 907 -- -- -- 907
Changes in assets and liabilities:
Accounts receivable ........................ (16,808) 110 (109) -- (16,807)
Receivable from affiliates ................. 1,100 -- -- (1,109) (9)
Inventories ................................ 384 -- -- -- 384
Other current assets ....................... (1,956) -- 14 -- (1,942)
Accounts payable ........................... (3,691) 26 (35) -- (3,700)
Accrued liabilities ........................ 17,034 5 57 -- 17,096
Transactions with affiliates, net .......... -- (259) (850) 1,109 --
Other assets ............................... (164) (5) -- -- (169)
Other liabilities .......................... (25,264) -- -- -- (25,264)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
operating activities ................... 15,322 (95) 584 -- 15,811
------------ ------------ ------------ ------------ ------------
Investing activities:
Capital expenditures ............................ (46,824) (299) (255) -- (47,378)
Proceeds from the sale of assets ................ 46 536 -- -- 582
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities .................... (46,778) 237 (255) -- (46,796)
------------ ------------ ------------ ------------ ------------
Financing activities:
Issuance of production payments ................. 12,500 -- -- -- 12,500
Principal payments on production payments ....... (16,723) -- -- -- (16,723)
Issuance of long-term debt ...................... 32,500 -- -- -- 32,500
Principal payments on long-term debt ............ (12,620) (145) (614) -- (13,379)
Revolving credit agreement, net ................. 7,949 -- -- -- 7,949
Debt issue costs ................................ (2,379) -- -- -- (2,379)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities .................... 21,227 (145) (614) -- 20,468
------------ ------------ ------------ ------------ ------------
Decrease in cash and
cash equivalents ........................ (10,229) (3) (285) -- (10,517)
Beginning cash and cash equivalents ................ 17,851 44 393 -- 18,288
------------ ------------ ------------ ------------ ------------
Ending cash and cash equivalents ................... $ 7,622 $ 41 $ 108 $ -- $ 7,771
============ ============ ============ ============ ============
</TABLE>
15
<PAGE> 17
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 and six months ended July 31,
2000 and 1999, is as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Sales volumes: | |
Gas (Bcf) ....................... 6.7 | 7.7 13.7 | 14.8
NGLs (MMgal) .................... 18.3 | 8.5 31.1 | 16.9
Condensate (MBbls) .............. 392 | 455 840 | 913
Average prices: | |
Gas (dry) (per Mcf) ............. $ 4.11 | $ 2.26 $ 3.43 | $ 2.07
NGLs (per gallon) ............... .34 | .30 .38 | .25
Condensate and oil (per Bbl) .... 29.50 | 17.90 28.89 | 15.82
Number of gross wells drilled ....... 6 | 2 9 | 5
Percentage of wells completed ....... 67% | 50% 56% | 20%
</TABLE>
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Operating costs and expenses: | |
Lease $ 3.0 | $ 2.0 $ 4.3 | $ 6.0
Pipeline and gathering 2.0 | 2.7 3.9 | 5.5
-------- | -------- -------- | --------
5.0 | 4.7 8.2 | 11.5
Taxes other than income taxes (1) 2.1 | 2.4 3.6 | 4.1
-------- | -------- -------- | --------
$ 7.1 | $ 7.1 $ 11.8 | $ 15.6
======== | ======== ======== | ========
</TABLE>
----------
(1) Taxes other than income taxes include severance, property and other taxes.
16
<PAGE> 18
TransTexas' average depletion rates are as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Depletion rates (per Mcfe) .......... $ 2.06 | $ 1.81 $ 2.12 | $ 1.82
======== | ======== ======== | ========
</TABLE>
THREE MONTHS ENDED JULY 31, 2000 COMPARED WITH THE THREE MONTHS ENDED
JULY 31, 1999
Gas, condensate and NGL revenues for the three months ended July 31, 2000
increased $14.7 million from the prior period, due primarily to higher prices
for all products and an increase in NGLs sales volumes. The average monthly
prices received per Mcf of gas ranged from $3.25 to $4.54 in the three months
ended July 31, 2000, compared to a range of $2.25 to $2.32 in the prior period.
Lease operating expenses for the three months ended July 31, 2000
increased $1.0 million from the prior period due primarily to increases in
workover expenses. Pipeline and gathering expenses decreased $0.7 million from
the prior period due primarily to the termination of certain natural gas
transportation contracts in connection with the Company's bankruptcy
proceedings. Depreciation, depletion and amortization expense for the three
months ended July 31, 2000 decreased $1.2 million due to a decrease in natural
gas and condensate production, partially offset by a $0.25 increase in the
depletion rate. General and administrative expenses decreased $1.3 million
primarily as a result of a decrease in professional fees. Taxes other than
income taxes decreased by $0.3 million over the prior period due primarily to
decreases in property taxes.
Interest income for the three months ended July 31, 2000 increased by $0.1
million as compared to the prior period due to higher cash balances available
for investment. TransTexas does not expect to earn significant interest income
during fiscal 2001. Interest expense for the three months ended July 31, 2000
increased by $6.5 million primarily as a result of discontinuing interest
accruals on prepetition unsecured debt obligations in the prior period.
SIX MONTHS ENDED JULY 31, 2000 COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1999
Gas, condensate and NGL revenues for the six months ended July 31, 2000
increased $34.2 million from the prior period, due primarily to higher prices
for all products and an increase in NGLs sales volumes. The average monthly
prices received per Mcf of gas ranged from $2.64 to $4.54 in the six months
ended July 31, 2000, compared to a range of $1.74 to $2.32 in the prior period.
For the six months ended July 31, 1999, TransTexas recognized a pre-tax loss of
$0.5 million on the sale of certain vehicles and other equipment.
Lease operating expenses for the six months ended July 31, 2000 decreased
$1.7 million from the prior period due primarily to decreases in salt water
disposal and maintenance costs. Pipeline and gathering expenses decreased $1.7
million from the prior period due primarily to the termination of certain
natural gas transportation contracts in connection with the Company's bankruptcy
proceedings. Depreciation, depletion and amortization expense for the six months
ended July 31, 2000 increased $2.4 million due to an increase in the depletion
rate resulting from higher cost properties and unsuccessful drilling results in
prior periods. General and administrative expenses decreased $1.8 million
primarily as a result of decreases in personnel and related costs and
professional fees. Taxes other than income taxes decreased by $0.5 million over
the prior period due primarily to decreases in property taxes.
Interest income for the six months ended July 31, 2000 increased by $0.2
million as compared to the prior period due to higher cash balances available
for investment. TransTexas does not expect to earn significant interest income
during fiscal 2001. Interest expense for the six months ended July 31, 2000
decreased by $6.8 million due primarily to the Company's reorganization as of
January 31, 2000 which resulted in an overall decrease in the amount of
outstanding debt.
17
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
On April 19, 1999, TransTexas filed a voluntary petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. The United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division confirmed the Company's
Second Amended, Modified and Restated Plan of Reorganization dated January 25,
2000 (the "Plan") on February 7, 2000. The Effective Date of the Plan is March
17, 2000.
On the Effective Date, the Company, as Borrower, and Galveston Bay
Processing Corporation and Galveston Bay Pipeline Company, as Guarantors,
entered into an Oil and Gas Revolving Credit and Term Loan Agreement, dated as
of March 15, 2000 (the "Oil and Gas Facility") with GMAC Commercial Credit LLC
("GMACC"), as a Lender and as Agent. The Oil and Gas facility consists of a term
loan (the "Term Loan") in the amount of $22.5 million and a revolving facility
(the "Revolving Loan") in a maximum amount of $30 million (all of which was
funded on the Effective Date). The Term Loan bears interest at a rate of 14% per
annum and the Revolving Loan bears interest at a rate of 13 1/2% per annum.
Interest on the Term Loan and the Revolving Loan is payable monthly in arrears.
Principal amortization of the Term Loan is due in 20 quarterly installments of
$56,250 each, with the balance due March 14, 2005; however, the Company may, and
in certain circumstances must, make prepayments of such amount. If, subsequent
to such prepayments, the Company demonstrates sufficient collateral value
meeting the requirements of the Oil and Gas Facility provisions, the Company may
be entitled to borrow additional advances under the Revolving Loan. The Oil and
Gas Facility is secured by substantially all of the assets of the Company. The
security interest in accounts receivable and inventory securing the Oil and Gas
Facility is subordinated to the security interest of GMACC under the Accounts
Receivable Facility.
On the Effective Date, the Company, as Issuer, Galveston Bay Pipeline
Company and Galveston Bay Processing Corporation, as Guarantors, and Firstar
Bank, N.A., as Trustee, entered into an Indenture dated as of March 15, 2000,
pursuant to which the Company issued the Notes. Interest on the Notes is due
semi-annually on March 15 and September 15. The Notes are secured by
substantially all of the assets of the Company other than accounts receivable
and inventory. The Indenture contains certain covenants that restrict the
Company's ability to incur indebtedness, engage in related party transactions,
dispose of assets or engage in sale/leasebacks transactions, issue dividends on
common stock, change its line of business, consolidate or merge with or into
another entity or convey, transfer or lease all or substantially all of its
assets, and suffer a change of control. The security interest in favor of the
Trustee is subordinated to the Security Interest in favor of the Agent under the
Oil and Gas Facility.
On the Effective Date, the Company and GMACC entered into a Third Amended
and Restated Accounts Receivable Management and Security Agreement, dated as of
March 15, 2000 (the "Accounts Receivable Facility"). The Accounts Receivable
Facility is a revolving credit facility secured by accounts receivable and
inventory. The maximum loan amount under the facility is $15 million, against
which the Company may from time to time, subject to the conditions of the
Accounts Receivable Facility, borrow, repay and reborrow. Advances under the
facility bear interest at a rate per annum equal to the higher of (i) the prime
commercial lending rate of The Bank of New York plus 1/2 of 1%, and (ii) the
Federal Funds Rate plus 1% payable monthly in arrears. As of July 31, 2000, the
outstanding principal balance under the Accounts Receivable Facility was $12.2
million with availability for additional advances of approximately $1.2 million
and will be due on March 14, 2005.
As of the Effective Date, the Company had outstanding 222,455,320 shares
of Series A Senior Preferred Stock (the "Senior Preferred Stock") with a
liquidation preference of $1.00 per share plus accrued and unpaid dividends. The
terms of the Senior Preferred Stock include a cumulative dividend preference,
payable quarterly out of funds legally available therefor, if any. During the
first two years following the Effective Date, the Company will be required to
pay cash dividends at a rate of $0.10 per share per annum, or, at its option,
in-kind dividends of additional shares of Senior Preferred Stock at a rate of
$0.20 per share per annum. The Senior Preferred Stock is mandatorily redeemable
on March 15, 2006 at a rate of $1.00 per share plus accrued and unpaid
dividends. One-half of the then-outstanding shares of Senior Preferred Stock is
mandatorily convertible into shares of Class A Common Stock at a rate of 0.3461
shares of Class A Common Stock per $1.00 of liquidation preference if either (i)
more than 75 million shares of Senior Preferred Stock remain outstanding after
March 15, 2006 or (ii) the Company fails to pay dividends on the Senior
Preferred Stock on any two dividend payment dates. The Certificate of
Designation for the Senior Preferred Stock includes restrictive covenants
comparable to those included in the Indenture.
As of the Effective Date, the Company had outstanding 20,716,080 shares of
Series A Junior Preferred Stock (the "Junior Preferred Stock" and, together with
the Senior Preferred Stock, the "Preferred Stock") with a liquidation preference
of $1.00 per share plus accrued and unpaid dividends. The terms of the Junior
Preferred Stock include a cumulative dividend preference, payable quarterly out
of funds legally available therefor, if any. During the first six
18
<PAGE> 20
years following the Effective Date, the Company will be required to pay in-kind
dividends of additional shares of Junior Preferred Stock at a rate of $0.10 per
share per annum. Thereafter, dividends will be payable both in cash at a rate of
$0.10 per share per annum and in kind at a rate of $0.10 per share per annum.
The Junior Preferred Stock is mandatorily redeemable on March 15, 2010 at a rate
of $1.00 per share plus accrued and unpaid dividends. Each share of Junior
Preferred Stock is mandatorily convertible into shares of Class A Common Stock
at the rate of 0.1168 shares of Class A Common Stock per $1.00 of liquidation
preference if either (i) more than 75 million shares of Senior Preferred Stock
remain outstanding after March 15, 2006 or (ii) the Company fails to pay
dividends on the Senior Preferred Stock on any two dividend payment dates. The
Certificate of Designation for the Junior Preferred Stock includes restrictive
covenants comparable to those included in the Indenture. Such covenants will
become effective when all of the Notes (and any refinancings thereof) have been
repaid and all of the Senior Preferred Stock has been redeemed.
Under Delaware law, dividends (including dividends payable in stock) may
only be paid to the extent a corporation has surplus or, in certain cases, out
of net profits for the current fiscal year and the preceding fiscal year. On
July 25, 2000, at the annual stockholders meeting, the Company requested that
its stockholders approve amendments to the certificates of designation under
which the Preferred Stock is outstanding to reduce the par value of the
Preferred Stock, which would eliminate substantially all of the Company's
capital deficit, as defined by Delaware law. The affirmative vote of 466,774
shares of Class A Common Stock, 247,500 shares of Class B Common Stock,
122,449,000 shares of Series A Senior Preferred Stock and 20,716,080 shares of
Series A Junior Preferred Stock approved the amendments to the Certificate of
Designation for the Series A Senior Preferred Stock. The affirmative vote of
466,438 shares of Class A Common Stock, 247,500 shares of Class B Common Stock,
122,483,454 shares of Series A Senior Preferred Stock and 20,716,080 shares of
Series A Junior Preferred Stock approved the amendments to the Certificate of
Designation for the Series A Junior Preferred Stock.
In February and September 1998, TransTexas entered into two production
payment agreements with an unaffiliated third party pursuant to which the
Company conveyed certain properties (the "Original Subject Interests") in the
form of a term overriding royalty interest. As of January 31, 2000, the
outstanding balance of these production payments was $35.1 million.
In March 2000, the Original Subject Interests were reconveyed to
TransTexas and a new production payment drilling program agreement was entered
into between TransTexas and two unaffiliated third parties in the form of a term
overriding royalty interest carved out of and burdening certain properties
including the Original Subject Interests (collectively, the "New Subject
Interests"). The Company has the right to offer additional properties ("Offered
Wells") to the production payment parties at a negotiated purchase price, up to
an aggregate maximum for all such wells, of up to $52 million. Upon acceptance
of the Offered Wells, one of the third parties would be committed to pay to the
Company either the drilling costs of the Offered Wells or, at the third party's
discretion, a higher, mutually agreed upon amount. The production payment calls
for the repayment of the primary sum plus an amount equivalent to a 15% annual
interest rate on the unpaid portion of such primary sum. In June 2000, the
Company offered an additional well (Offered Well) to the two unaffiliated third
parties. One of the third parties agreed to advance the Company an additional
primary sum of $8.0 million for the additional well. The Oil and Gas Facility
places certain restrictions on the amount that may be outstanding under the
production payment. As of July 31, 2000, the outstanding balance of the
production payment was $30.9 million.
In September 2000, the Company closed the Second Supplement to the
production payments. In exchange for additional properties being made subject to
the production payment, the Company received $10 million.
In connection with the production payment, the Company entered into
various marketing and processing agreements with one of the third parties.
Pursuant to these agreements, the Company will pay a nominal marketing fee with
respect to the Company's production associated with the New Subject Interests.
In addition, the third party will pay a fee for certain processing services to
be provided by Galveston Bay Processing.
After the Effective Date, TransTexas remains highly leveraged and will
have significant cash requirements for debt service and significant charges for
Preferred Stock dividends to net income available for common stockholders.
In order to maintain or increase proved oil and gas reserves, TransTexas
is required to make substantial capital expenditures for the exploration and
development of natural gas and oil reserves in the normal course of business.
For the six months ended July 31, 2000, total capital expenditures incurred were
$49 million, including $11 million for lease acquisitions, $36 million for
drilling and development and $2 million for gas gathering, other equipment and
seismic
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<PAGE> 21
acquisitions. Capital expenditures for fiscal 2001 are estimated to be
approximately $91 million which amount is in excess of anticipated cash flows
from operating activities. Management's plans are to fund TransTexas' 2001 debt
service requirements and planned capital expenditures with cash flows from
existing producing properties and certain identified relatively low risk
exploratory prospects to be drilled and completed during fiscal 2001. Expected
reserves from these prospects will be used to obtain additional production
payment financing which, together with excess cash flow from these prospects, is
necessary to continue to fund debt service and capital expenditure requirements.
Should these prospects not be productive or should prices decline for a
prolonged period, absent other sources of capital, the Company would
substantially reduce its capital expenditures, which would limit its ability to
maintain or increase production and in turn meet its debt service requirements.
Asset sales and financings are restricted under the terms of TransTexas' debt
documents and Senior Preferred Stock. In August 2000, TransTexas sold certain
producing properties in Jim Hogg County, Texas for a sales price of $6.5
million.
Potential Tax Liabilities
Based upon independent legal advice, including an opinion from a
nationally recognized law firm, TransTexas did not report any significant
federal income tax liability as a result of the Lobo Sale. There are, however,
significant uncertainties regarding TransTexas' tax position and no assurance
can be given that TransTexas' position will be sustained if challenged by the
Internal Revenue Service (the "IRS"). Prior to the bankruptcy, TransTexas was
part of an affiliated group for tax purposes (the "TNGC Consolidated Group"),
which included TNGC Holdings Corporation, the sole stockholder of TransAmerican
("TNGC"), TransAmerican, TEC, TransTexas and TARC. 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 the use of none of the available tax attributes of the TNGC
Consolidated Group), possible penalties equal to 20% of the amount of the tax,
and interest at the statutory rate (currently 9%) on the tax and penalties (if
any). Assuming the use of available tax attributes of the TNGC Consolidated
Group, primarily the carryback of net operating loss carryovers ("NOLs"), this
estimated tax would be reduced to approximately $10 million (with the NOL
carrybacks reducing interest as of the end of the tax year in which the
carryback arose and not reducing penalties). In this event, a substantial
portion of TransTexas' NOLs would be utilized and thus not available to
TransTexas after the bankruptcy. Pursuant to the tax allocation agreement among
the members of the TNGC Consolidated Group, TransAmerican is 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 make any such payment and the
other members of the TNGC Consolidated Group, including TransTexas as a former
member, may be required to pay the tax, penalties and interest. There can be no
assurance that TransTexas could pay this contingency.
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 provision (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended (the "Tax Code"), 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
any such challenge would not be upheld. Under 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 former member of the TNGC Consolidated Group, TransTexas will be
severally liable for any tax liability resulting from any transaction of the
TNGC Consolidated Group that occurred during any taxable year of the TNGC
Consolidated Group during which TransTexas was a member, including 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, 1994 and July 31, 1995. The Company has not been advised by the
IRS as to whether any tax deficiencies will be proposed by the IRS as a result
of its review.
TransTexas expects that a significant portion of its NOLs will be
eliminated and the use of those NOLs that are not eliminated will be severely
restricted as a consequence of the Plan. In addition, certain other tax
attributes of
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<PAGE> 22
TransTexas may under certain circumstances be eliminated or reduced as a
consequence of the Plan. The elimination or reduction of NOLs and such other tax
attributes may substantially increase the amount of tax payable by TransTexas
following the consummation of the Plan as compared with the amount of tax
payable had no such attribute reduction or restriction been required.
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
The Company is exposed to market risk from adverse changes in prices for
natural gas, condensate and oil and interest rates as discussed below.
The Company's revenues, profitability, access to capital and future rate
of growth are substantially dependent upon the prevailing prices of natural gas,
condensate and oil. These prices are subject to wide fluctuations in response to
relatively minor changes in supply and demand and a variety of additional
factors beyond the Company's control. From time to time, the Company has
utilized hedging transactions with respect to a portion of its gas and oil
production to achieve a more predictable cash flow, as well as to reduce
exposure to price fluctuations. While hedging limits the downside risk of
adverse price movements, it may also limit future revenues from favorable price
movements. Because gains or losses associated with hedging transactions are
included in gas and oil revenues when the hedged volumes are delivered, such
gains and losses are generally offset by similar changes in the realized prices
of commodities. The Company had no open hedging transactions at July 31, 2000.
Pursuant to the terms of the Company's production payment agreement
entered into in March 2000, the production payment purchasers entered into the
following hedge arrangements with respect to a portion of the natural gas and
condensate production associated therewith and which effectively hedge a portion
of the Company's production:
<TABLE>
<CAPTION>
Contract Price
-----------------
Collar
Volumes in -----------------
Period MMBtus/Bbls Floor Ceiling
------- ----------- ------- -------
<S> <C> <C> <C>
Natural Gas:
April 2000 -- October 2000 ........... 3,745,000 $ 2.10 $ 3.40
November 2000 -- March 2001 .......... 1,887,500 2.35 3.95
Condensate:
April 2000 -- September 2000 ......... 228,750 18.50 32.50
October 2000 -- March 2001 ........... 182,000 18.50 29.95
</TABLE>
Under these contracts, the counterparty is required to make payment to the
production payment purchaser if the settlement price for the period is below the
floor, and the production payment purchaser is required to make payment to the
counterparty if the settlement price for any period is above the ceiling price.
As of July 31, 2000, the Company had recognized a loss of $1.1 million and had a
deferred loss of $0.7 million under these contracts.
Because substantially all of its long-term obligations at July 31, 2000
are at fixed rates, the Company considers its interest rate exposure to be
minimal. The Company's borrowings under its credit facility are subject to a
rate of interest that fluctuates based on short-term interest rates ($12.2
million outstanding at July 31, 2000). The Company had no open interest rate
hedge positions at July 31, 2000.
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<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the condensed consolidated financial statements for a
discussion of TransTexas' legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on July 25, 2000.
The Company requested that its stockholders vote on the following
matters:
1. Approval of amendments to the certificate of designation for the
Series A Senior Preferred Stock to decrease the par value of the
Series A Senior Preferred Stock from $1.00 to $0.001, to change the
first dividend payment date, to make certain conforming changes and to
increase the number of authorized shares of Series A Preferred Stock.
Votes were cast (or shares were not voted) on this proposal as follows:
<TABLE>
<CAPTION>
For Against Abstained Not Voted
------------ --------- ----------- ------------
<S> <C> <C> <C>
143,879,354 147,992 73,707 100,320,598
</TABLE>
2. Approval of amendments to the certificate of designation for the
Series A Junior Preferred Stock to decrease the par value of the
Series A Junior Preferred Stock from $1.00 to $0.001, to change the
first dividend payment date, to correct an error and to make certain
conforming changes. Votes were cast (or shares were not voted) on this
proposal as follows:
<TABLE>
<CAPTION>
For Against Abstained Not Voted
------------ --------- ----------- ------------
<S> <C> <C> <C>
143,913,472 159,230 28,351 100,320,598
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended July 31,
2000.
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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
September 14, 2000
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<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 -- Financial Data Schedule
</TABLE>
