<PAGE> 1
Filed Pursuant to
Rule 424(b)(3) and (c)
with respect to
Reg. No. 333-38252
PROSPECTUS SUPPLEMENT
dated December 18, 2000 to
PROSPECTUS dated September 26, 2000
of TRANSTEXAS GAS CORPORATION
================================================================================
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 OCTOBER 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 December
15, 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.
================================================================================
<PAGE> 2
TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Report of Independent Accountants............................................................ 2
Condensed Consolidated Balance Sheet as of October 31, 2000 and January 31, 2000............. 3
Condensed Consolidated Statement of Operations for the three and nine months ended
October 31, 2000 and 1999................................................................. 4
Condensed Consolidated Statement of Cash Flows for the nine months ended October 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 6. Exhibits and Reports on Form 8-K................................................................ 22
Signature.................................................................................................. 23
</TABLE>
1
<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 (successor) as of October 31, 2000, the related
condensed consolidated statements of operations for the three-month and
nine-month periods ended October 31, 2000, the related condensed consolidated
statement of cash flows for the nine-month period ended October 31, 2000, and
the related condensed consolidated financial statements of TransTexas Gas
Corporation (predecessor) for the three-month and nine-month periods ended
October 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 have 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
December 15, 2000
2
<PAGE> 4
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 5,721 $ 18,288
Accounts receivable .................................................................... 36,631 19,592
Receivable from affiliates ............................................................. 1,067 1,107
Inventories ............................................................................ 1,676 1,741
Other .................................................................................. 3,884 926
--------- ---------
Total current assets ............................................................. 48,979 41,654
--------- ---------
Property and equipment ................................................................... 394,551 327,087
Less accumulated depreciation, depletion and amortization ................................ 60,066 --
--------- ---------
Net property and equipment -- based on the full cost method of accounting for
gas and oil properties of which $95,239 and $90,000 was excluded from
amortization at October 31, 2000 and January 31, 1999 respectively ................... 334,485 327,087
--------- ---------
Other assets.............................................................................. 2,858 513
--------- ---------
$ 386,322 $ 369,254
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt ................................................... $ 4,656 $ 6,934
Accounts payable ....................................................................... 9,402 15,759
Accrued liabilities .................................................................... 25,828 10,061
--------- ---------
Total current liabilities ........................................................ 39,886 32,754
--------- ---------
Long-term debt, less current maturities .................................................. 277,014 48,290
Production payments, less current portion ................................................ 22,442 32,460
Note payable to affiliate ................................................................ -- 196,346
Deferred income taxes .................................................................... 14,630 10,000
Other liabilities ........................................................................ 23,728 49,404
Redeemable preferred stock ............................................................... 18,670 --
Commitments and contingencies (Note 7) ................................................... -- --
Stockholders' deficit:
Common stock, $0.01 par value, 100,247,500 shares and 100,000,000 shares
authorized at October 31, 2000 and January 31, 2000: 1,250,251 shares and
57,515,566 shares issued and outstanding at October 31, 2000 and January 31,
2000 ................................................................................. 12 740
Additional paid-in capital ............................................................. 13 (740)
Accumulated deficit .................................................................... (10,073) --
--------- ---------
Total stockholders' deficit ...................................................... (10,048) --
--------- ---------
$ 386,322 $ 369,254
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
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 OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ | ------------- ------------ | ------------
<S> <C> | <C> <C> | <C>
Revenues | |
Gas, condensate and natural gas liquids ......... $ 49,027 | $ 28,763 $ 129,701 | $ 75,252
Loss on the sale of assets ...................... -- | (7) -- | (538)
Other ........................................... 554 | 649 1,746 | 2,329
------------ | ------------ ------------ | -----------
Total revenues ............................. 49,581 | 29,405 131,447 | 77,043
------------ | ------------ ------------ | -----------
Costs and expenses: | |
Operating ....................................... 4,660 | 3,538 12,821 | 15,080
Depreciation, depletion and amortization ........ 20,139 | 17,471 60,067 | 54,984
General and administrative....................... 4,108 | 3,468 14,085 | 15,274
Taxes other than income taxes.................... 1,630 | 2,073 5,275 | 6,183
------------ | ------------ ------------ | -----------
Total costs and expenses ................... 30,537 | 26,550 92,248 | 91,521
------------ | ------------ ------------ | -----------
Operating income (loss)..................... 19,044 | 2,855 39,199 | (14,478)
------------ | ------------ ------------ | -----------
Other income (expense): | |
Interest income ................................. 113 | 153 433 | 289
Interest expense, net ........................... (8,522) | (3,247) (26,405) | (27,966)
------------ | ------------ ------------ | -----------
Total other expense......................... (8,409) | (3,094) (25,972) | (27,677)
------------ | ------------ ------------ | -----------
Income (loss) before reorganization | |
items and income taxes ..................... 10,635 | (239) 13,227 | (42,155)
Reorganization items................................ -- | (4,167) -- | (5,086)
Income taxes - deferred ............................ 3,723 | -- 4,630 | --
------------ | ------------ ------------ | -----------
Net income (loss) .......................... $ 6,912 | $ (4,406) $ 8,597 | $ (47,241)
============ | ============ ============ | ===========
Accretion of preferred stock ....................... $ 3,549 | $ -- $ 18,670 | $ --
============ | ============ ============ | ===========
Net income (loss) available to common
stockholders ............................ $ 3,363 | $ (4,406) $ (10,073) | $ (47,241)
============ | ============ ============ | ===========
Basic and diluted net income (loss) per share ...... $ 2.69 | $ (0.08) $ (8.06) | $ (0.82)
============ | ============ ============ | ===========
Weighted average number of shares outstanding | |
for basic and diluted net income (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
<PAGE> 6
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ------------
NINE MONTHS ENDED
OCTOBER 31,
------------------------------
2000 1999
------------ | ------------
<S> <C> | <C>
Operating activities: |
Net income (loss) ............................................................. $ 8,597 | $ (47,241)
Adjustments to reconcile net income (loss) to net cash provided by operating |
activities: |
Depreciation, depletion and amortization.................................... 60,067 | 54,984
Accretion of discount on long-term debt..................................... 3,693 | --
Amortization of debt issue costs............................................ 239 | 1,655
Loss on the sale of assets.................................................. -- | 538
Deferred income taxes....................................................... 4,630 | --
Changes in assets and liabilities: |
Accounts receivable....................................................... (17,039) | (12,883)
Receivable from affiliates................................................ 40 | 169
Inventories............................................................... 65 | 730
Other current assets...................................................... (2,958) | (869)
Accounts payable.......................................................... (6,420) | 2,699
Accrued interest payable to affiliates.................................... -- | 14,629
Accrued liabilities....................................................... 12,704 | (867)
Transactions with affiliates, net......................................... -- | 700
Other assets.............................................................. (213) | 394
Other liabilities......................................................... (25,918) | (1,796)
--------- | ----------
Net cash provided by operating activities.............................. 37,487 | 12,842
--------- | ----------
Investing activities:............................................................. |
Capital expenditures........................................................... (72,489) | (20,310)
Proceeds from the sale of assets............................................... 6,632 | 556
--------- | ----------
Net cash used by investing activities.................................. (65,857) | (19,754)
--------- | ----------
Financing activities: |
Issuance of production payments................................................ 22,500 | --
Principal payments on production payments...................................... (29,867) | (12,958)
Principle payment on note payable to affiliate................................. -- | (1,093)
Issuance of note payable ...................................................... -- | 30,000
Issuance of long-term debt..................................................... 32,500 | --
Principal payments on long-term debt........................................... (14,824) | (322)
Revolving credit agreement, net................................................ 7,936 | 3,165
Proceeds from short-swing sale ................................................ 25 | --
Debt issue costs............................................................... (2,467) | --
--------- | ----------
Net cash provided by financing activities.............................. 15,803 | 18,792
--------- | ----------
Increase (decrease) in cash and cash equivalents....................... (12,567) | 11,880
Beginning cash and cash equivalents............................................... 18,288 | 3,775
--------- | ----------
Ending cash and cash equivalents.................................................. $ 5,721 | $ 15,655
========= | ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 7
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas" or the "Company")
as of October 31, 2000 and the results of its operations and cash flows for the
interim periods ended October 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 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," which the Company will adopt
effective February 1, 2001. SFAS 133, as amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," established
accounting and reporting standards for derivative instruments and for hedging
activities. Generally, it requires recognition of all derivatives as either
assets or liabilities in the balance sheet at their fair value. The accounting
for changes in fair value will depend on the intended use of the derivative and
the resulting designation. The Company is still evaluating the impact that the
adoption of SFAS 133 will have on its financial position and results of
operations, although the Company's management believes that the hedges to which
the Company is currently a party will continue to qualify as hedges under this
new standard. Based on this presumption, the Company will recognize the value of
the hedges at the date of implementation at their fair value as an asset or
liability in the balance sheet, recording a corresponding amount as a component
of comprehensive income. Subsequent changes in the fair value of the hedges
would be treated as a component of comprehensive income during the period of
change, while settlement of the hedged production would be reflected as an
adjustment to revenues in the period of production.
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 nine
months ended October 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 identify assets
based on their relative fair values. Postpetition liabilities were valued at
6
<PAGE> 8
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
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.
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 (loss) 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. In addition, net income (loss) available to common
stockholders reflects 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. For the three and nine months ended October 31, 2000,
accretion of preferred stock totaled $3.5 million and $18.7 million,
respectively.
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 operating
activities is dependent on gas and oil prices which are historically volatile.
Management plans to fund TransTexas' fiscal fourth quarter 2001 debt service and
capital expenditures with cash flows from existing producing properties, certain
identified relatively low risk exploratory prospects to be drilled and completed
during the remainder of fiscal 2001 and certain asset sales. 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.
TransTexas anticipates that fiscal 2002 capital expenditures will be funded by
cash flows from operating activities and borrowings under the production
payment drilling program. Should TransTexas' drilling prospects not be
productive or should oil and gas 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. In December 2000, TransTexas
sold certain producing properties in Kent, Starr, Wharton and Zapata Counties,
Texas for a sales price of $11.0 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 October 31, 2000, the outstanding principal balance under the Accounts
Receivable Facility was $12.1 million with availability for additional advances
of approximately $2.9 million and will be due on March 14, 2005.
7
<PAGE> 9
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
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 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. In September 2000, the Company closed
the Second Supplement to the production payment. In exchange for additional
properties being made subject to the production payment, the Company received
$10 million. The Oil and Gas Facility places certain restrictions on the amount
that may be outstanding under the production payment. As of October 31, 2000,
the aggregate purchase price of all wells purchased pursuant to this production
payment drilling program was $22.5 million and the outstanding balance of the
production payment was $27.7 million, of which $5.3 million is included in
accrued liabilities.
In November 2000, the Company closed the Third Supplement to the production
payment. In exchange for an additional well being made subject to the production
payment, the Company received $4.5 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.
5. HEDGE ARRANGEMENTS
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
-------------------
TOTAL 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 29.25
</TABLE>
8
<PAGE> 10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
Under these contracts, the counterparty is required to make payment to the
production payment purchaser if the settlement price (based on New York
Mercantile Exchange prices) 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. For the nine
months ended October 31, 2000, the Company had recognized hedging losses of $3.1
million. As of October 31, 2000, the Company had deferred losses of $1.3 million
under these contracts.
In November 2000, the Company entered into the following commodity price
hedging arrangement with respect to a portion of the Company's natural gas
production.
<TABLE>
<CAPTION>
CONTRACT PRICE
-------------------
TOTAL COLLAR
VOLUMES IN -------------------
PERIOD MMBTUS FLOOR CEILING
------ ---------- ------- -------
<S> <C> <C> <C>
Natural Gas:
December 2000 -- November 2001.............. 7,300,000 $ 3.50 $ 6.00
</TABLE>
Under terms of this collar transaction, the counterparty is required to
make a payment to the Company if the settlement price (based on a published
industry index of natural gas prices at Houston Ship Channel) for any settlement
period is below the floor price for such transaction and the Company is required
to make payment to the counterparty if the settlement price for any settlement
period is above the ceiling price for such transaction. This hedging arrangement
is supported by a letter of credit for drawings by the counterparty of up to
$6.5 million.
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ --------------
NINE MONTHS ENDED
OCTOBER 31,
------------------------------
2000 1999
------------ | --------------
<S> <C> | <C>
Financing activities: |
Accretion of preferred stock................................. $ 18,670 | $ --
======== | =========
Cancellation of old common stock............................. $ 740 | $ --
======== | =========
Issuance of new common stock................................. $ 12 | $ --
======== | =========
</TABLE>
7. 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
9
<PAGE> 11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
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 sale by TransTexas in 1997 of its subsidiary
that owned substantially all of its producing properties in the Lower
Wilcox/Lobo Trend in Webb and Zapata Counties in South Texas and its related
pipeline system for approximately $1.1 billion (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 among
the members of the TNGC Consolidated Group, 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.
10
<PAGE> 12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
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 potential elimination or reduction of
NOLs and such other tax attributes may substantially increase the amount of tax
payable by TransTexas.
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 per day of natural gas and 19,500 MMBtu
per day 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.
8. PREFERRED STOCK DIVIDENDS
On July 25, 2000 and August 30, 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 and September 1, 2000,
respectively. The quarterly dividends were paid in-kind on August 15, 2000 and
September 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.
9. SHORT-SWING SALE
During the quarter ended October 31, 2000, the Company received $25,000 in
cash from a stockholder as a result of such stockholder's compliance with the
requirement of the Securities Exchange Act of 1934, as amended, that profits
from the sale of certain securities of a company that were held less than six
months by certain officers, directors and principal stockholders must be
returned to the Company. The Company recorded the proceeds as an increase to
additional paid-in capital.
10. 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
nine months ended October 31, 2000.
11
<PAGE> 13
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 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 ....................... $ 5,604 $ 24 $ 93 $ -- $ 5,721
Accounts receivable ............................. 36,205 -- 426 -- 36,631
Receivables from affiliates ..................... 9,472 -- -- (8,405) 1,067
Inventories ..................................... 1,676 -- -- -- 1,676
Other ........................................... 3,793 23 68 -- 3,884
--------- --------- --------- --------- ---------
Total current assets ...................... 56,750 47 587 (8,405) 48,979
--------- --------- --------- --------- ---------
Property and equipment ............................ 382,388 1,820 10,343 -- 394,551
Less accumulated depreciation, depletion and
amortization .................................... 58,236 241 1,589 -- 60,066
--------- --------- --------- --------- ---------
Net property and equipment ................ 324,152 1,579 8,754 -- 334,485
--------- --------- --------- --------- ---------
Other assets ...................................... 2,859 -- 1 (2) 2,858
--------- --------- --------- --------- ---------
$ 383,761 $ 1,626 $ 9,342 $ (8,407) $ 386,322
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ............ $ 3,672 $ 24 $ 960 $ -- $ 4,656
Accounts payable ................................ 9,205 51 146 -- 9,402
Accrued liabilities ............................. 25,670 18 140 -- 25,828
--------- --------- --------- --------- ---------
Total current liabilities ................. 38,547 93 1,246 -- 39,886
--------- --------- --------- --------- ---------
Payable to affiliates ............................. -- 621 7,784 (8,405) --
Long-term debt, less current maturities ........... 275,735 1,063 216 -- 277,014
Production payments, less current portion ......... 22,442 -- -- -- 22,442
Deferred income taxes ............................. 14,630 -- -- -- 14,630
Other liabilities ................................. 23,728 -- -- -- 23,728
Redeemable preferred stock ........................ 18,670 -- -- -- 18,670
Stockholders' equity (deficit):
Common stock .................................... 12 -- -- -- 12
Additional paid-in capital ...................... 13 1 1 (2) 13
Retained earnings (accumulated deficit) ......... (10,016) (152) 95 -- (10,073)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) ...... (9,991) (151) 96 (2) (10,048)
--------- --------- --------- --------- ---------
$ 383,761 $ 1,626 $ 9,342 $ (8,407) $ 386,322
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 14
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED OCTOBER 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 $ 49,027 $ -- $ -- $ -- $ 49,027
Other .................................. 188 145 1,575 (1,354) 554
-------- -------- -------- -------- --------
Total revenues .................. 49,215 145 1,575 (1,354) 49,581
-------- -------- -------- -------- --------
Costs and expenses:
Operating .............................. 4,931 (3) 1,086 (1,354) 4,660
Depreciation, depletion and amortization 19,558 88 493 -- 20,139
General and administrative ............. 3,968 5 135 -- 4,108
Taxes other than income taxes .......... 1,598 4 28 -- 1,630
-------- -------- -------- -------- --------
Total costs and expenses ........ 30,055 94 1,742 (1,354) 30,537
-------- -------- -------- -------- --------
Operating income (loss) ......... 19,160 51 (167) -- 19,044
-------- -------- -------- -------- --------
Other income (expense):
Interest income ........................ 113 -- -- -- 113
Interest expense, net .................. (8,432) (41) (49) -- (8,522)
-------- -------- -------- -------- --------
Total other expense ............. (8,319) (41) (49) -- (8,409)
-------- -------- -------- -------- --------
Income before income taxes ...... 10,841 10 (216) -- 10,635
Income taxes -- deferred ................. 3,723 -- -- -- 3,723
-------- -------- -------- -------- --------
Net income (loss) ............... $ 7,118 $ 10 $ (216) $ -- $ 6,912
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 15
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 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 .. $ 129,701 $ -- $ -- $ -- $ 129,701
Other .................................... 386 513 5,461 (4,614) 1,746
--------- --------- --------- --------- ---------
Total revenues .................... 130,087 513 5,461 (4,614) 131,447
--------- --------- --------- --------- ---------
Costs and expenses:
Operating ................................ 14,277 28 3,130 (4,614) 12,821
Depreciation, depletion and amortization . 58,236 240 1,591 -- 60,067
General and administrative ............... 13,608 128 349 -- 14,085
Taxes other than income taxes ............ 5,160 24 91 -- 5,275
--------- --------- --------- --------- ---------
Total costs and expenses .......... 91,281 420 5,161 (4,614) 92,248
--------- --------- --------- --------- ---------
Operating income (loss) ........... 38,806 93 300 -- 39,199
--------- --------- --------- --------- ---------
Other income (expense):
Interest income .......................... 433 -- -- -- 433
Interest expense, net .................... (25,955) (245) (205) -- (26,405)
--------- --------- --------- --------- ---------
Total other expense ............... (25,522) (245) (205) -- (25,972)
--------- --------- --------- --------- ---------
Income before income taxes ........ 13,284 (152) 95 -- 13,227
Income taxes -- deferred .................... 4,630 -- -- -- 4,630
--------- --------- --------- --------- ---------
Net income (loss) ....................... $ 8,654 $ (152) $ 95 $ -- $ 8,597
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 16
TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 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) ............................. $ 8,654 $ (152) $ 95 $ -- $ 8,597
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization .... 58,236 240 1,591 -- 60,067
Accretion of discount on long-term debt ..... 3,496 52 145 -- 3,693
Amortization of debt issue costs ............ 239 -- -- -- 239
Deferred income taxes ....................... 4,630 -- -- -- 4,630
Changes in assets and liabilities:
Accounts receivable ...................... (17,062) 110 (87) -- (17,039)
Receivable from affiliates ............... 774 -- -- (734) 40
Inventories .............................. 65 -- -- -- 65
Other current assets ..................... (2,885) (23) (50) -- (2,958)
Accounts payable ......................... (6,510) 48 42 -- (6,420)
Accrued liabilities ...................... 12,612 7 85 -- 12,704
Transactions with affiliates, net ........ -- (16) (718) 734 --
Other assets ............................. (213) -- -- -- (213)
Other liabilities ........................ (25,918) -- -- -- (25,918)
-------- -------- -------- -------- --------
Net cash provided by operating
activities .......................... 36,118 266 1,103 -- 37,487
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures .......................... (71,510) (585) (394) -- (72,489)
Proceeds from the sale of assets .............. 6,096 536 -- -- 6,632
-------- -------- -------- -------- --------
Net cash used by investing
activities .......................... (65,414) (49) (394) -- (65,857)
-------- -------- -------- -------- --------
Financing activities:
Issuance of production payments ............. 22,500 -- -- -- 22,500
Principal payments on production payments ... (29,867) -- -- -- (29,867)
Issuance of long-term debt .................. 32,500 -- -- -- 32,500
Principal payments on long-term debt ........ (13,578) (237) (1,009) -- (14,824)
Revolving credit agreement, net ............. 7,936 -- -- -- 7,936
Proceeds from short-swing sale .............. 25 -- -- -- 25
Debt issue costs ............................ (2,467) -- -- -- (2,467)
-------- -------- -------- -------- --------
Net cash provided (used) by financing
activities .......................... 17,049 (237) (1,009) -- 15,803
-------- -------- -------- -------- --------
Decrease in cash and cash equivalents . (12,247) (20) (300) -- (12,567)
Beginning cash and cash equivalents .............. 17,851 44 393 -- 18,288
-------- -------- -------- -------- --------
Ending cash and cash equivalents ................. $ 5,604 $ 24 $ 93 $ -- $ 5,721
======== ======== ======== ======== ========
</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 nine months ended October 31,
2000 and 1999, is as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Sales volumes | |
Gas (Bcf) ............................ 6.6 | 6.4 20.3 | 21.3
NGLs (MMgal) ......................... 10.3 | 14.3 41.4 | 31.2
Condensate (MBbls) ................... 385 | 419 1,225 | 1,333
Average prices | |
Gas (dry) (per Mcf) .................. $ 4.81 | $ 2.72 $ 3.88 | $ 2.27
NGLs (per gallon) .................... .74 | .28 .47 | .26
Condensate and oil (per Bbl) ........... 32.51 | 21.57 30.03 | 17.63
Number of gross wells drilled .......... 5 | 4 13 | 9
Percentage of wells completed .......... 60% | 75% 62% | 33%
</TABLE>
A summary of TransTexas' operating expenses is set forth below (in millions
of dollars):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------- ---------------------------
2000 1999 2000 | 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Operating costs and expenses: | |
Lease ................................ $ 2.5 | $ 1.5 $ 6.8 | $ 7.5
Pipeline and gathering ............... 2.1 | 2.0 6.0 | 7.6
-------- | -------- -------- | --------
4.6 | 3.5 12.8 | 15.1
Taxes other than income taxes (1) ...... 1.7 | 2.1 5.3 | 6.2
-------- | -------- -------- | --------
$ 6.3 | $ 5.6 $ 18.1 | $ 21.3
======== | ======== ======== | ========
</TABLE>
(1) Taxes other than income taxes include severance, property and other taxes.
TransTexas' average depletion rates are as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- | -------- -------- | --------
<S> <C> | <C> <C> | <C>
Depletion rates (per Mcfe).............. $ 2.22 | $ 1.93 $ 2.15 | $ 1.85
======= | ======== ======== | ========
</TABLE>
16
<PAGE> 18
Three Months Ended October 31, 2000 Compared with the Three Months Ended
October 31, 1999
Gas, condensate and NGL revenues for the three months ended October 31,
2000 increased $20.2 million from the prior period, due primarily to higher
prices for all products. The average monthly prices received per Mcf of gas
ranged from $4.12 to $5.53 in the three months ended October 31, 2000, compared
to a range of $2.56 to $2.89 in the prior period.
Lease operating expenses for the three months ended October 31, 2000
increased $1.0 million from the prior period due primarily to increases in
personnel costs, rentals and workover expenses. Pipeline and gathering expenses
increased $0.1 million from the prior period due primarily to the higher cost of
natural gas used in the treating process at Galveston Bay Processing's facility.
Depreciation, depletion and amortization expense for the three months ended
October 31, 2000 increased $2.7 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 increased $0.6 million primarily as
a result of increased professional fees and higher insurance costs. Taxes other
than income taxes decreased by $0.4 million over the prior period due primarily
to decreases in severance taxes. Interest expense for the three months ended
October 31, 2000 increased by $5.3 million primarily as a result of the issuance
of the Senior Secured Notes, partially offset by an increase in capitalized
interest.
Nine Months Ended October 31, 2000 Compared with the Nine Months Ended
October 31, 1999
Gas, condensate and NGL revenues for the nine months ended October 31, 2000
increased $54.4 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 $5.53 in the nine months
ended October 31, 2000, compared to a range of $1.74 to $2.89 in the prior
period. For the nine months ended October 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 nine months ended October 31, 2000
decreased $0.7 million from the prior period due primarily to decreases in salt
water disposal and maintenance costs. Pipeline and gathering expenses decreased
$1.6 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 nine
months ended October 31, 2000 increased $5.1 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 $1.2
million primarily as a result of decreases in personnel and related costs. Taxes
other than income taxes decreased by $0.9 million due primarily to decreases in
property and severance taxes. Interest expense for the nine months ended October
31, 2000 decreased by $1.6 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.
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 beginning June 14, 2000, 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.
17
<PAGE> 19
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/leaseback 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 October 31, 2000,
the outstanding principal balance under the Accounts Receivable Facility was
$12.1 million with availability for additional advances of approximately $2.9
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 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.
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.
18
<PAGE> 20
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. 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. The Oil and Gas Facility places certain restrictions on the amount
that may be outstanding under the production payment. As of October 31, 2000,
the aggregate purchase price of all wells purchased pursuant to this production
payment drilling program was $22.5 million and the outstanding balance of the
production payment was $27.7 million, of which $5.3 million is included in
accrued liabilities.
In November 2000, the Company closed the Third Supplement to the production
payment. In exchange for an additional well being made subject to the production
payment, the Company received $4.5 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.
TransTexas is highly leveraged and has 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 its proved oil and gas reserves,
TransTexas must continue to make substantial capital expenditures for the
exploration and development of its natural gas and oil prospects. For the nine
months ended October 31, 2000, total capital expenditures incurred were $74
million, including $16 million for nonproducing leases, $55 million for drilling
and development and $3 million for gas gathering, other equipment and seismic.
Capital expenditures for the fourth quarter of fiscal 2001 are estimated to be
approximately $22 million. Management plans to fund TransTexas' fiscal fourth
quarter 2001 debt service requirements and capital expenditures with cash flows
from existing producing properties, certain identified relatively low risk
exploratory prospects to be drilled and completed during the remainder of fiscal
2001 and certain assets sales. 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. TransTexas anticipates capital
expenditures of $72 million for fiscal 2002 and estimates that these capital
expenditures will be funded by cash flows from operating activities and
borrowings under the production payment drilling program. Should TransTexas'
drilling prospects not be productive or should oil and gas 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. In December 2000, TransTexas sold certain producing properties in Kent,
Starr, Wharton and Zapata Counties, Texas for a sales price of $11.0 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 sale by TransTexas in 1997 of its subsidiary
that owned substantially all of its producing properties in the Lower
Wilcox/Lobo Trend in Webb and Zapata Counties in South Texas and its related
pipeline system for approximately $1.1 billion (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
19
<PAGE> 21
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 among
the members of the TNGC Consolidated Group, 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.
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.
20
<PAGE> 22
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.
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
----------------
TOTAL COLLAR
VOLUMES IN ----------------
MMBTUS/BBLS FLOOR CEILING
----------- ----- -------
<S> <C> <C> <C>
PERIOD
------
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 29.25
</TABLE>
Under these contracts, the counterparty is required to make payment to the
production payment purchaser if the settlement price (based on New York
Mercantile Exchange prices) 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. For the nine
months ended October 31, 2000, the Company had recognized hedging losses of $3.1
million. As of October 31, 2000, the Company had deferred losses of $1.3 million
under these contracts.
In November 2000, the Company entered into the following commodity price
hedging arrangement with respect to a portion of the Company's natural gas
production.
<TABLE>
<CAPTION>
CONTRACT PRICE
------------------
TOTAL COLLAR
VOLUMES IN -------------------
MMBTUS FLOOR CEILING
----------- ----- -------
<S> <C> <C> <C>
PERIOD
------
Natural Gas:
December 2000 -- November 2001............................... 7,300,000 $3.50 $6.00
</TABLE>
Under terms of this collar transaction, the counterparty is required to
make a payment to the Company if the settlement price (based on a published
industry index of natural gas prices at Houston Ship Channel) for any settlement
period is below the floor price for such transaction and the Company is required
to make payment to the counterparty if the settlement price for any settlement
period is above the ceiling price for such transaction. This hedging arrangement
is supported by a letter of credit for drawings by the counterparty of up to
$6.5 million.
Because substantially all of its long-term obligations at October 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 ($12.1
million outstanding at October 31, 2000). The Company had no open interest rate
hedge positions at October 31, 2000.
21
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the condensed consolidated financial statements for a
discussion of TransTexas' legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated August 15, 2000,
reporting under Item 5, Other Events, the authorization of the payment of
quarterly dividends to the holders of the Company's Preferred Stock of record on
June 1, 2000.
22
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTEXAS GAS CORPORATION
By: /s/ ED DONAHUE
-------------------------------------
Ed Donahue
Vice President and Chief Financial Officer
December 15, 2000
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<PAGE> 26
(ARTICLE) 5
(LEGEND)
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheet at October 31, 2000 and the
unaudited condensed consolidated statement of operations for the nine months
ended October 31, 2000 and is qualified in its entirety by reference to such
financial statements.
(/LEGEND)
(MULTIPLIER) 1,000
(TABLE)
(S) (C)
(PERIOD-TYPE) 9-MOS
(FISCAL-YEAR-END) JAN-31-2001
(PERIOD-START) FEB-01-2000
(PERIOD-END) OCT-31-2000
(CASH) 5,721
(SECURITIES) 0
(RECEIVABLES) 37,698
(ALLOWANCES) 0
(INVENTORY) 1,676
(CURRENT-ASSETS) 48,979
(PP&E) 394,551
(DEPRECIATION) 60,066
(TOTAL-ASSETS) 386,322
(CURRENT-LIABILITIES) 39,886
(BONDS) 277,014
(PREFERRED-MANDATORY) 18,670
(PREFERRED) 0
(COMMON) 12
(OTHER-SE) (10,060)
(TOTAL-LIABILITY-AND-EQUITY) 386,322
(SALES) 129,701
(TOTAL-REVENUES) 131,447
(CGS) 0
(TOTAL-COSTS) 92,248
(OTHER-EXPENSES) 0
(LOSS-PROVISION) 0
(INTEREST-EXPENSE) 26,405
(INCOME-PRETAX) 13,227
(INCOME-TAX) 4,630
(INCOME-CONTINUING) 8,597
(DISCONTINUED) 0
(EXTRAORDINARY) 0
(CHANGES) 0
(NET-INCOME) 8,597
(EPS-BASIC) (8.06)
(EPS-DILUTED) (8.06)
(/TABLE)
