<PAGE> 1
As filed with the Securities and Exchange Commission on August 9, 1996.
Registration No. 33-85930
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Post-Effective Amendment No. 4
to
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
TRANSAMERICAN REFINING CORPORATION
(Exact name of Co-Registrant as specified in its charter)
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Texas 2911 76-0229632
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
TRANSAMERICAN ENERGY CORPORATION
(Exact name of Co-Registrant as specified in its charter)
DELAWARE 1389 76-0441642
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1300 EAST NORTH BELT, SUITE 320, HOUSTON, TEXAS 77032-2949, (713) 986-8811
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------------
JEFFREY H. SIEGEL, CHIEF FINANCIAL OFFICER
1300 EAST NORTH BELT, SUITE 320
HOUSTON, TEXAS 77032-2949, (713) 986-8811
(Address, including zip code, and telephone number, including
area code, of registrant's agent for service)
copies to:
C. ROBERT BUTTERFIELD KRIS F. HENZELMAN
Gardere & Wynne, L.L.P. Cravath, Swaine & Moore
3000 Thanksgiving Tower Worldwide Plaza
Dallas, Texas 75201 825 Eighth Avenue
(214) 999-3000 New York, New York 10019
(212) 474-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
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CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
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ITEM NUMBER AND HEADING HEADING IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus ................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus....................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges............................................. Prospectus Summary; Risk Factors; The Company and
TEC; Selected Financial and Operating Data of
the Company; Selected Financial and Operating
Data of TEC
4. Use of Proceeds............................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............................. Underwriting
6. Dilution ................................................... Not Applicable
7. Selling Security Holders ................................... Selling Securityholder
8. Plan of Distribution ....................................... Outside Front Cover Page; Plan of Distribution
9. Description of Securities to be Registered ................. Outside Front Cover Page; Prospectus Summary;
Description of the Notes; Description of the
Warrants; Description of Capital Stock of the
Company; Description of Capital Stock of TEC
10. Interests of Named Experts and Counsel ..................... Not Applicable
11. Information with Respect to the Registrant ................. Outside Front Cover Page; Prospectus Summary; Risk
Factors; The Company and TEC; Capitalization of
the Company; Combined Capitalization of
TransTexas and the Company; Selected Financial
Data of the Company; Selected Financial and
Operating Data of TEC; Management's Discussion
and Analysis of Financial Condition and Results
of Operations of the Company; Management's
Discussion and Analysis of Financial Condition
and Results of Operations of TEC; Business of
the Company; Business of TransTexas; Management;
Certain Relationships and Related Transactions;
Description of the Notes; Description of the
Warrants; Description of Capital Stock of the
Company; Certain Legal Considerations;
Additional Information; Financial Statements
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ............................... Not Applicable
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***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* Registration Statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* Registration Statement becomes effective. This Prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
Subject to Completion August 9, 1996
PROSPECTUS
TRANSAMERICAN REFINING CORPORATION
TRANSAMERICAN ENERGY CORPORATION, AS GUARANTOR
340,000 A UNITS CONSISTING OF
$340,000,000 GUARANTEED FIRST MORTGAGE DISCOUNT NOTES DUE 2002
AND 5,811,773 COMMON STOCK PURCHASE WARRANTS
100,000 B UNITS CONSISTING OF
$100,000,000 GUARANTEED FIRST MORTGAGE NOTES DUE 2002
AND 1,683,540 COMMON STOCK PURCHASE WARRANTS
_______________
This Prospectus relates to securities issued in February 1995 (the
"1995 Offering") by TransAmerican Refining Corporation (the "Company") including
340,000 A Units consisting of $340,000,000 aggregate principal amount of
Guaranteed First Mortgage Discount Notes due 2002 (the "Discount Mortgage
Notes") and 5,811,773 Common Stock Purchase Warrants (the "Warrants"), and
100,000 B Units consisting of $100,000,000 aggregate principal amount of
Guaranteed First Mortgage Notes due 2002 (the "Mortgage Notes" and, together
with the Discount Mortgage Notes, the "Notes") and 1,683,540 Warrants and to the
guarantee of the Notes by TransAmerican Energy Corporation ("TEC"), the parent
corporation of the Company. This Prospectus also relates to the Common Stock of
the Company, that may be issued by the Company upon exercise of the Warrants
(the "Warrant Shares"). Certain of the Securities (as defined below) may be
offered from time to time by the selling securityholder named herein (the
"Selling Securityholder"). The Company will receive $74,953 upon exercise of
all 7,495,313 of the Warrants. The Company will not receive any of the proceeds
from the sale of Securities by the Selling Securityholder. In connection with
the 1995 Offering the Company incurred, and in connection with the offering
described herein the Company will incur, certain expenses, estimated at $6
million in the aggregate. See "Selling Securityholder."
The Company may from time to time issue Warrant Shares upon the
exercise of any or all of the Warrants. The Selling Securityholder may from
time to time sell all or a portion of the Securities it holds and Warrant
Shares it acquires upon exercise of Warrants in the over-the-counter market, on
any national securities exchange on which the Securities are listed or traded,
in negotiated transactions or otherwise, at prices then prevailing or related
to the then current market price or at negotiated prices. The Securities may
be sold directly or through brokers or dealers or in a distribution by one or
more underwriters on a firm commitment or best efforts basis. See "Plan of
Distribution." The Selling Securityholder and any broker-dealers participating
in the distribution of the Securities may be deemed to be "underwriters" within
the meaning of the Securities Act and any profit on the sale of the Securities
by the Selling Securityholder and any commissions received by any such
broker-dealer may be deemed to be underwriting commissions under the Securities
Act. The Securities have not been registered for sale by the Selling
Securityholder under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Securities should
confirm the registration thereof under the securities laws of the states in
which such transactions occur, or the existence of any exemption from
registration.
Cash interest does not accrue on the Discount Mortgage Notes prior to
February 15, 1998. Commencing August 15, 1998, cash interest on the Discount
Mortgage Notes is payable semi-annually on February 15 and August 15 at a rate
of 18 1/2% per annum, subject to adjustment. The Mortgage Notes bear interest
at the rate of 16 1/2% per annum, subject to adjustment, payable semi-annually
on February 15 and August 15. Upon payment in full in cash of the interest
payment due on August 15, 1998, in respect of the Discount Mortgage Notes, the
Discount Mortgage Notes and the Mortgage Notes will thereafter bear interest at
the respective rates per annum set forth above less 50 basis points (0.5%). The
Notes will mature on February 15, 2002. The Notes are not redeemable prior to
February 15, 1999, except that the Company may redeem, at its option prior to
February 15, 1999, up to 30% of the original aggregate principal amount of the
Discount Mortgage Notes and up to 30% of the original aggregate principal
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amount of the Mortgage Notes, at the redemption prices set forth herein, with
the net proceeds of any Equity Offering (as defined below) completed within 90
days prior to such redemption. The Company is required to redeem (subject to
certain offsets), at a redemption price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of redemption,
$85 million principal amount of the Discount Mortgage Notes and $25 million
principal amount of the Mortgage Notes on each of February 15, 2000 and 2001,
which redemptions are calculated to retire 50% of the principal amount of the
Notes prior to maturity. On or after February 15, 1999, the Notes are
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. Upon the occurrence of a Change of Control (as defined below),
the Company is obligated to make an offer to purchase all outstanding Notes at
a price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, or, in the case of any such purchase of Discount Mortgage
Notes prior to February 15, 1998, at a price equal to 101% of the Accreted
Value (as defined below) thereof, in each case, to and including the date of
purchase. In addition, the Company is obligated, subject to certain conditions,
to make an offer to purchase Notes (i) with the net cash proceeds of certain
asset sales or other dispositions of assets, (ii) with a percentage of Excess
Cash (as defined below), and (iii) if the Company's net worth is less than $75
million and its Consolidated Fixed Charge Coverage Ratio (as defined below) is
less than 1.25 to 1, at a price equal to 100% of the principal amount of such
Notes, plus accrued and unpaid interest, if any, or, in the case of any such
purchase of Discount Mortgage Notes prior to February 15, 1998, at a price
equal to 100% of the Accreted Value thereof, in each case, to and including the
date of purchase.
The Notes are senior obligations of the Company, collateralized by a first
priority lien in substantially all existing and future Collateral (as defined
below) of the Company, which currently includes substantially all of the
properties and assets of the Company. At April 30, 1996, the Company had
outstanding capitalized lease obligations in the aggregate amount of $2.3
million which are collateralized by liens on certain of the Collateral ranking
prior to the lien collateralizing the Notes. In addition, at April 30, 1996,
the Company had outstanding obligations in the aggregate amount of $16.0
million which rank pari passu in right of payment with the Notes. The Notes are
unconditionally guaranteed on a senior secured basis (the "Guarantee") by TEC.
The Notes and the Guarantee currently are secured by pledges of 50.45 million
shares of common stock (68.2% of the currently outstanding capital stock) of
TransTexas Gas Corporation ("TransTexas") and all of the outstanding capital
stock of the Company.
The Warrants entitle the holders thereof to purchase in the aggregate
7,495,313 shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"), or 19.99% of the outstanding Common Stock on the date hereof,
assuming the exercise of all the Warrants. The Warrants are exercisable until
5:00 p.m. New York City time on February 15, 2002, at an exercise price of $0.01
per share. The Notes, the Warrants, and the Warrant Shares are sometimes
referred to herein as the "Securities."
----------------------
SEE "RISK FACTORS" ON PAGES [10-19] FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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August 9, 1996
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ADDITIONAL INFORMATION
The Company and TEC are subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith file reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information can be inspected and
copied at the Public Reference Section of the SEC, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, New York, New York
10048.
The Company and TEC have filed with the SEC a Registration Statement on
Form S-1 under the Securities Act with respect to the Securities offered hereby.
As permitted by the rules and regulations of the SEC, this Prospectus omits
certain information contained in the Registration Statement and exhibits and
schedules thereto. For further information with respect to the Company and the
Securities, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements made in this Prospectus regarding
the contents of any contract or any other document provide an accurate
description of the material provisions of such contracts or documents, but are
not necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at, and copies of such materials may be obtained at
prescribed rates from, the Public Reference Section of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its
regional offices located at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, New York, New
York 10048.
The Company and TEC will distribute to registered holders of the Notes and
Warrants annual reports containing audited financial statements and an opinion
thereon by the Company's and TEC's independent public accountants,
respectively, and quarterly reports containing unaudited summary financial
information for each of the first three quarters of each fiscal year.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including notes thereto) appearing
elsewhere in this Prospectus. Certain terms relating to the refining business
are defined in the "Glossary" of this Prospectus. Unless the context indicates
otherwise, references in this Prospectus to the "Company" are to TransAmerican
Refining Corporation and the business and assets that were transferred to it on
or before February 23, 1995, and references in this Prospectus to "TransTexas"
are to TransTexas Gas Corporation and its subsidiary, TransTexas Transmission
Corporation, and the business and assets transferred to TransTexas on August
24, 1993, by its parent, TransAmerican Natural Gas Corporation (together with
its predecessors, "TransAmerican"). Financial information contained herein
reflects a 30,000-for-1 stock split for TransAmerican Refining Corporation
effected in July 1994. In January 1996, the Board of Directors of the Company,
the Board of Directors of TEC and the Board of Directors of TransTexas elected
to change their fiscal year end for financial reporting purposes from July 31
to January 31. As a result, all references herein to fiscal 1996 are to the six
month period ended January 31, 1996 and all references herein to fiscal 1997
are to the year ended January 31, 1997.
THE COMPANY
The Company owns and operates a large petroleum refinery strategically
located in the Gulf Coast region along the Mississippi River, approximately 20
miles from New Orleans, Louisiana. The Company's business strategy is to
maximize refining margins by converting low-cost, heavy, sour crude oils into
high-value, light petroleum products including gasoline and heating oil. The
Company is engaged in a construction and expansion program (the "Capital
Improvement Program"), which is designed to reactivate the refinery and increase
its complexity. The Company has engaged a number of specialty consultants and
engineering and construction firms to assist the Company in completing the
individual projects that comprise the Capital Improvement Program. Phase I of
the Capital Improvement Program includes the completion and start-up of the
major conversion units, including a fluid catalytic cracking unit and a delayed
coking unit. The Company estimates, subject to obtaining adequate financing on
a timely basis, that Phase I will be completed and tested by February 1997, and
will result in the refinery having the capacity to process 170,000 to 200,000
BPD of medium to light, sour crude oil. See "Business of the Company" and
"Management's Discussion and Analysis." Phase II includes the installation of
additional equipment expected to further improve refinery economics. The
Company estimates, subject to obtaining adequate financing on a timely basis,
that Phase II will be completed and tested by February 1998, and will result in
the refinery having the capability to process 200,000 BPD of heavy, sour crude
oil. Upon successful completion of the Capital Improvement Program, the Company
will own and operate one of the largest independent refineries in the Gulf Coast
region, with a replacement cost estimated by management to be over $1.5 billion.
The completed refinery is projected to have a complexity rating of approximately
11, which is substantially above the current United States average of 9.4. The
Company is required under the Indenture Governing the Notes (the "Indenture") to
complete Phase I by February 1997. The foregoing estimates, as well as other
estimates and projections herein, are subject to substantial revision upon the
occurrence of future events, such as unavailability of financing, engineering
problems, work stoppages and cost overruns over which the Company may not have
any control, and there can be no assurance that any such projections or
estimates will prove accurate.
Total U.S. refining capacity is near to its lowest point in 18 years as
many small, low-complexity refineries have ceased operations. Over the same
period, demand for refined products has increased. As a result, capacity
utilization increased to approximately 91.9% in 1995, from approximately 77.6%
in 1985, reflecting the increase in demand for refined products. The refinery
utilization rate is a key determinant of refining profitability. Management of
the Company believes that over the next several years domestic demand for
refined products will increase while refining capacity should continue at
current levels, causing United States refining utilization rates to remain
high. In addition, management of the Company believes that increased foreign
demand, particularly in the Far East, combined with more stringent domestic
product specifications, should limit the availability of imported refined
products. Management believes that these factors, together with relatively low
prices expected by it for heavy, sour crude oil, should have a positive effect
on the Company's refining margins.
4
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In February 1995, in connection with the 1995 Offering, TransAmerican
contributed all of the capital stock of the Company, and 55 million shares of
common stock (74.3% of the currently outstanding shares) of TransTexas to TEC.
TEC then contributed 15 million of these shares of TransTexas common stock
(20.3% of the currently outstanding shares) to the Company. TEC and the Company
pledged their stock in TransTexas, and TEC pledged its stock in the Company, as
security for the Notes and the Guarantee. Such shares of stock are held by the
Indenture Trustee (as defined below) for the benefit of the holders of Notes. In
March 1996, the Company sold 4.55 million shares of TransTexas common stock
(6.1% of the total outstanding) in public offerings. The 50.45 million shares of
TransTexas common stock held by TEC and the Company are currently pledged as
collateral for the Company's Notes. TransTexas' common stock is traded on the
Nasdaq National Market ("NNM") and its closing price on August 8, 1996 was
$9.50 per share. As a part of the 1995 Offering, the Company issued Warrants to
purchase 7,495,313 shares of its Common Stock. The Warrants have an exercise
price of $0.01 per share, effectively resulting in dilution of 19.99% of TEC's
ownership of the Company.
TRANSTEXAS
TransTexas is engaged in the exploration for and the development,
production and transportation of natural gas primarily from the Lower Wilcox
Lobo Trend (the "Lobo Trend") in Webb and Zapata counties in South Texas. Since
1973, TransTexas operates essentially 100% of its production. TransTexas also
owns and operates a system of approximately 1,100 miles of gathering and
transmission pipelines. TransTexas minimizes operating costs by performing
substantially all of its own oilfield services with the exception of open-hole
logging and some reservoir stimulation services.
5
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THE OFFERING
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Securities Offered................. The Selling Security Holder, from time to time, may offer Notes, Warrants or
Warrant Shares.
Use of Proceeds ................... The Company will use the $74,953 received upon exercise of the Warrants for
general corporate purposes. The Company will not receive any of the proceeds
from the sale of the Securities by the Selling Securityholder.
THE NOTES
Interest on Discount
Mortgage Notes................... The Discount Mortgage Notes accrete at 18 1/2% per annum (compounded semi-
annually on February 15 and August 15) from February 23, 1995 through
February 15, 1998 (without giving effect to allocation of part of the issue
price of the A Units to the Warrants). Cash interest does not accrue on the
Discount Mortgage Notes prior to February 15, 1998. Cash interest on the
Discount Mortgage Notes is payable semi-annually on February 15 and August 15,
commencing August 15, 1998, at a rate of 18 1/2% per annum, subject to
adjustment. Upon payment in full in cash of the interest payment due on
August 15, 1998 in respect of the Discount Mortgage Notes, the Discount
Mortgage Notes will thereafter bear interest at 18% per annum. For federal
income tax purposes, the Discount Mortgage Notes were issued with an original
issue discount of 20.2%. Holders of Discount Mortgage Notes will generally be
required to include original issue discount in ordinary income over the period
that they hold the Discount Mortgage Notes in advance of the receipt of cash
attributable thereto. See "Certain Legal Considerations -- Tax Considerations
-- Taxation of the Notes."
Interest on Mortgage
Notes ......................... The Mortgage Notes bear interest at a rate of 16 1/2% per annum, subject to
adjustment. Interest accrues from the date of issuance thereof and is payable
semi-annually in cash in arrears on each February 15 and August 15. Upon
payment in full in cash of the interest payment due on August 15, 1998 in
respect of the Discount Mortgage Notes, the Mortgage Notes will thereafter
bear interest at 16% per annum.
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Ranking ........................... The Notes are senior indebtedness of the Company. Currently the Notes are the
only outstanding indebtedness of the Company other than capitalized lease
obligations, trade payables, and intercompany debt to TransAmerican and other
affiliates. The Indenture permits the Company to obtain a Revolving Credit
Facility, restricts the Company's ability to incur other indebtedness in
excess of $50 million and restricts the Company's ability to grant additional
liens on its assets except for Permitted Liens (as defined below). See
"Description of the Notes -- Covenants -- Limitation on Incurrences of
Additional Debt and Issuances of Disqualified Capital Stock" and "Description
of the Notes -- Covenants -- Limitation on Liens."
Optional Redemption ............... The Notes are not redeemable prior to February 15, 1999, except that the
Company may redeem, at its option, up to 30% of the original aggregate
principal amount of the Discount Mortgage Notes and up to 30% of the original
aggregate principal amount of the Mortgage Notes, at the redemption prices set
forth herein, with the net proceeds of any Equity Offering completed within
90 days prior to such redemption. On or after February 15, 1999, the Notes are
redeemable at the option of the Company, in whole or in part, at the
redemption prices set forth herein, plus accrued and unpaid interest, if any,
to the date of redemption.
Mandatory
Redemption....................... The Company is required to redeem, at a redemption price of 100% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption, $85 million principal amount of the Discount Mortgage Notes and
$25 million principal amount of the Mortgage Notes (subject to offset from
redemptions or repurchases) on each of February 15, 2000 and 2001, which
redemptions are calculated to retire 50% of the principal amount of the Notes
prior to maturity.
Offers to Purchase................. Upon the occurrence of a Change of Control, the Company is obligated to make
an offer to purchase all outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, or, in the
case of any such purchase of Discount Mortgage Notes prior to February 15, 1998,
at a price equal to 101% of the Accreted Value thereof, in either case, to and
including the date of purchase. The events constituting a Change of Control are
set forth in "Description of the Notes -- Covenants." In addition, the Company
is obligated, subject to certain conditions, to make an offer to purchase Notes
(i) with the net cash proceeds of certain asset sales or other dispositions of
assets, (ii) with a percentage of Excess Cash, and (iii) in the event that the
Company's net worth is less than $75 million and its Consolidated Fixed Charge
Coverage Ratio is less than 1.25 to 1. Any such offer to purchase will be made
at a price equal to 100% of the principal amount of such Notes, plus accrued
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and unpaid interest, if any, or, in the case of any such purchase of Discount
Mortgage Notes prior to February 15, 1998, at a price equal to 100% of the
Accreted Value thereof, in either case, to and including the date of purchase.
Collateral Account................. The Company deposited $173 million of the net proceeds of the 1995 Offering in the
Collateral Account (as defined below). In March 1996, the Company sold 4.55 million
shares of TransTexas common stock for net proceeds of approximately $42.7 million,
approximately $26.6 million of which were deposited in the cash collateral account. In
addition, the Company is required to deposit the first $50 million of proceeds from a
Revolving Credit Facility in the Collateral Account if the Company obtains such a
facility. The Disbursement Agent (as defined below) disburses funds from the Collateral
Account only upon the satisfaction of the disbursement conditions set forth in the
Disbursement Agreement (as defined below).
Guarantee ......................... The Notes are unconditionally guaranteed by TEC on a senior secured basis.
The Guarantee is currently the only debt of TEC. The Guarantee currently is
secured by pledges of 50.45 million shares of common stock (68.2% of the
currently outstanding shares ) of TransTexas and all of the outstanding
capital stock of the Company. Under certain circumstances, TransTexas common
stock pledged to secure the Guarantee may be released from such pledge. See
"Description of the Notes -- Collateral and Security." The Indenture and TEC's
certificate of incorporation will prohibit TEC from incurring or otherwise
becoming liable with respect to any other indebtedness.
Security........................... The Notes currently are secured by a first priority lien on substantially all
of the assets and properties of the Company (including 10.45 million shares of
common stock of TransTexas, the cash in the Collateral Account, the refinery,
accounts receivable, inventory and equipment) and by a pledge by TEC of
40 million shares of common stock of TransTexas and all of the outstanding
capital stock of the Company. The liens on the Company's accounts receivable
and inventory will be released if the Company obtains a Revolving Credit
Facility secured by such accounts receivable and inventory and deposits
$50 million in the Collateral Account. Under certain circumstances, shares of
TransTexas common stock pledged to secure the Notes and the Guarantee may be
released from such pledge. See "Description of the Notes -- Collateral and
Security." The Indenture prohibits the Company and TEC from incurring or
permitting any liens on their assets and properties other than Permitted Liens
(as defined below). See "Description of the Notes -- Covenants -- Limitation
on Liens."
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Certain Covenants ................. The Indenture governing the Notes (the "Indenture") contains certain covenants that,
among other things, require the Company to implement the Capital Improvement Program and
limit the ability of the Company or any of its subsidiaries to incur additional
indebtedness, transfer or sell assets, transfer assets to subsidiaries or create new
subsidiaries, pay dividends or make certain other restricted payments, enter into certain
transactions with affiliates or consummate a merger, consolidation or sale of all or
substantially all of its assets. These covenants are subject to certain exceptions and
qualifications. See "Description of the Notes."
THE WARRANTS
Exercise Date ..................... The Notes and Warrants are separately transferable and the Warrants are
exercisable at any time through February 15, 2002. Units consist of Notes and a
fractional number of Warrants. Upon separation of the Notes and Warrants, fractional
Warrants will not be issued, but in lieu thereof the Company will pay a cash adjustment.
Exercise of
Warrants......................... Each Warrant entitles the holder thereof, on or after the Exercise Date and
prior to 5:00 p.m., New York City time, on the expiration date set forth
below, to purchase from the Company one share (subject to adjustment as
described herein) of Common Stock at a purchase price of $0.01 per share. See
"Description of the Warrants."
Expiration of
Warrants......................... February 15, 2002.
</TABLE>
For additional information concerning the Notes and the Warrants, see
"Description of the Notes" and "Description of the Warrants," respectively.
9
<PAGE> 12
RISK FACTORS
Prospective purchasers of the Securities should consider carefully the
specific investment considerations set forth below as well as the other
information contained in this Prospectus.
ABSENCE OF PUBLIC MARKET FOR THE SECURITIES
The Company has agreed to use its best efforts to list the Common Stock on
a stock market or to have the Common Stock included in an automated quotation
system as soon as the Company meets the requirements for listing or inclusion.
There can be no assurance that the Common Stock will be so listed or included.
The Company does not intend to register the Warrants or the Common Stock
pursuant to the Securities Exchange Act of 1934, as amended, until it has the
requisite number of holders or the Common Stock is listed on a stock market or
included in an automated quotation system.
There can be no assurance that an active public market for the Securities
will develop. If a market for the Securities does not develop, purchasers may
not be able to resell any of the Securities for an extended period of time, if
at all. If a market for the Securities does develop, such securities may trade
at a discount from their initial offering price, depending upon prevailing
interest rates, the Company's results of operations, the market for similar
securities, and other factors. There can be no assurance that a holder of
Securities will be able to sell such securities in the future or that such sale
will be at a price equal to or greater than the initial offering price thereof.
SIGNIFICANT LEVERAGE
As of April 30, 1996, the Company has total long-term debt of $328.2
million, representing approximately 73.5% of total capitalization. In
addition, the accretion of original issue discount on the Discount Mortgage
Notes will increase the indebtedness represented by the Notes to $440 million
by February 15, 1998. The Company's high degree of leverage will have
important consequences, including (i) a substantial portion of the Company's
net cash provided by operations will be committed to the payment of the
Company's interest expense and principal repayment obligations, (ii) the
Company will be more sensitive to fluctuations in prices of crude oil and
refined products than less leveraged companies, and (iii) the Company will be
more leveraged than other large companies in the refining business, which may
place it at a competitive disadvantage. The Indenture permits the Company to
obtain a Revolving Credit Facility, subject to certain restrictions, and
permits the Company to incur other indebtedness up to $50 million without
restriction. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
MATERIAL PROCEEDINGS AND CONTINGENT LIABILITIES
TransAmerican filed for protection from creditors under the federal
bankruptcy laws in 1975 and 1983. In both cases, certain creditor claims were
compromised. In connection with the 1983 bankruptcy, a group of bank creditors
of TransAmerican (the "Bank Group") filed a motion, which was subsequently
withdrawn, to have a trustee in bankruptcy appointed. See "The Company and TEC
- -- Background."
TransAmerican has been and continues to be party to a number of legal
proceedings, including two disputed claims under its plan of reorganization
confirmed October 19, 1987. TransTexas is also involved in many legal
proceedings. The litigation and contingent liabilities of the Company and
TransTexas, individually and in the aggregate, amount to significant potential
liability and, if adjudicated adversely, could have a material adverse effect
on the Company, TEC or TransTexas. The adverse resolution in any reporting
period of one or more of these matters could have a material adverse impact on
the results of operations of the Company, TEC or TransTexas for that period.
SUBSTANTIVE CONSOLIDATION; BANKRUPTCY
An investment in the Securities involves certain insolvency and bankruptcy
considerations including substantive consolidation and fraudulent transfer
issues. If the Company or TEC were to become a debtor in a bankruptcy
proceeding, there could be delays in payment of the Notes or holders of the
Notes could be delayed or prevented from enforcing remedies under the Notes or
the Guarantee. A financial failure by Mr. Stanley, TNGC Holdings Corporation,
the parent corporation of TransAmerican ("TNGC"), TransAmerican or TransTexas
could also result in impairment of payment of the Notes if a bankruptcy court
were to "substantively consolidate" the Company and TEC with either Mr.
Stanley, TNGC, TransAmerican or TransTexas. If a bankruptcy court substantively
consolidated the Company and TEC with Mr. Stanley, TNGC, TransAmerican or
TransTexas, the assets of each such entity would be subject to the claims of
creditors of each other such entity. Such a consolidation would expose the
holders of the Notes not only to the usual impairments arising from bankruptcy,
but also to potential dilution of the amount ultimately recoverable because of
the larger creditor base. TransAmerican filed for bankruptcy protection under
the federal bankruptcy laws in 1975 and 1983. As a result of the bankruptcy
proceedings, creditors of TransAmerican received less than the amount to which
they would otherwise have been entitled. See "The Company and TEC --
Background" and "Certain Legal Considerations -- Insolvency and Bankruptcy
Considerations."
LIMITED OPERATING HISTORY
The Company has a limited operating history. The Company's predecessor and
indirect parent corporation, TransAmerican, acquired the refining facility in
1971 and, between 1978 and 1983, invested approximately $900 million in capital
improvements to expand capacity and increase refining complexity. In January
1983, financial difficulties prevented TransAmerican from completing certain
units of the refinery and forced a shutdown of operations. See "-- Substantive
Consolidation; Bankruptcy." TransAmerican had operating losses of $63 million
and $301 million in fiscal 1981 and 1982, respectively. The Company recommenced
partial operations at the refinery in March 1994 and has operated the No. 2
Vacuum Unit intermittently since that time. From time to time, the Company will
be required to suspend operations in order to tie-in units as they are
completed. Additionally, the Company may suspend operations because of working
capital constraints or operating margins. The likelihood of future success of
the refinery should be considered in light of the expenses, complications, and
delays that may be encountered in connection with the reactivation and
expansion of the refinery and the competitive and regulatory environment in
which the Company operates.
HOLDING COMPANY STRUCTURE
TEC is a holding company formed to hold shares of the Company and
TransTexas and has no operations of its own. In addition, provisions in TEC's
certificate of incorporation limits TEC's ability to undertake additional
operations. Therefore, TEC's only source of income is dividends from the
Company and TransTexas and up to $350,000 per year in administrative fees
payable by the Company. The Indenture restricts the payment of dividends by the
Company to TEC. See "Description of the Notes -- Covenants -- Limitation on
Restricted Payments." Any dividend payable to TEC from TransTexas would be
subject to the dividend limitations in the indenture governing the TransTexas
indebtedness and the ability of TransTexas otherwise to pay a dividend.
CAPITAL IMPROVEMENT PROGRAM REQUIREMENTS; ADDITIONAL CASH REQUIREMENTS;
CONSTRUCTION RISKS
The capital budget for the Capital Improvement Program calls for
expenditures of approximately $434 million. The Company believes that
expenditures of between $146 million and $151 million in addition to the current
budget will be required to complete the Capital Improvement Program. A
significant portion of the additional expenditures will relate to the Delayed
Coking Unit, the FCC Unit and the offsite facilities. In connection with the
issuance of the Notes, $173 million of the proceeds thereof were deposited into
a cash collateral account, designated for use in the Capital Improvement
Program. In March 1996, the Company sold 4.55 million shares of TransTexas
common stock and $26.6 million of the proceeds thereof where deposited into the
cash collateral account.
As of April 30, 1996, expenditures on the Capital Improvement Program
funded or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Giving effect to current estimates, and the March
sale of TransTexas stock, additional funding of $374 million to $379 million
will be required to complete the Capital Improvement Program, of which
approximately $41 million is anticipated to be funded by the South Louisiana
Port Commission ("Port Commission") tax exempt bonds. Additional funds necessary
to complete the Capital Improvement Program may be provided from (i) the sale of
additional shares of TransTexas Common Stock held by the Company, (ii) the sale
of Common Stock of the Company, (iii) equity investments in the Company
(including the sale of preferred stock of the Company to TEC, funded by the sale
of TransTexas common stock held by TEC), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the Notes. The Company has entered into
preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. Sales of shares of TransTexas common stock may result in deconsolidation of
TransTexas from the consolidated group for federal income tax purposes. There is
no assurance that sufficient funds will be available from these sources or upon
terms acceptable to the Company or TransAmerican. If this financing is not
available in the near future or if significant engineering problems, work
stoppages or cost overruns occur, the Company will likely not be able to
complete and test Phase I of the Capital Improvement Program by February 15,
1997. Even if required financing is obtained on a timely basis, completion by
February 15, 1997 will still prove very difficult if personnel shortages prevent
full staffing during peak construction periods. The Company has identified and
is considering certain steps to minimize the impact of potential construction
worker shortages, including the retention of field supervisors, direct hiring of
field supervisors and field labor by the Company's major contractors, adding a
second shift, and modularization of certain construction items. There can be no
assurance that these steps will prove successful; however, the Company believes
that implementation of these steps will adequately address staffing concerns.
Under the Indenture, the failure of the Company to complete and test Phase I by
February 15, 1997 (subject to extension to August 15, 1997, if certain financial
coverage ratios are met) would constitute an event of default at such date. As a
result, there is substantial doubt about the Company's ability to continue as a
going concern. The financial statements contained elsewhere herein do not
contain any adjustments as a result of this uncertainty. TransAmerican, TEC or
the Company may sell additional shares of TransTexas common stock to provide
additional funding for the Company. See "-- Deconsolidation for Federal Income
Tax Purposes." If the Company obtains a Revolving Credit Facility, the Company
will be required to deposit the first $50 million of the proceeds from such
facility into the Collateral Account, which will be used for
10
<PAGE> 13
the Capital Improvement Program. There is no assurance that operating cash
flow will be sufficient for the Company's needs or that any other financing
sources will be available.
The Company has incurred losses and negative cash flows from operating
activities as a result of limited refining operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
and losses on refined product sales due to financing costs and low margins.
Based on recent refining margins and projected levels of operations, such
negative cash flows are likely to continue. In order to operate the refinery,
the Company must raise debt or equity capital in addition to the funds required
to complete the Capital Improvement Program. There is no assurance that
additional capital will be available. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. If the Company (i)
does not complete the Capital Improvement Program timely, (ii) incurs
significant cost overruns, (iii) does not ultimately achieve profitable
operations, or (iv) ceases to continue operations, the Company's investment in
the refinery may not be recovered. Assuming timely completion of the Capital
Improvement Program, the Company believes that future refining margins will be
sufficient to recover the cost of the refinery over its estimated useful life.
Management believes there have been no events or changes in circumstances that
would require the recognition of an impairment loss. The financial statements
included elsewhere herein do not include any adjustments as a result of such
uncertainties. Additionally, TEC has pledged its ownership interest in
TransTexas as collateral on the Company's Discount Mortgage Notes and Mortgage
Notes. In the event the Company does not obtain the necessary additional funding
TEC may not be able to recover its investment in the Company and may lose its
ownership interest in TransTexas. Therefore, there is substantial doubt in TEC's
ability to continue as a going concern. The TEC consolidated financial
statements do not contain any adjustments that might result from the outcome of
this uncertainty.
Major construction projects, such as the Capital Improvement Program,
entail significant risks, including possible unanticipated shortages of
materials or skilled labor, unforeseen engineering or environmental problems,
work stoppages, weather interference, unanticipated cost increases and
regulatory problems. Adverse developments in any of these areas could delay the
project or increase its costs. If engineering problems, cost overruns or delays
occur, the Company may not be able to complete the entire Capital Improvement
Program and there can be no assurance that the Company will have sufficient
cash flow to make payments on the Notes. Although the Company has hired third
party contractors, the Company itself is doing a substantial portion of the
construction relating to the Capital Improvement Program. The Company's
predecessor commenced two major construction projects in the 1970s, neither of
which was completed. See "The Company and TEC" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RELIANCE ON SALES OF TRANSTEXAS COMMON STOCK
In March 1996, the Company sold 4.55 million shares of TransTexas common
stock for approximately $42.7 million, approximately $26.6 million of which
were deposited in the cash collateral account. TransAmerican, TEC or the Company
may sell additional shares of TransTexas common stock to provide additional
funding for the Company's Capital Improvement Program and other corporate
purposes, which may require an effective registration statement under the
Securities Act. See "-- Deconsolidation for Federal Income Tax Purposes."
TransTexas has registered such common stock pursuant to a shelf registration
statement. Circumstances beyond the control of TransAmerican, TEC or the
Company, however, may delay the availability of a current prospectus at times
when the Company needs additional funding. In addition, there can be no
assurance as to the price of TransTexas common stock at the time of any such
sale. The market price of the TransTexas common stock may be influenced by many
factors, including, among others, investor perception of TransTexas, natural
gas prices, conditions in the oil and gas industry, fluctuations in quarterly
results and general economic and market conditions. In addition, the stock
market has experienced substantial price and volume fluctuations in recent
years. These fluctuations have had a significant effect on the market price of
the stock of many companies, often unrelated to the operating performance of
the companies.
VOLATILITY OF REFINING MARGINS; CURRENT MARKET CONDITIONS
The Company's income and cash flow are derived from the difference between
its costs to obtain and refine crude oil and the price for which it can sell
its refined products. The Company buys crude oil and sells refined petroleum
products on the spot market. The Company maintains inventories of crude oil,
intermediate products and refined products, the values of which are subject to
fluctuations in market prices. Factors that are beyond the control of the
Company may cause the cost of crude oil purchased by the Company and the price
of refined products sold by the Company to fluctuate widely. Although prices of
crude oil and refined petroleum products generally move in the same direction,
prices of refined products often do not respond immediately to changes in crude
oil costs. An increase in market prices for crude oil or a decrease in market
prices for refined products could have an adverse impact on the Company's
earnings and cash flow. In recent periods, refining margins have been near
their lows for the past 10 years. There can be no assurance that refining
margins will improve from current levels.
OPERATING CONDITIONS
The refinery consists of many processing units which have been idle for a
substantial period of time. During the reactivation, expansion and modification
of the refinery, it could be subject to more frequent downtime for construction
tie-ins. The refining operations are subject to inherent risks including fires,
accidents, explosions and chemical releases into the air and water. During its
operations prior to 1983, the Company's predecessor experienced a number of
interruptions of operations at the refinery as a result of fires and accidents.
All of the Company's refining activities are conducted at one location. As a
result, the operations of the Company would be subject to
11
<PAGE> 14
significant interruption if the refinery were to experience a major accident,
shutdown or equipment failure, or if it were damaged by severe weather or other
natural disaster. Although the Company expects to have sufficient insurance at
all times, there can be no assurance that the Company can provide scheduled
increased coverage amounts in the future at rates or on terms it considers
reasonable or acceptable or that all damages or liability for an accident will
be covered by insurance. The occurrence of significant events against which the
Company is not fully insured or of a number of lesser events against which the
Company is fully insured but subject to substantial deductibles could
materially and adversely affect the Company's operations and financial
condition. See "Business of the Company -- Insurance." The refinery receives
substantially all of its crude oil feedstock at its dock on the Mississippi
River. The weather or any obstruction in the river could also interrupt
supplies of crude oil feedstock or otherwise materially affect operations.
COMPETITION
The refining business is extremely competitive. Many of the Company's
principal competitors are major integrated multinational oil companies that are
substantially larger than the Company. Large integrated oil companies, because
of the diversity and integration of their operations, larger capitalization and
greater resources, may be better able to withstand volatile market conditions.
Competition also exists between the petroleum refining industry and other
industries supplying energy and fuel to industrial, commercial and individual
consumers. See "Business of the Company -- Competition."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances relating to activities or operations that may have adverse
environmental effects ("Pollution Control Laws"), which regulate activities
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes. The Company believes that it is in substantial
compliance with applicable Pollution Control Laws. However, changes in
Pollution Control Laws, as well as increasingly strict enforcement of existing
Pollution Control Laws, may require the Company to make capital expenditures
in order to comply with such laws and regulations.
The National Emission Standards for Hazardous Air Pollutants for Benzene
Waste Operations (the "Benzene Waste NESHAPS"), promulgated in January 1993
pursuant to the Clean Air Act, regulate benzene emissions from numerous
industries, including petroleum refineries. The Benzene Waste NESHAPS require
all existing, new, modified, or reconstructed sources to reduce benzene
emissions to a level that will provide an ample margin of safety to protect
public health. The Company will be required to comply with the Benzene Waste
NESHAPS as its refinery operations start up. At this time, the Company cannot
estimate the costs of such compliance. Although the Company does not believe
that such costs will be material, there can be no assurance that such costs
will not have a material adverse effect on its financial position.
The EPA promulgated federal regulations pursuant to the Clean Air Act to
control fuels and fuel additives (the "Gasoline Standards") that could have a
material adverse effect on the Company. Under these regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Upon completion of the Capital
Improvement Program, the Company believes that it will be able to produce
conventional gasoline and, to a limited extent, reformulated gasoline that
meets the Gasoline Standards. The Company filed a petition with the EPA
requesting an individual baseline adjustment or other appropriate regulatory
relief based on extenuating circumstances. The extenuating circumstances upon
which the Company relied in its petition include the fact that the refinery was
not in operation in 1990 (and thus there is no 1990 average for purposes of the
necessary comparison) and the fact that the start-up of the refinery is to
occur on a phased-in basis, with all of the refinery units operational by
February 1998. The EPA has denied the Company's request for an individual
adjusted baseline adjustment, and the Company cannot predict at this time when
or whether the EPA will grant the Company other appropriate regulatory relief.
In correspondence to the Company, the EPA has expressed willingness to consider
whether different standards should apply to refineries that are now commencing
operations. If the EPA fails to grant appropriate regulatory relief, the
Company will be restricted in the amount of gasoline it
12
<PAGE> 15
will be able to sell domestically or will incur additional gasoline blending
costs until the Capital Improvement Program is completed. There can be no
assurance that any action taken by the EPA will not have a material adverse
effect on the Company's future results of operations, cash flows or financial
position. See "-- Capital Improvement Program Requirements; Construction Risks;
Additional Cash Requirements" and "Business of the Company -- Environmental
Matters."
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at four Superfund sites. The Company's liability for
each such matter has not been finally determined; therefore, there can be no
assurance that such matters, or other Superfund matters in the future, will not
have a material adverse effect on the Company's future results of operations,
cash flows or financial position. See "Business of the Company -- Environmental
Matters."
If the Indenture Trustee forecloses on the Collateral, as defined below, it
could incur liability in certain circumstances for the environmental liabilities
of the Company. The risk of such liability would arise primarily as a result of
activities conducted by the Indenture Trustee with respect to environmental
operations of the Company beyond those activities necessary to the distribution
of the Collateral. Environmental liability to the Indenture Trustee also could
arise as a result of control by the Indenture Trustee over the environmental
operations of the Company. In addition, environmental liabilities associated
with the Collateral could result in a diminution in its value. There can be no
assurance that the Indenture Trustee will be able to sell the Collateral without
substantial delays or absent substantial involvement in the management of the
Company in a manner that will avoid incurring any environmental liability;
therefore there can be no assurance that the value of the Collateral will not be
impaired as a result of environmental liabilities related thereto. See "--
Adequacy of Collateral; Risks of Foreclosure."
ADEQUACY OF COLLATERAL; RISKS OF FORECLOSURE
The Company and TEC granted and pledged to the Indenture Trustee, for the
ratable benefit of the holders of the Notes, a security interest in
substantially all of the assets and properties of the Company and TEC
(collectively, the "Collateral"). The security interest in the Company's
accounts receivable and inventory will be released if the Company obtains a
Revolving Credit Facility secured by such accounts receivable and inventory and
deposits $50 million in the Collateral Account. Under certain circumstances,
shares of TransTexas common stock pledged to secure the Notes and the Guarantee
may be released from such pledge. See "Description of the Notes -- Collateral
and Security." The mortgage created a first priority lien on the refinery real
property, subject only to exceptions permitted under the Indenture. However,
certain types of subsequent encumbrances (such as tax liens, mechanics' and
materialmen's liens, and environmental liens) are entitled to super priority
over the lien of the mortgage as a matter of law. The title policy insuring the
lien of the mortgage contains exceptions from coverage for these and other
matters. See "Business of the Company -- Title Insurance."
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<PAGE> 16
There can be no assurance that the Indenture Trustee will be able to sell
any of the Collateral without substantial delays and other risks or that the
proceeds obtained will be sufficient to pay all amounts owing to holders of the
Notes. Although the Company and its predecessors have previously invested $900
million in capital improvements, management of the Company estimates that the
refinery has a current liquidation value of only $250 million to $300 million.
Further, the Company is or may be subject to potential liability under
applicable Pollution Control Laws and Hazardous Substance Cleanup Laws. If the
Indenture Trustee forecloses on the Collateral, it could incur liability in
certain circumstances for the environmental liabilities of the Company. See "--
Environmental Matters" and "Business of the Company -- Environmental Matters."
TransTexas has registered the pledged shares of common stock pursuant to a
shelf registration statement. Circumstances beyond the control of TEC or the
Company, however, may delay the availability of a current prospectus. The
market price of the TransTexas common stock may be influenced by many factors,
including, among others, investor perception of TransTexas, natural gas prices,
conditions in the oil and gas industry, fluctuations in quarterly results and
general economic and market conditions. In addition, the stock market has
experienced substantial price and volume fluctuations in recent years. These
fluctuations have had a significant effect on the market price of the stock of
many companies, often unrelated to the operating performance of the companies.
GUARANTEE
The Notes are unconditionally guaranteed by TEC. The Guarantee and the
Notes are currently secured by TEC's only assets, which consists of 100% of the
outstanding capital stock of the Company and 40 million shares of common stock
(54.1% of the currently outstanding capital stock) of TransTexas. In addition,
15 million shares of common stock (20.3% of the currently outstanding capital
stock) of TransTexas held by the Company were originally pledged to secure the
Notes and the Guarantee. In March 1996, the Company sold 4.55 million shares of
the 15 million shares of TransTexas common stock (6.1% of the total outstanding)
in public offerings. Under certain circumstances, additional shares of
TransTexas common stock pledged to secure the Guarantee may be released from
such pledge. See "Description of the Notes -- Collateral and Security." If
required to honor the Guarantee, TEC has no current or expected future ability
to do so without selling its shares of Common stock of TransTexas or the
Company. The Indenture restricts the payment of dividends by the Company to TEC.
See "Description of the Notes -- Covenants -- Limitation on Restricted
Payments." Any dividend payable to TEC from TransTexas would be subject to
dividend limitations in the indenture governing the TransTexas indebtedness
described below and the ability of TransTexas otherwise to pay a dividend.
There can be no assurance that, following demand for payment under the
Guarantee after an Event of Default (as defined below) on the Notes, the
proceeds from the sale of the Collateral securing the Guarantee will be
sufficient to satisfy all amounts due on the Notes. The ability of the holders
of the Notes to realize upon the Collateral will be subject to certain
procedural limitations described in "Description of the Notes -- Events of
Default and Remedies" in the Indenture and related pledge agreement and would
be further restricted by applicable law in the event of a bankruptcy proceeding
involving the Company or its subsidiaries.
In June 1995, TransTexas issued $800 million aggregate principal amount of
11 1/2% Senior Secured Notes due 2002 (the "TransTexas Notes") that are secured
by substantially all of the assets of TransTexas and its subsidiary. A sale of
the 50.45 million shares of common stock of TransTexas securing the Notes and
the Guarantee by the holders of the Notes following foreclosure may constitute
a change of control of TransTexas under the indenture governing the TransTexas
Notes if as a result, a person or group other than affiliates of John R.
Stanley holds more than 50% of the voting shares of TransTexas common stock.
The occurrence of a change of control would allow the holders of the TransTexas
Notes to require TransTexas to repurchase the TransTexas Notes at a price equal
to 101% of the principal amount thereof plus accrued and unpaid interest.
There can be no assurance that TransTexas will have sufficient funds to make
such payments. If the holders of the Notes foreclose on the TransTexas stock
they will become stockholders of TransTexas. If TransTexas becomes a debtor in
a bankruptcy proceeding, dissolves, liquidates or reorganizes, the holders of
the TransTexas Notes and all other creditors of TransTexas will be senior in
right of payment to TransTexas stockholders.
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<PAGE> 17
ORIGINAL ISSUE DISCOUNT
The Discount Notes were issued with original issue discount for federal
income tax purposes. Consequently, holders of Discount Notes are generally
required to include amounts in gross income for federal income tax purposes in
advance of the receipt of the cash payments to which the income is
attributable. Further, the deduction for federal income tax purposes by the
Company of original issue discount on the Discount Mortgage Notes is limited
because the Discount Mortgage Notes are "applicable high yield discount
obligations." See "Certain Legal Considerations -- Tax Considerations --
Taxation of the Notes" for a more detailed discussion of the federal income tax
consequences of the purchase, ownership and disposition of the Discount Notes
and of the possible deferral or disallowance (in part) of original issue
discount deductions of the Company.
If a bankruptcy case is commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the Discount Notes, the
claim of a holder of Discount Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the initial
offering price and (ii) that portion of the original issue discount (if any)
that is deemed not to constitute "unmatured interest" for purposes of the
United States Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
CONTROL BY SOLE STOCKHOLDER; POTENTIAL CONFLICTS OF INTEREST
TransAmerican is the sole holder of common stock of TEC. In connection
with the 1995 Offering, TEC issued 1,000 shares of Preferred Stock to the
public. Prior to the exercise of the Warrants, TEC is the sole stockholder of
the Company. As a member of the board of directors and chief executive officer
of the Company, TEC, TransTexas and TransAmerican, and sole stockholder,
chairman of the board, and chief executive officer of TNGC, John R. Stanley is
in a position to control or significantly influence the management and
operations of the Company, TEC and TransTexas, including actions with respect
to pending and any future litigation. Prior to exercise of any Warrants, the
directors generally will have fiduciary obligations to TEC, the sole
stockholder of the Company, not the holders of the Warrants. There can be no
assurance that conflicts will not arise between TNGC, TransAmerican, TEC, Mr.
Stanley in his various capacities and the holders of the Securities. In
addition, Mr. Stanley has guaranteed certain indemnity obligations of
TransAmerican and TransTexas and certain debt of TransTexas. See "Management --
Compensation Committee Interlocks and Insider Participation -- The Bank Group
Agreement." TransTexas' response to any litigation or any indemnification
demand may be influenced by TransAmerican or Mr. Stanley in a manner that could
be adverse to the holders of the Securities. TransAmerican and its existing
subsidiaries, including the Company, TEC and TransTexas, are parties to a tax
allocation agreement, the general terms of which provide for TransAmerican and
all of its subsidiaries to file federal income tax returns as members of a
consolidated group. The tax allocation agreement requires the Company, TEC and
TransTexas to make certain payments to TransAmerican to enable TransAmerican to
pay its federal or alternative minimum tax. In the event of an Internal Revenue
Service ("IRS") audit or examination, the tax allocation agreement generally
gives TransAmerican the authority to compromise or settle disputes and to
control litigation, subject to the approval of the Company, TEC or TransTexas,
as the case may be, where such compromise or settlement affects the
determination of the separate tax liability of that company. See "Management --
Compensation Committee Interlocks and Insider Participation -- The Tax
Allocation Agreement."
RELATIONSHIPS WITH AFFILIATES
The Company is wholly-owned by TEC. All of the outstanding common stock of
TEC is owned by TransAmerican, which is wholly-owned by TNGC, which is
wholly-owned by John R. Stanley. TEC, the Company, TransAmerican and
TransDakota Oil Corporation ("TDOC"), a wholly-owned subsidiary of
TransAmerican, own 40 million shares (54.1%), 10.45 million shares (14.1%), 5.2
million shares (7%) and 3.7 million shares (5%), respectively, of the
outstanding common stock of TransTexas. The relationships among these companies
result in certain potential conflicts of interest. See "-- Control by Sole
Stockholder; Potential Conflicts of Interest." A portion of the funds needed by
the Company to complete the Capital Improvement Program and to fund potential
negative cash flow from operations may be provided by sales by the Company and,
potentially, by TEC of shares of TransTexas common stock owned by them. The
value of such common stock and the amounts which may be realized from such sales
will be dependent, to some extent, on the success achieved by TransTexas in its
operations. In addition, the ability of TransAmerican to make capital
contributions, or otherwise provide financial support, to TEC, the Company and
TransTexas will depend on the success achieved by TransAmerican in its
operations.
15
<PAGE> 18
DECONSOLIDATION FOR FEDERAL INCOME TAX PURPOSES
Under certain circumstances, TransAmerican, TDOC, TEC, or the Company may
sell or otherwise dispose of shares of common stock of TransTexas. If, as a
result of any sale or other disposition of TransTexas common stock, the direct
and indirect ownership of TransTexas by TransAmerican is less than 80% (measured
by voting power and value), TransTexas will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the "TransAmerican
Consolidated Group") and, with certain exceptions, will no longer be obligated
under the terms and conditions of the Tax Allocation Agreement (as defined
below) ("Deconsolidation"). Further, if TEC or the Company sells or otherwise
transfers any stock of the Company, or issues any options, warrants or other
similar rights relating to such stock, outside of the TransAmerican Consolidated
Group, then a Deconsolidation of both the Company and TransTexas from the
TransAmerican Consolidated Group would occur. For the taxable year during which
Deconsolidation of TransTexas occurs, which would also be the final year that
TransTexas is a member of the TransAmerican Consolidated Group, TransAmerican
would recognize a previously deferred gain of approximately
16
<PAGE> 19
$266.3 million associated with the Transfer (as defined below) and would be
required to pay federal income tax on this gain (the tax is estimated to be
between $29 million and $56 million if Deconsolidation occurs in fiscal 1997 and
between $24 million and $45 million if Deconsolidation occurs in fiscal 1998).
This analysis is based on TransTexas' position that the gain from the Transfer,
which occurred in 1993, was deferred under the consolidated return regulations.
The deferred gain generally is being included in TransAmerican's taxable income
in a manner that corresponds (as to timing and amount) with the realization by
TransTexas of (and, thus, will be offset by) the tax benefits (i.e., additional
depreciation, depletion and amortization on, or reduced gain or increased loss
from a sale of, the transferred assets) arising from the additional basis. If,
under the terms of the Notes, it was reasonably certain when the Notes were
issued that a sufficient amount of TransTexas' stock would be disposed in the
future to cause a Deconsolidation of TransTexas from the TransAmerican
Consolidated Group, it is possible that the Deconsolidation of TransTexas would
be treated as occurring as of the date the Notes were issued. However, the
Company has advised TransTexas that it believes that when the Notes were issued,
it was not reasonably certain that a Deconsolidation of TransTexas would occur
in the future. Under the Tax Allocation Agreement, TransTexas is required to pay
TransAmerican each year an amount equal to the lesser of (i) the reduction in
taxes paid by TransTexas for such year as a result of any increase in the tax
basis of assets acquired by TransTexas from TransAmerican that is attributable
to the Transfer and (ii) the increase in taxes paid by TransAmerican for such
year and all prior years attributable to gain recognized by TransAmerican in
connection with the contribution of assets by TransAmerican to TransTexas (less
certain amounts paid by TransTexas for all prior years). TransTexas estimates
that if Deconsolidation occurs in fiscal 1997 or 1998, the amount reimbursed to
TransAmerican would be between $9 million and $16 million and between $7 million
and $13 million, respectively. The remaining amount of the tax relating to the
gain would be paid over the lives of the assets transferred. In addition,
TransTexas could be liable for additional taxes pursuant to the Tax Allocation
Agreement and the several liability provisions of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TransAmerican Consolidated Group,
then TransTexas is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent TransTexas has taxable
income, remains a member of the TransAmerican Consolidated Group, and the other
group members have the ability to pay such taxes. If the Company, TEC or TDOC
transfers shares of TransTexas (or transfers options or other rights to acquire
such shares) and, as a result of such transfer, the direct and indirect
ownership of TransTexas by TEC, TransAmerican and the Company is less than 80%
(measured by voting power and value), TransTexas would no longer be a member of
the TransAmerican Consolidated Group. TransTexas, therefore, would not receive
any benefit pursuant to the Tax Allocation Agreement for net operating losses
of TransTexas used by other members of the TransAmerican Consolidated Group
prior to the deconsolidation of TransTexas.
Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the Internal Revenue Service (the "IRS") for
the consolidated federal income tax liability of the consolidated group. There
can be no assurance that TransAmerican will have the ability to satisfy the
above tax obligation at the time due and, therefore, TransTexas, TEC or the
Company may be required to pay the tax.
OTHER POTENTIAL TAX LIABILITIES; NO TAX RULING OR OPINION
Under the Tax Allocation Agreement, TransTexas will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
For federal income tax purposes, TransAmerican reported the creation of
TransTexas and all other transactions relating to the Transfer (as defined
below) as non-taxable events. No federal tax opinion was rendered with respect
to those transactions, however, and neither TransAmerican nor TransTexas
obtained a ruling from the IRS regarding those transactions. There can be no
assurance that the IRS or the courts will concur with TransAmerican's tax
position that no current federal income tax is due as a result of those
transactions.
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. 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. TransAmerican has taken the federal tax position that the entire
amount of this debt cancellation is excluded from its income under the
cancellation of indebtedness provisions of the Internal Revenue Code of 1986, as
amended, ("COD Exclusion") and has reduced its tax attributes (including its
net operating loss and credit carryforwards) as a consequence of the COD
Exclusion. Although TransTexas believes that there is substantial legal
authority to support the position that the COD Exclusion applies to the
cancellation of TransAmerican's indebtedness 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 member of the TransAmerican Consolidated Group, the Company will be
severally liable for any tax liability resulting from the above-described
transactions.
EXPLORATION, PRODUCTION, AND TRANSPORTATION OPERATIONS OF TRANSTEXAS
Ability to Replace Short-Lived Reserves. TransTexas' principal producing
properties are characterized by high initial production, followed by a steep
decline in production. As a result, TransTexas must find and develop or acquire
new natural gas reserves to replace those being depleted by production. Without
successful drilling or acquisition activities, TransTexas' reserves and
production will decline rapidly. There can be no assurance that TransTexas will
drill that number of wells or that the production from new wells will be
sufficient to replace
17
<PAGE> 20
production from existing wells. See "Business of TransTexas -- General" and
"Business of TransTexas -- Reserves."
Natural Gas Price Fluctuations and Markets. TransTexas' results of
operations are highly dependent upon the prices received for TransTexas'
natural gas and NGLs. Substantially all of TransTexas' sales of natural gas are
made in the spot market, or pursuant to contracts based on spot market prices,
and not pursuant to long-term, fixed-price contracts. Accordingly, the prices
received by TransTexas for its natural gas production are dependent upon
numerous factors beyond the control of TransTexas, including the level of
consumer product demand, government regulations and taxes, the price and
availability of alternative fuels, the level of foreign imports of oil and
natural gas, and the overall economic environment. Any significant decline in
current prices for natural gas and NGLs could have a material adverse effect on
TransTexas' financial condition, results of operations, and quantities of
reserves recoverable on an economic basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of TEC -- Liquidity
and Capital Resources," "Business of TransTexas -- Reserves," "Business of
TransTexas -- Natural Gas Marketing," "Business of TransTexas -- Governmental
Regulation" and "Business of TransTexas -- Environmental Matters."
Competition. TransTexas competes in the highly competitive areas of
natural gas exploration, production, development, and transportation with other
companies, many of which may have substantially larger financial resources,
staffs, and facilities. See "Business of TransTexas -- Competition."
Drilling Risks. Drilling activities are subject to numerous risks,
including the risk that no commercially productive reservoirs will be
encountered. There can be no assurance that new wells drilled by TransTexas
will be productive or that TransTexas will recover all or any portion of its
investment. The cost of drilling, completing, and operating wells is often
uncertain. TransTexas' drilling operations may be curtailed, delayed, or
canceled as a result of numerous factors, many of which are beyond TransTexas'
control, including title problems, weather conditions, compliance with
governmental requirements, and shortages or delays in the delivery of equipment
and services.
Operating Hazards and Uninsured Risks. TransTexas' operations are subject
to hazards and risks inherent in drilling for, and production and
transportation of, natural gas, such as fires, explosions, encountering
formations with abnormal pressures, blowouts, cratering, pipeline ruptures, and
spills, any of which can result in loss of hydrocarbons, environmental
pollution, personal injury claims, and other damage to properties of TransTexas
and others. TransTexas' insurance coverage includes, among other things,
operator's extra expense, physical damage on certain assets, employer's
liability, comprehensive general liability, automobile, and workers'
compensation insurance. TransTexas believes that its insurance is adequate and
customary for companies of a similar size engaged in operations similar to
those of TransTexas, but losses can occur for uninsurable or uninsured risks or
in amounts in excess of existing insurance coverage.
Substantial Capital Requirements; Liquidity. TransTexas makes substantial
capital expenditures for the exploration, development and production of its
natural gas reserves. TransTexas has financed these expenditures primarily with
cash from operations, public offerings of debt and equity securities and the
sale of production payments. Total capital expenditures in fiscal 1995 were $278
million, including $134 million for drilling and development, $125 million for
lease acquisitions and $17 million for TransTexas' gas gathering and pipeline
system and other equipment. For the six months ended January 31, 1996, total
capital expenditures were approximately $205 million, including approximately
$145 million for drilling and development, $31 million for lease acquisitions
and $29 million for TransTexas' gas gathering and pipeline system and other
equipment. For the three months ended April 30, 1996, total capital expenditures
were $92 million, including $5 million for lease acquisitions, $71 million for
drilling and development and $16 million for TransTexas' gas gathering and
pipeline system and other equipment. Pursuant to the indenture governing
TransTexas' Notes (the "TransTexas Indenture"), if TransTexas' Working Capital,
as defined in the TransTexas Indenture, is less than $20 million at the end of
any fiscal quarter, TransTexas' Capital Expenditures, as defined, for the next
succeeding fiscal quarter may not exceed 90% of TransTexas' Consolidated EBITDA
for such prior fiscal quarter minus TransTexas' Consolidated Fixed Charges for
such prior fiscal quarter (the "Capital Expenditure Limit"). TransTexas' Working
Capital at April 30, 1996 was less than $20 million. As a result, TransTexas'
Capital Expenditures for the quarter ending July 31, 1996 may not exceed the
Capital Expenditure Limit. TransTexas anticipates that such restriction will not
have a material effect on developmental drilling for the current fiscal quarter.
In addition, the TransTexas Indenture permits TransTexas to fund the drilling
of up to 30 wells in any fiscal year pursuant to third-party drilling programs.
Any costs associated with these wells would not be included in Capital
Expenditures.
TransTexas anticipates total capital expenditures of approximately $210
million in each of fiscal 1997 and fiscal 1998, subject to available cash flow,
of which approximately $175 million will be used for drilling and development,
$15 million for lease acquisitions and $20 million for TransTexas' gas
gathering and pipeline system (including pipeline expansion into the La Grulla
development area) and other equipment. TransTexas anticipates that its cash used
for debt service will be approximately $120 million and $105 million in fiscal
1997 and fiscal 1998, respectively. If revenues decrease, or certain contingent
obligations of TransTexas become fixed, TransTexas may not have sufficient funds
for capital
18
<PAGE> 21
expenditures necessary to replace its reserves or to maintain production at
current levels and, as a result, production may decrease over time. Although
TransTexas' cash from operating activities for the three months ended April 30,
1996, has increased, net cash provided by operating activities declined over the
three and one-half years ended January 31, 1996. No assurance can be given that
TransTexas' cash flow from operating activities will be sufficient to meet
planned capital expenditures, contingent liabilities and debt service in the
future. Since July 31, 1995, TransTexas has utilized asset sales and various
financings, in addition to cash flow from operating activities, to meet its
working capital requirements. TransTexas anticipates that it will utilize
additional financing or sales of assets to fund planned levels of operations and
to meet its obligations, including its obligations under the Indenture, through
January 1997.
TransTexas currently has a $40 million credit facility with BNY Financial
Corporation (the "BNY Facility") pursuant to which it may borrow funds based on
the amount of its accounts receivable. At April 30, 1996, the outstanding
balance under the BNY Facility was $20.7 million. TransTexas does not
anticipate that it will be able to borrow more than $26 million under the BNY
Facility during fiscal 1997, based on the expected amount of its accounts
receivable. The BNY Facility requires TransTexas to maintain certain financial
ratios and includes certain covenants. Under the terms of the BNY Facility,
TransTexas' net loss (including any extraordinary losses) may not exceed $5
million for each fiscal quarter ending after January 31, 1996 ($10 million
for each six-month period). TransTexas obtained a waiver for the three months
ended January 31, 1996.
Reliance on Estimates of Proved Reserves. There are numerous uncertainties
inherent in estimating quantities of proved reserves, including many factors
beyond the control of TransTexas. The reserve data set forth in this Prospectus
represent only estimates prepared by Netherland, Sewell & Associates, Inc.
("Netherland, Sewell"). Gas reserve assessment is a subjective process of
estimating the recovery from underground accumulations of gas that cannot be
measured in an exact way, and estimates of other persons might differ
materially from those of Netherland, Sewell. Certain events, including
production, acquisitions, and future drilling and development could result in
increases or decreases in estimated quantities of proved reserves. In addition,
estimates of TransTexas' future net revenues from proved reserves and the
present value thereof are based on certain assumptions regarding future natural
gas prices, production levels, and operating and development costs that may not
prove to be correct over time. See "Business of TransTexas -- Reserves" and
"Business of TransTexas -- Exploration and Production Operations -- Drilling
Activities."
Government Regulations. TransTexas' business is subject to certain
federal, state, and local laws and regulations relating to the exploration for,
and the development, production, and transportation of natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Because the requirements
imposed by such laws and regulations are frequently changed, TransTexas is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations.
19
<PAGE> 22
THE COMPANY AND TEC
GENERAL
TransAmerican Refining Corporation (the "Company" or "TARC") was formed in
1987 to hold and eventually to operate the refinery assets of TransAmerican
Natural Gas Corporation (together with its predecessors, "TransAmerican") and
is engaged in the refining and storage of crude oil and petroleum products.
TransAmerican Energy Corporation ("TEC") is a limited-purpose holding
company formed in 1994 to hold certain shares of common stock of TransTexas Gas
Corporation ("TransTexas") and all of the outstanding capital stock of the
Company. The Company, TransTexas and TEC are all direct or indirect
subsidiaries of TransAmerican. The address of the Company's principal executive
offices is 1300 East North Belt, Suite 320, Houston, Texas 77032, and its
telephone number at that address is (713) 986-8811.
BACKGROUND
Founded in 1958 by John R. Stanley with a single gas station,
TransAmerican grew rapidly and by the mid-1970s had developed into a chain of
over 200 independent gasoline stations in New England and New York. In the
early 1970s, TransAmerican sought to vertically integrate its retail gasoline
operations by purchasing a refinery in Louisiana. During this period,
TransAmerican also entered the exploration and production business by acquiring
certain oil and gas properties in South Texas. As a result of its successful
gas drilling program in South Texas, in 1974 TransAmerican began constructing
gathering and transmission facilities.
In 1974, TransAmerican also began construction of a $140 million ammonia
plant that would use natural gas from its South Texas drilling operations as
feedstock. Primarily as a result of a collapse in ammonia prices, TransAmerican
was unable to obtain sufficient financing to complete construction of the
plant. Unable to meet its obligations, TransAmerican and its affiliates filed a
voluntary bankruptcy petition in October 1975. TransAmerican began operating
pursuant to a confirmed plan of reorganization in May 1980. Under such plan of
reorganization, TransAmerican provided full payment with interest to
substantially all creditors, with the exception that claims of creditors of its
ammonia plant subsidiary were compromised.
TransAmerican acquired a refining facility in 1971. Between 1978 and 1983,
TransAmerican invested approximately $900 million in capital improvements to
expand capacity and increase refining complexity. This expansion was largely
financed through a $750 million credit facility. In 1982, before all the units
of the refinery were completed, oil prices soared, refining margins collapsed
and interest on TransAmerican's floating-rate debt exceeded 20%. In addition,
as a result of certain regulatory changes, TransAmerican's natural gas sales to
certain intrastate pipelines became subject to proration, which significantly
reduced sales to several key customers. As a result, TransAmerican was unable
to meet all of its financial obligations and, in January 1983, TransAmerican
filed a voluntary bankruptcy petition. In 1985, following allegations of
mismanagement and misrepresentation by TransAmerican's management made by a
group of bank creditors of TransAmerican (the "Bank Group") and others in
connection with attempts to have a trustee in bankruptcy appointed by the
court, TransAmerican appointed a majority of independent directors to alleviate
these concerns and to secure the knowledge and experience of the independent
directors to assist TransAmerican in its reorganization efforts and in future
operations. TransAmerican emerged from bankruptcy in October 1987. As a
condition of the bankruptcy plan, TransAmerican formed the Company as a wholly
owned subsidiary and transferred its refinery's net assets to the Company.
In August 1993, TransAmerican and its subsidiaries transferred their
natural gas exploration, production and transmission businesses to TransTexas
(the "Transfer") pursuant to an agreement among TransAmerican, TransTexas and
John R. Stanley (the "Transfer Agreement"). In February 1995, in connection
with a public offering of debt securities by the Company, TransAmerican
transferred 55 million shares of TransTexas common stock (74.3% of the total
outstanding) to TEC. TEC then transferred 15 million of these shares (20.3% of
the total outstanding) to
20
<PAGE> 23
the Company. In March 1996, the Company sold 4.55 million shares of TransTexas
common stock (6.1% of the total outstanding) in a public offering for proceeds
of $42.7 million, $26.6 of which was deposited in the collateral account. The
50.45 million shares of TransTexas common stock held by TEC and the Company are
currently pledged as collateral for the Company's Notes.
In February 1995, the Company issued the Notes and received approximately
$301 million from the offering. Net proceeds received by the Company
approximated $92 million after deducting approximately $16 million for
underwriting discounts, commissions, fees and expenses, approximately $20
million for the repayment of the balance of a loan from TransAmerican and $173
million which was deposited into a collateral account to fund the expansion and
upgrading of the Company's refinery. The $92 million of net proceeds were used
to fund working capital requirements, including construction costs incurred
prior to the offering and repayment of remaining intercompany debt to
TransAmerican.
The Notes are unconditionally guaranteed on a senior secured basis (the
"Guarantee") by TEC. The Guarantee and the Notes are currently collateralized
by TEC's only assets, which consist of 100% of the outstanding capital stock of
the Company and 40 million shares of common stock (54.1% of the currently
outstanding capital stock) of TransTexas. In addition, 10.45 million shares of
common stock (14.1% of the currently outstanding capital stock) of TransTexas
held by the Company are pledged to collateralize the Notes and the Guarantee.
Under certain circumstances, shares of TransTexas common stock pledged to
collateralize the Guarantee may be released from such pledge. If required to
honor the Guarantee, TEC has no current or expected future ability to do so
without selling its shares of capital stock of TransTexas or the Company.
BUSINESS OF THE COMPANY
The Company owns and operates a large petroleum refinery strategically
located in the Gulf Coast region along the Mississippi River, approximately 20
miles from New Orleans, Louisiana. The Company's business strategy is to
maximize refining margins by converting low-cost, heavy, sour crude oils into
high-value, light petroleum products including gasoline and heating oil. The
Company is engaged in a construction and expansion program (the "Capital
Improvement Program"), which is designed to reactivate the refinery and
increase its complexity. The Company has engaged a number of specialty
consultants and engineering and construction firms to assist the Company in
completing the individual projects that comprise the Capital Improvement
Program. Phase I of the Capital Improvement Program includes the completion and
start-up of the major conversion units, including a fluid catalytic cracking
unit and a delayed coking unit. The Company estimates, subject to obtaining
adequate financing on a timely basis, that Phase I will be completed by February
1997, and will result in the refinery having the capacity to process 170,000 to
200,000 BPD of medium to light, sour crude oil. Phase II includes the
installation of additional equipment expected to further improve refinery
economics. The Company estimates that Phase II will be completed by February
1998, and will result in the refinery having the capability to process 200,000
BPD of heavy, sour crude oil. Upon completion of the Capital Improvement
Program, the Company will own and operate one of the largest independent
refineries in the Gulf Coast region, with a replacement cost estimated by
management to be over $1.5 billion. The completed refinery is projected to have
a complexity rating of approximately 11, which is substantially above the
current United States average of 9.4. The foregoing estimates, as well as other
estimates and projections herein, are subject to substantial revision upon the
occurrence of future events, such as unavailability of financing, engineering
problems, work stoppages and cost overruns over which the Company may not have
any control, and there can be no assurance that any such projections or
estimates will prove accurate.
As of April 30, 1996, expenditures on the Capital Improvement Program
funded or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Giving effect to current estimates, and the March
sale of TransTexas stock, additional funding of $374 million to $379 million
will be required to complete the Capital Improvement Program, of which
approximately $41 million is anticipated to be funded by the South Louisiana
Port Commission ("Port Commission") tax exempt bonds. Additional funds necessary
to complete the Capital Improvement Program may be provided from (i) the sale of
additional shares of TransTexas Common Stock held by the Company, (ii) the sale
of Common Stock of the Company, (iii) equity investments in the Company
(including the sale of preferred stock of the Company to TEC, funded by the sale
of TransTexas common stock held by TEC), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the Notes. The Company has entered into
preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. Sales of shares of TransTexas common stock may result in deconsolidation of
TransTexas from the consolidated group for federal income tax purposes. There is
no assurance that sufficient funds will be available from these sources or upon
terms acceptable to the Company or TransAmerican. If this financing is not
available when needed or if significant engineering problems, work stoppages or
cost overruns occur, the Company will likely not be able to complete and test
Phase I of the Capital Improvement Program by February 15, 1997. Even if
required financing is obtained on a timely basis, completion by February 15,
1997 will still prove very difficult if personnel shortages prevent full
staffing during peak construction periods. The Company has identified and is
considering certain steps to minimize the impact of potential construction
worker shortages, including the retention of field supervisors, direct hiring of
field supervisors and field labor by the Company's major contractors, adding a
second shift, and modularization of certain construction items. There can be no
assurance that these steps will prove successful; however, the Company believes
that implementation of these steps will adequately address staffing concerns.
Under the Indenture, the failure of the Company to complete and test Phase I by
February 15, 1997 (subject to extension to August 15, 1997, if certain financial
coverage ratios are met) would constitute an event of default at such date.
TransAmerican, TEC or the Company may sell additional shares of TransTexas
common stock to provide additional funding for the Company. See "--
Deconsolidation for Federal Income Tax Purposes." If the Company obtains a
Revolving Credit Facility, the Company will be required to deposit the first $50
million of the proceeds from such facility into the Collateral Account, which
will be used for the Capital Improvement Program. There is no assurance that
operating cash flow will be sufficient for the Company's needs or that any
other financing sources will be available.
As of July 10, 1996, the Company had expended the $173 million placed in
the collateral account from the issuance of the Notes as well as the majority of
the proceeds from the March 1996 sale of TransTexas common stock. In May 1996,
in anticipation of the limited availability of collateral account funds, the
Company began scaling back expenditures on the Capital Improvement Program so
that remaining funds were expended only on those critical path items necessary
to complete and test refinery units by the dates specified in the Indenture. In
July 1996, TARC executed a promissory note to TransAmerican for up to $25
million. Currently, the Company has drawn $5 million against the note. The note
bears interest at 15% per annum, with quarterly interest payments beginning in
October 1996 and with the principal due in July, 1998. In July and August 1996,
TransAmerican advanced $4.3 million to the Company. The Company anticipates
repaying this non-interest bearing advance within 30 days. These advances will
be utilized by the Company to fund certain critical path items in the Capital
Improvement Program as well as working capital needs, pending additional
financing from other sources. There can be no assurance that such advances will
provide sufficient interim funds to keep the Capital Improvement Program on
schedule even if additional financing is eventually obtained.
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<PAGE> 24
USE OF PROCEEDS
The Company will use the $74,953 received upon exercise of the Warrants
for general corporate purposes. The Company will not receive any of the
proceeds from the sale of the Securities by the Selling Securityholder.
CAPITALIZATION OF THE COMPANY
The following table sets forth at April 30, 1996 the historical
capitalization of the Company. The information included in this table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company " and the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
See "Use of Proceeds."
<TABLE>
<CAPTION>
April 30, 1996
----------------
(dollars in millions)
<S> <C>
Payable to affiliate(1) ................................... $ 7.8
=========
Long-term debt, net of current maturities(2):
Guaranteed first mortgage discount notes ................ 232.7(3)
Guaranteed first mortgage notes ......................... 95.5(3)
---------
Total long-term debt ............................... 328.2(3)
---------
Stockholder's equity:
Common stock $0.01 par value, 100,000,000 shares
authorized, 30,000,000 shares issued
and outstanding ....................................... .3
Additional paid-in capital .............................. 248.5
Accumulated deficit ..................................... (130.2)
---------
Total stockholder's equity ......................... 118.6
---------
Total capitalization ............................... $ 446.8
=========
</TABLE>
- ---------
(1) Payable to affiliates include $7.1 million of intercompany debt owed to
TransAmerican at April 30, 1996. See "Management Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Liquidity of
Capital Resources."
(2) The Company is permitted under the Indenture to obtain a Revolving Credit
Facility, subject to certain restrictions and to incur without restriction
an additional $50 million of indebtedness.
(3) Gives effect to allocation of $23.3 million of the proceeds from the sale
of the Units to the Warrants.
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<PAGE> 25
CAPITALIZATION OF TEC
The following table sets forth at April 30, 1996, the historical
consolidated capitalization of TEC. The respective bond indenture agreements of
TransTexas and the Company each contain substantial restrictions which generally
prevent TEC from using the assets of one entity to satisfy the liabilities of
the other and limit transactions between affiliates. Accordingly, information
included in the table below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of TEC," and TEC and Predecessor's financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
April 30, 1996
----------------
(dollars in millions)
<S> <C>
Note payable ............................................... $ 20.7
=========
Payable to affiliates ...................................... $ 11.3
=========
Long-term debt, net of current maturities(1):
Guaranteed first mortgage discount notes .................. 232.7(2)
Guaranteed first mortgage notes ........................... 95.5(2)
Senior secured notes ...................................... 800.0
Notes payable ............................................. 13.1
---------
Total long-term debt ...................................... 1,141.3(2)
---------
Mandatorily redeemable Series A preferred stock ............ .1
---------
Equity:
Common stock, $0.01 par value, 100,000 shares
authorized; 9,000 shares issued and outstanding ......... --
Additional paid-in capital ............................... 161.4
Accumulated deficit ...................................... (162.5)
---------
Total stockholder's deficit .............................. (1.1)
---------
Total capitalization ..................................... $ 1,140.3
=========
</TABLE>
- ---------
(1) The Company is permitted under the Indenture to obtain a Revolving Credit
Facility, subject to certain restrictions, and to incur without
restriction an additional $50 million of indebtedness.
(2) Gives effect to allocation of $23.3 million of the proceeds from the sale
of the Units to the Warrants.
23
<PAGE> 26
SELECTED FINANCIAL AND OPERATING DATA OF THE COMPANY
(ISSUER)
On January 29, 1996, the Company changed its fiscal year end for financial
reporting purposes to January 31, from July 31. The following table sets forth
selected financial data of the Company as of and for each of the five years
ended July 31, 1995, the six months ended January 31, 1995 and 1996, and the
three months ended April 30, 1995 and 1996. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto. The
financial data for fiscal years ended July 31, 1991, 1992 and 1993, represent
the results of operations and financial position of the Company prior to the
reactivation of the refinery. During these periods, the Company had only
maintenance expenses and lease income for storage facilities. The data for the
year ended July 31, 1994, reflects the limited operations of the refinery since
March 1994, and expenses related to reactivation of portions of the refinery.
Subsequent to March 1994, the Company has operated the vacuum unit
intermittently. The Company's decision to commence or suspend operations is
based on the availability of financing, current operating margins and the need
to tie-in units as they are completed. The Company does not consider its
historical results to be indicative of future results.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
Year Ended July 31, January 31, April 30,
-------------------------------------------------- ------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996 1995 1996
------ ------- -------- -------- -------- -------- -------- -------- ---------
(In thousands of dollars, except per share amounts)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Refining revenues $ -- $ -- $ -- $ 174,143 $140,027 $ 71,035 $107,237 $ 558 $ 10,857
Storage and other income 278 3,179 5,178 3,035 552 551 -- -- --
Operating expenses 10,225 11,693 13,238 187,208 171,411 86,383 121,770 3,229 18,639
General and
administrative
expenses (1) 2,329 7,057 11,341 4,496 13,614 8,442 7,438 1,081 2,103
Equity in income (loss)
before extraordinary
item of TransTexas -- -- -- -- (2,428) -- (156) (842) 1,001
Other income (expense) 309 666 28 (2,827) (5,966) 89 (3,944) (5,757) 55,480(6)
Extraordinary item (2) -- -- -- -- (11,497) -- -- -- --
Net income (loss) (11,967) (14,905) (19,373) (17,353) (64,337) (23,150) (26,071) (10,351) 46,596
Net income (loss) per
common share (3) (0.40) (0.50) (0.65) (0.58) (2.14) (.77) (0.87) (0.35) 1.55
Weighted average number
of shares outstanding
(in thousands) (3) 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000
Ratio of earnings to
fixed charges(4) -- -- -- -- -- -- -- -- 2.6x
BALANCE SHEET DATA:
Working capital
(deficit) $ (756) $ (949) $ (1,494) $(16,838) $ 5,965 $(35,509) $(17,707) $ 27,364 $(12,993)
Long-term debt proceeds
held in collateral
account (5) -- -- -- -- 140,857 -- 24,405 174,742 17,021
Total assets 70,650 70,579 70,900 176,327 499,879 229,462 518,323 463,882 539,844
Total long-term
liabilities 31,287 45,636 64,512 45,373 342,505 112,719 368,091 318,560 367,030
Stockholder's equity 38,163 23,626 4,253 100,400 98,028 77,250 71,957 128,864 118,553
</TABLE>
- ---------
(1) Includes litigation accruals of $4.5 million, $9.0 million, and $4.5
million for the years ended July 31, 1992, 1993 and 1995,
respectively and $2.0 million for the six months ended January 31, 1996.
(2) Represents the Company's equity in the early extinguishment of debt at
TransTexas.
(3) Gives retroactive effect to a 30,000-for-1 stock split effected in July
1994.
(4) Earnings were inadequate to cover fixed charges by $12.0 million, $14.9
million, $19.4 million, $17.4 million, $69.3 million, $26.7 million,
$52.1 million and $16.1 million for the years ended July 31, 1991, 1992,
1993, 1994 and 1995, the six months ended January 31, 1995 and 1996 and
the three months ended April 30, 1995, respectively.
(5) Includes $7.9 million, $14.7 million, $16.6 million and $12.1 million,
respectively, at July 31, 1995, January 31, 1996 and April 30, 1995 and
1996, respectively, which is classified as a current asset.
(6) Includes a gain of $56.2 million related to the sale of 4.55 million shares
of TransTexas common stock.
24
<PAGE> 27
SELECTED FINANCIAL AND OPERATING DATA OF TEC
(GUARANTOR)
On January 30, 1996, TEC changed its fiscal year end for financial
reporting purposes to January 31, from July 31. The following table sets forth
selected financial data of TEC and its predecessor as of and for each of the
five years ended July 31, 1995, the six months ended January 31, 1995 and 1996,
and the three months ended April 30, 1995 and 1996. The respective bond
indenture agreements of TransTexas and TARC each contain substantial
restrictions which generally prohibit TEC from using the assets of one entity
to satisfy the liabilities of the other and limit transactions between
affiliates. Accordingly this data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto. The financial data
for fiscal years ended July 31, 1991, 1992 and 1993 represent the results of
operations and financial position of TEC prior to the reactivation of the
refinery. During these periods, the Company had only maintenance expenses and
lease income for storage facilities. The data for the year ended July 31, 1994
reflects the limited operations of the refinery since March 1994 and expenses
related to reactivation of portions of the refinery. Subsequent to March 1994,
the Company has operated the vacuum unit intermittently. The Company's decision
to commence or suspend operations is based on the availability of financing,
current operating margins and the need to tie-in units as they are completed.
The Company does not consider its historical results to be indicative of future
results.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended July 31, January 31,
------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------- ----------- -----------
(Dollars in thousands of dollars, except per share amounts)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate and NGL
revenues $ 193,235 $ 227,208 $ 294,753 $ 300,210 $ 273,092 $ 142,070 $ 123,253
Refining revenues -- -- -- 174,143 140,027 71,035 107,237
Transportation revenues 31,870 30,749 30,816 33,240 36,787 19,161 15,892
Other revenues 982 3,402 5,425 3,192 837 603 127
--------- --------- --------- --------- ----------- ---------- ----------
226,087 261,359 330,994 510,785 450,743 232,869 246,509
Operating costs and expenses 65,704 87,109 113,220 285,766 262,331 133,336 162,830
Depreciation, depletion, and
amortization 92,427 96,523 95,016 116,447 135,819 73,051 64,053
General and administrative
expenses 23,961 34,912 34,954 44,807 45,592 21,037 21,213
Net interest expense 378 1,724 2,457 50,131 74,214 29,086 44,151
Income taxes and other 14,193 3,587 11,103 7,231 (4,866) (247) (18,961)
Extraordinary loss, net
of taxes -- -- -- -- 56,637 -- --
--------- --------- --------- --------- ----------- ---------- ----------
Net income (loss) $ 29,424 $ 37,504 $ 74,244 $ 6,403 $ (118,984) $ (23,394) $ (26,777)
========= ========= ========= ========= =========== ========== ==========
Net income (loss) per
share: (1)
Income (loss) before
extraordinary item $ (13,901) $ (2,975)
Extraordinary item (12,628) --
----------- ----------
Net income (loss) $ (26,529) $ (2,975)
=========== ==========
Ratio of earnings to fixed
charges (2) 19.5x 12.7x 27.3x 1.2x -- -- --
OPERATING DATA OF TRANSTEXAS:
Sales volumes:
Gas (average daily) (MMcfd) 331.0 350.8 326.8 358.8 405.2 417.7 363.4
Gas (Bcf) 120.0 128.4 119.3 130.9 147.9 76.9 66.9
NGLs (MMgal) 75.4 165.9 183.8 164.0 225.3 121.3 65.3
Condensate (MBbls) 483 498 617 650 638 354 259
Total production (Bcfe) 123.7 131.4 123.0 134.8 151.7 79.0 68.4
Average prices:
Gas (dry) (per Mcf) $ 1.32 $ 1.36 $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65
NGLs (per gallon) 0.40 0.29 0.30 0.27 0.26 0.27 0.30
Condensate (per Bbl) 23.21 19.52 18.65 15.13 17.22 16.50 17.39
Average finding costs
(per Mcfe) 0.54 0.66 1.01 1.12 0.21(7) 0.32 1.06
Average lifting costs
(per Mcfe) 0.22 0.19 0.22 0.24 0.21 0.21 0.23
Proved reserves (net)
(end of period):
Gas (Bcf) 683.5 686.2 695.0 717.4 1,122.6 943.5 1.139.1
Condensate (MBbls) 1,741 2,171 1,968 1,935 3,049 2,637 2,903
Number of gross wells
drilled 68 71 103 140 97 60 60
Percentage of wells
drilled completed 90% 82% 85% 83% 77% 78% 75%
BALANCE SHEET DATA:
Working capital
(deficit) (3) $ (35,829) $ (36,244) $ (58,443) $ (25,702) $ 112,998 $ (92,258) $ 25,859
Total assets 383,055 377,421 431,141 758,664 1,325,656 823,726 1,456,422
Total long-term debt 3,105 3,246 8,270 500,000 1,094,963 510,000 1,140,779
Stockholder's equity
(deficit) 202,787 198,957 230,418 15,262 (9,252) (8,133) (36,029)
<CAPTION>
Three Months Ended
April 30,
--------------------------
1995 1996
---------- ----------
(Unaudited)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate and NGL revenues $ 63,805 $ 79,508
Refining revenues 558 10,857
Transportation revenues 8,890 8,195
Other revenues(4) 56 7,961
---------- ----------
73,309 106,521
Operating costs and expenses 25,125 49,163
Depreciation, depletion, and amortization 32,249 31,903
General and administrative expenses 6,755 9,641
Net interest expense 17,571 22,097
Income taxes and other(4) 4,962 (54,799)
Extraordinary loss, net of taxes -- --
---------- ----------
Net income (loss) $ (13,353) $ 48,516
========== ==========
Net income (loss) per share: (1)
Income (loss) before extraordinary item $ (1,902) $ 5,391
Extraordinary item -- --
---------- ----------
Net income (loss) $ (1,902) $ 5,391
========== ==========
Ratio of earnings to fixed charges (2) -- 1.7x
OPERATING DATA OF TRANSTEXAS:
Sales volumes:
Gas (average daily) (MMcfd)(5) 397.6 403.2
Gas (Bcf)(5) 35.8 36.2
NGLs (MMgal) 52.3 48.2
Condensate (MBbls) 176 164
Total production (Bcfe) 36.9 37.2
Average prices:
Gas (dry) (per Mcf)(6) $ 1.34 $ 2.03
NGLs (per gallon) .26 .31
Condensate (per Bbl) 17.67 20.03
Average finding costs (per Mcfe) N/A N/A
Average lifting costs (per Mcfe) .20 .35
Proved reserves (net) (end of period):
Gas (Bcf) N/A N/A
Condensate (MBbls) N/A N/A
Number of gross wells drilled 18 45
Percentage of wells drilled completed 83% 84%
BALANCE SHEET DATA:
Working capital (deficit) (3) $ (7,995) $ (30,293)
Total assets 1,087,990 1,541,512
Total long-term debt 802,319 1,162,062
Stockholder's equity (deficit) 73,081 (1,087)
</TABLE>
- ---------
(1) Per share data for years prior to July 31, 1995 is omitted because TEC's
predecessor ("TAEC") was not a separate entity with its own capital
structure.
(2) Earnings were inadequate to cover fixed charges by $84.5 million, $27.0
million, $60.8 million and $18.9 million for the year ended July 31, 1995,
for the six months ended January 31, 1995 and 1996 and the three months
ended April 30, 1995, respectively.
(3) For all periods prior to the Transfer, excludes all cash and accounts
receivable because those assets were not transferred to TransTexas in the
Transfer. Working capital at July 31, 1995, January 31, 1996 and April 30,
1996 includes $44.7 million, $46.0 million and $46.0 million, respectively,
in a restricted interest reserve account pursuant to the indenture
governing the TransTexas Notes.
(4) Other revenues for the three months ended April 30, 1996 include a gain of
approximately $7.5 million on the sale of TransTexas' interest in a
pipeline. "Income Taxes and Other" for the three months ended April 30,
1996 includes a gain of approximately $56.2 million on TARC's sale of
4.55 million shares of TransTexas common stock.
(5) Sales volumes for the three months ended April 30, 1996 include 5.9 Bcf
delivered pursuant to a volumetric production payment.
(6) Average price for the three months ended April 30, 1996 includes amounts
delivered under volumetric production payments. The average gas price for
TransTexas' undedicated production for this period was $2.18 per Mcf. Gas
prices do not include the effect of hedging agreements.
(7) The decrease in average finding costs for the year ended July 31, 1995 is
primarily attributable to reserve additions of approximately 564 Bcfe
(see Note 17 of Notes to Consolidated Financial Statements of TransTexas).
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
General
The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues related primarily to tank
rentals and its expenses were for maintenance and repairs, tank rentals,
general and administrative expenses and property taxes. The Company commenced
partial operations at the refinery in March 1994 and has operated the vacuum
unit intermittently since then. The Company's decision to commence or suspend
operations is based on the availability of financing, current operating margins
and the need to tie-in units as they are completed. The Company does not
consider its historical results to be indicative of future results.
The Company's results of operations are dependent on the operating
status of its refinery equipment, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the
unit costs of purchased feedstocks and the unit prices of refined products,
which can vary significantly. The Capital Improvement Program is designed to
significantly change the Company's throughput capacity, the feedstocks
processed, and refined product yields. See "Business of the Company -- Capital
Improvement Program."
Three Months Ended April 30, 1996, Compared with the Three Months Ended
April 30, 1995
Total revenues for the three months ended April 30, 1996, increased $10.3
million to $10.9 million from $0.6 million for the same period in 1995,
primarily as a result of increased sales volume.
Costs of products sold for the three months ended April 30, 1996, increased
$12.3 million to $13.4 million from $1.1 million for the same period in 1995,
primarily as a result of increased sales volume and a loss of approximately
$1.9 million related to a processing agreement.
Operations and maintenance expense for the three months ended April 30,
1996, increased $3.3 million to $3.0 million from $(0.3) million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expense for the three months ended April 30,
1996, increased $0.4 million to $1.8 million from $1.4 million for the same
period in 1995, primarily due to the placing in service of certain terminal
facilities and tankage equipment.
General and administrative expense for the three months ended April 30,
1996, increased $1.0 million to $2.1 million from $1.1 million for the same
period in 1995, primarily due to increases in wages, outside services and
professional fees.
Taxes other than income taxes for the three months ended April 30, 1996,
decreased $0.6 million to $0.4 million from $1.0 million for the same period
in 1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.
Interest income for the three months ended April 30, 1996, decreased $1.8
million as compared to the same period in 1995 primarily due to interest earned
in 1995 on the initial $173 million long-term debt proceeds held in the
Collateral Account. Interest expense for the three months ended April 30, 1996
decreased $3.5 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the three months ended April 30, 1996,
the Company capitalized approximately $16.6 million of interest related to
property and equipment additions at the Company's refinery.
The equity in earnings (loss) of TransTexas for the three months ended
April 30, 1996, reflects the Company's 20.3% equity interest in TransTexas until
the Company's sale of 4.55 million shares of TransTexas stock in March 1996
which decreased the Company's interest in TransTexas to 14.1%. The Company
recognized a $56.2 million non-operating gain as a result of the sale of
TransTexas stock.
Other expense for the three months ended April 30, 1995 was $3.0 million
which was primarily a result of trading losses on futures contracts.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Total revenues for the six months ended January 31, 1996, increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.
Cost of products sold for the six months ended January 31, 1996, increased
$36.2 million to $110.1 million from $73.9 million for the same period in 1995,
primarily due to an increase in the volume of products sold, partially offset
by a decrease in the average price of feedstocks purchased.
Operations and maintenance expenses for the six months ended January 31,
1996, increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expenses for the six months ended January
31, 1996, increased $0.5 million to $3.2 million from $2.7 million for the same
period in 1995, primarily due to the transfer of certain terminal facilities
and tankage equipment from construction in progress to depreciable assets
during the recent period.
General and administrative expenses for the six months ended January 31,
1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a reduction in litigation accruals,
$2.5 million, partially offset by an increase in payroll of $1.1 million
arising from operations support requirements.
26
<PAGE> 29
Taxes other than income taxes for the six months ended January 31, 1996
decreased $1.4 million to $0.7 million from $2.1 million for the same period in
1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.
Interest income for the six month period ended January 31, 1996, increased
$2.3 million compared to the same period in 1995 due primarily to interest
earned on long-term debt proceeds held in the Collateral Account. Interest
expense for the six month period ended January 31, 1996, increased $28.6
million due to interest accrued on long-term debt issued in February 1995,
amortization of debt issue costs and financing costs associated with product
purchases. During the six months ended January 31, 1996, the Company
capitalized $26.2 million of interest related to property and equipment
associated with the Capital Improvement Program.
Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994
Total revenues for the year ended July 31, 1995, decreased $36.6 million
to $140.6 million from $177.2 million in the same period in 1994, primarily due
to a decrease in the volume of products sold which was partially offset by an
increase in the average price of products sold.
Cost of products sold for the year ended July 31, 1995, decreased $19.8
million to $149.1 million from $168.9 million for the same period in 1994,
primarily as a result of a decrease in volume of products sold, partially
offset by an increase in the average price of feedstocks purchased and a
contract cancellation loss of approximately $3.8 million.
Operations and maintenance expense for the year ended July 31, 1995,
increased $0.2 million to $12.3 million from $12.1 million for the same period
in 1994, primarily as a result of an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expense for the year ended July 31, 1995,
increased $3.3 million to $5.9 million from $2.6 million for the same period in
1994, primarily as a result of increased depreciation expense being recorded
for refinery assets which were taken out of discontinued operations during
1994.
General and administrative expenses for the year ended July 31, 1995,
increased $9.1 million to $13.6 million from $4.5 million in the same period in
1994, primarily as a result of a litigation accrual of $4.5 million and
increases in legal and consulting fees and insurance costs as a result of
expanded refinery operations.
Taxes other than income taxes for the year ended July 31, 1995, increased
$0.5 million to $4.2 million from $3.7 million for the same period in 1994,
primarily as a result of an increase in property taxes assessed.
Interest income for the year ended July 31, 1995, increased $4.1 million
compared to the same period in 1994 due primarily to interest earned on
long-term debt proceeds held in the Collateral Account. Interest expense for
the year ended July 31, 1995, increased $31.3 million due to interest accrued
on long-term debt issued during 1995, amortization of debt issue costs and
financing costs associated with product purchases. During the year ended July
31, 1995, the Company capitalized $18.9 million of interest related to property
and equipment associated with the Company's Capital Improvement Program.
Other income for the year ended July 31, 1995, was $2.5 million compared
to other expense of $2.9 million for the same period in 1994 primarily as a
result of trading gains on futures contracts.
During the fourth quarter of 1995, net loss before an extraordinary item
increased $35.5 million over the same period in 1994, primarily due to interest
associated with the Company's long-term debt and amortization of debt issue
costs.
In February 1995, TransAmerican contributed 55 million shares of
TransTexas common stock to TEC, and TEC then contributed 15 million of these
shares of TransTexas common stock to the Company. The equity in loss of
TransTexas for the year ended July 31, 1995, reflects the Company's 20.3%
equity interest in TransTexas' loss
27
<PAGE> 30
before an extraordinary item from the date of acquisition. The equity in the
extraordinary loss of TransTexas represents the Company's equity in a charge
recorded by TransTexas in the fourth quarter for the early retirement of $500
million of its 10 1/2% Senior Secured Notes due 2000 from the proceeds of the
issuance by TransTexas in June 1995 of $800 million in 11 1/2% Senior Secured
Notes due 2002.
Year Ended July 31, 1994, Compared with the Year Ended July 31, 1993
Total revenues for the year ended July 31, 1994, increased $172.0 million
to $177.2 million from $5.2 million in the same period in 1993, primarily as a
result of the Company's operation of the vacuum unit at its refinery.
Approximately 32% of sales were to a single customer pursuant to a processing
agreement.
Cost of products sold for the year ended July 31, 1994, increased $168.9
million as compared to the same period in 1993, due to the operation of the
vacuum unit at the refinery.
Operations and maintenance expense for the year ended July 31, 1994,
increased $2.5 million to $12.1 million from $9.6 million for the same period
in 1993, primarily due to the operation of the vacuum unit at the refinery.
Depreciation and amortization expense for the year ended July 31, 1994,
increased $2.6 million as compared to the same period in 1993, due to the
depreciation of refinery assets that were taken out of discontinued operations
during 1994.
General and administrative expenses for the year ended July 31, 1994,
decreased $6.8 million to $4.5 million from $11.3 million in the same period in
1993, primarily as a result of a litigation accrual of $9 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the issuance of the TARC Notes, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. The current budget for the Capital
Improvement Program calls for total expenditures of $434 million; however, the
Company estimates that expenditures of approximately $146 million to $151
million in addition to the current budget will be required to complete the
Capital Improvement Program. The foregoing estimates, as well as other estimates
and projections herein, are subject to substantial revision upon the occurrence
of future events, such as unavailability of, or delays in, financing,
engineering problems, work stoppages and cost overruns over which the Company
may not have any control.
As of April 30, 1996, expenditures on the Capital Improvement Program
funded by or approved for reimbursement from the cash collateral account totaled
approximately $189 million. The Company sold 4.55 million shares of TransTexas
common stock in March 1996, and deposited approximately $26.6 million of the
proceeds of such sale into the cash collateral account in accordance with the
requirements of the Indenture. Giving effect to current estimates and the sale
of TransTexas stock in March 1996, additional funding of $264 million to
$269 million will be required to complete Phase I, of which approximately
$41 million is anticipated to be funded by the Port Commission tax exempt
bonds and additional funding of $110 million will be required to complete
Phase II. As of April 30, 1996, the Company had commitments for refinery
construction and maintenance of approximately $64 million. Additional funds
necessary to complete the Capital Improvement Program may be provided from (i)
the sale of additional shares of TransTexas common stock held by the Company,
(ii) the sale of common stock of the Company, (iii) equity investments in the
Company (including the sale of preferred stock of the Company to TEC, funded by
the sale of TransTexas common stock held by TEC), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the Notes. The Company has entered into
preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. There is no assurance that sufficient funds will be available from these
sources on a timely basis or upon terms acceptable to the Company and
TransAmerican. If this financing is not available or if significant engineering
problems, work stoppages or cost overruns occur, the Company likely will not be
able to complete and test Phase I of the Capital Improvement Program by February
15, 1997. Even if required financing is obtained on a timely basis, completion
by February 15, 1997 will still prove very difficult if personnel shortages
prevent full staffing during peak construction periods. The Company has
identified and is considering certain steps to minimize the impact of potential
construction worker shortages, including the retention of field supervisors,
direct hiring of field supervisors and field labor by the Company's major
contractors, adding a second shift, and modularization of certain construction
items. There can be no assurance that these steps will prove successful;
however, the Company believes that implementation of these steps will adequately
address staffing concerns. Under the Indenture, the failure of the Company
to complete and test Phase I by February 15, 1997 (subject to extension to
August 15, 1997 if certain financial coverage ratios are met) would constitute
an event of default at such date.
As of July 10, 1996, the Company had expended the $173 million placed in
the collateral account from the issuance of the Notes as well as the majority of
the proceeds from the March 1996 sale of TransTexas common stock. In May 1996,
in anticipation of the limited availability of collateral account funds, the
Company began scaling back expenditures on the Capital Improvement Program so
that remaining funds were expended only on those critical path items necessary
to complete and test refinery units by the dates specified in the Indenture. In
July 1996, TARC executed a promissory note to TransAmerican for up to $25
million. Currently, the Company has drawn $5 million against the note. The note
bears interest at 15% per annum, with quarterly interest payments beginning in
October 1996 and with the principal due in July 1998. In July and August 1996,
TransAmerican advanced $4.3 million to the Company. The Company anticipates
repaying a portion of this non-interest bearing advance within 30 days. These
advances will be utilized by the Company to fund the critical path items
mentioned above, as well as working capital needs, pending additional financing
from other sources. There can be no assurance that such advances will provide
sufficient interim funds to keep the Capital Improvement Program on schedule
even if additional financing is eventually obtained.
28
<PAGE> 31
The Company and the South Louisiana Port Commission ("Port Commission")
have reached an agreement in principle which would allow for the issuance of
approximately $75 million in Port Commission tax exempt bonds, the proceeds of
which may be used to construct tank storage facilities, docks and air and waste
water treatment facilities. The air and waste water treatment facilities are
included in the Capital Improvement Program at an estimated cost of $41 million.
The issuance of the tax exempt bonds could provide an alternate source of
financing for the construction of such facilities. The Port Commission would own
the facilities built with the proceeds of the bonds, and the Company would
operate the facilities pursuant to a long-term (30-year) lease. There can be no
assurance that the issuance of the tax-exempt bonds, which may require the
consent of the holders of the Notes, will occur.
The Company has incurred losses and negative cash flow from operations as a
result of limited refining operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to product financing costs and low margins. Based on
recent refining margins, projected levels of operations and debt service
requirements, such negative cash flows are likely to continue. In order to
operate the refinery and service its debt, the Company must raise debt or equity
capital in addition to the funds required to complete the Capital Improvement
Program. TransAmerican, TEC or the Company may sell securities to raise funds
for additional working capital. There is no assurance that the necessary
additional funding for the refinery expansion and working capital can be
obtained or that profitable operations will be ultimately achieved. As a result,
there is substantial doubt about the Company's ability to continue as a going
concern. If the Company (i) does not complete the Capital Improvement Program
timely, (ii) incurs significant cost overruns, (iii) does not ultimately achieve
profitable operations, or (iv) ceases to continue operations, the Company's
investment in the refinery may not be recovered. The financial statements do
not include any adjustments for such uncertainties.
Additionally, TEC has pledged its entire ownership interest of the common
stock of TransTexas as collateral on the Notes. In the event the Company does
not continue as a going concern, it is likely that TEC will lose its entire
investment in TransTexas. Therefore, if TEC is unable to recover its investment
in the Company, as described above and it loses its investment in TransTexas,
there is substantial doubt in the Company's and TEC's ability to continue as a
going concern.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax purposes
could result in the acceleration of payment of a substantial amount of federal
income taxes by TransAmerican. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable for the consolidated
federal income tax liability of the consolidated group. There can be no
assurance that TransAmerican will have the ability to satisfy the above tax
obligation at the time due and, therefore, the Company, or other members may be
required to pay the tax. A decision by TEC or the Company to sell TransTexas
shares could result in deconsolidation of TransTexas for tax purposes.
TransAmerican's tax liability which could result from deconsolidation is
estimated to be approximately $40 million at April 30, 1996. The Company as a
member of the consolidated group is severally liable for this liability. To the
extent TransAmerican is unable to fund the entire liability, the Company may be
required to pay a portion of this tax. The Company is unable to determine its
share, if any, of the liability which would result from deconsolidation because
(i) it is uncertain whether deconsolidation will occur and (ii) if
deconsolidation should occur, it is uncertain whether the Company would be
required to fund any portion of the tax liability under the joint and several
provisions.
The Company enters into financing arrangements in order to maintain an
available supply of feedstocks. Typically, the Company enters into an agreement
with a third party to acquire a cargo of feedstock which is scheduled to be
delivered to the Company's refinery. The Company pays through the third party
all transportation costs, related taxes and duties and letter of credit fees
for the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and the Company commits to purchase,
at a later date, the cargo at an agreed price plus commission and costs. The
Company also places a margin deposit with the third party to permit the third
party to hedge its price risk. The Company purchases these cargos in quantities
sufficient to maintain expected operations and is obligated to purchase all of
the cargos delivered pursuant to these arrangements. In the event the refinery
is not operating, these cargos may be sold on the spot market. During the three
months
29
<PAGE> 32
ended April 30, 1996, approximately 0.4 million barrels of feedstocks with a
cost of $8.0 million were sold by a third party on the spot market prior to
delivery to the Company without a material gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. Under the terms
of the agreement, the processing fee earned by the Company is based on the
margin earned by the third party, if any, after deducting all of its related
costs such as feedstock acquisition, hedging, transportation, processing and
inspections plus a commission for each barrel processed. This agreement provides
for the Company to process a total of approximately 1.1 million barrels of
feedstock. For the three months ended April 30, 1996, the Company incurred a
loss of approximately $1.9 million related to the processing agreement,
primarily as a result of price management decisions. In April 1996, the Company
entered into a similar processing agreement with another third party to process
feedstocks. Recently, the Company has agreed to process approximately 4.3
million barrels of feedstocks under this agreement.
In July 1996, the Company entered into a processing agreement with a third
party to process approximately 0.2 million barrels of feedstocks for a fixed
price per barrel. Under the terms of the agreement, the Company is responsible
for only certain quantity and quality yields.
Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years the Company does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on the
Company's future results of operations, cash flows or financial condition. The
Company also has contingent liabilities with respect to litigation matters as
more fully described in Note 11 of Notes to Financial Statements.
On December 13, 1995, litigation with Frito-Lay, Inc. was settled. The
Company intends to pay $2.5 million to Frito-Lay, Inc. during fiscal year 1997
in accordance with the Tax Allocation Agreement and other relevant documents. As
of April 30, 1996, the Company has paid approximately $0.7 million of this
obligation.
INFLATION AND CHANGES IN PRICES
The Company's revenues and feedstock costs have been and will continue to
be affected by changes in the prices of petroleum and petroleum products. The
Company's ability to obtain additional capital is also substantially dependent
on refined product prices and refining margins, which are subject to
significant seasonal, cyclical and other fluctuations that are beyond the
Company's control.
From time to time, the Company enters into futures contracts, options on
futures, swap agreements and forward sale agreements for crude and refined
products intended to protect against a portion of the price risk associated
with price declines from holding inventory of feedstocks and refined products,
or for fixed price purchase commitments. The Company's policy is not to enter
into fixed price or other purchase commitments in excess of anticipated
processing requirements. The Company believes that these current and
anticipated futures transactions do not and will not constitute speculative
trading as specified under and prohibited by the Indenture.
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. Words such as "anticipates," "expects,"
"believes" and "likely" indicates forward-looking statements. The Company's
management believes that 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 the Company's success in raising additional capital to complete the
Capital Improvement Program (as defined below) as scheduled, engineering
problems, work stoppages, cost overruns, fluctuations in the commodity prices
for petroleum and refined products, casualty losses, conditions in the capital
markets and competition.
RECENTLY ISSUED PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As of
February 1, 1996, the Company adopted the requirements of SFAS No. 121. The
Company currently believes, based on estimates of refining margins and current
estimates for costs of the Capital Improvement Program, that future undiscounted
cash flows will be sufficient to recover the cost of the refinery over
its estimated useful life. Management believes there have been no events or
changes in circumstances that would require the recognition of an impairment
loss. However, due to the inherent uncertainties in constructing and operating a
large scale refinery and the uncertainty (see Note 2) regarding the Company's
ability to complete the Capital Improvement Program, there can be no assurance
that the Company will ultimately recover the cost of the refinery.
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<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF TEC
TEC, which has guaranteed the Notes, conducts its operations through
its operating subsidiaries in three industry segments: exploration and
production of natural gas, transportation of natural gas, and petroleum
refining. TEC's only sources of liquidity and cash flow will be dividends from
the Company or TransTexas. The Indenture restricts the ability of the Company,
and the TransTexas Indenture restricts the ability of TransTexas, to pay
dividends. Until March 1994, the exploration, production, and transportation
operations of TransTexas constituted substantially all of the operations of TEC.
The Report of Independent Accountants of Coopers & Lybrand L.L.P. relating to
the audited financial statements of TEC included herein (the "Report") notes
that there is no assurance that the Company will be able to obtain necessary
additional funding to expand its refinery and to fund its ongoing working
capital requirements. The Report points out that if the Company is unable to
raise the required additional funds, there would be substantial doubt about
TEC's ability to continue as a going concern because TEC may be unable to
recover its investment in the Company and may lose its ownership interest in
TransTexas. See "Report of Independent Accountants Regarding Financial
Statements of TransAmerican Energy Corporation."
Business segment information for TEC and predecessor for the years ended
July 31, 1993, 1994 and 1995 and the six months ended January 31, 1995 and 1996
is as follows:
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1993
Exploration and production $ 294,753 $ 120,200 $ 89,126 $ 131,955 $ 316,646
Gas transportation 30,816 (440) 5,758 8,297 30,475
Refining 5,178 (19,401) -- 48 70,900
Other 247 (6,955) 132 6,950 13,120
------------ ------------ ------------ ------------ ------------
$ 330,994 $ 93,404 $ 95,016 $ 147,250 $ 431,141
============ ============ ============ ============ ============
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1994
Exploration and production $ 300,210 $ 96,828 $ 107,727 $ 180,426 $ 462,951
Gas transportation 33,240 (2,257) 5,913 35,763 66,019
Refining 177,178 (14,526) 2,589 84,295 176,327
Other 157 (15,280) 218 34,522 53,367
------------ ------------ ------------ ------------ ------------
$ 510,785 $ 64,765 $ 116,447 $ 335,006 $ 758,664
============ ============ ============ ============ ============
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1995
Exploration and production $ 273,092 $ 62,855 $ 121,625 $ 259,189 $ 712,322
Gas transportation 36,787 2,827 8,041 10,105 60,916
Refining 140,579 (44,446) 5,855 116,654 499,879
Other 285 (14,235) 298 12,786 52,539
------------ ------------ ------------ ------------ ------------
$ 450,743 $ 7,001 $ 135,819 $ 398,734 $ 1,325,656
============ ============ ============ ============ ============
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JANUARY 31, 1995 (UNAUDITED)
Exploration and production $ 142,070 $ 32,860 $ 66,175 $ 99,672 $ 483,511
Gas transportation 19,161 2,796 4,031 6,366 63,541
Refining 71,586 (23,239) 2,706 58,093 229,462
Other 52 (6,972) 139 11,855 47,213
------------ ------------ ------------ ------------ ------------
$ 232,869 $ 5,445 $ 73,051 $ 175,986 $ 823,727
============ ============ ============ ============ ============
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
TRANSITION PERIOD ENDED
JANUARY 31, 1996
Exploration and production $ 123,253 $ 51,443 $ 56,543 $ 176,386 $ 738,648
Gas transportation 15,892 (4,393) 4,194 13,266 72,815
Refining 107,237 (21,971) 3,159 150,238 518,205
Other 127 (8,366) 157 16,904 126,754
------------ ------------ ------------ ------------ ------------
$ 246,509 $ 16,713 $ 64,053 $ 356,794 $ 1,456,422
============ ============ ============ ============ ============
</TABLE>
31
<PAGE> 34
The following discussion relates to the exploration, production, and
transportation businesses conducted by TEC through its subsidiary, TransTexas,
and TransTexas' subsidiary, TransTexas Transmission Corporation ("TTC").
Amounts reflected in this discussion include amounts shown in "Exploration and
Production," "Transportation" and "Other" in the business segment information
provided above. This discussion should be read in conjunction with the
consolidated financial statements of TransTexas and its predecessor included
elsewhere in this Prospectus and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company," which provides
similar information relating to the petroleum refining business conducted by
TEC through the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF TRANSTEXAS
The following discussion should be read in conjunction with the financial
statements and notes thereto of TransTexas included elsewhere in this report.
RESULTS OF OPERATIONS
General
TransTexas conducts its operations through two industry segments:
exploration and production ("E&P"), and gas transportation ("Transportation").
The E&P segment explores for, develops, produces and markets natural gas,
condensate and natural gas liquids. The Transportation segment engages in
intrastate natural gas transportation and marketing.
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
NGLs. The profitability of TransTexas also depends on the volume of natural gas
it gathers and transports and its ability to minimize finding and lifting costs
and maintain its reserve base while maximizing production.
TransTexas' operating data for the years ended July 31, 1993, 1994 and
1995, the six months ended January 31, 1995 and 1996 and the three months
ended April 30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
--------------------------------- --------------------------- --------------------
1993 1994 1995 1995 1996 1995 1996
--------- -------- --------- ---------- ---------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf)(1) 119.3 130.9 147.9 76.9 66.9 35.8 36.2
NGLs (MMgals) 183.8 164.0 225.3 121.3 65.3 52.3 48.2
Condensate (MBbls) 617 650 638 354 259 176 164
Average prices:
Gas (dry) (per Mcf)(2) $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65 $ 1.34 $ 2.03
NGLs (per gallon) .30 .27 .26 .27 .30 .26 .31
Condensate (per Bbl) 18.65 15.13 17.22 16.50 17.39 17.67 20.03
Number of gross wells drilled 103 140 97 60 60 18 45
Percentage of wells completed 85% 83% 77% 78% 75% 83% 84%
</TABLE>
- --------------
(1) Sales volumes for the three months ended April 30, 1996, include 5.9 Bcf
delivered pursuant to a volumetric production payment.
(2) Average price for the three months ended April 30, 1996, includes amounts
delivered under volumetric production payments. The average gas price for
the Company's undedicated production for this period was $2.18 per Mcf.
Gas prices do not include the effect of hedging agreements.
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<PAGE> 35
TransTexas uses the full-cost method of accounting for exploration and
development costs. Under the full-cost method, the cost for successful, as well
as unsuccessful, exploration and development activities is capitalized and
amortized on a unit-of-production basis over the life of the remaining proved
reserves. A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
--------------------------------- ------------------------ ---------------------
1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- ----------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Lease $ 15.5 $ 19.8 $ 19.6 $ 10.3 $ 9.4 $ 4.0 $ 6.7
Pipeline 24.3 25.5 21.2 9.8 13.0 5.3 8.2
Natural gas liquids 47.6 44.8 44.4 24.5 15.6 10.2 12.5
Well service .2 .1 .1 -- .1 -- --
--------- --------- --------- --------- --------- --------- --------
87.6 90.2 85.3 44.6 38.1 19.5 27.4
Taxes other than income taxes (1) 12.4 13.2 14.0 6.3 7.5 3.9 5.2
--------- --------- --------- --------- --------- --------- ---------
Total $ 100.0 $ 103.4 $ 99.3 $ 50.9 $ 45.6 $ 23.4 $ 32.6
========= ========= ========= ========= ========= ========= =========
</TABLE>
- ---------
(1) Taxes other than income taxes include severance, property, and other
taxes.
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
------------------------------- --------------------- ---------------------
1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Depletion rates (per Mcfe) $ .73 $ .80 $ .81 $ .84 $ .82 $ .78 $ .90
</TABLE>
THREE MONTHS ENDED APRIL 30, 1996, COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1995
Gas, condensate and NGLs revenues for the three months ended April 30,
1996, increased by $15.9 million from the comparable period of the prior year,
due primarily to increases in gas, condensate and NGL prices, offset in part by
decreases in condensate and NGL sales volumes. The average monthly prices
received per Mcf of gas, excluding amounts dedicated to volumetric production
payments, ranged from $2.04 to $2.45 in the three months ended April 30, 1996,
compared to a range of $1.29 to $1.43 in the same period in the prior year. As
of April 30, 1996, TransTexas had a total of 1,024 producing wells compared to
936 at April 30, 1995. NGL sales volumes decreased primarily due to the
decrease in the volumes of natural gas processed. Transportation revenues
decreased by $0.7 million for the quarter ended April 30, 1996, due to
decreases in volumes transported through TransTexas' pipeline system.
TransTexas currently transports a portion of its production from the Bob West
and Bob West North development areas through a third-party pipeline.
Lease operating expenses for the quarter ended April 30, 1996, increased by
$2.7 million over the comparable prior year period primarily due to the
increase in producing wells and the initiation of a program to increase flow
rates on certain of TransTexas' wells through the installation of wellhead
compressors. TransTexas estimates that rental of these compressors will add
approximately $0.9 million to lease operating expenses in fiscal 1997. Pipeline
operating expenses increased by $2.9 million due primarily to increases in
compressor fuel costs and chemicals used in the operation of TransTexas' amine
plants. NGLs cost increased by $2.3 million from the first quarter in the prior
year due to the increase in the cost of natural gas processed. Depreciation,
depletion and amortization expense for the three months ended April 30, 1996
decreased by $0.8 million due to a decrease in TransTexas' undedicated natural
gas production, offset by a $0.12 increase in the depletion rate. General and
administrative expenses increased by $1.8 million in the three months ended
April 30, 1996, due primarily to increases in wages and benefits and outside
services.
Interest income for the three months ended April 30, 1996, increased
by approximately $0.7 million over the comparable prior year period due to
increased cash balances resulting from the issuance of the TransTexas Notes in
June 1995. Interest expense increased by $7.0 million over the same period of
the prior year primarily as a result of interest accrued on the TransTexas
Notes, offset in part by the capitalization of approximately $3.7 million of
interest in connection with the acquisition of certain of TransTexas' gas and
oil properties.
Cash provided by operating activities for the three months ended April 30,
1996, increased by $56.9 million from the comparable prior year period due
primarily to the increase in prices received for TransTexas' gas,
condensate and NGLs and the sale of a volumetric production payment in the
three months ended April 30, 1996. Cash provided by operating activities for
the three months ended April 30, 1995 reflects an interest payment of $26.2
million on TransTexas' $500 million Senior Secured Notes.
SIX MONTHS ENDED JANUARY 31, 1996, COMPARED WITH THE SIX MONTHS ENDED JANUARY
31, 1995
Gas, condensate and NGL revenues for the six months ended January 31, 1996,
decreased by $18.6 million from the comparable period of the prior year, due
primarily to decreases in gas, condensate and NGL sales volumes, partly offset
by increases in gas, condensate and NGL prices. The decrease in gas sales
volumes reflects the normal decline in natural gas production from TransTexas'
Lobo Trend wells, offset in part by production from TransTexas' new development
areas. The average monthly prices received per Mcf of gas ranged from $1.33 to
$1.95 in the six months ended January 31, 1996, compared to a range of $1.32 to
$1.52 in the same period in the prior year. NGL sales volumes decreased
primarily due to the decrease in the volumes of natural gas processed.
Transportation revenues decreased by $3.3 million for the six months ended
January 31, 1996, due primarily to decreases in volumes transported.
Lease operating expenses in the six months ended January 31, 1996,
decreased by $0.9 million from the prior year period as increases in repairs
and maintenance expense attributable to the increase in the number of producing
wells were offset by a decrease in workover expense due to fewer workovers
performed. Pipeline operating expenses increased by $3.2 million due primarily
to increases in repairs and maintenance expenses, compressor fuel costs, and
pipeline loss. Also contributing to the increase in pipeline operating expenses
were costs incurred by TransTexas to remove carbon dioxide from natural gas
produced from certain of TransTexas' new development areas. NGL cost decreased
by $8.9 million from the comparable period in the prior year due to the
decrease in volumes of natural gas processed. Depreciation, depletion and
amortization expense for the six months ended January 31, 1996, decreased by
$9.4 million due to the decrease in natural gas production and a $0.02 decrease
in the depletion rate. General and administrative expenses increased by $1.1
million in the six months ended January 31, 1996, due primarily to costs
associated with the relocation of TransTexas' corporate offices, offset in part
by decreases in
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<PAGE> 36
consulting and professional fees. The gain on litigation settlement of $18.3
million represents the value of properties received in a litigation settlement.
Interest income for the six months ended January 31, 1996, increased by
approximately $2 million over the comparable period of the prior year due to
increased cash balances resulting from the issuance of the TransTexas Notes.
Interest expense increased by $13.4 million primarily as a result of interest
accrued on the TransTexas Notes and a dollar-denominated production payment,
offset in part by the capitalization of approximately $7.4 million of interest
in connection with the acquisition of TransTexas' unevaluated gas and oil
properties.
Cash flow from operating activities for the six months ended January 31,
1996, decreased by approximately $22.2 million from the prior-year period due
primarily to decreased production, offset in part by net proceeds of $32.9
million from the sale of a volumetric production payment.
Cash used in investing activities increased by $31.4 million due to
increases in lease acquisitions and drilling activity, and the purchase and
installation of three amine plants to treat gas produced from certain of
TransTexas' new discovery areas. These increases were offset by cash proceeds
from the sale of a portion of TransTexas' Lodgepole properties and a
sale-leaseback of drilling equipment.
Cash flow from financing activities decreased by approximately $5.2
million due primarily to repayments of TransTexas' dollar-denominated
production payment, offset in part by increases in long-term borrowings.
YEAR ENDED JULY 31, 1995, COMPARED WITH THE YEAR ENDED JULY 31, 1994
Gas, condensate and NGL revenues decreased by $26.9 million, due primarily
to the decline in prices for natural gas, offset in part by increases in NGL
and natural gas production. The average monthly prices received per Mcf of gas
ranged from a low of $1.29 to a high of $1.52 in the year ended July 31, 1995,
compared to a low of $1.71 to a high of $2.21 in fiscal 1994. The increase in
gas sales volumes was due to a net increase in producing wells to 947 at July
31, 1995 from 865 at July 31, 1994. NGL production increased due to increased
volumes of TransTexas' natural gas processed at the Exxon King Ranch Plant.
Transportation revenues for the year ended July 31, 1995, increased by $3.5
million compared to 1994 due primarily to increases in volumes transported.
Lease operating expenses decreased by $0.2 million, primarily as a result
of a decrease in operating materials and supplies expense. The decrease in NGL
cost of $0.4 million reflects the decrease in the cost of natural gas used in
NGL processing, offset in part by increased NGL production. Pipeline operating
expenses decreased by $4.3 million as increases in repair and maintenance
expenses associated with higher volumes transported were offset by a decrease
in compressor fuel costs. Depreciation, depletion and amortization expenses
increased by $16.1 million in the year ended July 31, 1995 over the prior year
due to the increase in natural gas production and a $.01 increase in the
depletion rate. General and administrative expenses decreased by $8.4 million
compared to the prior year due primarily to a $6.0 million decrease in
litigation accruals and a corresponding reduction in legal fees. Litigation
accruals totaled $7.0 million in the year ended July 31, 1995, compared to $13.0
million in 1994.
Interest expense for the year ended July 31, 1995, increased by $16.8
million over the prior year as a result of the increase in principal amount and
interest rate on the TransTexas Notes as compared to the Prior Notes, along
with interest accrued on TransTexas' production payment, short-term borrowings
and certain litigation settlements.
Income tax benefit for the year ended July 31, 1995, is net of a valuation
allowance of $13.6 million relating to net operating loss carryforwards and an
adjustment relating to tight sands credits of $7.8 million. Income tax expense
for the year ended July 31, 1994 includes $5.8 million of tax benefits that
became available as a result of a change in tax status of TransAmerican's
consolidated group to an integrated oil company.
TransTexas recorded an extraordinary loss of approximately $56.6 million,
net of taxes, on the retirement of the Prior Notes. This loss consists of $40.0
million in premium and consent fees paid to the holders of the Prior Notes,
$2.5 million in underwriting fees and expenses and the recognition of
approximately $15.6 million of unamortized deferred financing costs, less a
related income tax benefit of approximately $1.5 million.
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Capital expenditures for the year ended July 31, 1995, increased by $37.2
million to $278.5 million from $241.3 million for the prior year, due primarily
to an increase in lease acquisitions, offset in part by the completion of a
major pipeline expansion project in July 1994.
YEAR ENDED JULY 31, 1994, COMPARED WITH THE YEAR ENDED JULY 31, 1993
Total revenues for the year ended July 31, 1994, increased $10.1 million to
$335.9 million from $325.8 million in 1993. Gas, condensate and NGL sales
increased by $7.8 million, due primarily to increased volumes for natural gas
and condensate, offset by decreases in NGL prices and volumes and decreases in
the prices received for condensate and natural gas. Contributing to the
increased gas sales volumes was a net increase in producing wells to 865 at
July 31, 1994, from 761 at July 31, 1993. The average monthly prices received
per Mcf of gas ranged from a low of $1.71 to a high of $2.21 in the year ended
July 31, 1994 compared to a low of $1.65 to a high of $2.39 in fiscal 1993. The
average price received per gallon of NGL decreased by $0.03 from the prior year
and the resulting decline in volumes of NGLs produced reflects TransTexas'
strategy of reducing NGL production until operating margins for NGL processing
reached more favorable levels. The average price received per barrel of
condensate declined by $3.52 to $15.13 per barrel for the year ended July 31,
1994, from $18.65 in the prior fiscal year. Transportation revenues for the
year ended July 31, 1994 increased by $2.4 million compared to 1993 due
primarily to increases in volumes transported.
Lease operating expenses increased by $4.3 million, primarily as a result
of the increase in the number of producing wells and well workovers. The
decrease in NGL costs of $2.8 million reflects the decline in NGL production
volumes. Pipeline operating expenses increased by $1.2 million due to increases
in fuel costs and repair and maintenance expenses associated with the higher
volumes transported.
Depreciation, depletion and amortization expenses increased by $18.8
million in the year ended July 31, 1994, compared to the prior year due to the
increase in natural gas production and a $0.07 increase in the depletion rate.
General and administrative expenses increased $16.7 million primarily due to
increased legal and professional fees and litigation accruals. General and
administrative expenses for the year ended July 31, 1993, also includes a $2.0
million reduction in legal and professional fees related to a litigation
settlement. Interest expense for the year ended July 31, 1994, increased by
$48.7 million compared to the prior year as a result of interest accrued on
TransTexas' Prior Notes and the amortization of related financing costs.
Income tax expense for fiscal 1994 includes $5.8 million of tax benefits
that became available as a result of the TransAmerican Consolidated Group's
change in tax status to an integrated oil company. The effective tax rate for
the year ended July 31, 1994 was 18.5%, as compared to 15.2% in the prior year.
This increase is primarily attributable to the effect of an increase in the
federal statutory rate, which was partially offset by tight sands credits. Due
to diminishing availability of TransTexas' remaining reserves that are subject
to Section 29 credits, TransTexas believes the effects of these credits will be
less significant in future years.
Capital expenditures for the year ended July 31, 1994, increased $94.1
million to $241.3 million from $147.2 million for the same period in 1993
primarily because of an increase in drilling costs, lease acquisitions, and a
major pipeline expansion.
LIQUIDITY AND CAPITAL RESOURCES
A primary source of funds to meet TransTexas' capital and debt service
requirements is net cash flow provided by operating activities, which is
dependent on the prices TransTexas receives for the volumes of natural gas
TransTexas produces. TransTexas has entered into hedge agreements to reduce a
portion of its exposure to natural gas prices. See Note 16 of Notes to
TransTexas' Consolidated Financial Statements included elsewhere herein.
TransTexas makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. TransTexas has financed
these expenditures primarily with cash from operations, public offerings of
debt and equity securities, the sale of production payments and other
financings. Total capital expenditures in fiscal 1995 were $278 million,
including $134 million for drilling and development, $125 million for lease
acquisitions
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and $17 million for TransTexas' gas gathering and pipeline system and other
equipment. For the six months ended January 31, 1996, TransTexas' total capital
expenditures were approximately $205 million, including approximately $145
million for drilling and development, $31 million for lease acquisitions and $29
million for TransTexas' gas gathering and pipeline system and other equipment.
For the three months ended April 30, 1996, total capital expenditures were $92
million, including $5 million for lease acquisitions, $71 million for drilling
and development and $16 million for TransTexas' gas gathering and pipeline
system and other equipment. Pursuant to the TransTexas Indenture (defined
below), if TransTexas' Working Capital, as defined in the TransTexas Indenture,
is less than $20 million at the end of any fiscal quarter, TransTexas' Capital
Expenditures, as defined, for the next succeeding fiscal quarter may not exceed
90% of TransTexas' Consolidated EBITDA for such prior fiscal quarter minus
TransTexas' Consolidated Fixed Charges for such prior fiscal quarter (the
"Capital Expenditure Limit"). TransTexas' Working Capital at April 30, 1996 was
less than $20 million. As a result, TransTexas' Capital Expenditures for the
quarter ending July 31, 1996 may not exceed the Capital Expenditure Limit.
TransTexas anticipates that such restriction will not have a material effect on
developmental drilling for the current fiscal quarter. In addition, the
TransTexas Indenture permits TransTexas to fund the drilling of up to 30 wells
in any fiscal year pursuant to third-party drilling programs. Any costs
associated with these wells would not be included in Capital Expenditures.
TransTexas anticipates total capital expenditures of approximately $210
million in each of fiscal 1997 and fiscal 1998, subject to TransTexas Indenture
requirements and available cash flow, of which approximately $175 million will
be used for drilling and development, $15 million for lease acquisitions and
$20 million for TransTexas' gas gathering and pipeline system (including
pipeline expansion into the La Grulla development area) and other equipment. If
revenues decrease, certain contingent obligations of TransTexas become fixed or
TransTexas' level of capital expenditures remains limited by the TransTexas
Indenture, TransTexas may not have sufficient funds for, or may be restricted
in maintaining the level of, capital expenditures necessary to replace its
reserves or to maintain production at current levels and, as a result,
production may decrease over time. Although cash from operating activities for
the three months ended April 30, 1996 has increased, net cash provided by
operating activities declined over the three and one-half years ended January
31, 1996. No assurance can be given that TransTexas' cash flow from operating
activities will be sufficient to meet planned capital expenditures, contingent
liabilities and debt service in the future. Since July 31, 1995, TransTexas has
utilized asset sales and various financings, in addition to cash flow from
operating activities, to meet its working capital requirements. TransTexas
anticipates that it will utilize additional financing or sales of assets to
fund planned levels of operations and to meet its obligations, including its
obligations under the TransTexas Indenture, through January 1997.
In October 1995, TransTexas sold an undivided portion of its leases in the
Lodgepole Prospect in North Dakota to TransDakota Oil Corporation, a subsidiary
of TransAmerican ("TDOC"), for approximately $16.0 million. The $16.0 million
sales price represents TransTexas' cost for this portion of these leases. The
remaining portion of these leases, with a cost of approximately $15 million,
are held for sale to third parties, and a portion, with a cost of $6 million,
is subject to a contract with a third party.
In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
TransTexas in a legal proceeding. Prior to this transaction, the supersedeas
bond had been collateralized by other letters of credit. These letters of
credit were collateralized by $20 million in cash, which has been released to
TransTexas. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days.
In January and February 1996, TransTexas completed both a financing and a
sale-leaseback transaction, each in the amount of $3 million, related to its
operating equipment. Both the financing, which has an interest rate of 9 1/2%
per annum, and the sale-leaseback transaction, which has a monthly lease
payment of approximately $56,400, have a 36-month term. In February 1996,
TransTexas completed an additional financing collateralized by its operating
equipment in the amount of $10 million at an interest rate of 12 1/2% per annum
and a 36-month term.
In May 1996, TransTexas entered into a Note Purchase Agreement pursuant to
which TransTexas issued notes in the aggregate principal amount of $15.75
million for aggregate proceeds of $15 million. The notes, which bore interest
at 13 1/3% per annum, were paid in full in July 1996. The notes were guaranteed
on a senior secured basis by TransAmerican.
In May 1996, TransTexas entered into an agreement with one of its swap
counter parties as a result of which TransTexas, subject to compliance with
certain collateral coverage tests, will not be required to make cash margin
deposits with respect to the swaps covered by such agreement. See Note 16 to
TransTexas' Consolidated Financial Statements.
In January 1996, TransTexas sold to an unaffiliated third party a term
overriding royalty interest in the form of a production payment carved out of
its interests in certain of its producing properties. For net proceeds of
approximately $33 million, TransTexas conveyed to the third party a term
overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional net
proceeds of approximately $15.5 million, TransTexas supplemented the production
payment to subject a percentage of its interests in certain additional
producing properties to the production payment
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and to include additional volumes of approximately 14 Bcf of natural gas within
the base volume subject to the production payment.
In May 1996, TransTexas sold to two unaffiliated third parties a volumetric
production payment for net proceeds of approximately $43 million. TransTexas
conveyed to the third parties a term overriding royalty equivalent to a base
volume of approximately 37 Bcf of natural gas, subject to certain increases in
the base volume and in the percentage interest dedicated if certain minimum
performance and delivery requirements are not met. Concurrently with the closing
of that transaction, TransTexas and one of the affiliated third parties
terminated, prior to the expiration of its stated term, a dollar-denominated
term overriding royalty interest previously sold by TransTexas to that
unaffiliated third party for a payment by TransTexas of approximately $25
million. As a result of such termination, the remaining base volume from the
previously sold overriding royalty interest was conveyed to TransTexas.
In March 1996, TransTexas sold its 41.67% interest in the 76-mile, 24-inch
MidCon Texas pipeline that runs from TransTexas' Thompsonville compressor
station to Agua Dulce for $7.5 million. TransTexas believes that its existing
transportation capacity in this area is adequate for TransTexas' production and
does not anticipate any material constraints on the transportation of its
natural gas as a result of this sale.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified TransTexas for substantially all of TransTexas' liability in
connection with the settlement of the Terry/Penrod litigation (see Note 14 to
TransTexas' consolidated financial statements). In order to facilitate the
settlement, TransTexas advanced to TransAmerican $16.4 million of the
settlement in exchange for a note receivable. The note is due in installments
and partially collateralized by certain of TransAmerican's oil and gas
properties. In connection with the litigation settlement, TransTexas received
from Terry the reversionary interest in certain producing properties.
TransTexas and TransAmerican had intended that such interests would revert to
TransAmerican under the Transfer Agreement. TransTexas and TransAmerican have
agreed in principle that TransTexas will retain such interests in partial
satisfaction of TransAmerican's indemnity obligations.
TransTexas has engaged an investment banking firm to assist in the
potential sale or sale/leaseback of all or a portion of the Pipeline System,
without disrupting the pipeline capacity available to TransTexas. TransTexas
has also engaged an investment banking firm to assist in the sale of its
interest in the Lodgepole area and three separate packages of producing
properties in the Lobo Trend containing a total of approximately 200 Bcfe of
natural gas reserves.
In July 1996, TransTexas consummated the sale, effective as of May 1, 1996,
of one of these property packages in Zapata County, Texas for consideration of
approximately $62 million. TransTexas has entered in to a purchase and sale
agreement pursuant to which it intends to sell, effective as of February 1,
1996, a second set of properties in Webb County, Texas for consideration of
approximately $23 million. TransTexas anticipates consummating such sale in
August 1996 if certain closing conditions, including the receipt of a favorable
appraisal, are met. In May 1996, TransTexas consummated the sale, effective as
of February 1, 1996, of certain other producing properties in Webb County, Texas
for consideration of approximately $9.95 million. The purchase price for each of
the properties discussed above was or is subject to adjustment for gas sales
between the effective date and the closing date. TransTexas retained or will
retain the proceeds of all such gas sales.
TransTexas currently has a $40 million credit facility with BNY Financial
Corporation (the "BNY Facility") pursuant to which it may borrow funds based on
the amount of its accounts receivable. At April 30, 1996, the outstanding
balance under the BNY Facility was $20.7 million. TransTexas does not
anticipate that it will be able to borrow more than $26 million under the BNY
Facility during fiscal 1997, based on the expected amount of its accounts
receivable. The BNY Facility requires TransTexas to maintain certain financial
ratios and includes certain covenants. Under the terms of the BNY Facility,
TransTexas' net loss (including any extraordinary losses) may not exceed $5
million for each fiscal quarter ending after January 31, 1996 ($10 million
for each six-month period). TransTexas obtained a waiver for the
three-month period ended January 31, 1996.
Pursuant to the indenture governing the TransTexas Notes (the "TransTexas
Indenture"), TransTexas maintains an account (the "Interest Reserve Account")
from which funds may only be disbursed in accordance with the terms of a Cash
Collateral and Disbursement Agreement (the "Disbursement Agreement"). TransTexas
has deposited into the Interest Reserve Account funds sufficient to pay the
aggregate amount of the next ensuing interest payment due in respect of the
TransTexas Notes. Funds in the Interest Reserve Account may be invested, at the
direction of TransTexas (except as provided below), only in cash and Cash
Equivalents as defined in the Disbursement Agreement, and any interest income
thereon will be added to the balance of the Interest Reserve Account. TransTexas
must maintain a balance (the "Requisite Balance") in the Interest Reserve
Account at least equal to the amount necessary to satisfy TransTexas' obligation
to pay interest in respect of all then outstanding TransTexas Notes on the next
Interest Payment Date; provided, however, that if, pursuant to the Disbursement
Agreement, any funds in the Interest Reserve Account are applied to the payment
of interest on the TransTexas Notes, TransTexas shall not be obligated to
maintain the Requisite Balance during the period of 60 days immediately
following the Interest Payment Date in respect of which such payment was made.
TransTexas may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date,
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement provides that if TransTexas fails to pay an installment of interest
on the Notes on any Interest Payment Date, then all investments in the Interest
Reserve Account will be immediately liquidated and all funds in the Interest
Reserve Account will be deposited with the Indenture Trustee. If TransTexas has
not paid such installment of interest within five days after such Interest
Payment Date, or if TransTexas so instructs the Indenture
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Trustee, the Indenture Trustee will apply such deposited funds to the payment
of interest on the TransTexas Notes. The Disbursement Agreement provides that
funds may be disbursed from the Interest Reserve Account and released to
TransTexas only to the extent that the balance thereof exceeds the Requisite
Balance.
DECONSOLIDATION FOR FEDERAL INCOME TAX PURPOSES
Under certain circumstances, TransAmerican, TDOC, TEC, or the Company may
sell or otherwise dispose of shares of common stock of TransTexas. If, as a
result of any sale or other disposition of TransTexas' common stock, the direct
and indirect ownership of TransTexas by TransAmerican is less than 80%
(measured by voting power and value), TransTexas will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the "TransAmerican
Consolidated Group") and, with certain exceptions, will no longer be obligated
under the terms and conditions of the Tax Allocation Agreement (as defined
below) ("Deconsolidation"). Further, if TEC or the Company sells or otherwise
transfers any stock of the Company, or issues any options, warrants or other
similar rights relating to such stock, outside of the TransAmerican
Consolidated Group, then a Deconsolidation of both the Company and TransTexas
from the TransAmerican Consolidated Group would occur. For the taxable year
during which Deconsolidation of TransTexas occurs, which would also be the
final year that TransTexas is a member of the TransAmerican Consolidated Group,
TransAmerican would recognize a previously deferred gain of approximately
$266.3 million associated with the Transfer and would be required to pay
federal income tax on this gain (the tax is estimated to be between $29 million
and $56 million if Deconsolidation occurs in fiscal 1997 and between $24
million and $45 million if Deconsolidation occurs in fiscal 1998). This
analysis is based on TransTexas' position that the gain from the Transfer,
which occurred in 1993, was deferred under the consolidated return regulations.
The deferred gain generally is being included in TransAmerican's taxable income
in a manner that corresponds (as to timing and amount) with the realization by
TransTexas of (and, thus, will be offset by) the tax benefits (i.e., additional
depreciation, depletion and amortization on, or reduced gain or increased loss
from a sale of, the transferred assets) arising from the additional basis. If,
under the terms of the Notes, it was reasonably certain when the Notes were
issued that a sufficient amount of TransTexas' stock would be disposed in the
future to cause a Deconsolidation of TransTexas from the TransAmerican
Consolidated Group, it is possible that the Deconsolidation of TransTexas would
be treated as occurring as of the date the Notes were issued. However, the
Company has advised TransTexas that it believes that when the Notes were
issued, it was not reasonably certain that a Deconsolidation of TransTexas
would occur in the future. Under the Tax Allocation Agreement, TransTexas is
required to pay TransAmerican each year an amount equal to the lesser of (i)
the reduction in taxes paid by TransTexas for such year as a result of any
increase in the tax basis of assets acquired by TransTexas from TransAmerican
that is attributable to the Transfer and (ii) the increase in taxes paid by
TransAmerican for such year and all prior years attributable to gain recognized
by TransAmerican in connection with the contribution of assets by TransAmerican
to TransTexas (less certain amounts paid by TransTexas for all prior years).
TransTexas estimates that if Deconsolidation occurs in fiscal 1997 or 1998, the
amount reimbursed to TransAmerican would be between $9 million and $16 million
and between $7 million and $13 million, respectively. The remaining amount of
the tax relating to the gain would be paid over the lives of the assets
transferred. In addition, TransTexas could be liable for additional taxes
pursuant to the Tax Allocation Agreement and the several liability provisions
of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TransAmerican Consolidated Group,
then TransTexas is entitled to the benefit (through reduced current tax payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TransAmerican Consolidated Group, and the other group
members have the ability to pay such taxes. If the Company, TEC or TDOC
transfers shares of TransTexas (or transfers options or other rights to acquire
such shares) and, as a result of such transfer, Deconsolidation of TransTexas
occurs, TransTexas would not receive any benefit pursuant to the Tax
Allocation Agreement for net operating losses of TransTexas used by other
members of the TransAmerican Consolidated Group prior to the deconsolidation of
TransTexas.
Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the Internal Revenue Service (the "IRS") for
the consolidated federal income tax liability of the consolidated group.
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There can be no assurance that TransAmerican will have the ability to satisfy
the above tax obligation at the time due and, therefore, TransTexas, TEC or the
Company may be required to pay the tax.
Under the Tax Allocation Agreement, TransTexas will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including
liabilities with respect to litigation matters, indemnification obligations
relating to certain tax benefit transfer sale-leaseback transactions, and
other obligations assumed in the Transfer. These matters, individually and in
the aggregate, amount to significant potential liability which, if adjudicated
in a manner adverse to TransTexas in one reporting period, could have a
material adverse effect on TransTexas' cash flows or results of operations for
that period. Although the outcome of these lawsuits cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position. TransTexas has delivered letters of credit
and placed into escrow cash, which letters of credit and cash total
approximately $50 million, to be applied to certain potential litigation
claims. In addition, a change of control or other event that results in
deconsolidation of TransTexas and TransAmerican for federal income tax
purposes could also result in acceleration of a substantial amount of federal
income taxes. See Note 10 of Notes to TransTexas' Consolidated Financial
Statements included elsewhere herein.
INFLATION AND CHANGES IN PRICES
TransTexas' results of operations and the value of its gas properties are
highly dependent upon the prices received for TransTexas' natural gas and NGLs.
Substantially all of TransTexas' sales of natural gas are made in the spot
market, or pursuant to contracts based on spot market prices, and not pursuant
to long-term, fixed-price contracts. Accordingly, the prices received by
TransTexas for its natural gas production are dependent upon numerous factors
beyond the control of TransTexas, including the level of consumer product
demand, the North American supply of natural gas, government regulations and
taxes, the price and availability of alternative fuels, the level of foreign
imports of oil and natural gas, and the overall economic environment. Demand
for natural gas is seasonal, with demand typically higher during the summer and
winter, and lower during the spring and fall, with concomitant changes in
price.
Any significant decline in current prices for natural gas and NGLs could
have a material adverse effect on TransTexas' financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Based
on current levels of production and certain hedge agreements, TransTexas
estimates that a $0.10 per MMBtu change in average gas prices received would
change annual operating income by approximately $8 million. TransTexas' ability
to obtain additional capital on attractive terms is also substantially
dependent on gas prices. Although certain of TransTexas' costs and expenses are
affected by the level of inflation, inflation has not had a significant effect
on TransTexas' results of operations during the Transition Period.
HEDGING
Beginning in April 1995, TransTexas entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either
TransTexas or the counter party thereto is required to make a payment to the
other at the end of each month (the "Settlement Date"). The payments will equal
the product of a notional quantity ("Base Quantity") of natural gas and the
difference between a specified fixed price ("Fixed Price") and a market price
("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for TransTexas to make
payments to the counter party to the extent that the Floating Price exceeds the
Fixed Price, up to a maximum ("Maximum Floating Price") and for the counter
party to make payments to TransTexas to the extent that the Floating Price is
less than the Fixed Price. For the Transition Period, TransTexas made net
settlement payments totaling approximately $5.4 million to the counter
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party pursuant to the Hedge Agreements. As of April 30, 1996, TransTexas has
Hedge Agreements with Settlement Dates ranging from May 1996 through April 1997
involving total Base Quantities for all monthly periods of approximately 73.0
TBtu of natural gas. Fixed Prices for these agreements range from $1.70 to $1.72
per MMBtu ($1.76 to $1.78 per Mcf) up to a Maximum Floating Price of $2.20 per
MMBtu ($2.28 per Mcf). At April 30, 1996, the estimated cost to settle these
Hedge Agreements would have been approximately $31.1 million. These agreements
are accounted for as hedges and accordingly, any gains or losses are deferred
and recognized in the month the physical volumes are delivered. At April 30,
1996, TransTexas maintained $13.9 million in margin accounts related to the
Hedge Agreements. TransTexas may be required to post additional cash margin
whenever the daily natural gas futures prices as reported on the NYMEX, for each
of the months in which the swap agreements are in place, exceed the Fixed Price.
The maximum margin call under each Hedge Agreement will never exceed the product
of the Base Quantity for the remaining months under such Hedge Agreement
multiplied by the difference between the Maximum Floating Price and the Fixed
Price.
In June 1996, TransTexas entered into a Master Swap Agreement (the "Master
Swap Agreement") with one of its counter parties, which replaced a previously
existing master agreement governing swap agreements between the two parties.
TransTexas' obligations under the Master Swap Agreement are collateralized by a
mortgage on a substantial portion of TransTexas' producing properties. In
accordance with the TransTexas Indenture, the lien created by the mortgage
collateralizes obligations up to a maximum of $80.8 million (10% of the SEC PV10
of TransTexas' most recent reserve report). As contemplated by the TransTexas
Indenture, the Trustee under the TransTexas Indenture has subordinated the lien
collateralizing the TransTexas Notes outstanding thereunder to the lien
collateralizing TransTexas' obligations under the Master Swap Agreement. The
maximum amount of obligations of TransTexas that could be collateralized by the
mortgage, based on the swap agreements in place under the Master Swap Agreement
as of July 1, 1996, is approximately $10 million. Subject to compliance with
certain collateral coverage tests, TransTexas is not required to provide
additional cash margin for any swap agreements now or thereafter subject to the
Master Swap Agreement.
POTENTIAL EFFECTS OF CHANGE OF CONTROL
The TransTexas Indenture provides that, upon the occurrence of a Change of
Control (as such term is defined in the TransTexas Indenture), each holder of
the TransTexas Notes will have the right to require TransTexas to repurchase
such holder's TransTexas Notes at 101% of the principal amount thereof plus
accrued and unpaid interest. As used in the TransTexas Indenture, "Change of
Control" means (i) any sale, transfer, or other conveyance, whether direct or
indirect, of all or substantially all of the assets of TransTexas, on a
consolidated basis, to any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), other than to or among TransTexas' Wholly Owned Subsidiaries or the
trustee under the Indenture, whether in a single transaction or a series of
related transactions, unless, immediately after such transaction, John R.
Stanley has, directly or indirectly, in the aggregate, sole beneficial ownership
of more than 50%, on a fully diluted basis, of the total voting power entitled
to vote in the election of directors, managers, or trustees of the transferee,
(ii) the liquidation or dissolution of the Company, or (iii) any transaction,
event or circumstance pursuant to which any "person" or "group" (as such terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether
or not applicable), other than John R. Stanley and his Wholly Owned Subsidiaries
or the trustee under the Indenture, is or becomes the "beneficial owner" (as
that terms is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or
not applicable, except that a person shall be deemed to be the "beneficial
owner" of all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of TransTexas' then
outstanding Voting Stock, unless, at the time of the occurrence of an event
specified in clauses (i), (ii) or (iii), the TransTexas Notes, issued under the
TransTexas Indenture have an Investment Grade Rating (as defined); provided,
however, that if, at any time within 120 days after such occurrence, the
TransTexas Notes cease having an Investment Grade Rating, such event would
constitute a "Change of Control." The term "person," as used in the definition
of Change of Control, means a natural person, company, government or political
subdivision, agency or instrumentality of a government and also includes a
"group," which is defined as two or more persons acting as a partnership,
limited partnership or other group. In addition, certain changes or other events
in respect of the ownership or control of TransTexas that do not constitute a
Change of Control under the TransTexas Indenture may result in a "change of
control" of TransTexas under the terms of the BNY Facility and certain equipment
financing, which may create an obligation for TransTexas to repay such other
indebtedness. At April 30, 1996, TransTexas had approximately $30.2 million of
indebtedness (excluding the TransTexas Notes) subject to such right of repayment
or repurchase. In the event of a Change of Control under the TransTexas
Indenture or a "change of control" under the terms of other outstanding
indebtedness, there can be no assurance that TransTexas will have sufficient
funds to satisfy any such payment obligations.
In February 1995, the Company issued the Notes that were initially
collateralized by, among other things, 55 million shares of TransTexas common
stock. A foreclosure on the shares that have been pledged to secure the
Notes would constitute a "change of control" of TransTexas under the BNY
Facility, which may create an obligation for TransTexas to repay such
indebtedness, but would not constitute a Change of Control under the TransTexas
Indenture. The Company is engaged in a two-phase capital improvement program
designed to reactivate its refinery and increase its complexity. In March 1996,
the Company sold 4.55 million shares of TransTexas common stock to provide
additional financing for the Capital Improvement Program. Giving effect to
current estimates and the sale of TransTexas stock in March 1996, the Company
will require additional financing of $374 million to $379 million to complete
the Capital Improvement Program. The Company has advised TransTexas that if
this financing is not available on a timely basis, or if significant
engineering problems, cost overruns or delays occur, the Company likely will
not be able to complete the first phase of the Capital Improvement Program by
February 15, 1997. Under the Indenture, the failure of the Company to complete
the first phase of its Capital Improvement Program by February 15, 1997
(subject to extension to August 15, 1997 if certain financial coverage ratios
are met) would constitute an event of default at such date. Any such event of
default could result in the sale, following the occurrence of such event of
default, of some or all of the remaining 50.45 million shares of TransTexas
common stock owned by TEC and the Company that are pledged to secure their
obligations under the Notes. A foreclosure on the shares of Common Stock that
have been pledged to secure the Notes would constitute a "change of control" of
TransTexas under the BNY Facility and certain equipment financing, which may
create an obligation for TransTexas to repay amounts outstanding thereunder. A
sale of such shares following a foreclosure might also result in a Change of
Control under the TransTexas Indenture.
40
<PAGE> 43
BUSINESS OF THE COMPANY
GENERAL
TransAmerican Refining Corporation was formed in 1987 to hold and
eventually to operate the refinery assets of TransAmerican and is engaged in the
refining and storage of crude oil and petroleum products. The Company owns and
operates a large petroleum refinery strategically located in the Gulf Coast
region along the Mississippi River, approximately 20 miles from New Orleans,
Louisiana. The Company's predecessor corporation, TransAmerican, acquired the
refining facility in 1971 and, between 1978 and 1983, invested approximately
$900 million in capital improvements to expand capacity and increase refining
complexity. In January 1983, financial difficulties prevented TransAmerican from
completing certain units of the refinery and forced a shutdown of operations.
From 1983 to August 1993, TransAmerican and the Company spent approximately $125
million on maintenance and capital expenditures at the refinery.
The Company's business strategy is to maximize refining margins by
converting low-cost, heavy, sour crude oils into high-value, light petroleum
products including gasoline and heating oil. The Company is engaged in a
construction and expansion program (the "Capital Improvement Program"), which is
designed to reactivate the refinery and increase its complexity. The Company has
engaged a number of specialty consultants and engineering and construction firms
to assist the Company in completing the individual projects that comprise the
Capital Improvement Program. Phase I of the Capital Improvement Program includes
the completion and start-up of the major conversion units, including a fluid
catalytic cracking unit and a delayed coking unit. The Company estimates,
subject to obtaining adequate financing on a timely basis, that Phase I will be
completed by February 1997, and will result in the refinery having the capacity
to process 170,000 to 200,000 BPD of medium to light, sour crude oil. Phase II
includes the installation of additional equipment expected to further improve
refinery economics. The Company estimates, subject to obtaining adequate
financing on a timely basis, that Phase II will be completed by February 1998,
and will result in the refinery having the capability to process 200,000 BPD of
heavy, sour crude oil. Upon successful completion of the Capital Improvement
Program, the Company will own and operate one of the largest independent
refineries in the Gulf Coast region, with a replacement cost estimated by
management to be over $1.5 billion. The completed refinery is projected to have
a complexity rating of approximately 11, which is substantially above the
current United States average of 9.4. The Company is required under the
Indenture to complete Phase I by February 1997. The foregoing estimates, as well
as other estimates and projections herein, are subject to substantial revision
upon the occurrence of future events, such as unavailability of financing,
engineering problems, work stoppages and cost overruns over which the Company
may not have any control, and there can be no assurance that any such
projections or estimates will prove accurate.
Total U.S. refining capacity is near to its lowest point in 18 years as
many small, low-complexity refineries have ceased operations. Over the same
period, demand for refined products has increased. As a result, capacity
utilization increased to approximately 91.9% in 1995, from approximately 77.6%
in 1985, reflecting the increase in demand for refined products. The refinery
utilization rate is a key determinant of refining profitability. Management of
the Company believes that over the next several years domestic demand for
refined products will increase while refining capacity should continue at
current levels, causing United States refining utilization rates to remain high.
In addition, management of the Company believes that increased foreign demand,
particularly in the Far East, combined with more stringent domestic product
specifications, should limit the availability of imported refined products.
Management believes that these factors, together with relatively low prices
expected by it for heavy, sour crude oil, should have a positive effect on the
Company's refining margins.
41
<PAGE> 44
DOMESTIC REFINING CAPACITY
UTILIZATION RATES, AND DEMAND FOR REFINED PRODUCTS
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capacity (MMBPD) 15.7 15.5 15.6 15.9 15.6 15.6 15.7 15.7 15.1 15.2 15.4
Utilization 77.6% 82.9% 83.2% 84.7% 86.6% 87.1% 86.0% 87.9% 91.5% 92.6% 91.9%
Demand for refined products
(MMBPD) 15.7 16.3 16.7 17.3 17.3 17.0 16.7 17.0 17.2 17.7 17.7
</TABLE>
- ---------
Source: Energy Information Administration
BACKGROUND OF THE REFINERY
Operations at the Company's refining site originally began in 1967 with
the installation of a 7,000 BPD "topping" facility to process light crude and
condensate available in South Louisiana. A few years later, a 4,000 BPD naphtha
reformer was added and crude processing capacity was increased to 10,000 BPD of
light, sweet crude. In 1971, TransAmerican purchased the refinery and over the
next eight years expanded it to 100,000 BPD of medium, sour crude capacity, and
added significant additional downstream processing. In 1979, TransAmerican
began an expansion and modernization program in response to a need for
additional United States refining capacity. This program was designed to permit
the refinery to process up to 300,000 BPD of heavy, sour crude oil into a high
proportion of high-value, light petroleum products.
In 1982, high oil prices and a general economic recession led to reduced
product demand and a large surplus of refining capacity, which in turn caused a
significant drop in refining margins. In addition, TransAmerican's cash flow
was adversely affected by reduced sales to natural gas customers due to
proration and by the interest expense on its floating rate debt which exceeded
20%. As a result, in January 1983, before completion of the construction
program and after expenditures of over $900 million, these financial
difficulties prevented completion of a delayed coking unit and certain other
units of the refinery necessary to process heavy, sour crude oil, and forced a
shutdown of operations.
CURRENT OPERATIONS
From August 1993 through April 1996, TransAmerican and the Company spent
approximately $259 million to reactivate and operate the Company's refinery. In
March 1994, the Company commenced partial operations at the refinery with the
start up of the No. 2 Vacuum Unit. This unit has been operating intermittently
based on Vacuum Unit economics. Modifications and tie-ins to the No. 2 Crude
Unit have been completed, however it has not been activated due to low, crude
topping margins. From time to time, the Company may suspend operations of
either or both units because of working capital constraints or operating
margins.
The following is a brief description of the Company's vacuum unit and
crude unit:
No. 2 Vacuum Unit. The No. 2 Vacuum Unit, one of the world's largest of
its kind, has demonstrated a capacity in excess of 200,000 BPD. The Company
reactivated the No. 2 Vacuum Unit in March 1994. The No. 2 Vacuum Unit is
designed to process atmospheric tower bottoms into vacuum gas oil ("VGO") and,
with the addition of cutterstocks, into No. 6 residual fuel oil. When the No. 2
Crude Unit is placed into operation, the No. 2 Vacuum Unit will process bottoms
from the No. 2 Crude Unit. Upon completion of Phase I, VGO is expected to be
upgraded in the Fluid Catalytic Cracking Unit to gasoline and No. 2 fuel oil.
When the Delayed Coking Unit is complete, the No. 2 Vacuum Unit tower bottoms
are expected to be processed through the Delayed Coking Unit into lighter, more
valuable products.
No. 2 Crude Unit. This unit was operated for approximately three months
prior to the 1983 shutdown. It demonstrated a capacity of 175,000 BPD using
sweet crude oil and was designed to process as much as
42
<PAGE> 45
200,000 BPD of heavy, sour crude oil. The No. 2 Crude Unit is expected to
process a mix of sweet and sour crude oils into naphtha, kerosene, No. 2 fuel
oil, atmospheric gas oil and atmospheric tower bottoms.
CAPITAL IMPROVEMENT PROGRAM
The Capital Improvement Program, designed to increase the capacity and
complexity of the refinery, is currently scheduled to be completed and tested by
February 1997 for Phase I and February 1998 for Phase II. The most significant
projects include: (i) completion of a delayed coking unit to process vacuum
tower bottoms into lighter petroleum products, (ii) reactivation and revamp of a
fluid catalytic cracking unit to increase gasoline production capacity, (iii)
upgrading and expanding existing hydrotreating and desulfurization units to
increase sour crude processing capacity, and (iv) reactivation and expansion of
the MTBE Unit. In addition, the Company plans to expand, modify, and add other
processing units, tankage, and offsite facilities as part of the Capital
Improvement Program. The Capital Improvement Program includes expenditures
necessary to ensure that the refinery is in compliance with certain existing air
and water discharge regulations and that gasoline produced will comply with
federal standards. The Company has engaged a number of specialty consultants and
engineering and construction firms to assist the Company in completing the
individual projects that comprise the Capital Improvement Program. Each of these
firms was selected because of its specialized expertise in a particular process
or unit integral to the Capital Improvement Program.
Pursuant to a cash collateral and disbursement agreement (the
"Disbursement Agreement") among the Indenture Trustee, First Union
National Bank, as disbursement agent (the "Disbursement Agent"), and Baker &
O'Brien, Inc., as construction supervisor (the "Construction Supervisor"), $173
million of the net proceeds from the sale of the Notes pursuant to the 1995
Offering was placed in an account (the "Collateral Account"), held and invested
by the Disbursement Agent until needed from time to time to fund the Capital
Improvement Program. In addition, the Company is required to deposit the first
$50 million of proceeds from a Revolving Credit Facility in the Collateral
Account if the Company obtains such facility. The Disbursement Agent invests
the assets of the Collateral Account in cash, Cash Equivalents and Marketable
Securities. Interest income, if any, earned on the invested proceeds will be
added to the balance of the Collateral Account. The Disbursement Agent
disburses funds from the Collateral Account only upon satisfaction of the
disbursement conditions set forth in the Disbursement Agreement. All funds in
the Collateral Account are pledged as security for the repayment of the Notes.
The Disbursement Agent makes disbursements out of the Collateral
Account in accordance with a budget prepared by the Company and approved by the
Construction Supervisor. The budget consists of an itemized schedule setting
forth on a line item basis the additional expenditures estimated to be incurred
in connection with the Capital Improvement Program, the total cost of which may
not exceed $434 million, subject to certain exceptions. See "Business of the
Company -- Capital Improvement Program." The Company may amend the budget only
with the approval of the Construction Supervisor. The Construction Supervisor
will approve an amended budget if it satisfies all of the requirements of the
original budget or certain other conditions are satisfied. If the Capital
Improvement Program runs over budget, the Disbursement Agreement gives priority
to expenditures for Phase I.
Under the Disbursement Agreement, the Construction Supervisor is
responsible for review and approval of the Company's plans and specifications
and budget for the Capital Improvement Program. The Construction Supervisor is
required to perform weekly inspections of the Company's refinery and to advise
the Disbursement Agent and the Indenture Trustee on the progress of the Capital
Improvement Program. In addition, the Construction Supervisor is required to
review each request by the Company for a disbursement from the Collateral
Account to pay for the Capital Improvement Program. No disbursements may be
made from the Collateral Account to fund the Capital Improvement Program unless
the Construction Supervisor determines (i) that the disbursement has been
requested to pay for expenses that are in accordance with the plans and
specifications approved by the Construction Supervisor, (ii) that the expense
for which a disbursement has been requested does not exceed the amount for such
item as set forth in the budget approved by the Construction Supervisor, and
(iii) that transactions for which a disbursement has been requested were made
on an arm's length basis, as represented by the Company.
The Company plans to complete the Capital Improvement Program in two
phases as described below:
PHASE I
Phase I is expected to be completed and tested in February 1997, subject to
timely availability of financing. See "Additional Financing and Working Capital
Requirements." This expectation is based upon the Company's procurement and
fabrication, in various stages, of major critical path equipment, the progress
of onsite construction work on critical path items such as foundations and
underground piping, and engineering progress on all parts of the project. In
addition, the Company believes there is a large supply of experienced
construction labor available, and the involvement of major international
contractors for construction management and execution will provide both a high
level of expertise and quality field supervision. The Company estimates that
additional expenditures of between $264 million and $269 million will be
required to complete Phase I. Phase I will involve completion or reactivation of
a delayed coking unit, a naphtha pretreater, a catalytic reformer, a vacuum gas
oil hydrodesulfurization unit, a fluid catalytic cracking unit, an alkylation
plant, an MTBE unit and sulfur recovery facilities. The Company anticipates that
following completion of Phase I, it will be processing low-cost, sour crude oil
in combination with sweet crude oil and atmospheric tower bottoms. Products from
this phase are expected to include all the products produced prior to Phase I
plus conventional gasoline and petroleum coke. The Company must raise between
$264 million and $269 million of additional capital to complete Phase I. The
following is a description of the units and offsite facilities that are
scheduled to be added or improved during Phase I and the Company's plans and
expectations therefor:
Delayed Coking Unit. The Company's visbreaking unit was originally
designed for conversion to a delayed coking unit. The major new equipment
needed for this conversion are coke drums, coke cutting equipment, coke
handling facilities and upgrades to the heaters. All major equipment has been
purchased and delivered to the refinery. Fluor-Daniel is providing
construction management and INDTECH, Inc. is the prime engineering contractor.
The Delayed Coking Unit is being designed to process approximately 60,000 BPD
of vacuum tower bottoms produced from the No. 2 Vacuum Unit. Intermediate
product streams will include light gas, naphtha, coker distillate and coker gas
oil. These products can all be upgraded further by the Company's refinery or
sold to other refiners for upgrading. Petroleum coke will be sold on the
Company's behalf by a company specializing in this area.
Naphtha Pretreater. The Company has purchased a used naphtha pretreater,
which it will re-erect at the refinery, to produce desulfurized naphtha for
processing by the No. 2 Reformer. James & Luther, Inc. has completed the
dismantling of the Naphtha Pretreater and the relocation of the Naphtha
Pretreater to the refinery. The feedstock for the Naphtha Pretreater will be
naphtha produced by the No. 2 Crude Unit and the Delayed Coking Unit. The
Naphtha Pretreater will be designed to treat up to 20,000 BPD of naphtha
feedstock.
No. 2 Reformer. Desulfurized heavy naphtha will be processed in the No. 2
Reformer to raise its octane level to that suitable for gasoline blending. The
No. 2 Reformer was purchased by the Company's predecessor and relocated to the
refinery during the 1980s expansion. Although the unit did not operate at the
refinery prior to the
43
<PAGE> 46
shutdown, the previous owner operated it successfully at its design capacity of
12,000 BPD. PCI Engineers, Inc. ("PCI") is performing the engineering design.
This unit will provide a portion of the hydrogen required for operation of the
HDS units. The primary product from the No. 2 Reformer will be high octane
reformate for gasoline production.
Hydrodesulfurization (HDS) Unit -- VGO. In the early 1980s, the Company's
predecessor designed and built a two-train distillate HDS unit with a common
fractionation section. Each train of the HDS Unit has the capacity to treat
30,000 BPD. Neither train was placed in service, but both were approximately
85% mechanically complete at the time of the 1983 shutdown. With the revision
for the MSCC (as defined below) technology, the Company will modify and
activate both trains to desulfurize 60,000 BPD of VGO after Phase II. PCI is
performing the detailed engineering design.
Fluid Catalytic Cracking (FCC) Unit. The Company's FCC Unit will process
gas oil feedstocks directly from the No. 2 Crude Unit, the No. 2 Vacuum Unit,
the Delayed Coking Unit or from outside purchases of VGO. Before being fed to
the FCC Unit, a portion of the VGO will be desulfurized in the HDS Unit in
order to meet environmental guidelines and improve product quality from the FCC
Unit. The FCC Unit previously demonstrated a sustained capacity of 82,000 BPD.
The Company signed a contract with UOP to provide the engineering design for
the new Milli-Second Catalytic Cracking ("MSCC") technology. This technology,
which was successfully employed in The Coastal Corporation's Eagle Point
Refinery, will expand the FCC Unit's capacity to 100,000 BPD. The Company
selected Raytheon Engineers and Constructors ("Raytheon") to provide the
mechanical design and construction management services for the FCC Unit. New
equipment required to upgrade the FCC Unit has been ordered and is presently
undergoing fabrication. The FCC Unit produces refinery fuel, propane, butane,
light olefins, gasoline blendstock, No. 2 fuel oil and a residual product
(decant/slurry oil). Light olefins will be processed in the refinery's MTBE
unit with the remainder going to the Alkylation Unit for further upgrade. Other
materials will be blended to finished products or consumed in the refinery.
FCC Upgrades. The Company has selected Belco Technologies Corporation to
supply the FCC Unit flue gas scrubbing equipment.
Alkylation Unit. Light olefins from the FCC Unit and Delayed Coking Unit
are expected to be converted to high octane gasoline blendstock (alkylate) in
the Alkylation Unit. Alkylate is a relatively clean burning fuel component
important in the production of environmentally sensitive gasolines. The
Alkylation Unit will be reactivated and expanded to a capacity of approximately
25,000 BPD of alkylate product. Stratco, Inc. has completed the process
engineering study of this unit and has issued equipment specifications.
Raytheon will provide the construction management services.
MTBE Unit. MTBE is an oxygenated, high octane blending component which is
used in the production of environmentally sensitive, low-polluting gasoline.
MTBE is made by reacting isobutylene (a light olefin produced by the FCC Unit)
and purchased methanol. The refinery's existing MTBE Unit, which employs
UOP-licensed Huels technology, will be activated with a capacity of 3,500 BPD.
Sulfur Recovery Units/Amine System. Sulfur is captured in various refinery
processes, primarily hydrodesulfurization, in the form of hydrogen sulfide
which is absorbed into amine solution. The hydrogen sulfide is removed from the
amine solution and then processed in a series of reactors to recover elemental
sulfur. The Company has purchased equipment to construct an additional sulfur
recovery unit and all the ancillary facilities to support the operations.
Included in the sulfur recovery area are sour water stripping and amine
systems, which will be expanded as required. A 200 LTPD sulfur unit has been
purchased by the Company and relocated to the refinery. The Pritchard
Corporation ("Pritchard") was selected to design and construct the additional
sulfur plant, amine system, tail gas unit and sour water strippers. Based on
Pritchard's latest design, it is estimated that the relocated unit will be
capable, with oxygen enrichment, of producing 400 LTPD of sulfur.
44
<PAGE> 47
Additional Tank Storage Capacity. The Company will require additional
tankage to store crude oil and refined products in connection with the
refinery's increased throughput after completion of Phase I. The Company plans
to purchase, construct or lease additional storage facilities in order to
conduct refinery operations at expected levels, including construction of the
Prospect Tank Farm, comprised of 9 tanks with a capacity of approximately 1
million barrels.
Offsite Facilities. The Company will add steam-generating capacity, air
compression equipment and new electrical equipment during Phase I. A marine
vapor recovery system will also be installed at the terminal docks. Lanier &
Associates have been selected to engineer the marine vapor recovery system.
Other. Additional equipment will be installed to enhance waste water
treatment and reduce the generation of solid waste. The Company is required to
perform Hazardous Operation ("HAZOP") analysis of the refinery process units as
required by OSHA regulations. A butadiene saturation unit will also be
installed to reduce the acid consumption in the alkylation facilities.
PHASE II
Phase II is expected to be completed and tested in February 1998 subject to
timely availability of financing. This expectation is based upon the Company's
procurement of certain equipment. In addition, the Company believes there is a
large supply of experienced construction labor available, and the involvement of
major international contractors for construction management and execution will
provide both a high level of expertise and quality field supervision. The
Company estimates that additional expenditures of $110 million will be required
to complete Phase II. In Phase II of the Capital Improvement Program, the
Company will expand hydrodesulfurization capacity, add a naphtha isomerization
unit and add sulfur recovery facilities. The Company anticipates that, following
completion of Phase II, it will process 200,000 BPD of heavy, sour crude oil.
The Company must raise approximately $110 million of additional capital to
complete Phase II. The following is a brief description of the units and offsite
facilities that are scheduled to be added or improved during Phase II and the
Company's plans and expectations therefor:
Light Naphtha Isomerization Unit. The Company has purchased a light
naphtha hydrotreater and a UOP-licensed PENEX isomerization unit from a
Canadian refinery that it will utilize at the Company's refinery site. The unit
can process 7,500 BPD of light naphtha into isomerate, a higher octane
component for gasoline blending. Isomerate is an attractive component for
producing gasolines which comply with the EPA's new environmental regulations
for gasoline. E. S. Fox Ltd. has completed the dismantling and relocation of
the isomerization unit from its previous location near Toronto, Canada to the
refinery.
HDS Unit - No. 2 Fuel Oil. The Company plans to construct a 30,000 BPD No.
2 Fuel Oil HDS Unit to accommodate expected volumes of high-sulfur No. 2 fuel
oil. Some of the equipment originally planned for the Kerosene HDS Unit will be
used in constructing this unit. PCI was selected to perform the process design
engineering of this unit.
MTBE Unit Expansion. The Company has a partially constructed butane
dehydrogenation unit, employing CATOFIN technology. This unit, in conjunction
with the expansion of the existing MTBE Unit, will be capable of producing an
additional 7,500 BPD of MTBE from isobutane feedstock, which the Company plans
to purchase, and will add to the refinery's fuel production flexibility.
Sulfur Recovery Unit. The Company will reactivate and expand an existing
80 LTPD sulfur unit to a 160 LTPD sulfur unit. This unit, with the Phase I
Sulfur Unit, will provide a combined sulfur capacity of 560 LTPD.
Offsite Facilities. Additional capacity will be installed for cooling
water, steam, plant air, instrument air, and electrical distribution. Other
piping, electrical and instrumentation equipment will be installed to connect
the new process units with the refinery and new storage tanks.
Other. The Company is required to perform HAZOP analysis of the refinery
process units added during Phase II as required by OSHA regulations.
45
<PAGE> 48
CAPITAL BUDGET AND EXPENDITURES
The following table sets forth as of April 30, 1996, the Company's
capital budget for, and expenditures, on, the Capital Improvement Program (in
millions of dollars):
<TABLE>
<CAPTION>
CAPITAL
BUDGET EXPENDITURES
------- ------------
<S> <C> <C>
PHASE I:
Delayed Coking Unit $ 38 $ 53
Naphtha Pretreater 7 4
No. 2 Reformer 6 1
VGO HDS Unit 25 5
FCC Unit 75 33
FCC Upgrades 11 7
Alkylation Unit 20 9
MTBE Unit 2 --
Sulfur Recovery Units/Amine System 26 19
Additional Tank Storage Capacity 21 10
Offsite Facilities 22 18
Other 8 4
Engineering and Administrative 8 12
Contingencies 40* 8
------- -------
Total Phase I 309 183
------- -------
PHASE II:
Light Naphtha Isomerization Unit 5 2
No. 2 Fuel Oil HDS Unit 31 2
MTBE Unit Expansion 33 --
Sulfur Recovery Unit 17 --
Offsite Facilities 18 --
Other 2 --
Engineering and Administrative 3 --
Contingencies 16* 2
------- -------
Total Phase II 125 6
------- -------
Total Capital Improvement Program $ 434 $ 189
======= =======
</TABLE>
- ---------
* To the extent expenditures exceed the approved capital budget for a unit or
units, the contingencies portion of the budget will be allocated to specific
units. As of April 30, 1996, approximately $19 million of the contingencies
have been allocated for expenditures on the Delayed Coking Unit and Engineering
and Administrative. The foregoing estimates, as well as other estimates and
projections herein, are subject to substantial revision upon the occurrence of
future events, such as unavailability of, or delays in financing, engineering
problems, work stoppages and cost overruns over which the Company may not have
control.
The Company estimates that expenditures of between $146 million and $151
million in addition to the current budget of $434 million will be required to
complete the Capital Improvement Program. As of April 30, 1996, expenditures on
the Capital Improvement Program funded by or approved for reimbursement from the
cash collateral account totaled approximately $189 million. Giving effect to
current estimates, additional funding of $264 million to $269 million will be
required to complete Phase I, of which approximately $41 million is
anticipated to be funded by the Port Commission tax exempt bonds and additional
funding of $110 million will be required to complete Phase II. As of April 30,
1996, the Company had commitments for refinery construction and maintenance of
approximately $64 million. Additional funds
46
<PAGE> 49
necessary to complete the Capital Improvement Program may be provided from (i)
the sale of additional shares of TransTexas common stock held by the Company,
(ii) the sale of common stock of the Company, (iii) equity investments in the
Company (including the sale of preferred stock of the Company to TEC, funded by
the sale of TransTexas common stock held by TEC), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the TARC Notes. The Company has entered
into preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. There is no assurance that sufficient funds will be available from these
sources on a timely basis or upon terms acceptable to the Company and
TransAmerican. If this financing is not available when needed or if significant
engineering problems, work stoppages or cost overruns occur, the Company may not
be able to complete and test Phase I of the Capital Improvement Program by
February 15, 1997. Even if required financing is obtained on a timely basis,
completion by February 15, 1997 will still prove very difficult if personnel
shortages prevent full staffing during peak construction periods. The Company
has identified and is considering certain steps to minimize the impact of
potential construction worker shortages, including the retention of field
supervisors, direct hiring of field supervisors and field labor by the Company's
major contractors, adding a second shift, and modularization of certain
construction items. There can be no assurance that these steps will prove
successful; however, the Company believes that implementation of these steps
will adequately address staffing concerns. Under the TARC Indenture, the failure
of the Company to complete and test Phase I by February 15, 1997 (subject to
extension to August 15, 1997 if certain financial coverage ratios are met) would
constitute an event of default at such date.
As of July 10, 1996, the Company had expended the $173 million placed in
the collateral account from the issuance of the Notes as well as the majority of
the proceeds from the March 1996 sale of TransTexas common stock. In May 1996,
in anticipation of the limited availability of collateral account funds, the
Company began scaling back expenditures on the Capital Improvement Program to
include only those critical path items necessary to complete and test refinery
units by the specified dates under the Indenture. In July 1996, the Company
executed a promissory note to TransAmerican for up to $25 million. Currently,
the Company has drawn $5 million against the note. The note bears interest at
15% per annum, with quarterly interest payments beginning in October 1996 and
with the principal due in July, 1998. In July and August 1996, TransAmerican
advanced $4.3 million to the Company. The Company anticipates repaying this
non-interest bearing advance within 30 days. These advances will be utilized
by the Company to fund the critical path items mentioned above, as well as
working capital needs in anticipation of financing from other sources.
PORT COMMISSION BONDS
The Company and the Port Commission have reached an agreement in principle
which would allow for the issuance of approximately $75 million in Port
Commission tax exempt bonds, the proceeds of which may be used to construct
tank storage facilities, docks and air and waste water treatment facilities.
The air and waste water treatment facilities are included in the Capital
Improvement Program at an estimated cost of $41 million. The issuance of the
tax exempt bonds could provide an alternate source of financing for the
construction of such facilities. The Port Commission would own the facilities
built with the proceeds of the bonds, and the Company would operate the
facilities pursuant to a long-term (30-year) lease. There can be no assurance
that the issuance of the tax-exempt bonds, which may require the consent of the
holders of the TARC Notes, will occur.
PRICE MANAGEMENT ACTIVITIES
The Company enters into futures contracts, options on futures, and swap
agreements and forward sales agreements with the intent to protect against a
portion of the price risk associated with price declines from holding inventory
of feedstocks and refined products or fixed price purchase commitments. For the
three months ended April 30, 1996, the Company indirectly entered into price
management activities through the third party processing agreement discussed
below.
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENT
The Company enters into financing arrangements to maintain an available
supply of feedstocks. Typically, the Company enters into an agreement with a
third party to acquire a cargo of feedstock that is scheduled for delivery to
the Company's refinery. The Company pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for
the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and the Company commits to purchase,
at a later date, the cargo at an agreed price plus commission and costs. The
Company also places a margin deposit with the third party to permit the third
party to hedge its price risk. The Company purchases these cargos in quantities
sufficient to maintain expected operations and is obligated to purchase all of
the cargos delivered pursuant to these arrangements. In the event the refinery
is not operating, these cargos may be sold on the spot market. These
arrangements are accounted for as product financing arrangements and
accordingly the inventory and related obligations are recognized on the
Company's balance sheet. During the three months ended April 30, 1996,
approximately 0.4 million barrels of feedstocks with a cost of $8 million were
sold by a third party on the spot market prior to delivery to the Company
without a material gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a
third party for the processing of various feedstocks at the refinery. Under the
terms of the agreement, the processing fee earned by the Company is based on
the margin earned by the third party, if any, after deducting all of its
related costs such as feedstock acquisition, hedging, transportation,
processing and inspections plus a commission for each barrel processed. This
agreement provides for the Company to process a total of approximately 1.1
million barrels of feedstocks. For the three months ended April 30, 1996, the
Company incurred a loss of approximately $1.9 million related to the processing
agreement, primarily as a result of price management decisions. In April 1996,
the Company entered into a similar processing agreement with another third
party to process feedstocks. Recently, the Company has agreed to process
approximately 4.3 million barrels of feedstocks under this agreement.
In July 1996, the Company entered into a processing agreement with a third
party to process approximately 0.2 million barrels of feedstocks for a fixed
price per barrel. Under the terms of the agreement, the Company is responsible
for only certain quantity and quality yields.
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<PAGE> 50
CRUDE OIL AND FEEDSTOCK SUPPLY
The Company purchases feedstocks on the spot market but has no long-term
supply contracts. The Company believes that it will have access to adequate
supplies of the crude oil it intends to process. Upon completion of the Capital
Improvement Program, the Company expects to purchase heavy, sour crude oils
produced in countries such as Venezuela and Mexico, and regions such as the
Persian Gulf.
The refinery has a variety of supply channels. The Mississippi River
permits delivery of feedstocks from both barge and ocean-going vessels. The
Company has its own ship dock and barge dock. The Company's ship dock can
accommodate 100,000 dwt tankers which draw less than 45 feet of water, or up to
200,000 dwt tankers which have been lightered (partially offloaded) and draw
less than 45 feet of water. The barge dock provides access to smaller cargos of
intermediate feedstocks such as cracking stock or fuel oil cutterstocks. An
adjacent storage terminal has four ship docks on the river to which the Company
has access for loading or unloading of feedstocks. The Company is connected to
a pipeline designed for the transfer of crude oil from Shell Oil Company's
Norco refinery (the "Shell Refinery"). Through pipeline connections with the
Shell Refinery, the Company has access to Louisiana Offshore Oil Port's 24-inch
diameter pipeline network, which permits receipt of large quantities of foreign
crude oil. The Company's title to and continued use of these facilities is
subject to the rights of the government and public use.
PRODUCT DISTRIBUTION
The Company previously sold its refined products pursuant to a processing
agreement with a third party and currently sells on the spot market, but has no
long-term sales contracts. Major market areas for the Company's refined
products include the Gulf Coast region, the Mississippi River Valley and the
East Coast of the United States as well as foreign markets. Until the
completion of the Capital Improvement Program or appropriate regulatory relief
from the Environmental Protection Agency, the Company will incur additional
gasoline blending costs or be restricted in the amount of gasoline the Company
will be able to sell domestically. The Company's refined products are
transported by pipeline, train, ocean-going vessel and truck. The Company's
refinery is connected, through third party pipelines, to two major Gulf Coast
common carrier pipelines, the Colonial and the Plantation, which permit
transportation of the refinery's products to East Coast markets. Products can
be discharged into these pipelines at rates of up to 15,000 Bbls per hour. The
Company is also connected to a pipeline designed to transfer refined products
to the Shell Refinery. Railroad lines serve the refinery and adjacent
industries. The Company's barge and ship docks and an adjacent terminal for
ship docks provide access to the Mississippi River and the intracoastal
waterway.
INSURANCE
The Company maintains insurance in accordance with customary industry
practices to cover some, but not all risks. The Company currently maintains
property insurance for the refinery in an amount and with deductibles which
management believes will allow the Company to survive damage to the refinery.
The insurance coverage amounts are scheduled to increase as the Company
completes the Capital Improvement Program.
PROPERTY
The Company owns the approximately 215-acre site on which the refinery is
located. See "Certain Relationships and Related Transactions." The Company also
has available, through ownership, lease agreement or other appropriate
arrangements, the use of storage tanks, loading racks, and other related assets
at the refinery site. The Company leases office space located in Houston, Texas
from TransTexas. See "Certain Relationships and Related Transactions."
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<PAGE> 51
TITLE INSURANCE
The title insurance policy to insure against certain claims made against
title to the refinery parcel site consists of a $440 million lender's title
insurance policy for the benefit of the trustee under the Indenture. The title
insurance policy has been reinsured through various title insurance companies
in the United States. The ability to successfully recover under the policies is
dependent on the creditworthiness of the title company and its reinsurers at
the time of the claim and any defenses that the title insurers and its
reinsurers may have. There can be no assurance that the amount of title
insurance will be sufficient to cover any losses incurred by the Company or the
trustee under the Indenture as a result of a title defect impairing the ability
to use the refinery site or that the title insurers will be able to fulfill
their financial obligations under the title insurance policy. The title policy
contains customary exceptions to coverage, including taxes not yet due and
payable, riparian rights and numerous servitudes, rights of way, rights of
access and other encroachments in favor of utilities, railroads, pipelines and
adjacent refineries and tank farms, as well as exceptions for (i) government
claims with respect to, and public rights to use, the Company's property
located between the Mississippi River and the River Road upon which is located
pipe racks and the Company's docking facilities, (ii) a right of first refusal
in favor of an adjacent landowner with respect to a certain portion of property
which, in the event exercised, may require the Company to relocate at its
expense certain pipelines that connect various refinery parcels, (iii) tax
benefits that have been conveyed to certain tax lessors, (iv) the priority of
liens that may be filed by materialmen and mechanics in connection with the
Capital Improvement Program, and (v) certain rights of creditors pursuant to
federal or state bankruptcy and insolvency laws, which rights may affect the
enforceability of the mortgage securing the Notes.
SEASONALITY
The Company anticipates that its operations will be subject to significant
fluctuations in seasonal demand. In the Company's markets, demand for gasoline
is typically higher during the second and third quarters of the Company's
fiscal year. During winter months, demand for heating oil increases. The
refinery is designed, upon completion of the Capital Improvement Program, to
change its product yields to take advantage of seasonal demands.
FLUCTUATION IN PRICES
Factors that are beyond the control of the Company may cause the cost of
crude oil purchased by the Company and the price of refined products sold by
the Company to fluctuate widely. Although prices of crude oil and refined
petroleum products generally move in the same direction, prices of refined
products often do not respond immediately to changes in crude oil costs. An
increase in market prices for crude oil or a decrease in market prices for
refined products could have an adverse impact on the Company's earnings and
cash flow.
COMPETITION
The industry in which the Company is engaged is highly competitive. The
Company primarily competes with refiners in the Gulf Coast region, many of
which are owned by large, integrated oil companies which, because of their more
diverse operations and stronger capitalization, may be better able than the
Company to withstand volatile industry conditions, including shortages or
excesses of crude oil or refined products or intense price competition. The
principal competitive factors affecting the Company's refining operations are
the quality, quantity and delivered costs of crude oil and other refinery
feedstocks, refinery processing efficiency, mix of refined products, refined
product prices and the cost of delivering refined products to markets.
Competition also exists between the petroleum refining industry and other
industries supplying energy and fuel to industrial, commercial and individual
consumers.
The Company has no crude oil reserves and is not engaged in the
exploration for crude oil and plans to obtain all its crude oil requirements
from unaffiliated sources. The Company believes that it will be able to obtain
adequate supplies of crude oil and feedstocks at generally competitive prices
for the foreseeable future. Crude oil prices are affected by a variety of
factors that are beyond the control of the Company. The principal factors
currently influencing prices include the pricing and production policies of
members of the Organization of Petroleum Exporting
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<PAGE> 52
Countries, the availability to world markets of production from Kuwait, Iraq
and Russia and the worldwide and domestic demand for oil and refined products.
Oil pricing will continue to be unpredictable and greatly influenced by
governmental and political forces.
EMPLOYEES
The Company has approximately 244 employees and will employ additional
personnel as required by its operations and may engage the services of
engineering and other consultants from time to time. Currently, none of the
Company's employees are parties to a collective bargaining agreement. The Oil,
Chemical and Atomic Workers International Union (the "OCAW Union") has a
pending unfair labor practice charge against the Company. The Equal Employment
Opportunity Commission ("EEOC") has initiated an investigation into the
Company's and Southeast Contractors' (as defined) employment practices,
alleging discriminatory hiring and promotion practices. See Note 11 to the
Notes to the Company's Financial Statements included elsewhere herein.
Since July 1994, Southeast Louisiana Contractors of Norco, Inc.
("Southeast Contractors"), a subsidiary of TransAmerican, has provided
construction personnel to the Company in connection with the Capital
Improvement Program. Southeast Contractors will provide from 500 to 3,000
construction personnel to the Company as required to implement the Capital
Improvement Program. These construction workers are temporary employees, and
the number and composition of the workforce will vary throughout the
reactivation at the refinery during the Capital Improvement Program. Southeast
Contractors charges the Company for the direct costs it incurs, which consist
solely of employee payroll and benefits plus administrative costs and fees;
such administrative costs and fees charged to the Company are $1.2 million per
year.
ENVIRONMENTAL MATTERS
COMPLIANCE MATTERS. The Company is subject to federal, state, and local laws,
regulations, and ordinances relating to activities and operations that may have
adverse environmental effects ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. The Company believes that it
is in substantial compliance with applicable Pollution Control Laws. However,
newly enacted Pollution Control Laws, as well as increasingly strict
enforcement of existing Pollution Control Laws, will require the Company to
make capital expenditures in order to comply with such laws and regulations. To
ensure continuing compliance, the Company has made environmental compliance and
permitting issues an integral part of its refinery's start-up plans and has
budgeted for such capital expenditures in the Capital Improvement Program.
The Company uses (and in the past has used) certain materials, and
generates (and in the past has generated) certain substances or wastes that are
or may be deemed hazardous substances or wastes. In the past, the refinery has
been the subject of certain environmental enforcement actions, and incurred
certain fines as a result, arising out of certain of the Company's operations.
The Company also was previously subject to enforcement proceedings relating to
its prior production of leaded gasoline and air emissions. The Company believes
that, with minor exception, all of these past matters were resolved prior to or
in connection with the resolution of the bankruptcy proceedings and, in some
cases (such as the leaded gasoline matter), are no longer applicable to the
Company's operations. As a result, the Company believes that such matters will
not have a material adverse effect on the Company's future results of
operations, cash flows or financial position.
PENDING REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. The Company will be
required to comply with the Benzene Waste NESHAPS as its refinery operations
start up. At this time, the Company cannot
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<PAGE> 53
estimate the costs of such compliance. Thus, while the Company does not believe
that such costs will be material, there can be no assurance that such costs
will not have a material adverse effect on its financial position.
In addition, the anticipated promulgation of Hazardous Organic NESHAPS
regulations for refineries under the Clean Air Act could have a material
adverse effect on the Company. The Clean Air Act requires the EPA to set
"Maximum Achievable Control Technology" ("MACT")standards for all categories of
major sources of hazardous air pollutants by November 15, 2000. The EPA
promulgated its "Final Rule for National Emission Standards for Hazardous Air
Pollutants; Petroleum Refineries" on August 18, 1995. This rule sets MACT
standards for the petroleum refining industry. The Company cannot estimate at
this time what the effect may be of any such regulations on the refinery.
The EPA recently promulgated federal regulations pursuant to the Clean Air
Act to control fuels and fuel additives (the "Gasoline Standards") that could
have a material adverse effect on the Company. Under the new regulations only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced benzene
and aromatics compared to the average 1990 gasoline. The number and extent of
the areas subject to reformulated gasoline standards may increase in the future
if the applicable laws and regulations become more stringent or other areas
become subject to the existing program. Conventional gasoline may be used in
all other domestic markets; however, a refiner's post-1994 average conventional
gasoline must not be more polluting than it was in 1990. With limited
exception, a refiner must compare its post-1994 and 1990 average values of its
controlled fuel parameters and emissions in order to determine its compliance
as of January 1, 1995. The Gasoline Standards recognize that many gasoline
producers may not be able to develop an individual 1990 baseline for a number
of reasons, including, for example, lack of adequate data and limited or no
operations in 1990. Under such circumstances, the refiner must use a statutory
baseline reflecting the 1990 industry average. The EPA has authority, upon a
showing of extenuating circumstances by a refiner, to grant an individual
adjusted baseline or other appropriate regulatory relief to that refiner.
The Company filed a petition with the EPA requesting an individual
baseline adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which the Company relied in
its petition include the fact that the refinery was not in operation in 1990
(and thus there is no 1990 average for purposes of the necessary comparison)
and the fact that the start-up of the refinery is to occur on a phased-in
basis, with all of the refinery units expected to be operational by February
1998. The EPA has denied the Company's request for an individual adjusted
baseline adjustment, and the Company cannot predict at this time when or
whether the EPA will grant the Company other appropriate regulatory relief. In
correspondence to the Company, the EPA has expressed willingness to consider
whether different standards should apply to refineries that are now commencing
operations. If the EPA fails to grant appropriate regulatory relief, the
Company will be restricted in the amount of gasoline it will be able to sell
domestically or will incur additional gasoline blending costs until the Capital
Improvement Program is completed. Upon completion of the Capital Improvement
Program, the Company believes that it will be able to produce conventional
gasoline and, to a limited extent, reformulated gasoline that meets the
Gasoline Standards. There can be no assurance that any action taken by the EPA
will not have a material adverse effect on the Company's future results of
operations or financial position.
CLEANUP MATTERS. The Company also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of cleaning up,
and certain damages resulting from, past spills, disposals or other releases of
hazardous substances ("Hazardous Substance Cleanup Laws"). Over the past
several years, the Company has been, and to a limited extent continues to be,
engaged in environmental cleanup or remedial work relating to or arising out of
operations or activities at the refinery. In addition, the Company has been
engaged in upgrading its solid waste facilities, including the closure of
several waste management units. Similar to numerous other industrial sites in
the state, the refinery has been listed by the Louisiana Department of
Environmental Quality on the Federal Comprehensive Environmental Response,
Compensation and Liability Information System, as a result of the Company's
prior waste management activities (as discussed below).
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<PAGE> 54
In 1991, the EPA performed a facility assessment at the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. The Company is unable to predict what the results of the
EPA's investigations will be, or the effect that any further investigation or
remediation that would be required by the EPA will have on the Company's
financial position. As part of the facility assessment, in March 1993 the
Company submitted a "Closure Equivalency Demonstration" for the former sludge
drying beds at the refinery. The EPA has not yet made a determination regarding
the Company's submission or issued any further requests relating to this
matter. The Company believes that the sludge drying beds were properly closed
in 1985 in accordance with applicable law and should not require further
remediation as a result of the EPA's pending review. However, there can be no
assurance that the EPA will not require further work in this regard. The
Company is unable to estimate what the costs, if any, will be if the EPA does
require further remediation or closure activities.
Certain former employees have alleged that the Company's predecessor
improperly disposed of catalyst containing hazardous substances at the site of
the Company's visbreaker. These employees have further alleged that certain
permits for the refinery were obtained as a result of political contributions
made by the Company. As a result of these allegations, the EPA and the
Louisiana Department of Environmental Quality (the "DEQ") commenced an
investigation of the refinery. The Company has denied each of these allegations
and believes that they are wholly without merit. In the early 1980's, the
Company disposed of catalyst with the approval of the applicable Louisiana
authorities at off-site and on-site locations; however, no catalyst was
disposed of in the vicinity of the visbreaker. The Company's records confirm
that the State of Louisiana was aware of and approved the Company's disposal of
catalyst, and that the catalyst was not hazardous under any applicable legal
standards. The DEQ has concluded its investigation without citing any
violations by the Company. The Company also has independently investigated the
allegations. Analysis of soil borings taken from the site of the visbreaker by
three independent laboratories found no evidence of catalyst or other alleged
toxic substances in the samples taken. All permits that have been applied for
and obtained by the Company for its operations have been in accordance with all
applicable laws and regulations. The Company does not expect to incur any
liability in connection with these allegations that will have a material
adverse effect on the Company's future results of operations, cash flows or
financial position.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at four Superfund sites (i.e. sites on the National
Priorities List ("NPL"), to which it has been alleged that the Company, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA
to include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRP's liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.
The Company's liability at one of the four Superfund sites at which it has
been named a PRP has been settled for a nominal amount, and the Company expects
to incur no further liability in this matter. At a second Superfund site, the
EPA has invited the Company to enter into negotiations, and the Company
attended a scheduled settlement meeting and negotiations are continuing.
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With respect to the remaining two sites, the Company's liability for each such
matter has not been determined, and the Company anticipates that it may incur
costs related to the cleanup (and possibly including additional costs arising in
connection with any recovery action brought pursuant to such matters) at each
such site. After a review of the data available to the Company regarding the
basis of the Company's alleged liability at each site, and based on various
factors, which depend on the circumstances of the particular Superfund site
(including, for example, the relationship of the Company to each such site, the
volume of wastes the Company is alleged to have contributed to each such site in
comparison to other PRPs without giving effect to the ability of any other PRPs
to contribute to or pay for any liabilities incurred and the range of likely
cleanup costs at each such site) the Company does not believe its ultimate
liability will be significant; however, it is not possible to determine the
ultimate environmental liabilities, if any, that may arise from the matters
discussed above.
OTHER GOVERNMENTAL REGULATIONS
The Company must also comply with federal and state laws and regulations
promulgated by the Department of Transportation for the movement of volatile
and flammable materials, the U.S. Coast Guard for marine operations and oil
spill prevention and the Occupational Safety and Health Administration ("OSHA")
for worker and job site safety. Some of these laws and regulations correspond
or relate to certain Pollution Control Laws applicable to the Company and
governed by agencies in addition to the foregoing. To comply with OSHA
regulations, the Company must conduct extensive Process Safety Management and
Hazardous Operations reviews prior to placing units into service. The Company
has budgeted funds in the Capital Improvement Program to comply with all of
these requirements.
LEGAL PROCEEDINGS
The Company's liability for lawsuits, including those set forth below,
which matters individually and in the aggregate amount to significant potential
liability, if adjudicated in a manner adverse to the Company, could have a
material adverse effect on the Company. In addition to the legal proceedings
described below, the Company is also party to other ordinary course, routine
litigation incidental to its business. While the outcome of these other
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position.
The following is a description of the legal proceedings of the Company.
NLRB PROCEEDING. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union ("OCAW") filed unfair labor practices charges against the
Company with the New Orleans Regional Office of the National Labor Relations
Board ("NLRB"). The charge alleges that the Company refused to reinstate 22
former employees because of their union membership. The NLRB has refused to
issue a complaint against the Company based on the OCAW's charges. The OCAW has
until July 26, 1996 to appeal the NLRB decision.
EEOC. On August 31, 1995, the Equal Employment Opportunity Commission ("EEOC")
initiated a systemic investigation into the Company's and Southeast
Contractors' employment practices. The EEOC is investigating whether the
Company is discriminating on the basis of sex and race. The Company intends to
vigorously defend this action.
GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit against
the Company alleging breach of an operating agreement to pay GATX $122,500 per
month beginning January 1996. The Company intends to vigorously defend this
action.
GENERAL. The Company is also named a defendant in other ordinary course,
routine litigation incidental to its business. While the outcome of these other
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position, operations
or cash flow. At April 30, 1996, the possible range of estimated losses
related to all of the aforementioned claims, other than the EEOC claim, which
the Company could not reasonably estimate and in addition to the estimates
accrued by the Company, is $0 to $2 million.
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BUSINESS OF TRANSTEXAS
TransTexas Gas Corporation (together with its subsidiaries, the "Company")
is engaged in the exploration for and the development, production and
transportation of natural gas primarily from the Lower Wilcox Lobo Trend (the
"Lobo Trend") in Webb and Zapata counties in South Texas. TransTexas is the
fifth largest producer of natural gas in Texas on a gross basis. TransTexas'
average net production, including amounts delivered pursuant to volumetric
production payments, for the three months ended April 30, 1996, was
approximately 403 MMcfd, for a total net production of 36.2 Bcf of natural gas.
TransTexas' average net production for the six months ended January 31, 1996,
(the "Transition Period") was approximately 363 MMcfd, for a total net
production of 66.9 Bcf of natural gas. During the five years ended January 31,
1996, TransTexas drilled, or participated in the drilling of, 507 wells,
completed approximately 81% of those wells, and had an average finding cost of
approximately $0.58 per Mcfe.
TransTexas, through its wholly-owned subsidiary, TransTexas Transmission
Corporation ("Transmission") owns and operates a system of approximately 1,100
miles of gathering and transmission pipelines that interconnect with seven
major Texas intrastate and seven major interstate pipeline systems. These
interconnects provide access to customers in all major natural gas markets in
the continental United States and Mexico. TransTexas performs a wide variety of
oil field services, including drilling, workover, completion and production
services, and construction of roads, pipelines and well sites for its own
operations.
TransTexas' business strategy is to continue to develop its reserves, to
increase its acreage position and to optimize the operation of its related
transmission system. TransTexas believes that the experience gained from its 20
years of drilling and operating wells in the Lobo Trend allows it to find,
develop and produce reserves at a low cost. TransTexas drilled 60 wells in the
Transition Period and plans to drill approximately 112 wells in fiscal 1997.
Through processing arrangements, TransTexas will continue to attempt to
optimize the recovery of liquids NGLs from its production. TransTexas believes
that its gathering and transmission system allows TransTexas to market its
production effectively. TransTexas encourages connection of third-party wells
to maximize utilization and increase profitability of the system.
EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of TransTexas consist of
geological evaluation of current and prospective leased properties, the
acquisition of mineral leases or other interests in prospects and the drilling,
development, workover and operation of leased properties for the production and
sale of natural gas and condensate. TransTexas generates its prospects
primarily through its in-house geological staff. Drilling activities are
performed by TransTexas and, when necessary, by independent drilling
contractors.
To maintain its reserve base and production, TransTexas must locate and
acquire new gas and condensate reserves to replace those being depleted by
production. Without successful drilling and exploration or acquisition
activities, TransTexas' reserves and production will decline appreciably. In
particular, TransTexas' principal producing properties are characterized by a
high initial production rate, followed by a steep decline in production
resulting in an average half-life per well of less than two years. Accordingly,
TransTexas believes that its future success will depend to a significant extent
upon the results of its exploration and development program. TransTexas'
business strategy includes increasing its reserve base, which will require
TransTexas to add appreciable reserves by pursuing an active drilling program
on its existing undeveloped properties and on properties that it may acquire in
the future. Although TransTexas intends to drill approximately 112 wells per
year, there can be no assurance that TransTexas will drill that number of wells
or that reserves attributable to these wells will be sufficient to replace
current production.
Drilling Activities
TransTexas' drilling strategy in the Lobo Trend is primarily driven by the
trend's highly faulted geology. TransTexas' exploration staff selects drilling
locations of roughly uniform spacing based on their knowledge of the
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Lobo Trend and TransTexas' drilling experience in that area. During the five
years ended January 31, 1996, TransTexas drilled, or participated in the
drilling of, 507 wells and completed approximately 81% of these wells,
resulting in finding costs of approximately $0.58 per Mcfe over that period. As
of July 23, 1996, TransTexas was drilling 9 gross wells (9 net wells) and
intends to drill a total of approximately 112 wells during fiscal 1997.
TransTexas drilled, or participated in the drilling of, the following numbers
of wells during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------------------------------- ------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ----------- ------------ ----------- ----------- ------------ -----------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- --- ----- --- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wells(1):
Productive 61 58 58 55 88 85 116 116 75 74 47 47 45 45 15 15 38 37
Non-
Productive 7 7 13 13 15 15 24 24 22 22 13 13 15 15 3 3 7 7
</TABLE>
- ---------
(1) Drilling a location designated as a proved undeveloped location is
considered a development well, while all other drilling locations are
considered exploratory wells. Because of the highly faulted geology of the
Lobo Trend, each producing well location is considered to add only one new
proved undeveloped location. This criterion makes it difficult to
distinguish clearly between exploratory and development wells because well
location designations change continually as new producing wells are added.
TransTexas' success rate has not varied significantly among drilling
locations designated as proved undeveloped, probable or possible.
Net Production, Unit Prices, and Costs
The following table sets forth information with respect to net production
and average unit prices and costs for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
--------------------------------------------------------- ---------------------- --------------------
1991 1992 1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- --------- --------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Production:
Gas (Bcf) 120.8 128.4 119.3 130.9 147.9 76.9 66.9 35.8 36.2
NGLs (MMgals) 75.4 165.9 183.8 164.0 225.3 121.3 65.3 52.3 48.2
Condensate (MBbls) 483 498 617 650 638 354 259 176 164
Average sales
prices:
Gas (dry) (per Mcf) $ 1.32 $ 1.36 $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65 $ 1.34 $ 2.03
NGLs (per gallon) .40 .29 .30 .27 .26 .27 .30 .26 .31
Condensate (per Bbl) 23.21 19.52 18.65 15.13 17.22 16.50 17.39 17.67 20.03
Average lifting cost
per Mcfe (1) .22 .19 .22 .24 .21 .21 .23 .20 .35
</TABLE>
- ---------
(1) Gas and condensate are converted to a common unit of measure on the basis
of six Mcf of natural gas to one barrel of condensate. The components of
production costs may vary substantially among wells depending on the
methods of recovery employed and other factors.
Well Stimulation
Most of the Lobo Trend and nearby development and exploratory areas
contain low permeability sands (ability of natural gas to flow through the sand
into the wellbore) and must be fracture-stimulated to achieve economic flow
rates. Fracture treatments involve inducing a proppant (sand or resin-coated
ceramics) with a fluid into the
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<PAGE> 58
hydrocarbon-bearing sand under surface-controlled hydraulic pressure, in an
attempt to increase the effective wellbore drainage radius. TransTexas acquired
fracture stimulation equipment in 1993 and has begun performing fracture
treatments on a portion of its wells.
Oilfield Services
TransTexas performs substantially all of its own oilfield services with
the exception of open-hole logging and some reservoir fracturing. These
activities include drilling, workover and completion services as well as a
variety of support services required for the exploration and production of
natural gas. TransTexas owns 17 drilling rigs, seven completion rigs and other
service equipment.
RESERVES
The following table sets forth certain information with respect to
TransTexas' proved reserves and the present value (discounted at 10%) of
estimated future net revenues before income taxes, as estimated by Netherland,
Sewell & Associates, Inc. ("Netherland, Sewell"), TransTexas' independent
petroleum engineers, as of the dates indicated. For additional information
regarding TransTexas' proved reserves at February 1, 1996, see Note 17 of
Notes to TransTexas' Consolidated Financial Statements included elsewhere
herein.
<TABLE>
<CAPTION>
AUGUST 1,
---------------------------------------- FEBRUARY 1,
1993 1994 1995 1996
---------- ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Proved Developed Reserves:
Gas (MMcf) 384,161 442,157 476,582 425,317
Condensate (MBbls) 1,093 1,109 1,073 880
Estimated future net revenues(1) $ 580,419 $ 514,567 $ 457,982 $ 572,882
Present value of estimated future net revenues
discounted at 10% (1) $ 438,998 $ 405,414 $ 351,428 $ 416,205
Proved Undeveloped Reserves:
Gas (MMcf) 310,850 275,210 646,063 713,810
Condensate (MBbls) 875 826 1,976 2,023
Estimated future net revenues(1) $ 381,175 $ 216,613 $ 355,502 $ 686,423
Present value of estimated future net revenues
discounted at 10% (1) $ 262,436 $ 138,973 $ 196,218 $ 391,857
Total Proved Reserves:
Gas (MMcf) 695,011 717,367 1,122,645 1,139,127
Condensate (MBbls) 1,968 1,935 3,049 2,903
Estimated future net revenues(1) $ 961,594 $ 731,180 $ 813,484 $1,259,305
Present value of estimated future net revenues
discounted at 10% (1) $ 701,434 $ 544,387 $ 547,646 $ 808,062
Additional disclosure: (2)
Proved Developed Reserves:
Gas (MMcf) 468,223
Condensate (MBbls) 1,116
Estimated future net revenues(1) $ 658,908
Present value of estimated future net revenues
discounted at 10%(1) $ 494,084
</TABLE>
- ---------
(1) Before income taxes.
(2) Includes amounts attributable to future deliveries required under a
volumetric production payment.
56
<PAGE> 59
In accordance with applicable guidelines of the Securities and Exchange
Commission, the estimates of TransTexas' proved reserves and future net
revenues therefrom set forth herein are made using gas and condensate sales
prices in effect as of the date of such reserve estimates and are held constant
throughout the life of the properties (except for fixed and determinable price
escalations as provided by contract). Estimated quantities of proved reserves
and future net revenues therefrom are affected by changes in gas and condensate
prices. Prices have fluctuated widely in recent years. TransTexas has entered
into hedging transactions to mitigate a portion of such natural gas price
volatility. As of February 1, 1996 and August 1, 1995, 1994 and 1993, the sales
prices used for purposes of estimating TransTexas' proved reserves and the
future net revenues from those reserves were $1.95, $1.37, $1.62 and $2.00 per
Mcf of gas, respectively, and $18.34, $16.27, $17.62 and $16.15 per Bbl of
condensate, respectively.
TEC has also presented, as additional disclosure, the volumetric reserve
amounts and present value of estimated future net revenues including amounts
attributable to future deliveries required under the volumetric production
payment. TEC believes that this information is informative to readers of its
financial statements because the related gas and oil properties costs and
deferred revenue are shown in TransTexas' balance sheets for each of the years
presented. This additional information is not required to be presented in
accordance with Securities and Exchange Commission guidelines; however, TEC
believes this additional information is useful in assessing its reserve and
financial position on a comprehensive basis.
Proved reserves are the estimated quantities of natural gas and condensate
that geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that
can be expected to be recovered through existing wells with existing equipment
and operating methods. The estimation of reserves requires substantial judgment
on the part of petroleum engineers, resulting in imprecise determinations,
particularly with respect to recent discoveries. The accuracy of any reserve
estimate depends on the quality of available data and engineering and
geological interpretation and judgment. Results of drilling, testing, and
production after the date of the estimate may result in revisions of the
estimate. Accordingly, estimates of reserves are often materially different
from the quantities of natural gas and condensate that are ultimately
recovered, and these estimates will change as future production and development
information becomes available. The reserve data represent estimates only and
should not be construed as being exact.
The present value of estimated future net revenues relating to proved
reserves are presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities", except income taxes have been omitted. In computing these data,
assumptions and estimates have been used, and TransTexas cautions against
viewing this information as a forecast of future economic conditions. The
future net revenues are determined by using estimated quantities of proved
reserves and the periods in which they are expected to be developed and
produced based on economic conditions at the date of the estimates. The
estimated future production is based on prices in effect at the date of the
estimates, except where fixed and determinable price escalations are provided
by contract. The resulting estimated future gross revenues are reduced by
estimated future costs to develop and produce the proved reserves based on cost
levels in effect at the date of the estimates, but not for debt service, income
taxes and general and administrative expenses (except to the extent such
general and administrative expenses constitute overhead costs incurred at the
district or field level that are allowed under joint operating agreements). The
present value of proved reserves set forth herein should not be construed as
the current market value of the estimated proved reserves attributable to
TransTexas' properties.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, TransTexas performs only a
preliminary title investigation before leasing undeveloped properties.
Accordingly, working interest percentages set forth above for undeveloped
properties are preliminary. However, a title opinion is obtained before the
commencement of drilling operations and any material defects in title are
remedied prior to the time actual drilling of a well on the lease is commenced.
TransTexas believes that it has satisfactory title to developed properties in
accordance with standards generally
57
<PAGE> 60
accepted in the oil and gas industry. TransTexas' properties are subject to
customary royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens which TransTexas believes do not materially
interfere with the use of or affect the value of such properties. In addition,
several litigants against TransTexas have filed claims that affect certain of
TransTexas' properties. TransTexas does not expect these claims to interfere
with the use of, or affect the value of, its properties in any material way.
ACREAGE
The following table sets forth TransTexas' total developed and undeveloped
acreage and productive wells at April 30, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)(2)
--------- ----------- -----------
<S> <C> <C> <C>
Gross .................... 90,960 711,447 1,061
Net ...................... 84,427 491,247 1,038
</TABLE>
(1) Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connection. Wells that
are completed in more than one producing zone are counted as one well. As
of April 30, 1996, TransTexas had interests in a total of 1,061 productive
wells, 32 of which had multiple completions.
(2) TransTexas has a small interest in one oil well. On the average,
TransTexas' gas wells have produced approximately three Bbls of condensate
and NGLs per MMcf of natural gas.
At April 30, 1996, TransTexas held approximately 302,000 gross acres
(approximately 282,000 net acres) in the Lobo Trend, primarily in Webb and
Zapata Counties, Texas. TransTexas has developed approximately 28% of its total
net Lobo Trend acreage.
The Lobo Trend covers an area in excess of one million acres and, based on
information as of the end of 1992, has produced approximately four trillion
cubic feet of natural gas from over 2,000 wells since its discovery in 1973.
The subsurface structure of the Lobo Trend is characterized by extensive
faulting, which has trapped hydrocarbons into numerous producing horizons.
Because of the highly faulted geology of the Lobo Trend, each producing well
adds only one undeveloped location (for purposes of proved reserve estimates).
Most of the Lobo Trend sands are of low permeability and must be
fracture-stimulated to provide maximum rates of production. Most of TransTexas'
Lobo Trend production is from formations at depths of approximately 6,000 to
14,000 feet. Most Lobo Trend wells are short-lived, typically having a
half-life of less than two years and an economic life of approximately ten
years.
TransTexas owns a 100% working interest in substantially all of its gross
lease acreage in the Lobo Trend, and intends to continue to own large working
interests in its properties. TransTexas is the operator of substantially all of
the properties in the Lobo Trend in which it has an interest. At April 30,
1996, TransTexas had interests in approximately 975 producing wells in the Lobo
Trend.
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<PAGE> 61
DEVELOPMENT ACTIVITY AND RECENT DISCOVERIES
TransTexas is also developing three natural gas discoveries in areas near
the Lobo Trend. Management of TransTexas believes that significant additional
reserves will be added by developing these areas of Bob West North, La Grulla
and Cuba Libre as well as from on-going drilling in the Lobo Trend. The
near-term strategy of TransTexas is to increase production through concentrated
development drilling in these areas.
Bob West Field/Bob West North Field. The Bob West North Field is located
in Zapata County, Texas, approximately two miles north of the Bob West Field.
As of April 30, 1996, TransTexas had drilled 19 wells in the field, all of
which have been completed, and TransTexas was drilling or completing two
additional wells. In April 1996, these wells produced an aggregate average of
approximately 79 MMcfd. TransTexas' gross acreage, as of April 30, 1996, in
the Bob West North Field consisted of a 100% working interest in approximately
9,100 acres (approximately 8,900 net acres).
TransTexas has also acquired approximately 5,800 gross acres (approximately
4,400 net acres) for development in the vicinity of the Bob West Field. As of
April 30, 1996, TransTexas has drilled and completed nine wells on this acreage.
In April 1996, these wells produced an aggregate average of approximately
4 MMcfd.
La Grulla. As of April 30, 1996, TransTexas had drilled 11 wells and completed
four wells in the La Grulla area of Starr County, Texas. In April 1996, these
wells produced an aggregate average of approximately 12 MMcfd. However, well
production was constrained due to difficulties encountered in the start-up of an
amine plant, designed to remove carbon dioxide from the natural gas stream. In
late February 1996, TransTexas connected an additional amine plant. As of April
30, 1996, TransTexas was drilling one additional well in the area. TransTexas
holds in excess of an 83% working interest in approximately 116,000 gross acres
(approximately 88,000 net acres) in this area of South Texas. TransTexas is
conducting 3-D seismic surveys to identify the optimal location and number of
future drill sites.
Cuba Libre. As of April 30, 1996, TransTexas had drilled eleven wells in the
Cuba Libre area in Webb County, Texas and purchased seven wells. In April 1996,
TransTexas-drilled wells and the purchased wells produced an average of
approximately 6 MMcfd. TransTexas holds a 95% working interest in approximately
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<PAGE> 62
42,000 gross acres (approximately 40,000 net acres) in this area of South
Texas. TransTexas is conducting 3-D seismic surveys to identify the optimal
location and number of future drill sites.
TransTexas, as part of its business strategy, continually evaluates its
assets and may, from time to time, decide to sell certain of its assets.
TransTexas has engaged an investment banking firm to assist in the sale of its
interest in the Lodgepole area (see "-- Exploratory Activity") and three
separate parcels of producing properties comprised of approximately 87,000 net
acres in the Lobo Trend containing a total of approximately 200 Bcfe of natural
gas reserves, based on TransTexas' February 1, 1996 reserve report.
In July 1996, TransTexas consummated the sale, effective as of May 1,
1996, of one of these property packages in Zapata County, Texas for
consideration of approximately $62 million. TransTexas has entered into a
purchase and sale agreement pursuant to which it intends to sell, effective as
of February 1, 1996, a second set of properties in Webb County, Texas for
consideration of approximately $23 million. TransTexas anticipates consummating
such sale in August 1996 if certain closing conditions, including the receipt
of a favorable appraisal, are met. In May 1996, TransTexas consummated the
sale, effective as of February 1, 1996, of certain other producing properties
in Webb County, Texas for consideration of approximately $9.95 million. The
purchase price for each of the properties discussed above was or is subject to
adjustment for gas sales between the effective date and the closing date.
TransTexas retained or will retain the proceeds of all such gas sales.
EXPLORATORY ACTIVITY
TransTexas' exploration strategy is principally focused in South Texas
where TransTexas has more than 20 years of operating experience and an
extensive pipeline infrastructure. TransTexas seeks to identify exploration
prospects with natural gas reserve potential of 100 Bcf or more per prospect.
TransTexas attempts to obtain a 100% working interest in such prospects and
control as much acreage covering the prospect as practical. In addition to the
three discovery areas (Bob West North, La Grulla and Cuba Libre), TransTexas
has identified several other prospects in which it has acquired an acreage
position. There can be no assurance, however, that these prospects will be
productive or, if productive, as to the volume of reserves or rate of
production from such prospects.
Val Verde Basin. TransTexas has acquired a 100% working interest in
approximately 37,000 acres in the Val Verde Basin in Val Verde County, Texas.
An exploratory well has been drilled and logged on the acreage, revealing
hydrocarbon potential in both the Ellenberger and Cambrian formations.
Additional seismic information is under study to further evaluate the area.
Lodgepole. TransTexas owns an approximate 41% working interest in
approximately 199,000 gross acres (approximately 51,000 net acres) in the
Lodgepole area of the Williston Basin of North Dakota. TransTexas has a 3.6%
working interest in a recent discovery well, the RG 1-10, which has successfully
flow-tested at a gross rate of 362 barrels of oil per day ("BOPD") at 25 p.s.i.
through a 30/64-inch choke. In April 1996, the RG 1-10 well was producing at a
rate of 165 BOPD. TransTexas has a 2.7% working interest in a recent discovery
well, which was producing at an average rate of 695 BOPD as of June 30, 1996.
TransTexas intends to drill two wells in the proximity of this well based on the
interpretation of 3-D seismic data. TransTexas is currently waiting for final
approvals of the drilling permits. TransTexas is conducting, or participating
in, a series of 3-D seismic surveys covering more than 270 square miles in order
to develop drilling locations within the Lodgepole area. Since the inception of
its Lodgepole drilling program, TransTexas has drilled four exploratory dry
holes based on 3-D seismic information. These four wells were drilled in areas
that are a significant distance from the current productive trend. TransTexas is
optimistic concerning future drilling potential of its acreage position.
TransTexas has engaged an investment banking firm to assist in the sale of its
interest in the Lodgepole area.
TransTexas is also participating in other exploratory plays, including a
100% interest in 2,900 gross acres in Jackson County, Texas and a 75% interest
in approximately 43,000 acres in Wharton and Colorado Counties, Texas. Although
initial results are positive, there can be no assurance as to the volume of
reserves or rate of production from such prospects.
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<PAGE> 63
SECTION 29 TAX CREDIT
Significant federal tax incentives are available under Section 29 of the
Internal Revenue Code of 1986, as amended (the "Code"), for the production and
sale of certain qualified fuels from nonconventional sources, including natural
gas produced from tight sand formations. These federal tax incentives (the
"Section 29 Tax Credit") apply to tight sand gas produced and sold to an
unrelated party before January 1, 2003, from wells drilled after November 4,
1990, and before January 1, 1993. The Section 29 Tax Credit is approximately
$0.52 per MMBtu of natural gas produced from tight sand formations. The amount
of the Section 29 Tax Credit is not adjusted for inflation although it could be
reduced if the average reference price of domestic crude oil rises
substantially. As of February 1, 1996, TransTexas had remaining developed
reserves of approximately 35.9 Bcf that TransTexas believes qualify for the
Section 29 Tax Credit. These credits are currently not allowable because
TransTexas files a consolidated tax return with TransAmerican, and
TransAmerican is in a net operating loss/alternative minimum tax position.
TransTexas currently benefits on a separate taxpayer basis from the Section 29
Tax Credits to the extent that it has taxable income.
The State of Texas exempts from severance taxes tight sand gas produced
and sold from September 1991 through August 2001, from wells drilled after May
24, 1989, and before September 1, 1996. TransTexas believes that the majority
of TransTexas' reserves from wells drilled after May 24, 1989 qualify for this
exemption. In addition, the State of Texas recently adopted a bill extending
this severance tax exemption to tight sand gas produced from wells drilled
after August 31, 1996 and before September 1, 2002. Tight sand gas produced
from such wells is entitled to a reduction in severance taxes for the first 120
months beginning on the first day of production or until the cumulative value
of the tax reduction equals 50% of the drilling and completion costs incurred
for the well.
PIPELINE AND TRANSMISSION OPERATIONS
TransTexas owns and operates approximately 1,100 miles of intrastate gas
gathering and mainline transmission pipeline systems (the "Pipeline System") in
South Texas. The Pipeline System provides direct access to several major
intrastate and interstate pipeline systems with major sales points at Laredo,
Thompsonville, Alice and Agua Dulce, Texas. All of the interstate pipelines to
which the Pipeline System is connected are "open access" systems of FERC's
Order 636, requiring nondiscriminatory transportation of natural gas by third
parties.
The Pipeline System includes gathering systems that connect TransTexas'
producing wells to its compression stations and transmission pipelines. The
Pipeline System includes eleven compression stations providing combined
mainline compression of approximately 78,100 horsepower and five dehydration
plants with daily aggregate capacities of 900 MMcfd.
TransTexas' high-Btu mainline system consists of a 27.5-mile, 30-inch line
(550 MMcfd capacity) from Vaquillas to Hebbronville; a 55-mile, 20-inch line
(320 MMcfd capacity) from TransTexas' Laredo dehydration station to
Hebbronville; and a 9-mile, 16-inch line from Mirando to Vaquillas. All the
high-Btu gas converges on a 40-mile, 30-inch line (630 MMcfd capacity) from
Hebbronville to the Exxon King Ranch gas processing plant. This system
transports TransTexas' production gathered from its northern properties in Webb
and Zapata counties.
TransTexas' low-Btu mainline system consists of a 25-mile, 20-inch line
(300 MMcfd capacity) from its Jennings compressor station to the Thompsonville
compressor station; a 21-mile, 30-inch pipeline from Thompsonville to
Hebbronville; and a 50-mile, 20-inch pipeline (320 MMcfd capacity) from
Hebbronville to Agua Dulce. This system transports TransTexas' production from
its southern properties in Zapata County to the sales points at Agua Dulce.
On March 27, 1996, TransTexas completed the sale of its 41.67% interest in
the 76-mile, 24-inch MidCon Texas line that runs from TransTexas' Thompsonville
compressor station to Agua Dulce. This 41.67% interest represented a capacity
right to transport 125 MMcfd. TransTexas believes that its existing
transportation capacity
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<PAGE> 64
in this area is adequate for TransTexas' production and does not anticipate any
material constraints on the transportation of its natural gas as a result of
this sale.
TransTexas has engaged an investment banking firm to assist in the sale or
sale/leaseback of all or a portion of the Pipeline System, without disrupting
the pipeline capacity available to TransTexas.
Volume and Throughput
The delivery capacity of the Pipeline System is currently 900 MMcfd (with
the potential for 1.2 Bcf). For the Transition Period, 86% (460 MMcfd) of the
natural gas transported by the Pipeline System was from wells operated by
TransTexas; the remaining 14% (74 MMcfd) was from third parties in the South
Texas area. Virtually all of TransTexas' significant third-party
transportation arrangements are on an interruptible basis with the exception of
a transportation contract with The Coastal Corporation (together with its
subsidiaries, "Coastal"). The agreement with Coastal provides for
transportation rights of up to 38,700 MMBtu per day and terminates on July 1,
1999. TransTexas charges Coastal a transportation fee of $0.05 per MMBtu for
deliveries in or near Agua Dulce. If TransTexas arranges for deliveries in the
vicinity of Houston the charge is $0.13 per MMBtu.
During the last three fiscal years, transportation fees charged for
natural gas production of third parties have ranged from $0.05 to $0.17 per
Mcf. For the Transition Period, the average fee charged by Transmission for
transportation of natural gas production of third parties and TransAmerican was
$0.11 per Mcf, while natural gas transportation, gathering, dehydration and
compression charges with respect to TransTexas' production have been $0.17 per
Mcf.
TransTexas and MidCon Texas Pipeline Corp. ("MidCon") entered into a firm
transportation agreement on January 10, 1996, under which MidCon is required
for a period of five years to transport up to 150,000 MMBtu per day from four
specified receipt points to the proposed pipeline interconnection between
MidCon's pipeline and TransTexas' pipeline at Thompsonville. The minimum
transportation fee will commence upon the earlier of completion of certain
pipeline construction (see "-- Natural Gas Marketing") or ninety days after the
acquisition of all related rights of way, permits and construction drawings.
The minimum transportation fee is equal to 50,000 MMBtu times $0.03 times the
number of days in the month, and TransTexas is required to pay the minimum fee
for a total of 91.25 TBtu during the five-year period.
In connection with a conveyance by TransTexas of a production payment
interest, TransTexas and an unaffiliated third party entered into a
transportation agreement on January 30, 1996, under which TransTexas will
transport all gas produced under such production payment to TransTexas' Agua
Dulce hub for the term of the production payment at no more than $0.17 per Mcf.
The table below reflects the amounts of TransTexas' natural gas production
and third parties' and TransAmerican's natural gas production transported by
the Pipeline System for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------- ------------- ------------- ------------- -------------
(BCF) % (BCF) % (BCF) % (BCF) % (BCF) %
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TransTexas
production 173.8 89 165.7 91 168.1 92 179.0 90 199.3 89
Third-parties and
TransAmerican 20.9 11 16.9 9 14.7 8 19.2 10 25.3 11
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total volume 194.7 100 182.6 100 182.8 100 198.2 100 224.6 100
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JANURY 31, APRIL 30,
----------------------------- ----------------------------
1995 1996 1995 1996
------------- ------------- ------------- ------------
(BCF) % (BCF) % (BCF) % (BCF) %
----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TransTexas
production 104.0 90 84.6 86 67.9 95 37.5 74
Third-parties and
TransAmerican 11.7 10 13.6 14 3.8 5 13.4 26
----- ----- ----- ----- ----- ----- ----- -----
Total volume 115.7 100 98.2 100 71.7 100 50.9 100
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE> 65
Natural Gas Processing
TransTexas is processing natural gas at the Exxon King Ranch plant located
in Kleberg County, Texas, pursuant to a new contract with Exxon that terminates
in May 1997. The new contract contains similar terms and conditions as a
previous contract with Exxon.
TransTexas' average daily production of natural gas liquids and the
average price received by TransTexas from the sale of its NGLs was 0.4 million
gallons and $0.30 per gallon, respectively, for the Transition Period.
TransTexas' NGLs are sold to Exxon pursuant to the processing contract
described above.
NATURAL GAS MARKETING
Since 1983, TransTexas has become a major marketer of its natural gas
products to a broad and diverse customer base of pipelines,
industrial/commercial end-users and gas cooperatives throughout the country.
TransTexas sells its natural gas on the spot market on an interruptible basis
or pursuant to long-term contracts at market prices. TransTexas currently
delivers gas to between twenty-five and thirty customers each month.
Three purchasers accounted for a total of 44% of the consolidated net gas,
condensate and transportation revenues of TransTexas for the Transition Period.
Two purchasers accounted for a total of 36% of the consolidated net gas,
condensate and transportation revenues of TransTexas for the year ended July
31, 1995. One purchaser accounted for a total of 15% of the consolidated net
gas, condensate and transportation revenues of TransTexas for the year ended
July 31, 1994. Two purchasers accounted for a total of 32% of the consolidated
net gas, condensate and transportation revenues of TransTexas for the year
ended July 31, 1993. TransTexas believes that the loss of any single purchaser
would not have a material adverse effect on TransTexas, due to the availability
of other purchasers for TransTexas' production at comparable prices.
TransTexas has two gas supply agreements with Coastal. Under the first
agreement, as amended, TransTexas is currently required to make available for
delivery and sale to Coastal 50 MMcf per day until the termination date of June
15, 1997. Each month, Coastal is obligated to purchase a minimum quantity of an
average of 40 MMcf per day, but may not purchase more than 60 MMcf per day.
Pursuant to this agreement, Coastal cannot purchase in any one month more than
an average of 50 MMcf per day. The purchase price for the gas each month is
determined by an averaging mechanism of two indices. In consideration for an
amendment to this agreement which potentially increased prices for future
sales, TransTexas agreed to pay Coastal $13,750 per day through June 15, 1997.
Such amount is recorded as a reduction of revenue. This amendment also reduced
TransTexas' gas sales commitments, eliminated TransTexas' obligations to
dedicate reserves to the contract and obligated Coastal to purchase a minimum
quantity of natural gas.
Under a second agreement with Coastal, as amended, Coastal has the right,
but not the obligation, to purchase up to 40 MMcf per day from TransTexas. The
purchase price under the second agreement is also determined by an averaging
mechanism of the same two indices less $0.12 per MMBtu.
TransTexas has a gas sales contract with Washington Gas & Light Company
("Washington Gas") that provides for the sale to Washington Gas of a maximum of
40 MMBtu per day subject to a limitation imposed by a pricing formula. The
purchase price is a mutually agreed-upon spot price plus a long-term premium
plus any applicable delivery point adjustments. Depending upon the long-term
premium, TransTexas is either obligated to sell the full 40 MMBtu per day or
has the option of not accepting the price and thus not being obligated to
supply the volumes. This contract terminates on November 1, 1997. Due to the
associated transportation costs necessary to deliver gas to Washington Gas,
TransTexas and Washington Gas have been unable to agree on the purchase price.
Therefore, no deliveries have been made pursuant to this contract since June
1994.
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<PAGE> 66
TransTexas and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994, under which TransTexas
will deliver 100,000 MMBtu per day through August 1997. The selling price for
this gas is determined by certain industry averages as defined in the contract.
TransTexas believes the impact of this contract on the operations of TransTexas
is immaterial.
TransTexas and MidCon entered into a long-term gas purchase contract on
January 10, 1996, under which TransTexas is required to deliver a total of
100,000 MMBtu per day to four specified delivery points for a period of five
years. The purchase price is determined by an industry index less $0.09 per
MMBtu. Deliveries shall commence upon the earlier of completion of pipeline
construction or ninety days after the acquisition of all rights of way, permits
and construction drawing. As part of this agreement, TransTexas has agreed to
build, and has commenced building, a 24-inch pipeline for MidCon to span
approximately 68 miles from Bob West North Field to MidCon's 30-inch pipeline
in Webb County, Texas. The agreement provides for TransTexas to earn a 50%
interest in a 28-mile segment of the new pipeline after 10 years.
TransTexas' objective has been to maximize cash flow, principally by
maximizing volumes of gas sold. Demand for natural gas is seasonal, with demand
higher during the summer and winter, and lower during the spring and fall.
Because of TransTexas' substantial undedicated reserves and its ability to use
the Pipeline System to transport its gas to the location where demand is
higher, TransTexas has developed the ability to shift delivery points in
response to seasonal market demand fluctuations in order to obtain higher
prices.
As a result of the strategic location of the Pipeline System, TransTexas
has access to customers in all major natural gas markets in the continental
United States and Mexico. Through the efforts of its marketing group,
TransTexas believes it will be able to meet customer demands as market
conditions evolve.
HEDGING
Beginning in April 1995, TransTexas entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either TransTexas
or the counter party thereto is required to make a payment to the other at the
end of each month (the "Settlement Date"). The payments will equal the product
of a notional quantity ("Base Quantity") of natural gas and the difference
between a specified fixed price ("Fixed Price") and a market price ("Floating
Price") for natural gas. The Floating Price is determined by reference to
natural gas futures contracts traded on the New York Mercantile Exchange
("NYMEX"). The Hedge Agreements provide for TransTexas to make payments to the
counter party to the extent that the Floating Price exceeds the Fixed Price, up
to a maximum ("Maximum Floating Price") and for the counter party to make
payments to TransTexas to the extent that the Floating Price is less than the
Fixed Price. For the Transition Period, TransTexas made net settlement payments
totaling approximately $5.4 million to the counter party pursuant to the Hedge
Agreements. For the three months ended April 30, 1996, TransTexas has incurred
additional net settlement losses totaling approximately $9.6 million. As of
April 30, 1996, TransTexas has Hedge Agreements with Settlement Dates ranging
from May 1996 through April 1997 involving total Base Quantities for all monthly
periods of approximately 73.0 TBtu of natural gas. Fixed Prices for these
agreements range from $1.70 to $1.72 per MMBtu ($1.76 to $1.78 per Mcf) up to a
Maximum Floating Price of $2.20 per MMBtu ($2.28 per Mcf). At April 30, 1996,
the estimated cost to settle these Hedge Agreements would have been
approximately $31.1 million. These agreements are accounted for as hedges and
accordingly, any gains or losses are deferred and recognized in the month the
physical volumes are delivered. At April 30, 1996, TransTexas maintained $13.9
million in margin accounts related to the Hedge Agreements. TransTexas may be
required to post additional cash margin whenever the daily natural gas futures
prices as reported on the NYMEX, for each of the months in which the swap
agreements are in place, exceed the Fixed Price. The maximum margin call under
each Hedge Agreement will never exceed the product of the Base Quantity for the
remaining months under such Hedge Agreement multiplied by the difference between
the Maximum Floating Price and the Fixed Price.
In June 1996, TransTexas entered into a Master Swap Agreement (the "Master
Swap Agreement") with one of its counter parties, which replaced a previously
existing master agreement governing swap agreements between the two parties.
TransTexas' obligations under the Master Swap Agreement are collateralized by a
mortgage on a substantial portion of TransTexas' producing properties. In
accordance with the TransTexas Indenture, the lien created by the mortgage
collateralizes obligations up to a maximum of $80.8 million (10% of the SEC PV10
of TransTexas' most recent reserve report). As contemplated by the TransTexas
Indenture, the Trustee under the TransTexas Indenture has subordinated the lien
collateralizing the TransTexas Notes outstanding thereunder to the lien
collateralizing TransTexas' obligations under the Master Swap Agreement. The
maximum amount of obligations of TransTexas that could be collateralized by the
mortgage, based on the swap agreements in place under the Master Swap Agreement
as of July 1, 1996, is approximately $10 million. Subject to compliance with
certain collateral coverage tests, TransTexas is not required to provide
additional cash margin for any swap agreements now or hereafter subject to the
Master Swap Agreement.
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COMPETITION
TransTexas encounters intense competition from major oil and gas companies
and independent operators in the acquisition of desirable undeveloped natural
gas leases and in the sale of natural gas. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than TransTexas' and which, in many instances, have
been engaged in the energy business for a much longer time than TransTexas.
The primary bases for competition in natural gas sales are price and
access to markets. TransTexas believes the Pipeline System, with major
intrastate and interstate connections, enables it to compete effectively on
these bases. TransTexas believes that the combination of its low finding,
development and operating costs, its Pipeline System with major intrastate and
interstate connections, and its marketing capability enables TransTexas to
efficiently produce, sell and deliver its production, maximizing its operating
margin.
GOVERNMENTAL REGULATION
TransTexas' gas exploration, production and related operations are subject
to extensive rules and regulations promulgated by federal and state agencies.
Failure to comply with such rules and regulations can result in substantial
penalties. The regulatory burden on the gas industry increases TransTexas' cost
of doing business and affects its profitability. Because such rules and
regulations are frequently amended or reinterpreted, TransTexas is unable to
predict the future cost or impact of complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations, and impose other
requirements related to the exploration and production of gas. Such states also
have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of gas properties, the establishment
of maximum rates of production from gas wells and the regulation of spacing,
plugging and abandonment of such wells. The statutes and regulations of the
State of Texas limit the rate at which gas can be produced from TransTexas'
properties. However, these statutes and regulations have not impacted
TransTexas' results of operations.
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") since 1985 that affect the economics of
natural gas production, transportation and sales. In addition, the FERC
continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry, most notably
interstate natural gas transmission companies, that remain subject to the
FERC's jurisdiction. These initiatives may also affect the intrastate
transportation of gas under certain circumstances. The stated purpose of many
of these regulatory changes is to promote competition among the various sectors
of the gas industry. The ultimate impact on TransTexas of these complex and
overlapping rules and regulations, many of which are repeatedly subjected to
judicial challenge and interpretation, cannot be predicted.
Certain of TransTexas' businesses are subject to regulation by the Texas
Railroad Commission, the Federal Natural Gas Pipeline Safety Act of 1968 and
other state and federal environmental statutes and regulations.
Various aspects of the energy industry and the nation's production and use
of its energy sources are the subject of numerous state and federal legislative
proposals. On October 8, 1992, comprehensive national energy legislation came
into effect which is focused on electric power, renewable energy sources and
conservation. The legislation, among other things, guarantees equal treatment
of domestic and imported natural gas supplies, mandates expanded use of natural
gas and other alternative fuels vehicles, funds natural gas research and
development, permits continued offshore drilling and use of natural gas for
electric generation and adopts various conservation measures designed to reduce
consumption of imported oil.
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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. TransTexas has received notices of violation from the
Texas Air Control Board, predecessor agency to the Texas Natural Resource
Conservation Commission, alleging that, in connection with compression
stations, TransTexas built one and modified two emission sources without the
appropriate air permits. TransTexas has paid an administrative penalty of
approximately $300,000, has obtained the appropriate air permits and is now in
compliance. Certain other aspects of its operations may not be in compliance
with applicable environmental laws and regulations, and such noncompliance may
also give rise to compliance costs and administrative penalties. TransTexas
does not expect the foregoing environmental compliance matters to have a
material adverse effect on its financial position. 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.
LEGAL PROCEEDINGS
TransTexas has succeeded to the potential liability, if any, of
TransAmerican and certain subsidiaries in connection with the lawsuits described
below. TransTexas has assumed liability for the disputed claims described under
"Ginther/Warren" and liability for other litigation up to $15 million plus the
difference, if any, between $10 million and the costs (if less than $10 million)
incurred to resolve the disputed claims. Pursuant to an agreement among
TransTexas, TransAmerican and certain of its subsidiaries, as amended (the
"Transfer Agreement"), TransAmerican will indemnify TransTexas against all
losses incurred by TransTexas in excess of $25 million in connection with (a)
disputed claims in TransAmerican's bankruptcy and (b) other litigation assumed
by TransTexas and other agreements related to TransAmerican's plan of
reorganization (other than settlements and judgments paid from escrowed cash
established in connection with TransAmerican's plan of reorganization).
Effective with the settlement of the Terry/Penrod litigation described below,
TransAmerican will be required to indemnify TransTexas for all future losses
incurred in connection with litigation or bankruptcy claims assumed in the
Transfer. Any indemnification payments received from TransAmerican for which
TransTexas is the primary obligor will be considered a contribution of capital.
There can be no assurance that TransAmerican will have the financial ability to
meet all of its indemnification obligations.
FINKELSTEIN. On April 15, 1990, H.S. Finkelstein and Medallion Oil Company
filed suit against TransAmerican in the 49th Judicial District Court, Zapata
County, Texas, alleging that TransAmerican failed to pay royalties and
improperly marketed oil and gas produced in connection with the La Perla Ranch.
On September 27, 1994, the plaintiffs added TransTexas as an additional
defendant. On January 6, 1995, a judgment against TransAmerican and TransTexas
was entered for approximately $18 million in damages, interest and attorney's
fees. TransAmerican and TransTexas have posted a supersedeas bond and appealed
the judgment to the Fourth Circuit Court of Appeals, San Antonio, Texas. The
Fourth Circuit Court of Appeals affirmed the judgment on April 3, 1996.
TransAmerican and TransTexas have filed a motion for rehearing. On April 22,
1991, the plaintiffs filed another suit against TransAmerican and various
affiliates in the 49th Judicial District Court, Zapata County, Texas, alleging
an improper calculation of overriding royalties allegedly owed to the
plaintiffs and seeking damages in an unspecified amount. On November 18, 1993,
the plaintiffs added TransTexas as an additional defendant. The parties have
agreed to binding arbitration in this matter, which is set for January 6, 1997.
GINTHER/WARREN. Wilbur L. Ginther and Howard C. Warren conveyed a portion
of a lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas
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Supreme Court upheld a judgment in favor of Messrs. Ginther and Warren against
Taub's interest in the lease. The lower court judgment had awarded a portion of
the lease to Messrs. Ginther and Warren because Taub's attorney had defrauded
Messrs. Ginther and Warren with respect to their interest in the lease. On
November 26, 1986, the estates of Messrs. Ginther and Warren filed an adversary
proceeding in the United States Bankruptcy Court for the Southern District of
Texas, Houston Division (the "Bankruptcy Court") against TransAmerican claiming
that TransAmerican had constructive notice of their disputes but continued to
pay royalties and proceeds of production to Taub and seeking damages.
TransAmerican filed an interpleader action in the Bankruptcy Court and deposited
the disputed funds accruing from and after November 1984 into the registry of
the court. On September 30, 1993, the Bankruptcy Court entered a judgment
against TransAmerican in the amount of $6.3 million plus post judgment interest.
On September 15, 1995, the U.S. District Court for the Southern District of
Texas entered an order reversing the award of interest to Taub and affirming the
final judgment in all other respects. TransTexas appealed the judgment to the
Fifth Circuit Court of Appeals. On July 2, 1996, TransTexas and the estates of
Messrs. Ginther and Warren entered into a settlement pursuant to which such
estates received $3.5 million and a promissory note for $2.8 million. The
promissory note is payable in 36 equal monthly installments commencing
August 1, 1996, and bears no interest unless an installment payment is not
made. In addition, TransTexas transferred to such estates an additional
override in a portion of the lease and agreed to drill additional wells on the
lease. In conjunction with the settlement, the estates of Messrs. Ginther and
Warren agreed to farm out to TransTexas an additional working interest in the
lease.
COASTAL. On October 28, 1991, Coastal filed an action that was
consolidated in the 49th Judicial District Court, Webb County, Texas, alleging
breach of contract and tortious interference related to two gas sales contracts
and a transportation agreement, seeking unspecified actual and punitive damages
and injunctive relief. On April 22, 1994, the court entered a judgment adverse
to TransAmerican and TransTexas requiring them to pay $1.3 million plus $0.7
million in attorney's fees to Coastal. TransAmerican and TransTexas are
appealing this judgment. Coastal has abstracted the judgment in Webb and Zapata
counties. While this matter is being judicially resolved, TransTexas is
continuing to furnish gas to Coastal.
ALAMEDA. On May 27, 1993, Alameda Corporation ("Alameda") sued
TransAmerican and Mr. Stanley in the 215th Judicial District Court of Harris
County, Texas claiming that TransAmerican failed to account to Alameda for a
share of the proceeds TransAmerican received in a settlement during 1990 of
litigation with El Paso Natural Gas Company ("El Paso"), and that TransAmerican
has been unjustly enriched by its failure to share these proceeds with Alameda.
The court granted Mr. Stanley's motion for summary judgment. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda has
appealed to the Fourteenth Court of Appeals.
ASPEN. TransAmerican brought suit, on September 29, 1993, against Aspen
Services ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts received
by Aspen. Aspen, under provisions of the parties' drilling agreement, requested
that TransAmerican's audit be made subject to arbitration, and the court
agreed. While the audit was in progress, Aspen asserted additional costs that
it contended should be added to the production payment account. One category of
such costs, relating to overhead expenses, amounted to approximately $2.6
million. On July 3, 1996, the arbitrators issued a decision in which they
rejected all of Aspen's overhead charges, and accepted and rejected various
charges contested by TransAmerican, with the net result of a credit in
TransAmerican's favor of approximately $80,000. Aspen also filed, in the court
proceeding, on July 19, 1995, a counterclaim and third party claim against
TransAmerican, TransTexas, and affiliated entities, asserting, among other
things, that these entities failed to make certain payments and market the gas
from these wells. Aspen is seeking damages in an unspecified amount, as well as
certain equitable claims. TransTexas and its affiliates are vigorously
contesting this claim. The parties' drilling contract was not transferred to
TransTexas in the Transfer. The properties relating to the drilling contract,
however, were transferred to TransTexas. TransAmerican is entitled to any
settlement or damages awarded to it in this matter.
KATHRYN M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred to
the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in the La Perla Ranch
leases, are entitled to receive a portion
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of the settlement proceeds received by TransAmerican from El Paso.
TransAmerican has filed its motion for summary judgment which will be heard by
the Court on August 2, 1996. Plaintiffs have also filed a motion for partial
summary judgment based on the Finkelstein case. TransAmerican has responded to
this motion.
TERRY/PENROD. TransAmerican and a group of TransAmerican's former bank
lenders (the "Bank Group") were parties to a consolidated suit filed December
6, 1991, in the United States District Court for the Southern District of
Texas, Houston Division, relating to the interpretation of two third-party
drilling agreements. Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling
Corporation, Terry Oilfield Supply Co., Inc. and Terry Resources, Inc.
("Terry") sued TransAmerican for approximately $50 million in actual damages
and punitive damages of not less than five times actual damages. On April 5,
1996, the court entered a final judgement against TransAmerican, TransTexas and
several of their affiliates, in the amount of approximately $43 million, plus
interest. On April 18, 1996, the court entered a separate judgment against the
same parties for Terry's attorneys' fees of $2 million. In May 1996, TransTexas
paid Terry approximately $19 million and caused escrowed funds held for the
benefit of the Bank Group of approximately $22 million to be paid to Terry.
Upon payment of the settlement amount, Terry released the judgments, released
all liens and reassigned to TransTexas a production payment in certain
properties. Terry dismissed an unrelated administrative proceeding upon payment
of the settlement amount described above.
MCNAMARA. On June 28, 1996, TransTexas consummated a settlement of
litigation with Tennessee Gas Pipeline Company that was pending in Ector County
("Tennessee lawsuit") pursuant to which TransTexas and another Plaintiff (ICA
Energy, Inc.) received approximately $125 million from Tennessee. TransTexas'
share of the settlement proceeds was $96 million. On July 2, 1996, John
McNamara, Jr. et. al ("The Hubberd Trusts") filed a new suit against TransTexas
in the 241st District Court of Webb County, Texas asserting that TransTexas had
breached its duties to The Hubberd Trusts under certain oil and gas leases and
that TransTexas owed The Hubberd Trusts 25% of the gross settlement proceeds or
approximately $31.25 million. However, in August of 1995, The Hubberd Trusts had
already intervened in the Tennessee lawsuit wherein The Hubberd Trusts asserted
the exact same claims as those asserted in the 241st District Court proceeding.
Accordingly, TransTexas has already denied any liability to The Hubberd Trusts
and counterclaimed that The Hubberd Trusts are not due any portion of the
settlement proceeds received in Tennessee lawsuit. On July 5, 1996, TransTexas
filed a plea-in-abatement requesting that the 241st District Court proceeding
be dismissed based upon the dominant jurisdiction that already existed in the
Tennessee lawsuit. On July 15, 1996, the Court in the Tennessee lawsuit issued
a temporary injunction granting TransTexas' request that The Hubberd Trusts be
prevented and enjoined from pursuing their claims relating to the Tennessee
settlement proceeds in the 241st District Court. The Hubberd Trusts have filed
their notice of appeal to this temporary injunction.
WEST. On July 17, 1996, Milton H. West, III D/B/A West Energy Company
("West") filed suit against TransTexas for $30 million from the Tennessee
lawsuit settlement asserting TransTexas obtained its right to the settlement
proceeds from ICA Energy, Inc. ("ICA"). West had a prior contract with ICA for
a percent of such proceeds. TransTexas intends to vigorously defend this action.
BRIONES. In an arbitration proceeding, Briones, a lessor, claimed that a
TransTexas well on adjacent lands had been draining natural gas from a portion
of his acreage leased to TransTexas on which no well had been drilled. On
October 31, 1995, the Arbitrator decided that drainage had occurred. On June 3,
1996, the Arbitrator issued a letter indicating that drainage damages would be
awarded to Briones in the amount of $1,365,118.29. The Arbitrator entered his
award of damages on June 27, 1996. On July 3, 1996, TransTexas filed a petition
in Zapata County to vacate the Arbitrator's award.
FROST. On November 10, 1994, First National Bank filed suit against
TransTexas seeking a declaratory judgment determination that TransTexas failed
to properly and accurately calculate royalties under a lease. Plaintiff has
demanded $10 million plus interest. This litigation is in the discovery stage.
GENERAL. TransTexas is also a named defendant in other ordinary course,
routine litigation incidental to its business. While the outcome of these other
lawsuits cannot be predicted with certainty, TransTexas does not expect these
matters to have a material adverse effect on its financial position. At April
30, 1996, the possible range of estimated losses related to all of the
aforementioned claims in addition to the estimates accrued by the Company is $0
to $62 million. The resolution in any reporting period of one or more of these
matters in a manner adverse to TransTexas could have a material impact on
TransTexas' results of operations and cash flows for that period. Litigation
expense, including legal fees, was approximately $11 million, $20 million and
$11 million for the years ended July 31, 1993, 1994 and 1995, respectively.
Litigation expense, consisting primary of legal fees, totaled approximately $2
million and $3 million for the six months ended January 31, 1995 and 1996 and
approximately $1 million for each of the quarters ended April 30, 1995 and
1996. TransTexas has delivered letters of credit and placed into escrow cash,
which letters of credit and cash total approximately $29.3 million, to be
applied to the litigation claims described above. In addition, a change of
control or other event that results in deconsolidation of TransTexas and
TransAmerican for federal income tax purposes could result in acceleration of
a substantial amount of federal income taxes.
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MANAGEMENT OF THE COMPANY
The Company's board of directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
T. Gerald Harper Director 69
Donald B. Henderson Director 46
Thomas B. McDade Director 73
John R. Stanley Director, Chairman of the Board, President
and Chief Executive Officer 57
Gary L. Karr Vice President of Refining 47
R. Glenn McGinnis Vice President of Manufacturing 47
Jeffrey H. Siegel Chief Financial Officer and Secretary 39
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company.
T. Gerald Harper became a director of the Company in February 1995. Mr.
Harper has been an independent consultant in the energy and banking industries
since 1983. He served as Executive Vice President of The Coastal Corporation
from 1980 to 1983. From 1952 to 1980, Mr. Harper was with the Gulf Oil
Corporation and retired as Executive Vice President of its U.S. refining,
marketing and transportation operations. Mr. Harper is a director of Hercules
Transport, Inc.
Donald B. Henderson has been a director of the Company and of TEC since
July 1994. Mr. Henderson is a partner in the law firm of Blackburn & Henderson
and is a director of Colonial Casualty Insurance Co. From 1972 to 1978, Mr.
Henderson was a member of the Texas House of Representatives. Mr. Henderson has
been a member of the Texas Senate since 1982. Mr. Henderson has been a director
of TransAmerican since 1985 until his resignation in February 1995.
Thomas B. McDade has been a director of the Company and of TEC since July
1994. He is also a director of TransTexas. Mr. McDade is primarily engaged in
managing his personal investments and in providing consulting services in
Houston, Texas. Mr. McDade has been a director of TransAmerican since 1985
until his resignation in February 1995. Prior to 1989, he served as a
consultant to Texas Commerce Bancshares, Inc. and prior to July 1985 he served
as Vice Chairman and Director of Texas Commerce Bancshares, Inc. and Vice
Chairman and Advisory Director of Texas Commerce Bank. Mr. McDade is a former
director and trustee of eleven registered investment companies for which John
Hancock Funds serves as investment advisor in Boston, Massachusetts. Mr. McDade
is a former director of Houston Industries, Inc. and Houston Lighting & Power
Company. He is a member of the Board of Managers of the Harris County Hospital
District and former Chairman of the State Securities Board of Texas.
John R. Stanley has been a director and Chief Executive Officer of the
Company since September 1987 and a director and Chief Executive Officer of TEC
since July 1994. Mr. Stanley is the founder, Chairman of the Board, Chief
Executive Officer, and sole stockholder of TNGC Holdings Corporation, which is
the sole stockholder of TransAmerican. He has operated TransAmerican since
1958.
Gary L. Karr has been the Vice President of Refining of the Company since
January 1994 and Refinery Manager for approximately eight years prior thereto.
Mr. Karr has been with TransAmerican or a subsidiary of TransAmerican since
1971 in various positions.
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R. Glenn McGinnis has been the Vice President of Manufacturing of the
Company since July 1995. Prior to joining the Company, Mr. McGinnis held senior
refining and supply positions in Canada with Imperial Oil Limited, an affiliate
of Exxon Corporation. Mr. McGinnis was with Imperial Oil Limited for 23 years.
Jeffrey H. Siegel became Chief Financial Officer of the Company in
November 1995. From August 1991 to October 1995, Mr. Siegel served in various
financial and accounting capacities with affiliates of Enron Corp., most
recently as Vice President and Controller of Enron Global Power & Pipelines
L.L.C. Prior thereto, he was Cost Accounting and Financial Reporting Manager at
Occidental Chemical Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee and a Compensation Committee.
The Audit Committee is composed of Messrs. Harper, Henderson and McDade.
The Audit Committee reviews the scope of the independent auditors' examinations
of the Company's financial statements and receives and reviews their reports.
The Audit Committee meets with the independent auditors, receives
recommendations or suggestions for changes in accounting procedures, and
initiates or supervises any special investigations it may choose to undertake.
DIRECTOR COMPENSATION
Each director other than John R. Stanley is paid an annual director's fee
of $75,000 plus $750 for each meeting of the Board of Directors attended and
$750 for each meeting of a committee of the Board of Directors attended
(exclusive of committee meetings occurring on the same day as Board of
Directors' meetings).
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Company's
Chief Executive Officer and each of its other executive officers serving in
that capacity at January 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position ----------------------- All Other
in the Company Salary Bonus Compensation(a)(b)
- -------------------------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
John R. Stanley (c) 1996* $ 175,000 $ -- $ 807
Chief Executive Officer 1995 350,000 -- 4,620
1994 350,000 -- 4,620
1993 350,000 1,500,000 --
Gary L. Karr 1996* 67,500 -- 311
Vice President of Refining 1995 140,192 -- 2,312
1994 125,577 -- 4,228
R. Glenn McGinnis 1996* 115,687 -- --
Vice President of Manufacturing 1995 8,654 -- --
Jeffrey H. Siegel 1996* 24,230 -- --
Chief Financial Officer
</TABLE>
- ---------
*Six months ended January 31, 1996 (Transition Period)
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(a) Certain of the Company's executive officers receive personal benefits in
addition to salary and cash bonuses. The aggregate amount of the personal
benefits, however, does not exceed the lesser of $50,000 or 10% of the
total of the annual salary and bonus reported for the named executive
officer and accordingly has been excluded from the table.
(b) Reflects the amount contributed under the Savings Plan (as defined below).
(c) Amounts shown for fiscal 1995 and 1994 and the six months ended January
31, 1996 were paid by TransTexas. Amounts shown for fiscal 1993 were paid
by TransAmerican. The Company did not pay a salary or other employee
benefits to Mr. Stanley in 1995, 1994, 1993 or the six months ended
January 31, 1996. The Board of Directors of the Company has not set
compensation for Mr. Stanley.
EMPLOYMENT ARRANGEMENTS
On June 12, 1995, the Company and Mr. McGinnis entered into an employment
agreement for a term of one year. The employment agreement requires the Company
to pay Mr. McGinnis a salary of $225,000 per year. On November 12, 1995, the
Company and Mr. Siegel entered into a similar employment agreement whereby the
Company is required to pay Mr. Siegel a salary of $140,000 per year. If the
Company terminates Mr. McGinnis' or Mr. Siegel's employment prior to the term
of their respective employment agreements, the Company is required to pay Mr.
McGinnis or Mr. Siegel his respective salary for the remaining term of the
employment agreement plus an additional three months salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Harper, Henderson and
McDade. The Compensation Committee determines the nature and amount of all
compensation of the Company's officers. During the six months ended January 31,
1996, none of the members was an officer or employee of the Company, and none
had any relationship with the Company requiring disclosure under Item 404 of
Regulation S-K. The Indenture prohibits the Company and any Guarantor under the
Notes from paying compensation to Mr. Stanley in excess of $1 million per year,
in the aggregate.
TransAmerican and its affiliates have provided the Company with
substantially all of its corporate services requirements, including insurance,
legal, accounting and treasury functions. During 1994 and 1995, the six months
ended January 31, 1996, and the three months ended April 30, 1995 and 1996,
TransAmerican and TransTexas charged the Company approximately $0.1 million,
$0.2 million, $0.2 million, $0.1 million, and $0.1 million, respectively, to
cover its costs of providing these services, which management believes to be
reasonable based on the limited services provided. The Company's increase in
operations requires more corporate services and, accordingly, pursuant to the
revised services agreement, the Company is currently charged $26,000 per month
for such services. In addition, third party charges incurred by TransAmerican
and its affiliates have been charged directly or allocated to the Company on
usage or other methods that management believes are reasonable. All significant
transactions with affiliates to the extent unpaid are recorded in the "payable
to affiliates account."
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors"), a
subsidiary of TransAmerican, provides construction personnel to the Company in
connection with the Capital Improvement Program. These construction workers are
temporary employees, and the number and composition of the workforce will vary
throughout the Capital Improvement Program. Southeast Contractors charges the
Company for the direct costs it incurs, which consist solely of employee payroll
and benefits plus administrative costs and fees; such administrative costs and
fees charged to the Company are $1.2 million per year. Total labor costs paid to
Southeast Contractors were approximately $15.5 million for the year ended July
31, 1995, approximately $20.2 million for the six months ended January 31,
1996 and approximately $0.9 million for the three months ended April 30, 1996,
of which $1.0 million, $2.3 million and $0.9 million were payable July 31, 1995,
January 31, 1996 and April 30, 1996, respectively. No labor costs were paid to
Southeast Contractors in prior years.
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<PAGE> 74
Certain refinery assets held by TransAmerican or its subsidiaries,
including the real property on which the Company's refinery is located, were
transferred to the Company in July 1994 at TransAmerican's net book value of
approximately $25 million.
A former subsidiary of TransAmerican owed $205,000 to Lynn Petroleum
Storage and Transport Co., Inc., a company owned by Mr. Stanley's children
("Lynn"). This liability was assumed by the Company in conjunction with the
transfer of refinery assets described above. In May 1995, the Company paid this
obligation, and a $492,200 obligation to Lynn arising from the purchase of a
cryogenic gas processing unit and butane tanks from Lynn in April 1994. The
Company believes that the purchase price for the cryogenic gas processing unit
is fair and reasonable to the Company and on terms no less favorable than could
be obtained from an unrelated third party.
In July 1994, JRS Ventures, Inc. ("JRS"), owned by John R. Stanley,
conveyed to the Company a portion of the real property on which the Company's
refinery is located. The Company intends to pay JRS $25,000, which is the
amount for which JRS purchased the land in August 1993 from Lynn. During the
three fiscal years ended July 31, 1993, the Company paid Lynn ground rent of
approximately $300,000 per year for the use of this land. Lease payments under
the ground lease were terminated effective August 1993 when JRS acquired the
land.
From time to time TransAmerican and TransTexas have made advances to Mr.
Stanley. The Indenture prohibits loans or advances to Mr. Stanley from the
Company or any Guarantor or any of their subsidiaries (other than TransTexas).
During 1995, TransAmerican acquired an office building which it renovated
and subsequently sold to TransTexas in February 1996. TransAmerican advanced $4
million of the proceeds from this sale to the Company for working capital. The
Company leases office space from TransTexas on terms and conditions permitted
by the TARC Indenture.
Prior to the sale of the Notes, the Company participated in
TransAmerican's centralized cash management program. Funds required by the
Company for daily operations and capital expenditures have been advanced by
TransAmerican. All cash transactions have been effected through intercompany
accounts other than amounts funded by the Collateral Account. The intercompany
debt currently owed by the Company to TransAmerican does not bear interest and
has no fixed maturity. In October 1994, TransAmerican sold 5.25 million shares
of TransTexas common stock. TransAmerican advanced approximately $50 million of
the proceeds from these stock sales to the Company, of which approximately $20
million was used by the Company to repay a portion of the TransAmerican Loan,
and the remaining $30 million was used for working capital and general
corporate purposes. The Company used approximately $20 million of the net
proceeds of the sale of the Notes to repay the balance of the TransAmerican
Loan. Approximately $10 million of the net proceeds from the sale of the Notes
were used to repay other intercompany debt to TransAmerican. TransAmerican
contributed to the capital of the Company (through TEC) all but $10 million of
the remainder of the Company's intercompany debt owed to TransAmerican. In
April 1995, the Company repaid the remaining $10 million of intercompany
indebtedness owed to TransAmerican. In August 1995, the Company received an
advance of $3 million from TransTexas which the Company used to settle its
remaining portion of the Halliburton litigation. In September 1995, the Company
received an advance of $1.7 million from TransAmerican which the Company used
to purchase feedstock. In October 1995, the Company repaid these advances to
TransAmerican without interest. Additionally, in October 1995, the Company
received an advance of approximately $4 million from TransAmerican which the
Company used for working capital, a portion of which has been repaid.
In September 1995, the Company received an advance of $1 million from
TransTexas which the Company used to purchase feedstock. This advance was repaid
by the Company with interest. In December 1995, the Company advanced $1 million
to TransTexas. This advance was repaid to the Company with interest. In July
1996, the Company executed a promissory note to TransAmerican for up to $25
million. Currently, the Company has drawn $5 million against the note. The note
bears interest at 15% per annum, with quarterly interest payments beginning in
October 1996 and with the principal due in July, 1998. In July and August 1996,
TransAmerican advanced $4.3 million to the Company. The Company anticipates
repaying a portion of this non-interest bearing advance within 30 days.
The TARC Indenture requires that, with certain exceptions, transactions
between the Company and certain related parties be on terms no less favorable
to the Company than would be available from an unrelated party and that are
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<PAGE> 75
fair and reasonable to the Company. This standard will apply to future
transactions, if any, with entities in which Mr. Stanley or members of his
family may have an interest. A similar covenant is in the indenture governing
the TransTexas Notes. Before the issuance of the TransTexas Notes,
TransAmerican regularly acquired products and services from suppliers owned in
whole or in part by adult children of Mr. Stanley.
THE STOCK TRANSFER AGREEMENT. Pursuant to a Stock Transfer Agreement among
TransAmerican, TEC, and the Company, TransAmerican contributed to the capital
of TEC (i) all of the outstanding capital stock of the Company, and (ii) 55
million shares of common stock of TransTexas; and TEC then contributed 15
million of these shares of TransTexas common stock to the Company.
REGISTRATION RIGHTS AGREEMENT. Pursuant to a Registration Rights Agreement
among TransTexas, the Company, TEC, and the trustee under the Indenture,
TransTexas filed a shelf registration statement to register under the
Securities Act the shares of TransTexas common stock pledged by the Company and
TEC pursuant to the Indenture.
THE GAS PURCHASE AGREEMENT. Pursuant to a Gas Purchase Agreement, as
amended in August 1994, the Company purchases natural gas from TransTexas at the
average prices charged by TransTexas for interruptible delivery for the month of
purchase. Total natural gas purchased for the years ended July 31, 1994 and
1995, the six months ended January 31, 1996, and the three months ended April
30, 1995 and 1996, was approximately $2.3 million, $2.5 million, $1.4 million,
$0.1 million, and $0.3 million, respectively. The payable to TransTexas for
natural gas purchased totaled approximately $1.2 million, $0.4 million, $0.1
million, $0.1 million, and $0.3 million at July 31, 1994 and 1995, January 31,
1996, and April 30, 1995 and 1996, respectively.
THE SERVICES AGREEMENT. TransAmerican, TransTexas, TEC and the Company
entered into a Services Agreement (the"Services Agreement") pursuant to which
TransTexas provides certain accounting and legal services to the Company and
TEC. To the extent TransTexas provides legal services to the Company, TEC or
TransAmerican, other than general legal services included in the monthly fee
and costs of the TransTexas legal department relating to the litigation for
which TransTexas has assumed liability, TransTexas will be compensated in an
amount equal to its direct costs for such services plus 10% of such costs. It
is anticipated that these additional legal services will primarily consist of
litigation support and supervision. The Services Agreement will terminate (i)
upon 30 days' notice to TransTexas by the trustee of the indenture governing
the TransTexas Notes after an Event of Default under the indenture governing
the TransTexas Notes of (ii) upon 30 day's notice from either party to the
other party. In accordance with the Indenture, other services provided by
TransTexas to the Company and TEC must be on terms that are fair and reasonable
to the Company and TEC and at least as favorable to the Company and TEC as
could be obtained on an arm's length basis with unrelated parties. In
accordance with the indenture governing the TransTexas Notes, other services
provided by TransTexas to TransAmerican, TEC and the Company must be on terms
that are fair and reasonable to TransTexas and at least as favorable to
TransTexas as could be obtained on an arm's length basis with unrelated
parties.
THE TAX ALLOCATION AGREEMENT. TransAmerican, its existing subsidiaries,
including the Company, TEC, and TransTexas, entered into a Tax Allocation
Agreement, the general terms of which require TransAmerican and all of its
subsidiaries to file federal income tax returns as members of a consolidated
group to the extent permitted by law. Filing on a consolidated basis allows
income and tax of one member to be offset by losses and credits of another and
allows deferral of certain intercompany gains; however, each member is
severally liable for the consolidated federal income tax liability of the
consolidated group.
The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal
income tax liabilities among the members if the Internal Revenue Service
("IRS") or the courts ultimately re-determine the group's regular tax or
alternative minimum tax liability. In the event of an IRS audit or examination,
the Tax Allocation Agreement generally gives TransAmerican the authority to
compromise or settle disputes and to control litigation, subject to the
approval of the Company, TEC or TransTexas, as the case may be, where such
compromise or settlement affects the determination of the separate tax
liability of that company.
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Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year
except that each subsidiary will be able to utilize net operating losses and
credits of TransAmerican and the other members of the TransAmerican
consolidated group effectively to defer payment of tax liabilities that it
would have otherwise owed had it filed a separate federal income tax return.
Each subsidiary will essentially pay the deferred taxes at the time
TransAmerican (or the member whose losses or credits are utilized by such
subsidiary) begins generating taxable income or tax. This will have the effect
of deferring a portion of such subsidiary's tax liability to future years.
In addition to its Allocable Share, TransTexas will pay the following
amounts:
(a) the amount of federal income or alternative minimum tax due and
payable by TransAmerican after the Transfer for the taxable year ending
July 31, 1994, to the extent attributable to the Transfer; and the amount
of Texas franchise tax due and payable by TransAmerican after the Transfer
for the privilege periods ending after December 31, 1993, but in no event
later than the privilege period ending on December 31, 1995, to the extent
attributable to the Transfer; and
(b) each year, an amount equal to the lesser of (i) the reduction in
taxes paid by TransTexas for such year as a result of any increase in the
tax basis of assets acquired by TransTexas from TransAmerican that is
attributable to the Transfer, and (ii) the increase in taxes paid by
TransAmerican for such year and all prior years attributable to gain
recognized by TransAmerican in connection with the contribution of assets
by TransAmerican to TransTexas (less amounts paid by TransTexas under
clause (b) or clause (c)(i) above for all prior years).
SAVINGS PLAN
The Company maintains a long-term savings plan (the "Savings Plan") in
which eligible employees of the Company and certain of its affiliates may elect
to participate. Each employee becomes eligible to participate in the Savings
Plan on January 1 or July 1 following the completion of one year of service
with the Company or its participating affiliates and attainment of age 21. The
Savings Plan is intended to constitute a qualified plan under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and contains a
salary reduction arrangement described in Section 401(k) of the Code.
Each participant may elect to reduce his compensation by a percentage
equal to 2% to 15% and the Company will contribute that amount to the Savings
Plan on a pre-tax basis on behalf of the participant. The Code limits the
annual amount that a participant may elect to have contributed on his behalf on
a pre-tax basis to the Savings Plan. For 1996, this limit is $9,500. The
Company presently makes a matching contribution in an amount equal to 10%, 20%,
or 50% of the amount elected to be contributed by each participant on a pre-tax
basis, up to a maximum of 3% of each participant's compensation, depending on
whether the employee has been a participant in the Savings Plan for one year,
two years or three years. Each participant also may elect to contribute up to
10% of his compensation to the Savings Plan on an after-tax basis. The Code
imposes nondiscrimination tests on contributions made to the Savings Plan
pursuant to participant elections and on the Company's matching contributions,
and limits amounts which may be allocated to a participant's Savings Plan
account each year. In order to satisfy the nondiscrimination tests,
contributions made on behalf of certain highly compensated employees (as
defined in the Code) may be limited. Contributions made to the Savings Plan
pursuant to participant elections and matching contributions are at all times
100% vested. Contributions to the Savings Plan are invested, according to
specified investment options selected by the participants, in investment funds
maintained by the trustee of the Savings Plan. Generally, a participant's
vested benefits will be distributed from the Savings Plan as soon as
administratively practicable following a participant's retirement, death,
disability or other termination of employment. In addition, a participant may
elect to withdraw his after-tax contributions from the Savings Plan prior to
his termination of employment, and subject to certain strict limitations and
exceptions, the Savings Plan provides for withdrawals of a participant's
pre-tax contributions prior to a participant's termination of employment in the
event of the
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participant's severe financial hardship or attainment of age 59 1/2. The
Savings Plan may be amended or terminated by the Board of Directors of the
Company. As of July 12, 1996, approximately 154 employees were eligible to
participate in the Savings Plan.
INDEMNIFICATION ARRANGEMENTS
As authorized by Texas Business Corporation Law and Delaware General
Corporation Law, the Company's Articles of Incorporation and TransTexas'
Certificate of Incorporation, respectively, provide that the directors will
have no personal liability to the Company or TransTexas, as the case may be or
its stockholders to the fullest extent of the law. In addition, the Company and
TEC has customary directors' and officers' liability insurance policies for
their directors and officers. Agreements with directors also provide for
indemnification for amounts in respect of the deductibles for such insurance
policies, and amounts that exceed the liability limits of such insurance
policies. Such indemnification may be made even though directors and officers
would not otherwise be entitled to indemnification under other provisions of
the By-laws or such agreements.
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MANAGEMENT OF TEC
TEC's board of directors and executive officers are as follows
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
James V. Langston Director -- Independent 72
John R. Blinn Director -- Independent 53
Thomas B. McDade Director -- Independent 73
Kim E. Morris Director -- Independent 40
Donald B. Henderson Director -- Independent 46
John R. Stanley Director, Chairman of the Board
and Chief Executive Officer 57
Jeffrey H. Siegel Chief Financial Officer and Secretary 39
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of TEC.
James V. Langston has been a director of TEC since February 1995. Mr.
Langston is the Chairman and Chief Executive Officer of Artic Offshore
Technology Company. From 1977 to 1984 he was President, Director, and Chief
Operating Officer of Dual Drilling Company. Prior thereto, he was with Exxon,
USA for 29 years and was their Manager of Exploration and Production Drilling.
Mr. Langston was a director of TransAmerican from 1986 to 1995.
John R. Blinn became a director of TEC in September 1995. Mr. Blinn is of
Counsel to the law firm of Leonard, Hurt, Terry & Blinn. Prior thereto, he was
in private practice, and he served as U.S. Bankruptcy Judge for the Southern
District of Texas from 1975 to 1982. Mr. Blinn had been a director of
TransAmerican until his resignation in 1995.
Thomas B. McDade has been a director of the Company and TEC since July
1994. He is also a director of TransTexas. Mr. McDade is primarily engaged in
managing his personal investments and in providing consulting services in
Houston, Texas. Mr. McDade had been a director of TransAmerican since 1985 until
his resignation in February 1995. Prior to 1989, he served as a consultant to
Texas Commerce Bancshares, Inc. and prior to July 1985 he served as Vice
Chairman and director of Texas Commerce Bancshares, Inc. and Vice Chairman and
Advisory Director of Texas Commerce Bank. Mr. McDade is a former director and
trustee of eleven registered investment companies for which John Hancock Funds
serves as investment advisor in Boston, Massachusetts. Mr. McDade is a former
director of Houston Industries, Inc. and Houston Lighting & Power Company. He is
a member of the Board of Managers of the Harris County Hospital District and
former Chairman of the State Securities Board of Texas.
Kim E. Morris was elected to TEC's Board of Directors in December
1995 by the holders of the Company's Series A Preferred Stock. Ms. Morris is a
portfolio manager at R.H. Capital Associates in Glen Rock, New Jersey. She
joined that firm in August 1995 after holding similar positions at Cerberus
Partners and Morgens Waterfall for the previous five years. Prior thereto, Ms.
Morris was an analyst at Paine Webber, specializing in the energy industry,
manufacturing and retail.
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Donald B. Henderson has been a director of the Company and TEC since July
1994. Mr. Henderson is a partner in the law firm of Blackburn & Henderson
and is a director of Colonial Casualty Insurance Co. From 1972 to 1978, Mr.
Henderson was a member of the Texas House of Representatives. Mr. Henderson has
been a member of the Texas Senate since 1982. Mr. Henderson had been a director
of TransAmerican since 1985 until his resignation in February 1995.
John R. Stanley has been a director and Chief Executive Officer of TEC
since July 1994. Mr. Stanley has been a director and Chief Executive Officer of
the Company since September 1987 and has been a director and Chief Executive
Officer of TransTexas since May 1993. Mr. Stanley is the founder, Chairman of
the Board, Chief Executive Officer, and sole stockholder of TNGC Holdings
Corporation, which is the sole stockholder of TransAmerican. He has operated
TransAmerican since 1958.
Jeffrey H. Siegel became Chief Financial Officer and Secretary of TEC
in November 1995. Mr. Siegel is also Chief Financial Officer of the Company.
From August 1991 to October 1995, Mr. Siegel served in various financial and
accounting capacities with affiliates of Enron Corp., most recently as Vice
President and Controller of Enron Global Power & Pipelines L.L.C. Prior
thereto, he was Cost Accounting and Financial Reporting Manager at Occidental
Chemical Corporation.
DIRECTOR COMPENSATION
Each director other than John R. Stanley is paid an annual director's fee
of $75,000 plus $750 for each meeting of the Board of Directors attended and
$750 for each meeting of a committee of the Board of Directors attended
(exclusive of committee meetings occurring on the same day as board of
directors meetings).
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the TEC's Chief
Executive Officer and each of its other executive officers serving in that
capacity at January 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position ----------------------- All Other
in the Company Salary Bonus Compensation(a)(b)
- -------------------------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
John R. Stanley (c) 1996* $ 175,000 $ -- $ 807
Chief Executive Officer 1995 350,000 -- 4,620
1994 350,000 -- 4,620
1993 350,000 1,500,000 --
Jeffrey H. Siegel (d)
Chief Financial Officer 1996* 24,230 -- --
</TABLE>
- ---------
* Six months ended January 31, 1996 (Transition Period)
(a) Certain of the TEC's executive officers receive personal benefits in
addition to salary and cash bonuses. The aggregate amount of the personal
benefits, however, does not exceed the lesser of $50,000 or 10% of the
total of the annual salary and bonus reported for the named executive
officer and accordingly has been excluded from the table.
(b) Reflects the amount contributed under the Savings Plan (as defined below).
(c) Amounts shown for fiscal 1995 and 1994 and the six months ended January
31, 1996 were paid by TransTexas. Amounts shown for 1993 were paid by
TransAmerican. TEC did not pay a salary or other employee benefits
to Mr. Stanley in 1995, 1994, 1993 or the six months ended January 31,
1996. The Board of Directors has not set compensation for Mr. Stanley.
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<PAGE> 80
(d) Amounts shown for 1996 were paid by the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
TEC has no audit committee or compensation committee. See "Business of the
Company -- Compensation Committee Interlocks and Insider Participation" for a
discussion of certain related party transactions of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Management of the Company -- Compensation Committee Interlocks and
Insider Participation" and "Note 13 Transactions With Affiliates in the Notes to
the Consolidated Financial Statements for TEC" for a description of certain
relationships and transactions among the Company and TEC and their affiliates.
OWNERSHIP OF THE COMPANY
The following table sets forth the beneficial ownership of the Common
Stock, as of July 23, 1996, by each stockholder of the Company who beneficially
owns more than 5% of the Common Stock:
Number of
Shares
Beneficially Percentage
Name and Address of Beneficial Owner Owned of Class
- ------------------------------------ ------------ ----------
TransAmerican Energy Corporation 30,000,000 100%(1)
1300 East North Belt, Suite 200
Houston, Texas 77032
John R. Stanley(2) 30,000,000 100%(2)
1300 East North Belt, Suite 300
Houston, Texas 77032
- --------------------
(1) In February 1995, the Company issued warrants to purchase 7,459,313 shares
of Common Stock at $0.01 per share (the "Warrants"). If the Warrants were
exercised in full, TEC's ownership of Common Stock would be diluted by
19.99%
(2) John R. Stanley owns 100% of the outstanding capital stock of TNGC
Holdings, Inc., which owns 100% of the outstanding capital stock of
TransAmerican, which owns 100% of the outstanding common stock
(representing 90% of the combined voting power of all capital stock) of
TEC. As the sole stockholder of TNGC Holdings, Inc., Mr. Stanley may be
deemed to beneficially own all of the outstanding shares of capital stock
of each of TransAmerican and the Company and all of the outstanding common
stock of TEC. No other director or executive officer of the Company
beneficially owns any equity securities of the Company, TNGC
Holdings, Inc., TransAmerican or TEC.
DESCRIPTION OF THE NOTES
The Notes are issued pursuant to an Indenture, dated as of February 15,
1995 (the "Indenture"), by and between the Company, TEC, as Guarantor, and First
Union National Bank, as trustee (the "Indenture Trustee"). The terms of the
Indenture are also governed by certain provisions contained in the Trust
Indenture Act of 1939, as amended. The following is an accurate summary of
material provisions of the Indenture, but is not necessarily
complete. Reference is made to the copy of the Indenture which has been filed
as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to them in the Indenture. References to the
"Company" as used in this "Description of the Notes" are to TransAmerican
Refining Corporation.
GENERAL
The Company issued Discount Mortgage Notes in the aggregate principal
amount of $340 million and Mortgage Notes in the aggregate principal amount of
$100 million. The Notes are senior obligations of the Company ranking pari
passu in right of payment with all other unsubordinated obligations of the
Company and senior to any subordinated indebtedness of the Company. The Notes
were issued only in fully registered form, without coupons, in denominations of
$1,000 and integral multiples thereof.
The Notes will mature on February 15, 2002. The Discount Mortgage Notes
were issued at a substantial discount from their principal amount, and the
original issue discount on the Discount Mortgage Notes accrete from the date of
their original issuance until February 15, 1998. Thereafter, the Discount
Mortgage Notes bear interest at the rate of 18 1/2% per annum, subject to
adjustment, from February 15, 1998 or from the most recent interest payment
date to which interest has been paid or provided for. After February 15, 1998,
interest on the Discount Mortgage Notes will be payable semi-annually on
February 15 and August 15 of each year, commencing August 15, 1998, to the
persons in whose names such Discount Mortgage Notes are registered at the close
of business on the February 1 or August 1 preceding such interest payment date.
The Mortgage Notes bear interest at the rate of 16 1/2% per annum, subject to
adjustment, from the most recent interest payment date to which interest has
been paid or provided for, payable semi-annually on February 15 and August 15
of each year, to the persons in whose names such Mortgage Notes are registered
at the close of business on the February 1 or August 1 preceding such interest
payment date. Upon payment in full in cash of the interest payment due on
August 15, 1998 in respect of the Discount Mortgage
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<PAGE> 81
Notes, the Discount Mortgage Notes and Mortgage Notes will thereafter bear
interest at the respective rates per annum set forth on the cover page hereof
less 50 basis points (0.5%).
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose. At the option of
the Company, payment of interest may be made by check mailed to the Holders of
the Notes at the addresses set forth upon the registry books of the Company. No
service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith. Until otherwise
designated by the Company, the Company's office or agency is the corporate
trust office of the Trustee presently located at 230 S. Tryon Street, Charlotte,
North Carolina 28288, Attention: Trust Department.
DISBURSEMENT OF FUNDS; COLLATERAL ACCOUNT
Pursuant to the Disbursement Agreement, $173 million of the net proceeds
from the sale of the Notes pursuant to the 1995 Offering was placed in the
Collateral Account, held and invested by the Disbursement Agent until needed
from time to time to fund the Capital Improvement Program. In addition, the
Company is required to deposit the first $50 million of proceeds from a
Revolving Credit Facility in the Collateral Account if the Company obtains such
facility. The Disbursement Agent invests the assets of the Collateral Account in
cash, Cash Equivalents and Marketable Securities. Interest income, if any,
earned on the invested proceeds will be added to the balance of the Collateral
Account. The Disbursement Agent disburses funds from the Collateral Account only
upon satisfaction of the disbursement conditions set forth in the Disbursement
Agreement. All funds in the Collateral Account are pledged as security for the
repayment of the Notes.
The Disbursement Agent makes disbursements out of the Collateral Account
in accordance with a budget prepared by the Company and approved by the
Construction Supervisor. The budget consists of an itemized schedule setting
forth on a line item basis the additional expenditures estimated to be incurred
in connection with the Capital Improvement Program, the total cost of which may
not exceed $434 million, subject to certain exceptions. See "Business of the
Company -- Capital Improvement Program." The Company may amend the budget only
with the approval of the Construction Supervisor. The Construction Supervisor
will approve an amended budget if it satisfies all of the requirements of the
original budget or certain other conditions are satisfied. If the Capital
Improvement Program runs over budget, the Disbursement Agreement gives priority
to expenditures for Phase I.
Under the Disbursement Agreement, the Construction Supervisor is
responsible for review and approval of the Company's plans and specifications
and budget for the Capital Improvement Program. The Construction Supervisor is
required to perform weekly inspections of the Company's refinery and to advise
the Disbursement Agent and the Indenture Trustee on the progress of the Capital
Improvement Program. In addition, the Construction Supervisor is required to
review each request by the Company for a disbursement from the Collateral
Account to pay for the Capital Improvement Program. No disbursements may be
made from the Collateral Account to fund the Capital Improvement Program unless
the Construction Supervisor determines (i) that the disbursement has been
requested to pay for expenses that are in accordance with the plans and
specifications approved by the Construction Supervisor, (ii) that the expense
for which a disbursement has been requested does not exceed the amount for such
item as set forth in the budget approved by the Construction Supervisor, and
(iii) that transactions for which a disbursement has been requested were made
on an arm's length basis, as represented by the Company.
OPTIONAL REDEMPTION
The Company does not have the right to redeem the Notes prior to February
15, 1999, except that the Company may redeem, at its option, up to 30% of the
original aggregate principal amount of the Discount Mortgage
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<PAGE> 82
Notes and up to 30% of the original aggregate principal amount of the Mortgage
Notes, at the redemption prices set forth below (expressed as a percentage of
the principal amount thereof or, in the case of Discount Mortgage Notes prior
to February 15, 1998, as a percentage of Accreted Value thereof), together with
accrued and unpaid interest, if any, to the redemption date, within 90 days
after completion of any Equity Offering, with the net proceeds of such Equity
Offering. On or after February 15, 1999, the Company has the right to redeem
all or any part of the Notes in cash at the redemption prices set forth below
(expressed as a percentage of the principal amount thereof), together with
accrued and unpaid interest, if any, to the redemption date:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE 12-MONTH REDEMPTION
PERIOD BEGINNING FEBRUARY 15 PRICE
---------------------------- -----
<S> <C>
1995 ............................................................. 112%
1996 ............................................................. 112%
1997 ............................................................. 112%
1998 ............................................................. 112%
1999 ............................................................. 106%
2000 ............................................................. 103%
2001 and thereafter .............................................. 100%
</TABLE>
In the case of a partial redemption, the Indenture Trustee shall select
the Notes or portions thereof to be redeemed pro rata or by lot or in such
other manner as in its sole discretion it deems appropriate and fair. The Notes
may be redeemed in part in multiples of $1,000 principal amount only.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal
to the unredeemed portion thereof and must state that on and after the date
fixed for redemption, upon surrender of such Note, a new Note, or Notes in a
principal amount equal to the unredeemed portion thereof will be issued. On and
after the date fixed for redemption, interest will cease to accrue on the Notes
or portions thereof called for redemption and original issue discount, if any,
will cease to accrete on the Discount Mortgage Notes or portions thereof called
for redemption.
MANDATORY REDEMPTION
The Indenture requires the Company to redeem, at a redemption price equal
to 100% of the principal amount thereof, plus accrued interest thereon to the
redemption date, $85 million principal amount of the Discount Mortgage Notes
and $25 million principal amount of the Mortgage Notes on each of February 15,
2000 and 2001, which redemptions are calculated to retire 50% of the principal
amount of the Notes prior to maturity. The Company may, at its option, receive
credit against mandatory redemption payments for the principal amount of Notes
redeemed or otherwise acquired by it (other than by operation of this mandatory
redemption) and surrendered to the Indenture Trustee for cancellation.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms contained in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accounts Receivable Subsidiary" means a subsidiary of the Company
designated as an Accounts Receivable Subsidiary for the purpose of financing
the accounts receivable of the Company.
"Accounts Receivable Subsidiary Notes" means the notes to be issued by the
Accounts Receivable Subsidiary for the purchase of accounts receivable.
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"Accreted Value" means, with respect to any Discount Mortgage Note, as of
any date of determination, the sum of (a) the initial offering price of each A
Unit and (b) the portion of the excess of the principal amount of each Discount
Mortgage Note over such initial offering price which shall have been accreted
thereon through such date, such amount to be so accreted on a daily basis at
the rate of 18 1/2% per annum of the initial offering price of the A Unit,
compounded semi-annually on each February 15 and August 15 from the date of
issuance of the Discount Mortgage Notes through the date of determination.
"Adjusted EBITDA" of any Person for any period means (a) the Consolidated
Net Income of such Person for such period, plus (b) the sum, without
duplication (and only to the extent such amounts are deducted from net revenues
in determining such Consolidated Net Income), of (i) the provision for income
taxes for such period for such Person and its consolidated Subsidiaries, (ii)
depreciation, amortization and other non-cash charges of such Person and its
consolidated Subsidiaries during such period, and (iii) Consolidated Fixed
Charges of such Person for such period, determined, in each case, on a
consolidated basis for such Person and its consolidated Subsidiaries in
accordance with GAAP, less (c) the sum, without duplication, of (i) all noncash
items increasing such Consolidated Net Income during such period and (ii) the
amount of all cash payments relating to non-cash charges that were added back
in determining Adjusted EBITDA for such period or for any prior period,
determined, in each case, on a consolidated basis for such Person and its
consolidated Subsidiaries in accordance with GAAP.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP or,
in the event that such rate of interest is not reasonably determinable,
discounted at the rate of interest borne by the Mortgage Notes) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended).
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85% of the book value of all accounts receivable owned by the Company and its
Subsidiaries (excluding any accounts receivable from a Related Person or that
are more than 90 days past due, less (without duplication) the allowance for
doubtful accounts attributable to such current accounts receivable) calculated
on a consolidated basis and in accordance with GAAP and (b) 80% of the current
market value of all inventory owned by the Company and its Subsidiaries as of
such date. To the extent that information is not available as to the amount of
accounts receivable as of a specific date, the Company may utilize, to the
extent reasonable, the most recent available information for purposes of
calculating the Borrowing Base.
"Capital Expenditures" of a Person means expenditures (whether paid in
cash or accrued as a liability) by such Person or any of its Subsidiaries that,
in conformity with GAAP, are or would be included in "capital expenditures,"
"additions to property, plant, or equipment," or comparable items in the
consolidated financial statements of such Person consistent with prior
accounting practices.
"Capital Stock" means, with respect to any Person, any capital stock of
such Person and shares, interests, participations, or other ownership interests
(however designated) of such Person and any rights (other than debt securities
convertible into corporate stock), warrants or options to purchase any of the
foregoing, including without limitation each class of common stock and
preferred stock of such Person if such Person is a corporation and each general
and limited partnership interest of such Person if such Person is a
partnership.
"Capitalized Lease Obligation" means obligations under a lease that are
required to be capitalized for financial reporting purposes in accordance with
GAAP (including Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board as in effect on the Issue Date) and the
amount of Debt represented by such obligations shall be the capitalized amount
of such obligations, as determined in accordance with GAAP, unless such
obligations arise as a result of a Sale/Leaseback Transaction, in which case
the amount of debt represented by such obligation shall be the Attributable
Debt in respect of such Sale/Leaseback Transaction.
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"Cash Equivalents" means (a) United States dollars, (b) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (c) certificates of deposit with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months, and overnight bank
deposits, in each case, with any Eligible Institution, (d) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (b) and (c) entered into with any Eligible
Institution, and (e) commercial paper rated "P-1," "A-1" or the equivalent
thereof by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation, Inc. ("S&P"), respectively, and in each case maturing within six
months after the date of acquisition.
"Closing Price" of a share of common stock on any day shall mean (a) the
closing sales price regular way per share of common stock on such day on the
New York Stock Exchange ("NYSE"), or (b) if the common stock is not listed on
the NYSE, the last reported sales price regular way, or in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices regular way, on the principal national securities exchange on
which the common stock is admitted for trading, or (c) if the common stock is
not listed or admitted for trading on any national securities exchange, the
last reported sales price regular way per share of common stock on such day,
or, in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case, on the
Nasdaq National Market.
"Collateral Ratio" means, as of any date, the ratio of (a) the sum of the
Public Market Value of common stock of the Company pledged as security for the
Notes and the Guarantee plus the Market Value of shares of TransTexas common
stock pledged as security for the Notes and the Guarantee, and, if the common
stock of the Company has a Public Market Value greater than zero, minus the
Market Value of shares of TransTexas common stock pledged by the Company as
security for the Notes and the Guarantee, to (b) the outstanding principal
amount of the Notes, plus all accrued and unpaid interest thereon.
"Company Pledge Agreement" means the Pledge Agreement between the Company
and the Indenture Trustee, as amended from time to time in accordance with the
Indenture.
"Consolidated EBITDA" of any Person for any period means (a) the
Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted from net
revenues in determining such Consolidated Net Income), of (i) the provision for
income taxes for such period for such Person and its consolidated Subsidiaries,
(ii) depreciation and amortization of such Person and its consolidated
Subsidiaries during such period, and (iii) Consolidated Fixed Charges of such
Person for such period, determined, in each case, on a consolidated basis for
such Person and its consolidated Subsidiaries in accordance with GAAP unless
otherwise defined herein.
"Consolidated Fixed Charge Coverage Ratio" on any date (the "Transaction
Date") means, with respect to any Person, the ratio, on a pro forma basis, of
(a) the aggregate amount of Consolidated EBITDA of such Person (attributable to
continuing operations and businesses and exclusive of the amounts attributable
to operations and businesses discontinued or disposed of, on a pro forma basis)
for the Reference Period to (b) the aggregate Consolidated Fixed Charges of
such Person (exclusive of amounts attributable to discontinued operations and
businesses, but only to the extent that the obligations giving rise to such
Consolidated Fixed Charges would no longer be obligations contributing to such
Person's Consolidated Fixed Charges subsequent to the Transaction Date) during
the Reference Period; provided, that for purposes of such computation, in
calculating Consolidated EBITDA and Consolidated Fixed Charges, (i) the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period, (ii) the incurrence of any Debt or issuance of Disqualified
Capital Stock during the Reference Period or subsequent thereto and on or prior
to the Transaction Date (and the application of the proceeds therefrom) shall
be assumed to have occurred on the first day of such Reference Period, and
(iii) Consolidated Interest Expense attributable to any Debt (whether existing
or being incurred) bearing a floating interest rate shall be computed as if the
rate in effect on the Transaction Date had been the applicable rate for the
entire period, unless such Person or any of its Subsidiaries is a party to an
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Interest Swap Obligation (that remains in effect for the 12-month period after
the Transaction Date) that has the effect of fixing the interest rate on the
date of computation, in which case such rate (whether higher or lower) shall be
used.
"Consolidated Fixed Charges" of any Person for any period means (without
duplication) the sum of (a) Consolidated Interest Expense of such Person for
such period, (b) dividend requirements of such Person and its Subsidiaries
(whether in cash or otherwise (except dividends payable solely in shares of
Qualified Capital Stock)) with respect to Preferred Stock, paid or accrued
during such period, in each case to the extent attributable to such period and
excluding items eliminated in consolidation, and (c) fees paid or accrued
during such period by such Person and its Subsidiaries in respect of
performance bonds or other guarantees of payment. For purposes of clause (b)
above, dividend requirements shall be increased to an amount representing the
pretax earnings that would be required to cover such dividend requirements;
accordingly, the increased amount shall be equal to a fraction, the numerator
of which is such dividend requirements and the denominator of which is 1 minus
the applicable actual combined federal, state, local and foreign income tax
rate of such Person and its subsidiaries (expressed as a decimal), on a
consolidated basis, for the fiscal year immediately preceding the date of the
transaction giving rise to the need to calculate Consolidated Fixed Charges.
"Consolidated Interest Expense" of any Person means, for any period, the
aggregate interest (without duplication), whether expensed or capitalized, paid
or accrued during such period in respect of all Debt of such Person and its
consolidated Subsidiaries (including (a) amortization of deferred financing
costs and original issue discount and noncash interest payments or accruals,
(b) the interest portion of all deferred payment obligations, calculated in
accordance with the effective interest method, and (c) all commissions,
discounts, other fees and charges owed with respect to letters of credit and
banker's acceptance financing and costs associated with Interest Swap
Obligations, in each case to the extent attributable to such period) determined
on a consolidated basis in accordance with GAAP. For purposes of this
definition, (i) interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by the board of directors of
such Person (as evidenced by a Board Resolution) to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with GAAP
(including Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board), and (ii) Consolidated Interest Expense
attributable to any Debt represented by the guarantee by such Person or a
Subsidiary of such Person other than with respect to Debt of such Person or a
Subsidiary of such Person shall be deemed to be the interest expense
attributable to the item guaranteed.
"Consolidated Net Income" of any Person for any period means the net
income (loss) of such Person and its consolidated Subsidiaries for such period,
determined in accordance with GAAP, excluding (without duplication) (a) all
extraordinary, unusual and nonrecurring gains, (b) the net income, if positive,
of any other Person, other than a consolidated Subsidiary in which such Person
or any of its consolidated Subsidiaries has an interest, except to the extent
of the amount of any dividends or distributions actually paid in cash to such
Person or a consolidated Subsidiary of such Person during such period, but not
in excess of such Person's pro rata share of such other Person's aggregate net
income earned during such period, (c) the net income, if positive, of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition, and (d) the net income, if positive, of any
Subsidiary of such Person to the extent that the declaration or payment of
dividends or similar distributions is not at the time permitted by operation of
the terms of its charter or any agreement, instrument (other than the
Indenture), judgment, decree, order, statute, rule, or governmental regulation
applicable to such Subsidiary; provided, however, that the Consolidated Net
Income of TEC or the Company shall not include any income of TEC or the Company
arising from dividends or distributions paid to TEC or the Company by
TransTexas.
"Debt" means, with respect to any Person, (a) all liabilities, contingent
or otherwise, of such Person (i) for borrowed money (whether or not the
recourse of the lender is to the whole of the assets of such Person or only to
a portion thereof), (ii) evidenced by bonds, notes, debentures, or similar
instruments or letters of credit or representing the balance deferred and
unpaid of the purchase price of any property or services, (iii) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks or
Interest Swap Obligations, or (iv) for the payment of money relating to a
Capitalized Lease Obligation; (b) reimbursement obligations of such Person with
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respect to letters of credit; (c) all liabilities of others of the kind
described in the preceding clause (a) or (b) that such Person has guaranteed or
that are otherwise its legal liability; (d) all obligations secured by a Lien
to which the property or assets (including, without limitation, leasehold
interests and any other tangible or intangible property rights) of such Person
are subject, whether or not the obligations secured thereby shall have been
assumed by or shall otherwise be such Person's legal liability; (e) the
Attributable Debt associated with any Sale/Leaseback Transactions; and (f) any
and all deferrals, renewals, extensions, refinancings and refundings (whether
direct or indirect) of, or amendments, modifications, or supplements to, any
liability of the kind described in any of the preceding clauses (a) through (e)
whether or not between or among the same parties.
"Default" means an event or condition, the occurrence of which is, or with
the lapse of time would be, or giving of notice, or both, would be an Event of
Default.
"Disqualified Capital Stock" means, with respect to any Person, any
Capital Stock of such Person or its Subsidiaries that, by its terms or by the
terms of any security into which it is convertible or exchangeable, is or, upon
the happening of an event or the passage of time, would be required to be
redeemed or repurchased, in whole or in part, by such Person or its
subsidiaries, including any redemption or repurchase at the option of the
holder, or has or, upon the happening of an event or passage of time, would
have a redemption, repurchase or similar payment due, on or prior to February
15, 2002.
"Eligible Institution" means a domestic commercial banking institution
that has combined capital and surplus of not less than $500 million, whose debt
is rated "A" (or higher) according to S&P or Moody's at the time as of which
any investment or rollover therein is made.
"Equity Offering" means a sale by the Company of Qualified Capital Stock
of the Company to one or more Persons other than a Related Person or an
affiliate of the Company.
"Excess Cash" of any Person means, for any period, Adjusted EBITDA of such
Person for such period less the sum (without duplication) of (a) the provision
for income taxes for such period for such Person and its consolidated
Subsidiaries, (b) Consolidated Interest Expense of such Person for such period,
(c) all redemption payments (other than accrued interest for such period) made
during such period pursuant to Paragraph 5 or Paragraph 6 of the Notes and the
payments (other than accrued interest for such period) made by the Company to
repurchase Notes in the market, (d) all payments (other than accrued interest
for such period) made during such period to purchase Notes pursuant to "--
Covenants -- Limitation on Asset Sales," but only to the extent that the Asset
Sales generating the cash proceeds used to make any such payments increased
Adjusted EBITDA for such period, (e) all payments (other than accrued interest
for such period) made during such period to purchase Notes pursuant to "--
Covenants -- Maintenance of Net Worth and Consolidated Fixed Charge Coverage
Ratio," but only to the extent that sales of TransTexas common stock generating
the cash proceeds used to make any such payments increased Adjusted EBITDA for
such period, and (f) Capital Expenditures (other than Capital Expenditures
funded from the Collateral Account) by such Person made during such period.
"Excess Cash Date" means each January 31 and July 31, commencing January
31, 1998.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Force Majeure" means strikes, lockouts or other labor trouble, fire or
other casualty, governmental preemption in connection with a national
emergency, any rule, order or regulation of any governmental agency or any
department or subdivision thereof, or inability to secure materials or labor
because of any such emergency, rule, order, regulation, war, civil disturbance
or other emergency, cause or event beyond the reasonable control of the Company
or the Guarantors.
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"GAAP" means generally accepted accounting principles, as in effect in the
United States on the Issue Date, applied on a basis consistent with those used
in the preparation of the audited financial statements of the Company included
in this Prospectus.
"Gas Purchase Agreement" means the Interruptible Gas Sales Terms and
Conditions between the Company and TransTexas, as in effect on the Issue Date
and as amended from time to time, provided that any such amendment is not
adverse to the holders of the Notes.
"Government Securities" means direct obligations of the United States of
America for the payment of which guarantee or obligations the full faith and
credit of the United States is pledged.
"Guarantee" means any guarantee of obligations under the Notes by a
Guarantor.
"Guarantor" means (a) TEC, (b) each of the Company's Subsidiaries that
becomes a guarantor of the Notes in compliance with the provisions of the
Indenture, and (c) each of the Company's Subsidiaries executing a supplemental
indenture in which such Subsidiary agrees to be bound by the terms of the
Indenture.
"Interest Swap Obligation" means (a) any obligation of any Person pursuant
to any arrangement whereby, directly or indirectly, such Person is entitled to
receive from time to time periodic payments calculated by applying either a
fixed or floating rate of interest on a stated notional amount in exchange for
periodic payments made by such Person calculated by applying a fixed or
floating rate of interest on the same notional amount, and (b) any interest
rate exchange, collar, cap, swap option, or similar agreement providing
interest rate protection.
"Investment" by any Person in any other Person means (a) the acquisition
(whether for cash, property, services, securities or otherwise) of capital
stock, bonds, notes, debentures, partnership, or other ownership interests or
other securities of such other Person or any agreement to make any such
acquisition; (b) the making by such Person of any deposit with, or advance,
loan, contribution, or other extension of credit to, such other Person
(including the purchase of property from another Person subject to an
understanding or agreement, contingent or otherwise, to resell such property to
such other Person) and (without duplication) any amount committed to be
advanced, loaned, or extended to such other Person; (c) the entering into of
any guarantee of, or other contingent obligation with respect to, Debt or any
other liability of such other Person; or (d) the entering into of any Interest
Swap Obligation with such other Person.
"Investment Grade Rating" means, with respect to the Notes, a rating in
one of the four highest letter rating categories (without regard to "+" or "-"
or other modifiers) by both S&P and Moody's or any successor rating agency to
either entity, or, if any such rating agency has ceased using letter rating
categories or the four highest of such letter rating categories are not
considered to represent "investment grade" ratings, the comparable "investment
grade" ratings (as designated by such rating agency).
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Junior Debt" means Debt of the Company or a Guarantor that (a) requires
no payment of principal prior to or on the date on which all principal of and
interest on the Notes is paid in full or (b) is subordinate or junior in right
of payment to the Notes and any Guarantee issued by such Guarantor.
"Lien" means any mortgage, lien, pledge, charge, security interest, or
other encumbrance of any kind, whether or not filed, recorded, or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement and any lease deemed to constitute a security interest and
any option or other agreement to give any security interest).
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"Market Value" means, as of any date, with respect to any number of shares
of any equity security, the average of the Closing Prices of such security for
the 20 Trading Day period for such security immediately preceding such date
multiplied by such number of shares.
"Marketable Securities" means (a) Government Securities, (b) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution, (c)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with a rating,
at the time as of which any investment therein is made, of "A-1" (or higher)
according to S&P or "P-1" (or higher) according to Moody's, issued or offered
by an Eligible Institution, (d) any bankers acceptances or money market deposit
accounts issued or offered by an Eligible Institution, and (e) any fund
investing exclusively in investments of the types described in clauses (a)
through (d) above.
"Mortgage" means the Mortgage, Assignment of Leases and Rents, Security
Agreement and Financing Statement from the Company in favor of the Indenture
Trustee.
"Net Proceeds" means the cash proceeds received from the sale of
TransTexas common stock less reasonable and customary underwriting discounts
and broker's commissions incurred in connection with such sale and less the
amount of any tax liabilities arising as a result of such sale other than as a
result of TransTexas ceasing to be a member of TransAmerican's consolidated
group for federal tax purposes.
"Net Worth" of any Person means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of such Person and its Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts included therein attributable to Disqualified
Capital Stock or any equity security convertible into or exchangeable for Debt,
the cost of treasury stock, and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of such Person or any of its
Subsidiaries, each item to be determined in conformity with GAAP.
"Non-Recourse Debt" of any Person means Debt of such Person that (a) is
not guaranteed by any other Person (except a wholly owned Subsidiary of such
Person), (b) is not recourse to and does not obligate any other Person (except
a wholly owned Subsidiary of such Person) in any way, (c) does not subject any
property or assets of any other Person (except a wholly owned Subsidiary of
such Person), directly or indirectly, contingently or otherwise, to the
satisfaction thereof, and (d) is not required by GAAP to be reflected on the
financial statements of any other Person (other than a Subsidiary of such
Person) prepared in accordance with GAAP.
"Note Redemption" means a redemption of Notes by the Company pursuant to
the redemption provisions of the Indenture.
"Note Repurchase" means a purchase of Notes by the Company or TEC, other
than pursuant to a Deficiency Purchase Offer, a Change of Control Offer, an
Offer to Purchase, or an Excess Cash Offer, provided that all Notes purchased
are delivered to the Indenture Trustee for cancellation promptly upon their
receipt by the Company or TEC.
"Permitted Hedging Transactions" means transactions in futures contracts
and related options that are permitted under "-- Covenants -- Limitation on
Speculative Trading."
"Permitted Investment" means, when used with reference to the Company, a
Guarantor, or any of their Subsidiaries, (a) trade credit extended to persons
in the ordinary course of business; (b) a purchase of (i) readily marketable
obligations of, or obligations guaranteed unconditionally by, the United States
of America maturing in one year or less from the date of purchase, (ii)
commercial paper having the highest rating obtainable from either Moody's or
S&P (or any successor rating agency to either entity), (iii) certificates of
deposit maturing in one year or less from the date of purchase issued by,
bankers' acceptances and deposit accounts of, and time deposits with,
commercial banks of recognized standing chartered in the United States of
America or Canada with capital, surplus
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and undivided profit aggregating in excess of $250 million, (iv) demand or
fully insured time deposits used in the ordinary course of business with
commercial banks insured by the Federal Deposit Insurance Corporation, (v)
Eurodollar time deposits, or (vi) shares of money market funds that invest
solely in Permitted Investments of the kind described in clauses (i) through
(v) above; (c) an Investment in the Company or a Person that is or upon such
Investment becomes a wholly owned Subsidiary of the Company or a Guarantor that
is engaged in a Related Business; (d) any Interest Swap Obligation permitted to
be incurred under "-- Covenants -- Limitations on Incurrence of Additional Debt
and Issuances of Disqualified Capital Stock"; (e) the receipt of capital stock
or notes in lieu of cash in connection with the settlement of litigation to the
extent that cash is not otherwise available to the Person obligated to make
such settlement payment; (f) an advance to an officer or employee in connection
with the performance of his duties in the ordinary course of business in an
amount that, together with all other such advances to officers and employees
that are outstanding, does not exceed $3 million at any time; or (g) a margin
deposit in connection with a Permitted Hedging Transaction; provided however,
that "Permitted Investment" shall not include any investment by the Company in
TEC or TransTexas, other than the 15 million shares of TransTexas common stock
contributed to the Company on or prior to the Issue Date.
"Permitted Liens" means (a) Liens imposed by governmental authorities for
taxes, assessments, or other charges not yet due or which are being contested
in good faith and by appropriate proceedings, if adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP; (b)
statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen,
repairmen, mineral interest owners, or other like Liens arising by operation of
law in the ordinary course of business provided that (i) the underlying
obligations are not overdue for a period of more than 60 days, or (ii) such
Liens are being contested in good faith and by appropriate proceedings and
adequate reserves with respect thereto are maintained on the books of the
Company in accordance with GAAP; (c) deposits to secure the performance of
bids, trade contracts (other than borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other obligations
of a like nature incurred in the ordinary course of business; (d) easements,
rights-of-way, zoning, similar restrictions and other similar encumbrances or
title defects incurred in the ordinary course of business which, in the
aggregate, are not material in amount and which do not, in any case, materially
detract from the value of the property subject thereto (as such property is
used by the Company or any of its Subsidiaries) or interfere with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (e) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with
respect thereto; (f) Liens existing on the Issue Date not in excess of $2
million; (g) pledges or deposits made in the ordinary course of business in
connection with worker's compensation, unemployment insurance and other types
of social security legislation; (h) if the Company has obtained a Revolving
Credit Facility that satisfies the requirements described under "-- Covenants
- -- Limitation on Incurrence of Additional Debt and Issuances of Disqualified
Capital Stock" and the Company has deposited in the Collateral Account $50
million of the proceeds of Debt incurred pursuant to such Revolving Credit
Facility, Liens on (i) accounts receivable owned by the Company and its
Subsidiaries or (ii) inventory owned by the Company and its Subsidiaries, in
either case, securing Debt of the Company pursuant to such Revolving Credit
Facility; (i) Liens on the assets of any entity existing at the time such
assets are acquired by the Company or any of its Subsidiaries, whether by
merger, consolidation, purchase of assets or otherwise so long as such Liens
(i) are not created, incurred or assumed in contemplation of such assets being
acquired by the Company or such Subsidiary and (ii) do not extend to any other
assets of the Company or any of its Subsidiaries; (j) Liens (including
extensions and renewals thereof) on real or personal property acquired after
the Issue Date, except for property acquired in whole or in part with the
proceeds of this offering; provided, however, that (i) such Lien is created
solely for the purpose of securing Debt Incurred to finance the cost (including
the cost of improvement or construction) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of, or within
six months after the later of the acquisition, the completion of construction,
or the commencement of full operation of such property, (ii) the principal
amount of the Debt secured by such Lien does not exceed 100% of such cost, and
(iii) any such Lien shall not extend to or cover any property or assets other
than such item of property or assets and any improvements on such item; (k)
leases or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Subsidiaries, taken as a
whole; (l) Liens in favor of the Company; (m) Liens securing reimbursement
obligations with respect to letters of credit that encumber documents
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and other property relating to such letters of credit and the products and
proceeds thereof; (n) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of customs duties in connection with the
importation of goods; (o) Liens encumbering customary initial deposits and
margin deposits securing Interest Swap Obligations or Permitted Hedging
Transactions; (p) until the Company obtains a Revolving Credit Facility, Liens
on cash deposits of up to $30 million to secure reimbursement obligations with
respect to letters of credit; (q) Liens encumbering funds disbursed from the
Collateral Account in accordance with the Disbursement Agreement; and (r) any
replacement of the Permitted Liens set forth in the foregoing clauses (a)
through (q) that is on substantially similar terms and does not secure any
additional Debt or encumber or otherwise affect or relate to any additional
property; provided, however, that the aggregate amount of Debt secured by Liens
pursuant to the foregoing clauses (i), (j) and (p) shall not exceed $50 million
plus the amount of any Debt, not in excess of $10 million, incurred to finance
the acquisition of tank storage facilities.
"Permitted Proceeds Uses" means (a) the payment of Project Costs, (b) the
repayment of unsubordinated indebtedness, and (c) for general corporate
purposes, including the payment of interest on the Mortgage Notes.
"Person" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state, or political subdivision thereof, trust, municipality,
or other entity.
"Plans" means (a) the plans and specifications prepared by or on behalf of
the Company and approved by the Construction Supervisor under the Disbursement
Agreement, which describe and show the proposed expansion and modification of
the Company's refinery and (b) a budget prepared by or on behalf of the Company
and approved by the Construction Supervisor under the Disbursement Agreement,
which sets forth on a line item basis the costs estimated to be incurred in
connection with such plans and specifications.
"Pledge Agreements" means the Company Pledge Agreement and the TEC Pledge
Agreement.
"8% Preferred Stock" means Preferred Stock of the Company that is
Qualified Capital Stock, is not entitled to receive cash dividends, is not
entitled to any voting rights (other than as required by law), is not
convertible into or exchangeable for any other security (whether or not of the
Company), is issued at a price at least equal to its liquidation preference,
and provides for dividends or distributions payable only in additional shares
of 8% Preferred Stock at a rate less than or equal to 8% per annum of the
purchase price thereof.
"Preferred Stock" means, with respect to any corporation, any class or
classes (however designated) of Capital Stock of such Person which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or distribution of such corporation over
shares of Capital Stock of any other class of such corporation.
"Project Costs" means, with respect to a proposed expansion or
modification of the Company's refinery, the aggregate costs required to
complete such expansion or modification of the refinery in accordance with the
Plans therefor and applicable legal requirements, including direct costs
related thereto such as construction, engineering and design costs and the cost
of site work, construction permits, certificates and bonds, fixtures, machinery
and equipment.
"Public Equity Offering" means a public offering by the Company of
Qualified Capital Stock of the Company underwritten by a nationally recognized
member of the National Association of Securities Dealers pursuant to an
effective registration statement filed with the Securities and Exchange
Commission pursuant to the Securities Act.
"Public Market Value" means, as of any date, with respect to any equity
security, the product of the weighted average number of shares of such security
outstanding during the 20 Trading Day period for such security immediately
preceding such date multiplied by the average of the Closing Prices of such
security for such period.
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Notwithstanding the foregoing, if such security is not listed or admitted for
trading on any national securities exchange or the Nasdaq National Market, the
Public Market Value of such security shall be zero.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
"Reference Period" with regard to any Person means the four full fiscal
quarters for which financial statements are available of such Person ended on
or immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture; provided, however, that
for purposes of calculating the Consolidated Fixed Charge Coverage Ratio of the
Company in connection with the definition of "Required Phase I Completion Date"
and the provisions described under "Collateral and Security," "Reference
Period" means the three-month period ending on the date as of which the
Consolidated Fixed Charge Coverage Ratio is calculated.
"Registration Rights Agreement" means the Registration Rights Agreement
among TransTexas, the Company, TEC and the Indenture Trustee, as in effect on
the Issue Date and as amended from time to time, provided that any such
amendment is not adverse to the holders of the Notes.
"Related Business" means the business of processing, blending, storing,
marketing (other than through operating retail gasoline stations), refining, or
distilling crude oil, condensate, natural gas liquids, petroleum blendstocks or
refined products thereof.
"Related Person" means, with respect to any Person, (a) any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the referenced Person (or any Subsidiary of the Company if
the Company is the referenced Person) or any officer, director, or employee of
the referenced Person (or any Subsidiary of the Company if the Company is the
referenced Person) or of such Person, (b) the spouse, any immediate family
member, or any other relative who has the same principal residence of any
Person described in clause (a) above, and any Person, directly or indirectly,
controlling or controlled by or under direct or indirect common control with,
such spouse, family member, or other relative, and (c) any trust in which any
Person described in clause (a) or (b), above, is a fiduciary or has a
beneficial interest. For purposes of this definition the term "control" means
(i) the power to direct the management and policies of a Person, directly or
through one or more intermediaries, whether through the ownership of voting
securities, by contract, or otherwise, or (ii) the beneficial ownership of 10%
or more of the voting common equity of such Person (on a fully diluted basis)
or of warrants or other rights to acquire such equity (whether or not presently
exercisable).
"Required Phase I Completion Date" means the earliest to occur of (i)
February 15, 1997, unless the Company's Consolidated Fixed Charge Coverage
Ratio as of December 31, 1996 is greater than or equal to 1.25 to 1, (ii) May
15, 1997, unless the Company's Consolidated Fixed Charge Coverage Ratio as of
March 31, 1997 is greater than or equal to 1.25 to 1, or (iii) August 15, 1997.
"Restricted Investment" means any direct or indirect Investment other than
a Permitted Investment.
"Restricted Payment" means, with respect to any Person, (a) any Restricted
Investment by such Person, (b) any dividend or other distribution on shares of
Capital Stock of such Person, (c) any direct or indirect payment on account of
the purchase, redemption, or other acquisition or retirement for value of any
shares of Capital Stock of such Person or any Subsidiary of such Person, and
(d) any defeasance, redemption, repurchase, or other acquisition or retirement
for value, or any payment in respect of any amendment (in anticipation of or in
connection with any such retirement, acquisition, or defeasance) in whole or in
part, of any Junior Debt, directly or indirectly, of such Person or a
Subsidiary of such Person prior to the scheduled maturity or prior to any
scheduled repayment of principal in respect of such Junior Debt; provided,
however, that, with respect to the Company or TEC, the term "Restricted
Payment" does not include (i) any dividend, distribution, or other payment on
shares of Capital Stock of an issuer solely in shares of Qualified Capital
Stock of such issuer that is at least as junior in ranking as the Capital Stock
on which such dividend, distribution, or other payment is to be made, (ii) any
dividend, distribution, or other payment to the Company, or any of its directly
or indirectly owned Subsidiaries, by any of its Subsidiaries,
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(iii) any defeasance, redemption, repurchase, or other acquisition or
retirement for value, in whole or in part, of any Junior Debt payable solely in
shares of Qualified Capital Stock of such Person, (iv) the repayment of Debt to
TransAmerican existing on the Issue Date in an amount up to $30 million with
the proceeds of the 1995 Offering, (v) any dividend, distribution, or other
payment to TEC by any of its Subsidiaries (other than the Company or its
Subsidiaries), (vi) any dividend or distribution by TEC of shares of TransTexas
common stock that have been released from the pledge to the Indenture Trustee
in accordance with the provisions described under "Collateral and Security,"
(vii) payments by the Company to TEC, in an aggregate amount not to exceed
$350,000 per fiscal year, as reimbursement for expenses of TEC in connection
with accounting, legal, financial and other expenses, or (viii) dividends by
TEC on the TEC Preferred Stock in accordance with the terms thereof. For
purposes of clause (a) of the immediately preceding sentence, the aggregate
amount of Restricted Investments made by the Company and its Subsidiaries after
the Issue Date shall equal the aggregate gross amount of such Restricted
Investments, less amounts received in cash without restriction by the Company
or its wholly owned Subsidiaries upon the disposition, liquidation, or
repayment of any portion of such Restricted Investment (not to exceed the
original cost of such portion), to the extent not reflected in the Consolidated
Net Income of the Company, in either case less the cost of disposition,
liquidation, or repayment.
"Revolving Credit Facility" means any revolving credit facility of the
type and with such terms as are customarily entered into with banks, between
the Company or any of its Subsidiaries, on the one hand, and any banks or other
lenders, on the other hand; provided that all indebtedness incurred pursuant to
such facility would be reflected on the balance sheet of the Company or its
Subsidiaries as current liabilities in accordance with GAAP.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned on the Issue Date or thereafter acquired whereby the Company, a Guarantor
or a Subsidiary of the Company or a Guarantor transfers such property to a
Person and leases it back from such Person, other than (i) any such arrangement
(a) the term of which is for not more than one year and (b) the Attributable
Debt associated with which is less than $1.0 million (aggregating any series of
related transactions), and (ii) any such arrangement between the Company or a
Guarantor and a wholly owned Subsidiary of the Company or a Guarantor, or
between wholly owned subsidiaries of the Company or the Guarantor.
"Security Agreement" means the Security Agreement between the Company and
the Indenture Trustee.
"Security Documents" means (a) the Security Agreement, (b) the TEC Pledge
Agreement, (c) the Company Pledge Agreement, (d) the Disbursement Agreement,
(e) the Mortgage, and (f) each other agreement relating to the pledge of assets
to secure the Notes or a Guarantee that may be entered into after the Issue
Date pursuant to the terms of the Indenture.
"Senior Debt" means, with respect to any Person, any Debt that is not
Subordinated Debt.
"Services Agreement" means the Services Agreement among the Company, TEC,
TransTexas and TransAmerican, as in effect on the Issue Date and as amended
from time to time, provided that any such amendment is not adverse to the
holders of the Notes.
"Significant Subsidiary" means, with respect to any Person, a Subsidiary
of such Person that would be a "significant subsidiary," within the meaning of
Rule 1-02 of Regulation S-X of the Securities and Exchange Commission, if such
Person were deemed to be the "registrant" referred to therein.
"Stock Transfer Agreement" means the Stock Transfer Agreement among
TransAmerican, TEC and the Company, as in effect on the Issue Date and as
amended from time to time, provided that any such amendment is not adverse to
the holders of the Notes.
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"Subordinated Debt" means Debt of the Company that (a) requires no payment
of principal prior to or on the date on which all principal of and interest on
the Notes is paid in full and (b) is subordinate and junior in right of payment
to the Notes in all respects.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
such Person, one or more Subsidiaries of such Person or such Person and one or
more Subsidiaries of such Person, directly or indirectly, owns at least 50% of
the Voting Stock, or (b) a partnership of which such Person or a Subsidiary of
such Person is a general partner, or (c) any entity (other than a corporation
or a partnership) in which such Person, one or more Subsidiaries of such
Person, or such Person and one or more Subsidiaries of such Person, directly or
indirectly, has (i) at least a 50% ownership interest or (ii) the power to
elect or direct the election of the directors or other governing body of such
entity. For the purposes of the Indenture, "Subsidiary" shall not include (x)
the Accounts Receivable Subsidiary, except for purposes of determining the
Consolidated Fixed Charge Coverage Ratio of the Company, or (y) TransTexas or
any of its Subsidiaries.
"Tax Allocation Agreement" means the Tax Allocation Agreement among
TransAmerican, TEC, the Company, TransTexas and TransAmerican's other
subsidiaries.
"TEC Pledge Agreement" means the Pledge Agreement between TEC and the
Indenture Trustee, as amended from time to time in accordance with the
Indenture.
"Trading Day" means any day on which the securities in question are quoted
on the Nasdaq National Market, or if such securities are not approved for
listing on the Nasdaq National Market, on the principal national securities
market or exchange on which such securities are listed or admitted.
"TransAmerican Lease" means a lease to be entered into between
TransAmerican and the Company, as amended from time to time, with respect to an
office building owned by TransAmerican located in Houston, Texas, which lease
will provide for payments by the Company to TransAmerican not in excess of
$950,000 per year.
"Value" means, as of any date, (a) when used with respect to Discount
Mortgage Notes prior to February 15, 1998, the Accreted Value of such Discount
Mortgage Notes, and (b) when used with respect to (i) Discount Mortgage Notes
on or after February 15, 1998 or (ii) Mortgage Notes, the outstanding principal
amount of such Notes, plus all accrued and unpaid interest thereon.
"Voting Stock" means, with respect to any corporation, Capital Stock of
such corporation having generally the right to vote in the election of
directors of such corporation.
"Weighted Average Life" means, as of the date of determination, with
respect to any debt instrument, the quotient obtained by dividing (a) the sum
of the products, for each scheduled principal payment of such debt instrument,
of (i) the number of years from the date of determination to the date of such
scheduled principal payment and (ii) the amount of such principal payment, by
(b) the sum of all such scheduled principal payments.
COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Use of Proceeds. The Indenture provides that the Company
shall use the net proceeds derived from the sale of the Units only for
Permitted Proceeds Uses. Proceeds deposited in the Collateral Account shall be
disbursed to the Company in accordance with the Disbursement Agreement.
Construction. The Indenture provides that the Company shall use its best
efforts to expand and modify its refinery with diligence and continuity in a
good and workmanlike manner in accordance with the Plans except during
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the existence of delays caused by Force Majeure. The Company will use its best
efforts to prevent and to minimize any delays caused by Force Majeure.
Maintenance of Net Worth and Consolidated Fixed Charge Coverage Ratio. The
Company shall furnish to the Indenture Trustee an Officers' Certificate within
45 days after the end of each quarter (or within 90 days after the end of a
quarter, if such quarter is the last quarter of the Company's fiscal year),
commencing with the quarter ending January 31, 1998, setting forth the
Company's Net Worth and Consolidated Fixed Charge Coverage Ratio as of the end
of that quarter and stating whether or not Phase II of the Capital Improvement
Program has been completed. If, at the end of each of any two consecutive
quarters (a "Deficiency Reference Period"), commencing with the quarter ending
January 31, 1998, the Company's Net Worth is less than $75 million and the
Company's Consolidated Fixed Charge Coverage Ratio as of the end of each of
such quarters is less than 1.25 to 1, then, no later than 90 days after the
last day (the "Deficiency Date") of such Deficiency Reference Period, (i) the
Company shall make a Deficiency Purchase Offer (as defined below) or (ii) if
the Company does not have sufficient funds on such date to consummate a
Deficiency Purchase Offer, TEC shall make a Deficiency Exchange Offer (as
defined below); provided, however, that a Deficiency Purchase Offer or
Deficiency Exchange Offer (each, a "Deficiency Offer") shall not be required to
be made more than once in any six-month period.
"Deficiency Purchase Offer" means an irrevocable, unconditional offer by
the Company to all Holders of Notes to purchase Notes in an aggregate principal
amount, together with accrued but unpaid interest, if any, to the Deficiency
Payment Date (as defined below), equal to 94% of the Deficiency Amount (as
defined below) (or such lesser amount of Notes as may be outstanding at the
time such Deficiency Purchase Offer is made), on a date that is no later than
120 days after the Deficiency Date (the "Deficiency Payment Date"), at a cash
purchase price (the "Deficiency Purchase Price") equal to 100% of the principal
amount thereof, plus accrued but unpaid interest, if any, to and including the
Deficiency Payment Date. "Deficiency Amount" means an amount equal to the
product of (a) 15 million (subject to adjustment upon the occurrence of certain
events, including subdivisions, combinations and certain reclassifications,
affecting TransTexas Common Stock) and (b) the average of the Closing Prices of
TransTexas common stock for the ten consecutive Trading Days commencing on the
Deficiency Date. On or before the Deficiency Payment Date, the Company will (a)
accept for payment Notes or portions thereof properly tendered pursuant to the
Deficiency Purchase Offer prior to the close of the third Business Day prior to
the Deficiency Payment Date, (b) deposit with the Paying Agent U.S. Legal
Tender sufficient to pay the aggregate Deficiency Purchase Price of all Notes
so accepted, and (c) deliver to the Indenture Trustee Notes so accepted,
together with an Officers' Certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Deficiency
Purchase Price for all Notes so accepted. The Indenture Trustee will promptly
cancel all Notes accepted by the Company pursuant to the Deficiency Purchase
Offer and authenticate and mail or deliver to each Holder of Notes so accepted
a new Note equal in principal amount to any portion of the Note surrendered
that is not purchased. Any Notes not so accepted will be promptly mailed or
delivered by the Company to the Holder thereof. The Company will publicly
announce the results of the Deficiency Purchase Offer on or as soon as
practicable after the Deficiency Payment Date. The Notes tendered in response
to a Deficiency Purchase Offer will be accepted by the Company on a pro rata
basis; provided, however, that portions of Notes may be purchased pursuant to a
Deficiency Purchase Offer only in multiples of $1,000 principal amount. In
connection with a Deficiency Purchase Offer, the Company may direct the
Indenture Trustee to release, on the Deficiency Payment Date, up to 15 million
shares of TransTexas common stock that have been pledged by the Company to the
Indenture Trustee. Such shares will be sold on the Deficiency Payment Date and
the Net Proceeds used to pay the Deficiency Purchase Price in accordance with
the Indenture.
"Deficiency Exchange Offer" means an irrevocable, unconditional offer by
TEC to all Holders of Notes to exchange Notes in an aggregate principal amount,
together with accrued but unpaid interest, if any, to the Deficiency Exchange
Date (as defined below), equal to 85% of the Deficiency Amount (or such lesser
amount as may be outstanding at the time such Deficiency Exchange Offer is
made), on a date that is no later than 120 days after the Deficiency Date (the
"Deficiency Exchange Date"), for 15 million shares of TransTexas common stock
(subject to adjustment upon the occurrence of certain events, including
subdivisions, combinations and certain reclassifications,
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affecting TransTexas Common Stock) . The Deficiency Exchange Offer shall be
registered under the Securities Act of 1933, as amended. On or before the
Deficiency Exchange Date, TEC will (a) accept for exchange Notes or portions
thereof properly tendered pursuant to the Deficiency Exchange Offer prior to
the close of the third Business Day prior to the Deficiency Exchange Date, (b)
deposit with the Paying Agent 15 million shares of TransTexas common stock
(subject to adjustment upon the occurrence of certain events, including
subdivisions, combinations and certain reclassifications, affecting TransTexas
Common Stock), and (c) deliver to the Indenture Trustee Notes so accepted,
together with an Officers' Certificate listing the Notes or portions thereof
being exchanged by TEC. The Paying Agent will promptly deliver to the Holders
of Notes so accepted shares of TransTexas common stock. Holders of Notes that
are exchanged pursuant to a Deficiency Exchange Offer will receive cash in lieu
of any fractional shares to which they would otherwise be entitled. The
Indenture Trustee will promptly cancel all Notes accepted by TEC pursuant to
the Deficiency Exchange Offer and authenticate and mail or deliver to each
Holder of Notes so accepted a new Note equal in principal amount to any portion
of the Note surrendered that is not exchanged. Any Notes not so accepted will
be promptly mailed or delivered by TEC to the Holder thereof. TEC will publicly
announce the results of the Deficiency Exchange Offer on or as soon as
practicable after the Deficiency Exchange Date. The Notes tendered in response
to a Deficiency Exchange Offer will be accepted by TEC on a pro rata basis;
provided, however, that portions of Notes may be exchanged pursuant to a
Deficiency Exchange Offer only in multiples of $1,000 principal amount. In
connection with a Deficiency Exchange Offer, TEC may direct the Indenture
Trustee to release, on the Deficiency Exchange Date, up to 15 million shares of
TransTexas common stock (subject to adjustment upon the occurrence of certain
events, including subdivisions, combinations and certain reclassifications,
affecting TransTexas Common Stock) that have been pledged by TEC to the
Indenture Trustee. Such shares will be exchanged for Notes on the Deficiency
Exchange Date pursuant to the Deficiency Exchange Offer.
A Deficiency Offer will be made by sending written notice thereof by
first-class mail, to each Holder of Notes at its registered address, with a
copy to the Indenture Trustee. The notice to Holders will contain all
instructions and materials required by applicable law and will contain or make
available to Holders other information material to such Holders' decision to
tender Notes pursuant to the Deficiency Offer. To the extent applicable and if
required by law, the Company and TEC will comply with Section 14 of the
Exchange Act and the provisions of Regulation 14E and any other tender offer
rules under the Exchange Act and other securities laws, rules and regulations
which may then be applicable to any Deficiency Offer by the Company or TEC.
Repurchase of Notes at the Option of the Holder Upon a Change of Control.
In the event that a Change of Control (as defined below) occurs, each Holder of
Notes has the right, at such Holder's option, to require the Company to
repurchase all or any part of such Holder's Notes (provided that the principal
amount of such Notes at maturity must be $1,000 or an integral multiple
thereof) on the date that is no later than 40 Business Days after the
occurrence of a Change of Control (the "Change of Control Payment Date"), at a
cash purchase price (the "Change of Control Purchase Price") equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, or, in
the case of any repurchase of Discount Mortgage Notes prior to February 15,
1998, 101% of the Accreted Value thereof, in either case, to and including the
Change of Control Payment Date.
The Company shall notify the Indenture Trustee within five Business Days
after each date upon which the Company knows of the occurrence of a Change of
Control. Within 10 Business Days after the Company knows of the occurrence of
each Change of Control, the Company will make an irrevocable, unconditional
offer (a "Change of Control Offer") to all Holders of Notes to purchase for
cash all of the Notes at the Change of Control Purchase Price by sending
written notice of a Change of Control Offer, by first-class mail, to each
Holder at its registered address, with a copy to the Indenture Trustee. The
notice to Holders will contain all instructions and materials required by
applicable law and will contain or make available to Holders other information
material to such Holders' decision to tender Notes pursuant to the Change of
Control Offer.
On or before the Change of Control Payment Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer prior to the close of the third Business Day prior to
the Change of Control Payment Date, (ii) deposit with the Paying Agent U.S.
Legal Tender sufficient
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to pay the Change of Control Purchase Price (together with accrued and unpaid
interest) of all Notes so tendered, and (iii) deliver to the Indenture Trustee
Notes so accepted together with an Officers' Certificate listing the Notes or
portions thereof being purchased by the Company. The Paying Agent will promptly
mail to the Holders of Notes so accepted payment in an amount equal to the
Change of Control Purchase Price (together with accrued and unpaid interest).
The Indenture Trustee will promptly cancel all Notes accepted by the Company
pursuant to the Change of Control Offer and authenticate and mail or deliver to
the Holders of Notes so accepted a new Note equal in principal amount to any
unpurchased portion of the Note surrendered. Any Notes not so accepted will be
promptly mailed or delivered by the Company to the Holder thereof. The Company
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
"Change of Control" means (a) any sale, lease, transfer, or other
conveyance or disposition, whether direct or indirect, of more than 50% of the
fair market value of the assets of the Company, on a consolidated basis, to any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable), other than to or among
the Company's wholly owned Subsidiaries, whether in a single transaction or a
series of related transactions, unless, immediately after such transaction,
John R. Stanley has, directly or indirectly, in the aggregate, sole beneficial
ownership of more than 50%, on a fully diluted basis, of the total voting power
entitled to vote in the election of directors, managers, or trustees of the
transferee, (b) the liquidation or dissolution of the Company, or (c) any
transaction, event or circumstance pursuant to which any "person" or "group"
(as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable), other than John R. Stanley and his
wholly owned Subsidiaries, is or becomes the "beneficial owner" (as that term
is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not
applicable, except that a person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether such right
is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the Company's then
outstanding Voting Stock, unless at the time of the occurrence of an event
specified in clause (a), (b) or (c), the Notes have an Investment Grade Rating;
provided, however, that if, at any time within 120 days after such occurrence,
the Notes cease having an Investment Grade Rating, such event shall be a
"Change of Control."
To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and
any other tender offer rules under the Exchange Act and other securities laws,
rules and regulations which may then be applicable to any offer by the Company
to purchase the Notes at the option of Holders upon a Change of Control.
Limitation on Speculative Trading. The Indenture provides that neither the
Company nor any Guarantor may, and neither the Company nor any Guarantor may
permit any of its Subsidiaries to, engage in transactions in futures contracts
and options for speculative purposes. The Company, the Guarantors and their
Subsidiaries may engage in such transactions only as part of normal business
operations as a risk-management strategy or hedge against changes resulting
from market conditions in the petroleum refining industry related to the
operations of the Company or such Guarantor or Subsidiary.
Limitation on Incurrences of Additional Debt and Issuances of Disqualified
Capital Stock. The Indenture provides that neither the Company nor any
Guarantor may, and neither the Company nor any Guarantor may permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, or
otherwise become liable for, contingently or otherwise (to "Incur" or, as
appropriate, an "Incurrence"), any Debt or issue any Disqualified Capital Stock
(other than Capital Stock of the Company issued to TEC), except (a) Debt
evidenced by the Notes pursuant to the Indenture; (b) Subordinated Debt of the
Company solely to any wholly owned Subsidiary of the Company, or Debt of any
wholly owned Subsidiary of the Company solely to the Company or to any wholly
owned Subsidiary of the Company, provided that neither the Company nor any
Subsidiary of the Company shall become liable to any person other than the
Company or another wholly owned Subsidiary of the Company; (c) Debt of the
Company pursuant to a Revolving Credit Facility outstanding at any time in an
aggregate principal amount not to exceed the greater of (i) $70 million or (ii)
the Borrowing Base, less, in each case, the amount of any Debt of the Accounts
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Receivable Subsidiary; (d) Debt of the Company (including Attributable Debt and
any purchase money Debt) outstanding at any time in an aggregate principal
amount, or Disqualified Capital Stock of the Company outstanding at any time
with an aggregate liquidation value, or any combination thereof, not to exceed
$50 million in the aggregate, plus the amount of any Debt, not in excess of $10
million, incurred to finance the acquisition of tank storage facilities; (e)
Subordinated Debt of the Company outstanding at any time in an aggregate
principal amount not to exceed $200 million in the aggregate; (f) the Company
may Incur Debt as an extension, renewal, replacement, or refunding of any of
the Debt permitted to be Incurred by clause (a) or (c) above, or this clause
(f) (such Debt is collectively referred to as "Refinancing Debt"), provided,
that (1) the maximum principal amount of Refinancing Debt (or, if such
Refinancing Debt does not require cash payments prior to maturity, the original
issue price of such Refinancing Debt) permitted under this clause (f) may not
exceed the lesser of (x) the principal amount of the Debt being extended,
renewed, replaced, or refunded plus reasonable financing fees and other
associated reasonable out-of-pocket expenses (including any premium and
defeasance costs) other than those paid to a Related Person (collectively,
"Refinancing Fees"), or (y) if such Debt being extended, renewed, replaced, or
refunded was issued at an original issue discount, the original issue price,
plus amortization of the original issue discount at the time of the Incurrence
of the Refinancing Debt plus Refinancing Fees, (2) the Refinancing Debt has a
Weighted Average Life and a final maturity that is equal to or greater than the
Debt being extended, renewed, replaced, or refunded at the time of such
extension, renewal, replacement, or refunding, (3) the Refinancing Debt shall
rank with respect to the Notes to an extent no more favorable in respect
thereof than the Debt being refinanced, and (4) Refinancing Debt Incurred
pursuant to clause (c) may be renewed, replaced, refunded, or refinanced only
with another Revolving Credit Facility; (g) Debt of the Company represented by
trade payables or accrued expenses, in each case, incurred on normal, customary
terms in the ordinary course of business, not overdue for a period of more than
45 days (or, if overdue for a period of more than 45 days being contested in
good faith and by appropriate proceedings and adequate reserves with respect
thereto being maintained on the books of the Company in accordance with GAAP)
and not constituting any amounts due to banks or other financial institutions;
and (h) Debt Incurred and Disqualified Capital Stock issued by any Person at a
time when that Person is not a Subsidiary of the Company or a Guarantor, which
Debt or Disqualified Capital Stock is outstanding at the time such Person
becomes, or is merged into, or consolidated with, a Subsidiary of the Company
or a Guarantor, was not incurred or issued in contemplation of such Person
becoming, or being merged into, or consolidated with, a Subsidiary of the
Company or a Guarantor, and is in an aggregate amount not to exceed $25
million. For the purpose of determining the amount of outstanding Debt that has
been Incurred pursuant to clause (f) above, there shall be included in such
clause the principal amount then outstanding of any Debt originally Incurred
pursuant to such clause and, after any refinancing or refunding of such Debt,
any outstanding Debt Incurred pursuant to clause (f) above so as to refinance
or refund such Debt Incurred pursuant to clause (h) and any subsequent
refinancings or refundings thereof. For purposes of clause (h) above, Debt
shall be deemed to be incurred, and Disqualified Capital Stock shall be deemed
to be issued, as the case may be, at the time such person becomes or is merged
into or consolidated with, a Subsidiary of the Company or a Guarantor.
Notwithstanding the foregoing provisions of this covenant, (a) the Company
and the Guarantors may Incur Senior Debt of the Company and the Company may
issue Disqualified Capital Stock if, at the time such Senior Debt is Incurred
or such Disqualified Capital Stock is issued, (i) no Default or Event of
Default shall have occurred and be continuing at the time or immediately after
giving effect to such transaction on a pro forma basis, and (ii) immediately
after giving effect to the Consolidated Interest Expense in respect of such
Debt being Incurred or such Disqualified Capital Stock being issued and the
application of the proceeds therefrom to the extent used to reduce Debt or
Disqualified Capital Stock, on a pro forma basis, (x) the Consolidated Fixed
Charge Coverage Ratio of the Company for the Reference Period is greater than
3.5 to 1, and (y) the rating agencies have indicated in writing that the Notes
will be rated "BB-" or higher by S&P and "Ba3" or higher by Moody's, and (b)
the Company and the Guarantors may Incur Subordinated Debt if, at the time such
Subordinated Debt is incurred, (i) no Default or Event of Default shall have
occurred and be continuing at the time or immediately after giving effect to
such transaction on a pro forma basis, and (ii) immediately after giving effect
to the Consolidated Interest Expense in respect of such Subordinated Debt being
incurred and the application of the proceeds therefrom to the extent used to
reduce Debt, on a pro forma basis, (x) the Consolidated Fixed Charge Coverage
Ratio of the Company for the Reference Period is greater than 2.5 to 1, and (y)
the rating agencies have indicated in writing that the Notes will be rated
"BB-" or higher by S&P and "Ba3" or higher by Moody's.
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For the purpose of determining compliance with this covenant, (a) if an
item of Debt meets the criteria of more than one of the types of Debt described
in the above clauses, the Company shall have the right to determine in its sole
discretion the category to which such Debt applies and shall not be required to
include the amount and type of such Debt in more than one of such categories
and (b) the amount of any Debt which does not pay interest in cash shall be
deemed to be equal to the amount of the liability in respect thereof determined
in accordance with GAAP.
Limitation on Restricted Payments. The Indenture provides that neither the
Company nor any Guarantor may, and neither the Company nor any Guarantor may
permit any of its Subsidiaries to, directly or indirectly, make any Restricted
Payment, if, at the time or after giving effect thereto on a pro forma basis,
(a) the Company's Consolidated Fixed Charge Coverage Ratio does not exceed 3.5
to 1, (b) the Company's Net Worth is not equal to or greater than $170 million,
(c) a Default or an Event of Default would occur or be continuing, or (d) the
aggregate amount of all Restricted Payments made by the Company, all Guarantors
and all of their Subsidiaries, including such proposed Restricted Payment and
all payments made pursuant to the proviso at the end of this sentence (if not
made in cash, then the fair market value of any property used therefor), from
and after the Issue Date and on or prior to the date of such Restricted
Payment, shall exceed an amount equal to (i) 25% of Consolidated Net Income of
the Company accrued for the period (taken as one accounting period) from the
first full fiscal quarter that commenced after the Issue Date to and including
the fiscal quarter ended immediately prior to the date of each calculation for
which financial statements are available (or, if the Company's Consolidated Net
Income for such period is a deficit, then minus 100% of such deficit), minus
(ii) 100% of the amount of any write-downs, write-offs, other negative
reevaluations, and other negative extraordinary charges not otherwise reflected
in the Company's Consolidated Net Income during such period, minus (iii) the
aggregate net proceeds received by TEC or its Subsidiaries from the sale of
shares of TransTexas common stock that have been pledged to the Indenture
Trustee; provided, that the foregoing clauses will not prohibit the payment of
any dividend within 60 days after the date of its declaration if such dividend
could have been made on the date of its declaration in compliance with the
foregoing provisions. For purposes of clause (d) above, dividends by TEC with
cash received from the Company pursuant to a dividend permitted hereunder shall
not constitute a Restricted Payment by TEC. Notwithstanding the foregoing, TEC
may not make any Restricted Payment with cash received by TEC pursuant to a
dividend or other distribution paid in respect of shares of TransTexas common
stock owned by TEC. The Company shall not make any Investment in TEC or
TransTexas, other than the 15 million shares of TransTexas common stock
contributed to the Company on or prior to the Issue Date.
Limitation on Restricting Subsidiary Dividends. The Indenture provides
that neither the Company nor any Guarantor may, and neither the Company nor any
Guarantor may permit any of its Subsidiaries (other than the Company) to,
directly or indirectly, create, assume, or suffer to exist any consensual
encumbrance or restriction on the ability of any of its Subsidiaries to (a) pay
dividends or make other distributions on the Capital Stock of any such
Subsidiary or pay any obligation to the Company, any Guarantor or any of their
Subsidiaries or (b) otherwise transfer assets or make or pay loans or advances
to the Company, any Guarantor, or any of their Subsidiaries, except
encumbrances and restrictions existing under any agreement of a Person acquired
by the Company, the Guarantor, or one of their Subsidiaries, which encumbrances
and restrictions existed at the time of acquisition, were not put in place in
anticipation of such acquisition and are not applicable to any Person or
property, other than the Person or any property of the Person so acquired.
Guarantee by Subsidiary. The Indenture provides that if the Company, a
Guarantor or any of their Subsidiaries shall make Investments in an amount, or
otherwise transfer (including by capital contribution) or cause to be
transferred, in a manner otherwise permitted pursuant to the Indenture, any
assets (tangible or intangible), businesses, divisions, real property, or
equipment having a book value as shown in such entity's most recent balance
sheet or the notes thereto (or if greater, a fair market value at the time of
transfer), in excess of $1 million in or to any of its Subsidiaries that is not
a Guarantor (other than an Accounts Receivable Subsidiary), the Company or such
Guarantor shall (a) cause such transferee Subsidiary to (x) guarantee payment
of the Notes by executing a Guarantee, and (y) execute the appropriate security
document in substantially the form of the relevant Security Document,
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necessary to grant a security interest in all of the assets of such Subsidiary
to secure such Guarantee and (b) deliver to the Indenture Trustee an Opinion of
Counsel, in form reasonably satisfactory to the Indenture Trustee, that such
Guarantee is a valid, binding and enforceable obligation of such Subsidiary,
subject to customary exceptions for bankruptcy, fraudulent transfer, and
equitable principles. If the Company or a Guarantor shall subsequently sell or
otherwise transfer all of the Capital Stock of such Subsidiary held by the
Company or such Guarantor or shall subsequently sell or transfer or cause to be
sold or transferred all or substantially all of the assets of such Subsidiary,
the Guarantee required hereby may be withdrawn or cancelled, provided that the
proceeds of any such sale are applied in the manner and to the extent required
by the provision described under "-- Limitations on Asset Sales."
Limitation on Transactions with Related Persons. The Indenture
provides that neither the Company nor any Guarantor may, and neither the
Company nor any Guarantor may permit any of its Subsidiaries to, enter directly
or indirectly into, or permit to exist, any transaction or series of related
transactions with any Related Person of the Company (including without
limitation: (a) the sale, lease, transfer or other disposition of properties,
assets, or securities to such Related Person; (b) the purchase or lease of any
properties, assets, or securities from such Related Person; (c) an Investment
in such Related Person (other than (i) a purchase by TEC of 8% Preferred Stock
of the Company or (ii) a Restricted Investment permitted by the provision
described under "-- Limitation on Restricted Payments"); and (d) entering into
or amending any contract or agreement with or for the benefit of a Related
Person) (each a "Related Person Transaction"), except for (i) permitted
Restricted Payments and transactions made in good faith, the terms of which
are: (x) fair and reasonable to the Company or such Guarantor or Subsidiary, as
the case may be, and (y) at least as favorable as the terms which could be
obtained by the Company or such Guarantor or Subsidiary, as the case may be, in
a comparable transaction made on an arm's length basis with Persons who are not
Related Persons, (ii) transactions between the Company and any of its wholly
owned Subsidiaries and transactions between wholly owned Subsidiaries of the
Company, (iii) transactions pursuant to the Services Agreement, the Tax
Allocation Agreement, the Gas Purchase Agreement, the Stock Transfer Agreement,
the Registration Rights Agreement and the TransAmerican Lease, and (iv) any
employee compensation arrangement in an amount which, together with the amount
of all other compensation to such employee, shall not exceed $1 million in any
fiscal year of such employee's employer and which has been approved, if the
Company or one of its Subsidiaries is the employer, by a majority of the
Company's directors or, if a Guarantor or one of its Subsidiaries is the
employer, by a majority of the Guarantor's directors, and found in good faith
by such directors to be in the best interests of the Company or such Guarantor
or Subsidiary, as the case may be. Notwithstanding the foregoing, (a) the
Company shall not issue any Capital Stock or securities convertible or
exchangeable into Capital Stock to John R. Stanley or any of his affiliates
other than 8% Preferred Stock, (b) neither the Company nor any Guarantor may,
and neither the Company nor any Guarantor may permit any of its Subsidiaries
to, directly or indirectly, loan or advance any funds to John R. Stanley, and
the aggregate amount of total compensation that the Company and the Guarantors
may pay John R. Stanley shall not exceed $1 million per year and (c) the
amounts payable by the Company and its Subsidiaries to Southeast Contractors
for employee services provided to the Company shall not exceed the actual costs
to Southeast Contractors of the employees, which costs consist solely of
payroll and employee benefits, plus related administrative costs and an
administrative fee, which administrative costs and fee shall not exceed
$1,200,000 per year in the aggregate.
Without limiting the foregoing, except for sales of accounts receivable to
an Accounts Receivable Subsidiary in accordance with the provisions described
under "-- Accounts Receivable Subsidiary," (a) with respect to any Related
Person Transaction or series of Related Person Transactions with an aggregate
value in excess of $1 million, such transaction must first be approved, if the
Related Person Transaction involves the Company or any of its Subsidiaries, by
a majority of the Board of Directors of the Company or, if the Related Person
Transaction involves a Guarantor or any of its Subsidiaries, by a majority of
the Board of Directors of such Guarantor, and a majority of the directors of
the Company or such Guarantor, as the case may be, who are disinterested in the
transaction pursuant to a Board Resolution, as (i) fair and reasonable to the
Company or such Guarantor or Subsidiary, as the case may be, and (ii) on terms
which are at least as favorable as the terms which could be obtained by the
Company or such Guarantor or Subsidiary, as the case may be, on an arm's length
basis with Persons who are not Related Persons, and (b) with respect to any
Related Person Transaction or series of Related Person Transactions with an
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aggregate value in excess of $5 million, the Company or such Guarantor or
Subsidiary, as the case may be, must first obtain a favorable written opinion
as to the fairness of such transaction to the Company or such Guarantor or
Subsidiary, as the case may be, from a financial point of view from a "big 6
accounting firm" or a nationally recognized investment banking firm that has
not received and does not receive any fees or other compensation (other than
solely for such opinion or other opinions pursuant hereto) from the Company,
any Guarantor, or any of their Subsidiaries, or a Related Person within 24
months prior to, and 12 months after, such opinion.
Limitation on Asset Sales. The Indenture provides that neither the Company
nor any Guarantor may, and neither the Company nor any Guarantor may permit any
of its Subsidiaries to, in one or a series of related transactions, convey,
sell, transfer (other than the granting of any Permitted Lien), or otherwise
dispose of (including through damage or destruction for which insurance
proceeds are paid or by condemnation), directly or indirectly, any of their
properties, businesses, or assets, whether owned on the Issue Date or
thereafter acquired (an "Asset Sale") unless: (a) the Net Cash Proceeds
therefrom are applied to the repurchase of the Notes pursuant to an Offer to
Purchase (as defined below) and (b) at least 85% of the value of the
consideration for such Asset Sales consists of (i) cash, (ii) the assumption of
Debt of the Company, a Guarantor or any of their Subsidiaries and the release
of the Company or such Guarantor or Subsidiary from all liability on such Debt
in connection with such Asset Sale, or (iii) securities received by the
Company, a Guarantor or any of their Subsidiaries from the transferee that are
promptly converted by the Company or such Guarantor or Subsidiary into cash.
Notwithstanding the foregoing:
(a) any Guarantor and any Subsidiary of the Company or a Guarantor
may convey, sell, lease, transfer, or otherwise dispose of any or all of
its assets (upon voluntary liquidation or otherwise) to the Company or a
wholly owned Subsidiary of the Company;
(b) the Company, any Guarantor and any Subsidiary of the Company or a
Guarantor may convey, sell, lease, transfer, or otherwise dispose of
assets in the ordinary course of business and on ordinary business terms
if the aggregate proceeds from all such Asset Sales not otherwise
permitted do not exceed $2 million in any twelve-month period;
(c) the Company and any Guarantor may convey, sell, lease, transfer,
or otherwise dispose of assets pursuant to and in accordance with the
provisions described under "-- Limitation on Mergers, Sales, or
Consolidation";
(d) the Company, any Guarantor and any Subsidiary of the Company or a
Guarantor may (i) sell damaged, worn out, or other obsolete property in
the ordinary course of business or other property no longer necessary for
the proper conduct of the business or (ii) abandon such property if it
cannot, through reasonable efforts, be sold;
(e) the Company and its Subsidiaries may sell accounts receivable to
an Accounts Receivable Subsidiary in accordance with the provisions
described under "-- Accounts Receivable Subsidiary";
(f) the Company and its Subsidiaries may convey, sell, transfer or
otherwise dispose of crude oil and refined products in the ordinary course
of business;
(g) the Company may sell two Avon 1535 Gas Turbines and related
equipment for cash proceeds of at least $6 million, provided that the
Company deposits at least $6 million of such proceeds in the Collateral
Account within 5 Business Days after receipt of such proceeds; and
(h) the Company and TEC may sell or otherwise dispose of shares of
TransTexas common stock only in accordance with the provisions described
under "-- Maintenance of Net Worth and Consolidated Fixed Charge Coverage
Ratio," "-- Additional Equity Investments" and "Collateral and Security."
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For purposes of the foregoing, "Net Cash Proceeds" means the aggregate
amount of cash received by the Company, the Guarantors and their Subsidiaries
in respect of an Asset Sale (other than those expressly permitted in clauses
(a) through (h) of the immediately preceding sentence), including any cash as
and when received from the proceeds of any property which itself was acquired
in consideration of an Asset Sale, less the sum of (a) all reasonable
out-of-pocket fees, commissions and other expenses incurred in connection with
such Asset Sale, including the amount (estimated in good faith by the Company)
of income, franchise, sales and other applicable taxes required to be paid by
the Company, the Guarantors and their Subsidiaries in connection with such
Asset Sale and (b) the aggregate amount of cash so received which is used to
retire any then existing Debt of the Company, the Guarantors, or their
Subsidiaries (other than the Notes) that is required by the terms of such Debt
to be repaid in connection with such Asset Sale.
The Company will accumulate all Net Cash Proceeds and the aggregate amount
of such accumulated Net Cash Proceeds not timely used for the purposes
permitted above is referred to as the "Accumulated Amount."
Not later than 10 Business Days after each date on which the Accumulated
Amount exceeds $20 million, the Company will make an irrevocable, unconditional
offer (an "Offer to Purchase") to the Holders to purchase, on a pro rata basis,
Notes having a principal amount (the "Offer Amount") equal to the Accumulated
Amount, at a purchase price (the "Offer Price") equal to 100% of the principal
amount thereof, plus accrued but unpaid interest, or, in the case of Discount
Mortgage Notes prior to February 15, 1998, 100% of the Accreted Value thereof,
in either case, to and including the date the Notes tendered are purchased and
paid for in accordance with the Indenture, which date will be no later than 25
Business Days after the first date on which the Offer to Purchase is required
to be made (the "Purchase Date"). Notice of an Offer to Purchase will be sent
at least 20 Business Days prior to the close of business on the third Business
Day prior to the Purchase Date (the "Final Put Date"), by first-class mail, by
the Company to each Holder at its registered address, with a copy to the
Indenture Trustee. The notice to the Holders will contain all information,
instructions and materials required by applicable law or otherwise material to
such Holders' decision to tender Notes pursuant to the Offer to Purchase.
On or before a Purchase Date, the Company will (a) accept for payment
Notes or portions thereof properly tendered pursuant to the Offer to Purchase
on or prior to the Final Put Date (on a pro rata basis if Notes in a principal
amount in excess of the principal amount of Notes to be acquired are tendered
and not withdrawn), (b) deposit with the Paying Agent U.S. Legal Tender
sufficient to pay the Offer Price for all Notes or portions thereof so
accepted, and (c) deliver to the Indenture Trustee Notes so accepted together
with an Officers' Certificate stating the Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail or deliver to
Holders of Notes so accepted payment in an amount equal to the Offer Price for
such Notes. The Indenture Trustee will promptly cancel all Notes accepted by
the Company pursuant to the Offer to Purchase and authenticate and mail or
deliver to the Holders of Notes so accepted a new Note equal in principal
amount to any unpurchased portion of the Note surrendered. Any Notes not so
accepted will be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Offer to
Purchase on or as soon as practicable after the Purchase Date.
If the amount required to acquire all Notes tendered by Holders pursuant
to the Offer to Purchase (the "Acceptance Amount") is less than the Offer
Amount, the excess of the Offer Amount over the Acceptance Amount may be used
by the Company for general corporate purposes without restriction, unless
otherwise restricted by the other provisions of the Indenture. Upon
consummation of any Offer to Purchase made in accordance with the terms of the
Indenture, the Accumulated Amount will be reduced to zero and accumulations
thereof will be deemed to recommence from the day next following such day the
Accumulated Amount exceeds $20 million.
To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and
any other tender offer rules under the Exchange Act and other securities laws,
rules and regulations which may then be applicable to any Offer to Purchase by
the Company to purchase the Notes.
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Limitation on Liens. The Indenture provides that neither the Company nor
any Guarantor may, and neither the Company nor any Guarantor may permit any of
its Subsidiaries to, directly or indirectly, incur or suffer to exist any Lien
upon any of their properties or assets, whether now owned or hereafter
acquired, other than Permitted Liens, and TEC may not permit any Liens on
pledged shares of TransTexas common stock or pledged shares of common stock of
the Company.
Restriction on Sale and Issuance of Subsidiary Stock. The Indenture
provides that neither the Company nor any Guarantor may, and neither the
Company nor any Guarantor may permit any of its Subsidiaries to, issue or sell
any shares of Capital Stock of any Subsidiary of the Company or a Guarantor to
any Person other than the Company or such Guarantor, respectively, or a wholly
owned Subsidiary of the Company or such Guarantor, respectively; provided,
however, that the Company shall be permitted to issue additional shares of its
Capital Stock (a) to TEC or (b) in connection with an Equity Offering.
Notwithstanding the foregoing, no additional shares of Capital Stock, or
securities convertible or exchangeable into Capital Stock, of the Company
(other than 8% Preferred Stock) may be issued to John R. Stanley or any of his
Related Persons.
Limitations on Line of Business. The Indenture provides that neither the
Company nor any of its Subsidiaries may directly or indirectly engage to any
substantial extent in any line or lines of business activity other than a
Related Business.
Maintenance of Properties and Insurance. The Indenture provides that each
of the Company and the Guarantors will cause the properties used or useful to
the conduct of its business and the business of each of its Subsidiaries to be
maintained and kept in good condition, repair and working order (reasonable
wear and tear excepted) and supplied with all necessary equipment and will
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in its reasonable judgment may be necessary, so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.
Each of the Company and the Guarantors will provide, or cause to be
provided, for itself and each of its Subsidiaries, insurance (including
appropriate self-insurance) against loss or damage of the kinds that, in its
reasonable, good faith opinion, are adequate and appropriate for the conduct of
its business and the business of such Subsidiaries in a prudent manner, with
reputable insurers or with the government of the United States of America or an
agency or instrumentality thereof, in such amounts, with such deductibles, and
by such methods as is customary, in its reasonable, good faith opinion, and
adequate and appropriate for the conduct of its business and the business of
its Subsidiaries in a prudent manner for companies engaged in a similar
business; provided, that the Company will not be required to obtain business
interruption insurance and delay in start up insurance until 90 days after the
first introduction of hydrocarbons into the Company's crude unit.
Limitation on Status as Investment Company or Public Utility Company. The
Indenture provides that neither the Company nor any Guarantor may become, and
neither the Company or any Guarantor may permit any of its Subsidiaries to
become, an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended) or a "holding company" or "public utility
company" (as such terms are defined in the Public Utility Holding Company Act
of 1935, as amended), or otherwise subject to regulation under the Investment
Company Act or the Public Utility Holding Company Act.
Accounts Receivable Subsidiary. The Indenture provides that:
(a) Notwithstanding the provisions of the covenant entitled "Restricted
Payments," the Company may, and may permit any of its Subsidiaries to, make
Investments in an Accounts Receivable Subsidiary (i) the proceeds of which are
applied within five Business Days of the making thereof solely to finance the
purchase of accounts receivable of the Company and its Subsidiaries and (ii) in
the form of Accounts Receivable Subsidiary Notes to the extent permitted by
clause (b) below; provided that the aggregate amount of such Investments shall
not exceed $20 million at any time.
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(b) Neither the Company nor any Guarantor may, and neither the Company nor
any Guarantor may permit any of its Subsidiaries to, sell accounts receivable
to an Accounts Receivable Subsidiary except for consideration in an amount not
less than that which would be obtained in an arm's length transaction and
solely in the form of cash or Cash Equivalents; provided that an Accounts
Receivable Subsidiary may pay the purchase price for any such accounts
receivable in the form of Accounts Receivable Subsidiary Notes so long as,
after giving effect to the issuance of any such Accounts Receivable Subsidiary
Notes, the aggregate principal amount of all Accounts Receivable Subsidiary
Notes outstanding shall not exceed 20% of the aggregate purchase price paid for
all outstanding accounts receivable purchased by an Accounts Receivable
Subsidiary since the date of this Indenture (and not written off or required to
be written off in accordance with the normal business practice of an Accounts
Receivable Subsidiary);
(c) The Company shall not permit an Accounts Receivable Subsidiary to sell
any accounts receivable purchased from the Company and its Subsidiaries or
participation interests therein to any other Person except on an arm's length
basis and solely for consideration in the form of cash or Cash Equivalents;
(d) Neither the Company nor any Guarantor may, and neither the Company nor
any Guarantor may permit any of its Subsidiaries to, enter into any guarantee,
subject any of their respective properties or assets (other than the accounts
receivable sold by them to an Accounts Receivable Subsidiary) to the
satisfaction of any liability or obligation or otherwise incur any liability or
obligation (contingent or otherwise), in each case, on behalf of an Accounts
Receivable Subsidiary or in connection with any sale of accounts receivable or
participation interests therein by or to an Accounts Receivable Subsidiary,
other than obligations relating to breaches of representations, warranties,
covenants and other agreements of the Company or any of its Subsidiaries with
respect to the accounts receivable sold by the Company or any of its
Subsidiaries to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; provided that neither the Company, the Guarantor nor any of
their Subsidiaries shall at any time guarantee or be otherwise liable for the
collectibility of accounts receivable sold by them;
(e) The Company shall not permit an Accounts Receivable Subsidiary to
engage in any business or transaction other than the purchase and sale of
accounts receivable or participation interests therein of the Company and its
Subsidiaries and activities incidental thereto;
(f) The Company shall not permit an Accounts Receivable Subsidiary to
incur any Debt other than the Accounts Receivable Subsidiary Notes, Debt owed
to the Company, and Non-Recourse Debt; provided that the aggregate principal
amount of all such Debt of an Accounts Receivable Subsidiary shall not exceed
the book value of its total assets as determined in accordance with GAAP;
(g) The Company shall cause any Accounts Receivable Subsidiary to remit to
the Company or a wholly owned Subsidiary of the Company on a monthly basis as a
distribution all available cash and Cash Equivalents not held in a collection
account pledged to acquirors of accounts receivable or participation interests
therein, to the extent not applied to (i) pay interest or principal on the
Accounts Receivable Subsidiary Notes or any Debt of such Accounts Receivable
Subsidiary owed to the Company, (ii) pay or maintain reserves for reasonable
operating expenses of such Accounts Receivable Subsidiary or to satisfy
reasonable minimum operating capital requirements, or (iii) to finance the
purchase of additional accounts receivable of the Company and its Subsidiaries;
and
(h) Neither the Company nor any Guarantor may, and neither the Company nor
any Guarantor may permit any of its Subsidiaries to, sell accounts receivable
to, or enter into any other transaction with or for the benefit of, an Accounts
Receivable Subsidiary (i) if such Accounts Receivable Subsidiary pursuant to or
within the meaning of any Bankruptcy Law (A) commences a voluntary case, (B)
consents to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property, (D) makes general assignment for the benefit
of its creditors, or (E) generally is not paying its debts as they become due;
or (ii) if a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that (A) is for relief against such Accounts Receivable
Subsidiary in an involuntary case, (B) appoints a Custodian of such Accounts
Receivable Subsidiary or for all or substantially all of the property of such
Accounts Receivable Subsidiary,
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or (C) orders the liquidation of such Accounts Receivable Subsidiary, and, with
respect to clause (ii) hereof, the order or decree remains unstayed and in
effect for 60 consecutive days.
Excess Cash. The Indenture provides that if, as of any Excess Cash Date,
the Notes do not then have an Investment Grade Rating or the Common Stock does
not have a Public Market Value of at least $750 million and the Company and its
Subsidiaries have Excess Cash for the six months ending on such Excess Cash
Date in an amount which, together with the amount of Excess Cash as of each
prior Excess Cash Date subsequent to the most recent Excess Cash Offer
("Aggregate Excess Cash"), exceeds $80 million, then the Company shall make an
irrevocable, unconditional offer to all Holders (an "Excess Cash Offer") to
purchase, on a pro rata basis, on or before the last day of the next following
fiscal quarter or, if the Excess Cash Date is the last day of the Company's
fiscal year, the 45th day after the first day of the next following fiscal
quarter (the "Excess Cash Payment Date"), Notes having a principal amount (the
"Excess Cash Offer Amount") equal to the lesser of $25 million and 25% of the
amount of Aggregate Excess Cash, at a purchase price (the "Excess Cash Offer
Price") equal to 100% of principal amount, plus accrued but unpaid interest to,
and including, the Excess Cash Payment Date.
To the extent applicable and if required by law, the Company shall comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and
any other tender offer rules under the Exchange Act and other securities laws,
rules and regulations which may then be applicable to any Excess Cash Offer by
the Company to purchase the Notes.
The Company shall give the Indenture Trustee prompt notice if it has
Aggregate Excess Cash as of any Excess Cash Date. Notice of an Excess Cash
Offer shall be sent at least 20 Business Days prior to the close of business on
the third Business Day prior to the Excess Cash Payment Date, by first-class
mail, by the Company to each Holder at its registered address, with a copy to
the Indenture Trustee.
On or before an Excess Cash Payment Date, the Company shall (a) accept for
payment Notes or portions thereof properly tendered pursuant to the Excess Cash
Offer prior to the close of business on the third Business Day prior to the
Excess Cash Payment Date (on a pro rata basis if Notes in a principal amount in
excess of the principal amount of Notes to be acquired are tendered and not
withdrawn), (b) deposit with the Paying Agent U.S. Legal Tender sufficient to
pay the purchase price of all Notes or portions thereof so accepted, and (c)
delivery to the Trustee Notes so accepted together with an Officers'
Certificate stating the Notes or portions thereof being purchased by the
Company. The Paying Agent shall promptly mail or deliver to Holders of Notes so
accepted, payment in an amount equal to the purchase price for such Notes. The
Trustee shall promptly cancel all Notes accepted by the Company pursuant to the
Excess Cash Offer and authenticate and mail or deliver to the Holders of Notes
so accepted a new Note equal in principal amount to any unpurchased portion of
the Note surrendered. Any Notes not so accepted shall be promptly mailed or
delivered by the Company to the Holder thereof. The Company will publicly
announce the results of the Excess Cash Offer on or as soon as practicable
after the Excess Cash Payment Date.
If the amount required to acquire all Notes tendered by Holders pursuant
to the Excess Cash Offer (the "Excess Cash Acceptance Amount") shall be less
than the Aggregate Excess Cash amount, the excess of the Excess Cash Offer
Amount over the Excess Cash Acceptance Amount may be used by the Company for
general corporate purposes without restriction, unless otherwise restricted by
the other provisions of the Indenture.
Additional Equity Investments. TEC shall make an Equity Exchange Offer (as
defined below) unless, prior to December 31, 1997, (a) the Company has received
cash equity Investments aggregating at least $100 million that have been
deposited in the Collateral Account, or (b) TEC has sold for cash at least 10
million shares of TransTexas common stock and, as soon as practicable
thereafter, used the Net Proceeds of such sale or sales to purchase 8%
Preferred Stock of the Company, and the Company has, immediately upon receipt
thereof, deposited such Net Proceeds in the Collateral Account.
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"Equity Exchange Offer" means an irrevocable, unconditional offer by TEC
to all Holders of Notes to exchange all or any portion of such Holders' Notes,
on a date (the "Equity Exchange Date") that is no later than 40 Business Days
after December 31, 1997, for that number of shares of TransTexas common stock
equal to (a) in the case of the exchange of Discount Mortgage Notes on or after
February 15, 1998, or the exchange of Mortgage Notes, the aggregate principal
amount of such Notes, together with accrued but unpaid interest, if any, to the
Equity Exchange Date, divided by the product of 0.85 and the average of the
Closing Prices of TransTexas common stock for the ten consecutive trading days
commencing on December 31, 1997 (the "Average Price"), and (b) in the case of
the exchange of Discount Mortgage Notes prior to February 15, 1998, the
aggregate Accreted Value of such Discount Mortgage Notes to the Equity Exchange
Date divided by the product of 0.85 and the Average Price. The Equity Exchange
Offer shall be registered under the Securities Act of 1933, as amended. On or
before the Equity Exchange Date, TEC will (a) accept for exchange Notes or
portions thereof properly tendered pursuant to the Equity Exchange Offer prior
to the close of the third Business Day prior to the Equity Exchange Date, (b)
deposit with the Paying Agent shares of TransTexas common stock in an amount
sufficient to satisfy its obligation to exchange all Notes properly tendered
pursuant to the Equity Exchange Offer, and (c) deliver to the Indenture Trustee
Notes so accepted, together with an Officers' Certificate listing the Notes or
portions thereof being exchanged by TEC. The Paying Agent will promptly deliver
to the Holders of Notes so accepted shares of TransTexas common stock. Holders
of Notes that are exchanged pursuant to an Equity Exchange Offer will receive
cash in lieu of any fractional shares to which they would otherwise be
entitled. The Indenture Trustee will promptly cancel all Notes accepted by TEC
pursuant to the Equity Exchange Offer and authenticate and mail or deliver to
each Holder of Notes so accepted a new Note equal in principal amount to any
portion of the Note surrendered that is not exchanged. Any Notes not so
accepted will be promptly mailed or delivered by TEC to the Holder thereof. TEC
will publicly announce the results of the Equity Exchange Offer on or as soon
as practicable after the Equity Exchange Date. If TEC does not have sufficient
shares of TransTexas common stock to satisfy its obligation to exchange all
Notes properly tendered pursuant to the Equity Exchange Offer, the Notes
tendered in response to an Equity Exchange Offer will be accepted by TEC on a
pro rata basis; provided, however, that portions of Notes may be exchanged
pursuant to an Equity Exchange Offer only in multiples of $1,000 principal
amount. In connection with an Equity Exchange Offer, TEC may direct the
Indenture Trustee to release shares of TransTexas common stock that have been
pledged to the Indenture Trustee in an amount sufficient to satisfy its
obligation to exchange all Notes properly tendered pursuant to the Equity
Exchange Offer, and such shares will be exchanged for Notes pursuant to the
Equity Exchange Offer.
An Equity Exchange Offer will be made by sending written notice thereof by
first-class mail, to each Holder of Notes at its registered address, with a
copy to the Indenture Trustee. The notice to Holders will contain all
instructions and materials required by applicable law and will contain or make
available to Holders other information material to such Holders' decision to
tender Notes pursuant to the Equity Exchange Offer.
To the extent applicable and if required by law, the Company and TEC will
comply with Section 14 of the Exchange Act and the provisions of Regulation 14E
and other tender offer rules under the Exchange Act and other securities laws,
rules and regulations which may then be applicable to any Equity Exchange Offer
by the Company or TEC.
Revolving Credit Facility. If the Company obtains a Revolving Credit
Facility, the Company will promptly deposit in the Collateral Account $50
million of the proceeds of Debt incurred pursuant to such Revolving Credit
Facility.
Limitation on Sale/Leaseback Transactions. The Indenture provides that
neither the Company nor any Guarantor will, and neither the Company nor any
Guarantor will permit any of its Subsidiaries to, enter into any Sale/Leaseback
Transaction unless (a) the Company could have (i) incurred Debt in the amount
equal to the aggregate amount of Attributable Debt relating to such
Sale/Leaseback Transaction pursuant to the covenant described above under the
caption "-- Limitation on Incurrences of Additional Debt and Issuances of
Disqualified Capital Stock" and (ii) incurred a Lien to secure such Debt
pursuant to the covenant described above under the caption "-- Limitation on
Liens," (b) the gross cash proceeds of such Sale/Leaseback Transaction are at
least equal to the fair market value
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(as determined in good faith by the Board of Directors) of the property that is
subject to such Sale/Leaseback Transaction and (c) the transfer of assets in
such Sale/Leaseback Transaction is permitted by, and the Company applies the
proceeds of such transaction in compliance with, the covenant described above
under the caption "-- Limitation of Asset Sales."
LIMITATION ON MERGER, SALE, OR CONSOLIDATION
The Indenture provides that neither the Company nor any Guarantor will, in
a single transaction or through a series of related transactions, consolidate
with or merge with or into any other Person or, directly or indirectly, sell,
lease, assign, transfer or convey all or substantially all of its assets
(computed on a consolidated basis), to another Person or group of Affiliated
Persons, unless (i) either (a) the Company or such Guarantor, as the case may
be, is the continuing Person or (b) the resulting, surviving or transferee
entity is a corporation or partnership organized under the laws of the United
States, any state thereof, or the District of Columbia, and shall expressly
assume all of the obligations of the Company or such Guarantor, as the case may
be, under the Notes, any Guarantee, the Security Documents, and the Indenture
by an indenture supplemental thereto, and any supplements to any Security
Documents as the Trustee in its sole discretion may require, execute and
deliver to the Trustee on or prior to the consummation of such transaction, in
form satisfactory to the Trustee; (ii) no Default or Event of Default shall
exist or shall occur immediately before and after giving effect to such
transaction; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Net Worth of the surviving or transferee entity is at least
equal to the Net Worth of the Company and its Subsidiaries or such Guarantor
and its Subsidiaries immediately prior to such transaction; and (iv) the rating
agencies have indicated in writing that, immediately thereafter, the Notes will
be rated "BB-" or higher by S&P and "Ba3" or higher by Moody's or the ratings
of the Notes by S&P and Moody's will be higher than before the transaction.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company or a Guarantor in accordance with the
foregoing, the successor Person formed by such consolidation or into which the
Company or a Guarantor is merged or to which such transfer is made, shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company or such Guarantor under the Indenture with the same effect as if
such successor corporation had been named as the Company or such Guarantor
therein.
COLLATERAL AND SECURITY
Pursuant to the Indenture and the Security Documents, the Company and TEC
granted and pledged to the Indenture Trustee, for the ratable benefit of the
Holders of the Notes, a security interest in substantially all of the assets
and properties of the Company and TEC to secure the performance of the
obligations of the Company and the Guarantors under the Indenture, the Notes
and any Guarantee. The Indenture also provides that as long as any Notes remain
outstanding, the stock of any future subsidiary of TEC or the Company (subject
to certain limitations) shall be pledged to secure the Notes.
The Indenture provides that the security interest in the Company's
accounts receivable and inventory will be released if the Company obtains a
Revolving Credit Facility secured by such accounts receivable and inventory and
deposits $50 million in the Collateral Account.
Pledged shares of TransTexas common stock may be released from such pledge
as necessary in order to permit the Company or TEC to consummate a Deficiency
Offer or an Equity Exchange Offer. See "-- Covenants -- Maintenance of Net
Worth and Consolidated Fixed Charge Coverage Ratio" and "-- Covenants --
Additional Equity Investments."
Up to the remaining 10.45 million shares (subject to adjustment) of
pledged TransTexas common stock owned by the Company may be released from the
pledge (a) if such shares are sold for cash and the Net Proceeds are
immediately deposited in the Collateral Account or (b) if the Company issues
and sells Preferred Stock that is exchangeable for TransTexas common stock and
the Net Proceeds of such sale are deposited concurrently in the
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Collateral Account, provided such Net Proceeds are at least equal to the Market
Value, as of the date of such release, of the shares of TransTexas common stock
that are released. Any such shares sold by the Company must be sold at prices
no less favorable to the Company than those that could be obtained in
arms-length transactions with unrelated persons.
Up to 10 million shares (subject to adjustment) of pledged TransTexas
common stock owned by TEC may be released from the pledge if (a) Phase I of the
Capital Improvement Program has been completed, (b) the 10.45 million shares of
pledged TransTexas common stock referred to in clause (a) of the immediately
preceding paragraph have been sold in accordance with the Indenture or if the
Company has issued Preferred Stock exchangeable for all 15 million shares of
the originally pledged TransTexas common stock in accordance with clause (b) of
the immediately preceding paragraph, (c) Phase I of the Capital Improvement
Program is completed by the Required Phase I Completion Date, (d) such shares
are sold on or before December 31, 1997, (e) such shares are sold for cash, (f)
the Net Proceeds from such sale are used to make a concurrent purchase of 8%
Preferred Stock of the Company, (g) the Company immediately deposits such Net
Proceeds in the Collateral Account, and (h) the Net Proceeds from such sale,
together with all other amounts in the Collateral Account, are sufficient to
fund the completion of Phase II of the Capital Improvement Program. Any such
shares sold by TEC must be sold at prices no less favorable to TEC than those
that could be obtained in arms-length transactions with unrelated persons.
Pledged shares of TransTexas common stock owned by TEC may be released
from such pledge (a) if (i) TEC sells such shares at a price of at least $12
per share, (ii) the Net Proceeds of such sale are immediately deposited in a
segregated cash collateral account established for such purpose and in which
the Indenture Trustee has a perfected first priority security interest, (iii)
such account does not have a balance in excess of $30 million for a period in
excess of 30 consecutive days, (iv) funds in such account are released only to
permit TEC to purchase 8% Preferred Stock of the Company, (v) simultaneously
with TEC's purchase of such shares of 8% Preferred Stock, the Company uses all
such Net Proceeds to fund a Note Redemption or a Note Repurchase, and (vi)
until Phase II of the Capital Improvement Program has been completed, at least
10 million shares of pledged TransTexas common stock (subject to adjustment)
would continue to be pledged after such release; (b) after a Public Equity
Offering, if (i) the outstanding Common Stock of the Company has a Public
Market Value of at least $750 million, (ii) after such shares are released, the
Collateral Ratio is at least 3:1 and (iii) at any time thereafter that the
Collateral Ratio is less than 3:1, within 5 Business Days, TEC pledges, as
security for the Notes and the Guarantee, additional shares of TransTexas
common stock sufficient to make the Collateral Ratio exceed 3:1; (c) if (i) TEC
sells such shares and the Net Proceeds of such sale are immediately deposited
in a segregated cash collateral account established for such purpose and in
which the Indenture Trustee has a perfected first priority security interest,
funds in such account are released only to permit TEC to purchase 8% Preferred
Stock of the Company and the Company immediately uses such Net Proceeds to fund
a Note Redemption or a Note Repurchase, or (ii) the Company or TEC has
completed a Note Redemption or a Note Repurchase prior to such release, and, in
the case of both (i) and (ii), (w) the number of shares released does not
exceed the product of (1) the number of shares so pledged immediately prior to
such release, and (2) a fraction, the numerator of which is equal to the Value
of Notes subject to such Note Redemption or Note Repurchase, and the
denominator of which is equal to the Value of Notes outstanding immediately
prior to such Note Redemption or Note Repurchase, (x) the Market Value of the
shares of TransTexas common stock pledged to secure the Notes and the Guarantee
(excluding the shares to be released) is at least equal to the outstanding
principal amount of the Notes, plus all accrued and unpaid interest thereon
(after giving effect to such Note Redemption or Note Repurchase), (y) Phase II
of the Capital Improvement Program has been completed or, if Phase II has not
been completed but Phase I has been completed, no more than 10 million shares
of TransTexas common stock (subject to adjustment) are sold pursuant to this
clause (c), and (z) until Phase II of the Capital Improvement Program has been
completed, at least 10 million shares of pledged TransTexas common stock
(subject to adjustment) would continue to be pledged after such release; or (d)
if (i) Phase II of the Capital Improvement Program has been completed, (ii) the
Company has received, subsequent to the Issue Date, cash equity investments
aggregating at least $100 million that have been deposited in the Collateral
Account prior to December 31, 1997 and, (iii) after giving effect to such
release, at least 35 million shares of TransTexas common stock (subject to
adjustment for stock splits, stock dividends and other similar transactions)
remain subject to the pledge. Any such shares sold
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by TEC must be sold at prices no less favorable to TEC than those that could be
obtained in arms-length transactions with unrelated persons.
All of the pledged shares of TransTexas common stock and pledged shares of
stock of the Company will be released from such pledge (a) if the Notes have an
Investment Grade Rating and the rating agencies have indicated in writing that
the Notes will continue to have an Investment Grade Rating after the release of
the shares of TransTexas common stock and shares of stock of the Company or (b)
upon the occurrence of a Change of Control (i) on the day after the Change of
Control Payment Date if a Change of Control Offer has been consummated in
accordance with the Indenture or (ii) at any time after a Change of Control has
occurred if the shares released from the pledge are sold by TEC and (w) the Net
Proceeds of such sale are, together with other funds of the Company available
therefor, at least equal to the Change of Control Purchase Price (including
accrued and unpaid interest) of all outstanding Notes, (x) such Net Proceeds
are immediately deposited in a segregated cash collateral account established
for such purpose and in which the Indenture Trustee has a perfected first
priority security interest, (y) funds in such account are released only to
permit TEC to purchase 8% Preferred Stock of the Company and (z) simultaneously
with TEC's purchase of such shares of 8% Preferred Stock, the Company uses all
of such Net Proceeds to fund payments to Holders of Notes in connection with a
Change of Control Offer.
Notwithstanding the foregoing, no shares of TransTexas common stock may be
released from the pledge if at the time of such proposed release, a Default or
Event of Default has occurred and is continuing or would occur as a result of
such release.
The Company and TEC shall give written notice to the holders of Notes
within 10 days of any release of pledged shares of TransTexas common stock.
Such notice shall set forth the date of such release, the number of shares
released, and the provision of the Indenture pursuant to which such shares were
released.
Concurrently with any Asset Sale, the Collateral that is the subject of
such Asset Sale may be released from the security interest created by the
Security Documents if (i) such Asset Sale complies with the provisions
described under "-- Covenants -- Limitation on Asset Sales," and (ii) if the
Net Cash Proceeds therefrom are required to be used to make an Offer to
Purchase or invested in a Related Business, such Net Cash Proceeds are
deposited in the Collateral Account pending their use for such purpose. In
addition, the Indenture Trustee will be required to subordinate the lien of the
holders of the Notes to certain purchase money liens granted to other lenders
as permitted by the Indenture.
If the Notes become due and payable prior to the stated maturity thereof
or are not paid in full at the stated maturity thereof, the Indenture Trustee
may take all actions it deems necessary or appropriate, including, but not
limited to, foreclosing upon the Collateral as provided in the Indenture. If
the Indenture Trustee takes possession of or otherwise acquires the Company's
refinery, the Indenture Trustee may retain one or more experienced operators of
refineries to manage the refinery on behalf of the holders of the Notes. The
proceeds received from the sale of any Collateral that is the subject of a
foreclosure shall be applied first to pay the expenses of such foreclosure and
amounts then payable to the Indenture Trustee and thereafter to pay (subject to
any prior liens on the Collateral) the principal of and interest on the Notes.
The Indenture Trustee has the power to institute and maintain such suits and
proceedings as it may deem expedient to prevent impairment of, or to preserve
or protect its and the Holders' interest in, the Collateral.
There can be no assurance that the Indenture Trustee will be able to sell
the Collateral without substantial delays or that the proceeds obtained will be
sufficient to pay all amounts owing to Holders of the Notes. See "Risk Factors
- -- Adequacy of Collateral," "Risk Factors -- Substantive Consolidation;
Bankruptcy" and "Certain Legal Considerations -- Insolvency and Bankruptcy
Considerations."
GUARANTEE
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The Guarantors will unconditionally guarantee, on a senior secured basis,
the payment of principal (premium, if any) and interest and other amounts
payable on the Notes. The obligations of each Guarantor are limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, result in the obligations of such
Guarantor under the Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount based on the Net Worth of each
Guarantor.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as any one of the following
events: (a) the failure by the Company to pay installments of interest on the
Notes as and when the same become due and payable and the continuance of any
such failure for 30 days; (b) the failure by the Company to pay all or any part
of the principal or premium, if any, on the Notes when and as the same become
due and payable at maturity, redemption, by acceleration, or otherwise,
including payment of the Change of Control Purchase Price, the Offer Price, the
Deficiency Purchase Price, or the Excess Cash Offer Price; (c) the failure by
the Company or a Guarantor to observe or perform any other covenant, agreement,
or warranty contained in the Security Documents, the Notes or the Indenture
and, subject to certain exceptions, the continuance of such failure for a
period of 30 days after written notice is given to the Company and the
Guarantors by the Indenture Trustee or to the Company, the Guarantors and the
Indenture Trustee by the Holders of at least 25% in aggregate principal amount
of the Notes outstanding; (d) certain events of bankruptcy, insolvency, or
reorganization in respect of the Company, a Guarantor, or any of their
Significant Subsidiaries; (e) a default which extends beyond any stated period
of grace applicable thereto (including any extension thereof) under any
mortgage, indenture or instrument under which there is outstanding any Debt of
the Company, a Guarantor, or any of their Subsidiaries aggregating in excess of
$10 million or a failure to pay such Debt at its stated maturity, provided that
a waiver by the lenders of such debt of such default shall constitute a waiver
hereunder for the same period; (f) final judgments not covered by insurance
aggregating at least $10 million at any one time rendered against the Company,
a Guarantor, or any of their Subsidiaries and not stayed or discharged within
60 days; (g) any of the Security Documents not being in full force and effect
or ceasing to give the Indenture Trustee a perfected security interest in, and
Lien on, the Collateral, or the occurrence of a default under any of the
Security Documents; (h) any violation of, or failure to observe, the terms and
provisions of the Certificate of Incorporation of TEC and any amendment to the
Certificate of Incorporation or Bylaws of the Company, a Guarantor, or any of
their Subsidiaries that would materially adversely affect the interests of the
Holders of the Notes and is not corrected within 10 days (or 90 days if a
Public Equity Offering has occurred) after written notice is given to the
Company and the Guarantors by the Indenture Trustee or to the Company, the
Guarantors and the Indenture Trustee by the holders of at least 25% in
aggregate principal amount of the Notes outstanding; (i) if any shares of
TransTexas common stock are pledged to secure the Notes or the Guarantee, the
occurrence of any "Event of Default" under the indenture for the TransTexas
Notes if, as a result thereof, any of the TransTexas Notes shall become due and
payable by declaration of acceleration or otherwise; (j) if Phase I of the
Capital Improvement Program is not completed by the Required Phase I Completion
Date; or (k) if Phase II of the Capital Improvement Program has not been
completed by December 31, 1997, and, as of such date, funds in the Collateral
Account are not sufficient to pay the cost to complete Phase II or if Phase II
of the Capital Improvement Program has not been completed by December 31, 1998
and, as of such date, the Notes have a rating below "BB-" by S&P and "Ba3" by
Moody's. The Indenture provides that if a default occurs and is continuing and
if it is known to the Indenture Trustee, the Indenture Trustee must, within 45
days after the occurrence of such default, give to the Holders notice of such
default; provided, that, except in the case of a default in payment of
principal of, premium, if any, or interest on the Notes, including a default in
the payment of the Redemption Price, the Offer Price, the Change of Control
Purchase Price, the Excess Cash Offer Price or the Deficiency Purchase Price as
required by the Indenture, the Indenture Trustee will be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the interest of the Holders.
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If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (d), above, relating to the Company, a Guarantor or
any of their Subsidiaries), then in every such case, unless the principal of
all of the Notes shall have already become due and payable, either the
Indenture Trustee or the Holders of 25% in aggregate principal amount of Notes
then outstanding, by notice in writing to the Company (and to the Indenture
Trustee if given by Holders) (an "Acceleration Notice"), may declare all
principal of the Notes, determined as set forth below, and accrued interest
thereon or, as appropriate, the Change of Control Purchase Price, to be due and
payable immediately. If an Event of Default specified in clause (d), above,
relating to the Company, a Guarantor, or their Subsidiaries occurs, all
principal and accrued interest thereon will be immediately due and payable on
all outstanding Notes without any declaration or other act on the part of the
Indenture Trustee or the Holders. The Holders of no less than a majority in
aggregate principal amount of Notes (excluding any Notes held by the Company
and its affiliates) generally are authorized to rescind such acceleration if
all existing Events of Default, other than the non-payment of the principal of,
premium, if any, and interest on the Notes which have become due solely by such
acceleration, have been cured or waived.
Prior to the declaration of acceleration of the Notes, the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding may
waive on behalf of all the Holders any default, except a default in the payment
of principal of, premium, if any, or interest on any Note not yet cured, or a
default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, the Indenture Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request, order, or direction
of any of the Holders, unless such Holders have offered to the Indenture
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the Notes at the time outstanding have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee, or exercising any trust or power conferred on the Indenture
Trustee.
COVENANT DEFEASANCE; SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture ceases to be of further effect as to all outstanding Notes
(except as to (a) rights of registration of transfer, substitution and exchange
of Notes and the Company's right of optional redemption, (b) rights of Holders
to receive payments of principal of, premium, if any, and interest on the Notes
(but not the Change of Control Purchase Price of the Notes) and any other
rights of the Holders with respect to such amounts, (c) the rights, obligations
and immunities of the Indenture Trustee under the Indenture, and (d) certain
other specified provisions in the Indenture (the foregoing exceptions (a)
through (d) are collectively referred to as the "Reserved Rights") on the 91st
day (or one day after such other greater period of time in which any such
deposit of trust funds may remain subject to bankruptcy or insolvency laws)
after the irrevocable deposit by the Company with the Indenture Trustee, in
trust for the benefit of the Holders, of (a) money in an amount, (b) Government
Securities which through the payment of interest and principal will provide,
not later than one day before the due date of payment in respect of the Notes,
money in an amount, or (c) a combination thereof, sufficient to pay and
discharge the principal of, premium, if any, and interest on the Notes then
outstanding on the dates on which any such payments are due and payable in
accordance with the terms of the Indenture and of the Notes. Such a trust may
be established only if certain conditions are satisfied, including delivery by
the Company to the Indenture Trustee of an opinion of outside counsel
acceptable to the Indenture Trustee (who may be outside counsel to the Company)
to the effect that (a) the defeasance and discharge will not be deemed, or
result in, a taxable event for federal income tax purposes, with respect to the
Holders, (b) the Company's deposit will not result in the Company, the Trust,
or the Indenture Trustee being subject to regulation under the Investment
Company Act of 1940, (c) after the passage of 90 days (or any greater period of
time in which any such deposit of trust funds may remain subject to bankruptcy
or insolvency laws insofar as those laws apply to the Company) following the
deposit of the trust funds, such funds will not be subject to any bankruptcy,
insolvency, or other similar laws affecting creditors' rights generally, and
(d) Holders of the Notes will have a valid, perfected and unavoidable (under
applicable bankruptcy and insolvency laws), subject to the passage of time
referred to in clause (c), first priority security interest in the trust funds.
The Indenture will not be discharged if, among other things, a Default or an
Event of Default shall have occurred and be continuing on the
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date of such deposit. The Company will be deemed to have paid and discharged
the entire indebtedness on all of the outstanding Notes when (a) all
outstanding Notes have been delivered to the Indenture Trustee for
cancellation, or (b) the Company has paid or caused to be paid the principal of
and interest on the Notes.
REPORTS
The Company and each Guarantor are required to furnish to the Indenture
Trustee, within 45 days after the end of each fiscal quarter, an officers'
certificate to the effect that such officers have conducted or supervised a
review of the activities of the Company and its Subsidiaries or such Guarantor
and its Subsidiaries, as the case may be, and of performance under the
Indenture and that, to the best of such officers' knowledge, based on their
review, the Company or such Guarantor, as the case may be, has fulfilled all of
its obligations under the Indenture or, if there has been a default, specifying
each default known to them, its nature and its status. The Company and each
Guarantor are also required to notify the Indenture Trustee of any changes in
the composition of the Board of Directors of the Company, any Guarantor or any
of their Subsidiaries or of any amendment to the charter or bylaws of the
Company or any of their Subsidiaries.
The Company and each Guarantor shall deliver to the Indenture Trustee and
to each Holder, within 15 days after it files them with the Commission, copies
of all reports and information that it is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall include
in all reports required to be filed with the Commission pursuant to Section 13
or 15(d) of the Exchange Act a summary of the status of the Company's Capital
Improvement Program, including a description of sources of funds available for
the completion of the Capital Improvement Program. The Company and each
Guarantor agree to continue to be subject to the filing and reporting
requirements of the Commission as long as any of the Notes are outstanding.
Concurrently with the reports delivered pursuant to the preceding
paragraph, each of the Company and each Guarantor shall deliver to the
Indenture Trustee and to each Holder annual and quarterly financial statements
with appropriate footnotes of the Company and its Subsidiaries or such
Guarantor and its Subsidiaries, as the case may be, all prepared and presented
in a manner substantially consistent with those of the Company or such
Guarantor, as the case may be, required by the preceding paragraph.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, all Guarantors
and the Indenture Trustee to enter into a supplemental indenture for certain
limited purposes without the consent of the Holders. With the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time outstanding, the Company, all Guarantors and the Indenture Trustee
are permitted to amend or supplement the Indenture or any supplemental
indenture or modify the rights of the Holders; provided, that no such
modification may, without the consent of each Holder affected thereby: (a)
change the stated maturity or the Change of Control Payment Date, the
Deficiency Payment Date, the Deficiency Exchange Date, the Excess Cash Payment
Date, the Equity Exchange Date, or the Purchase Date of, the principal of, or
any installment of principal of, or any installment of interest on, any Note,
or reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or the
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the stated maturity thereof (or, in
the case of redemption, on or after the Redemption Date), or reduce the Change
of Control Purchase Price, the Offer Price, the Excess Cash Offer Price, the
Deficiency Purchase Price, the Redemption Price or the principal amount of
Notes to be exchanged pursuant to a Deficiency Exchange Offer or an Equity
Exchange Offer or alter the provisions of the "Repurchase of Notes at the
Option of the Holder Upon a Change of Control" covenant in a manner adverse to
the Holders, or (b) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture, or waiver provided for in the Indenture, or
(c) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding
Note affected thereby; provided, further, that no such
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modification may, without the consent of the Holders of Notes with a principal
amount at least equal to 66 2/3% of the aggregate principal amount of the Notes
at the time outstanding, change any provisions relating to the Collateral or
the covenants described under "-- Covenants -- Limitation on Incurrences of
Additional Debt and Issuances of Disqualified Capital Stock" or "-- Covenants
- -- Limitation on Liens."
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS
No stockholder, officer or director, as such, past, present, or future of
the Company or any Guarantor shall have any personal liability in respect of
the obligations of the Company or such Guarantor under the Indenture or the
Notes by reason of his or its status as such stockholder, officer or director.
DESCRIPTION OF THE WARRANTS
The Warrants were issued under a warrant agreement (the "Warrant
Agreement") between the Company, TEC and First Union National Bank, as Warrant
Agent"). The Warrants are subject to the terms contained in the Warrant
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part. The following is an accurate summary of
material provisions of the Warrant Agreement but is not necessarily complete.
Reference is made to the copy of the Warrant Agreement which has been filed as
an exhibit to the Registration Statement of which this Prospectus constitutes a
part.
Each Warrant entitles the registered holder thereof, subject to and upon
compliance with the provisions thereof and of the Warrant Agreement, at such
holder's option, prior to 5:00 p.m., Eastern time, on February 15, 2002, to
purchase from the Company one share (or such other number as may result from
adjustments as provided in the Warrant Agreement) of Common Stock at a purchase
price of $0.01 per share, subject to adjustment (the "Exercise Price").
Warrants may be exercised by paying the Exercise Price and surrendering
the certificate evidencing such Warrants with the form of election to purchase
shares set forth on the reverse side thereof duly completed and executed by the
registered holder thereof at the office or agency designated for such purpose,
which will initially be the corporate trust office of the Warrant Agent. Each
Warrant may be exercised only in whole.
The certificates evidencing the Warrants may be surrendered for exercise
or exchange, and the transfer of Warrant certificates is registrable, at the
office or agency of the Company maintained for such purpose, which initially
will be the corporate trust office of the Warrant Agent. The Warrant
certificates were issued only in fully registered form in denominations of
whole numbers of Warrants. No service charge will be made for any exercise,
exchange or registration of transfer of Warrant certificates, but the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Holders of Warrants will not be entitled, by virtue of being such holders,
to receive dividends, vote, receive notice of any meetings of stockholders or
otherwise have any right of stockholders of the Company. Until February 15,
2002, the Company will provide all holders of Warrants with copies of all
reports and documents filed by the Company with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended.
The number of shares of Common Stock issuable upon exercise of a Warrant
(the "Exercise Rate") is subject to adjustment from time to time upon the
occurrence of certain events, including (a) dividends or distributions on
Common Stock payable in Common Stock or certain other capital stock; or (b)
subdivisions, combinations or certain reclassifications of Common Stock. The
Warrant Agreement permits the Company voluntarily to increase the Exercise Rate
from time to time for a period of time not less than 20 business days.
Subject to certain exceptions, if the Company makes a distribution to all
holders of its Common Stock of any of its assets (including but not limited to
cash), securities (other than capital stock), or any rights or warrants
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to purchase securities (including but not limited to Common Stock) of the
Company that does not require an adjustment of the Exercise Rate, the Company
will make the same distribution to holders of the Warrants as though,
immediately prior to the record date with respect to such distribution, each
such holder owned the number of shares of Common Stock such holder could have
purchased upon the exercise of the Warrants held by such holder.
Prior to issuing any additional capital stock, the Company will give all
holders of Warrants the option to purchase shares of such capital stock in an
amount sufficient to enable such holders of Warrants to maintain, individually
and as a group, their proportionate equity interest in the Company on the same
terms and at the same price as such shares of capital stock are offered to
others.
The Company shall not issue shares of Common Stock, or any securities
convertible into or exchangeable for Common Stock, for a consideration per
share of Common Stock less than the Current Market Value.
For purposes of the preceding paragraph, the term "Current Market Value"
per share of Common Stock or any other security at any date means, on any date
of determination, (a) the average of the daily closing sale prices for each of
15 business days immediately preceding such date (or such shorter number of
days during which such security has been listed), if the security has been
listed on the New York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or other national securities exchange for at least 10 business
days prior to such date, (b) if such security is not so listed, the average of
the daily closing bid prices for each of the 15 business days immediately
preceding such date (or such shorter number of days during which such security
has been quoted), if the security has been quoted on a national
over-the-counter market for at least 10 business days, and (c) otherwise, the
value of the security (i) most recently determined as of a date within the
three months preceding such date by an Independent Financial Expert (as
defined) retained by the Company specifically for the purpose of determining
such value and (ii) unanimously approved by the Board of Directors of the
Company.
If the Company consolidates or merges with or into, or transfers or leases
all or substantially all of its assets to, any person (each, an "Acquisition
Transaction"), (a) if none of the other parties to such Acquisition Transaction
are a Related Person (as defined) of the Company, upon consummation of such
transaction the Warrants shall automatically become exercisable for the kind
and amount of securities, cash, or other assets that the holder of the Warrant
would have owned immediately after the Acquisition Transaction if the holder
had exercised the Warrant immediately before the effective date of the
transaction (which securities, cash or other assets may not necessarily be of
equal value to the Common Stock) and (b) if any other party to such Acquisition
Transaction is a Related Person of the Company, the holders of Warrants will be
entitled to receive, in addition to any consideration, a fairness opinion from
an independent investment banking firm of recognized national standing stating
that the consideration to be received by each holder of Warrants in connection
with such Acquisition Transaction is fair from a financial point of view. In
the event of any Acquisition Transaction, holders of Warrants shall be entitled
to receive the same consideration for each share of Common Stock into which the
Warrants are exercisable as any holder of more than 50% of the outstanding
Common Stock is entitled to receive.
If TEC or any of its affiliates (other than the Company) enters into an
agreement to transfer, sell or otherwise dispose of, directly or indirectly,
any shares of Common Stock, then holders of Warrants will have the right, but
not the obligation, to participate in such sale by selling a proportionate
number of Warrants on the same terms and conditions as the proposed sale by TEC
or such affiliate.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment to the number of shares of Common Stock or other
consideration for which a Warrant may be exercised, the holders of the Warrants
may, in certain circumstances, be deemed to have received a distribution
subject to United States federal income tax as a dividend. See "Certain Legal
Considerations -- Tax Considerations -- Taxation of the Warrants."
Fractional shares of Common Stock are not required to be issued upon
exercise of Warrants, but in lieu thereof the Company will pay a cash
adjustment.
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The Warrant Agreement permits, with certain exceptions, the amendment
thereof and the modification of the rights and obligations of the Company and
the rights of the holders of Warrants under the Warrant Agreement at any time
by the Company and the Warrant Agent with the consent of the holders of a
majority of the then outstanding Warrants (excluding Warrants held by the
Company and its affiliates).
The Company has authorized and reserved for issuance the Warrant Shares.
Such Warrant Shares, when issuable, will be duly and validly issued and fully
paid and non-assessable. The Company has agreed to maintain an effective
registration statement for the exercise of the Warrants, and resales of
Warrants and Warrant Shares, until the expiration of the Warrants.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 100,000,000 shares of Common Stock,
$0.01 par value per share and 20,000,000 shares of Preferred Stock, $1.00 par
value per share ("Preferred Stock"). The following summary of certain provisions
of the Company's capital stock accurately summarizes all material provisions of
the Articles of Incorporation and the By-laws of the Company regarding the
Company's capital stock, but does not purport to be complete. Reference is made
to the copies of the Company's Articles of Incorporation and By-laws included
as exhibits to the Registration Statement of which this Prospectus forms a
part and to the provisions of applicable law.
COMMON STOCK
The Common Stock is not redeemable, does not have any conversion rights
and is not subject to call. Holders of shares of Common Stock have no
preemptive rights to maintain their respective percentage ownership in future
offerings or sales of stock of the Company, although holders of the Warrants
will have preemptive rights based upon the percentage ownership the Warrants
would represent if fully exercised. Holders of shares of Common Stock are
entitled to one vote per share on any matter submitted to a vote of
stockholders of the Company. Cumulative voting is prohibited in the election of
directors. Subject to restrictions in the Indenture and other agreements that
may be entered into by the Company in the future, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as and when declared
from time to time by the Board of Directors of the Company out of funds legally
available therefor. See "-- Dividend Policy." Upon liquidation, dissolution, or
winding-up of the affairs of the Company, the holders of Common Stock will be
entitled to participate equally and ratably, in proportion to the number of
shares held, in the net assets of the Company available for distribution to
holders of Common Stock. The shares of Common Stock currently outstanding are,
and the shares of Common Stock issuable upon exercise of the Warrants when
issued will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors will be authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the designations, preferences,
powers and relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption price and liquidation preference, and to fix
the number of shares to be included in any such series. Any Preferred Stock so
issued may rank senior to the Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of Preferred Stock may have class or series voting
rights. Future issuances of Preferred Stock, while providing the Company with
flexibility in connection with general corporate purposes, may, among other
things, have an adverse effect on the rights of holders of Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock since
inception. The Company's ability to pay dividends in the future is restricted
by the Indenture and will depend upon the Company's debt levels, earnings
levels and book value and discounted value of certain tangible assets. The
Company would not currently be permitted
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under the Indenture to declare dividends. In determining whether to declare and
pay a dividend, the Board of Directors will consider various other factors,
including the Company's capital requirements and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Articles of Incorporation contain a provision that is
designed to limit the directors' liability to the extent permitted by the Texas
Miscellaneous Corporation Laws Act and any amendments thereto. Under current
law, directors will not be held liable to the Company or its shareholders for
monetary damages for any breach of fiduciary duty except for liability as a
result of: (i) a breach of the duty of loyalty to the Company or its
shareholders, (ii) actions or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper stock repurchases, or improper stock redemptions,
or (iv) actions or omissions pursuant to which the director will receive an
improper personal benefit.
The principal effect of the limitation of liability provision is that a
shareholder is unable to prosecute an action for monetary damages against a
director of the Company unless the shareholder can demonstrate one of the
specified bases for liability. This provision, however, may not eliminate or
limit director liability arising in connection with causes of action brought
under federal securities laws.
The Company's Articles of Incorporation do not eliminate its directors'
duty of care. The inclusion of this provision in the Company's Articles of
Incorporation may, however, discourage or deter stockholders or management from
bringing a lawsuit against directors for a breach of their fiduciary duties,
even though such an action, if successful, might otherwise have benefited the
Company and its shareholders. This provision should not affect the availability
of equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
SHARES ELIGIBLE FOR FUTURE SALE
TEC holds all 30 million outstanding shares of Common Stock of the
Company. Holders of the Warrants will be entitled to purchase an aggregate of
7,495,313 shares of the Company's Common Stock. The Company has agreed, until
the expiration of the Warrants, to maintain an effective registration statement
registering the sale of shares of Common Stock for which the Warrants are
exercisable. All shares held by TEC are eligible for sale pursuant to Rule 144
("Rule 144") under the Securities Act of 1933, as amended.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years is entitled to sell, within any three-month period commencing 90 days
after the date of the Prospectus, a number of shares that does not exceed the
greater of one percent of the then outstanding shares of Common Stock (three
million shares immediately after the offering) or the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to the availability of certain public
information about the Company, restrictions on the manner of sale (which could
not be met currently by TEC), and notice requirements. A person who is not
deemed an affiliate of the Company at any time during the three months
preceding a sale and who has beneficially owned shares for at least three years
is entitled to sell those shares under Rule 144 without regard to the volume
limitations and other restrictions described above.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation and By-laws provide that the
Company will indemnify its officers and directors to the fullest extent
permitted by Texas law. The Company has entered into indemnification agreements
with its directors that contractually provide for indemnification and expense
advancement and include related provisions meant to facilitate the indemnitees'
receipt of such benefits. The Company has purchased directors' and officers'
liability insurance policies for its directors and officers. Agreements with
directors also provide for indemnification for amounts in respect of the
deductibles for such insurance policies, and amounts that exceed
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the liability limits of such insurance policies. Such indemnification may be
made even though the directors would not otherwise be entitled to
indemnification under other provisions of the By-laws or such agreements.
CERTAIN LEGAL CONSIDERATIONS
INSOLVENCY AND BANKRUPTCY CONSIDERATIONS
Upon the consummation of the 1995 Offering, Gardere & Wynne, L.L.P.
("Gardere & Wynne"), counsel to the Company, delivered to the underwriter in
the 1995 Offering an opinion, concluding on the basis of a reasoned analysis of
analogous case law (although there is no precedent based on directly similar
facts) that, subject to the assumptions and qualifications specified therein,
in connection with a bankruptcy proceeding wherein TransAmerican, the Company
or TransTexas is the debtor, a court should not (i) in a TransAmerican
bankruptcy proceeding, disregard the separate organizational form of TEC or of
the Company or of TransTexas; in a Company bankruptcy proceeding, disregard the
separate organizational form of TransAmerican or of TEC or of TransTexas; or in
a TransTexas bankruptcy proceeding disregard the separate organizational form
of TransAmerican or of TEC or of the Company, in any case so as to cause a
substantive consolidation of the assets and liabilities of any such entity with
the applicable debtor; (ii) find the assets of the Company or the Company's
interest in the proceeds of such assets to be property of the bankruptcy estate
of TransAmerican or of TransTexas under Section 541 of the Bankruptcy Code;
(iii) find the assets of TEC or TEC's interest in the proceeds of such assets
to be property of the bankruptcy estate of TransAmerican or of the Company or
of TransTexas; (iv) determine that the automatic stay of Section 362(a) of the
Bankruptcy Code prevents payments to the collateral agent under the Security
Documents securing the Notes or foreclosure on the TransTexas stock that is
part of the Collateral; or (v) void TransAmerican's transfer of assets to
TransTexas or TransAmerican's transfer of assets to TEC as a fraudulent
transfer under Section 548 of the Bankruptcy Code or under Texas fraudulent
transfer laws. In rendering its opinion, Gardere & Wynne relied upon
TransAmerican's, TransTexas' and TEC's certificates that there were valid
business reasons for effecting the Transfer, the Stock Transfer and the offering
of the TransTexas Notes and that the conveyance was not being made with any
intention of hindering, delaying, or defrauding creditors or circumventing
public policy. Furthermore, in rendering its opinion, Gardere & Wynne relied
upon a certificate from TransAmerican to the effect that (x) in the opinion of
TransAmerican, the assumption of liabilities by TransTexas, and the value of the
equity in TransTexas received by TransAmerican in the Transfer, constituted
reasonably equivalent value and fair consideration for the conveyance of the
assets, (y) after giving effect to the conveyance of assets to and the
assumption of liabilities by TransTexas in the Transfer, TransAmerican was not
be rendered insolvent and did not have an unreasonably small capitalization, and
(z) in connection with the Transfer and the Stock Transfer, TransAmerican did
not intend to incur, and did not believe it would incur, debts that would be
beyond its ability to pay as such debts mature, which certified facts were not
be independently investigated or verified by Gardere & Wynne.
A financial failure by Mr. Stanley, who has guaranteed certain indemnity
obligations of TransAmerican and certain debt of TransTexas, TransAmerican or
TransTexas could also impair the Company. TransAmerican has twice filed for
protection under federal bankruptcy laws. If Mr. Stanley, TNGC, TransAmerican
or TransTexas were to become a debtor in a new bankruptcy proceeding, a
claimant of Mr. Stanley, TNGC, TransAmerican or TransTexas, as the case may be,
might attempt to have the bankruptcy court "substantively consolidate"
TransAmerican or TransTexas and the Company, i.e. combine the assets and
liabilities of TransAmerican or TransTexas and the Company so that the assets
of each entity would be subject to the claims of creditors of both entities.
Such a consolidation would expose the holders of the Units not only to the
usual impairments arising from bankruptcy, but also to potential dilution of
the amount ultimately recoverable because of the larger creditor base.
Further, a claimant might assert, whether or not a bankruptcy proceeding
is filed, that the Transfer or Stock Transfer was voidable as a fraudulent
transfer. Generally, a transfer of property or the incurrence of a debt may be
voidable upon a showing that the transfer or debt incurrence was (i) effected
with the intention to defraud, delay, or hinder creditors or (ii) made without
receiving reasonably equivalent value or fair consideration when, or
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as a result of which, the transferor was or became insolvent, undercapitalized,
or unable to timely pay its debts. Possible remedies upon a judgment of
fraudulent transfer could include return of the property transferred, judgment
for its value, cancellation of indebtedness and invalidation of liens.
TAX CONSIDERATIONS
The following discussion sets forth the anticipated material United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes and the Warrants that constitute the Units. This discussion is based
upon the Code, its legislative history, existing and proposed regulations
thereunder, published rulings and court decisions, all as in effect and
existing on the date hereof and all of which are subject to change at any time,
which change may be retroactive. This discussion applies only to those persons
who hold the Units as capital assets and does not address the tax consequences
to taxpayers who are subject to special rules (such as financial institutions,
tax- exempt organizations, and insurance companies) or aspects of federal
income taxation that may be relevant to a prospective investor based upon such
investor's particular tax situation. Accordingly, purchasers of the Units
should consult their tax advisors with respect to the particular consequences
to them of the purchase, ownership and disposition of the Notes and Warrants,
including the applicability of any state, local or foreign tax laws to which
they may be subject as well as with respect to the possible effects of changes
in federal and other tax laws.
Taxation of the Notes
Issue Price.The issue price of the A Units and the B Units the first price
at which a substantial amount of each of such A Units and B Units, as the case
may be, were initially sold to the public. The aggregate issue price for each
security in each Unit was determined by allocating the aggregate issue price of
(i) the Discount Mortgage Notes and the Warrants and (ii) the Mortgage Notes
and the Warrants, as the case may be, between each of the securities based upon
their relative fair market values on the date of issuance. The Company has
allocated $23.3 million of the issue price of the Units to the Warrants for the
purpose of calculating the yield to maturity of the Notes. A holder that
purchases a Unit will be required to allocate the purchase price between the
Note and Warrants (based on relative fair market values) for purposes of
determining the tax basis and purchase price of the Note and the Warrants.
Original Issue Discount.For federal income tax purposes, the Discount
Mortgage Notes and the Mortgage Notes were issued with original issue discount
("OID"). The amount of OID for the Discount Mortgage Notes equals the
difference between the issue price of the Discount Mortgage Notes (giving
effect to allocation of part of the issue price of the A Units to the Warrants)
and the sum of all payments provided for under the terms of the Discount
Mortgage Notes (whether denominated as principal or interest), and the amount
of OID for the Mortgage Notes will be equal to the difference between the issue
price of the Mortgage Notes (giving effect to allocation of part of the issue
price of the B Units to the Warrants) and the sum of (i) the stated principal
amount due at maturity of the Mortgage Notes and (ii) the stated interest on
the Mortgage Notes attributable to the 0.5% rate adjustment payable through
August 15, 1998. The Company has calculated OID with respect to the Notes by
assuming that the stated interest rate on the Notes will decrease by 0.5
percentage points on August 15, 1998. If the interest rate on the Notes does
not decrease as expected on such date, then holders of the Notes will be
required to include in income additional OID equal to the additional 0.5
percentage points payable subsequent to August 15, 1998 throughout the
remaining term of the Notes.
A holder of a Note with OID will be required to include such OID in income
periodically over the term of such Note before receipt of the cash attributable
to such income. In general, during the initial three-year period during which a
Discount Mortgage Note is outstanding, the annual amount of such inclusion will
be approximately equal to the corresponding annual increase in the Accreted
Value of the A Unit attributable to the Discount Mortgage Note, plus a portion
of the original issue discount attributable to the excess of (i) the initial
issue price of the A Unit over (ii) the initial issue price that is allocated
to the Discount Mortgage Note (such excess referred to as "Additional
Discount"). Thereafter, the amount of original issue discount required to be
included in income annually by a holder
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of a Discount Mortgage Note should be approximately equal to the amount of
scheduled annual interest payments received, plus a portion of the OID
attributable to the Additional Discount. Under the OID rules, in general,
holders of the Discount Mortgage Notes will have to include in gross income
increasingly greater amounts of OID in each successive accrual period until the
cash interest payments on the Discount Mortgage Notes commence. In general,
during the period prior to the date that the interest rate on the Mortgage
Notes is reduced by 50 basis points, a holder of a Mortgage Note will include
in income an amount somewhat less than the actual cash payments received with
respect to the Mortgage Notes and, thereafter, a somewhat larger amount.
More specifically, a holder of a Note with OID must include in gross
income for federal income tax purposes the sum of the daily portions of OID
with respect to the Note for each day during the taxable year or portion of a
taxable year on which such holder holds the Note (such sum, "Accrued OID"). The
daily portion is determined by allocating to each day of any accrual period
within a taxable year a pro rata portion of an amount equal to the adjusted
issue price of the Note at the beginning of the accrual period multiplied by
the yield to maturity of the Note, less, in the case of a Mortgage Note, the
amount of interest paid during the accrual period equal to the interest rate on
the Mortgage Notes after the downward adjustment of 0.5% (such reduced rate,
the "Mortgage Note Base Rate"). For purposes of computing OID, the Company will
use six-month accrual periods that end on the days in the calendar year
corresponding to the maturity date of the Notes and the date six months prior
to such maturity date, with the possible exception of the initial accrual
period for the Notes. The adjusted issue price of a Note at the beginning of
any accrual period is the issue price of the Note increased by the Accrued OID
for all prior accrual periods (less all payments made on the Notes, including
any principal payments but excluding, however, in the case of a Mortgage Note,
payments of interest equal to the Mortgage Note Base Rate). The Company will
file information returns with the IRS which will set forth a schedule of OID
accruals with respect to the Notes. This information, which will be published
annually by the IRS, may be used by holders of Notes to determine the amount of
OID they must include in income.
Disposition of Notes. Generally, any sale or redemption or other
disposition of Notes (including in connection with a Deficiency Offer) will
result in taxable gain or loss equal to the difference between (i) the amount
of cash and the fair market value of other property received and (ii) the
holder's adjusted tax basis in the Note. In the case of a holder who purchases
a Unit, the adjusted tax basis of a Note will initially equal the portion of
the purchase price of the Unit that is allocated to the Note and, in the case
of a holder who purchases a Note without purchasing Warrants, the adjusted tax
basis of a Note will initially equal the purchase price of the Note. The
adjusted tax basis of a Note will be increased by any Accrued OID (and market
discount as described below) includable in such holder's gross income, and
decreased by all payments (including principal) received by such holder on such
Note, excluding, however, in the case of a Mortgage Note, payments of interest
equal to the Mortgage Note Base Rate. Except to the extent that the market
discount rules apply as described below, any gain or loss upon a sale or other
disposition of a Note will generally be capital gain or loss, which will be
long-term if the Note has been held by the holder for more than one year.
Acquisition Premium. A holder who acquires a Note at a cost in excess of
its adjusted issue price but less than or equal to the sum of all payments
payable on a Note (other than payments of interest equal to the Mortgage Note
Base Rate in the case of a Mortgage Note) will be considered to have purchased
such Note at an "acquisition premium." Under the acquisition premium rules
contained in the Code, generally such holder would be entitled to a reduction
in the amount of OID otherwise includable in income with respect to such Note.
Market Discount. Generally, market discount will exist to the extent the
purchase price paid by a holder for a Note is less than the revised issue price
of the Note at the time of purchase, subject to a statutory de minimum
exception. The revised issue price for a Note equals the issue price of the
Note plus the amount of Accrued OID for periods prior to the holder's
acquisition (disregarding any deduction on account of acquisition premium),
presumably less any payments on the Note (other than payments of interest equal
to the Mortgage Note Base Rate in the case of a Mortgage Note). Generally, a
holder who acquires a Note with market discount will be required to treat any
gain realized upon the disposition (including redemption) of such Note as
ordinary income to the extent
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of the market discount that has accrued (but was not previously included in
income) during the period such holder held the Note. Furthermore, the Code
requires that partial principal payments on a market discount bond be included
in gross income to the extent that such payments do not exceed the accrued
market discount on such bond. Thus, if a cash payment is received by a holder
(including possibly the payment of stated interest), such holder may be
required to include in income at the time such cash payment is received the
portion of the unrecognized market discount that accrued prior to the receipt
of such payment (up to the amount of such payment). A holder of a Note who has
acquired the Note with market discount will also be required to defer the
deduction of a portion of interest on debt incurred or continued to purchase or
carry the Note until disposition of the Note in a taxable transaction.
A holder may elect to include market discount in income as such discount
accrued with a corresponding increase in the holder's adjusted tax basis in the
Note. If a holder so elects, the rules in the preceding paragraph regarding the
treatment of income or gain upon the disposition of a Note and upon receipt of
certain cash payments as ordinary income or gain, and regarding the deferral of
interest deductions on indebtedness related to a Note, would not apply. Once
made, such an election applies to all debt obligations that are purchased by a
holder at a market discount during the taxable year for which the election is
made, and all subsequent taxable years of the holder, unless the IRS consents
to a revocation of the election.
AHYDO Rules. The Discount Mortgage Notes constitute "applicable high yield
discount obligations" ("AHYDOs") since (i) the Discount Mortgage Notes have
"significant original issue discount" within the meaning of the Code, and (ii)
the yield to maturity of the Discount Mortgage Notes is equal to or greater
than the sum (x) 7.81%, compounded semi-annually, the relevant applicable
federal rate (the "AFR") for the month in which the Discount Mortgage Notes
were issued, plus (y) 5 percentage points. Because the Discount Mortgage Notes
are AHYDOs, as described below, a portion of the tax deductions that would
otherwise be available to the Company in respect of the Discount Mortgage Notes
will be deferred or disallowed, which, in turn, might reduce the after-tax cash
flows of the Company. Regardless of the application of the AHYDO rules to a
Discount Mortgage Note, a holder of the Discount Mortgage Notes will be
required to include Accrued OID in gross income as discussed above under
"Original Issue Discount." More particularly, because the Discount Mortgage
Notes constitute AHYDOs, the Company will not be entitled to deduct OID that
accrues with respect to the Discount Mortgage Notes until amounts attributable
to OID are paid in cash or property (excluding, however, stock of the Company
or a related entity). In addition, to the extent that the yield to maturity of
the Discount Mortgage Notes exceeds the sum of the relevant AFR plus six
percentage points (the "Excess Yield"), the "disqualified portion" of the OID
accruing on the Discount Mortgage Notes will be characterized as a
non-deductible dividend with respect to the Company and may also be treated as
a dividend distribution solely for purposes of the dividends received deduction
of Sections 243, 246 and 246A of the Code with respect to holders of Discount
Mortgage Notes which are U.S. corporations. In general, the "disqualified
portion" of OID for any accrual period will be equal to the product of (i) a
percentage determined by dividing the Excess Yield by the yield to maturity and
(ii) the OID for the accrual period. Based on the Company's determination of
the value of the Warrants that are part of the B Units and that stated interest
on the Mortgage Notes in excess of the Mortgage Note Base Rate is expected to
be paid during the first five years of the Mortgage Notes, the Company intends
to take the position that the Mortgage Notes are not subject to the AHYDO
provisions.
Foreign Holders. The following discussion is a summary of certain United
States federal income tax consequences to a Foreign Person that holds a Note.
The term "Foreign Person" means a nonresident alien individual or foreign
corporation, but only if the income or gain on the Note is not "effectively
connected with the conduct of a trade or business within the United States." If
the income or gain on the Note is "effectively connected with the conduct of a
trade or business within the United States," then the nonresident alien
individual or foreign corporation will be subject to tax on such income or gain
in essentially the same manner as a United States citizen or resident or a
domestic corporation, as discussed above, and in the case of a foreign
corporation, may also be subject to the branch profits tax.
Regardless of whether the Discount Mortgage Notes are subject to the AHYDO
rules discussed above, under the "portfolio interest" exception to the general
rules for the withholding of tax on interest and original issue discount paid
to a Foreign Person, a Foreign Person will not be subject to United States tax
(or to withholding) on interest
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or original issue discount on a Note, provided that (i) the Foreign Person does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote and is not a
controlled foreign corporation with respect to the United States that is
related to the Company through stock ownership, and (ii) the Company, its
paying agent or the person who would otherwise be required to withhold tax
receives either (A) a statement (an "Owner's Statement") signed under penalties
of perjury by the beneficial owner of the Note in which the owner certifies
that the owner is not a United States person and which provides the owner's
name and address, or (B) a statement signed under penalties of perjury by the
Financial Institution holding the Note on behalf of the beneficial owner,
together with a copy of the Owner's Statement. The term "Financial Institution"
means a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business and that holds a Note on behalf of the owner of the Note. A Foreign
Person who does not qualify for the "portfolio interest" exception would, under
current law, generally be subject to United States withholding tax at a flat
rate of 30% (or a lower applicable treaty rate) on interest payments and
payments (including redemption proceeds) attributable to original issue
discount on the Notes.
In general, gain recognized by a Foreign Person upon the redemption, sale
or exchange of a Note (including any gain representing accrued market discount)
will not be subject to United States tax. However, a Foreign Person may be
subject to United States tax at a flat rate of 30% (unless exempt by applicable
treaty) on any such gain if the Foreign Person is an individual present in the
United States for 183 days or more during the taxable year in which the Note is
redeemed, sold or exchanged, and certain other requirements are met.
Taxation of the Warrants
Characterization of the Warrants. The federal income tax consequences of
the purchase, exercise and sale of Warrants will depend, to some extent, on
whether or not they are viewed, for federal income tax purposes, as equivalent
to common stock. There is no authority directly dealing with that issue.
However, because of the nominal exercise price for the Warrants, the Company
believes that the Warrants should be treated as issued and outstanding shares
of common stock of the Company for federal income tax purposes.
Exercise. Whether or not the Warrants are treated as stock for federal
income tax purposes, a holder of a Warrant will generally not recognize gain or
loss upon exercise of a Warrant. A holder's initial tax basis in a Warrant will
be equal to (i) the portion of the purchase price of the Unit allocable to a
Warrant as described under "-- Taxation of the Notes -- Issue Price" above or
(ii) the purchase price of the Warrant, if the Warrant is purchased without the
purchase of a Note. The tax basis of shares of the Common Stock acquired upon
exercise of a Warrant will be equal to the sum of (i) the holder's adjusted tax
basis in such Warrant and (ii) the exercise price. The holding period of the
Common Stock acquired upon exercise of a Warrant will include the period during
which the Warrant was held by such holder, provided the Warrant is treated as
stock.
Distributions. If the Warrants are treated as stock and if a distribution
is made with respect to a Warrant, the amount of the distribution will
generally be subject to tax to the holder of the Warrant as a dividend under
Section 301 of the Code (subject to a possible dividends-received deduction in
the case of corporate holders) to the extent of the Company's current and
accumulated earnings and profits, as calculated for tax purposes. The amount of
any distribution in excess of current and accumulated earnings and profits will
first be a tax-free recovery of basis to the extent of (and reduce) such
holder's adjusted basis in the Warrant, and any remaining amount of the
distribution will generally be subject to tax to the holder of the Warrant as
capital gain.
Disposition. Whether or not the Warrants are treated as stock for federal
income tax purposes, upon a sale, exchange or other taxable disposition of a
Warrant or of shares of Common Stock, a holder generally will recognize gain or
loss for United States federal income tax purposes in an amount equal to the
difference between (i) the sum of an amount of cash and the fair market value
of any property received upon such sale, exchange or other disposition and (ii)
the holder's adjusted tax basis in the Warrant or in the shares of Common Stock
being sold. Any gain or loss recognized upon a sale, exchange or disposition of
a Warrant or of shares of Common Stock generally
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would be long-term capital gain or loss if the Warrant or Common Stock were
held by the holder for more than one year at the time of the sale or exchange.
If the Warrants are treated as stock and are redeemed by the Company, a
holder of the Warrants will generally recognize capital gain or loss if the
holder has no other interest in the Company, directly or constructively through
the attribution rules of Section 318 of the Code. If the holder of the Warrants
has such an interest, the redemption could be treated as a dividend under
Section 302 of the Code, provided that the Warrants are treated as stock.
Lapse. Whether or not the Warrants are treated as stock for federal income
tax purposes, upon the lapse of a Warrant, a holder generally will recognize a
capital loss equal to such holder's adjusted tax basis in the Warrant. Any such
loss will be long-term capital loss if the Warrant was held by the holder for
more than one year at the time of lapse.
Adjustment. The conversion ratio and exercise price of the Warrants are
subject to adjustments under certain circumstances. Under Section 305 of the
Code and Regulations issued thereunder, holders of the Warrants will be treated
as having received a constructive distribution, resulting in ordinary income
(subject to a possible dividends-received deduction in the case of corporate
holders) to the extent of the Company's current or accumulated earnings and
profits, if and to the extent that certain adjustments in the conversion ratio
and exercise price that may occur in limited circumstances (particularly an
adjustment to reflect a taxable dividend to holders of Common Stock) increase
the proportionate interest of a holder of a Warrant in the fully diluted Common
Stock, whether or not the holder ever exercises the Warrant.
Foreign Holders. In general, gain (to the extent it is not "effectively
connected with the conduct of a trade or business within the United States")
recognized by a Foreign Person upon a sale, exchange or other taxable
disposition of a Warrant or of shares of Common Stock will not be subject to
United States federal income tax unless such Foreign Person is an individual
present in the United States for 183 days or more during the taxable year in
which the disposition occurs, and certain other requirements are met. However,
the Company will likely be treated as a United States real property holding
company for United States federal income tax purposes because of its ownership
of substantial real estate assets in the United States. In such event, unless
the Common Stock is traded on an established securities market and the holder
of the Warrants does not directly or constructively own more than 5% of the
fair market value of the outstanding Common Stock, or unless an exemption is
provided under an applicable treaty, a Foreign Person who holds Warrants or
Common Stock would generally be subject to United States federal income tax on
any gain recognized from sale or other disposition of Warrants or Common Stock.
If subject to United States federal income tax, the gain would be treated as
effectively connected with the conduct of a trade or business within the United
States and the sale or other disposition generally would be subject to
withholding tax equal to ten percent of the amount realized therefrom.
Dividends paid on the Common Stock or on a Warrant (if the Warrant is treated
as stock) to a Foreign Person (other than dividends that constitute U.S. trade
or business income) will be subject to United States federal income tax
withholding at a rate of 30 percent of the amount of the dividend (unless the
rate is reduced by an applicable tax treaty).
Any Foreign Person that recognized gain upon the sale, exchange or other
taxable disposition of a Warrant or of shares of Common Stock or receives a
dividend on the Common Stock that is "effectively connected with the conduct of
a trade or business within the United States" will be subject to tax in
essentially the same manner as a U.S. person, as discussed above. A Foreign
Person that is a foreign corporation engaged in a U.S. trade or business also
may be subject to the branch profits tax with respect to such gain or dividend.
Backup Withholding
A holder may be subject, under certain circumstances, to backup
withholding at a 31 percent rate with respect to payments received with respect
to the Notes and with respect to payments received with respect to the
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Warrants and the Common Stock acquired upon exercise of a Warrant. This
withholding generally applies only if the holder (i) fails to furnish his or
her social security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed to report properly payments of interest and dividends and the IRS has
notified the Company that he or she is subject to backup withholding, or (iv)
fails, under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the TIN provided is his or her correct number
and that he or she is not subject to backup withholding. Any amount withheld
from a payment to a holder under the backup withholding rules is allowable as a
credit against such holder's federal income tax liability, provided that the
required information is furnished to the IRS. Certain holders (including, among
others, corporations and foreign individuals who comply with certain
certification requirements described above under "Foreign Holders") are not
subject to backup withholding. Holders should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
Recent Transactions
General. For federal income tax purposes, TransAmerican reported the
creation of TransTexas and all other transactions relating to the Transfer as
non-taxable events. No federal tax opinion was rendered with respect to those
transactions, however, and neither TransAmerican nor TransTexas obtained a
ruling from the IRS regarding those transactions. There can be no assurance that
the IRS or the courts will concur with TransAmerican's tax position that no
current federal income tax is due as a result of those transactions.
Under the terms of the Tax Allocation Agreement, TransAmerican, the
Company, TEC and TransTexas will be required to file federal income tax returns
as members of a consolidated group (the "TransAmerican Consolidated Group").
Corporations that are members of a federal consolidated group are generally
severally liable for the federal tax of the entire group. Accordingly,
TransAmerican, TransTexas, the Company and TEC will be severally liable for any
federal tax resulting from the Transfer. In any event, under the Tax
Allocation Agreement TransTexas will be required to pay such tax regardless of
whether TransTexas is treated as a member of the TransAmerican Consolidated
Group.
Cancellation of Debt Issues. Part of the refinancing of TransAmerican's
debt in 1993 involved the cancellation of approximately $65.9 million of
accrued interest and of a contingent liability for interest of $102 million
owed by TransAmerican. TransAmerican has taken the federal tax position that
the entire amount of this debt cancellation is excluded from its income under
the cancellation of indebtedness provisions of the Internal Revenue Code of
1986, as amended ("COD Exclusion"). TransAmerican has reduced its tax attributes
(including its net operating loss and credit carryforwards) as a consequence of
the COD Exclusion. Although TransTexas believes that there is substantial legal
authority to support the position that the COD Exclusion applies to the
cancellation of TransAmerican's indebtedness 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.
Nonrecognition and Deferral of Gain.Under current law, TransTexas believes
that the Transfer qualifies as a partially tax-free capital contribution
and that the gain recognized by TransAmerican on the Transfer will be
deferred (the "deferred gain") under the consolidated return regulations for so
long as TransTexas is a member of the TransAmerican Consolidated Group. The
deferred gain will be significant. This tax treatment will result in TransTexas
having a tax basis in the transferred assets equal to the tax basis that
TransAmerican had in such assets immediately before the transfer, plus an
amount of additional basis ("additional basis") equal to the amount of deferred
gain. The deferred gain generally will be includable in TransAmerican's taxable
income in a manner that corresponds (as to timing and amount) with the
realization by TransTexas of (and, thus, will be offset by) the tax benefits
(i.e., additional depreciation, depletion and amortization on, or reduced gain
or increased loss from a sale
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of, the transferred assets) arising from the additional basis. Under the Tax
Allocation Agreement, TransTexas is required to pay to TransAmerican the amount
by which TransTexas' separately computed tax liability is reduced by reason of
this additional basis or, if less, the amount by which TransAmerican's
separately computed tax liability is increased as a result of recognition of
the deferred gain. If, in connection with a Deficiency Offer, an Equity
Exchange Offer, or otherwise, a transfer or other disposition occurs of an
amount of TransTexas common stock which results in the Company, TEC and
TransAmerican owning less than 80 percent of the voting power and 80 percent of
the stock value of TransTexas, then the remaining portion of the deferred gain
would be immediately taken into income by TransAmerican. If the Company were no
longer a member of the TransAmerican Consolidated Group, TransTexas would also
no longer be a member of the TransAmerican Consolidated Group based on the
Company's anticipated level of ownership of TransTexas stock. Further, in
connection with a Deficiency Exchange Offer or an Equity Exchange Offer, TEC
will recognize gain (which would not be deferred) upon the acquisition of Notes
in exchange for TransTexas stock equal to the excess (if any) of the fair
market value of the TransTexas stock transferred over the basis TEC has in such
stock immediately before the transfer. Moreover, if, under the terms of the
Notes, it was reasonably certain that a sufficient amount of TransTexas stock
would be disposed in the future to cause a Deconsolidation of TransTexas from
the TransAmerican Consolidated Group, it is possible that the Deconsolidation
of TransTexas would be treated as occurring as of the date the Notes were
issued. However, the Company believes that when the Notes were issued, it will
not be reasonably certain that a Deconsolidation of TransTexas would occur in
the future.
Likewise, if TransAmerican, TEC, or the Company sells or otherwise
disposes of stock of TransTexas outside of the TransAmerican Consolidated
Group, the selling corporation will recognize gain (which would not be deferred
under the consolidated return regulations) equal to the excess (if any) of the
fair market value of the TransTexas stock disposed of over the seller's basis
in such stock. It is expected that any shares of TransTexas stock sold by the
TransAmerican Consolidated Group will have a small basis.
State Tax. Texas does not permit consolidation under its franchise tax
and, accordingly, any gain recognized by TransAmerican on the Transfer
will not be deferred for Texas franchise tax purposes. Under the Tax Allocation
Agreement, TransTexas will be required to pay any Texas franchise tax (which is
estimated not to exceed $10.6 million) attributable to any such gain and will
be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
DETERMINATION OF OFFERING PRICE
The Securities were issued in a registered public offering pursuant to
which the Company issued 440,000 Units consisting of, in the aggregate,
$440,000,000 of Notes and Warrants that entitle the holders thereof to purchase
7,495,313 shares of Common Stock at an exercise price of $0.01 per share. The
Warrants were attached to the Notes to enhance the marketability of the Notes
by providing the investors with 19.99% of the Company's Common Stock, on a
fully- diluted basis. Because the Warrants were included in the 1995 Offering
to enhance the marketability of the Notes, the Exercise Price of the Warrants
was set at $0.01 per share.
The Selling Securityholder may from time to time sell all or a portion of
the Securities it holds and Warrant Shares it acquires upon exercise of
Warrants in the over-the-counter market, on any national securities exchange on
which the Warrants and Warrant Shares are traded, in negotiated transactions or
otherwise, at prices then prevailing or related to the then current market
price or at negotiated prices. The price at which the Selling Securityholder
will sell the Securities will depend on market conditions such as yields on
alternative investments, general economic conditions, the Company's financial
condition and other factors. There is only a limited secondary market for the
Securities and the Company cannot determine whether an actual public market
will develop for the Securities.
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SELLING SECURITYHOLDER
This Prospectus relates to the sale from time to time by CS First Boston
Corporation (the "Selling Securityholder") of (i) up to $49,259,000 principal
amount of the Discounted Notes, (ii) Warrants to acquire an aggregate of 841,852
shares of Common Stock and (iii) the Warrant Shares it may acquire upon exercise
of such Warrants. In connection with the 1995 Offering, the Selling
Securityholder has the right to cause the Company and TEC to effect the
registration of the Securities being offered by the Selling Securityholder. The
Selling Securityholder is not affiliated with the Company nor has it had any
position, office or other material relationship with the Company or any of its
predecessors or affiliates within the past three years other than a loan by an
affiliate of the Selling Securityholder to a subsidiary of TransAmerican for
approximately $10 million. If required, other information concerning the Selling
Securityholder may be set forth in Prospectus Supplements from time to time.
Because the Selling Securityholder may offer all or some of the Securities
it holds or will hold upon exercise of the Warrants, and because there are
currently no agreements, arrangements or understandings with respect to the
sale of any of the Securities, no estimate can be given as to the amount or
number of Securities that will be held by the Selling Securityholder upon
completion of this offering. See "Plan of Distribution."
The Company will pay all costs and expenses incurred in connection with
the registration under the Securities Act of the Securities offered by the
Selling Securityholder including, without limitation, all registration and
filing fees, printing expenses and fees and disbursements of counsel and
accountants for the Company. The Selling Securityholder will pay all brokerage
fees and commissions, if any, incurred in connection with the sale of the
Securities.
PLAN OF DISTRIBUTION
The Company will issue up to 7,495,313 Warrant Shares (subject to
adjustment pursuant to the terms of the Warrant Agreement) upon exercise of the
Warrants. The Company will receive $74,953 upon exercise of all 7,495,313
Warrants, but will not receive any proceeds upon the sale of Securities by the
Selling Securityholder. The Selling Securityholder may sell all or a portion of
the Securities offered hereby from time to time in the over-the-counter market
on terms to be determined at the times of such sales. The Selling
Securityholder may also make private sales directly or through a broker or
brokers. Alternatively, the Selling Securityholder may from time to time offer
the Securities through underwriters, dealers or agents who may receive
compensation in the form of underwriting discounts, commissions or concessions
from the Selling Securityholder and/or the purchasers of the Securities for
whom they may act as agent. To the extent required, the aggregate amount or
number of Notes, Warrants or Warrant Shares to be sold, the purchase price, the
name of any such agent, dealer, or underwriter and any applicable commissions
with respect to a particular offer will be set forth in an accompanying
Prospectus Supplement. The aggregate proceeds to the Selling Securityholder
from the sale of the Securities offered by the Selling Securityholder hereby
will be the purchase price of such Securities less any broker's commissions.
There is no assurance that the Selling Securityholder will sell any or all
of the Securities offered hereby.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
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The Selling Securityholder, as a broker-dealer, and any broker-dealers,
agent or underwriters that participate with the Selling Securityholder in the
distribution of the Securities may be deemed to be "underwriters" within the
meaning of the Securities Act, in which event any commissions received by such
broker-dealers, agents or underwriters and any profit on the resale of the
Securities purchased by them from the Selling Securityholder may be deemed to
be underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Securities offered hereby may not
simultaneously engage in market making activities with respect to any of the
Securities for a period of nine business days prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Selling
Securityholder will be subject to applicable provisions of the Exchange Act and
the Rules and Regulations thereunder, including, without limitation, Rules
10b-6 and 10b-7, which provisions may limit the timing of purchases and sales
of Securities by the Selling Securityholder.
The Company, TEC and the Selling Securityholder are obligated to indemnify
each other against certain liabilities arising under the Securities Act. The
Company has agreed to pay certain costs and expenses incurred in connection
with the Registration Statement of which this Prospectus forms a part. In
connection with the 1995 Offering the Company incurred, and in connection with
the offering described herein the Company will incur, certain expenses,
estimated at $6 million in the aggregate.
LEGAL MATTERS
Certain legal matters in connection with the legality of the Securities
offered hereby were passed upon in the 1995 Offering for the Company by Gardere
& Wynne, L.L.P., Dallas, Texas, and for the underwriters by Skadden, Arps,
Slate, Meagher & Flom, Los Angeles, California.
INDEPENDENT ACCOUNTANTS
The balance sheets of the Company, TransTexas and TEC as of July 31, 1994
and 1995 and January 31, 1996, the related statements of operations and cash
flows of the Company, TransTexas and TEC for each of the three years in the
period ended July 31, 1995 and the six months ended January 31, 1996, the
related statements of stockholder's equity of the Company for each of the three
years in the period ended July 31, 1995 and the six months ended January 31,
1996, the related statement of stockholders' deficit of TransTexas for each of
the two years in the period ended July 31, 1995 and the six month period ended
January 31, 1996, the related statement of stockholder's deficit of TEC for each
of the two years in the period ended July 31, 1995 and the six month period
ended January 31, 1996, included in this Prospectus, have been included herein
in reliance on the reports, which include an explanatory paragraph relating to
the Company's and TEC's ability to continue as a going concern, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in auditing and accounting.
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INDEX TO FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT ACCOUNTANTS REGARDING TRANSAMERICAN REFINING CORPORATION F-2
FINANCIAL STATEMENTS OF TRANSAMERICAN REFINING CORPORATION:
BALANCE SHEET ............................................................... F-3
STATEMENT OF OPERATIONS ..................................................... F-4
STATEMENT OF STOCKHOLDER'S EQUITY ........................................... F-5
STATEMENT OF CASH FLOWS ..................................................... F-6
NOTES TO FINANCIAL STATEMENTS ............................................... F-7
REPORT OF INDEPENDENT ACCOUNTANTS REGARDING FINANCIAL STATEMENTS OF
TRANSAMERICAN ENERGY CORPORATION ............................................ F-26
FINANCIAL STATEMENTS OF TRANSAMERICAN ENERGY CORPORATION:
CONSOLIDATED BALANCE SHEET .................................................. F-27
CONSOLIDATED STATEMENT OF OPERATIONS ........................................ F-28
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT ............................. F-29
CONSOLIDATED STATEMENT OF CASH FLOWS ........................................ F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................. F-31
REPORT OF INDEPENDENT ACCOUNTANTS REGARDING TRANSTEXAS GAS CORPORATION ....... F-68
FINANCIAL STATEMENTS OF TRANSTEXAS GAS CORPORATION:
CONSOLIDATED BALANCE SHEET .................................................. F-69
CONSOLIDATED STATEMENT OF OPERATIONS ........................................ F-70
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) .................... F-71
CONSOLIDATED STATEMENT OF CASH FLOWS ........................................ F-72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................. F-73
</TABLE>
F-1
<PAGE> 127
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors
TransAmerican Refining Corporation:
We have audited the accompanying balance sheet of TransAmerican Refining
Corporation as of July 31, 1995 and 1994 and January 31, 1996 and the related
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended July 31, 1995 and for the six months ended
January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TransAmerican Refining
Corporation as of July 31, 1995 and 1994 and January 31, 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended July 31, 1995 and for the six months ended January 31, 1996 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is required to obtain
additional funds both to expand its refinery and to fund its ongoing working
capital requirements. There is no assurance that the necessary additional
funding for the refinery expansion and working capital can be obtained or that
profitable operations will be ultimately achieved. As a result there is
substantial doubt about the Company's ability to continue as a going concern.
Management plans are described in Note 2. The financial statements do not
contain any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
F-2
<PAGE> 128
TRANSAMERICAN REFINING CORPORATION
BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
--------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35 $ 6,105 $ 2,779 $ 135
Long-term debt proceeds held in collateral account -- 7,760 14,840 12,075
Accounts receivable 9,183 3,792 121 9
Receivable from affiliates -- 436 118 327
Inventories 15,098 39,974 37,231 26,216
Other -- 7,244 5,479 2,506
--------- --------- --------- ---------
Total current assets 24,316 65,311 60,568 41,268
--------- --------- --------- ---------
Property and equipment 159,308 279,552 430,858 478,302
Less accumulated depreciation and amortization 2,139 7,388 10,244 11,897
--------- --------- --------- ---------
Net property and equipment 157,169 272,164 420,614 466,405
--------- --------- --------- ---------
Long-term debt proceeds held in collateral account -- 133,097 9,565 4,946
Other assets, net 5,442 29,307 27,576 27,225
--------- --------- --------- ---------
$ 186,927 $ 499,879 $ 518,323 $ 539,844
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 15,971 $ 14,636 $ 23,552 $ 15,964
Payable to affiliate 1,239 1,847 2,957 1,895
Accrued liabilities 13,344 15,192 14,560 10,218
Product financing arrangements 10,600 27,671 37,206 26,184
--------- --------- --------- ---------
Total current liabilities 41,154 59,346 78,275 54,261
--------- --------- --------- ---------
Payable to affiliates 45,021 -- 3,799 5,874
Long-term debt -- 294,963 316,538 328,225
Investment in TransTexas -- 46,430 46,586 32,030
Other 352 1,112 1,168 901
Commitments and contingencies (Note 11) -- -- -- --
Stockholder's equity:
Common stock, $.01 par value, authorized 100,000,000
shares, issued and outstanding, 30,000,000 shares 300 300 300 300
Additional paid-in capital 186,548 248,513 248,513 248,513
Accumulated deficit (86,448) (150,785) (176,856) (130,260)
--------- --------- --------- ---------
Total stockholder's equity 100,400 98,028 71,957 118,553
--------- --------- --------- ---------
$ 186,927 $ 499,879 $ 518,323 $ 539,844
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 129
TRANSAMERICAN REFINING CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
---------------------------------- -------------------------- ----------------------
1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- ---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales $ -- $ 174,143 $ 140,027 $ 71,035 $ 107,237 $ 558 $ 10,857
Tank rentals 5,178 3,035 552 551 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues 5,178 177,178 140,579 71,586 107,237 558 10,857
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of products sold -- 168,855 149,087 73,862 110,052 1,086 13,380
Operations and maintenance 9,617 12,103 12,299 7,727 7,910 (274) 3,056
Depreciation and amortization -- 2,589 5,855 2,706 3,159 1,376 1,804
General and administrative 11,341 4,496 13,614 8,442 7,438 1,081 2,103
Taxes other than income 3,621 3,661 4,170 2,088 649 1,041 399
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses 24,579 191,704 185,025 94,825 129,208 4,310 20,742
--------- --------- --------- --------- --------- --------- ---------
Operating loss (19,401) (14,526) (44,446) (23,239) (21,971) (3,752) (9,885)
--------- --------- --------- --------- --------- --------- ---------
Other income (expense):
Interest income 2 37 4,087 4 2,263 1,919 143
Interest expense, net (17) (13) (31,354) (3,540) (32,180) (11,221) (17,705)
Interest capitalized -- -- 18,850 3,509 26,202 6,588 16,617
Equity in income (loss) before
extraordinary item of
TransTexas -- -- (2,428) -- (156) (842) 1,001
Gain on sale of TransTexas
stock -- 56,162
Other 43 (2,851) 2,451 116 (229) (3,043) 263
--------- --------- --------- --------- --------- --------- ---------
Total other income (expense) 28 (2,827) (8,394) 89 (4,100) (6,599) 56,481
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item (19,373) (17,353) (52,840) (23,150) (26,071) (10,351) 46,596
Extraordinary item:
Equity in extraordinary loss
of TransTexas -- -- (11,497) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (19,373) $ (17,353) $ (64,337) $ (23,150) $ (26,071) $ (10,351) $ 46,596
========= ========= ========= ========= ========= ========= =========
Net loss per share:
Net income (loss) before
extraordinary item $ (.65) $ (0.58) $ (1.76) $ (0.77) $ (0.87) $ (0.35) $ 1.55
Extraordinary item -- -- (0.38) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
(.65) $ (0.58) $ (2.14) $ (0.77) $ (0.87) $ (0.35) $ 1.55
========= ========= ========= ========= ========= ========= =========
Weighted average number of
shares outstanding
(in thousands) 30,000 30,000 30,000 30,000 30,000 30,000 30,000
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 130
TRANSAMERICAN REFINING CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- ADDITIONAL ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY
------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1992 30,000 $ 300 $ 73,048 $ (49,722) $ 23,626
Net loss -- -- -- (19,373) (19,373)
------------ ------------ ------------ ------------ ------------
Balance, July 31, 1993 30,000 300 73,048 (69,095) 4,253
Net loss -- -- -- (17,353) (17,353)
Equity contribution by TransAmerican -- -- 113,500 -- 113,500
------------ ------------ ------------ ------------ ------------
Balance, July 31, 1994 30,000 300 186,548 (86,448) 100,400
Net loss -- -- -- (64,337) (64,337)
Issuance of warrants -- -- 23,300 -- 23,300
Equity contribution by TransAmerican -- -- 71,170 -- 71,170
Contribution of TransTexas stock
by TEC -- -- (32,505) -- (32,505)
------------ ------------ ------------ ------------ ------------
Balance, July 31, 1995 30,000 300 248,513 (150,785) 98,028
Net loss -- -- -- (26,071) (26,071)
------------ ------------ ------------ ------------ ------------
Balance, January 31, 1996 30,000 300 248,513 (176,856) 71,957
Net income 46,596 46,596
------------ ------------ ------------ ------------ ------------
Balance, April 30, 1996 (unaudited) 30,000 $ 300 $ 248,513 $ (130,260) $ 118,553
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 131
TRANSAMERICAN REFINING CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS
YEAR ENDED JULY 31, JANUARY 31, ENDED APRIL 30,
----------------------------------- ------------------------ ------------------------
1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- ---------- ----------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ (19,373) $ (17,353) $ (64,337) $ (23,150) $ (26,071) $ (10,351) $ 46,596
Adjustments to reconcile
net income (loss) to net
cash used by operating
activities:
Depreciation and amortization -- 2,694 5,855 2,706 3,159 1,563 1,805
Litigation 9,000 -- 4,500 4,500 2,000 4,500 --
Amortization of discount on
long-term debt -- -- 7,673 -- 3,389 7,063 --
Amortization of financing costs -- -- 552 -- 238 940 --
Equity in (income) loss of
TransTexas -- -- 13,925 -- 156 842 (1,001)
Gain on sale of TransTexas stock -- -- -- -- -- -- (56,162)
Changes in assets and
liabilities:
Accounts receivable (326) (8,558) 4,570 6,901 3,671 (4,184) (97)
Inventories -- (4,498) (6,984) 3,063 11,648 (16,720) (7)
Prepayments and other -- -- (7,244) (221) 1,765 (580) 2,973
Accounts payable 131 5,194 (2,690) (105) (1,675) (13,406) 2,712
Payable to affiliates -- 1,239 (1,214) (765) 1,979 246 (1,062)
Accrued liabilities 687 11,391 (2,625) (4,871) (3,132) (7,405) (4,364)
Other assets -- (1,088) (2,126) 562 (130) (1,668) (606)
Other liabilities (41) (96) (259) (102) -- (576) --
--------- -------- --------- --------- --------- --------- ---------
Net cash used by operating
activities (9,922) (11,075) (50,404) (11,482) (3,003) (39,736) (9,213)
--------- ------- --------- --------- --------- --------- ---------
Investing activities:
Capital expenditures -- (57,209) (107,374) (52,306) (119,565) (26,995) (45,252)
--------- ------- --------- --------- --------- --------- ---------
Financing activities:
Issuance of long-term debt
and warrants -- -- 300,750 -- -- 300,750 --
Proceeds from sale of
TransTexas stock -- -- -- -- -- -- 42,607
Long-term debt proceeds held
in collateral account -- -- (173,000) -- -- (174,742) (26,549)
Withdrawals from collateral
account -- -- 32,143 -- 116,452 -- 33,933
Advances from TransAmerica
and affiliates 9,869 68,523 87,560 86,925 16,698 (1,979) 4,000
Payment of advances to
TransAmerican -- -- (60,000) (20,000) (13,450) (40,000) (1,925)
Financing costs -- (220) (23,605) (3,126) -- (16,733) --
Principal payments on
capital lease obligations -- -- -- -- (458) (61) (245)
--------- ------- --------- --------- --------- --------- ---------
Net cash provided by
financing activities 9,869 68,303 163,848 63,799 119,242 67,235 51,821
--------- ------- --------- --------- --------- --------- ---------
Increase (decrease) in
cash and cash equivalents (53) 19 6,070 11 (3,326) 504 (2,644)
Beginning cash and
cash equivalents 69 16 35 35 6,105 46 2,779
--------- ------- --------- --------- --------- --------- ---------
Ending cash and cash
equivalents $ 16 $ 35 $ 6,105 $ 46 $ 2,779 $ 550 $ 135
========= ========= ========= ========= ========= ========= =========
Cash paid for:
Interest $ -- $ -- $ 1,282 $ -- $ 8,719 $ 189 $ 8,965
Noncash financing and
investing activities:
Accounts payable for property
and equipment -- 10,429 11,784 8,293 10,591 (6,406) (10,300)
Forgiveness of advances
from TransAmerican (including
$25.0 million for property,
plant and equipment transferred
from TransAmerican at net book
value in 1994) -- 100,000 71,170 -- -- -- --
Contribution of TransTexas stock -- -- 37,176 -- -- -- --
TransTexas assumption of litigation
liabilities -- 13,500 -- -- -- -- --
Capital lease obligations incurred
for property and equipment -- 1,336 967 66 1,643 -- --
Interest accretion on notes and
discount notes capitalized in
property and equipment -- -- 9,840 -- 19,466 -- 11,687
Product financing arrangements -- 10,600 27,671 -- 37,206 -- (11,022)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 132
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation of the Company
TransAmerican Refining Corporation (the "Company" or "TARC") is engaged in
the refining and storage of crude oil and petroleum products. The Company's
refinery is strategically located in the Gulf Coast region along the
Mississippi River approximately 20 miles from New Orleans, Louisiana. The
Company was incorporated in September 1987 for the purpose of holding and
eventually operating certain refinery assets previously held by TransAmerican
Natural Gas Corporation ("TransAmerican") and its subsidiaries. TransAmerican
emerged from a proceeding under Chapter 11 of the Bankruptcy Code on October
19, 1987, pursuant to a confirmed plan of reorganization.
In 1984, TransAmerican decided to discontinue its refinery operations and
wrote down related assets by approximately $589 million to their estimated net
realizable value. In 1987, TransAmerican transferred substantially all of its
refinery assets at net book value to the Company.
From 1987 through 1993, the Company incurred operating losses principally
as a result of maintaining its idled refinery. The Company recommenced partial
operations of the refinery in March 1994 and temporarily ceased processing
operations in December 1994 pending additional financing. Processing operations
recommenced in May 1995 and temporarily ceased again in October 1995 pending
additional financing and recommenced again in April 1996. From time to time,
the Company will suspend operations in order to tie-in units as they are
completed. Additionally, the Company may suspend operations because of working
capital constraints or operating margins. The Company plans major expansion and
modifications which would significantly change the refinery's throughput
capacity, feedstocks used and refined product yields. Funds for construction
have historically been provided by TransAmerican; however, as more fully
described in Note 7, the Company's issuance of long-term debt during 1995
provided $173 million for refinery construction. As discussed in Note 2,
additional long-term financing is required to complete the refinery expansion.
In 1994, TransAmerican formed TransAmerican Energy Corporation ("TEC"), a
limited-purpose holding company, to hold 55 million shares of common stock
(74.3% of outstanding shares) of TransTexas Gas Corporation ("TransTexas"), a
natural gas exploration, production and transportation company, and all of the
Company's capital stock. In February 1995, in connection with a public offering
of debt securities by the Company, TransAmerican transferred 55 million shares
of TransTexas' common stock to TEC. TEC then transferred 15 million of the
shares (20.3% of the total outstanding) to the Company (See Note 9 Investment in
TransTexas). In March 1996, the Company sold 4.55 million shares of TransTexas
common stock (6.2% of the total outstanding) at $10 per share in a public
offering, for proceeds after underwriting discounts, broker's commissions and
related costs, of $42.6 million, $26.6 million of which was deposited in the
cash collateral account. The Company recognized a gain of $56.2 million on the
sale of TransTexas stock. This gain represents the difference in the Company's
investment carrying value and the proceeds received from the sale of stock. Due
to the Company's net operating loss position, there are no net tax effects of
the above transaction. The 50.45 million shares of TransTexas common stock held
by TEC and the Company are currently pledged as collateral for the TARC Notes
(as defined below).
Change in Fiscal Year
On January 29, 1996, the Board of Directors approved a change in the
Company's fiscal year end for financial reporting purposes to January 31 from
July 31. The financial statements include presentation as of and for the six
months ended January 31, 1996 as well as a presentation as of and for the three
months ended April 30, 1996. Prior fiscal year and/or quarterly presentations
are included as appropriate.
F-7
<PAGE> 133
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be a cash equivalent.
Inventories
The Company's inventories, consisting primarily of feedstocks and refined
products, are stated at the lower of average cost or market. For the year ended
July 31, 1994 and 1995 and the six months ended January 31, 1996, the Company
wrote down the value of its inventories by approximately $0.1 million, $1.3
million and $4.4 million, respectively, to reflect existing market prices.
Price Management Activities
The Company's revenues and feedstock costs have been and will continue to
be affected by changes in the prices of petroleum and petroleum products. The
Company's ability to obtain additional capital is also substantially dependent
on refined product prices and refining margins, which are subject to
significant seasonal, cyclical and other fluctuations that are beyond the
Company's control.
From time to time, the Company enters into commonly traded refinery
feedstocks and finished good related futures contracts, options on futures,
swap agreements and forward sale agreements with the intent to protect against
a portion of the price risk associated with price declines from holding
inventory, or fixed price purchase commitments. Commitments involving future
settlement give rise to market risk, which represents the potential loss that
can be caused by a change in the market value of a particular instrument and
credit risk, which represents the potential loss if a counterparty is unable to
perform. Under the guidelines of Statement of Financial Accounting Standards
No. 80 ("SFAS 80"), gains and losses associated with such transactions that
meet the hedge criteria in SFAS 80 will be deferred until realized. Those
transactions which do not meet the hedging criteria in SFAS 80 are recorded at
market value resulting in a gain or a loss which is recorded in other income in
the period in which a change in market value occurs.
Property and Equipment
Property and equipment acquired subsequent to 1983, including assets
transferred from TransAmerican in 1994, are stated at TransAmerican's or the
Company's historical cost. During the period from 1987 through August 1993,
property and equipment, acquired prior to 1983 were carried at estimated net
realizable value and no depreciation expense was charged. New or refurbished
units are depreciated as placed in service. Depreciation of refinery equipment
and other buildings and equipment is computed by the straight-line method at
rates which will amortize the unrecovered cost of depreciable property
including assets acquired under capital leases, over their estimated useful
lives. Costs of improving leased property are amortized over the estimated
useful lives of the assets or the terms of the leases, whichever is shorter.
The cost of repairs and minor replacements is charged to operating expense
while the cost of renewals and improvements are capitalized. At the time
depreciable assets are retired, or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts. Gains
or losses on dispositions in the ordinary course of business are included in
the statement of operations. Impairment of property and equipment is reviewed
whenever events or changes in circumstances indicate that the carrying amount
of assets may not be recoverable. Events or circumstances that may indicate
impairment may include a prolonged shutdown of
F-8
<PAGE> 134
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
the refinery or a prolonged period of negative or low refining margins.
Generally, impairment would be evaluated based on future estimated undiscounted
cash flow.
Turnarounds
A turnaround consists of a complete shutdown, inspection and maintenance
of a unit. The estimated costs of turnarounds are accrued over the period to
the next scheduled turnaround, generally greater than one year.
Environmental Remediation Costs
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures relating to an
existing condition caused by past operations that do not have future economic
benefits are expensed. Liabilities for these expenditures are provided when the
responsibility to remediate is probable and the amount of associated costs is
reasonably estimable.
Stockholder's Equity
Stockholder's equity was retroactively adjusted to reflect a 30,000-for-1
stock split which was effective in July 1994. In July 1994, the Company
increased its authorized capital to 100,000,000 shares and decreased the par
value of its common stock from $1.00 to $0.01.
Defined Contribution Plan
The Company, through its parent company, TransAmerican, maintains a
defined contribution plan, which incorporates a "401(k) feature" as allowed
under the Internal Revenue Code. All investments are made through Massachusetts
Mutual Life Insurance Company. Employees who are at least 21 years of age and
have completed one year of credited service are eligible to participate on the
next semiannual entry date. The Company matches 10%, 20% or 50% of employee
contributions up to a maximum of 3% of the participant's compensation, based on
years of plan participation. All contributions are currently funded.
Revenue Recognition
The Company recognizes revenue from sales of refined products in the
period of delivery.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables and forward contracts. Trade accounts
receivable are generally from companies with significant petroleum activities,
who would be impacted by conditions or occurrences affecting that industry. All
futures contracts were with major brokerage firms and, in the opinion of
management, did not expose the Company to any undue credit risks. In addition,
the Company had deposited cash totaling $5.1 million and $1.1 million with two
third parties to permit the third parties to hedge their price risk in
connection with the Company's financing arrangements as of January 31, 1996
and April 30, 1996, respectively. See Note 11.
The Company performs ongoing credit evaluations and, generally, requires
no collateral from its customers. For the six months ended January 31, 1996,
the Company had three customers which accounted for 41% of total revenues. In
1995, the Company had one customer which accounted for 37% of total revenues
and another
F-9
<PAGE> 135
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
customer which accounted for 19% of total revenues. For the year ended July 31,
1994, the Company had one customer which accounted for 32% of total revenues
and another customer which accounted for 14% of total revenues. For 1993, one
customer accounted for 100% of total revenues. One customer accounted for 85%
of accounts receivable at January 31, 1996, four customers accounted for 93% of
accounts receivable at July 31, 1995, and two customers accounted for 72% of
accounts receivable at July 31, 1994.
Income Taxes
The Company files a consolidated tax return with TransAmerican. Income
taxes are due from or payable to TransAmerican in accordance with a tax
allocation agreement (the "Tax Allocation Agreement"). It is the Company's
policy to record income tax expense as though the Company had filed separately.
Deferred income taxes are recognized, at enacted tax rates, to reflect the
future effects of tax carryforwards and temporary differences arising between
the tax bases of assets and liabilities and their financial reporting amounts in
accordance with Statement of Financial Accounting Standards No. 109 and the Tax
Allocation Agreement between the Company, TransAmerican, and TransAmerican's
other direct and indirect subsidiaries. Income taxes include federal and state
income taxes.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to the financial
statements when the fair value of its financial instruments is different from
the book value. The Company uses quoted market prices or, to the extent that
there are no available quoted market prices, market prices for similar
instruments. When the book value approximates fair value, no additional
disclosure is made.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform to the current year's presentation. The reclassifications
did not affect net loss or stockholder's equity.
Debt Issue Costs
The Company defers costs associated with issuing long-term debt.
Capitalized debt costs are amortized to interest expense over the scheduled
maturity of the debt utilizing the interest method.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As
of February 1, 1996, the Company adopted the requirements of SFAS No. 121. The
Company currently believes, based on estimates of refining margins and current
estimates for costs of the Capital Improvement Program, that future undiscounted
cash flows will be sufficient to recover the cost of the refinery over its
estimated useful life. Management believes there have been no events or changes
in circumstances that would require the recognition of an impairment loss.
However, due to the inherent uncertainties in constructing and operating a large
scale refinery and the uncertainty regarding the Company's ability to complete
the Capital Improvement Program (see Note 2), there can be no assurance that the
Company will ultimately recover the cost of the refinery.
F-10
<PAGE> 136
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995, 1996 and Subsequently is Unaudited)
2. CAPITAL IMPROVEMENT PROGRAM AND ADDITIONAL FINANCING REQUIREMENTS
The Company is currently engaged in an expansion and modification of its
refinery (the "Capital Improvement Program"). The current budget for the
Capital Improvement Program calls for total expenditures of $434 million. The
Company estimates that expenditures of between $146 million and $151 million in
addition to the current budget will be required to complete the Capital
Improvement Program. A significant portion of the additional expenditures will
relate to the Delayed Coking Unit, the FCC Unit and the offsite facilities. In
connection with the issuance of the TARC Notes, $173 million of the proceeds
thereof were deposited into a cash collateral account, designated for use in the
Capital Improvement Program. In March 1996, the Company sold 4.55 million
shares of TransTexas common stock and $26.6 million of the proceeds thereof
were deposited in the cash collateral account.
As of April 30, 1996, expenditures on the Capital Improvement Program
funded or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Giving effect to current estimates, additional
funding of $374 million to $379 million will be required to complete the Capital
Improvement Program, of which approximately $41 million is anticipated to be
funded by the South Louisiana Port Commission ("Port Commission") tax exempt
bonds. Additional funds necessary to complete the Capital Improvement Program
may be provided from (i) the sale of additional shares of TransTexas common
stock held by the Company, (ii) the sale of common stock of the Company, (iii)
equity investments in the Company (including the sale of preferred stock of the
Company to TEC, funded by the sale of TransTexas common stock held by TEC), (iv)
capital contributions by TransAmerican, or (v) other sources of financing, the
access to which could require the consent of the holders of the TARC Notes. The
Company has entered into preliminary discussions with potential third party
investors, including strategic equity investors, financial investors and foreign
producers of crude oil. Sales of shares of TransTexas common stock may result in
deconsolidation of TransTexas from the consolidated group for federal income tax
purposes. There is no assurance that sufficient funds will be available from
these sources on a timely basis or upon terms acceptable to the Company or
TransAmerican. If this financing is not available when needed or if significant
engineering problems, work stoppages or cost overruns occur, it will be unlikely
that the Company will be able to complete and test Phase I of the Capital
Improvement Program by February 15, 1997. Even if required financing is obtained
on a timely basis, completion by February 15, 1997 will still prove very
difficult if personnel shortages prevent full staffing during peak construction
periods. The Company has identified and is considering certain steps to minimize
the impact of potential construction worker shortages, including the retention
of field supervisors, direct hiring of field supervisors and field labor by the
Company's major contractors, adding a second shift, and modularization of
certain construction items. There can be no assurance that these steps will
prove successful; however, the Company believes that implementation of these
steps will adequately address staffing concerns. Under the Indenture, the
failure of the Company to complete and test Phase I by February 15, 1997
(subject to extension to August 15, 1997 if certain financial coverage ratios
are met) would constitute an event of default at such date.
If an Event of Default occurs and is continuing, unless the principal of
all of the Notes shall have already become due and payable, either the Indenture
Trustee or the Holders of 25% in aggregate principal amount of Notes then
outstanding, by notice in writing to the Company (and to the Indenture Trustee
if given by Holders) (an "Acceleration Notice"), may declare all principal of
the Notes and accrued interest to be due and payable immediately.
Prior to the declaration of acceleration of the Notes, the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding may
waive on behalf of all the Holders any default, except a default in the payment
of principal of, premium, if any, or interest on any Note not yet cured, or a
default with respect to any convenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
As of July 10, 1996, the Company had expended the $173 million placed in
the collateral account from the issuance of the TARC Notes as well as the
majority of the proceeds from the March 1996 sale of TransTexas common stock. In
May 1996, in anticipation of the limited availability of collateral account
funds, the Company began scaling back expenditures on the Capital Improvement
Program to include only those critical path items necessary to complete and test
refinery units by the specified dates under the Indenture. In July 1996, TARC
executed a promissory note to TransAmerican for up to $25 million. Currently,
the Company has drawn $5 million against the note. The note bears interest at
15% per annum, with quarterly interest payments beginning in October 1996 and
with the principal due in July, 1998. In July and August 1996, TransAmerican
advanced $4.3 million to the Company. The Company anticipates repaying this
non-interest bearing advance within 30 days. These advances will be utilized by
the Company to fund the critical path items in the Capital Improvement Program
as well as working capital needs, in anticipation of financing from other
sources. There can be no assurance that such advances will provide sufficient
interim funds to keep the Capital Improvement Program on schedule even if
additional financing is eventually obtained.
The Company and the Port Commission have reached an agreement in principle
which would allow the issuance of approximately $75 million in Port Commission
tax exempt bonds, the proceeds of which may be used to construct tank storage
facilities, docks and air and waste water treatment facilities. A portion of
the air and waste water treatment facility is included in the Capital
Improvement Program at an estimated cost of $41 million. The issuance of the
tax exempt bonds could provide an alternate source of financing for the
construction of such facilities. The Port Commission would own the facilities
built with the proceeds of the bonds, and the Company would operate the
facilities pursuant to a long-term (30-year) lease. There can be no assurance
that the issuance of the tax-exempt bonds, which may require the consent of the
holders of the TARC Notes, will occur.
The Company has incurred losses and negative cash flows from operating
activities as a result of limited refining operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
and losses on refined product sales due to financing costs and low margins.
Based on recent refining margins and projected levels of operations, such
negative cash flows are likely to continue. In order to operate the refinery,
the Company must raise debt or equity capital in addition to the funds required
to complete the Capital Improvement Program. There is no assurance that the
necessary additional funding for the refinery expansion and working capital can
be obtained or that profitable operations will be ultimately achieved. As a
result there is substantial doubt about the Company's ability to continue as a
going concern. If the Company (i) does not complete the Capital Improvement
Program in a timely manner, (ii) incurs significant cost overruns, (iii) does
not ultimately achieve profitable operations, or (iv) ceases to continue
operations, the Company's investment in the refinery may not be recovered. The
financial statements do not include any adjustments as a result of such
uncertainties.
3. INVENTORIES AND OTHER CURRENT ASSETS
The major components of inventories are as follows (in thousands of
dollars):
<TABLE>
<CAPTION> JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Refinery feedstocks and blendstocks $ 2,128 $ 1,283 $ 628 $ 13
Intermediate and refined products 2,370 10,199 1,294 19
Purchase commitments--refinery
feedstocks and blendstocks 10,600 20,288 3,767 21,639
Purchase commitments--intermediate
and refined products - 8,204 31,542 4,545
--------- --------- --------- ---------
$ 15,098 $ 39,974 $ 37,231 $ 26,216
========= ========= ========= =========
</TABLE>
F-11
<PAGE> 137
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JULY 31,
---------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Insurance prepayments $ -- $ 1,829 $ 1,027 $ 1,414
Prepaid product charges -- 5,415 4,452 1,092
--------- --------- --------- --------
$ -- $ 7,244 $ 5,479 $ 2,506
========= ========= ========= ========
</TABLE>
4. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
ESTIMATED JULY 31,
USEFUL LIFE -------------------- JANUARY 31, APRIL 30,
(YEARS) 1994 1995 1996 1996
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Land $ 8,978 $ 9,183 $ 9,362 $ 9,362
Refinery 10 144,758 261,412 411,650 456,273
Other 3 to 10 5,572 8,957 9,846 12,667
-------- -------- -------- --------
$159,308 $279,552 $430,858 $478,302
======== ======== ======== ========
</TABLE>
Approximately $33 million of refinery assets were being depreciated at July
31, 1994. Approximately $45 million of refinery assets were being depreciated
at July 31, 1995, January 31, 1996, and April 30, 1996 respectively. The
remaining refinery and other assets are considered construction in progress.
Approximately $90.4 million of property, plant and equipment represents assets
transferred by TransAmerican at net realizable value and $387.9 million
represents additions recorded at historical cost. Depreciation charges for
refinery assets for the years ended July 31, 1994 and 1995, the six months
ended January 31, 1995 and 1996, and the three months ended April 30, 1995 and
1996 were $2.7 million, $5.9 million, $2.7 million, $2.9 million, $1.6 million
and $1.7 million, respectively.
5. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
--------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Debt issue costs, net of accumulated
amortization of $-0- and $1,260 at July
31, 1994 and 1995, $2,819 at January 31,
1996, and $3,584 at April 30, 1996 $ 1,210 $22,345 $20,786 $20,231
Contractual rights and licenses, net
of accumulated amortization of $1,161,
$555, $1,464, and $1,616 at July 31, 1994
and 1995, January 31, 1996, and April 30,
1996, respectively 3,924 6,818 6,516 6,363
Other 308 144 274 631
------- ------- ------- -------
$ 5,442 $29,307 $27,576 $27,225
======= ======= ======= =======
</TABLE>
The Company uses the straight-line method to amortize intangibles over the
periods estimated to be benefited.
F-12
<PAGE> 138
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
6. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JULY 31,
---------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest $ -- $ 7,242 $ 7,609 $ 3,484
Processing imbalance 9,202 -- -- --
Litigation accrual -- 3,000 2,500 1,780
Taxes other than income taxes 2,269 2,361 321 1,212
Maintenance turnarounds -- 764 1,145 1,336
Payroll 1,295 791 1,321 721
Insurance 380 380 380 380
Other 198 654 1,284 1,305
--------- --------- --------- ---------
$ 13,344 $ 15,192 $ 14,560 $ 10,218
========= ========= ========= =========
</TABLE>
7. LONG-TERM DEBT
The Company's long-term debt is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Guaranteed First Mortgage Discount Notes due 2002 -- $ 199,917 $ 221,155 $ 232,664
Guaranteed First Mortgage Notes due 2002 -- 95,046 95,383 95,561
--------- --------- --------- ---------
-- $ 294,963 $ 316,538 $ 328,225
========= ========= ========= =========
</TABLE>
On February 23, 1995, the Company issued 340,000 A Units consisting of
$340 million aggregate principal amount of Guaranteed First Mortgage Discount
Notes due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase
Warrants ("Warrants"), and 100,000 B Units consisting of $100 million aggregate
principal amount of Guaranteed First Mortgage Notes due 2002 ("Mortgage Notes"
and, together with the Discount Mortgage Notes, the "TARC Notes") and 1,683,540
Warrants. The TARC Notes are senior obligations of the Company, collateralized
by a first priority lien on substantially all of the Company's property and
assets and pledges of 50.45 million shares of common stock of TransTexas and
all of the Company's outstanding common stock. The Warrants entitle holders to
purchase in the aggregate 7,495,313 shares of the Company's common stock,
representing 19.99% of the Company's common stock assuming the exercise of all
of the Warrants, at an exercise price of $0.01 per share. The Warrants are
immediately exercisable and expire on February 15, 2002. The Company allocated
$23.3 million of the proceeds from the issuance of the TARC Notes to the
Warrants based on their estimated fair value.
The Discount Mortgage Notes and the Mortgage Notes initially bear interest
at rates of 18 1/2% and 16 1/2%, respectively. Interest is payable
semi-annually with the first interest payment on the Discount Mortgage Notes
due August 15, 1998. Interest payments on the Mortgage Notes began August 15,
1995. The Company is required to redeem $110 million of the principal amount of
the TARC Notes on each of February 15, 2000 and 2001. The TARC Notes mature on
February 15, 2002. Upon the occurrence of a change of control, the Company is
required to offer to purchase all outstanding TARC Notes at a price equal to
101% of the principal amount thereof plus
F-13
<PAGE> 139
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
accrued and unpaid interest. In addition, the Company is required, subject to
certain conditions, to make an offer to purchase the TARC Notes with the net
proceeds of certain asset sales or dispositions of assets, with a percentage of
excess cash (as defined), or if, at the end of each of any two consecutive
quarters, commencing with the quarter ending January 31, 1998, the Company's Net
Worth is less than $75 million and the Company's Consolidated Fixed Charge
Coverage Ratio as of the end of each of such quarters is less than 1.25 to 1.
The Company will be required to generate net income or increase its present
capital before January 1998, to comply with certain covenants. The indenture
governing the TARC Notes ("Indenture") contains certain covenants which limit
the Company's ability to incur additional indebtedness, transfer or sell assets,
pay dividends or make certain other restricted payments, enter into certain
transactions with affiliates, or consummate a merger, consolidation or sale of
all or substantially all of its assets.
The Company received approximately $301 million from the sale of A Units
and B Units. Net proceeds received by the Company approximated $92 million
after deducting approximately $16 million for underwriting discounts,
commissions, fees and expenses, approximately $20 million for the repayment of
the balance of a loan from TransAmerican ("TransAmerican Loan"), and $173
million which was deposited into a cash collateral account ("Collateral
Account") to fund the expansion and upgrading of the Company's refinery.
Pursuant to a Disbursement Agreement, funds in the Collateral Account are
held and invested by the Disbursement Agent until needed from time to time to
fund the Capital Improvement Program. The Disbursement Agent disburses funds
from the Collateral Account in accordance with a budget prepared by the Company
and approved by the Construction Supervisor, a third party approved by the
trustee and compensated by the Company. The Construction Supervisor is required
to review each request by the Company for a disbursement from the Collateral
Account to pay for the Capital Improvement Program. All funds in the Collateral
Account are pledged as security for the repayment of the TARC Notes and are
classified as "long-term debt proceeds held in collateral account" in the
financial statements. To the extent the Company has current liabilities related
to the Capital Improvement Program, the corresponding amount in the Collateral
Account is classified as a current asset.
The Company's capitalized lease obligations were approximately $1.3
million, $1.2 million, $2.4 million and $2.3 million at July 31, 1994 and 1995,
January 31, 1996 and April 30, 1996, respectively. Maturities of such
obligations are approximately $1.1 million, and $0.8 million, $0.4 million and
$0.1 million in the years ending January 31, 1997, 1998, 1999 and 2000,
respectively. The fair value of the TARC Notes, based on quoted market prices,
was approximately $332 million, $295 million and $316 million as of July 31,
1995, January 31, 1996 and April 30, 1996, respectively.
F-14
<PAGE> 140
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
8. INCOME TAXES
For the years ended July 31, 1993, 1994 and 1995 and for the six
months ended January 31, 1996, and for the three months ended April 30, 1996,
the Company incurred net losses for which related tax benefits are recognizable.
Long-term deferred tax assets and liabilities are comprised of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31,
------------------------ JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Deferred tax assets:
Receivable from TransAmerican in lieu of
Federal net operating loss carryforwards $ 35,026 $ 56,416 $ 63,997 $ 52,148
Capital loss carryforward 1,095 -- --
Safe harbor leases 89,261 86,724 85,283 84,509
Other 826 8,013 10,897 6,867
--------- --------- --------- ---------
Gross deferred tax assets 126,208 151,153 160,177 143,524
Deferred tax liabilities:
Depreciation 2,409 6,356 6,617 6,753
--------- --------- --------- ---------
Net deferred tax assets 123,799 144,797 153,560 136,771
Valuation allowance (123,799) (144,797) (153,560) (136,771)
--------- --------- --------- ---------
$ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
The net deferred tax asset valuation allowance for each respective period
represents the amounts for which utilization is not assured due to the
uncertainty of realizing deferred tax assets. Changes in the net deferred tax
asset valuation allowance were primarily attributable to increases in tax loss
carryforwards.
On a separate return basis, the Company has incurred approximately $149.0
million of regular tax net operating losses from inception through April 30,
1996. The Company's regular tax net operating losses incurred from inception
through April 30, 1996 would generally expire from 2004 through 2012. Under the
Company's tax allocation agreement with TransAmerican and TransAmerican's other
subsidiaries, as long as the Company remains in the consolidated group for tax
purposes, the Company may receive benefits in the future for loss carryforwards
in the form of reduced current taxes payable (i) to the extent its losses
incurred are available for and utilized by TransAmerican and (ii) TransAmerican
has the ability to pay amounts then due the Company. As of July 31, 1995,
substantially all of the Company's NOL had been used by TransAmerican's
consolidated group. At April 30, 1996, the Company utilized $33.9 million of NOL
carryforwards.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax purposes
could result in the acceleration of payment of a substantial amount of federal
income taxes by TransAmerican. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable for the consolidated
federal income tax liability of the consolidated group. There can be no
assurance that TransAmerican will have the ability to satisfy the above tax
obligation at the time due and, therefore, the Company, or other members may be
required to pay all or a portion of the tax. A decision by TEC or the Company to
sell TransTexas shares could result in deconsolidation of TransTexas for tax
purposes. TransAmerican's tax liability which could result from deconsolidation
is estimated to be approximately $40 million at April 30, 1996. The Company as a
member of the consolidated group is severally liable for this liability. To the
extent TransAmerican is unable to fund the entire liability, the Company may be
required to pay a portion of this tax. The Company is unable to determine its
share, if any, of the liability which would result from deconsolidation because
(i) it is uncertain whether deconsolidation will occur and (ii) if
deconsolidation should occur, it is uncertain whether the Company would be
required to fund any portion of the tax liability under the joint and several
provisions.
F-15
<PAGE> 141
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
In the event the Company is not allowed to file a consolidated return with
TransAmerican, the receivable in lieu of federal net operating loss
carryforwards would not be available and the related valuation allowance would
decrease by $52 million.
9. INVESTMENT IN TRANSTEXAS
The Company uses the equity method to account for its investment in
TransTexas, due to its ability to exercise significant influence over
TransTexas, and initially recorded this investment at TransAmerican's historical
basis. The equity in loss of TransTexas reflects the Company's 20.3% interest in
TransTexas' loss before an extraordinary item from the date of the Company's
acquisition. The sale of TransTexas stock in March 1996 by the Company,
decreased the Company's interest in TransTexas to 14.1%. The Company continues
to record its pro rata share of losses due to the common control of TransTexas
and the Company by TransAmerican and TEC. The equity in extraordinary loss of
TransTexas for the year ended July 31, 1995, represents the Company's equity in
a charge by TransTexas for the early retirement of $500 million of its 10 1/2%
Senior Secured Notes due 2000 from the proceeds of the issuance by TransTexas in
June 1995 of $800 million in 11 1/2% Senior Secured Notes due 2002. The closing
price of TransTexas' common stock on April 29, 1996 was $10 1/8.
Summary financial information of TransTexas is as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
---------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Total current assets $ 70,248 $ 171,105 $ 159,438 $ 161,521
Property and equipment, net 462,340 601,460 715,340 774,302
Other assets 51,003 54,005 51,707 66,705
--------- --------- --------- ----------
$ 583,591 $ 826,570 $ 926,485 $1,002,528
========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities $ 79,113 $ 64,269 $ 115,836 $ 179,386
Total noncurrent liabilities 611,207 915,969 965,089 974,562
Total stockholders' deficit (106,729) (153,668) (154,440) (151,420)
--------- --------- --------- ----------
$ 583,591 $ 826,570 $ 926,485 $1,002,528
========= ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------ -------------------------- ------------------------
1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- ---------- ---------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 325,816 $ 335,919 $ 312,699 $ 162,517 $ 141,156 $ 72,828 $ 95,958
Operating costs and expenses 213,011 256,628 261,209 133,833 101,908 59,896 70,160
--------- --------- --------- --------- --------- --------- ---------
Operating income 112,805 79,291 51,490 28,684 39,248 12,932 25,798
Other expense (2,442) (50,155) (65,797) (29,059) (40,436) (14,857) (21,152)
Income tax (expense) benefit (16,746) (5,380) 2,415 131 416 (1,919) (1,626)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item 93,617 23,756 (11,892) (244) (772) (3,844) 3,020
Extraordinary item -- -- (56,637) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 93,617 $ 23,756 $ (68,529) $ (244) $ (772) $ (3,844) $ 3,020
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share $ 0.33 $ (0.93) $ -- $ (0.01) $ (0.05) $ 0.04
========= ========= ========= ========= ========= ==========
</TABLE>
F-16
<PAGE> 142
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
10. TRANSACTIONS WITH AFFILIATES
TransAmerican and its affiliates have provided the Company with
substantially all of its corporate services requirements, including insurance,
legal, accounting and treasury functions. During 1994 and 1995, the six months
ended January 31, 1996, and the three months ended April 30, 1995 and 1996,
TransAmerican and TransTexas charged the Company approximately $0.1 million,
$0.2 million, $0.2 million, $0.1 million, and $0.1 million, respectively, to
cover its costs of providing these services, which management believes to be
reasonable based on the limited services provided. The Company's increase in
operations requires more corporate services and, accordingly, pursuant to the
revised services agreement, the Company is currently charged $26,000 per month
for such services. In addition, third party charges incurred by TransAmerican
and its affiliates have been charged directly or allocated to the Company on
usage or other methods that management believes are reasonable. All significant
transactions with affiliates to the extent unpaid are recorded in the "payable
to affiliates account."
During 1995, TransAmerican acquired an office building which it renovated
and subsequently sold to TransTexas in February 1996. In February 1996,
TransAmerican advanced $4 million of the proceeds from this sale to the Company
for working capital. The Company leases office space from TransTexas on terms
and conditions permitted by the Indenture.
The Company purchases natural gas from TransTexas on an interruptible
basis. Total natural gas purchased for the years ended July 31, 1994 and 1995,
the six months ended January 31, 1995 and 1996, and the three months ended
April 30, 1995 and 1996, was approximately $2.3 million, $2.5 million,
$1.2 million, $1.4 million, $0.1 million, and $0.3 million, respectively.
The payable to TransTexas for natural gas purchased totaled approximately
$1.2 million, $0.4 million, $0.1 million, $0.1 million, and $0.3 million at
July 31, 1994 and 1995, January 31, 1996, and April 30, 1995 and 1996,
respectively.
Certain refinery assets, which were held by TransAmerican and not included
in the 1987 asset transfer, were transferred to the Company during fiscal 1994
at TransAmerican's net book value of approximately $25 million.
As part of the formation and asset transfer from TransAmerican to
TransTexas (the "Asset Transfer"), TransTexas agreed to assume a portion of the
liability for the Frito-Lay and Halliburton litigation discussed in Note 12. In
July 1994, TransAmerican agreed to contribute $100 million as an additional
contribution of capital to the Company. Pursuant to the Company's debt
offering, TransAmerican (through TEC) contributed approximately $71 million to
the capital of the Company in 1995. The financial statements at July 31, 1995
and 1994 reflect these transactions as "additional paid-in capital" with a
corresponding reduction in "payable to affiliates."
Prior to the sale of the TARC Notes, the Company participated in
TransAmerican's centralized cash management program. Funds required by the
Company for daily operations and capital expenditures have been advanced by
TransAmerican. All cash transactions have been effected through intercompany
accounts other than amounts funded by the Collateral Account. The intercompany
debt owed by the Company to TransAmerican does not bear interest and has no
fixed maturity. In October 1994, TransAmerican sold 5.25 million shares of
TransTexas common stock. TransAmerican advanced approximately $50 million of
the proceeds from these stock sales to the Company, of which approximately $20
million was used by the Company to repay a portion of the TransAmerican Loan,
and the remaining $30 million was used for working capital and general
corporate purposes. The Company used approximately $20 million of the net
proceeds of the sale of the TARC Notes to repay the balance of the
TransAmerican Loan. Approximately $10 million of the net proceeds from the
sale of the TARC Notes were used to repay other intercompany debt to
TransAmerican. TransAmerican contributed to the capital of the
F-17
<PAGE> 143
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Company (through TEC) all but $10 million of the remainder of the Company's
intercompany debt owed to TransAmerican. In April 1995, the Company repaid the
remaining $10 million of intercompany indebtedness owed to TransAmerican. In
August 1995, the Company received an advance of $3 million from TransTexas
which the Company used to settle its remaining portion of the Halliburton
litigation. In September 1995, the Company received an advance of $1.7 million
from TransAmerican which the Company used to purchase feedstock. In October
1995, the Company repaid these advances without interest. Additionally in
October 1995, the Company received an advance of approximately $4 million from
TransAmerican for working capital, a portion of which has been repaid.
In September 1995, the Company received an advance of $1 million from
TransTexas which the Company used to purchase feedstock. This advance was repaid
by the Company with interest. In December 1995, the Company advanced $1 million
to TransTexas. This advance was repaid to the Company with interest. In July
1996, TARC executed a promissory note to TransAmerican for up to $25 million.
Currently, the Company has drawn $5 million against the note. The note bears
interest at 15% per annum, with quarterly interest payments beginning in October
1996 and with the principal due in July, 1998. In July and August 1996,
TransAmerican advanced $4.3 million to the Company. The Company anticipates
repaying a portion of this non-interest bearing advance within 30 days.
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors"), a
subsidiary of TransAmerican, provides construction personnel to the Company in
connection with the Capital Improvement Program. These construction workers are
temporary employees, and the number and composition of the workforce will vary
throughout the Capital Improvement Program. Southeast Contractors charges the
Company for the direct costs it incurs, which consist solely of employee payroll
and benefits plus administrative costs and fees; such administrative costs and
fees charged to the Company are $1.2 million per year. Total labor costs paid to
Southeast Contractors were approximately $15.5 million for the year ended July
31, 1995, approximately $20.2 million for the six months ended January 31, 1996
and approximately $1.8 million and $0.9 million for the three months ended April
30, 1995 and 1996, respectively, of which $1.0 million, $2.3 million and $0.9
million were payable July 31, 1995, January 31, 1996 and April 30, 1996,
respectively. No labor costs were paid to Southeast Contractors in prior years.
A former affiliate of TransAmerican owed $205,000 to Lynn Petroleum
Storage and Transport Co., Inc. ("Lynn"), a company owned by the children of
the sole stockholder of TransAmerican. This liability was assumed by the
Company in conjunction with the transfer of refinery assets described above. In
May 1995, the Company paid this obligation and an obligation arising from the
purchase of a cryogenic gas processing unit and butane tanks from Lynn at
Lynn's undepreciated book value of such assets of $492,200.
In July 1994, JRS Ventures, Inc. ("JRS"), owned by John R. Stanley,
conveyed to the Company a portion of the real property on which the Company's
refinery is located. The Company intends to pay JRS $25,000, which is the
amount for which JRS purchased the land in August 1993 from Lynn. During the
three fiscal years ended July 31, 1993, the Company paid Lynn ground rent of
approximately $300,000 per year for the use of this land. Lease payments under
the ground lease were terminated effective August 1993 when JRS acquired the
land.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The following is a description of the legal proceedings of the Company.
F-18
<PAGE> 144
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
NLRB PROCEEDING. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union ("OCAW") filed unfair labor practices charges against the
Company with the New Orleans Regional Office of the National Labor Relations
Board ("NLRB"). The charge alleges that the Company refused to reinstate 22
former employees because of their union membership. The NLRB has refused
to issue a complaint against the Company based on the OCAW's charges.
The OCAW has until July 26, 1996 to appeal the NLRB decision.
EEOC. On August 31, 1995, the Equal Employment Opportunity Commission ("EEOC")
initiated a systemic investigation into the Company's and Southeast
Contractors' employment practices. The EEOC is investigating whether the
Company is discriminating on the basis of sex and race. The Company intends to
vigorously defend this action.
GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit against
the Company alleging breach of an operating agreement to pay GATX $122,500 per
month beginning January 1996. The Company intends to vigorously defend this
action.
GENERAL. The Company is also named a defendant in other ordinary course,
routine litigation incidental to its business. While the outcome of these other
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position, operations
or cash flow. At April 30, 1996, the possible range of estimated losses
related to all of the aforementioned claims, other than the EEOC claim, which
the Company could not reasonably estimate and in addition to the estimates
accrued by the Company, is $0 to $2 million.
Environmental Matters
COMPLIANCE MATTERS. The Company is subject to federal, state, and local laws,
regulations, and ordinances relating to activities and operations that may have
adverse environmental effects ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. The Company believes that it
is in substantial compliance with applicable Pollution Control Laws. However,
newly enacted Pollution Control Laws, as well as increasingly strict
enforcement of existing Pollution Control Laws, will require the Company to
make capital expenditures in order to comply with such laws and regulations. To
ensure continuing compliance, the Company has made environmental compliance and
permitting issues an integral part of its refinery's start-up plans and has
budgeted for such capital expenditures in the Capital Improvement Program.
The Company uses (and in the past has used) certain materials, and
generates (and in the past has generated) certain substances or wastes that are
or may be deemed hazardous substances or wastes. In the past, the refinery has
been the subject of certain environmental enforcement actions, and incurred
certain fines as a result, arising out of certain of the Company's operations.
The Company also was previously subject to enforcement proceedings relating to
its prior production of leaded gasoline and air emissions. The Company believes
that, with minor exception, all of these past matters were resolved prior to or
in connection with the resolution of the bankruptcy proceedings and, in some
cases (such as the leaded gasoline matter), are no longer applicable to the
Company's operations. As a result, the Company believes that such matters will
not have a material adverse effect on the Company's future results of
operations, cash flows or financial position.
PENDING REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. The Company will be
required to
F-19
<PAGE> 145
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
comply with the Benzene Waste NESHAPS as its refinery operations start up. At
this time, the Company cannot estimate the costs of such compliance. Thus,
while the Company does not believe that such costs will be material, there can
be no assurance that such costs will not have a material adverse effect on its
financial position.
In addition, the anticipated promulgation of Hazardous Organic NESHAPS
regulations for refineries under the Clean Air Act could have a material
adverse effect on the Company. The Clean Air Act requires the Environmental
Protection Agency ("EPA") to set "Maximum Achievable Control Technology"
("MACT") standards for all categories of major sources of hazardous air
pollutants by November 15, 2000. The EPA promulgated its "Final Rule for
National Emission Standards for Hazardous Air Pollutants; Petroleum Refineries"
on August 18, 1995. This rule sets MACT standards for the petroleum refining
industry. The Company cannot estimate at this time what the effect may be of
this new regulation on the refinery.
The EPA recently promulgated federal regulations pursuant to the Clean Air
Act to control fuels and fuel additives (the "Gasoline Standards") that could
have a material adverse effect on the Company. Under the new regulations only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced benzene
and aromatics compared to the average 1990 gasoline. The number and extent of
the areas subject to reformulated gasoline standards may increase in the future
if the applicable laws and regulations become more stringent or other areas
become subject to the existing program. Conventional gasoline may be used in
all other domestic markets; however, a refiner's post-1994 average conventional
gasoline must not be more polluting than it was in 1990. With limited
exception, a refiner must compare its post-1994 and 1990 average values of its
controlled fuel parameters and emissions in order to determine its compliance
as of January 1, 1995. The Gasoline Standards recognize that many gasoline
producers may not be able to develop an individual 1990 baseline for a number
of reasons, including, for example, lack of adequate data and limited or no
operations in 1990. Under such circumstances, the refiner must use a statutory
baseline reflecting the 1990 industry average. The EPA has authority, upon a
showing of extenuating circumstances by a refiner, to grant an individual
adjusted baseline or other appropriate regulatory relief to that refiner.
The Company filed a petition with the EPA requesting an individual
baseline adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which the Company relied in
its petition include the fact that the refinery was not in operation in 1990
(and thus there is no 1990 average for purposes of the necessary comparison)
and the fact that the start-up of the refinery is to occur on a phased-in
basis, with all of the refinery units expected to be operational by February
1998. The EPA has denied the Company's request for an individual adjusted
baseline adjustment, and the Company cannot predict at this time when or
whether the EPA will grant the Company other appropriate regulatory relief. In
correspondence to the Company, the EPA has expressed willingness to consider
whether different standards should apply to refineries that are now commencing
operations. If the EPA fails to grant appropriate regulatory relief, the
Company will be restricted in the amount of gasoline it will be able to sell
domestically or will incur additional gasoline blending costs until the Capital
Improvement Program is completed. Upon completion of the Capital Improvement
Program, the Company believes that it will be able to produce conventional
gasoline and, to a limited extent, reformulated gasoline that meets the
Gasoline Standards. There can be no assurance that any action taken by the EPA
will not have a material adverse effect on the Company's future results of
operations or financial position.
CLEANUP MATTERS. The Company also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of cleaning up,
and certain damages resulting from, past spills, disposals or other releases of
hazardous substances ("Hazardous Substance Cleanup Laws"). Over the past
several years, the Company has been, and to a limited extent continues to be,
engaged in environmental cleanup or remedial work relating to
F-20
<PAGE> 146
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
or arising out of operations or activities at the refinery. In addition, the
Company has been engaged in upgrading its solid waste facilities, including the
closure of several waste management units. Similar to numerous other industrial
sites in the state, the refinery has been listed by the Louisiana Department of
Environmental Quality on the Federal Comprehensive Environmental Response,
Compensation and Liability Information System, as a result of the Company's
prior waste management activities (as discussed below).
In 1991, the EPA performed a facility assessment at the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. The Company is unable to predict what the results of the
EPA's investigations will be, or the effect that any further investigation or
remediation that would be required by the EPA will have on the Company's
financial position. As part of the facility assessment, in March 1993 the
Company submitted a "Closure Equivalency Demonstration" for the former sludge
drying beds at the refinery. The EPA has not yet made a determination regarding
the Company's submission or issued any further requests relating to this
matter. The Company believes that the sludge drying beds were properly closed
in 1985 in accordance with applicable law and should not require further
remediation as a result of the EPA's pending review. However, there can be no
assurance that the EPA will not require further work in this regard. The
Company is unable to estimate what the costs, if any, will be if the EPA does
require further remediation or closure activities.
Certain former employees have alleged that the Company's predecessor
improperly disposed of catalyst containing hazardous substances at the site of
the Company's visbreaker. These employees have further alleged that certain
permits for the refinery were obtained as a result of political contributions
made by the Company. As a result of these allegations, the EPA and the
Louisiana Department of Environmental Quality (the "DEQ") commenced an
investigation of the refinery. The Company has denied each of these allegations
and believes that they are wholly without merit. In the early 1980's, the
Company disposed of catalyst with the approval of the applicable Louisiana
authorities at off-site and on-site locations; however, no catalyst was
disposed of in the vicinity of the visbreaker. The Company's records confirm
that the State of Louisiana was aware of and approved the Company's disposal of
catalyst, and that the catalyst was not hazardous under any applicable legal
standards. The DEQ has concluded its investigation without citing any
violations by the Company. The Company also has independently investigated the
allegations. Analysis of soil borings taken from the site of the visbreaker by
three independent laboratories found no evidence of catalyst or other alleged
toxic substances in the samples taken. All permits that have been applied for
and obtained by the Company for its operations have been in accordance with all
applicable laws and regulations. The Company does not expect to incur any
liability in connection with these allegations that will have a material
adverse effect on the Company's future results of operations, cash flows or
financial position.
The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at four Superfund sites (i.e. sites on the National
Priorities List ("NPL"), to which it has been alleged that the Company, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA
to include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRP's liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
F-21
<PAGE> 147
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.
The Company's liability at one of the four Superfund sites at which it has
been named a PRP has been settled for a nominal amount, and the Company expects
to incur no further liability in this matter. At a second Superfund site, the
EPA has invited the Company to enter into negotiations, and the Company attended
a scheduled settlement meeting and negotiations are continuing. With respect
to the remaining two sites, the Company's liability for each such matter has not
been determined, and the Company anticipates that it may incur costs related to
the cleanup (and possibly including additional costs arising in connection with
any recovery action brought pursuant to such matters) at each such site. After a
review of the data available to the Company regarding the basis of the Company's
alleged liability at each site, and based on various factors, which depend on
the circumstances of the particular Superfund site (including, for example, the
relationship of the Company to each such site, the volume of wastes the Company
is alleged to have contributed to each such site in comparison to other PRPs
without giving effect to the ability of any other PRPs to contribute to or pay
for any liabilities incurred and the range of likely cleanup costs at each such
site) the Company does not believe its ultimate liability will be significant;
however, it is not possible to determine the ultimate environmental liabilities,
if any, that may arise from the matters discussed above.
PURCHASE COMMITMENTS
The Company has various purchase commitments for materials, supplies and
services incidental to the ordinary course of business and for the Capital
Improvement Program. As of January 31, 1996, the Capital Improvement Program
includes planned expenditures to expand and modify its existing refinery of
approximately $407 million during the next three years. As of April 30, 1996,
the Company had commitments for refinery construction and maintenance of
approximately $64 million. The Company is acting as general contractor and can
generally cancel or postpone capital projects.
PRICE MANAGEMENT ACTIVITIES
The Company enters into futures contracts, options on future, swap
agreements and forward sales agreements with the intent to protect against a
portion of the price risk associated with price declines from holding inventory
of feedstocks and refined products or fixed price purchase commitments. At April
30, 1996, the Company's position in open futures contracts, options on futures,
swap agreements and forward sales agreements was not significant. A net trading
loss of approximately $3.1 million and a net trading gain of approximately $2.3
million were reflected in other income (expense) for the twelve months ended
July 31, 1994 and July 31, 1995, respectively. For the six months ended January
31, 1996, a net trading loss of approximately $0.4 million was reflected in
other income (expense). These transactions did not qualify for hedge accounting
treatment under the guidelines of SFAS 80; therefore, gains or losses associated
with these futures contracts have not been deferred.
For the three months ended April 30, 1996, the Company indirectly entered
into price management activities through the third party processing agreement
discussed below.
F-22
<PAGE> 148
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENT
The Company enters into financing arrangements to maintain an
available supply of feedstocks. Typically, the Company enters into an agreement
with a third party to acquire a cargo of feedstock that is scheduled for
delivery to the Company's refinery. The Company pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for the
cargo, plus a negotiated commission. Prior to arrival at the refinery, another
third party purchases the cargo, and the Company commits to purchase, at a later
date, the cargo at an agreed price plus commission and costs. The Company also
places margin deposits with the third party to permit the third party to hedge
its price risk. The Company purchases these cargos in quantities sufficient to
maintain expected operations and is obligated to purchase all of the cargos
delivered pursuant to these arrangements. In the event the refinery is not
operating, these cargos may be sold on the spot market. These arrangements are
accounted for as product financing arrangements and accordingly the inventory
and related obligations are recognized on the Company's balance sheet. During
the three months ended April 30, 1996, approximately 0.4 million barrels of
feedstocks with a cost of $8 million were sold by a third party on the spot
market prior to delivery to the Company without a material gain or loss to the
Company.
In March 1996, the Company entered into a processing agreement with a
third party for the processing of various feedstocks at the refinery. Under the
terms of the agreement, the processing fee earned by the Company is based on
the margin earned by the third party, if any, after deducting all of its related
costs such as feedstock acquisition, hedging, transportation, processing and
inspections plus a commission for each barrel processed. This agreement provides
for the Company to process a total of approximately 1.1 million barrels of
feedstocks. For the three months ended April 30, 1996, the Company incurred a
loss of approximately $1.9 million related to the processing agreement,
primarily as a result of price management decisions. In April 1996, the Company
entered into a similar processing agreement with another third party to process
feedstocks. Recently, the Company has agreed to process approximately 4.3
million barrels of feedstocks under this agreement.
In July 1996, the Company entered into a processing agreement with a third
party to process approximately 0.2 million barrels of feedstocks for a fixed
price per barrel. Under the terms of the agreement, the Company is responsible
for only certain quantity and quality yields.
F-23
<PAGE> 149
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
OPERATING LEASES
As of April 30, 1996, the Company has long-term leases covering land and
other property and equipment. Rental expense was approximately $4 million, $3
million and $2 million for the fiscal years 1995, 1994 and 1993, respectively
and approximately $1.9 million for the six months ended January 31, 1996.
Included in rent expense are land rentals which were paid to a related party by
TransAmerican for the Company of approximately $0.3 million in fiscal year
1993. Future minimum rental payments required under operating leases that have
initial or remaining noncancellable lease terms in excess of one year as of
January 31, 1996, are as follows (in thousands of dollars):
<TABLE>
<S> <C>
1997 $ 3,261
1998 3,236
1999 2,969
2000 183
2001 183
Later years 705
---------
$ 10,537
=========
</TABLE>
12. LITIGATION SETTLEMENTS
TERRY/PENROD. TransAmerican and a group of TransAmerican's former bank lenders
are parties to a consolidated suit filed December 6, 1991, in the United States
District Court for the Southern District of Texas, Houston Division. Plaintiffs
ENSCO Offshore Company, f/k/a Penrod Drilling Corporation, Terry Oilfield
Supply Co., Inc. and Terry Resources, Inc. ("Terry") have sued TransAmerican
for approximately $50 million in actual damages and punitive damages of not
less than five times actual damages. The plaintiffs claimed that
TransAmerican breached two third-party drilling agreements and are seeking,
among other things, a portion of the assets TransAmerican received in a
settlement during 1990 of litigation with El Paso Natural Gas Company ("El
Paso"). A judgment was entered against TransAmerican, TransTexas and related
parties. This matter was subsequently settled with no resulting liability to
the Company.
HALLIBURTON. On May 13, 1994, Halliburton Company ("Halliburton") filed suit
against TransAmerican, the Company and TransTexas for breach of contract arising
out of a 1982 tax benefit transaction between Halliburton and TransAmerican
relating to equipment located at the Company's refinery. The Company assumed the
obligations of TransAmerican under a sale-leaseback arrangement relating to such
equipment when the refinery was transferred to the Company in 1987. As part of
the Transfer, TransTexas assumed the liability arising from this suit, but
TransAmerican agreed to indemnify TransTexas for any liability from the suit in
excess of $10 million plus interest at the rate payable by TransAmerican to
Halliburton on the unpaid amount thereof from April 12, 1993 to the date or
dates of payment. In March 1995, the parties reached a settlement whereby
Halliburton received $14 million on August 29, 1995. TransTexas paid $10 million
of this settlement and the remainder was paid by the Company.
Frito-Lay. On June 24, 1993, Frito-Lay, Inc. ("Frito-Lay") filed suit against
TransAmerican and the Company in the Supreme Court of the State of New York,
County of New York, alleging that TransAmerican and the Company failed to make
indemnification payments to Frito-Lay in the amounts and at the times required
under the tax benefit transfer sale-leaseback agreements executed by
TransAmerican and Frito-Lay in November and December 1981 relating to equipment
located at the refinery. The Company assumed the obligations of TransAmerican
under these sale-leaseback agreements when the refinery was transferred to the
Company in 1987. Frito-Lay sought actual damages of not less than $7 million. In
the transfer of certain of TransAmerican's oil and gas properties and
exploration, production and transportation operations to TransTexas, TransTexas
assumed certain liabilities for this matter subject to certain indemnifications.
On December 13, 1995, the suit was settled and dismissed with prejudice. The
liabilities will be allocated among the Company, TransTexas and TransAmerican in
accordance with the Tax Allocation Agreement and other relevant documents.
F-24
<PAGE> 150
TRANSAMERICAN REFINING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
TransAmerican relating to equipment located at the Company's refinery. The
Company assumed the obligations of TransAmerican under a sale-leaseback
arrangement relating to such equipment when the refinery was transferred to the
Company in 1987. As part of the Transfer, TransTexas assumed the liability
arising from this suit, but TransAmerican agreed to indemnify TransTexas for
any liability from the suit in excess of $10 million plus interest at the rate
payable by TransAmerican to Halliburton on the unpaid amount thereof from April
12, 1993 to the date or dates of payment. In March 1995, the parties reached a
settlement whereby Halliburton received $14 million on August 29, 1995. The
Company paid $4 million representing its portion of the settlement.
WILLIAM L. STANLEY. In July 1994, William L. Stanley ("Billy Stanley") filed
suit in the District Court of Harris County, Texas, against his father, John R.
Stanley, for alleged breach of an oral contract and certain intentional torts.
Billy Stanley claimed that his father agreed to transfer to Billy Stanley a 25%
ownership interest in TransAmerican in exchange for 75% of the profits
generated by oil and gas supply and other operations established by Billy
Stanley to provide services and materials to TransAmerican from January 2, 1991
to August 31, 1993. The complaint asserted that after providing such services
and materials, Billy Stanley arranged for consideration to be received by John
R. Stanley in excess of $5 million, representing 75% of such profits (the
"Alleged Payments"). On December 2, 1994, Billy Stanley filed a supplemental
petition to include TransTexas, the Company, and TransAmerican as defendants in
this matter. In this supplemental petition, Billy Stanley claimed (i) that each
defendant is the alter ego of the other defendants, (ii) intentional infliction
of emotional distress, (iii) unjust enrichment, (iv) fraud, (v) breach of
fiduciary duties, (vi) conspiracy to commit intentional torts, and (vii)
violations of the Racketeer Influenced and Corrupt Organization Act. Billy
Stanley sought, among other things, the imposition of a trust upon any and all
properties obtained by the defendants as a result of the improper actions
alleged by Billy Stanley. In addition, Billy Stanley has made other allegations
regarding his father, TransAmerican, TransTexas and the Company to the media
and others and has stated his intent to make such allegations to various
governmental agencies and, upon receipt of immunity, to assist in any
investigation by such agencies as a consequence of these assertions. These
allegations include, among others, bankruptcy fraud relating to the Alleged
Payments, misappropriation, bribery of government officials, and violation of
environmental regulations. John R. Stanley has removed the case to the United
States District Court for the Southern District of Texas, Houston Division.
Mr. Stanley, TransAmerican, TransTexas and the Company denied all of Billy
Stanley's allegations of wrongdoing and intend to cooperate with any
governmental investigation that may ensue as a consequence thereof. In October
1994, TransAmerican, the Company and TransTexas filed suit against Billy
Stanley and his attorney in the 341st Judicial District Court of Webb County,
Texas, claiming libel, slander, business disparagement, tortious interference,
and civil conspiracy in connection with, among other things, Billy Stanley's
allegations described above. TransAmerican, the Company and TransTexas received
a temporary restraining order, sought damages and temporary and permanent
injunctions. All pending litigation between Billy Stanley and John R. Stanley,
TransAmerican, the Company and TransTexas was settled in August 1995.
F-25
<PAGE> 151
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransAmerican Energy Corporation:
We have audited the accompanying consolidated balance sheet of
TransAmerican Energy Corporation (and predecessor) as of July 31, 1995 and 1994
and January 31, 1996 and the related consolidated statements of operations and
cash flows for each of the three years in the period ended July 31, 1995 and
for the six months ended January 31, 1996, and the statement of stockholder's
deficit for the year ended July 31, 1995 and the six months ended January 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of TransAmerican Energy Corporation (and predecessor) as of July 31, 1995 and
1994 and January 31, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended July 31, 1995 and for the
six months ended January 31, 1996 in conformity with generally accepted
accounting principles.
As described in Note 2, the accompanying consolidated financial statements
have been prepared assuming that the Company and its wholly-owned subsidiary,
TransAmerican Refining Corporation ("TARC"), will continue as going concerns.
TARC is required to obtain additional funds both to expand its refinery and to
fund its ongoing working capital requirements. There is no assurance that the
necessary additional funding for the refinery expansion and working capital
requirements can be obtained or that profitable operations will be ultimately
achieved. As a result, there is substantial doubt about TARC's ability to
continue as a going concern. Additionally, the Company has pledged its
ownership interest in TransTexas Gas Corporation ("TransTexas") as collateral
on TARC's Discount Mortgage Notes and Mortgage Notes. In the event TARC does
not obtain the necessary additional funding the Company may not be able to
recover its investment in TARC and lose its ownership interest in TransTexas.
Therefore, there is substantial doubt in the Company's ability to continue as a
going concern. The consolidated financial statements do not contain any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
F-26
<PAGE> 152
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars, Except Share Amounts)
<TABLE>
<CAPTION>
JULY 31,
------------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,600 $ 88,864 $ 14,114 $ 14,057
Interest reserve account - TransTexas -- 44,722 46,000 46,000
Long-term debt proceeds held in collateral account - TARC -- 7,760 14,840 12,075
Accounts receivable 46,241 25,735 36,372 31,805
Receivable from affiliates 4,391 436 3,000 3,327
Inventories 25,043 48,210 48,652 37,998
Other current assets 4,051 20,397 56,300 57,236
----------- ----------- ----------- -----------
Total current assets 93,326 236,124 219,278 202,498
----------- ----------- ----------- -----------
Property and equipment 1,714,999 2,112,261 2,438,926 2,578,237
Less accumulated depreciation, depletion and amortization 1,095,490 1,238,637 1,302,972 1,337,530
----------- ----------- ----------- -----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $5,409 and
$139,386 at July 31, 1994 and 1995, respectively, and
$136,360 at January 31, 1996 were excluded from amortization 619,509 873,624 1,135,954 1,240,707
----------- ----------- ----------- -----------
Long-term debt proceeds held in collateral account - TARC -- 133,097 9,565 4,946
Due from affiliates 2,450 7,827 26,846 27,825
Other assets, net 53,979 74,984 64,779 65,536
----------- ----------- ----------- -----------
$ 769,264 $ 1,325,656 $ 1,456,422 $ 1,541,512
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ -- $ -- $ 1,335 $ 4,311
Accounts payable 47,103 31,040 63,302 74,946
Payable to affiliate -- 1,346 2,260 1,034
Product financing arrangements 10,600 27,671 37,206 26,184
Accrued liabilities 61,325 63,069 89,316 126,316
----------- ----------- ----------- -----------
Total current liabilities 119,028 123,126 193,419 232,791
----------- ----------- ----------- -----------
Due to affiliates 67,276 14,297 18,992 10,263
Production payment -- 40,079 31,036 21,613
Long-term debt, less current maturities 500,000 1,094,963 1,119,079 1,137,067
Revolving credit agreement -- -- 20,365 20,684
Deferred revenue -- -- 32,850 41,512
Deferred income taxes 35,476 40,672 40,256 41,882
Other liabilities 32,222 21,675 36,358 36,691
Redeemable preferred stock, $0.01 par value, 10,000 shares
authorized; Series A - 1,000 shares issued and outstanding -- 96 96 96
Commitments and contingencies (Note 15) -- -- -- --
Stockholder's deficit:
Common stock, $0.01 par value, 100,000 shares authorized;
9,000 shares issued and outstanding -- -- -- --
Additional paid-in capital -- 175,019 175,019 161,445
Accumulated deficit -- (184,271) (211,048) (162,532)
TransAmerican Natural Gas Corporation equity investment 15,262 -- -- --
----------- ----------- ----------- -----------
Total stockholder's deficit 15,262 (9,252) (36,029) (1,087)
----------- ----------- ----------- -----------
$ 769,264 $ 1,325,656 $ 1,456,422 $ 1,541,512
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-27
<PAGE> 153
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
-------------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- --------- -----------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids $294,753 $ 300,210 $ 273,092 $ 142,070 $ 123,253
Transportation 30,816 33,240 36,787 19,161 15,892
Product sales -- 174,143 140,027 71,035 107,237
Tank rentals 5,178 3,035 552 551 --
Gains on sale of assets -- -- -- -- 474
Other 247 157 285 52 127
--------- --------- --------- --------- ---------
Total revenues 330,994 510,785 450,743 232,869 246,983
--------- --------- --------- --------- ---------
Costs and expenses:
Operating 97,244 268,862 244,123 124,960 154,697
Depreciation, depletion and amortization 95,016 116,447 135,819 73,051 64,053
General and administrative 34,954 44,807 45,592 21,037 21,213
Taxes other than income taxes 15,976 16,904 18,208 8,376 8,133
Litigation settlements (5,600) (1,000) -- -- (18,300)
--------- --------- --------- --------- ---------
Total costs and expenses 237,590 446,020 443,742 227,424 229,796
--------- --------- --------- --------- ---------
Operating income 93,404 64,765 7,001 5,445 17,187
--------- --------- --------- --------- ---------
Other income (expense):
Interest income 542 1,553 6,798 916 5,197
Interest expense (2,999) (51,684) (81,012) (30,002) (49,348)
Gain on sale of TransTexas stock -- -- -- -- --
Other, net 43 (2,851) 2,451 116 (229)
--------- --------- --------- --------- ---------
Total other income (expense) (2,414) (52,982) (71,763) (28,970) (44,380)
--------- --------- --------- --------- ---------
Income (loss) before income taxes 90,990 11,783 (64,762) (23,525) (27,193)
Income tax expense (benefit) 16,746 5,380 (2,415) (131) (416)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 74,244 6,403 (62,347) (23,394) (26,777)
Extraordinary item - loss on early extinguishment
of debt-TransTexas, net of tax (Note 2) -- -- (56,637) -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 74,244 $ 6,403 $(118,984) $ (23,394) $ (26,777)
========= ========= ========= ========= =========
Net income (loss) per common share:
Income (loss) before extraordinary item $ (13,901) $ (2,975)
Extraordinary item (12,628) --
--------- ---------
$ (26,529) $ (2,975)
========= =========
Weighted average number of shares
outstanding 4,485 9,000
========= =========
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
------------------------
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
Gas, condensate and natural gas liquids $ 63,805 $ 79,508
Transportation 8,890 8,195
Product sales 558 10,857
Tank rentals -- --
Gains on sale of assets -- 7,762
Other 56 199
--------- --------
Total revenues 73,309 106,521
--------- --------
Costs and expenses:
Operating 21,234 43,580
Depreciation, depletion and amortization 32,249 31,903
General and administrative 6,755 9,641
Taxes other than income taxes 3,891 5,583
Litigation settlements -- --
--------- --------
Total costs and expenses 64,129 90,707
--------- --------
Operating income 9,180 15,814
--------- --------
Other income (expense):
Interest income 2,386 1,277
Interest expense (19,957) (23,374)
Gain on sale of TransTexas stock -- 56,162
Other, net (3,043) 263
--------- --------
Total other income (expense) (20,614) 34,328
--------- --------
Income (loss) before income taxes (11,434) 50,142
Income tax expense (benefit) 1,919 1,626
--------- --------
Income (loss) before extraordinary item (13,353) 48,516
Extraordinary item - loss on early extinguishment
of debt-TransTexas, net of tax (Note 2) -- --
--------- --------
Net income (loss) $ (13,353) $ 48,516
========= ========
Net income (loss) per common share:
Income (loss) before extraordinary item $ (1,902) $ 5,391
Extraordinary item -- --
--------- --------
$ (1,902) $ 5,391
========= ========
Weighted average number of shares
outstanding 7,022 9,000
========= ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-28
<PAGE> 154
TRANSAMERICAN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
(In Thousands of Dollars, Except Share Amounts)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------------------- PAID-IN CAPITAL (ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT (CAPITAL DEFICIT) DEFICIT) EQUITY (DEFICIT)
------------ ------------ ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1994 1,000 $ -- $ 1 $ -- $ 1
Stock Transfer, as adjusted (Note 1) -- -- 175,018 (65,287) 109,731
Issuance of common stock 8,000 -- -- -- --
Net loss -- -- -- (118,984) (118,984)
------------ ------------ ------------ ------------ ------------
Balance at July 31, 1995 9,000 -- 175,019 (184,271) (9,252)
Net loss -- -- -- (26,777) (26,777)
------------ ------------ ------------ ------------ ------------
Balance at January 31, 1996 9,000 $ -- $ 175,019 $ (211,048) $ (36,029)
Net income -- -- -- 48,516 48,516
Sale of TransTexas stock -- -- (13,574) -- (13,574)
------------ ------------ ------------ ------------ ------------
Balance at April 30, 1996 (unaudited) 9,000 $ -- $ 161,445 $ (162,532) $ (1,087)
============ ============ ============ ============ ============
</TABLE>
Prior year periods are not presented because the Company's predecessor was not
a separate entity with its own capital structure.
The accompanying notes are an integral part of the
consolidated financial statements.
F-29
<PAGE> 155
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------- ----------------------- ----------------------
1993 1994 1995 1995 1996 1995 1996
-------- -------- --------- ---------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 74,244 $ 6,403 $(118,984) $ (23,394) $ (26,777) $ (13,353) $ 48,516
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Extraordinary item -- -- 56,637 -- -- -- --
Litigation, net 10,900 13,000 11,500 4,500 (16,300) -- --
Depreciation, depletion and amortization 95,016 116,447 135,819 73,051 64,053 32,435 31,904
Amortization of discount on long-term debt -- -- 7,673 -- 3,389 7,063 --
Amortization of debt issue costs -- 2,818 4,339 1,524 1,533 1,406 1,018
Gains on sale of assets -- -- -- -- (474) -- (7,762)
Gain on sale of TransTexas stock -- -- -- -- -- -- (56,162)
Deferred income taxes (15,957) (5,961) 5,196 (1,483) (416) 898 1,626
Inventory writedown -- 79 1,265 -- 4,406 -- --
Proceeds from volumetric production
payment -- -- -- -- 32,850 -- 15,537
Amortization of deferred revenue -- -- -- -- -- -- (6,875)
Changes in assets and liabilities:
Accounts receivable (326) (45,616) 19,685 14,760 (9,189) (6,254) 4,358
Inventories (104) (3,600) (6,540) 4,816 4,057 (16,426) (368)
Other current assets (1,774) 351 (12,446) (2,414) 1,564 (1,202) 1,657
Accounts payable 4,665 9,690 (17,499) 2,901 1,995 (23,754) 9,165
Accrued liabilities 16,880 26,473 (27,184) (11,853) (6,975) (30,647) 30,702
Payable to affiliates -- (721) (12,320) 265 (3,447) 11,045 (13,127)
Other assets -- (1,816) (3,690) (323) 569 (1,537) (1,694)
Other liabilities (9,000) 7,516 434 500 (1,928) 5,924 (726)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided (used) by
operating activities 174,544 125,063 43,885 62,850 48,910 (34,402) 57,769
--------- --------- --------- --------- --------- --------- ---------
Investing activities:
Capital expenditures (142,848) (290,494) (376,458) (158,476) (275,451) (80,664) (117,868)
Proceeds from sales of assets -- -- -- -- 20,500 -- 7,779
Withdrawals from interest reserve account -- -- -- -- 44,722 -- --
Deposits to interest reserve account -- -- (44,722) -- (46,000) -- --
Advances to affiliate -- (8,257) -- -- -- -- --
Payment of advances by affiliate -- 8,257 -- -- -- -- --
Purchase of production payment
from affiliate -- (5,000) -- -- -- -- --
Production payment by affiliate -- 609 4,391 844 -- 3,547 --
--------- --------- --------- --------- --------- --------- ---------
Net cash used by investing activities (142,848) (294,885) (416,789) (157,632) (256,229) (77,117) (110,089)
--------- --------- --------- --------- --------- --------- ---------
Financing activities:
Principal payments on long-term debt (1,891) -- (20,000) -- (219) (455) (968)
Proceeds from long-term borrowings 4,000 -- 320,750 10,000 3,000 300,750 10,000
Revolving credit agreement, net -- -- -- 8,701 20,365 2,522 319
Issuance of production payment -- -- 49,500 -- -- 49,500 --
Repayments of production payment -- -- (7,866) -- (8,833) (2,992) (8,097)
Issuance of redeemable preferred stock -- -- 96 -- -- 96 --
Issuance of senior secured notes -- 500,000 800,000 -- -- -- --
Retirement of senior secured notes -- -- (542,500) -- -- -- --
Debt issue costs -- (19,638) (38,515) (3,578) (1,258) (21,324) (1,038)
Issuance of common stock -- 66,143 -- -- -- -- --
Dividend to TransAmerican -- (32,960) -- -- -- -- --
Long-term debt proceeds held in
collateral account -- -- (173,000) -- -- (174,742) (26,549)
Withdrawals from collateral account -- -- 32,143 -- 116,452 -- 33,933
Net proceeds from sale of TransTexas stock -- -- -- -- -- -- 42,607
Dividend payment on redeemable
preferred stock -- -- -- -- -- -- (19)
Advances from TransAmerican and affiliates
to TARC 9,869 68,523 87,560 86,925 12,270 -- 2,075
Repayment of advances -- -- (60,000) (20,000) (8,750) (41,282) --
Restricted cash -- (29,133) -- -- -- -- --
Other (1,602) -- -- -- (458) -- --
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 10,376 552,935 448,168 82,048 132,569 112,073 52,263
--------- --------- --------- --------- --------- --------- ---------
TransTexas transactions with TransAmerican, net (42,125) (369,529) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents (53) 13,584 75,264 (12,734) (74,750) 554 (57)
Beginning cash and cash equivalents 69 16 13,600 13,600 88,864 865 14,114
--------- --------- --------- --------- --------- --------- ---------
Ending cash and cash equivalents $ 16 $ 13,600 $ 88,864 $ 866 $ 14,114 $ 1,419 $ 14,057
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-30
<PAGE> 156
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Data by Entity
The respective bond indenture agreements of TransTexas and TARC each
contain substantial restrictions which generally prevent the Company from using
the assets of one entity to satisfy the liabilities of the other and limit
transactions between affiliates. Accordingly, the consolidated financial
statements should be read in conjunction with the separate financial statements
of TransTexas and TARC filed on their respective Transition Reports on Form 10-K
for the period ended January 31, 1996 and quarterly reports on Form 10-Q for the
period ended April 30, 1996. See Note 14.
Organization
The consolidated financial statements include the following subsidiaries
of TransAmerican Natural Gas Corporation ("TransAmerican"):
TransTexas Gas Corporation and subsidiaries and its combined
predecessors ("TransTexas")
TransAmerican Refining Corporation ("TARC")
The combined entity described above is referred to as "TAEC". TAEC is the
predecessor to TransAmerican Energy Corporation (the "Company" or "TEC"), a
subsidiary of TransAmerican. The Company was formed on July 12, 1994 to hold 55
million shares of common stock (74.3% of outstanding shares) of TransTexas and
all of the outstanding capital stock of TARC. TransAmerican contributed 55
million shares of TransTexas common stock and all of the capital stock of TARC
to the Company in connection with the public offering of debt securities by TARC
(the "Stock Transfer"). The Company then contributed 15 million of these shares
(20.3% of the total outstanding) of TransTexas common stock to TARC. In March
1996, TARC sold 4.55 million shares (6.1% of the total outstanding) of
TransTexas common stock in public offerings. TARC recognized a gain of $56.2
million on the sale of TransTexas stock. This gain represents the
difference in investment carrying value and the proceeds received from the sale
of stock. Due to TARC's net operating loss position there are no net tax
effects of the above transaction. The consolidated financial statements include
the financial statements of TransTexas and TARC on a wholly-owned basis. Once
TransTexas is in a positive equity position, 19.8% of the results of its
operations will be allocated to nonaffiliates. Prior to the Stock Transfer, all
financial statements were presented on a combined basis.
TransAmerican and certain subsidiaries emerged from a proceeding under
Chapter 11 of the Bankruptcy Code on October 19, 1987, pursuant to a confirmed
plan of reorganization. With the proceeds of the public offering of TransTexas'
10 1/2% senior secured notes (the "Prior Notes"), TransTexas paid all allowed
claims under TransAmerican's plan of reorganization as well as certain other
debts of TransAmerican. During 1996, TransTexas reclassified approximately
$21.6 million of deferred tax liability to capital to properly reflect
liabilities of TransAmerican.
In February 1995, the Company sold 8,000 shares of its common stock to
TransAmerican at par value. This sale had not been previously reflected in the
Company's consolidated financial statements and is being retroactively applied
herein.
In December 1995, TransTexas Exploration Corporation ("TTEX") was
incorporated as a wholly-owned subsidiary of TransTexas and qualifies as an
Unrestricted Subsidiary, as defined in the TransTexas Indenture (as defined in
Note 3).
All significant intercompany transactions between the combined entities
have been eliminated. All significant intercompany transactions and balances
with TransAmerican prior to the Stock Transfer are recorded in TransAmerican's
equity investment.
F-31
<PAGE> 157
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
From 1987 through 1993, TARC incurred operating losses principally as a
result of maintaining its idled refinery. TARC recommenced partial operations
of the refinery in March 1994 and temporarily ceased processing operations in
December 1994 pending additional financing. Processing operations recommenced
in May 1995. TARC plans major expansion and modifications which would
significantly change the refinery's throughput capacity, the feedstocks used
and refined product yields. Funds for construction have historically been
provided by TransAmerican; however, as more fully described in Note 3, TARC's
issuance of long-term debt during 1995 provided $173 million for refinery
construction (the "Capital Improvement Program"). Additional long-term
financing is required to complete the refinery expansion necessary for
profitable levels of operations.
The results of operations and cash flows for the years ended July 31, 1994
and 1993, represent that of TAEC. Included in the results of operations and
cash flows for the year ended July 31, 1995, are the activities of TAEC through
February 23, 1995.
Change in Fiscal Year
On January 30, 1996, the Board of Directors approved a change in the
Company's fiscal year end for financial reporting purposes to January 31 from
July 31. The consolidated financial statements include presentation as of and
for the six months ended January 31, 1996 (the "Transition Period"). The
unaudited comparable period of the prior fiscal year is also presented, as
appropriate.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date(s) of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period(s). Actual results could differ from these estimates.
Interim Financial Information
The consolidated financial statements reflect all adjustments, consisting
of normal recurring accruals, which are, in the opinion of management,
necessary to fairly state the financial position of the Company as of April 30,
1996 and the results of its operations and cash flows for the three month ended
April 30, 1995 and 1996. The results of operations and cash flows for interim
periods are not necessarily indicative of the results that may be expected for
the entire year. Certain previously reported financial information has been
reclassified to conform with the current presentation.
Cash and Cash Equivalents and Accounts Receivable
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
The Company's inventories, consisting primarily of tubular goods,
feedstocks and refined products, are stated at the lower of average cost or
market. At July 31, 1994 and 1995 and January 31, 1996, TARC wrote down the
value of its inventories by approximately $0.1 million, $1.3 million and
$4.4 million, respectively, to reflect existing market prices.
F-32
<PAGE> 158
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Gas and Oil Properties
The Company uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, the cost for successful as
well as unsuccessful exploration and development activities are capitalized.
Such capitalized costs and estimated future development and reclamation costs
are amortized on a unit-of-production method. Net capitalized costs of gas and
oil properties are limited to the lower of unamortized cost or the cost center
ceiling, defined as the sum of the present value (10% discount rate) of
estimated unescalated future net revenues from proved reserves; plus the cost
of properties not being amortized, if any; plus the lower of cost or estimated
fair value of unproved properties included in the costs being amortized, if
any; less related income tax effects.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.
Unevaluated properties and associated costs not currently being amortized
and included in oil and gas properties were $5 million and $139 million at July
31, 1994 and 1995, respectively and $136 million and $142 million at January 31,
1996 and April 30, 1996, respectively. The properties represented by these costs
were at such dates undergoing exploration activities or are properties on which
the Company intends to commence such activities in the future. The Company
believes that the unevaluated properties at April 30, 1996 will be substantially
evaluated in 12 to 24 months and it will begin to amortize these costs at such
time.
Refining Properties
Refining property and equipment acquired subsequent to 1983, including
assets transferred from TransAmerican in 1994, are stated at TransAmerican's or
TARC's historical cost. During the period from 1987 through August 1993,
refining property and equipment acquired prior to 1983 were carried at
estimated net realizable value and no depreciation expense was charged. New or
refurbished units are depreciated as placed in service. Depreciation of
refinery equipment is computed by the straight-line method at rates which will
amortize the unrecovered cost of depreciable property, including assets
acquired under capital leases, over their estimated useful lives. Costs of
improving leased property are amortized over the estimated useful lives of the
assets or the terms of the leases, whichever is shorter.
Other Property and Equipment
Other property and equipment are recorded at cost. The cost of repairs and
minor replacements is charged to operating expense while the cost of renewals
and betterments is capitalized. At the time depreciable assets other than gas
and oil properties are retired, or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts. Gains
or losses on dispositions in the ordinary course of business are included in
the consolidated statement of operations. Impairment of property and equipment
is reviewed whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Generally, impairment would
be evaluated based on future estimated undiscounted cash flow.
Depreciation of pipeline and transmission facilities and other buildings
and equipment is computed by the straight- line method at rates which will
amortize the unrecovered cost of depreciable property, including assets
acquired under capital leases, over their estimated useful lives.
Costs of improving leased property are amortized over the estimated useful
lives of the assets or the terms of the leases, whichever is shorter.
F-33
<PAGE> 159
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Turnarounds
A turnaround consists of a complete shutdown, inspection and maintenance
of a unit. The estimated costs of turnarounds are accrued over the period to
the next scheduled turnaround, generally greater than one year.
Environmental Remediation Costs
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have future
economic benefits are expensed. Liabilities for these expenditures are provided
when the responsibility to remediate is probable and the amount of associated
costs is reasonably estimable.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other
Assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the interest method.
Defined Contribution Plan
The Company, through its parent company, TransAmerican, maintains a
defined contribution plan, which incorporates a "401(k) feature" as allowed
under the Internal Revenue Code. All investments are made through Massachusetts
Mutual Life Insurance Company. Employees who are at least 21 years of age and
have completed one year of credited service are eligible to participate on the
next semiannual entry date. The Company matches 10%, 20%, or 50% of employee
contributions up to a maximum of 3% of the participant's compensation, based on
years of plan participation. The Company and its predecessor's contributions
with respect to this plan totaled approximately $0.1 million, $0.2 million,
$0.3 million, $0.1 million, $0.2 million, $0.1 million and $0.1 million for
the years ended July 31, 1993, 1994 and 1995, for the six months ended January
31, 1995 and 1996 and for the three months ended April 30, 1995 and 1996,
respectively. All contributions are currently funded.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
different from the book value. The Company assumes the book value of those
financial instruments that are classified as current approximate fair value
because of the short maturity of these instruments. For noncurrent financial
instruments, the Company uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
Revenue Recognition
The Company recognizes revenues from the sales of refined products,
natural gas, condensate and natural gas liquids in the period of delivery.
Revenues are recognized from transportation of natural gas in the period the
service is provided. The sales method is used for natural gas imbalances that
arise from jointly produced properties.
Recently Issued Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted the requirements of SFAS No. 121 as of February 1, 1996.
TARC currently believes, based on estimates of refining margins and current
estimates for costs of the Capital Improvement Program, that future undiscounted
cash flows will be sufficient to recover the cost of the refinery over its
estimated useful life. Management believes there have been no events or changes
in circumstances that would require
F-34
<PAGE> 160
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
the recognition of an impairment loss. Gas and oil properties accounted for
under the full cost method will continue to be subject to a ceiling test
limitation.
Price Management Activities
TARC enters into futures contracts, options on futures, swap agreements
and forward sales agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory of feedstocks
and refined products or fixed price purchase commitments. For the three months
ended April 30, 1996, TARC indirectly entered into price management activities
through the third party processing agreement discussed below. Commitments
involving future settlement give rise to market risk, which represents the
potential loss that can be caused by a change in the market value of a
particular instrument and credit risk, which represents the potential risk if a
counterparty is unable to perform. Under the guidelines of Statement of
Financial Accounting Standards No. 80 ("SFAS 80"), gains and losses meeting the
hedge criteria in SFAS 80 will be deferred until realized. Those transactions
which do not meet the hedging criteria in SFAS 80 are recorded at market value
resulting in a gain or a loss in the period in which a change in market value
occurs.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk
consist principally of trade receivables, commodity price swap agreements and
forward contracts. Trade accounts receivable are generally from companies with
significant natural gas marketing and petroleum activities, who would be
impacted by conditions or occurrences affecting those industries. All futures
contracts were with major brokerage firms, and in the opinion of management,
exposed the Company to no undue credit risks. In addition, as of April 30,
1996, TARC had deposited cash totaling $1.1 million with two third parties to
ensure the availability of feedstocks. For additional information regarding the
Company's hedging arrangements, see Note 15.
Income Taxes
The Company, TARC and TransTexas file a consolidated tax return with
TransAmerican. Income taxes for each company are due from or payable to
TransAmerican in accordance with a tax allocation agreement (the "Tax
Allocation Agreement"). It is each company's policy to record income tax
expense as though it had filed separately. Deferred income taxes are
recognized, at enacted tax rates, to reflect the future effects of tax
carryforwards and temporary differences arising between the tax bases of assets
and liabilities and their financial reporting amounts in accordance with
Statement of Financial Accounting Standards No. 109 and the Tax Allocation
Agreement between the Company, TransAmerican and TransAmerican's other
subsidiaries. Income taxes include federal and state income taxes. The Company
could not file a consolidated return as it owns less than 80% of TransTexas
and, therefore, income taxes are presented on a combined basis.
2. ADDITIONAL FINANCING AND WORKING CAPITAL REQUIREMENTS
Giving effect to current estimates, TARC will have to obtain additional
funds totaling $374 million to $379 million to complete the Capital Improvement
Program of which approximately $41 million is anticipated to be funded by the
South Louisiana Port Commission ("Port Commission") tax exempt bonds. As of
April 30, 1996, TARC had commitments for refinery construction and maintenance
of $64 million. Additional funds necessary to complete the Capital Improvement
Program may be provided from (i) the sale of additional shares of TransTexas
common stock held by TARC, (ii) the sale of common stock of TARC, (iii) equity
investments in TARC (including the sale of preferred stock of TARC to the
Company, funded by the sale of TransTexas common stock held by the Company),
(iv) capital contributions by TransAmerican, or (v) other sources of financing,
the access to which could require the consent of the holders of the TARC Notes,
as defined in Note 3. TARC has entered into preliminary discussions with
potential third party investors, including strategic equity investors, financial
investors and foreign producers of crude oil. Sales of shares of TransTexas
common stock may result in deconsolidation of TransTexas from the consolidated
group for federal income tax purposes. See Note 11 for a discussion of
deconsolidation. There is no assurance that sufficient funds will be available
from these sources on a timely basis or upon terms acceptable to TARC or
F-35
<PAGE> 161
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
TransAmerican. If this financing is not available or if significant engineering
problems, work stoppages or cost overruns occur, TARC likely will not be able to
complete and test Phase I of the Capital Improvement Program by February 15,
1997. Even if required financing is obtained on a timely basis, completion by
February 15, 1997 will still prove very difficult if personnel shortages prevent
full staffing during peak construction periods. TARC has identified and is
considering certain steps to minimize the impact of potential construction
worker shortages, including the retention of field supervisors, direct hiring of
field supervisors and field labor by TARC's major contractors, use of adding a
second shift, and modularization of certain construction items. There can be no
assurance that these steps will prove successful; however, TARC believes that
implementation of these steps will adequately address staffing concerns. Under
the indenture governing the TARC Notes (the "TARC Indenture"), the failure of
TARC to complete and test Phase I by February 15, 1997 (subject to extension to
August 15, 1997 if certain financial coverage ratios are met) would constitute
an event of default at such date.
If an Event of Default occurs and is continuing, unless the principal
of all of the Notes shall have already become due and payable, either the
Indenture Trustee or the Holders of 25% in aggregate principal amount of Notes
then outstanding, by notice in writing to the Company (and to the Indenture
Trustee if given by Holders) (an "Acceleration Notice"), may declare all
principal of the Notes and accrued interest is to be due and payable
immediately.
Prior to the declaration of acceleration of the Notes, the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding may
waive on behalf of all the Holders any default, except a default in the payment
of principal of, premium, if any, or interest on any Note not yet cured, or a
default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
As of July 10, 1996, the Company had expended the $173 million placed in
the collateral account from the issuance of the TARC Notes as well as a majority
of the proceeds from the March 1996 sale of TransTexas common stock. In May
1996, in anticipation of the limited availability of collateral account funds,
the Company began scaling back expenditures on the Capital Improvement Program
to include only those critical path items necessary to complete and test
refinery units by the dates specified in the Indenture. In July 1996, TARC
executed a promissory note to TransAmerican for up to $25 million. Currently,
the Company has drawn $5 million against the note. The note bears interest at
15% per annum, with quarterly interest payments beginning in October 1996 and
with the principal due in July, 1998. In July and August 1996, TransAmerican
advanced $4.3 million to the Company. The Company anticipates repaying this
non-interest bearing advance within 30 days. These advances will be utilized by
the Company to fund the critical path items mentioned above, in anticipation of
financing from other sources. There can be no assurance that such advances will
provide sufficient iterim funds to keep the Capital Improvement Program on
schedule, even if additional financing is eventually obtained.
TARC has incurred losses and negative cash flows from operating activities
as a result of limited refinery operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to financing costs and low margins. Based on recent
refining margins and projected levels of operations, such negative cash flows
are likely to continue. In order to operate the refinery, TARC must raise
additional debt or equity capital in addition to the funds required to complete
the Capital Improvement Program. There is no assurance that the necessary
additional funding for the refinery expansion and working capital can be
obtained or that profitable operations will be ultimately achieved. As a result
there is substantial doubt about the Company's ability to continue as a going
concern. If TARC (i) does not complete the Capital Improvement Program timely,
(ii) incurs significant cost overruns, (iii) does not ultimately achieve
profitable operations, or (iv) ceases to continue operations, TARC's investment
in the refinery may not be recovered. The financial statements do
not include any adjustments as a result of such uncertainties. Additionally,
the Company has pledged its ownership interest in TransTexas as collateral on
TARC'S Discount Mortgage Notes and Mortgage Notes. In the event TARC does not
obtain the necessary additional funding the Company may not be able to recover
its investment in TARC and may lose its ownership interest in TransTexas.
Therefore, there is substantial doubt in the Company's ability to continue as a
going concern. The consolidated financial statements do not contain any
adjustments that might result from the outcome of this uncertainty.
Working Capital Requirements
Additionally, TEC has pledged its ownership interest in TransTexas as
collateral on the Company's Discount Mortgage Notes and Mortgage Notes. In the
event the Company does not obtain the necessary additional funding TEC may not
be able to recover its investment in the Company and may lose its ownership
interest in TransTexas. Therefore, there is substantial doubt in TEC's ability
to continue as a going concern. The TEC consolidated financial statements do not
contain any adjustments that might result from the outcome of this uncertainty.
A primary source of funds to meet TransTexas' debt service and capital
requirements is net cash flow provided by operating activities, which is
extremely sensitive to the prices TransTexas receives for its natural gas.
TransTexas has entered into hedge agreements to reduce its exposure to price
risk in the spot market for natural gas. However, a substantial portion of
TransTexas' production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development,
lease acquisitions, pipeline and other equipment additions. Since July 31, 1995,
TransTexas has utilized asset sales and various financings, in addition to cash
flow from operating activities, to meet its working capital requirements.
TransTexas anticipates that it will utilize additional financing or sales of
assets to fund planned levels of operations through January 1997. No assurance,
however, can be given that TransTexas' cash flow from operating activities will
be sufficient to meet planned capital expenditures, contingent liabilities, and
debt service in the future.
F-36
<PAGE> 162
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
3. PUBLIC OFFERINGS
TARC
On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of Guaranteed First Mortgage Discount Notes
due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase
Warrants ("Warrants"), and 100,000 B Units consisting of $100 million aggregate
principal amount of Guaranteed First Mortgage Notes due 2002 ("Mortgage Notes"
and, together with the Discount Mortgage Notes, the "TARC Notes") and 1,683,540
Warrants. The TARC Notes are senior obligations of TARC, collateralized by a
first priority lien on substantially all of TARC's property and assets, pledges
of 50.45 million shares of common stock of TransTexas, and all of TARC's
outstanding common stock. The Warrants entitle holders to purchase in the
aggregate 7,495,313 shares of TARC's common stock, representing 19.99% of
TARC's common stock assuming the exercise of all of the Warrants, at an
exercise price of $0.01 per share. The Warrants are immediately exercisable and
expire on February 15, 2002. TARC allocated $23.3 million of the proceeds from
the issuance of the TARC Notes to the Warrants based on their estimated fair
value.
TARC received approximately $301 million from the offering. Net proceeds
by TARC approximated $92 million after deducting approximately $16 million for
underwriting discounts, commissions, fees and expenses, approximately $20
million for the repayment of the balance of a loan from TransAmerican
("TransAmerican Loan"), and $173 million which was deposited into a collateral
account ("Collateral Account") to fund the expansion and upgrading of TARC's
refinery.
Pursuant to a Disbursement Agreement, funds in the Collateral Account are
held and invested by the Disbursement Agent until needed from time to time to
fund the Capital Improvement Program. The Disbursement Agent disburses funds
from the Collateral Account in accordance with a budget prepared by TARC and
approved by the Construction Supervisor. The Construction Supervisor is
required to review each request by TARC for a disbursement from the Collateral
Account to pay for the Capital Improvement Program. All funds in the Collateral
Account are pledged as security for the repayment of the TARC Notes and are
classified as "long-term debt proceeds held in collateral account" in the
consolidated financial statements.
TRANSTEXAS
On June 20, 1995, TransTexas issued $800 million aggregate principal
amount of 11 1/2% Senior Secured Notes due 2002 (the "TransTexas Notes"). The
TransTexas Notes are senior obligations of TransTexas collateralized by a lien
on substantially all existing and future collateral of TransTexas, which
initially includes substantially all of the properties and assets of TransTexas
other than Equipment, Receivables and Inventory, as defined in the indenture
governing the TransTexas Notes (the "TransTexas Indenture"). The TransTexas
Notes bear interest at the rate of 11 1/2% per annum, payable semiannually on
June 15 and December 15, commencing December 15, 1995. The TransTexas Notes
will mature on June 15, 2002.
In connection with the offering of the TransTexas Notes, TransTexas
commenced a tender offer to purchase for cash all of its $500 million principal
amount of 10 1/2% Senior Secured Notes due 2000 (the "Prior Notes") for 105% of
their principal amount plus accrued and unpaid interest to the date of
purchase. In addition, holders of the Prior Notes were offered a consent fee
equal to $30 per $1,000 principal amount of Prior Notes in return for their
consents to amendments to the indenture governing the Prior Notes.
Substantially all of the Prior Notes were tendered pursuant to this offer.
F-37
<PAGE> 163
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
TransTexas received net proceeds of approximately $787 million from the
sale of the TransTexas Notes after deducting underwriting discounts, fees and
expenses. TransTexas used approximately $556 million of the net proceeds to
retire or defease the entire principal amount of the Prior Notes, including
premium and consent fees and accrued and unpaid interest, and approximately $46
million to establish an interest reserve account (see Note 8). The remainder
was used for lease acquisitions, drilling and development and general and
corporate purposes. TransTexas recorded an extraordinary loss on the
extinguishment of the Prior Notes of approximately $56.6 million. The
components of this charge are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Premium and consent fee $ 40,000
Write-off of unamortized deferred financing costs 15,628
Underwriting fees and expenses 2,500
Related income tax benefit (1,491)
------------
Extraordinary item $ 56,637
============
</TABLE>
THE COMPANY
In February 1995, the Company's Board of Directors established one series
of preferred stock, designated "Series A Preferred Stock", consisting of an
aggregate of 1,000 shares (the "Preferred Stock"). In connection with the
offering of TARC Notes, the Company sold 1,000 shares of Preferred Stock
realizing net proceeds of $95,600. Holders of shares of the Company's Preferred
Stock who are not affiliates of the Company are entitled to one vote per share
on any matter submitted to a vote of stockholders of the Company. Holders of
Preferred Stock are entitled to receive a cumulative cash dividend each year of
$19 per share payable on February 15 of each year beginning February 15, 1996.
In addition, holders of Preferred Stock have the right to nominate and elect
one director of the Company. Upon liquidation, dissolution, or winding-up of
the affairs of the Company, the holders of Preferred Stock are entitled to
receive in cash from the Company's net assets, $100 per share plus all accrued
but unpaid dividends and interest accrued thereon, before any distribution or
payment is made to holders of the Company's common stock or any other shares of
capital stock of the Company ranking junior to the Preferred Stock. The
Preferred Stock must be redeemed on December 31, 2002 at a redemption price
equal to $100 per share plus all accrued but unpaid dividends and interest
accrued thereon. The Preferred Stock does not have any conversion rights, and
holders of shares of Preferred Stock have no preemptive rights to maintain
their respective percentage ownership in future offerings or sales of the
Company's stock.
4. INVENTORIES AND OTHER CURRENT ASSETS
The major components of inventories are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
------------------ JANUARY 31, APRIL 30,
1994 1995 1996 1996
------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Refinery feedstocks and blendstocks $ 2,128 $ 21,571 $ 628 $ 13
Intermediate and refined products 2,370 18,403 1,294 19
Purchase Commitments - refinery
feedstocks and blendstocks 10,600 -- 3,767 21,639
Purchase Commitments - intermediate
and refined products -- -- 31,542 4,545
Tubular goods and other 9,945 8,236 11,421 11,782
-------- -------- --------- ---------
$25,043 $ 48,210 $ 48,652 $ 37,998
======== ======== ========= =========
</TABLE>
F-38
<PAGE> 164
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Prepayments:
Trade $ 3,138 $ 5,776 $ 2,394 $ 3,770
Drilling 228 1,907 2,070 1,464
Insurance 685 3,349 2,457 3,375
Product charges -- 5,415 4,452 1,092
Properties held for sale -- -- 6,000 6,000
Restricted cash -- -- 7,368 7,368
Settlement values of commodity price
swap agreements -- 3,900 31,317 33,910
Other -- 50 242 257
-------- --------- --------- ---------
$ 4,051 $ 20,397 $ 56,300 $ 57,236
======== ========= ========= =========
</TABLE>
5. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
ESTIMATED JULY 31,
USEFUL LIFE ------------------------- JANUARY 31, APRIL 30,
(YEARS) 1994 1995 1996 1996
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Land $ 9,558 $ 9,763 $ 10,022 $ 10,704
Gas and oil properties 1,362,072 1,621,261 1,775,597 1,851,541
Gas transportation 10 137,448 147,553 160,819 169,535
Refinery 10 144,758 261,412 411,650 456,273
Equipment and other 4-10 61,163 72,272 80,838 90,184
---------- ---------- ---------- ----------
$1,714,999 $2,112,261 $2,438,926 $2,578,237
========== ========== ========== ==========
</TABLE>
In March 1996, TransTexas sold its 41.67% interest in the 76-mile, 24-inch
MidCon pipeline that runs from TransTexas' Thompsonville compressor station to
Agua Dulce for $7.5 million. TransTexas believes that its existing
transportation capacity in this area is adequate for TransTexas' production and
does not anticipate any material constraints on the transportation of its
natural gas as a result of this sale.
Approximately $33 million of refinery assets were being depreciated at
July 31, 1994. Approximately $45 million of refinery assets were being
depreciated at July 31, 1995, January 31, 1996 and April 30, 1996, respectively.
The remaining refinery and other assets are considered construction in progress.
Approximately $90.4 million of property, plant and equipment represents assets
transferred by TransAmerican at net realizable value and $387.9 million
represents additions recorded at historical cost. Depreciation charges for
refinery assets for the years ended July 31, 1994 and 1995, for the six months
ended January 31, 1996 and for the three months ended April 30, 1995 and 1996
were $2.7 million, $5.9 million, $2.9 million, $1.6 million and $1.7 million,
respectively.
TransTexas has engaged an investment banking firm to assist in the
potential sale or sale/leaseback of all or a portion of the Pipeline System,
without disrupting the pipeline capacity available to TransTexas. TransTexas
has also engaged an investment banking firm to assist in the sale of its
interest in the Lodgepole area and three separate packages of producing
properties in the Lobo Trend containing a total of approximately 200 Bcfe of
natural gas reserves.
In July 1996, TransTexas consummated the sale, effective as of May 1, 1996,
of one of these property packages in Zapata County, Texas for consideration of
approximately $62 million. TransTexas has entered in to a purchase and sale
agreement pursuant to which it intends to sell, effective as of February 1,
1996, a second set of properties in Webb County, Texas for consideration of
approximately $23 million. TransTexas anticipates consummating such sale in
August 1996 if certain closing conditions, including the receipt of a favorable
appraisal, are met. In May 1996, TransTexas consummated the sale, effective as
of February 1, 1996, of certain other producing properties in Webb County, Texas
for consideration of approximately $9.95 million. The purchase price for each of
the properties discussed above was or is subject to adjustment for gas sales
between the effective date and the closing date. TransTexas retained or will
retain the proceeds of all such gas sales.
F-39
<PAGE> 165
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
6. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Debt issue costs, net of accumulated amortization
of $2,818, $1,753, $4,607 and $6,119 at July 31,
1994 and 1995, January 31, 1996 and April 30,
1996, respectively $ 19,886 $ 36,597 $ 34,631 $ 34,096
Litigation escrow 29,133 30,842 22,972 23,236
Contractual rights and licenses, net
of accumulated amortization of $1,161, $555,
$1,464 and $1,616 at July 31, 1994 and 1995,
January 31, 1996 and April 30, 1996, respectively 3,924 6,818 6,516 6,363
Other 1,036 727 660 1,841
--------- --------- --------- ---------
$ 53,979 $ 74,984 $ 64,779 $ 65,536
========= ========= ========= =========
</TABLE>
7. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Royalties $ 8,642 $ 6,351 $ 9,793 $ 13,105
Taxes other than income taxes 8,440 8,025 3,054 8,184
Accrued interest 21,875 17,975 19,365 38,240
Payroll 6,223 4,551 6,153 6,370
Litigation settlements 4,049 13,492 9,553 5,833
Settlement values of commodity price swap agreements -- 3,900 31,317 36,638
Insurance -- 2,313 1,628 3,618
Processing imbalance 9,202 -- -- --
Deferred revenue -- -- 4,000 10,367
Maintenance turnarounds -- 764 1,145 1,336
Other 2,894 5,698 3,308 2,625
--------- --------- --------- ---------
$ 61,325 $ 63,069 $ 89,316 $ 126,316
========= ========= ========= =========
</TABLE>
F-40
<PAGE> 166
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
8. LONG-TERM DEBT
The major components of long-term debt are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
---------------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
11 1/2% Senior Secured Notes due 2002--TransTexas $ -- $ 800,000 $ 800,000 $ 800,000
10 1/2% Senior Secured Notes due 2000--TransTexas 500,000 -- - - --
Guaranteed First Mortgage Discount Notes due 2002-TARC -- 199,917 221,155 232,664
Guaranteed First Mortgage Notes due 2002-TARC -- 95,046 95,383 95,561
Notes payable, ranging from 9.5% to
13.25%, due through 1999 -- -- 3,876 13,153
------------ ------------ ----------- -----------
Total long-term debt 500,000 1,094,963 1,120,414 1,141,378
Less current maturities -- -- 1,335 4,311
------------ ------------ ----------- -----------
$ 500,000 $ 1,094,963 $ 1,119,079 $ 1,137,067
============ ============ =========== ===========
</TABLE>
The TransTexas Notes are senior obligations of TransTexas collateralized
by a lien on substantially all existing and future collateral of TransTexas,
which initially includes substantially all of the properties and assets of
TransTexas other than Equipment, Receivables and Inventory, as defined in the
TransTexas Indenture. Capitalized terms in the following discussion concerning
the TransTexas Notes have the meaning as defined in the TransTexas Indenture.
The TransTexas Notes bear interest at the rate of 11 1/2% per annum, payable
semiannually on June 15 and December 15, commencing December 15, 1995. The
TransTexas Notes will mature on June 15, 2002.
TransTexas will not have the right to redeem the TransTexas Notes prior to
June 15, 2000, except that (i) prior to June 15, 1998, TransTexas may redeem,
at its option, up to $240 million aggregate principal amount of the TransTexas
Notes in cash at a redemption price equal to 111.5% of the principal amount of
the TransTexas Notes so redeemed, together with accrued and unpaid interest, if
any, to the redemption date, with the net proceeds of any Public Equity
Offering and (ii) if TransTexas makes a Major Asset Sale, TransTexas may
redeem, at its option, at any time after consummation of such Major Asset Sale,
but in any event within 90 days of the expiration of any Offer to Purchase or
any Change of Control Offer, as applicable, made as a result of such Major
Asset Sale, any or all of the outstanding TransTexas Notes in cash at a
redemption price equal to 111.5% of the principal amount of the TransTexas
Notes so redeemed, together with accrued and unpaid interest, if any, to the
redemption date. On or after June 15, 2000 and 2001, TransTexas will have the
right to redeem all or any part of the TransTexas Notes in cash at the
redemption prices of 105.750% and 102.875%, respectively, together with accrued
and unpaid interest, if any, to the redemption date.
Pursuant to the TransTexas Indenture, TransTexas will maintain an account
(the "Interest Reserve Account") from which funds may only be disbursed in
accordance with the terms of a Cash Collateral and Disbursement Agreement (the
"Disbursement Agreement"). TransTexas deposited into the Interest Reserve
Account, out of the net proceeds from the sale of the TransTexas Notes, funds
sufficient to pay the aggregate amount of the next ensuing interest payment
due in respect of the TransTexas Notes. Funds in the Interest Reserve
Account may be invested, at the direction of TransTexas (except as provided
below), only in cash and Cash Equivalents, and any interest income thereon will
be added to the balance of the Interest Reserve Account. TransTexas must
maintain a balance (the "Requisite Balance") in the Interest Reserve Account at
least equal to the amount necessary to satisfy TransTexas' obligation to pay
interest in respect of all then outstanding TransTexas Notes on the next
Interest Payment Date; provided, however, that if, pursuant to the Disbursement
Agreement, any funds in the Interest Reserve Account are applied to the payment
of interest on the Notes, TransTexas shall not be obligated to maintain the
Requisite Balance
F-41
<PAGE> 167
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
during the period of 60 days immediately following the Interest Payment Date in
respect of which such payment was made.
TransTexas may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date,
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement will provide that if TransTexas fails to pay an installment of
interest on the TransTexas Notes on any Interest Payment Date, then all
investments in the Interest Reserve Account will be immediately liquidated and
all funds in the Interest Reserve Account will be deposited with the Indenture
Trustee. If TransTexas has not paid such installment of interest within five
days after such Interest Payment Date, or if TransTexas so instructs the
Indenture Trustee, the Indenture Trustee will apply such deposited funds to the
payment of interest on TransTexas Notes. The Disbursement Agreement will
provide that funds may be disbursed from the Interest Reserve Account and
released to TransTexas only to the extent that the balance thereof exceeds the
Requisite Balance.
If TransTexas' Working Capital, as defined in the TransTexas Indenture, is
less than $20 million at the end of any fiscal quarter, TransTexas' Capital
Expenditures, as defined, for the next succeeding fiscal quarter may not exceed
90% of TransTexas' Consolidated EBITDA, as defined, for such prior fiscal
quarter minus TransTexas' Consolidated Fixed Charges, as defined, for such prior
fiscal quarter (the "Capital Expenditure Limit"). TransTexas' Working Capital at
April 30, 1996 was less than $20 million. As a result, TransTexas' Capital
Expenditures for the quarter ending July 31, 1996 may not exceed the Capital
Expenditure Limit. TransTexas anticipates that such restriction will not have a
material effect on development drilling for the current fiscal quarter. In
addition, the TransTexas Indenture permits TransTexas to fund the drilling of up
to 30 wells in any fiscal year pursuant to third-party drilling programs. Any
costs associated with these wells would not be included in Capital Expenditures.
The TransTexas Indenture also contains other covenants affecting TransTexas'
liquidity and capital resources, including restrictions on TransTexas' ability
to incur indebtedness, pledge assets, and pay dividends on its common stock.
Working Capital does not include current assets or current liabilities of TTEX,
an Unrestricted Subsidiary.
The Discount Mortgage Notes and the Mortgage Notes initially bear interest
at rates of 18 1/2% and 16 1/2%, respectively. Interest is payable
semi-annually with the first interest payment on the Discount Mortgage Notes
due August 15, 1998, and the first interest payment on the Mortgage Notes due
August 15, 1995. TARC is required to redeem $110 million of the principal
amount of the TARC Notes on each of February 15, 2000 and 2001. The TARC Notes
mature on February 15, 2002. Upon the occurrence of a change of control, TARC
is required to offer to purchase all outstanding TARC Notes at a price equal to
101% of the principal amount thereof plus accrued and unpaid interest. In
addition, TARC is required, subject to certain conditions, to make an offer to
purchase the TARC Notes with the net proceeds of certain asset sales or
dispositions of assets, with a percentage of excess cash (as defined), or if,
at the end of each of any two consecutive quarters, commencing with the quarter
ending January 31, 1998, TARC's Net Worth is less than $75 million and TARC's
Consolidated Fixed Charge Coverage Ratio as of the end of each of such quarters
is less than 1.25 to 1. The TARC Indenture contains certain covenants which
limit TARC's ability to incur additional indebtedness, transfer or sell assets,
pay dividends or make certain other restricted payments, enter into certain
transactions with affiliates, or consummate a merger, consolidation or sale of
all or substantially all of its assets.
TransTexas' notes payable bear interest at rates ranging from 9.5% to
13.25% per annum and mature at various dates through January 1999. These notes
payable are collateralized by certain of TransTexas' operating equipment.
Aggregate principal payments on TransTexas' notes payable at January 31, 1996
total $1.3 million for each of the fiscal years ended January 31, 1997, 1998
and 1999.
In February 1996, TransTexas completed an additional financing in the
amount of $10 million at an interest rate of 12 1/2% per annum and a 36-month
term, collateralized by certain operating equipment. Aggregate principal
payments for this additional financing total approximately $2.7 million, $3.3
million, $3.7 million and $0.3 million for fiscal years ended January 31, 1997,
1998, 1999 and 2000, respectively.
F-42
<PAGE> 168
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The fair value of the TransTexas Notes, based on quoted market prices, was
approximately $826 million, $818 million and $798 million as of July 31, 1995,
January 31, 1996 and April 30, 1996, respectively. The fair value of the TARC
Notes, based on quoted market prices, was approximately $332 million, $295
million and $316 million as of July 31, 1995, January 31, 1996 and April 30,
1996, respectively.
9. CREDIT AGREEMENTS
TransTexas and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement, as of October
31, 1995, for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of TransTexas and is
guaranteed by John R. Stanley. The amounts which may be advanced to TransTexas
under this line of credit are based on a percentage of TransTexas' natural gas
receivables from unaffiliated third parties. The amount outstanding under the
line of credit as of April 30, 1996 was $20.7 million. Based upon
foreseeable accounts receivable levels, TransTexas estimates the maximum amount
available at any one time under this facility for fiscal 1997 will be
approximately $26 million.
Under the terms of this agreement, TransTexas' net loss (including any
extraordinary losses) may not exceed $5 million for each fiscal quarter ending
after January 31, 1996 ($10 million for each six-month period). TransTexas
obtained a waiver for the three months ended January 31, 1996. This line of
credit is also subject to certain other covenants which relate to, among other
things, the maintenance of certain financial ratios.
In May 1996, TransTexas entered into a Note Purchase Agreement pursuant to which
TransTexas issued notes in the aggregate principal amount of $15.75 million, for
aggregate proceeds of $15 million. The notes, which bore interest at 13 1/3%
per annum, were paid in full in July 1996. The notes were guaranteed on a
senior secured basis by TransAmerican.
10. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
---------------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Litigation accrual $ 31,870 $ 20,071 $ 12,171 $ 11,380
Short-term obligations expected
to be refinanced:
Litigation settlement -- -- 14,747 14,747
Accrued capital expenditures -- -- 5,443 5,443
Current portion of dollar-denominated production payment -- -- 1,765 3,090
Other 352 1,604 2,232 2,031
---------- ---------- ---------- ----------
$ 32,222 $ 21,675 $ 36,358 $ 36,691
========== ========== ========== ==========
</TABLE>
In February 1996, TransTexas completed a financing in the amount of
$10 million at an interest rate of 12 1/2% per annum and a 36-month term,
collateralized by certain operating equipment. In February 1996, TransTexas
also amended a purchase agreement with an unaffiliated third party related to a
volumetric production payment to include an additional 14 Bcf which were sold
to the third party for a purchase price of approximately $16 million. Proceeds
from these transactions net of current maturities will be used to pay all of the
obligations listed above under the caption "Short-term obligations expected to
be refinanced."
F-43
<PAGE> 169
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
11. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------- --------------------- -------------------
1993 1994 1995 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal:
Current $ 30,403 $ 10,909 $ (7,611) $ 1,352 $ -- $ 1,021 $ --
Deferred (15,957) (5,961) 5,196 (1,483) (416) 898 1,626
State:
Current 2,300 432 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income tax expense (benefit) before
extraordinary item 16,746 5,380 (2,415) (131) (416) 1,919 1,626
Tax benefit of extraordinary item -- -- (1,491) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total income tax expense (benefit) $ 16,746 $ 5,380 $ (3,906) $ (131) $ (416) $ 1,919 $ 1,626
======== ======== ======== ======== ======== ======== ========
</TABLE>
In August 1993, the Omnibus Reconciliation Act of 1993, among other
things, increased the maximum corporate marginal federal income tax rate to 35%
from 34% effective January 1, 1993. Deferred income taxes as of July 31, 1994
include an adjustment of approximately $2.7 million related to this increase in
corporate tax rates. TransTexas was unable to utilize any tight sands credits
during the Transition Period or in 1995 due to its net loss position.
During the third quarter of 1994, TARC reached a level of operations,
which, for federal income tax purposes, changed the tax status of
TransAmerican's consolidated group to an integrated oil company from an
independent producer. As a result of this change in tax status, TransTexas was
able to utilize a greater portion of its available tight sands credits, thereby
reducing its effective tax rate. Total income tax expense differs from amounts
computed by applying the statutory federal income tax rate to income before
income taxes. The items accounting for this difference are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
-------------------------------- --------------------- --------------------
1993 1994 1995 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal income tax expense (benefit)
at the statutory rate $ 31,428 $ 4,124 $(43,011) $ (8,234) $ (9,518) $ (4,674) $ 17,550
Increase (decrease) in tax resulting from:
Net operating losses (utilized) not
utilizable 6,691 6,073 31,263 8,103 9,102 4,000 (15,924)
Tax rate change -- 2,745 -- -- -- -- --
State income taxes, net of federal
income tax benefit 1,506 281 -- -- -- -- --
Tight sands credit (22,879) (7,843) 7,842 -- -- -- --
Accrual adjustment -- -- -- -- -- 2,593 --
-------- -------- -------- -------- -------- -------- --------
$ 16,746 $ 5,380 $ (3,906) $ (131) $ (416) $ 1,919 $ 1,626
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-44
<PAGE> 170
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Income tax expense for the three months ended April 30, 1995 includes an
adjustment of $2.6 million to reconcile TransTexas' fiscal 1994 tax accrual to
the tax return.
Significant components of the Company's tax attributes are as follows (in
thousand of dollars):
<TABLE>
<CAPTION>
July 31,
------------------------ JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Receivable from TransAmerican in lieu of federal net
operating loss carryforwards $ 35,026 $ 70,020 $ 86,716 $ 74,788
Safe harbor leases 89,261 86,724 85,283 84,509
Contingent liabilities 10,166 4,400 3,700 3,700
Alternative minimum tax credit carryforward 40,031 31,044 31,044 31,044
Capital loss carryforward 1,095 -- -- --
Other -- 8,013 10,483 12,330
--------- --------- --------- ---------
175,579 200,201 217,226 206,371
Valuation allowance (123,799) (158,401) (167,141) (150,375)
--------- --------- --------- ---------
Net deferred tax assets 51,780 41,800 50,085 55,996
--------- --------- --------- ---------
Deferred tax liabilities:
Depreciation, depletion and amortization 84,268 78,389 90,341 97,878
Other, net 2,988 4,083 -- --
--------- --------- --------- ---------
87,256 82,472 90,341 97,878
--------- --------- --------- ---------
Net deferred tax liabilities $ 35,476 $ 40,672 $ 40,256 $ 41,882
========= ========= ========= =========
</TABLE>
On a separate return basis, TARC and TransTexas have a total of
approximately $213.7 million of regular tax net operating loss ("NOL")
carryforwards at April 30, 1996 which would expire from 2004 through 2012.
Under the tax allocation agreement with TransAmerican and TransAmerican's other
subsidiaries, as long as TARC and TransTexas remain in the consolidated group
for tax purposes, TARC and TransTexas will receive benefits in the future for
loss carryforwards in the form of reduced current tax payable (i) to the extent
their loss carryforwards are available for and utilized by TransAmerican and
(ii) TransAmerican has the ability to pay tax then due. The Company can only
use alternative minimum tax credit carryforwards to the extent it is a regular
federal income tax payer. At April 30, 1996, TARC and TransTexas had NOL
carryforwards of approximately $145.4 million which have not been used by
TransAmerican and would expire in 2012.
Under certain circumstances, TransAmerican, TransDakota Oil Corporation
("TDOC"), a subsidiary of TransAmerican, TARC or the Company may sell or
otherwise dispose of shares of common stock of TransTexas. If, as a result of
any sale or other disposition of TransTexas' common stock, the direct and
indirect ownership of TransTexas by TransAmerican is less than 80% (measured by
voting power and value), TransTexas will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the "TransAmerican
Consolidated Group") and, with certain exceptions, will no longer be obligated
under the terms and conditions of the Tax Allocation Agreement (as defined
below) ("Deconsolidation"). Further, if the Company or TARC sells or otherwise
transfers any stock of TARC, or issues any options, warrants or other similar
rights relating to such stock, outside of the TransAmerican Consolidated Group,
then a Deconsolidation of both TARC and TransTexas from the TransAmerican
Consolidated Group would occur. For the taxable year during which
Deconsolidation of TransTexas occurs, which would also be the final year that
TransTexas is a member of the TransAmerican Consolidated Group, TransAmerican
would recognize a previously deferred gain of approximately $266.3 million
associated with the Transfer and would be required to pay federal income tax on
this gain (the tax is estimated to be between $29 million and $56 million if
Deconsolidation occurs in fiscal 1997 and between $24 million and $45 million
if Deconsolidation occurs in fiscal 1998). This analysis is based on
TransTexas' position that the gain from the
F-45
<PAGE> 171
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Transfer, which occurred in 1993, was deferred under the consolidated return
regulations. The deferred gain generally is being included in TransAmerican's
taxable income in a manner that corresponds (as to timing and amount) with the
realization by the Company of (and, thus, will be offset by) the tax benefits
(i.e., additional depreciation, depletion and amortization on, or reduced gain
or increased loss from a sale of, the transferred assets) arising from the
additional basis. If, under the terms of the TARC Notes, it was reasonably
certain when the TARC Notes were issued that a sufficient amount of TransTexas'
stock would be disposed in the future to cause a Deconsolidation of TransTexas
from the TransAmerican Consolidated Group, it is possible that the
Deconsolidation of TransTexas would be treated as occurring as of the date the
TARC Notes were issued. However, TARC has advised the Company that it believes
that when the TARC Notes were issued it was not reasonably certain that a
Deconsolidation of TransTexas would occur in the future. Under the Tax
Allocation Agreement, TransTexas is required to pay TransAmerican each year an
amount equal to the lesser of (i) the reduction in taxes paid by TransTexas for
such year as a result of any increase in the tax basis of assets acquired by
TransTexas from TransAmerican that is attributable to the Transfer and (ii) the
increase in taxes paid by TransAmerican for such year and all prior years
attributable to gain recognized by TransAmerican in connection with the
contribution of assets by TransAmerican to TransTexas (less certain amounts
paid by TransTexas for all prior years). TransTexas estimates that if
Deconsolidation occurs in fiscal 1997 or 1998, the amount reimbursed to
TransAmerican by TransTexas would be between $9 million and $16 million and
between $7 million and $13 million, respectively. The remaining amount of the
tax relating to the gain would be paid to TransAmerican over the lives of the
assets transferred. In addition, TransTexas could be liable for additional taxes
pursuant to the Tax Allocation Agreement and the several liability provisions of
federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TransAmerican Consolidated Group,
then TransTexas is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent TransTexas has taxable
income, remains a member of the TransAmerican Consolidated Group, and the other
group members have the ability to pay such taxes. If TARC, TDOC, TransAmerican
or the Company transfers shares of TransTexas (or transfers options or other
rights to acquire such shares) and, as a result of such transfer,
Deconsolidation of TransTexas occurs, TransTexas would not receive any benefit
pursuant to the Tax Allocation Agreement for net operating losses of TransTexas
used by other members of the TransAmerican Consolidated Group prior to the
Deconsolidation of TransTexas.
Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the Internal Revenue Service (the "IRS") for
the consolidated federal income tax liability of the consolidated group. There
can be no assurance that TransAmerican will have the ability to satisfy the
above tax obligation at the time due and, therefore, TransTexas, TARC or the
Company may be required to pay the tax.
Under the Tax Allocation Agreement, TransTexas will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
A change of control or other event that results in deconsolidation of
TransTexas from TransAmerican's Consolidated Group for federal income tax
purposes could result in the acceleration of payment of a substantial amount of
federal income taxes. The Company and TARC, both subsidiaries of TransAmerican,
currently own approximately 54% and 14%, respectively, of the outstanding
common stock of TransTexas. These shares are pledged as collateral for the TARC
Notes. A decision by either the Company or TARC to sell shares of TransTexas
could result in deconsolidation. Had deconsolidation occurred at April 30,
1996, TransTexas would owe between $30 million and $50 million to TransAmerican
pursuant to the tax allocation agreement with TransAmerican.
F-46
<PAGE> 172
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
------------------------------------ ----------------------------- -------------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ------------ ------------ ---------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Seller financed obligations
incurred for capital
expenditures $ 364 $ -- $ -- $ -- $ 1,095 $ -- $ --
========== ========== ========== ============ ============ ========== ============
Capitalized lease
obligations incurred for
property and equipment $ 2,551 $ 1,336 $ 967 $ 66 $ 1,643 $ -- $ --
========== ========== ========== ============ ============ ========== ============
Accounts payable and long-
term liabilities for
property and equipment $ -- $ 10,429 $ 11,784 $ 8,293 $ 36,080 $ (6,406) $ 2,479
========== ========== ========== ============ ============ ========== ============
Forgiveness of advances
from TransAmerican
(including $25.0 million
for property, plant and
equipment transferred from
TransAmerican at net book
value in 1994) $ -- $ 100,000 $ 71,170 $ -- $ -- $ -- $ --
========== ========== ========== ============ ============ ========== ============
Interest accretion on TARC
Notes capitalized in
property and equipment $ -- $ -- $ 9,840 $ -- $ 19,466 $ -- $ 11,687
========== ========== ========== ============ ============ ========== ============
Product financing
arrangements $ -- $ 10,600 $ 27,671 $ -- $ 37,206 $ -- $ (11,022)
========== ========== ========== ============ ============ ========== ============
</TABLE>
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
------------------------------------ ----------------------------- -------------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ------------ ------------ ---------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest $ 2,982 $ 26,978 $ 77,145 $ 29,971 $ 49,771 $ 27,717 $ 10,916
========== ========== ========== ============ =========== ========== ==========
Income taxes (paid to
TransAmerican) $ 9,046 $ 1,858 $ -- $ -- $ -- $ -- $ --
========== ========== ========== ============ =========== ========== ==========
</TABLE>
TransTexas capitalized a total of approximately $0.9 million, $7.4
million and $3.7 million of interest during the year ended July 31, 1995, the
six months ended January 31, 1996 and the three months ended April 30, 1996
respectively, in connection with the acquisition of certain of TransTexas'
unevaluated gas and oil properties. Total interest charges incurred by
TransTexas, including capitalized interest, were $69.4 million, $50.8 million
and $26.0 million for the respective periods. TARC capitalized interest of $18.8
million for the year ended July 31, 1995, $26.2 million for the six months ended
January 31, 1996, and $6.6 million and $16.6 million for the three months ended
April 30, 1995 and 1996, respectively, in connection with the Capital
Improvement Program. Total interest charges incurred by TARC were $31.4 million,
$32.2 million, $11.2 million and $17.7 million for the respective periods.
During 1994, TransTexas capitalized a total of approximately $0.7 million of
interest in connection with the expansion of TransTexas' pipeline system.
13. TRANSACTIONS WITH AFFILIATES
Pursuant to the terms of the Transfer Agreement, as defined in Note 15,
TransAmerican has indemnified TransTexas for substantially all of TransTexas'
liability in connection with the settlement of the Terry/Penrod litigation. In
order to facilitate the settlement, TransTexas will advance to TransAmerican
$16.4 million of the settlement in exchange for a note receivable. It is
anticipated that the note will be due in installments and partially
F-47
<PAGE> 173
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
collateralized by certain of TransAmerican's gas and oil properties. As a
result of the indemnity and the lis pendens that were in effect as of January
31, 1996, TransTexas recorded a liability for litigation settlement of $16.4
million and a related claim receivable at January 31, 1996. See Note 16.
During 1995, TransAmerican acquired an office building which it renovated
and subsequently sold to TransTexas in February 1996. TransAmerican advanced $4
million of the proceeds from this sale to TARC for working capital, a portion
of which has been repaid. TARC leases office space from TransTexas on terms
and conditions permitted by the TARC Indenture.
In September 1995, TARC received an advance of $1 million from TransTexas
which TARC used to purchase feedstock. This advance was repaid by TARC with
interest. In December 1995, TARC advanced $1 million to TransTexas. This advance
was repaid to TARC with interest. In July 1996, TARC executed a promissory note
to TransAmerican for up to $25 million. Currently, the Company has drawn $5
million against the note. The note bears interest at 15% per annum, with
quarterly interest payments beginning in October 1996 and with the principal due
in July, 1998. In July and August 1996, TransAmerican advanced $4.3 million
to the Company. The Company anticipates repaying a portion of this
non-interest bearing advance within 30 days.
TransAmerican and its affiliates have provided TARC with substantially all
of its corporate services requirements, including insurance, legal, accounting
and treasury functions pursuant to the Services Agreement. During the year ended
July 31, 1994 and 1995, the six months ended January 31, 1996 and the three
months ended April 30, 1995 and 1996, TransAmerican and TransTexas charged
TARC approximately $0.1 million, $0.2 million, $0.2 million, $0.1 million and
$0.1 million, respectively, to cover its costs of providing these services,
which management believes to be reasonable based on the limited services
provided. TARC expects its general administrative expenses to increase
significantly when the refinery commences more complex operations. In
addition, third party charges incurred by TransAmerican and its affiliates
have been charged directly or allocated to TARC on usage or other methods that
management believes are reasonable. All significant transactions with
affiliates to the extent unpaid are recorded in the "Payable to Affiliates"
account.
In April 1994, TransTexas purchased a production payment from Southern
States Exploration, Inc. ("Southern States"), a TransAmerican subsidiary, for
$5 million. The production payment accrued interest at the rate of 10% per
annum and was repaid by TransAmerican in March 1995.
In July 1995, TransTexas acquired certain oil leases in the Lodgepole
Prospect in North Dakota from TransAmerican for approximately $6.3 million,
which represented TransAmerican's cost for such leases. TransTexas continued to
acquire additional leases in the area. In October 1995, TransTexas sold an
undivided portion of these leases to TDOC, for approximately $16.0 million. The
$16.0 million sales price represents TransTexas' cost for this portion of these
leases. TransTexas and TDOC have entered into an operating agreement under
which TransTexas is the operator. The remaining portion of these leases, with a
cost of approximately $15 million, are held for sale to third parties, and a
portion, with a cost of $6 million, is subject to a contract with a third party
and is classified as a current asset because of the contract's effective date.
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $14.8
million, $11.1 million, $2.6 million and $10.4 million respectively, for the
year ended July 31, 1995, the six months ended January 31, 1996 and the three
months ended April 30, 1995 and 1996. The receivable from TransAmerican for
natural gas sales totaled approximately $10.5 million at April 30, 1996.
Certain refinery assets, which were held by TransAmerican and not included
in the 1987 asset transfer, were transferred to TARC during fiscal 1994 at
TransAmerican's net book value of approximately $25 million.
As part of the formation and asset transfer from TransAmerican to
TransTexas, TransTexas agreed to assume a portion of the liability for the
Frito-Lay and Halliburton litigation discussed in Note 16. The TransTexas
assumption includes a litigation accrual totaling $13.5 million which is
reflected in TARC's statement of operations and has been reflected as a credit
to "additional paid-in capital." In July 1994, TransAmerican agreed to
contribute $100 million as an additional contribution of capital to TARC.
Pursuant to TARC's debt offering, TransAmerican contributed approximately $71
million to the capital of TARC in 1995. The financial statements at July 31,
1994 have been adjusted to reflect this transaction as "additional paid-in
capital" with a corresponding reduction in "payable to affiliates."
The payable to affiliates prior to July 31, 1994 had no repayment terms.
In August 1994, TransAmerican borrowed $40 million and loaned all of the
available net proceeds of approximately $36 million to TARC (the "TransAmerican
Loan"). In October 1994, TransAmerican completed a sale of 5.25 million shares
of TransTexas common stock resulting in net proceeds of approximately $53
million, of which $50 million was advanced to TARC to fund working capital
needs including the repayment of $20 million of the TransAmerican Loan. TARC
repaid approximately $40 million of intercompany debt to TransAmerican,
including the TransAmerican Loan, with proceeds of its public bond offering. In
September 1995, TransTexas advanced $3 million and $1.7 million to
TransAmerican who then used the funds to purchase feedstock for TARC. In
October 1995, TransAmerican repaid the advance to TransTexas with interest.
As of January 1996, TransTexas and TransTexas Exploration Corporation, a
wholly owned subsidiary of TransTexas ("TTEX") entered into a Drilling Program,
as defined in the TransTexas Indenture. Pursuant to the Program, TTEX received a
portion of revenues, in the form of a production payment, from certain of
TransTexas' wells. The production payment was transferred in consideration of a
note payable in the amount of $23.6 million issued by TTEX. In July 1996,
TTEX transferred this production payment to TransTexas in the form of a
dividend, and TransTexas forgave the $13.2 million remaining balance of the
note payable.
In July and August 1996, TTEX loaned $12.5 million to TransAmerican
pursuant to the terms of a promissory note that bears interest, payable
quarterly, at 15% per annum. TTEX may make future advances pursuant to the
note, subject to the same terms.
F-48
<PAGE> 174
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors"), a
subsidiary of TransAmerican, provides construction personnel to TARC in
connection with the Capital Improvement Program. These construction workers are
temporary employees, and the number and composition of the workforce will vary
throughout the Capital Improvement Program. Southeast Contractors charges TARC
for the direct costs it incurs (which consist solely of employee payroll and
benefits) plus administrative costs and fees; such administrative costs and fees
charged to TARC are $1.2 million per year. Total labor costs paid to Southeast
Contractors were approximately $15.5 million for the year ended July 31, 1995,
approximately $20.2 million for the six months ended January 31, 1996, and
approximately $1.8 million and $0.9 million for the three months ended April 30,
1995 and 1996, respectively, of which $1.0 million, $2.3 million and $0.9
million were payable July 31, 1995, January 31, 1996 and April 30, 1996,
respectively. No labor costs were paid to Southeast Contractors in prior years.
A former affiliate of TransAmerican owed $205,000 to Lynn Petroleum
Storage and Transport Co., Inc. ("Lynn"), a company owned by the children of
the sole stockholder of TransAmerican. This liability was assumed by TARC in
conjunction with the transfer of refinery assets described above. In May 1995,
TARC paid this obligation and an obligation arising from the purchase of a
cyrogenic gas processing unit and butane tanks from Lynn at Lynn's
undepreciated book value of such assets for $492,200.
In July 1994, JRS Ventures, Inc. ("JRS"), owned by John R. Stanley,
conveyed to TARC a portion of the real property on which TARC's refinery is
located. TARC intends to pay JRS $25,000, which is the amount for which JRS
purchased the land in August 1993 from Lynn. During the three fiscal years
ended July 31, 1993, TARC paid Lynn ground rent of approximately $300,000 per
year for the use of this land. Lease payments under the ground lease were
terminated effective August 1993 when JRS acquired the land.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified TransTexas for substantially all of TransTexas' liability in
connection with the settlement of the Terry/Penrod litigation (See Note 16). In
order to facilitate the settlement, TransTexas has advanced to TransAmerican
$16.4 million of the settlement in exchange for a note receivable. The note is
due in installments and partially collateralized by certain of TransAmerican's
oil and gas properties. In connection with the litigation settlement,
TransTexas received from Terry the reversionary interest in certain producing
properties. TransTexas and TransAmerican had intended that such interests would
revert to TransAmerican under the Transfer Agreement. TransTexas and
TransAmerican have agreed in principle that TransTexas will retain such
interests in partial satisfaction of TransAmerican's indemnity obligations.
14. BUSINESS SEGMENTS
The Company conducts its operations through three industry segments:
exploration and production ("E&P"), gas transportation ("Transportation") and
refining operations ("Refining"). The E&P segment explores for, develops,
produces and markets natural gas, condensate and natural gas liquids. The
Transportation segment engages in intrastate natural gas transportation and
marketing. The refining segment is engaged in refining and storage operations.
All of the Company's significant gas and oil operations are located in Webb,
Zapata and Starr counties, Texas. The Company's refinery is located in Norco,
Louisiana, approximately 20 miles from New Orleans, Louisiana. Segment income
excludes interest income, interest expense and unallocated general corporate
expenses. Identifiable assets are those assets used in the operations of the
segment. Other assets consist primarily of deferred financing costs, escrowed
funds, certain receivables and other property and equipment. The Company's
revenues are derived principally from sales to interstate and intrastate gas
pipelines, direct end users, industrial companies, marketers, and refiners
located in the United States. As a general policy, collateral is not required
for receivables, but customers' financial condition and credit worthiness are
regularly evaluated. The Company is not aware of any significant credit risk
relating to its customers and has not experienced significant credit losses
associated with such receivables.
In 1993, two customers provided approximately $64 million and $39
million, respectively, in E&P and Transportation revenues. In 1994, one
customer provided approximately $51 million in E&P and Transportation
revenues. For the year ended July 31, 1995, two customers provided
approximately $73 million and $41 million, respectively, in E&P and
Transportation revenues. Two customers provided approximately $45 million and
$22 million, respectively, in E&P and Transportation revenues for the six
months ended January 31, 1995. For the Transition Period, three customers
provided approximately $25 million, $22 million and $14 million, respectively
in E&P and Transportation revenues.
F-49
<PAGE> 175
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
For the year ended July 31, 1993, TARC had one customer which accounted
for 100% of total product sales. For the year ended July 31, 1994, TARC had one
customer which accounted for 32% of total product sales and another customer
which accounted for 14% of total product sales. In 1995, TARC had one customer
which accounted for 37% of total product sales and another customer which
accounted for 19% of total product sales. For the Transition Period, TARC had
three customers which accounted for 41% of total product sales. Two customers
accounted for 72% of TARC's accounts receivable at July 31, 1994, and four
customers accounted for 93% of TARC's accounts receivable at July 31, 1995. One
customer accounted for 85% of TARC's accounts receivable at January 31, 1996.
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1993
Exploration and production $ 294,753 $ 120,200 $ 89,126 $ 131,955 $ 316,646
Gas transportation 30,816 (440) 5,758 8,297 30,475
Refining 5,178 (19,401) -- 48 70,900
Other 247 (6,955) 132 6,950 13,120
------------ ------------ ------------ ------------ ------------
$ 330,994 $ 93,404 $ 95,016 $ 147,250 $ 431,141
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1994
Exploration and production $ 300,210 $ 96,828 $ 107,727 $ 180,426 $ 462,951
Gas transportation 33,240 (2,257) 5,913 35,763 66,019
Refining 177,178 (14,526) 2,589 84,295 176,327
Other 157 (15,280) 218 34,522 53,367
------------ ------------ ------------ ------------ ------------
$ 510,785 $ 64,765 $ 116,447 $ 335,006 $ 758,664
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1995
Exploration and production $ 273,092 $ 62,855 $ 121,625 $ 259,189 $ 712,322
Gas transportation 36,787 2,827 8,041 10,105 60,916
Refining 140,579 (44,446) 5,855 116,654 499,879
Other 285 (14,235) 298 12,786 52,539
------------ ------------ ------------ ------------ ------------
$ 450,743 $ 7,001 $ 135,819 $ 398,734 $ 1,325,656
============ ============ ============ ============ ============
</TABLE>
F-50
<PAGE> 176
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JANUARY 31, 1995 (UNAUDITED)
Exploration and production $ 142,070 $ 32,860 $ 66,175 $ 99,672 $ 483,511
Gas transportation 19,161 2,796 4,031 6,366 63,541
Refining 71,586 (23,239) 2,706 58,093 229,462
Other 52 (6,972) 139 11,855 47,213
------------ ------------ ------------ ------------ ------------
$ 232,869 $ 5,445 $ 73,051 $ 175,986 $ 823,727
============ ============ ============ ============ ============
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
TRANSITION PERIOD ENDED
JANUARY 31, 1996
Exploration and production $ 123,253 $ 51,443 $ 56,543 $ 176,386 $ 738,648
Gas transportation 15,892 (4,393) 4,194 13,266 72,815
Refining 107,237 (21,971) 3,159 150,238 518,205
Other 127 (8,366) 157 16,904 126,754
------------ ------------ ------------ ------------ ------------
$ 246,509 $ 16,713 $ 64,053 $ 356,794 $ 1,456,422
============ ============ ============ ============ ============
</TABLE>
SUMMARY INFORMATION
The following summary financial information of TransTexas Transmission
Corporation ("Transmission") reflects its financial position and its results of
operations for the periods presented. Included in the results of operations for
the year ended July 31, 1994 are the activities of TTC, predecessor to
Transmission, through August 23, 1993. Summary financial information of
Transmission and TTC is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
July 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Total current assets $ 7,277 $ 1,047 $ 811 $ 6,324
Property and equipment, net 57,449 60,396 70,273 76,776
Other assets 118 118 3 3
--------- --------- --------- ---------
$ 64,844 $ 61,561 $ 71,087 $ 83,103
========= ========= ========= =========
LIABILITIES AND EQUITY
Total current liabilities $ 4,124 $ 4,066 $ 6,191 $ 5,565
Total noncurrent liabilities 30,957 14,259 21,016 28,995
Total equity 29,763 43,236 43,880 48,543
--------- --------- --------- ---------
$ 64,844 $ 61,561 $ 71,087 $ 83,103
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------ ----------------------- -----------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 88,042 $ 77,915 $ 97,928 $ 53,120 $ 36,226 $ 22,710 $ 31,153
Operating costs and expenses 80,162 79,566 77,154 40,443 35,236 17,981 23,979
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 7,880 (1,651) 20,774 12,677 990 4,729 7,174
Interest income (expense), net (378) 3 (47) -- -- (47) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 7,502 (1,648) 20,727 12,677 990 4,682 7,174
Income tax expense (benefit) 2,831 (497) 7,254 4,436 346 1,639 2,511
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 4,671 $ (1,151) $ 13,473 $ 8,241 $ 644 $ 3,043 $ 4,663
========== ========== ========== ========== ========== ========== ==========
</TABLE>
F-51
<PAGE> 177
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Income before income taxes for the six months ended January 31, 1996
decreased by approximately $11.7 million, due primarily to decreased production
of natural gas liquids.
Transmission conducts significant intercompany activities with TransTexas
Gas Corporation and TransAmerican. Included in the results of operations of
Transmission are the following transactions with affiliates (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------ ---------------------- ----------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ----------- ---------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 29,299 $ 30,398 $ 35,054 $ 18,242 $ 14,879 $ 8,530 $ 6,586
Operating costs and expenses 59,668 53,459 59,719 32,235 24,751 13,697 18,149
</TABLE>
Affiliated operating costs and expenses for the years ended July 31, 1993,
1994 and 1995, include the cost of natural gas purchased from TransTexas Gas
Corporation and its predecessor of approximately $40 million, $34 million and
$44 million, respectively, and $25 million and $16 million, respectively, for
the six months ended January 31, 1995 and 1996. Affiliated operating costs and
expenses for the three months ended April 30, 1995 and 1996 were approximately
$10 million and $12 million, respectively. Nonaffiliated revenues include the
sales of natural gas liquids and condensate extracted from this purchased gas of
$55 million, $44 million and $59 million, respectively for the years ended July
31, 1993, 1994 and 1995 and $33 million and $20 million, respectively, for the
six months ended January 31, 1995 and 1996. Nonaffiliated revenues for the three
months ended April 30, 1995 and 1996 were approximately $13 million and $14
million, respectively.
15. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
TransTexas has succeeded to the potential liability, if any, of
TransAmerican and certain subsidiaries in connection with the lawsuits
described below. TransTexas has assumed liability for the disputed claims
described under "NL Industries" and "Ginther/Warren" and the proceeding
described in Note 16 under "Frito-Lay" and liability for other litigation up to
$15 million plus the difference, if any, between $10 million and the costs (if
less than $10 million) incurred to resolve the disputed claims. Pursuant to an
agreement among TransTexas, TransAmerican and certain of its subsidiaries, as
amended (the "Transfer Agreement"), TransAmerican will indemnify TransTexas
against all losses incurred by TransTexas in excess of $25 million in
connection with (a) disputed claims in TransAmerican's bankruptcy and (b) other
litigation assumed by TransTexas and other agreements related to
TransAmerican's plan of reorganization (other than settlements and judgments
paid from escrowed cash established in connection with TransAmerican's plan of
reorganization). Any indemnification payments received from TransAmerican for
which TransTexas is the primary obligor will be considered a contribution of
capital. There can be no assurance that TransAmerican will have the financial
ability to meet all of its indemnification obligations.
TRANSTEXAS
FINKELSTEIN. On April 15, 1990, H.S. Finkelstein and Medallion Oil Company
filed suit against TransAmerican in the 49th Judicial District Court, Zapata
County, Texas, alleging that TransAmerican failed to pay royalties and
improperly marketed oil and gas produced in connection with the La Perla Ranch.
On September 27, 1994, the plaintiffs added TransTexas as an additional
defendant. On January 6, 1995, a judgment against TransAmerican and TransTexas
was entered for approximately $18 million in damages, interest and attorney's
fees. TransAmerican and TransTexas have posted a supersedeas bond and appealed
the judgment to the Fourth Circuit Court of Appeals,
F-52
<PAGE> 178
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
San Antonio, Texas. The Fourth Circuit Court of Appeals affirmed the judgment
on April 3, 1996. TransAmerican and TransTexas have filed a motion for
rehearing. On April 22, 1991, the plaintiffs filed another suit against
TransAmerican and various affiliates in the 49th Judicial District Court,
Zapata County, Texas, alleging an improper calculation of overriding royalties
allegedly owed to the plaintiffs and seeking damages in an unspecified amount.
On November 18, 1993, the plaintiffs added TransTexas as an additional
defendant. The parties have agreed to binding arbitration in this matter,
which is set for January 6, 1997.
COASTAL. On October 28, 1991, Coastal filed an action that was consolidated in
the 49th Judicial District Court, Webb County, Texas, alleging breach of
contract and tortious interference related to two gas sales contracts and a
transportation agreement, seeking unspecified actual and punitive damages and
injunctive relief. On April 22, 1994, the court entered a judgment adverse to
TransAmerican and TransTexas requiring them to pay $1.3 million plus $0.7
million in attorney's fees to Coastal. TransAmerican and TransTexas are
appealing this judgment. Coastal has abstracted the judgment in Webb and
Zapata counties. While this matter is being judicially resolved, TransTexas is
continuing to furnish gas to Coastal.
ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued TransAmerican
and Mr. Stanley in the 215th Judicial District Court of Harris County, Texas
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a settlement during 1990 of litigation with
El Paso Natural Gas Company ("El Paso"), and that TransAmerican has been
unjustly enriched by its failure to share these proceeds with Alameda. The
court granted Mr. Stanley's motion for summary judgment. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda has
appealed to the Fourteenth Court of Appeals.
ASPEN. TransAmerican brought suit, on September 29, 1993, against Aspen
Services ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts received
by Aspen. Aspen, under provisions of the parties' drilling agreement,
requested that TransAmerican's audit be made subject to arbitration, and the
court agreed. While the audit was in progress, Aspen asserted additional costs
that it contended should be added to the production payment account. One
category of such costs, relating to overhead expenses, amounted to
approximately $2.6 million. On July 3, 1996, the arbitrators issued a decision
in which they rejected all of Aspen's overhead charges, and accepted and
rejected various charges contested by TransAmerican, with the net result of a
credit in TransAmerican's favor of approximately $80,000. Aspen also filed,
in
F-53
<PAGE> 179
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
the court proceeding, on July 19, 1995, a counterclaim and third party claim
against TransAmerican, TransTexas, and affiliated entities, asserting, among
other things, that these entities failed to make certain payments and market
the gas from these wells. Aspen is seeking damages in an unspecified amount,
as well as certain equitable claims. TransTexas and its affiliates are
vigorously contesting this claim. The parties' drilling contract was not
transferred to TransTexas in the Transfer. The properties relating to the
drilling contract, however, were transferred to TransTexas. TransAmerican is
entitled to any settlement or damages awarded to it in this matter.
KATHRYN M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred to
the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in the La Perla Ranch
leases, are entitled to receive a portion of the settlement proceeds received
by TransAmerican from El Paso. TransAmerican has filed its motion for summary
judgment which will be heard by the Court on August 2, 1996. Plaintiffs have
also filed a motion for partial summary judgment based on the Finkelstein case.
TransAmerican has responded to the motion.
MCNAMARA. On June 28, 1996, TransTexas consummated a settlement of litigation
with Tennessee Gas Pipeline Company that was pending in Ector County
("Tennessee lawsuit") pursuant to which TransTexas and another Plaintiff (ICA
Energy, Inc.) received approximately $125 million from Tennessee. TransTexas'
share of the settlement proceeds was $96 million. On July 2, 1996, John
McNamara, Jr. et. al ("The Hubberd Trusts") filed a new suit against TransTexas
in the 241st District Court of Webb County, Texas asserting that TransTexas had
breached its duties to The Hubberd Trusts under certain oil and gas leases and
that TransTexas owed the Hubberd Trusts 25% of the gross settlement proceeds or
approximately $31.25 million. However, in August of 1995, The Hubberd Trusts
had already intervened in the Tennessee lawsuit wherein The Hubberd Trusts
asserted the exact same claims as those asserted in the 241st District Court
proceeding. Accordingly, TransTexas has already denied any liability to The
Hubberd Trusts and counterclaimed that The Hubberd Trusts are not due any
portion of the settlement proceeds received in Tennessee lawsuit. On July 5,
1996, TransTexas filed a plea-in-abatement requesting that the 241st District
Court proceeding be dismissed based upon the dominant jurisdiction that already
existed in the Tennessee lawsuit. On July 15, 1996, the Court in the Tennessee
lawsuit issued a temporary injunction granting TransTexas' request that The
Hubberd Trusts be prevented and enjoined from pursuing their claims relating
to the Tennessee settlement proceeds in the 241st District Court. The Hubberd
Trusts have filed their notice of appeal to this temporary injunction.
WEST. On July 17, 1996, Milton H. West, III D/B/A West Energy Company ("West")
filed suit against TransTexas for $30 million from the Tennessee lawsuit
settlement asserting TransTexas obtained its right to the settlement proceeds
from ICA Energy, Inc. ("ICA"). West had a prior contract with ICA for a percent
of such proceeds. TransTexas intends to vigorously defend this action.
BRIONES. In an arbitration proceeding, Briones, a lessor, claimed that a
TransTexas well on adjacent lands had been draining natural gas from a portion
of his acreage leased to TransTexas on which no well had been drilled. On
October 31, 1995, the Arbitrator decided that drainage had occurred. On June 3,
1996, the Arbitrator issued a letter indicating that drainage damages would be
awarded to Briones in the amount of $1,365,118.29. The Arbitrator entered his
award of damages on June 27, 1996. On July 3, 1996, TransTexas filed a petition
in Zapata County to vacate the Arbitrator's award.
FROST. On November 10, 1994, Frost National Bank filed suit against TransTexas
seeking a declaratory judgment determination that TransTexas failed to properly
and accurately calculate royalties under a lease. Plaintiff has demanded $10
million plus interest. This litigation is in the discovery stage.
TARC
NLRB PROCEEDINGS. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union ("OCAW") filed unfair labor practices charges against TARC
with the New Orleans Regional Office of the National Labor Relations Board
("NLRB"). The charge alleges that TARC refused to reinstate 22 former employees
because of their union membership. The NLRB has refused to issue a complaint
against TARC based on the OCAW's charges. The OCAW has until July 26, 1996 to
appeal the NLRB decision.
EEOC. On August 31, 1995, the Equal Employment Opportunity Commission ("EEOC")
initiated a systematic investigation into TARC's employment practices. The
EEOC is investigating whether TARC is discriminating on the basis of sex and
race. TARC intends to vigorously defend this action.
GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit against
the Company alleging breach of an operating agreement to pay GATX $122,500 per
month beginning January 1996. The Company intends to vigorously defend this
motion.
GENERAL. TransTexas and TARC are also named defendants in other ordinary
course, routine litigation incidental to their businesses. While the outcome
of these other lawsuits cannot be predicted with certainty, the Company does
not expect these matters to have a material adverse effect on its financial
position. At July 31, 1995, the possible range of estimated losses related to
all of the aforementioned claims, other than the EEOC claim which TARC could
not reasonably estimate, in addition to the estimates accrued by TransTexas
and TARC is $0 to $64 million. Litigation expense, including legal fees, for
the six months ended January 31, 1995 and 1996 was approximately $7 million and
$5 million, respectively. Litigation expense for the years ended July 31,
1993, 1994 and 1995 was approximately $20 million, $20 million and $15 million,
respectively. The resolution in any reporting period of one or more of these
matters in a manner adverse to TARC or TransTexas could have a material adverse
impact on the Company's results of operations or cash flows for that period.
TransTexas has delivered letters of credit and placed into escrow cash, which
letters of credit and cash total approximately $29.3 million, to be applied to
the litigation claims described above. In addition, a change of control or
other event that results in deconsolidation of TransTexas and TARC from
TransAmerican's consolidated group for federal income tax purposes could also
result in acceleration of a substantial amount of federal income taxes.
F-54
<PAGE> 180
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
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. TransTexas has
received notices of violation from the Texas Air Control Board, predecessor
agency to the Texas Natural Resource Conservation Commission, alleging that, in
connection with compression stations, TransTexas built one and modified two
emission sources without the appropriate air permits. TransTexas has paid an
administrative penalty of approximately $300,000, has obtained the appropriate
air permits and is now in compliance. Certain other aspects of its operations
may not be in compliance with applicable environmental laws and regulations,
and such noncompliance may also give rise to compliance costs and
administrative penalties. TransTexas does not expect the foregoing
environmental compliance matters to have a material adverse effect on its
financial position. 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.
CHANGE OF CONTROL
The TransTexas Indenture provides that, upon the occurrence of a Change of
Control (as such term is defined in the TransTexas Indenture), each holder of
the TransTexas Notes will have the right to require TransTexas to repurchase
such holder's TransTexas Notes at 101% of the principal amount thereof plus
accrued and unpaid interest. A Change of Control would be deemed to occur
under the TransTexas Indenture in the case of certain changes or other events
in respect of the ownership or control of TransTexas, including any
circumstance pursuant to which any person or group, other than John R. Stanley
and his wholly-owned subsidiaries or the trustee under the TARC Indenture, is
or becomes the beneficial owner of more than 50% of the total voting power of
TransTexas' then outstanding voting stock, unless the TransTexas Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also includes a "group," which is defined as two or more
persons acting as a partnership, limited partnership or other group. In
addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the
TransTexas Indenture may result in a "change of control" of TransTexas under
the terms of TransTexas' credit facility (the "BNY Facility") and certain
equipment financing which may create an obligation for TransTexas to repay such
other indebtedness. At April 30, 1996, TransTexas had approximately $30.2
million of indebtedness (excluding the TransTexas Notes) subject to such right
of repayment or repurchase. In the event of a Change of Control under the
TransTexas Indenture or a "change of control" under the terms of other
outstanding indebtedness, there can be no assurance that TransTexas will have
sufficient funds to satisfy any such payment obligations.
In February 1995, TARC issued the TARC Notes that were initially
collateralized by, among other things, 55 million shares of TransTexas' common
stock. A foreclosure on the shares that have been pledged to secure the TARC
Notes would constitute a "change of control" of TransTexas under the BNY
Facility, which may create an obligation for TransTexas to repay such
indebtedness, but would not constitute a Change of Control under the TransTexas
Indenture. TARC's refinery was shut down in January 1983 and is currently
partially operational. TARC is engaged in a two-phase capital improvement
program designed to reactivate the refinery and increase its complexity. In
March 1996, TARC sold 4.55 million shares of TransTexas common stock to provide
additional financing for the Capital Improvement Program. TARC will require
additional financing of approximately $374 million to
F-55
<PAGE> 181
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
$379 million over the course of the remaining construction period to complete
the Capital Improvement Program (see Note 2). If this financing is not
available on a timely basis, or if significant engineering problems, cost
overruns or delays occur, TARC likely will not be able to complete the first
phase of the Capital Improvement Program by February 15, 1997. Under the TARC
Indenture, the failure of TARC to complete the first phase of the Capital
Improvement Program by February 15, 1997 (subject to extension to August 15,
1997 if certain financial coverage ratios are met) would constitute an event of
default at such date. Any such event of default could result in the sale,
following the occurrence of such event of default, of some or all of the
remaining 50.45 million shares of TransTexas common stock owned by the Company
and TARC that are pledged to secure their obligations under the TARC Notes. A
foreclosure on the shares of TransTexas common stock that have been pledged to
secure the TARC Notes would constitute a "change of control" of TransTexas
under the BNY Facility, which may create an obligation for TransTexas to repay
amounts outstanding thereunder. A sale of such shares following a foreclosure
might also result in a Change of Control under the TransTexas Indenture.
COMPLIANCE MATTERS. TARC is subject to federal, state, and local laws,
regulations, and ordinances relating to activities and operations that may have
adverse environmental effects ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, will require TARC to make capital expenditures
in order to comply with such laws and regulations. To ensure continuing
compliance, TARC has made environmental compliance and permitting issues an
integral part of its refinery's start- up plans and has budgeted for such
capital expenditures in the Capital Improvement Program.
TARC uses (and in the past has used) certain materials, and generates (and
in the past has generated) certain substances or wastes that are or may be
deemed hazardous substances or wastes. In the past, the refinery has been the
subject of certain environmental enforcement actions, and incurred certain
fines as a result, arising out of certain of TARC's operations. TARC also was
previously subject to enforcement proceedings relating to its prior production
of leaded gasoline and air emissions. TARC believes that, with minor
exception, all of these past matters were resolved prior to or in connection
with the resolution of the bankruptcy proceedings and, in some cases (such as
the leaded gasoline matter), are no longer applicable to TARC's operations. As
a result, TARC believes that such matters will not have a material adverse
effect on TARC's future results of operations, cash flows or financial
position.
PENDING REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. At
this time, TARC cannot estimate the costs of such compliance. Thus, while TARC
does not believe that such costs will be material, there can be no assurance
that such costs will not have a material adverse effect on its financial
position.
In addition, the anticipated promulgation of Hazardous Organic NESHAPS
regulations for refineries under the Clean Air Act could have a material
adverse effect on TARC. The Clean Air Act requires the EPA to set "Maximum
Achievable Control Technology" standards for all categories of major sources of
hazardous air pollutants by November 15, 2000. As of the present time, the EPA
has promulgated standards for the chemical manufacturing industry; similar
standards are expected to be set by both the EPA and the Louisiana Department
of Environmental Quality for the petroleum refining industry. TARC cannot
estimate at this time what the effect may be of any such regulations on the
refinery.
F-56
<PAGE> 182
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The EPA recently promulgated Federal regulations pursuant to the Clean Air
Act to control fuels and fuel additives (the "Gasoline Standards") that could
have a material adverse effect on TARC. Under the new regulations only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced benzene
and aromatics compared to the average 1990 gasoline. The number and extent of
the areas subject to reformulated gasoline standards may increase in the future
if the applicable laws and regulations become more stringent or other areas
become subject to the existing program. Conventional gasoline may be used in
all other domestic markets; however, a refiner's post-1994 average conventional
gasoline must not be more polluting than it was in 1990. With limited
exception, a refiner must compare its post-1994 and 1990 average values of its
controlled fuel parameters and emissions in order to determine its compliance
as of January 1, 1995. The Gasoline Standards recognize that many gasoline
producers may not be able to develop an individual 1990 baseline for a number
of reasons, including, for example, lack of adequate data and limited or no
operations in 1990. Under such circumstances, the refiner must use a statutory
baseline reflecting the 1990 industry average. The EPA has authority, upon a
showing of extenuating circumstances by a refiner, to grant an individual
adjusted baseline or other appropriate regulatory relief to that refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis, with
all of the refinery units expected to be operational by August 1997. The EPA
has denied TARC's request for an individual adjusted baseline adjustment, and
TARC cannot predict at this time when or whether the EPA will grant TARC other
appropriate regulatory relief. In recent correspondence to TARC, the EPA has
expressed willingness to consider whether different standards should apply to
refineries that are now commencing operations. If the EPA fails to grant
appropriate regulatory relief, TARC will be restricted in the amount of
gasoline it will be able to sell domestically or will incur additional gasoline
blending costs until the Capital Improvement Program is completed. Upon
completion of the Capital Improvement Program, TARC believes that it will be
able to produce conventional gasoline and, to a limited extent, reformulated
gasoline that meets the Gasoline Standards. There can be no assurance that any
action taken by the EPA will not have a material adverse effect on TARC's
future results of operations or financial position.
CLEANUP MATTERS. TARC also is subject to Federal, state, and local laws,
regulations, and ordinances that impose liability for the costs of cleaning up,
and certain damages resulting from, past spills, disposals, or other releases
of hazardous substances ("Hazardous Substance Cleanup Laws"). Over the past
several years, TARC has been, and to a limited extent continues to be, engaged
in environmental cleanup or remedial work relating to or arising out of
operations or activities at the refinery. In addition, TARC has been engaged
in upgrading its solid waste facilities, including the closure of several waste
management units. Similar to numerous other industrial sites in the state, the
refinery has been listed by the Louisiana Department of Environmental Quality
on the Federal Comprehensive Environmental Response, Compensation and Liability
Information System, as a result of TARC's prior waste management activities (as
discussed below).
In 1991, the EPA performed a facility assessment at the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA has
not yet issued a report of its investigation. TARC is unable to predict what
the results of the EPA's investigation will be, or the effect that any further
investigation or remediation, that would be required by the EPA, will have on
TARC's financial position. As part of the facility assessment, in March 1993
TARC submitted a "Closure Equivalency Demonstration" for the former sludge
drying beds at the refinery. The EPA has not yet made a determination
regarding TARC's submission or issued any further requests relating to this
matter. TARC believes that the sludge drying beds were properly closed in 1985
in accordance with applicable law and should not require further remediation as
a result of the EPA's pending
F-57
<PAGE> 183
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
review. However, there can be no assurance that the EPA will not require
further work in this regard. TARC is unable to estimate what the costs, if
any, will be if the EPA does require further remediation or closure activities.
Certain former employees have alleged that TARC's predecessor improperly
disposed of catalyst containing hazardous substances at the site of TARC's
visbreaker. These employees have further alleged that certain permits for the
refinery were obtained as a result of political contributions made by TARC. As
a result of these allegations, the EPA and the Louisiana Department of
Environmental Quality (the "DEQ") commenced an investigation of the refinery.
TARC has denied each of these allegations and believes that they are wholly
without merit. In the early 1980's, TARC disposed of catalyst with the approval
of the applicable Louisiana authorities at off-site and on-site locations;
however, no catalyst was disposed of in the vicinity of the visbreaker. TARC's
records confirm that the State of Louisiana was aware of and approved TARC's
disposal of catalyst, and that the catalyst was not hazardous under any
applicable legal standards. The DEQ has concluded its investigation without
citing any violations by TARC. TARC also has independently investigated the
allegations. Analysis of soil borings taken from the site of the visbreaker by
three independent laboratories found no evidence of catalyst or other alleged
toxic substances in the samples taken. All permits that have been applied for
and obtained by TARC for its operations have been in accordance with all
applicable laws and regulations. TARC does not expect to incur any liability in
connection with these allegations that will have a material adverse effect on
TARC's future results of operations, cash flows or financial position.
TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at four Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA
to include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRP's liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of Federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.
TARC's liability at one of the four Superfund sites at which it has been
named a PRP has been settled for a nominal amount, and TARC expects to incur no
further liability in this matter. At a second Superfund site, the EPA has
invited TARC to enter into negotiations, and TARC attended a scheduled
settlement meeting and negotiations are continuing. With respect to the
remaining two sites, TARC's liability for each such matter has not been finally
determined, and TARC anticipates that it may incur costs related to the cleanup
(and possibly including additional costs arising in connection with any recovery
action brought pursuant to such matters) at each such site. After a review of
the data available to TARC regarding the basis of TARC's alleged liability at
each site, and based on various factors, which depend on the circumstances of
the particular Superfund site (including, for example, the relationship of TARC
to each such site, the volume of wastes TARC is alleged to have contributed to
each such site in comparison to other PRPs without giving effect to the ability
of any other PRPs to contribute to or pay for any liabilities incurred, and the
range of likely cleanup costs
F-58
<PAGE> 184
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
at each such site) TARC does not believe its ultimate liability will be
significant; however, it is not possible to determine the ultimate
environmental liabilities, if any, that may arise from the matters discussed
above.
COMMITMENTS
TARC has various purchase commitments for materials, supplies and services
incidental to the ordinary course of business and for the Capital Improvement
Program. As of January 31, 1996, TARC's Capital Improvement Program includes
expenditures to expand and modify its existing refinery of approximately $407
million during the next three years. As of January 31, 1996, TARC had
commitments for refinery construction and maintenance of approximately $121
million. TARC is acting as general contractor and can generally cancel or
postpone capital projects.
GAS SALES COMMITMENTS
In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for future
sales under the amended contract. In consideration, TransAmerican agreed to
pay the buyer approximately $0.4 million per month through June 1997. This
commitment was assumed by TransTexas.
TransTexas and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which TransTexas
will deliver 100,000 MMBtu of natural gas per day through August 1997. The
selling price for this gas is determined by certain industry averages as
defined in the contract.
TransTexas and MidCon Texas Pipeline Corp. entered into a long-term gas
purchase contract on January 10, 1996, under which TransTexas is required to
deliver a total of 100,000 MMBtu per day to four specified delivery points for
a period of five years. The purchase price is determined by an industry index
less $0.09 per MMBtu. Deliveries shall commence upon the earlier of completion
of pipeline construction or ninety days after the acquisition of all rights of
way, permits and construction drawings.
LETTER OF CREDIT
In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
TransTexas in a legal proceeding. Prior to this transaction, the supersedeas
bond had been collateralized by other letters of credit. These letters of
credit were collateralized by $20 million in cash, which has been released to
TransTexas. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days. TransTexas has agreed to
issue up to 8.6 million shares of TransTexas common stock to the third party if
this contingent obligation to such third party becomes fixed and remains unpaid
for 60 days. TransTexas does not believe that this contingency will occur. If
the obligation becomes fixed, and alternative sources of capital are not
available, TransTexas could elect to sell shares of TransTexas common stock
prior to the maturity of the obligation and use the proceeds of such sale to
repay the third party.
PRODUCTION PAYMENTS
On February 28, 1995, TransTexas sold to TCW Portfolio No. 1555
Sub-Custody Partnership, L.P. ("TCW"), a term royalty in the form of a
dollar-denominated production payment in certain of TransTexas' properties for
proceeds of $49.5 million, less closing costs of approximately $2 million.
F-59
<PAGE> 185
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Payments to TCW pursuant to this agreement totaled approximately $2 million per
month, including interest. Mr. John R. Stanley personally guaranteed certain
obligations of TransTexas under such agreement, including certain litigation
bonding requirements and indemnity obligations (including indemnification of TCW
against costs associated with production, environmental remediation, title
defects or enforcement of TCW's rights under the agreement). This production
payment was terminated with a portion of the proceeds of the volumetric
production payment described below.
In January 1996, TransTexas sold to an unaffiliated third party a term
royalty interest in the form of a volumetric production payment on certain of
its producing properties. For net proceeds of approximately $33 million,
TransTexas conveyed to the third party a royalty on approximately 29 Bcf of
natural gas, which amount can increase if certain minimum monthly volumes are
not delivered to the production payment interest. In February 1996, TransTexas
and the third party amended this purchase agreement to include an additional 14
Bcf which were sold to the third party for a purchase price of approximately
$16 million.
In May 1996, TransTexas sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production payment on certain
of TransTexas' producing properties. For net proceeds of approximately $43
million, TransTexas conveyed to the third party a royalty on approximately 37
Bcf of natural gas, which amount can increase if certain minimum monthly
volumes are not delivered to the production payment interest. TransTexas used
approximately $25 million of these net proceeds to terminate the
dollar-denominated production payment described above.
In May 1996, TransTexas consummated the sale, effective as of February 1,
1996, of certain producing properties in Webb County, Texas for consideration of
approximately $9.5 million. In July 1996, TransTexas consummated the sale,
effective as of May 1, 1996, of certain producing properties in Zapata County,
Texas for consideration of approximately $62 million. TransTexas is currently
negotiating a purchase and sale agreement pursuant to which it will sell,
effective as of February 1, 1996, certain producing properties in Webb County,
Texas for consideration of approximately $23 million. TransTexas anticipates
consummating such sale in August 1996 if certain closing conditions, including
the receipt of a favorable appraisal, are met. The purchase price for each of
the properties discussed above is subject to adjustment for gas sales between
the effective date and the closing date. TransTexas retained or will retain the
proceeds of such gas sales.
POSSIBLE FEDERAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions of the Internal Revenue Code of 1986, as amended ("COD
Exclusion"). TransAmerican expects that its tax attributes (including its net
operating loss and credit carryforwards) will be substantially reduced as a
consequence of the COD Exclusion. Although TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness 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.
PRICE MANAGEMENT ACTIVITIES
TARC enters into futures contracts, options on futures, swap
agreements and forward sales agreements with the intent to protect against a
portion of the price risk associated with price declines from holding inventory
of feedstocks and refined products or fixed price purchase commitments. At April
30, 1996, TARC's position in open futures contracts, options on futures, swap
agreements and forward sales agreements was not significant. A net trading loss
of approximately $3.1 million and a net trading gain of approximately $2.3
million were reflected in other income (expense) for the years ended July 31,
1994 and 1995, respectively. For the Transition Period, a net trading loss of
approximately $0.4 million was reflected in other income (expense). These
transactions did not qualify for hedge accounting treatment under the guidelines
of SFAS 80; therefore, gains or losses associated with these futures contracts
have not been deferred.
PROCESSING AGREEMENT AND FINANCING ARRANGEMENTS
TARC enters into financing arrangements in order to maintain an available
supply of feedstocks. Typically, TARC enters into an agreement with a third
party to acquire a cargo of feedstock which is scheduled to be delivered to
TARC's refinery. TARC pays through the third party all transportation costs,
related taxes and duties and letter of credit fees for the cargo, plus a
negotiated commission. Prior to arrival at the refinery, another third party
purchases the cargo, and TARC commits to purchase, at a later date, the cargo
at an agreed price plus commission and costs. TARC also places margin deposits
with the third party to permit the third party to hedge its price risk.
F-60
<PAGE> 186
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
TARC purchases these cargos in quantities sufficient to maintain expected
operations and is obligated to purchase all of the cargos delivered pursuant to
these arrangements. In the event the refinery is not operating, these cargos
may be sold on the spot market. These arrangements are accounted for as product
financing arrangements and accordingly the inventory and related obligations
are recognized on the consolidated balance sheet. During the Transition Period,
approximately 0.5 million barrels of feedstocks with a cost of $8.8 million
were sold by a third party on the spot market prior to delivery to TARC without
a material gain or loss to TARC.
In March 1996, TARC entered into a processing agreement with a third party
for the processing of various feedstocks at the refinery. TARC is required to
pay all costs for feedstock acquisition, transportation, processing and
inspections plus a commission for each barrel processed. TARC is entitled to a
processing fee based on the margin after all costs, if any, earned by the third
party on the sale of refined products. This agreement provides for TARC to
process approximately 1.1 million barrels of feedstock. In April 1996, TARC
entered into a similar processing agreement with another third party.
In July 1996, the Company entered into a processing agreement with a third
party to process approximately 0.2 million barrels of feedstocks for a fixed
price per barrel. Under the terms of the agreement, the Company is responsible
for only certain quantity and quality yields.
HEDGING AGREEMENTS
Beginning in April 1995, TransTexas entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either TransTexas
or the counter party thereto is required to make a payment to the other at the
end of each month (the "Settlement Date"). The payments will equal the product
of a notional quantity ("Base Quantity") of natural gas and the difference
between a specified fixed price ("Fixed Price") and a market price ("Floating
Price") for natural gas. The Floating Price is determined by reference to
natural gas futures contracts traded on the New York Mercantile Exchange
("NYMEX"). The Hedge Agreements provide for TransTexas to make payments to the
counter party to the extent that the Floating Price exceeds the Fixed Price, up
to a maximum ("Maximum Floating Price") and for the counter party to make
payments to TransTexas to the extent that the Floating Price is less than the
Fixed Price. For the Transition Period, TransTexas made net settlement payment
totaling approximately $5.4 million to the counter party pursuant to the Hedge
Agreements. For the three months ended April 30, 1996, TransTexas has incurred
additional net settlement losses totaling approximately $9.6 million. As of
April 30, 1996 TransTexas has Hedge Agreements with Settlement Dates ranging
from May 1996 through April 1997 involving total Base Quantities for all monthly
periods of approximately 73.0 Tbtu of natural gas. Fixed Prices for these
agreements range from $1.70 to $1.72 per MMBtu ($1.76 to $1.78 per Mcf) up to
Maximum Floating Price of $2.20 per MMBtu ($2.28 per Mcf). At April 30, 1996,
the estimated cost to settle these Hedge Agreements would have been
approximately $31.1 million. These agreements are accounted for as hedges and
accordingly, any gains or losses are deferred and recognized in the month the
physical volumes are delivered. At April 30, 1996, TransTexas maintained $13.9
million in margin accounts related to the Hedge Agreements. TransTexas may be
required to post additional cash margin whenever the daily natural gas futures
prices as reported on the NYMEX, for each of the months in which the swap
agreements are in place, exceed the Fixed Price. The maximum margin call under
each Hedge Agreement will never exceed the product of the Base Quantity for the
remaining months under such Hedge Agreement multiplied by the difference between
the Maximum Floating Price and the Fixed Price.
In June 1996, TransTexas entered into a Master Swap Agreement (the "Master
Swap Agreement") with one of its counter parties, which replaced a previously
existing master agreement governing the swap agreements between the two parties.
TransTexas' obligations under the Master Swap Agreement are collateralized by a
mortgage on a substantial portion of TransTexas' producing properties. In
accordance with the TransTexas Indenture, the lien created by the mortgage
collateralizes obligations up to a maximum of $80.8 million (10% of the SEC PV10
of TransTexas' most recent reserve report). As contemplated by the TransTexas
Indenture, the Trustee under the TransTexas Indenture has subordinated the lien
collateralizing the TransTexas Notes outstanding thereunder to the lien
collateralizing TransTexas' obligations under the Master Swap Agreement. The
maximum amount of obligations of TransTexas that could be collateralized by the
mortgage, based on the swap agreements in place under the Master Swap Agreement
as of July 1, 1996, is approximately $10 million. Subject to compliance with
certain collateral coverage tests, TransTexas is not subject to provide
additional cash margin for any swap agreements now or hereafter subject to the
Master Swap Agreement.
OPERATING LEASES
As of April 30, 1996, the Company has long-term leases covering land and
other property and equipment. Rental expense was approximately $5 million, $7
million and $9 million for the fiscal years 1993, 1994 and 1995, respectively
and approximately $5 million for each of the six months ended January 31, 1995
and 1996, respectively. Future minimum rental payments required under operating
leases that have initial or remaining noncancellable lease terms in excess of
one year as of January 31, 1996, including the sale-leaseback transaction
described below, are as follows (in thousands of dollars):
F-61
<PAGE> 187
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
<TABLE>
<S> <C>
1997 $ 4,367
1998 4,218
1999 3,939
2000 1,038
2001 841
Later years 1,155
-------
$15,558
=======
</TABLE>
In January 1996, TransTexas completed a sale-leaseback transaction in the
amount of $3 million, related to its operating equipment. The sale-leaseback
transaction has a monthly lease payment of approximately $56,000 per month and
a 60-month term. At the end of the lease term, the lease will automatically
renew for 12 months at approximately $38,000 per month.
16. LITIGATION SETTLEMENTS
TERRY/PENROD. TransAmerican and a group of TransAmerican's former bank lenders
(the "Bank Group") are parties to a consolidated suit filed December 6, 1991, in
the United States District Court for the Southern District of Texas, Houston
Division, relating to the interpretation of two third-party drilling agreements.
Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling Corporation, Terry
Oilfield Supply Co., Inc. and Terry Resources, Inc. ("Terry") sued TransAmerican
for approximately $50 million in actual damages and punitive damages of not less
than five times actual damages. On April 5, 1996, the court entered a final
judgment against TransAmerican, the Company and several of their affiliates, in
the amount of approximately $43 million, plus interest. On April 18, 1996, the
court entered a separate judgment against the same parties for Terry's
attorneys' fees of $2 million. In May 1996, the Company paid Terry approximately
$19 million and caused escrowed funds held for the benefit of the Bank Group of
approximately $22 million to be paid to Terry. Upon payment of the settlement
amount, Terry released the judgments, released all liens and reassigned to the
Company a production payment in certain properties. Terry dismissed an unrelated
administrative proceeding upon payment of the settlement amount described above.
CATTO HEIRS. On November 29, 1989, Roxanna G. Catto, et al., brought suit in
the 111th Judicial District Court, Webb County, Texas, seeking a declaratory
judgment with respect to the rights under a certain oil and gas lease, a
statutory lien and security interest on certain oil and gas production of
TransAmerican and proceeds therefrom, and foreclosure of that security
interest. Plaintiffs seek actual damages in excess of $4.5 million and
exemplary damages for the alleged breach of TransAmerican's duty of good faith
and fair dealing of at least $5 million. Plaintiffs filed a sixth amended
original petition alleging lease termination damages of $95 million.
TransAmerican has counterclaimed for $10 million in actual damages and $20
million in punitive damages alleging improper actions with certain former
employees of TransAmerican. This counterclaim has been severed and is now a
separate action. H. S. Finkelstein intervened in this action claiming
unspecified damages against TransAmerican alleging improper calculation of
royalty payments. The judge granted a partial summary judgment in favor of the
plaintiffs and intervenor on liability only. On February 9, 1994, the
plaintiffs added TransTexas as an additional defendant. This
F-62
<PAGE> 188
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
case was settled in April 1994 as to the Catto plaintiffs whereby TransTexas
paid these plaintiffs approximately $1.4 million in June 1994 and paid the
total remaining balance of approximately $4.8 million in monthly installments
through September 1995. No settlement was reached with Finkelstein, and this
matter has been consolidated with the Finkelstein litigation (see Note 15).
WILLIAM L. STANLEY. In July 1994, William L. Stanley ("Billy Stanley") filed
suit in the District Court of Harris County, Texas, against his father, John R.
Stanley, for alleged breach of an oral contract and certain intentional torts.
Billy Stanley claimed that his father agreed to transfer to Billy Stanley a 25%
ownership interest in TransAmerican in exchange for 75% of the profits
generated by oil and gas supply and other operations established by Billy
Stanley to provide services and materials to TransAmerican from January 2, 1991
to August 31, 1993. The complaint asserts that after providing such services
and materials, Billy Stanley arranged for consideration to be received by John
R. Stanley in excess of $5 million, representing 75% of such profits (the
"Alleged Payments"). On December 2, 1994, Billy Stanley filed a supplemental
petition to include TransTexas, TARC and TransAmerican as defendants in this
matter. In this supplemental petition, Billy Stanley claimed (i) that each
defendant is the alter ego of the other defendants, (ii) intentional infliction
of emotional distress, (iii) unjust enrichment, (iv) fraud, (v) breach of
fiduciary duties, (vi) conspiracy to commit intentional torts, and (vii)
violations of the Racketeer Influenced and Corrupt Organization Act. Billy
Stanley sought, among other things, the imposition of a trust upon any and all
properties obtained by the defendants as a result of the improper actions
alleged by Billy Stanley. In addition, Billy Stanley made other allegations
regarding his father, TransAmerican, TransTexas and TARC to the media and
others and stated his intent to make such allegations to various governmental
agencies and, upon receipt of immunity, to assist in any investigation by such
agencies as a consequence of these assertions. These allegations included,
among others, bankruptcy fraud relating to the Alleged Payments,
misappropriation, bribery of government officials, and violation of
environmental regulations. John R. Stanley removed the case to the United
States District Court for the Southern District of Texas, Houston Division.
Mr. Stanley, TransAmerican, TransTexas and TARC denied all of Billy
Stanley's allegations of wrongdoing and intend to cooperate with any
governmental investigation that may ensue as a consequence thereof. In October
1994, TransAmerican, TransTexas, and TARC filed suit against Billy Stanley and
his attorney in the 341st Judicial District Court of Webb County, Texas,
claiming libel, slander, business disparagement, tortious interference, and
civil conspiracy in connection with, among other things, Billy Stanley's
allegations described above. TransAmerican, TransTexas and TARC received a
temporary restraining order and sought damages and temporary and permanent
injunctions. All pending litigation between Billy Stanley and John R. Stanley,
TransTexas, TARC and TransAmerican was settled in August 1995.
HALLIBURTON. On May 13, 1994, Halliburton Company ("Halliburton") filed suit
against TransAmerican, TARC and TransTexas for breach of contract arising out
of a 1982 tax benefit transaction between Halliburton and TransAmerican
relating to equipment located at TARC's refinery. TARC assumed the obligations
of TransAmerican under a sale-leaseback arrangement relating to such equipment
when the refinery was transferred to TARC in 1987. As part of the Transfer,
TransTexas assumed the liability arising from this suit, but TransAmerican
agreed to indemnify TransTexas for any liability from the suit in excess of $10
million plus interest at the rate payable by TransAmerican to Halliburton on
the unpaid amount thereof from April 12, 1993 to the date or dates of payment.
In March 1995, the parties reached a settlement whereby Halliburton received
$14 million on August 29, 1995. TransTexas paid $10 million of this settlement
and the remainder was paid by TARC.
ENRON. On November 19, 1992, TransAmerican brought an action against Enron Oil
& Gas Company, et al., ("Enron") in the 93rd Judicial District Court of Hidalgo
County, Texas, alleging that Enron violated the terms of a confidentiality
agreement between TransAmerican and Enron in connection with Enron's evaluation
of TransTexas' gas and oil properties. Enron counterclaimed for $136.5 million
in damages, claiming that TransAmerican and Mr. Stanley induced Enron to commit
the actions complained of by fraud and claiming antitrust violations. In a
related
F-63
<PAGE> 189
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
case, Enron sued TransAmerican in the 111th District Court of Webb County,
Texas for a declaratory judgment that TransAmerican has no claim to certain
leases and special damages in an unspecified amount for delays in drilling
caused by the Enron litigation. All pending litigation between the parties to
these actions was settled on October 16, 1995.
FRITO-LAY. On June 24, 1993, Frito-Lay, Inc. ("Frito-Lay") filed suit against
TransAmerican and TARC in the Supreme Court of the State of New York, County of
New York, alleging that TransAmerican and TARC failed to make indemnification
payments to Frito-Lay in the amounts and at the times required under the tax
benefit transfer sale-leaseback agreements executed by TransAmerican and
Frito-Lay in November and December 1981 relating to equipment located at TARC's
refinery. TARC assumed the obligations of TransAmerican under these
sale-leaseback agreements when the refinery was transferred to TARC in 1987.
Frito-Lay is seeking actual damages of not less than $7 million. In the
Transfer, TransTexas assumed certain liability for this matter. On December
13, 1995, this suit was settled and dismissed with prejudice. The liabilities
will be allocated among TransTexas, TARC and TransAmerican, in accordance with
the Tax Allocation Agreement and other relevant documents.
NL INDUSTRIES. On August 27, 1986, NL Industries ("NL") filed suit against
TransAmerican in the United States District Court for the Southern District of
Texas, Houston Division, seeking $15 million in actual damages and $45 million
in punitive damages on the grounds of fraud, breach of contract, and negligence
arising from a recompletion agreement with TransAmerican. The court awarded
summary judgment to TransAmerican on all of NL's claims. On appeal, the Fifth
Circuit Court of Appeals found NL's claim for punitive damages to be improper,
and remanded the case to the United States District Court on a portion of NL's
$15 million breach of contract claim. The case was tried by a jury and a
judgment in favor of TransAmerican was entered on October 12, 1994. On
December 21, 1995, the Fifth Circuit Court of Appeals affirmed the judgment in
TransAmerican's favor. The judgment has become final.
GINTHER/WARREN. Wilbur L. Ginther and Howard C. Warren conveyed a portion of a
lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas Supreme
Court upheld a judgment in favor of Messrs. Ginther and Warren against Taub's
interest in the lease. The lower court judgment had awarded a portion of the
lease to Messrs. Ginther and Warren because Taub's attorney had defrauded
Messrs. Ginther and Warren with respect to their interest in the lease. On
November 26, 1986, the estates of Messrs. Ginther and Warren filed an
adversary proceeding in the United States Bankruptcy Court for the Southern
District of Texas, Houston Division (the "Bankruptcy Court") against
TransAmerican claiming that TransAmerican had constructive notice of their
disputes but continued to pay royalties and proceeds of production to Taub and
seeking damages. TransAmerican filed an interpleader action in the Bankruptcy
Court and deposited the disputed funds accruing from and after November 1984
into the registry of the court. On September 30, 1993, the Bankruptcy Court
entered a judgment against TransAmerican in the amount of $6.3 million plus
post judgment interest. On September 15, 1995, the U.S. District Court for
the Southern District of Texas entered an order reversing the award of
interest to Taub and affirming the final judgment in all other respects.
TransTexas appealed the judgment to the Fifth Circuit Court of Appeals. On
July 2, 1996, TransTexas and the estates of Messrs. Ginther and Warren entered
into a settlement pursuant to which such estates received $3.5 million and a
promissory note for $2.8 million. The promissory note is payable in 36 equal
monthly installments commencing August 1, 1996, and bears no interest unless an
installment payment is not made. In addition, TransTexas transferred to such
estates an additional override in a portion of the lease and agreed to drill
additional wells on the lease. In conjunction with the settlement, the estates
of Messrs. Ginther and Warren agreed to farm out to TransTexas an additional
working interest in the lease.
17. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning the Company's gas
and oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Estimates of the Company's proved reserves and proved developed reserves
were prepared by Netherland, Sewell & Associates, Inc., an independent firm of
petroleum engineers, based on data supplied to them by the Company. Such
estimates are inherently imprecise and may be subject to substantial revisions
as additional information such as reservoir performance, additional drilling,
technological advancements and other factors become available.
Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31,
--------------------------- JANUARY 31,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Proved properties $ 1,338,183 $ 1,481,875 $ 1,639,237
Unproved properties 23,889 139,386 136,360
------------ ------------ ------------
Total 1,362,072 1,621,261 1,775,597
Less accumulated depletion 987,775 1,109,400 1,165,943
------------ ------------ ------------
$ 374,297 $ 511,861 $ 609,654
============ ============ ============
</TABLE>
F-64
<PAGE> 190
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
------------------------------------ JANUARY 31,
1993 1994 1995 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Property acquisitions $ 3,715 $ 18,593 $ 124,956 $ 11,485
Exploration 84,317 114,266 84,201 27,039
Development 43,923 47,567 50,032 115,812
---------- ---------- ---------- ------------
$ 131,955 $ 180,426 $ 259,189 $ 154,336
========== ========== ========== ============
</TABLE>
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
SIX
YEAR ENDED JULY 31, MONTHS ENDED
------------------------------------ JANUARY 31,
1993 1994 1995 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 294,753 $ 302,522 $ 275,627 $ 124,663
---------- ---------- ---------- ------------
Expenses:
Production costs 74,881 76,928 76,798 31,376
Depletion 89,126 107,727 121,625 56,543
General and administrative 10,546 21,039 14,349 3,601
Litigation settlement -- -- -- (18,300)
---------- ---------- ---------- ------------
Total operating expenses 174,553 205,694 212,772 73,220
---------- ---------- ---------- ------------
Income before income taxes 120,200 96,828 62,855 51,443
Income taxes 18,638 26,047 21,999 18,005
---------- ---------- ---------- ------------
$ 101,562 $ 70,781 $ 40,856 $ 33,438
========== ========== ========== ============
Depletion rate per net equivalent Mcf $ .73 $ .80 $ .81 $ .82
========== ========== ========== ============
</TABLE>
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. All of the Company's
significant proved reserves are located in Webb, Zapata and Starr counties,
Texas. Natural gas quantities represent wet gas volumes, which include amounts
that will be extracted as natural gas liquids. The Company's estimated net
proved reserves and proved developed reserves of natural gas (billions of cubic
feet) and condensate (millions of barrels) are shown in the table below.
F-65
<PAGE> 191
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
-------------------------------------------------------------- JANUARY 31,
1993 1994 1995 1996
------------------- ------------------ ------------------ ------------------
Gas Oil Gas Oil Gas Oil Gas Oil
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year 686.2 2.2 695.0 2.0 717.4 1.9 1,122.6 3.0
Increase (decrease) during
the year attributable to:
Revisions of previous
estimates (14.1) (.2) .5 .1 143.5 .5 43.0 --
Extensions, discoveries and
other additions 142.2 .5 152.8 .4 409.6 1.2 73.8 .2
Litigation settlement -- -- -- -- -- -- 9.5 --
Sale of volumetric production
payment -- -- -- -- -- -- (42.9) --
Production (119.3) (.5) (130.9) (.6) (147.9) (.6) (66.9) (.3)
------- ------- ------- ------- ------- ------- ------- -------
End of year 695.0 2.0 717.4 1.9 1,122.6 3.0 1,139.1 2.9
======= ======= ======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year 348.6 .8 384.2 1.1 442.2 1.1 476.6 1.1
End of year 384.2 1.1 442.2 1.1 476.6 1.1 425.3 .9
</TABLE>
Standardized Measure Information
The calculation of estimated future net cash flows in the following
table assumed the continuation of existing economic conditions and applied
year-end prices (except for future price changes as allowed by contract) of gas
and condensate to the expected future production of such reserves, less
estimated future expenditures (based on current costs) to be incurred in
developing and producing those proved reserves.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value of the
Company's gas and oil reserves. These estimates reflect proved reserves only
and ignore, among other things, changes in prices and costs, revenues that
could result from probable reserves which could become proved reserves in 1996
or later years, and the risks inherent in reserve estimates. The
standardized measure of discounted future net cash flows relating to proved gas
and oil reserves is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
-------------------------------------------- JANUARY 31,
1993 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Future cash inflows $ 1,420,937 $ 1,194,656 $ 1,591,011 $ 2,269,585
Future production costs (221,564) (219,485) (316,055) (427,482)
Future development costs (237,778) (243,991) (461,471) (582,798)
Future income taxes (260,740) (199,065) (196,942) (310,445)
------------ ------------ ------------ ------------
Future net cash flows 700,855 532,115 616,543 948,860
Annual discount (10%) for estimated timing
of cash flows (188,395) (136,541) (201,479) (340,002)
------------ ------------ ------------ ------------
Standardized measure of discounted future
net cash flows $ 512,460 $ 395,574 $ 415,064 $ 608,858
============ ============ ============ ============
</TABLE>
F-66
<PAGE> 192
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
-------------------------------------- JANUARY 31,
1993 1994 1995 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Beginning of year $ 466,031 $ 512,460 $ 395,574 $ 415,064
Revisions:
Quantity estimates and production rates (60,339) (31,403) 122,771 31,712
Prices, net of lifting costs 72,130 (158,906) (155,257) 331,936
Estimated future development costs 39,064 26,667 (13,631) (128,584)
Additions, extensions, discoveries and
improved recovery 161,683 141,008 172,365 47,026
Net sales of production (219,330) (233,031) (198,829) (92,139)
Development costs incurred 29,351 35,285 49,873 115,812
Accretion of discount 56,515 63,824 54,439 27,382
Net changes in income taxes (32,645) 39,670 (16,722) (66,622)
Sale of a volumetric production payment -- -- -- (77,879)
Litigation settlement -- -- 4,481 5,150
---------- ---------- ---------- ------------
End of year $ 512,460 $ 395,574 $ 415,064 $ 608,858
========== ========== ========== ============
</TABLE>
Year-end wellhead prices received by the Company from sales of natural gas
including natural gas liquids' margins, were $2.00, $1.62, $1.37 and $1.95 per
Mcf for 1993, 1994, 1995 and 1996, respectively. Year-end condensate prices
were $16.15, $17.62, $16.27 and $18.34 per barrel for 1993, 1994, 1995 and
1996, respectively.
F-67
<PAGE> 193
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransTexas Gas Corporation:
We have audited the accompanying consolidated balance sheet of TransTexas
Gas Corporation as of January 31, 1996 and July 31, 1995 and 1994 and the
related consolidated statements of operations and cash flows for the six months
ended January 31, 1996 and each of the three years in the period ended July 31,
1995, and the statement of stockholders' deficit for the six months ended
January 31, 1996, and the two years ended July 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of TransTexas Gas Corporation as of January 31, 1996 and July 31, 1995 and
1994, and the results of their operations and their cash flows for the six
months ended January 31, 1996, and each of the three years in the period ended
July 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
F-68
<PAGE> 194
TRANSTEXAS GAS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
---------------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,564 $ 82,685 $ 11,248 $ 13,921
Interest reserve account (Note 6) -- 44,722 46,000 46,000
Accounts receivable 37,058 21,943 36,251 31,796
Receivable from affiliates 5,630 366 3,697 3,292
Inventories 9,945 8,236 11,421 11,782
Other current assets 4,051 13,153 50,821 54,730
------------ ------------ ------------ -----------
Total current assets 70,248 171,105 159,438 161,521
------------ ------------ ------------ -----------
Property and equipment 1,555,691 1,832,709 2,008,068 2,099,935
Less accumulated depreciation, depletion and amortization 1,093,351 1,231,249 1,292,728 1,325,633
------------ ------------ ------------ -----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $5,409,
$139,386, $136,360 and $141,944 at July 31, 1994 and 1995,
January 31, 1996 and April 30, 1996, respectively, were
excluded from amortization 462,340 601,460 715,340 774,302
------------ ------------ ------------ -----------
Due from affiliates 2,466 8,328 14,504 28,394
Other assets, net 48,537 45,677 37,203 38,311
------------ ------------ ------------ -----------
$ 583,591 $ 826,570 $ 926,485 $ 1,002,528
============ ============ ============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ -- $ -- $ 1,335 $ 4,311
Accounts payable 31,132 16,392 39,745 58,977
Accrued liabilities 47,981 47,877 74,756 116,098
------------ ------------ ------------ -----------
Total current liabilities 79,113 64,269 115,836 179,386
------------ ------------ ------------ -----------
Due to affiliates 22,271 14,655 2,851 4,239
Long-term debt, less current maturities -- -- 2,541 8,842
Production payment -- 40,079 31,036 21,613
Senior secured notes 500,000 800,000 800,000 800,000
Revolving credit agreement -- -- 20,365 20,684
Deferred revenue -- -- 32,850 41,512
Deferred income taxes 35,476 40,672 40,256 41,882
Other liabilities 31,870 20,563 35,190 35,790
Commitments and contingencies (Note 12) -- -- -- --
Stockholders' deficit:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 74,000,000 shares 740 740 740 740
Capital deficit (107,040) (107,040) (107,040) (107,040)
Retained earnings (accumulated deficit) 21,161 (47,368) (48,140) (45,120)
------------ ------------ ------------ -----------
Total stockholders' deficit (85,139) (153,668) (154,440) (151,420)
------------ ------------ ------------ -----------
$ 583,591 $ 826,570 $ 926,485 $ 1,002,528
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-69
<PAGE> 195
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
---------------------------------- ------------------------ -----------------------
1993 1994 1995 1995 1996 1995 1996
-------- ----------- ----------- ----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids $294,753 $ 302,522 $ 275,627 $ 143,304 $ 124,663 $ 63,882 $ 79,802
Transportation 30,816 33,240 36,787 19,161 15,892 8,890 8,195
Gains on sale of assets -- -- -- -- 474 -- 7,762
Other 247 157 285 52 127 56 199
-------- ----------- ----------- ----------- ----------- ----------- ----------
Total revenues 325,816 335,919 312,699 162,517 141,156 72,828 95,958
-------- ----------- ----------- ----------- ----------- ----------- ----------
Costs and expenses:
Operating 87,627 90,216 85,272 44,605 38,145 19,459 27,438
Depreciation, depletion and amortization 95,016 113,858 129,964 70,345 60,894 30,872 30,099
General and administrative 23,613 40,311 31,935 12,595 13,685 5,674 7,439
Taxes other than income taxes 12,355 13,243 14,038 6,288 7,484 3,891 5,184
Litigation settlements (5,600) (1,000) -- -- (18,300) -- --
-------- ----------- ----------- ----------- ----------- ----------- ----------
Total costs and expenses 213,011 256,628 261,209 133,833 101,908 59,896 70,160
-------- ----------- ----------- ----------- ----------- ----------- ----------
Operating income 112,805 79,291 51,490 28,684 39,248 12,932 25,798
-------- ----------- ----------- ----------- ----------- ----------- ----------
Other income (expense):
Interest income 540 1,516 2,711 912 2,934 467 1,134
Interest expense (2,982) (51,671) (68,508) (29,971) (43,370) (15,324) (22,286)
-------- ----------- ----------- ----------- ----------- ------------ ---------
Total other income (expense) (2,442) (50,155) (65,797) (29,059) (40,436) (14,857) (21,152)
-------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes 110,363 29,136 (14,307) (375) (1,188) (1,925) 4,646
Income tax expense (benefit) 16,746 5,380 (2,415) (131) (416) 1,919 1,626
-------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before extraordinary item 3,617 23,756 (11,892) (244) (772) (3,844) 3,020
Extraordinary item - loss on early
extinguishment of debt, net of tax (Note 2) -- -- (56,637) -- -- -- --
-------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) $ 93,617 $ 23,756 $ (68,529) $ (244) $ (772) $ (3,844) $ 3,020
======== =========== =========== =========== =========== =========== ==========
Net income (loss) attributable to:
TransTexas Gas Corporation $ -- $ 21,161 $ (68,529) $ (244) $ (772) $ (3,844) $ 3,020
Predecessor 93,617 2,595 -- -- -- -- --
-------- ----------- ----------- ----------- ----------- ----------- ----------
$ 93,617 $ 23,756 $ (68,529) $ (244) $ (772) $ (3,844) $ 3,020
======== =========== =========== =========== =========== =========== ==========
Net income (loss) per share:
Income (loss) before extraordinary item $ 0.33 $ (0.16) $ -- $ (0.01) $ (0.05) $ 0.04
Extraordinary item -- (0.77) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------
$ 0.33 $ (0.93) $ -- $ (0.01) (0.05) $ 0.04
=========== =========== =========== =========== =========== ==========
Weighted average number of shares
outstanding 71,105,263 74,000,000 74,000,000 74,000,000 74,000,000 74,000,000
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-70
<PAGE> 196
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS/ TOTAL
----------------------- PAID-IN CAPITAL (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT (CAPITAL DEFICIT) DEFICIT) EQUITY (DEFICIT)
---------- ---------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1993 1,000 $ -- $ 1 $ -- $ 1
Transfer, as adjusted (Note 1) -- -- (142,078) -- (142,078)
Effect of stock split 68,999,000 690 (690) -- --
Issuance of common stock 5,000,000 50 66,092 -- 66,142
Dividend to TransAmerican -- -- (32,960) -- (32,960)
Net income -- -- 2,595 21,161 23,756
---------- ---------- ----------------- ---------- --------------
Balance at July 31, 1994 74,000,000 740 (107,040) 21,161 (85,139)
Net loss -- -- -- (68,529) (68,529)
---------- ---------- ----------------- ---------- --------------
Balance at July 31, 1995 74,000,000 740 (107,040) (47,368) (153,668)
Net loss -- -- -- (772) (772)
---------- ---------- ----------------- ---------- --------------
Balance at January 31, 1996 74,000,000 740 (107,040) (48,140) (154,440)
Net income -- -- -- 3,020 3,020
---------- ---------- ----------------- ---------- --------------
Balance at April 30, 1996 (unaudited) 74,000,000 $ 740 $ (107,040) $ (45,120) $ (151,420)
========== ========== ================= ========== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-71
<PAGE> 197
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
-------------------------------- --------------------------- --------------------
1993 1994 1995 1995 1996 1995 1996
--------- --------- --------- ---------- ---------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 93,617 $ 23,756 $ (68,529) $ (244) $ (772) $ (3,844) $ 3,020
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary item -- -- 56,637 -- -- -- --
Depreciation, depletion and
amortization 95,016 113,858 129,964 70,345 60,894 30,872 30,099
Amortization of debt issue costs -- 2,818 3,787 1,524 1,295 921 1,018
Gain on litigation settlement -- -- -- -- (18,300) -- --
Gains on sale of assets -- -- -- -- (474) -- (7,762)
Deferred income taxes (15,957) (5,961) 5,196 (1,483) (416) 898 1,626
Proceeds from volumetric production
payment -- -- -- -- 32,850 -- 15,537
Amortization of deferred revenue -- -- -- -- -- -- (6,875)
Changes in assets and liabilities:
Accounts receivable -- (37,058) 15,115 7,859 (12,860) (2,070) 4,455
Receivable from affiliates -- (1,239) 873 765 272 451 405
Inventories (104) 977 1,709 1,753 (3,185) 294 (361)
Other current assets (1,774) 351 (5,202) (2,193) (201) (622) (1,316)
Accounts payable 4,534 4,496 (14,821) 3,006 3,677 (6,286) 6,453
Accrued liabilities 16,193 15,082 (24,559) (6,982) (3,843) (21,181) 35,066
Transactions with affiliates, net -- (721) (11,987) 265 (5,536) 11,045 (12,502)
Other assets -- (728) (1,564) (885) 699 (324) (1,088)
Other liabilities (7,059) 20,612 7,693 602 (1,928) -- (726)
--------- --------- --------- --------- ---------- -------- --------
Net cash provided by operating
activities 184,466 136,243 94,312 74,332 52,172 10,154 67,049
--------- --------- --------- --------- ---------- -------- --------
Investing activities:
Capital expenditures (142,848) (233,390) (269,084) (106,170) (155,886) (60,075) (72,616)
Proceeds from sale of assets -- -- -- -- 20,500 -- 7,779
Withdrawals from interest reserve
account -- -- -- -- 44,722 -- --
Deposits to interest reserve account -- -- (44,722) -- (46,000) -- --
Advances to affiliate -- (8,257) -- -- (4,700) -- --
Payment of advances by affiliate -- 8,257 -- -- 4,700 -- --
Purchase of production payment from
affiliate -- (5,000) -- -- -- -- --
Production payment by affiliate -- 609 4,391 844 -- 3,547 --
--------- --------- --------- --------- ---------- -------- --------
Net cash used by investing
activities (142,848) (237,781) (309,415) (105,326) (136,664) (56,528) (64,837)
--------- --------- --------- --------- ---------- -------- --------
Financing activities:
Principal payments on long-term debt (1,891) -- (20,000) -- (219) (455) (723)
Proceeds from long-term borrowings 4,000 -- 20,000 10,000 3,000 -- 10,000
Revolving credit agreement, net -- -- -- 8,701 20,365 2,521 319
Issuance of dollar-denominated
production payment -- -- 49,500 -- -- 49,500 --
Repayment of dollar-denominated
production payment -- -- (7,866) -- (8,833) (2,992) (8,097)
Issuance of senior secured notes -- 500,000 800,000 -- -- -- --
Retirement of senior secured notes -- -- (542,500) -- -- -- --
Debt issue costs -- (19,418) (14,910) (452) (1,258) (2,247) (1,038)
Issuance of common stock -- 66,142 -- -- -- -- --
Dividend to TransAmerican -- (32,960) -- -- -- -- --
Restricted cash -- (29,133) -- -- -- -- --
Other (1,602) -- -- -- -- -- --
--------- --------- --------- --------- ---------- -------- --------
Net cash provided by financing
activities 507 484,631 284,224 18,249 13,055 46,327 461
--------- --------- --------- --------- ---------- -------- --------
Net transactions with parent company (42,125) (369,529) -- -- -- -- --
--------- --------- --------- --------- ---------- -------- --------
Increase (decrease) in cash and
cash equivalents -- 13,564 69,121 (12,745) (71,437) (47) 2,673
Beginning cash and cash equivalents -- -- 13,564 13,564 82,685 819 11,248
--------- --------- --------- --------- ---------- -------- --------
Ending cash and cash equivalents $ -- $ 13,564 $ 82,685 $ 819 $ 11,248 $ 772 $ 13,921
========= ========= ========= ========= ========== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-72
<PAGE> 198
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The consolidated statements of operations and cash flows for the year
ended July 31, 1993, include certain accounts of TransAmerican Natural Gas
Corporation ("TransAmerican") and certain accounts of the following
subsidiaries of TransAmerican:
TransAmerican Pipeline Corporation
TransAmerican Gas Transmission Corporation
Southern States Exploration Inc.
Southern States Inc.
Laredo Exploration Inc.
The combined entity described above is referred to as "TGC." TGC is the
predecessor to TransTexas Gas Corporation. TransTexas Gas Corporation and
its wholly-owned subsidiary, TransTexas Transmission Corporation (together
with its subsidiaries, the "Company") were incorporated in May 1993 and June
1993, respectively, for the purpose of operating certain oil and gas and
transmission assets previously operated by TransAmerican and certain of its
subsidiaries. On August 24, 1993, the Company issued $500 million in 10 1/2%
Senior Secured Notes due 2000 (the "Prior Notes"), and concurrently, certain
of these operations were transferred at predecessor basis pursuant to an
agreement among the Company, TransAmerican and certain of its subsidiaries,
and TransAmerican's sole stockholder (the "Transfer"). As a result of the
Transfer, the Company became a wholly-owned subsidiary of TransAmerican and
succeeded to the gas and oil properties, exploration and development
operations, and natural gas gathering and transportation operations of
TransAmerican and certain subsidiaries, except for specific excluded assets
(including accounts receivable) retained by TransAmerican. The Company is
currently an indirect subsidiary of TransAmerican.
TransAmerican and certain subsidiaries emerged from a proceeding under
Chapter 11 of the Bankruptcy Code on October 19, 1987, pursuant to a confirmed
Plan of Reorganization. With the proceeds of the Company's public offering of
the Prior Notes, the Company paid all allowed claims under TransAmerican's Plan
of Reorganization as well as certain other debts of TransAmerican. During
1996, the Company reclassified approximately $21.6 million of deferred tax
liability to capital to properly reflect liabilities of TransAmerican.
In December 1995, TransTexas Exploration Corporation ("TTEX") was
incorporated as a wholly-owned subsidiary of the Company and qualifies as an
Unrestricted Subsidiary, as defined in the Indenture (as defined below).
The consolidated financial statements reflect all adjustments, consisting
of normal recurring accruals, which are, in the opinion of management, necessary
to fairly state the financial position of the Company as of April 30, 1996 and
the results of its operations and cash flows for the three months ended April
30, 1995 and 1996. The results of operations and cash flows for interim periods
are not necessarily indicative of the results that may be expected for the
entire year. Certain previously reported financial information has been
reclassified to conform with the current presentation.
F-73
<PAGE> 199
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
On January 12, 1996, the Board of Directors determined to change the
fiscal year end of the Company to January 31. The consolidated financial
statements include presentation of the six months ended January 31, 1996 (the
"Transition Period") and the comparable period of the prior fiscal year which
is unaudited.
The results of operations and cash flows for the year ended July 31, 1993
represent that of TGC. Included in the results of operations and cash flows
for the year ended July 31, 1994 are the activities of TGC through August 23,
1993.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). The Company's most significant financial estimates are
based on remaining proved gas and oil reserves (see Note 17). Actual results
could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
The Company's inventories, consisting primarily of tubular goods, are
stated at the lower of average cost or market.
Gas and Oil Properties
The Company uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, the cost for successful as
well as unsuccessful exploration and development activities are capitalized.
Such capitalized costs and estimated future development and reclamation costs
are amortized on a unit-of-production method. Net capitalized costs of gas and
oil properties are limited to the lower of unamortized cost or the cost center
ceiling, defined as the sum of the present value (10% discount rate) of
estimated unescalated future net revenues from proved reserves; plus the cost
of properties not being amortized, if any; plus the lower of cost or estimated
fair value of unproved properties included in the costs being amortized, if
any; less related income tax effects.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.
Unevaluated properties and associated costs not currently being
amortized and included in oil and gas properties were $5 million, $139 million
and $136 million at July 31, 1994 and 1995 and January 31, 1996, respectively,
and $142 million at April 30, 1996. The properties represented by these costs
were undergoing exploration activities at such date, or are properties on which
the Company intends to commence such activities in the future. The Company
believes that the unevaluated properties at April 30, 1996 will be
substantially evaluated in 12 to 24 months and it will begin to amortize these
costs at such time.
Other Property and Equipment
Other property and equipment are stated at cost. The cost of repairs and
minor replacements is charged to operating expense while the cost of renewals
and betterments is capitalized. At the time depreciable assets are retired, or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts. Gains or losses on dispositions in
the ordinary course of business are included in the consolidated statement of
operations. Impairment of other property and equipment is reviewed whenever
events or changes in circumstances indicate that the carrying value of assets
may not be recoverable. Generally, impairment would be evaluated based on
future estimated undiscounted cash flow.
Depreciation of pipeline and transmission facilities and other buildings
and equipment is computed by the straight- line method at rates that will
amortize the unrecovered cost of depreciable property, including assets
acquired under capital leases, over their estimated useful lives.
Costs of improving leased property are amortized over the estimated useful
lives of the assets or the terms of the leases, whichever is shorter.
F-74
<PAGE> 200
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Environmental Remediation Costs
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have future
economic benefits are expensed. Liabilities for these expenditures are provided
when the responsibility to remediate is probable and the amount of associated
costs is reasonably estimable.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other
Assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the straight-line method.
Defined Contribution Plan
The Company, through its parent company, TransAmerican, maintains a defined
contribution plan, which incorporates a "401(k) feature" as allowed under the
Internal Revenue Code. All investments are made through Massachusetts Mutual
Life Insurance Company. Employees who are at least 21 years of age and have
completed one year of credited service are eligible to participate on the next
semiannual entry date. The Company matches 10%, 20% or 50% of employee
contributions up to a maximum of 3% of the participant's compensation, based on
years of plan participation. The Company and its predecessor's contributions
with respect to this plan totaled $0.1 million, $0.2 million, $0.3 million,
$0.2 million, $0.1 million, $0.1 million and $0.1 million, respectively, for
the years ended July 31, 1993, 1994 and 1995, the six months ended January 31,
1995 and 1996 and the three months ended April 30, 1995 and 1996. All Company
contributions are currently funded.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
different from the book value. The Company assumes the book value of those
financial instruments that are classified as current approximate fair value
because of the short maturity of these instruments. For noncurrent financial
instruments, the Company uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
F-75
<PAGE> 201
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Revenue Recognition
The Company recognizes revenues from the sales of natural gas, condensate
and natural gas liquids in the period of delivery. Revenues are recognized
from transportation of natural gas in the period the service is provided. The
sales method is used for natural gas imbalances that arise from jointly
produced properties.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to credit risk
consist principally of trade receivables and commodity price swap agreements.
Trade accounts receivable are generally from companies with significant natural
gas marketing activities, who would be impacted by conditions or occurrences
affecting that industry. For further information regarding the Company's
hedging arrangements, see Note 16. The Company performs ongoing credit
evaluations and, generally, requires no collateral from its customers.
Income Taxes
The Company files a consolidated tax return with TransAmerican. Income
taxes are due from or payable to TransAmerican in accordance with a tax
allocation agreement (the "Tax Allocation Agreement"). It is the Company's
policy to record income tax expense as though the Company had filed separately.
Pursuant to the Tax Allocation Agreement, the Company is able to recognize
currently any benefits related to available tight sands credits. Deferred
income taxes are recognized, at enacted tax rates, to reflect the future
effects of tax carryforwards and temporary differences arising between the tax
bases of assets and liabilities and their financial reporting amounts in
accordance with Statement of Financial Accounting Standards No. 109 and the Tax
Allocation Agreement between the Company, TransAmerican and TransAmerican's
other subsidiaries. Income taxes include Federal and state income taxes.
Recently Issued Pronouncement
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company's pipeline assets are considered within the scope of SFAS No.
121. The Company adopted the requirements of SFAS No. 121 as of February 1,
1996. Based on the Company's estimates as of April 30, 1996, there have been
no events or circumstances that would require the recognition of an impairment
loss. Gas and oil properties accounted for under the full cost method are
outside the scope of SFAS No. 121 but are subject to a ceiling limitation.
2. PUBLIC OFFERING
On June 20, 1995, the Company issued $800 million aggregate principal
amount of 11 1/2% Senior Secured Notes due 2002 (the "Notes"). The Notes are
senior obligations of the Company collateralized by a lien on substantially all
existing and future collateral of the Company, which initially includes
substantially all of the properties and assets of the Company other than
Equipment, Receivables and Inventory, as defined in the indenture governing the
Notes (the "Indenture"). The Notes bear interest at the rate of 11 1/2% per
annum, payable semiannually on June 15 and December 15, commencing December 15,
1995. The Notes will mature on June 15, 2002.
In connection with the offering of the Notes, the Company commenced a
tender offer to purchase for cash all of its $500 million principal amount of
Prior Notes for 105% of their principal amount plus accrued and unpaid interest
to the date of purchase. In addition, holders of the Prior Notes were offered
a consent fee equal to $30 per $1,000 principal amount of Prior Notes in return
for their consents to amendments to the indenture governing the Prior Notes.
Substantially all of the Prior Notes were tendered pursuant to this offer.
F-76
<PAGE> 202
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The Company received net proceeds of approximately $787 million from the
sale of the Notes after deducting underwriting discounts, fees and expenses.
The Company used approximately $556 million of the net proceeds to retire the
entire principal amount of the Prior Notes, including premium and consent fees
and accrued and unpaid interest, and approximately $46 million to establish an
interest reserve account (see Note 6). The remainder was used for lease
acquisitions, drilling and development and general and corporate purposes. The
Company recorded an extraordinary loss on the extinguishment of the Prior Notes
of approximately $56.6 million, net of an income tax benefit.
The components of this charge are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Premium and consent fee $ 40,000
Write-off of unamortized debt issue costs 15,628
Underwriting fees and expenses 2,500
Related income tax benefit (1,491)
--------
$ 56,637
========
</TABLE>
3. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION> JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Prepayments:
Trade $ 3,138 $ 5,776 $ 2,394 $ 3,770
Drilling 228 1,907 2,070 1,464
Insurance 685 1,520 1,430 1,961
Properties held for sale -- -- 6,000 6,000
Restricted cash -- -- 7,368 7,368
Deferred loss on commodity price swap agreements -- 3,900 31,317 33,910
Other -- 50 242 257
---------- ---------- ---------- ----------
$ 4,051 $ 13,153 $ 50,821 $ 54,730
========== ========== ========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
ESTIMATED JULY 31,
USEFUL LIFE ----------------------- JANUARY 31, APRIL 30,
(YEARS) 1994 1995 1996 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Land $ 580 $ 580 $ 660 $ 1,342
Gas and oil properties 1,362,072 1,621,261 1,775,597 1,851,541
Gas transportation 10 137,448 147,553 160,819 169,535
Equipment and other 4-10 55,591 63,315 70,992 77,517
---------- ---------- ---------- ----------
$1,555,691 $1,832,709 $2,008,068 $2,099,935
========== ========== ========== ==========
</TABLE>
In March 1996, the Company sold its 41.67% interest in the 76-mile,
24-inch Midcon pipeline that runs from the Company's Thompsonville compressor
station to Agua Dulce for $7.5 million. The Company believes that its existing
transportation capacity in this area is adequate for the Company's production
and does not anticipate any material constraints on the transportation of its
natural gas as a result of this sale.
The Company has engaged an investment banking firm to assist in the
potential sale or sale/leaseback of all or a portion of the Pipeline System,
without disrupting the pipeline capacity available to the Company. The Company
has also engaged an investment banking firm to assist in the sale of its
interest in the Lodgepole area and three separate packages of producing
properties in the Lobo Trend containing a total of approximately 200 Bcfe of
natural gas reserves.
In July 1996, the Company consummated the sale, effective as of May 1,
1996, of one of these property packages in Zapata County, Texas for
consideration of approximately $62 million. The Company has entered in to a
purchase and sale agreement pursuant to which it intends to sell, effective as
of February 1, 1996, a second set of properties in Webb County, Texas for
consideration of approximately $23 million. The Company anticipates
consummating such sale in August 1996 if certain closing conditions, including
the receipt of a favorable appraisal, are met. In May 1996, the Company
consummated the sale, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million. The purchase price for each of the properties discussed above
was or is subject to adjustment for gas sales between the effective date and
the closing date. The Company retained or will retain the proceeds of all such
gas sales.
F-77
<PAGE> 203
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
5. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
--------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
--------- ---------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Debt issue costs, net of accumulated
amortization of $2,818, $493, $1,788
and $2,806 at July 31, 1994, and 1995,
January 31, 1996 and April 30, 1996,
respectively $ 18,676 $ 14,252 $ 13,845 $ 13,865
Litigation escrow 29,133 30,842 22,972 23,236
Other 728 583 386 1,210
--------- -------- ---------- --------
$ 48,537 $ 45,677 $ 37,203 $ 38,311
========= ======== ========== ========
</TABLE>
The Company expensed approximately $15.6 million of unamortized debt issue
costs in connection with the retirement of the Prior Notes. This charge is
included in the extraordinary loss on the extinguishment of the Prior Notes
(see Note 2). The Company incurred a total of approximately $12.5 million in
debt issue costs related to the issuance of the Notes which will be amortized
over the life of the Notes. Certain cash has been escrowed from the proceeds
of the offering of the Prior Notes to satisfy certain contingent liabilities.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31,
--------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
---------- -------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
11 1/2% Senior Secured Notes due 2002 $ -- $800,000 $ 800,000 $ 800,000
10 1/2% Senior Secured Notes due 2000 500,000 -- -- --
Notes payable, ranging from 9.5% to
13.25%, due through 1999 -- -- 3,876 13,153
---------- -------- ---------- ---------
Total long-term debt 500,000 800,000 803,876 813,153
Less current maturities -- -- 1,335 4,311
---------- -------- ---------- ---------
$ 500,000 $800,000 $ 802,541 $ 808,842
========== ======== ========== =========
</TABLE>
The Notes are senior obligations of the Company collateralized by a lien
on substantially all existing and future collateral of the Company, which
initially includes substantially all of the properties and assets of the
Company other than Equipment, Receivables and Inventory, as defined in the
Indenture. The Notes bear interest at the rate of 11 1/2% per annum, payable
semiannually on June 15 and December 15, commencing December 15, 1995. The
Notes will mature on June 15, 2002.
Capitalized words in the following discussion have the meanings as defined
in the Indenture. The Company will not have the right to redeem the Notes
prior to June 15, 2000, except that (i) prior to June 15, 1998, the Company may
redeem, at its option, up to $240 million aggregate principal amount of the
Notes in cash at a redemption price equal to 111.5% of the principal amount of
the Notes so redeemed, together with accrued and unpaid interest, if any, to
the redemption date, with the net proceeds of any Public Equity Offering and
(ii) if the Company makes a Major Asset Sale, the Company may redeem, at its
option, at any time after consummation of such Major Asset Sale, but in any
event within 90 days of the expiration of any Offer to Purchase or any Change
of Control Offer, as applicable, made as a result of such Major Asset Sale, any
or all of the outstanding Notes in cash
F-78
<PAGE> 204
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
at a redemption price equal to 111.5% of the principal amount of the Notes so
redeemed, together with accrued and unpaid interest, if any, to the redemption
date. On or after June 15, 2000 and 2001, the Company will have the right to
redeem all or any part of the Notes in cash at the redemption prices of
105.750% and 102.875%, respectively, together with accrued and unpaid interest,
if any, to the redemption date.
Pursuant to the Indenture, the Company maintains an account (the "Interest
Reserve Account") from which funds may only be disbursed in accordance with the
terms of a Cash Collateral and Disbursement Agreement (the "Disbursement
Agreement"). The Company has deposited into the Interest Reserve Account funds
sufficient to pay the aggregate amount of the next ensuing interest payment due
in respect of the Notes. Funds in the Interest Reserve Account may be invested,
at the direction of the Company (except as provided below), only in cash and
Cash Equivalents, and any interest income thereon will be added to the balance
of the Interest Reserve Account. The Company must maintain a balance (the
"Requisite Balance") in the Interest Reserve Account at least equal to the
amount necessary to satisfy the Company's obligation to pay interest in respect
of all then outstanding Notes on the next Interest Payment Date; provided,
however, that if, pursuant to the Disbursement Agreement, any funds in the
Interest Reserve Account are applied to the payment of interest on the Notes,
the Company shall not be obligated to maintain the Requisite Balance during the
period of 60 days immediately following the Interest Payment Date in respect of
which such payment was made.
The Company may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date,
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement provides that if the Company fails to pay an installment of interest
on the Notes on any Interest Payment Date, then all investments in the Interest
Reserve Account will be immediately liquidated and all funds in the Interest
Reserve Account will be deposited with the Indenture Trustee. If the Company
has not paid such installment of interest within five days after such Interest
Payment Date, or if the Company so instructs the Indenture Trustee, the
Indenture Trustee will apply such deposited funds to the payment of interest on
the Notes. The Disbursement Agreement will provide that funds may be disbursed
from the Interest Reserve Account and released to the Company only to the
extent that the balance thereof exceeds the Requisite Balance.
If the Company's Working Capital, as of the end of any fiscal quarter, is
less than $20 million, then the Company's Capital Expenditures for the next
succeeding fiscal quarter may not exceed 90% of (a) the Company's Consolidated
EBITDA for such prior fiscal quarter minus (b) the Company's Consolidated Fixed
Charges for such prior fiscal quarter (the "Capital Expenditure Limit"). The
Company's Working Capital at April 30, 1996 was less than $20 million. As a
result, the Company's Capital Expenditures for the quarter ending July 31, 1996
may not exceed the Capital Expenditure Limit. The Indenture also contains other
covenants affecting the Company's liquidity and capital resources, including
restrictions on the Company's ability to incur indebtedness, pledge assets and
pay dividends on its common stock. Working Capital does not include current
assets or current liabilities of the Unrestricted Subsidiary. TTEX is an
Unrestricted Subsidiary.
The Company's notes payable bear interest at rates ranging from 9.5% to
13.25% per annum and mature at various dates through January 1999. These notes
payable are collateralized by certain of the Company's operating equipment.
Aggregate principal payments on the Company's notes payable at January 31, 1996
total $1.3 million for each of the fiscal years ended January 31, 1997, 1998
and 1999.
In February 1996, the Company completed an additional financing in the
amount of $10 million at an interest rate of 12 1/2% per annum and a 36-month
term, collateralized by certain operating equipment. Aggregate principal
payments for this additional financing total approximately $2.7 million, $3.3
million, $3.7 million and $0.3 million for fiscal years ended January 31, 1997,
1998, 1999 and 2000, respectively.
The fair value of the Notes, based on quoted market prices, was approxi-
mately $826 million, $818 million and $798 million as of July 31, 1995, January
31, 1996 and April 30, 1996, respectively.
F-79
<PAGE> 205
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
WORKING CAPITAL REQUIREMENT
A primary source of funds to meet the Company's debt service and capital
requirements is net cash flow provided by operating activities, which is
extremely sensitive to the prices the Company receives for its natural gas. The
Company has entered into hedge agreements to reduce its exposure to price risk
in the spot market for natural gas. However, a substantial portion of the
Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development,
lease acquisitions, pipeline and other equipment additions. Since July 31, 1995,
the Company has utilized asset sales and various financings, in addition to cash
flow from operating activities, to meet its working capital requirements. The
Company anticipates that it will utilize additional financing or sales of assets
to fund planned levels of operations through January 1997. No assurance,
however, can be given that the Company's cash flow from operating activities
will be sufficient to meet planned capital expenditures, contingent liabilities,
and debt service in the future.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------ ----------------------- -----------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Seller financed obligations incurred for
capital expenditures $ 364 $ -- $ -- $ -- $ 1,095 $ -- $ --
========== ========== ========== ========== ========== ========== ==========
Capitalized lease obligations incurred
for property and equipment $ 2,551 $ -- $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ========== ========== ==========
Accounts payable and long-term
liabilities for property and equipment $ -- $ -- $ -- $ -- $ 25,489 $ -- $ 12,779
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------ ------------------------ -----------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest $ 2,982 $ 26,978 $ 75,863 $ 29,971 $ 41,052 $ 27,528 $ 1,951
========== ========== ========== ========== ========== ========== ==========
Income taxes (paid to TransAmerican) $ 9,046 $ 1,858 $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ========== ========== ==========
</TABLE>
F-80
<PAGE> 206
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The Company incurred approximately $69.4 million, $50.8 million and
$26.0 million of interest charges of which approximately $0.9 million, $7.4
million and $3.7 million was capitalized for the year ended July 31, 1995, the
six months ended January 31, 1996 and the three months ended April 30, 1995
and 1996, respectively, in connection with the acquisition of certain of the
Company's unevaluated gas and oil properties. During 1994, the Company
capitalized a total of approximately $0.7 million of interest in connection
with the expansion of the Company's pipeline system.
8. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Royalties $ 8,642 $ 6,351 $ 9,793 $ 13,105
Taxes other than income taxes 6,171 5,664 2,733 6,984
Accrued interest 21,875 10,733 11,756 34,756
Payroll 4,928 3,760 4,832 5,649
Litigation settlements 4,049 10,492 7,053 4,053
Settlement values of commodity price swap agreements -- 3,900 31,317 36,638
Insurance -- 1,933 1,248 3,238
Deferred revenue -- -- 4,000 10,367
Other 2,316 5,044 2,024 1,308
---------- ---------- ---------- ----------
$ 47,981 $ 47,877 $ 74,756 $ 116,098
========== ========== ========== ==========
</TABLE>
9. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31, APRIL 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Litigation accrual $ 31,870 $ 19,571 $ 12,171 $ 11,380
Short-term obligations expected
to be refinanced:
Litigation settlement -- -- 14,747 14,747
Accrued capital expenditures -- -- 5,443 5,443
Current portion of dollar-denominated production payment -- -- 1,765 3,090
Other -- 992 1,064 1,130
---------- ---------- ---------- ----------
$ 31,870 $ 20,563 $ 35,190 $ 35,790
========== ========== ========== ==========
</TABLE>
In February 1996, the Company completed a financing in the amount of
$10 million at an interest rate of 12 1/2% per annum and a 36-month term,
collateralized by certain operating equipment. In February 1996, the Company
also amended a purchase agreement with an unaffiliated third party related to a
volumetric production payment to include an additional 14 Bcf which were sold
to the third party for a purchase price of approximately $16 million. Proceeds
from these transactions net of current maturities will be used to pay all of the
obligations listed above under the caption "Short-term obligations expected to
be refinanced."
F-81
<PAGE> 207
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
10. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
-------------------------------------- -------------------------- ------------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal:
Current $ 30,403 $ 10,909 $ (7,611) $ 1,352 $ -- $ 1,021 $ --
Deferred (15,957) (5,961) 5,196 (1,483) (416) 898 1,626
State:
Current 2,300 432 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income tax expense
(benefit) before
extraordinary item 16,746 5,380 (2,415) (131) (416) 1,919 1,626
Tax benefit of
extraordinary item -- -- (1,491) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total income tax
expense (benefit) $ 16,746 $ 5,380 $ (3,906) $ (131) $ (416) $ 1,919 $ 1,626
========== ========== ========== ========== ========== ========== ==========
</TABLE>
In August 1993, the Omnibus Reconciliation Act of 1993, among other
things, increased the maximum corporate marginal federal income tax rate to 35%
from 34% effective January 1, 1993. Deferred income taxes as of July 31, 1994
include an adjustment of approximately $2.7 million related to this increase in
corporate tax rates. Included in "Due to affiliates" at January 31, 1996, and
July 31, 1995 and 1994 is the current tax portion payable to TransAmerican
totaling approximately $3.7 million, $11.2 million and $12.5 million,
respectively.
During the third quarter of 1994, TransAmerican's refining subsidiary
reached a level of operations, which, for federal income tax purposes, changed
the tax status of TransAmerican's consolidated group to an integrated oil
company from an independent producer. As a result of this change in tax
status, the Company was able to utilize a greater portion of its available
tight sands credits, thereby reducing its effective tax rate for 1994. The
Company was unable to utilize any tight sands credits during the Transition
Period or in 1995 due to its net loss position. Total income tax expense
differs from amounts computed by applying the statutory federal income tax rate
to income before income taxes. The items accounting for this difference are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JULY 31, ENDED JANUARY 31, APRIL 30,
------------------------------------ --------------------------- ------------------------
1993 1994 1995 1995 1996 1995 1996
--------- ---------- ---------- ----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Federal income tax expense
(benefit) at the statutory
rate $ 38,119 $ 10,197 $ (25,352) $ (131) $ (416) $ (674) $ 1,626
Increase (decrease) in tax
resulting from:
Tax rate change -- 2,745 -- -- -- -- --
State income taxes, net
of Federal income
tax benefit 1,506 281 -- -- -- -- --
Tight sands credit (22,879) (7,843) 7,842 -- -- -- --
Valuation allowance -- -- 13,604 -- -- -- --
Other -- -- -- -- -- 2,593 --
--------- ---------- ---------- ----------- ----------- ---------- ----------
$ 16,746 $ 5,380 $ (3,906) $ (131) $ (416) $ 1,919 $ 1,626
========= ========== ========== ========== ========== ========== ==========
</TABLE>
Income tax expense for the three months ended April 30, 1995 includes an
adjustment of approximately $2.6 million to reconcile the Company's fiscal 1994
tax accrual to the tax return.
F-82
<PAGE> 208
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Significant components of the Company's tax attributes are as follows (in
thousand of dollars):
<TABLE>
<CAPTION>
JULY 31,
------------------------ JANUARY 31, APRIL 30,
1994 1995 1996 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation, depletion and amortization $ 81,859 $ 72,033 $ 83,724 $ 91,125
Other, net 3,814 4,083 359 --
---------- ---------- ---------- ----------
85,673 76,116 84,083 91,125
---------- ---------- ---------- ----------
Deferred tax assets:
Net operating loss carryforwards -- 13,604 22,687 22,640
Contingent liabilities 10,166 4,400 3,700 3,700
Alternative minimum tax credit carryforward 40,031 31,044 31,044 31,044
Other, net -- -- -- 5,463
---------- ---------- ---------- ----------
50,197 49,048 57,431 62,847
Valuation allowance -- (13,604) (13,604) (13,604)
---------- ---------- ---------- ----------
Net deferred tax assets 50,197 35,444 43,827 49,243
---------- ---------- ---------- ----------
$ 35,476 $ 40,672 $ 40,256 $ 41,882
========== ========== ========== ==========
</TABLE>
The Company can only use alternative minimum tax credit carryforwards to
the extent it is a regular federal income tax payer. At April 30, 1996, the
Company had a net operating loss carryforward for federal income tax purposes
totaling approximately $65 million, which expires in 2012.
Under certain circumstances, TransAmerican, TDOC, TEC or TARC may sell or
otherwise dispose of shares of common stock of the Company. If, as a result of
any sale or other disposition of the Company's common stock, the direct and
indirect ownership of the Company by TransAmerican is less than 80% (measured
by voting power and value), the Company will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the "TransAmerican
Consolidated Group") and, with certain exceptions, will no longer be obligated
under the terms and conditions of the Tax Allocation Agreement (as defined
below) ("Deconsolidation"). Further, if TEC or TARC sells or otherwise
transfers any stock of TARC, or issues any options, warrants or other similar
rights relating to such stock, outside of the TransAmerican Consolidated Group,
then a Deconsolidation of both TARC and the Company from the TransAmerican
Consolidated Group would occur. For the taxable year during which
Deconsolidation of the Company occurs, which would also be the final year that
the Company is a member of the TransAmerican Consolidated Group, TransAmerican
would recognize a previously deferred gain of approximately $266.3 million
associated with the Transfer and would be required to pay federal income tax on
this gain (the tax is estimated to be between $29 million and $56 million if
Deconsolidation occurs in fiscal 1997 and between $24 million and $45 million
if Deconsolidation occurs in fiscal 1998). This analysis is based on the
Company's position that the gain from the Transfer, which occurred in 1993, was
deferred under the consolidated return regulations. The deferred gain generally
is being included in TransAmerican's taxable income in a manner that
corresponds (as to timing and amount) with the realization by the Company of
(and, thus, will be offset by) the tax benefits (i.e., additional depreciation,
depletion and amortization on, or reduced gain or increased loss from a sale
of, the transferred assets) arising from the additional basis. If, under the
terms of the TARC Notes, it was reasonably certain when the TARC Notes were
issued that a sufficient amount of the Company's stock would be disposed in the
future to cause a Deconsolidation of the Company from the TransAmerican
Consolidated Group, it is possible that the Deconsolidation of the Company
would be treated as occurring as of the date the TARC Notes were issued.
However, TARC has advised the Company that it believes that when the TARC Notes
were issued it was not reasonably certain that a Deconsolidation of the Company
would occur in the future. Under the Tax Allocation Agreement, the Company is
required to pay TransAmerican each year an amount equal to the lesser of (i)
the reduction in taxes paid by the Company for such year as a result of any
increase in the tax basis of assets acquired by the Company from TransAmerican
that is attributable to the Transfer and (ii) the increase in taxes paid by
TransAmerican for such year
F-83
<PAGE> 209
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
and all prior years attributable to gain recognized by TransAmerican in
connection with the contribution of assets by TransAmerican to the Company
(less certain amounts paid by the Company for all prior years). The Company
estimates that if Deconsolidation occurs in fiscal 1997 or 1998, the amount
reimbursed to TransAmerican would be between $9 million and $16 million and
between $7 million and $13 million, respectively. The remaining amount of the
tax relating to the gain would be paid over the lives of the assets
transferred. In addition, the Company could be liable for additional taxes
pursuant to the Tax Allocation Agreement and the several liability provisions
of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
the Company are used by other members of the TransAmerican Consolidated Group,
then the Company is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent the Company has taxable
income, remains a member of the TransAmerican Consolidated Group, and the other
group members have the ability to pay such taxes. If TEC, TARC or TDOC
transfers shares of the Company (or transfers options or other rights to acquire
such shares) and, as a result of such transfer, Deconsolidation of the Company
occurs, the Company would not receive any benefit pursuant to the Tax Allocation
Agreement for net operating losses of the Company used by other members of the
TransAmerican Consolidated Group prior to the Deconsolidation of the Company.
Under the Tax Allocation Agreement, the Company will be required to pay
any Texas franchise tax (which is estimated not to exceed $10.6 million) which
may be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax purposes
could result in the acceleration of payment of a substantial amount of federal
income taxes. TransAmerican Energy Corporation ("TEC") and TransAmerican
Refining Corporation ("TARC"), both subsidiaries of TransAmerican, currently
own approximately 54% and 14%, respectively, of the outstanding common stock of
the Company. These shares are pledged as collateral for TARC's outstanding
debt securities. A decision by either TEC or TARC, to sell shares of the
Company could result in deconsolidation. Had deconsolidation occurred at
January 31, 1996, the Company would owe between $30 million and $50
million to TransAmerican pursuant to a tax allocation agreement with
TransAmerican.
Each member of a consolidated group filing a consolidated federal
income tax return is severally liable to the Internal Revenue Service (the
"IRS") for the consolidated federal income tax liability of the consolidated
group. There can be no assurance that TransAmerican or other members of the
group will have the ability to satisfy their tax obligation at the time due
and, therefore, the Company may be required to pay the tax.
11. TRANSACTIONS WITH AFFILIATES
Pursuant to the terms of the Transfer Agreement defined in Note 12,
TransAmerican has indemnified the Company for substantially all of the
Company's liability in connection with the settlement of the Terry/Penrod
litigation (See Note 14). In order to facilitate the settlement, the Company
advanced to TransAmerican $16.4 million of the settlement in exchange for a
note receivable. The note is due in installments and partially collateralized
by certain of TransAmerican's oil and gas properties. In connection with the
litigation settlement, the Company received from Terry the reversionary
interest in certain producing properties. The Company and TransAmerican had
intended that such interests would revert to TransAmerican under the Transfer
Agreement. The Company and TransAmerican have agreed in principle that the
Company will retain such interests in partial satisfaction of TransAmerican's
indemnity obligations.
F-84
<PAGE> 210
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
In February 1996, the Company purchased the building for its corporate
headquarters from TransAmerican for $4 million.
In April 1994, the Company purchased a production payment from Southern
States Exploration, Inc., a TransAmerican affiliate, for $5 million. The
production payment accrued interest at a rate of 10% per annum, and was repaid
in March 1995.
In December 1994, the Company entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $14.8
million, $11.1 million, $2.6 million and $10.4 million, respectively, for the
year ended July 31, 1995, the six months ended January 31, 1996 and the three
months ended April 30, 1995 and 1996. The receivable from TransAmerican for
natural gas sales totaled approximately $10.5 million at April 30, 1996.
The Company sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$2.3 million and $2.5 million for the years ended July 31, 1994 and 1995,
respectively, $1.2 million and $1.4 million for the six months ended January 31,
1995 and 1996 and $0.1 million and $0.3 million for the three months ended April
30, 1995 and 1996, respectively. The receivable from TARC for natural gas sales
totaled approximately $0.4 million and $0.3 million at July 31, 1995 and April
30, 1996, respectively. The receivable from TARC for natural gas sales at April
30, 1996, was immaterial.
The Company provides accounting and legal services to TARC, TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement (the "Services Agreement"). The Company provides general commercial
legal services and certain accounting services (including payroll, tax, and
treasury services) to TARC and TEC for a fee of $26,000 per month. At
TransAmerican's request, the Company, at its election, may provide drilling and
workover services. The Company believes that the amount of payments pursuant
to the Services Agreement for all periods presented was immaterial.
In July 1995, the Company acquired certain oil leases from TransAmerican
for approximately $6.3 million, which represented TransAmerican's cost for such
leases. The Company continued to acquire additional leases in the area. In
October 1995, the Company sold an undivided portion of its leases in the
Lodgepole Prospect in North Dakota to TransDakota Oil Corporation
("TransDakota"), a subsidiary of TransAmerican, for approximately $16.0
million. The $16.0 million sales price represents the Company's cost for this
portion of these leases. The Company and TransDakota have entered into an
operating agreement under which the Company is the operator. The remaining
portion of these leases, with a cost of approximately $15 million, are held for
sale to third parties, and a portion, with a cost of $6 million, is subject to
a contract with a third party which is classified as a current asset because of
its effective date.
In September 1995, the Company advanced $3 million and $1.7 million to
TransAmerican. In October 1995, TransAmerican repaid the full amount of both
advances with interest at an annualized rate of 13%. In December 1995, TARC
advanced approximately $0.8 million to the Company which was subsequently
repaid with interest. The Company then advanced approximately $0.2 million to
TARC which will be repaid at a future date.
As of January 1996, the Company and TransTexas Exploration Corporation, a
wholly owned subsidiary of the Company ("TTEX") entered into a Drilling Program,
as defined in the Indenture. Pursuant to the Program, TTEX received a portion of
revenues, in the form of a production payment, from certain of the Company's
wells. The production payment was transferred in consideration of a note payable
in the amount of $23.6 million issued by TTEX. In July 1996, TTEX transferred
this production payment to TransTexas in the form of a dividend, and TransTexas
forgave the $13.2 million remaining balance of the note payable.
In July and August 1996, TTEX loaned $12.5 million to TransAmerican
pursuant to the terms of a promissory note that bears interest, payable
quarterly, at 15% per annum. TTEX may make future advances pursuant to the
note, subject to the same terms.
F-85
<PAGE> 211
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
12. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As part of the Transfer, the Company has succeeded to the potential
liability, if any, of TransAmerican and certain subsidiaries in connection with
the lawsuits described below. The Company has assumed liability for the
proceedings described in Note 14 under "Frito-Lay", "NL Industries" and
"Ginther/Warren", and liability for other litigation up to $15 million plus the
difference, if any, between $10 million and the costs (if less than $10 million)
incurred to resolve the disputed claims. Pursuant to an agreement among the
Company, TransAmerican and certain of its subsidiaries, as amended (the
"Transfer Agreement"), TransAmerican will indemnify the Company against all
losses incurred by the Company in excess of $25 million in connection with (a)
disputed claims in TransAmerican's bankruptcy and (b) other litigation assumed
by the Company and other agreements related to TransAmerican's plan of
reorganization (other than settlements and judgments paid from escrowed cash
established in connection with TransAmerican's plan of reorganization).
Effective with the settlement of the Terry/Penrod Litigation described in Note
14, TransAmerican will be required to indemnify the Company for all future
losses incurred in connection with litigation or bankruptcy claims assumed in
the Transfer. Any indemnification payments received from TransAmerican for which
the Company is the primary obligor will be considered a contribution of capital.
There can be no assurance that TransAmerican will have the financial ability to
meet all of its indemnification obligations.
FINKELSTEIN. On April 15, 1990, H.S. Finkelstein and Medallion Oil Company
filed suit against TransAmerican in the 49th Judicial District Court, Zapata
County, Texas, alleging that TransAmerican failed to pay royalties and
improperly marketed oil and gas produced from certain leases. On September 27,
1994, the plaintiffs added the Company as an additional defendant. On January 6,
1995, a judgment against TransAmerican and the Company was entered for
approximately $18 million in damages, interest and attorneys' fees. The Company
and TransAmerican have posted a supersedeas bond and appealed the judgment to
the Fourth Court of Appeals, San Antonio, Texas. The Fourth Court of Appeals
affirmed the judgment on April 3, 1996. The Company and TransAmerican have filed
a motion for rehearing. On April 22, 1991, the plaintiffs filed another suit
against TransAmerican and various affiliates in the 49th Judicial District
Court, Zapata County, Texas, alleging an improper calculation of overriding
royalties allegedly owed to the plaintiffs and seeking damages in an unspecified
amount. On November 18, 1993, the plaintiffs added the Company as an additional
defendant. The parties have agreed to binding arbitration in this matter, which
is set for January 6, 1997.
COASTAL. On October 28, 1991, Coastal filed an action against TransAmerican
that was consolidated in the 49th Judicial District Court, Webb County, Texas,
alleging breach of contract and tortious interference related to two
F-86
<PAGE> 212
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
gas sales contracts and a transportation agreement, seeking unspecified actual
and punitive damages and injunctive relief. On April 22, 1994, the court
entered a judgment adverse to TransAmerican and the Company requiring them to
pay $1.3 million plus $0.7 million in attorney's fees to Coastal. On May 29,
1996, the Court of Appeals affirmed the judgements. TransAmerican and the
Company continue to appeal this judgment. Coastal has abstracted the judgment in
Webb and Zapata Counties. While this matter is being judicially resolved, the
Company is continuing to furnish gas to Coastal.
ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued TransAmerican
and Mr. Stanley in the 215th Judicial District Court of Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the El
Paso settlement proceeds and that TransAmerican has been unjustly enriched by
its failure to share these proceeds with Alameda. The court granted Mr.
Stanley's motion for summary judgment. On September 20, 1995, the jury rendered
a verdict in favor of TransAmerican. Alameda has appealed to the Fourteenth
Court of Appeals.
ASPEN. TransAmerican brought suit, on September 29, 1993, against Aspen
Services ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts received
by Aspen. Aspen, under provisions of the parties' drilling agreement, requested
that TransAmerican's audit be made subject to arbitration, and the court
agreed. While the audit was in progress, Aspen asserted additional costs that
it contended should be added to the production payment account. One category of
such costs, relating to overhead expenses, amounted to approximately $2.6
million. On July 3, 1996, the arbitrators issued a decision in which they
rejected all of Aspen's overhead charges, and accepted and rejected various
charges contested by TransAmerican, with the net result of a credit in
TransAmerican's favor of approximately $80,000. Aspen also filed, in the court
proceeding, on July 19, 1995, a counterclaim and third party claim against
TransAmerican, the Company, and affiliated entities, asserting, among other
things, that these entities failed to make certain payments and market gas
from these wells. Aspen is seeking damages in an unspecified amount, as well as
certain equitable claims. The Company and its affiliates are vigorously
contesting this claim. The parties' drilling contract was not transferred to
the Company in the Transfer. The properties relating to the drilling contract,
however, were transferred to the Company. TransAmerican is entitled to any
settlement or damages awarded to it in this matter.
KATHRYN M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred to
the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in the La Perla Ranch
leases, are entitled to receive a portion of the settlement proceeds received
by TransAmerican from El Paso. TransAmerican has filed its motion for summary
judgment which will be heard by the Court on August 2, 1996. Plaintiffs have
also filed a motion for partial summary judgment based on the Finkelstein case.
TransAmerican has responded to this motion.
MCNAMARA. On June 28, 1996, the Company consummated a settlement of litigation
with Tennessee Gas Pipeline Company that was pending in Ector County ("Tennessee
lawsuit") pursuant to which the Company and another Plaintiff (ICA Energy, Inc.)
received approximately $125 million from Tennessee. the Company's share of the
settlement proceeds was $96 million. On July 2, 1996, John McNamara, Jr. et. al
("The Hubberd Trusts") filed a new suit against the Company in the 241st
District Court of Webb County, Texas asserting that the Company had breached its
duties to The Hubberd Trusts under certain oil and gas leases and that the
Company owed The Hubberd Trusts 25% of the gross settlement proceeds or
approximately $31.25 million. However, in August of 1995, The Hubberd Trusts had
already intervened in the Tennessee lawsuit wherein The Hubberd Trusts asserted
the exact same claims as those asserted in the 241st District Court proceeding.
Accordingly, the Company has already denied any liability to The Hubberd Trusts
and counterclaimed that The Hubberd Trusts are not due any portion of the
settlement proceeds received in Tennessee lawsuit. On July 5, 1996, the Company
filed a plea-in-abatement requesting that the 241st District Court proceeding be
dismissed based upon the dominant jurisdiction that already existed in the
Tennessee lawsuit. On July 15, 1996, the Court in the Tennessee lawsuit issued a
temporary injunction granting the Company's request that The Hubberd Trusts be
prevented and enjoined from pursuing their claims relating to the Tennessee
settlement proceeds in the 241st District Court. The Hubberd Trusts have filed
their notice of appeal this temporary injunction.
WEST. On July 17, 1996, Milton H. West, III D/B/A West Energy Company
("West") filed suit against TransTexas for $30 million from the Tennessee
lawsuit settlement asserting TransTexas obtained its right to the settlement
proceeds from ICA Energy, Inc. ("ICA"). West had a prior contract with ICA for
a percent of such proceeds. TransTexas intends to vigorously defend this action.
BRIONES. In an arbitration proceeding, Briones, a lessor, claimed that a
TransTexas well on adjacent lands had been draining natural gas from a portion
of his acreage leased to TransTexas on which no well had been drilled. On
October 31, 1995, the Arbitrator decided that drainage had occurred. On June 3,
1996, the Arbitrator issued a letter indicating that drainage damages would be
awarded to Briones in the amount of $1,365,118.29. The Arbitrator entered his
award of damages on June 27, 1996. On July 3, 1996, TransTexas filed a petition
in Zapata County to vacate the Arbitrator's award.
FROST. On November 10, 1994, Frost National Bank filed suit against
TransTexas seeking a declaratory judgment determination that TransTexas failed
to properly and accurately calculate royalties under a lease. Plaintiff has
demanded $10 million plus interest. This litigation is in the discovery stage.
GENERAL. The Company is also a named defendant in other ordinary course,
routine litigation incidental to its business. While the outcome of these other
lawsuits cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position. At April
30, 1996, the possible range of estimated losses related to all of the
aforementioned claims in addition to the estimates accrued by the Company is $0
to $62 million. The resolution in any reporting period of one or more of these
matters in a manner adverse to the Company could have a material impact on the
Company's results of operations and cash flows for that period. Litigation
expense, including legal fees, was approximately $11 million, $20 million and
$11 million for the years ended July 31, 1993, 1994 and 1995, respectively.
Litigation expense, consisting primarily of legal fees, totaled approximately
$2 million and $3 million for the six months ended January 31, 1995 and 1996,
respectively, and approximately $1 million for each of the quarters ended
April 30, 1995 and 1996. The Company has delivered letters of credit and
placed into escrow cash, which letters of credit and cash total approximately
$29.3 million, to be applied to the litigation claims described above. In
addition, a change of control or other event that results in deconsolidation
of the Company and TransAmerican for federal income tax purposes could result
in acceleration of a substantial amount of federal income taxes.
F-87
<PAGE> 213
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
ENVIRONMENTAL MATTERS. The Company's 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 the
Company's operations, and these permits are subject to revocation, modification,
and renewal by issuing authorities. The Company 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. The Company has received notices of
violation from the Texas Air Control Board, predecessor agency to the Texas
Natural Resource Conservation Commission, alleging that, in connection with
compression stations, the Company built one and modified two emission sources
without the appropriate air permits. The Company has paid an administrative
penalty of approximately $300,000, has obtained the appropriate air permits and
is now in compliance. Certain other aspects of its operations may not be in
compliance with applicable environmental laws and regulations, and such
noncompliance may also give rise to compliance costs and administrative
penalties. The Company does not expect the foregoing environmental compliance
matters to have a material adverse effect on its financial position. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material to the financial condition or operations of the
Company 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, the Company is unable to predict the ultimate cost of
complying with such laws and regulations.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control
(as such term is defined in the Indenture), each holder of the Notes will have
the right to require the Company to repurchase such holder's Notes at 101% of
the principal amount thereof plus accrued and unpaid interest. A Change of
Control would be deemed to occur under the Indenture in the case of certain
changes or other events in respect of the ownership or control of the Company,
including any circumstance pursuant to which any person or group, other than
John R. Stanley and his wholly owned subsidiaries or the trustee under the
indenture governing TARC's $440 million aggregate principal amount of mortgage
notes (the "TARC Notes"), is or becomes the beneficial owner of more than 50%
of the total voting power of the Company's then outstanding voting stock,
unless the Notes have an investment grade rating for the period of 120 days
thereafter. The term "person," as used in the definition of Change of Control,
means a natural person, company, government or political subdivision, agency or
instrumentality of a government and also includes a "group," which is defined
as two or more persons acting as a partnership, limited partnership or other
group. In addition, certain changes or other events in respect of the ownership
or control of the Company that do not constitute a Change of Control under the
Indenture may result in a "change of control" of the Company under the terms of
the BNY Facility and certain equipment financing which may create an obligation
for the Company to repay such other indebtedness. At April 30, 1996, the
Company had approximately $30.2 million of indebtedness (excluding the Notes)
subject to such right of repayment or repurchase. In the event of a Change of
Control under the Indenture or a "change of control" under the terms of other
outstanding indebtedness, there can be no assurance that the Company will have
sufficient funds to satisfy any such payment obligations.
TARC owns and operates a large petroleum refinery in the Gulf Coast region
along the Mississippi River, approximately 20 miles from New Orleans, Louisiana.
TARC's refinery was shut down in January 1983 and is currently partially
operational. TARC is engaged in a two-phase capital improvement program designed
to reactivate the refinery and increase its complexity. In February 1995, TARC
issued the TARC Notes that were initially collateralized by, among other things,
55 million shares of the Company's common stock (the "Common Stock"). In March
1996, TARC sold 4.55 million shares of Common Stock to provide additional
financing for the capital improvement program. TARC will require additional
financing of $374 million to $379 million over the course of the remaining
construction period to complete the capital improvement program. TARC has
advised the Company that if this financing is not available on a timely basis,
or if significant engineering problems, work stoppages, cost overruns or delays
occur, TARC likely will not be able to complete the first phase of the capital
improvement program by February 15, 1997. TARC has further advised the Company
that, even if required financing is obtained on a timely basis, completion by
February 15, 1997 will still prove very difficult if personnel shortages prevent
full staffing during peak construction periods. TARC has also advised the
Company that it has identified and is considering certain steps to address these
staffing concerns, but there can be no assurance that these steps will prove
successful. Under the indenture governing the TARC Notes, the failure of TARC to
complete the first phase of its capital improvement program by February 15, 1997
(subject to extension to August 15, 1997 if certain financial coverage ratios
are met) would constitute an event of default at such date. Any such event of
default could result in the sale, following the occurrence of such event of
default, of some or all of the remaining 50.45 million shares of Common Stock
pledged to collateralize the TARC Notes. A foreclosure on such shares would
constitute a "change of control" of the Company under the BNY Facility and
certain equipment financing, which may create an obligation for the Company to
repay amounts outstanding thereunder, but would not constitute a Change of
Control under the Indenture. A sale of such shares following a foreclosure could
result in a Change of Control under the Indenture.
F-88
<PAGE> 214
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
OPERATING LEASES
As of April 30, 1996, the Company has long-term leases covering land and
other property and equipment. Rental expense was approximately $3 million, $4
million and $5 million for the fiscal years 1993, 1994 and 1995, respectively,
$3 million for each of the six months ended January 31, 1995 and 1996 and
$1 million and $2 million, respectively, for the three months ended April 30,
1995 and 1996. Future minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one
year as of January 31, 1996, including the sale-leaseback transaction
described below, are as follows (in thousands of dollars):
<TABLE>
<S> <C>
1997 $ 1,106
1998 982
1999 970
2000 855
2001 658
Later years 450
--------
$ 5,021
========
</TABLE>
In January 1996, the Company completed a sale-leaseback transaction in the
amount of $3 million, related to its operating equipment. The sale-leaseback
transaction has a monthly lease payment of approximately $56 thousand per month
and a 60-month term. At the end of the lease term, the lease will automatically
renew for 12 months at approximately $38,000 per month.
GAS SALES COMMITMENTS
In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for future
sales under the amended contract. In consideration, TransAmerican agreed to
pay the buyer approximately $0.4 million per month through June 1997. This
commitment was assumed by the Company.
The Company and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which the Company
will deliver 100,000 MMBtu of natural gas per day through August 1997. The
selling price for this gas is determined by certain industry averages as
defined in the contract.
F-89
<PAGE> 215
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Period
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The Company and MidCon entered into a long-term gas purchase contract on
January 10, 1996, under which the Company is required to deliver a total of
100,000 MMBtu per day to four specified delivery points for a period of five
years. The purchase price is determined by an industry index less $0.09 per
MMBtu. Deliveries shall commence upon the earlier of completion of pipeline
construction or ninety days after the acquisition of all rights of way, permits
and construction drawings.
LETTER OF CREDIT
In January 1996, the Company entered into a reimbursement agreement with
an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of the Company in a legal proceeding. Prior to this transaction, the
supersedeas bond had been collateralized by other letters of credit. These
letters of credit were collateralized by $20 million in cash, which has been
released to the Company. If there is a draw under the letter of credit, the
Company is required to reimburse the third party within 60 days. The Company
has agreed to issue up to 8.6 million shares of common stock of the Company to
the third party if this contingent obligation to such third party becomes fixed
and remains unpaid for 60 days. The Company does not believe that this
contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, the Company could elect to sell shares of
the Company's common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party.
PRODUCTION PAYMENTS
On February 28, 1995, the Company sold to TCW Portfolio No. 1555
Sub-Custody Partnership, L.P. ("TCW"), a term royalty in the form of a
dollar-denominated production payment in certain of the Company's properties
for proceeds of $49.5 million, less closing costs of approximately $2 million.
Mr. John R. Stanley personally guaranteed certain obligations of the Company
under such agreement, including certain litigation bonding requirements and
indemnity obligations (including indemnification of TCW against costs
associated with production, environmental remediation, title defects or
enforcement of TCW's rights under the agreement. Payments to TCW pursuant to
this agreement totaled approximately $2 million per month, including interest.
This production payment was terminated in May 1996 with a portion of the
proceeds of the volumetric production payment described below.
In January 1996, the Company sold to an unaffiliated third party a term
royalty interest in the form of a volumetric production payment on certain of
its producing properties. For net proceeds of approximately $33 million, the
Company conveyed to the third party a royalty on approximately 29 Bcf of
natural gas, which amount can increase if certain minimum monthly volumes are
not delivered to the production payment interest. In February 1996, the Company
and the third party amended this purchase agreement to include an additional 14
Bcf which were sold to the third party for a purchase price of approximately
$16 million.
In May 1996, TransTexas sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production payment on certain
of TransTexas' producing properties. For net proceeds of approximately $43
million, TransTexas conveyed to the third party a royalty on approximately 37
Bcf of natural gas, which amount can increase if certain minimum monthly
volumes are not delivered to the production payment interest. TransTexas used
approximately $25 million of these net proceeds to terminate the
dollar-denominated production payment described above.
POSSIBLE FEDERAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions of the Internal Revenue Code of 1986, as amended ("COD
Exclusion"). TransAmerican expects that its tax attributes (including its net
operating loss and credit carryforwards) will be substantially reduced as a
consequence of the COD Exclusion. Although the Company
F-90
<PAGE> 216
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
believes that there is substantial legal authority to support the position that
the COD Exclusion applies to the cancellation of TransAmerican's indebtedness,
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, the Company 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.
The Company has significant contingent liabilities, including liabilities
with respect to litigation matters, indemnification obligations relating to
certain tax benefit transfer sale-leaseback transactions and other obligations
assumed in the Transfer. In addition, a change of control or other event that
results in deconsolidation of the Company and TransAmerican for federal income
tax purposes could result in acceleration of a substantial amount of federal
income taxes. These matters, individually and in the aggregate, amount to
significant potential liability which, if adjudicated in a manner adverse to
the Company in one reporting period, could have a material adverse effect on
the Company's cash flow or operations for that period. Although the outcome of
these contingencies or the probability of the occurrence of these contingencies
cannot be predicted with certainty, the Company does not expect these matters
to have a material adverse effect on its financial position.
13. BUSINESS SEGMENTS
The Company conducts its operations through two industry segments:
exploration and production ("E&P"), and gas transportation ("Transportation").
The E&P segment explores for, develops, produces and markets natural gas,
condensate and natural gas liquids. The Transportation segment engages in
intrastate natural gas transportation and marketing. All of the Company's
significant gas and oil operations are located in Webb, Zapata and Starr
Counties, Texas. Segment income excludes interest income, interest expense and
unallocated general corporate expenses. Identifiable assets are those assets
used in the operations of the segment. Other assets consist primarily of debt
issue costs, certain receivables and other property and equipment. The
Company's revenues are derived principally from sales to interstate and
intrastate gas pipelines, direct end users, industrial companies, marketers,
and refiners located in the United States. As a general policy, collateral is
not required for receivables, but customers' financial condition and credit
worthiness are regularly evaluated. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant
credit losses associated with such receivables.
For the year ended July 31, 1993, two customers provided approximately $64
million and $39 million, respectively, in E&P and Transportation revenues. For
the year ended July 31, 1994, one customer provided approximately $51 million in
E&P and Transportation revenues. For the year ended July 31, 1995, two
customers provided approximately $73 million and $41 million, respectively, in
E&P and Transportation revenues. Two customers provided approximately $45
million and $22 million, respectively, in E&P and Transportation revenues for
the six months ended January 31, 1995. For the Transition Period, three
customers provided approximately $25 million, $22 million and $14 million,
respectively, in E&P and Transportation revenues. During 1993, the Company
purchased goods and services from businesses partially owned or controlled by
a family member of the sole stockholder of TransAmerican which approximated
11% of capital expenditures and 4% of operating expenses. During 1994,
Company purchases of goods and services from these businesses were not
material. The Company made no purchases of goods and services from these
businesses during the year ended July 31, 1995 or the Transition Period.
F-91
<PAGE> 217
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Period
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Business segment information is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1993
Exploration and production $ 294,753 $ 120,200 $ 89,126 $ 131,955 $ 316,646
Gas transportation 30,816 (440) 5,758 8,297 30,475
Other 247 (6,955) 132 6,950 13,120
------------ ------------ ------------ ------------ ------------
$ 325,816 $ 112,805 $ 95,016 $ 147,202 $ 360,241
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1994
Exploration and production $ 302,522 $ 96,828 $ 107,727 $ 180,426 $ 464,190
Gas transportation 33,240 (2,257) 5,913 35,763 66,019
Other 157 (15,280) 218 25,079 53,382
------------ ------------ ------------ ------------ ------------
$ 335,919 $ 79,291 $ 113,858 $ 241,268 $ 583,591
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
JULY 31, 1995
Exploration and production $ 275,627 $ 62,855 $ 121,625 $ 259,189 $ 712,322
Gas transportation 36,787 2,827 8,041 10,105 60,916
Other 285 (14,192) 298 9,196 53,332
------------ ------------ ------------ ------------ ------------
$ 312,699 $ 51,490 $ 129,964 $ 278,490 $ 826,570
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JANUARY 31, 1995 (unaudited)
Exploration and production $ 143,304 $ 32,860 $ 66,175 $ 99,672 $ 483,984
Gas transportation 19,161 2,796 4,031 6,366 63,541
Other 52 (6,972) 139 4,804 47,213
------------ ------------ ------------ ------------ ------------
$ 162,517 $ 28,684 $ 70,345 $ 110,842 $ 594,738
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
TRANSITION PERIOD ENDED
JANUARY 31, 1996
Exploration and production $ 124,663 $ 51,443 $ 56,543 $ 176,386 $ 739,345
Gas transportation 15,892 (4,393) 4,194 13,266 72,815
Other 127 (8,276) 157 15,836 126,667
------------ ------------ ------------ ------------ ------------
$ 140,682 $ 38,774 $ 60,894 $ 205,488 $ 938,827
============ ============ ============ ============ ============
</TABLE>
F-92
<PAGE> 218
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
SUMMARY INFORMATION
The following summary financial information of TransTexas Transmission
Corporation ("Transmission") reflects its financial position and its results of
operations for the periods presented. The results of operations for the year
ended July 31, 1993, represent that of TTC, predecessor to Transmission.
Included in the results of operations for the year ended July 31, 1994 are the
activities of TTC through August 23, 1993. Summary financial information of
Transmission and TTC is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31, JANUARY 31, APRIL 30,
--------------------------- ------------ ------------
1994 1995 1996 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Total current assets $ 7,277 $ 1,047 $ 811 $ 6,324
Property and equipment, net 57,449 60,396 70,273 76,776
Other assets 118 118 3 3
------------ ------------ ------------ ------------
$ 64,844 $ 61,561 $ 71,087 $ 83,103
============ ============ ============ ============
LIABILITIES AND EQUITY
Total current liabilities $ 4,124 $ 4,066 $ 6,191 $ 5,565
Total noncurrent liabilities 30,957 14,259 21,016 28,995
Total equity 29,763 43,236 43,880 48,543
------------ ------------ ------------ ------------
$ 64,844 $ 61,561 $ 71,087 $ 83,103
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
--------------------------------------- ------------------------ -----------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 88,042 $ 77,915 $ 97,928 $ 53,120 $ 36,226 $ 22,710 $ 31,153
Operating costs and expenses 80,162 79,566 77,154 40,443 35,236 17,981 23,979
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 7,880 (1,651) 20,774 12,677 990 4,729 7,174
Interest income (expense), net (378) 3 (47) -- -- (47) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes 7,502 (1,648) 20,727 12,677 990 4,682 7,174
Income tax expense (benefit) 2,831 (497) 7,254 4,436 346 1,639 2,511
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 4,671 $ (1,151) $ 13,473 $ 8,241 $ 644 $ 3,043 $ 4,663
========== ========== ========== ========== ========== ========== ==========
</TABLE>
F-93
<PAGE> 219
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Income before income taxes for the six months ended January 31, 1996
decreased by approximately $11.7 million from the comparable prior year
period, due primarily to decreased production on natural gas liquids.
Operating expenses for the three months ended April 30, 1996 increased by
approximately $6.0 million from the comparable prior year period primarily due
to increases in the spot market price of natural gas, which resulted in
increases in NGL and compressor fuel costs. Included in revenues for the three
months ended April 30, 1996 is a gain of approximately $7.5 million on the sale
of the Company's interest in the MidCon Texas pipeline and net gains on the
disposition of other equipment.
Transmission conducts significant intercompany activities with TransTexas
Gas Corporation and TransAmerican. Included in the results of operations of
Transmission are the following transactions with affiliates (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31, APRIL 30,
------------------------------------ ------------------------- ----------------------
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 29,299 $ 30,398 $ 35,054 $ 18,242 $ 14,879 $ 8,530 $ 6,586
Operating costs and expenses 59,668 53,459 59,719 32,235 24,751 13,697 18,149
</TABLE>
Affiliated operating costs and expenses for the years ended July 31, 1993,
1994 and 1995 and the six months ended January 31, 1995 and 1996, include the
cost of natural gas purchased from TransTexas Gas Corporation of approximately
$40 million, $34 million, $44 million, $25 million and $16 million,
respectively, and $10 million and $12 million, respectively, for the three
months ended April 30, 1995 and 1996. Nonaffiliated revenues include the sales
of natural gas liquids and condensate extracted from this purchased gas of $55
million, $44 million, $59 million, $33 million and $20 million, respectively for
the years ended July 31, 1993, 1994 and 1995 and the six months ended January
31, 1995 and 1996 and $13 million and $14 million, respectively, for the three
months ended April 30, 1995 and 1996.
14. LITIGATION SETTLEMENTS
TERRY/PENROD. TransAmerican and a group of TransAmerican's former bank lenders
(the "Bank Group") are parties to a consolidated suit filed December 6, 1991, in
the United States District Court for the Southern District of Texas, Houston
Division, relating to the interpretation of two third-party drilling agreements.
Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling Corporation, Terry
Oilfield Supply Co., Inc. and Terry Resources, Inc. ("Terry") sued TransAmerican
for approximately $50 million in actual damages and punitive damages of not less
than five times actual damages. On April 5, 1996, the court entered a final
judgment against TransAmerican, the Company and several of their affiliates, in
the amount of approximately $43 million, plus interest. On April 18, 1996, the
court entered a separate judgment against the same parties for Terry's
attorneys' fees of $2 million. In May 1996, the Company paid Terry approximately
$19 million and caused escrowed funds held for the benefit of the Bank Group of
approximately $22 million to be paid to Terry. Upon payment of the settlement
amount, Terry released the judgments, released all liens and reassigned to the
Company a production payment in certain properties. Terry dismissed an unrelated
administrative proceeding upon payment of the settlement amount described above.
CATTO HEIRS. On November 29, 1989, Roxanna G. Catto, et al. brought suit in
the 111th Judicial District Court, Webb County, Texas, seeking a declaratory
judgment with respect to the rights under a certain oil and gas lease, a
F-94
<PAGE> 220
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
statutory lien and security interest on certain oil and gas production of
TransAmerican and proceeds therefrom, and foreclosure of that security
interest. Plaintiffs seek actual damages in excess of $4.5 million and
exemplary damages for the alleged breach of TransAmerican's duty of good faith
and fair dealing of at least $5 million. Plaintiffs filed a sixth amended
original petition alleging lease termination damages of $95 million.
TransAmerican has counterclaimed for $10 million in actual damages and $20
million in punitive damages alleging improper actions with certain former
employees of TransAmerican. This counterclaim has been severed and is now a
separate action. H. S. Finkelstein intervened in this action claiming
unspecified damages against TransAmerican alleging improper calculation of
royalty payments. The judge granted a partial summary judgment in favor of the
plaintiffs and intervenor on liability only. On February 9, 1994, the
plaintiffs added the Company as an additional defendant. This case was settled
in April 1994 as to the Catto plaintiffs whereby the Company paid these
plaintiffs approximately $1.4 million in June 1994 and paid the total remaining
balance of approximately $4.8 million in monthly installments through September
1995. No settlement was reached with Finkelstein, and this matter has been
consolidated with the Finkelstein litigation (see Note 12).
William L. Stanley. In July 1994, William L. Stanley ("Billy Stanley") filed
suit in the District Court of Harris County, Texas, against his father, John R.
Stanley, for alleged breach of an oral contract and certain intentional torts.
Billy Stanley claimed that his father agreed to transfer to Billy Stanley a 25%
ownership interest in TransAmerican in exchange for 75% of the profits
generated by oil and gas supply and other operations established by Billy
Stanley to provide services and materials to TransAmerican from January 2, 1991
to August 31, 1993. The complaint asserts that after providing such services
and materials, Billy Stanley arranged for consideration to be received by John
R. Stanley in excess of $5 million, representing 75% of such profits (the
"Alleged Payments"). On December 2, 1994, Billy Stanley filed a supplemental
petition to include the Company, TARC and TransAmerican as defendants in this
matter. In this supplemental petition, Billy Stanley claimed (i) that each
defendant is the alter ego of the other defendants, (ii) intentional infliction
of emotional distress, (iii) unjust enrichment, (iv) fraud, (v) breach of
fiduciary duties, (vi) conspiracy to commit intentional torts, and (vii)
violations of the Racketeer Influenced and Corrupt Organization Act. Billy
Stanley sought, among other things, the imposition of a trust upon any and all
properties obtained by the defendants as a result of the improper actions
alleged by Billy Stanley. In addition, Billy Stanley made other allegations
regarding his father, TransAmerican, the Company and TARC to the media and
others and stated his intent to make such allegations to various governmental
agencies and, upon receipt of immunity, to assist in any investigation by such
agencies as a consequence of these assertions. These allegations included,
among others, bankruptcy fraud relating to the Alleged Payments,
misappropriation, bribery of government officials, and violation of
environmental regulations. John R. Stanley removed the case to the United
States District Court for the Southern District of Texas, Houston Division.
Mr. Stanley, TransAmerican, the Company and TARC denied all of Billy
Stanley's allegations of wrongdoing and intend to cooperate with any
governmental investigation that may ensue as a consequence thereof. In October
1994, TransAmerican, the Company, and TARC filed suit against Billy Stanley and
his attorney in the 341st Judicial District Court of Webb County, Texas,
claiming libel, slander, business disparagement, tortious interference, and
civil conspiracy in connection with, among other things, Billy Stanley's
allegations described above. TransAmerican, the Company and TARC received a
temporary restraining order and sought damages and temporary and permanent
injunctions. All pending litigation between Billy Stanley and John R. Stanley,
the Company, TARC and TransAmerican was settled in August 1995.
Halliburton. On May 13, 1994, Halliburton Company ("Halliburton") filed suit
against TransAmerican, TARC and the Company for breach of contract arising out
of a 1982 tax benefit transaction between Halliburton and TransAmerican
relating to equipment located at TARC's refinery. TARC assumed the obligations
of TransAmerican under a sale-leaseback arrangement relating to such equipment
when the refinery was transferred to TARC in 1987. As part of the Transfer, the
Company assumed the liability arising from this suit, but TransAmerican agreed
to indemnify the Company for any liability from the suit in excess of $10
million plus interest at the rate payable by
F-95
<PAGE> 221
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
TransAmerican to Halliburton on the unpaid amount thereof from April 12, 1993
to the date or dates of payment. In March 1995, the parties reached a
settlement whereby Halliburton received $14 million on August 29, 1995. The
Company paid $10 million of this settlement and the remainder is owed by TARC.
ENRON. On November 19, 1992, TransAmerican brought an action against Enron Oil
& Gas Company, et al., ("Enron") in the 93rd Judicial District Court of Hidalgo
County, Texas, alleging that Enron violated the terms of a confidentiality
agreement between TransAmerican and Enron in connection with Enron's evaluation
of the Company's oil and gas properties. Enron counterclaimed for $136.5
million in damages, claiming that TransAmerican and Mr. Stanley induced Enron
to commit the actions complained of by fraud and claiming antitrust violations.
In a related case, Enron sued TransAmerican in the 111th District Court of Webb
County, Texas for a declaratory judgment that TransAmerican has no claim to
certain leases and special damages in an unspecified amount for delays in
drilling caused by the Enron litigation. All pending litigation between the
parties to these actions was settled on October 16, 1995.
FRITO-LAY. On June 24, 1993, Frito-Lay, Inc. ("Frito-Lay") filed suit against
TransAmerican and TARC in the Supreme Court of the State of New York, County of
New York, alleging that TransAmerican and TARC failed to make indemnification
payments to Frito-Lay in the amounts and at the times required under the tax
benefit transfer sale-leaseback agreements executed by TransAmerican and
Frito-Lay in November and December 1981 relating to equipment located at TARC's
refinery. TARC assumed the obligations of TransAmerican under these
sale-leaseback agreements when the refinery was transferred to TARC in 1987.
Frito-Lay is seeking actual damages of not less than $7 million. In the
Transfer, the Company assumed certain liability for this matter. On December
13, 1995, this suit was settled and dismissed with prejudice. The liabilities
will be allocated among the Company, TARC and TransAmerican, in accordance with
the Tax Allocation Agreement and other relevant documents.
NL INDUSTRIES. On August 27, 1986, NL Industries ("NL") filed suit against
TransAmerican in the United States District Court for the Southern District of
Texas, Houston Division, seeking $15 million in actual damages and $45 million
in punitive damages on the grounds of fraud, breach of contract, and negligence
arising from a recompletion agreement with TransAmerican. The court awarded
summary judgment to TransAmerican on all of NL's claims. On appeal, the Fifth
Circuit Court of Appeals found NL's claim for punitive damages to be improper,
and remanded the case to the United States District Court on a portion of NL's
$15 million breach of contract claim. The case was tried by a jury and a
judgment in favor of TransAmerican was entered on October 12, 1994. On December
21, 1995, the Fifth Circuit Court of Appeals affirmed the judgment in
TransAmerican's favor. The judgment has become final.
GINTHER/WARREN. Wilbur L. Ginther and Howard C. Warren conveyed a portion of a
lease to Henry J. N. Taub. Taub "farmed out" certain interests to TransAmerican,
and TransAmerican paid royalties to Taub. The Texas Supreme Court upheld a
judgment in favor of Messrs. Ginther and Warren against Taub's interest in the
lease. The lower court judgment had awarded a portion of the lease to Messrs.
Ginther and Warren because Taub's attorney had defrauded Messrs. Ginther and
Warren with respect to their interest in the lease. On November 26, 1986, the
estates of Messrs. Ginther and Warren filed an adversary proceeding in the
United States Bankruptcy Court for the Southern District of Texas, Houston
Division (the "Bankruptcy Court") against TransAmerican seeking damages and
claiming that TransAmerican had constructive notice of their disputes but
continued to pay royalties and proceeds of production to Taub. TransAmerican
filed an interpleader action in the Bankruptcy Court and deposited the disputed
funds accruing from and after November 1984 into the registry of the court. On
September 30, 1993, the Bankruptcy Court entered a judgment against
TransAmerican in the amount of $6.3 million plus post judgment interest. On
September 15, 1995, the U.S. District Court for the Southern District of Texas
entered an order reversing an award of interest to Taub and affirming the final
judgment in all other respects. The Company appealed the judgment to the
Fifth Circuit Court of Appeals. On July 2, 1996, the Company and the estates of
Messrs. Ginther and Warren entered into a settlement pursuant to which such
estates received $3.5 million and a promissory note for $2.8 million. The
promissory note is payable in 36 equal monthly installments commencing August
1, 1996, and bears interest unless an installment payment is not made. In
addition, the Company transferred to such estates an additional override in a
portion of the lease and agreed to drill additional wells on the lease. In
conjunction with the settlement, the estates of Messrs. Ginther and Warren
agreed to farm out to the Company an additional working interest in the lease.
15. CREDIT AGREEMENTS
The Company and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement, as of October
31, 1995, for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of the Company and is
guaranteed by John R. Stanley. The amounts which may be advanced to the Company
under this line of credit are based on a percentage of the Company's natural
gas receivables from unaffiliated third parties. The amount outstanding under
the line of credit as of April 30, 1996 was $20.7 million. Based upon
foreseeable accounts receivable levels, the Company estimates the maximum
amount available at any one time under this facility for fiscal 1997 will be
approximately $26 million.
Under the terms of this agreement, the Company's net loss (including any
extraordinary losses) may not exceed $5 million for each fiscal quarter ending
after January 31, 1996, ($10 million for each six-month period). The Company
obtained a waiver for the three months ended January 31, 1996.
F-96
<PAGE> 222
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
This line of credit is also subject to certain other covenants which relate
to, among other things, the maintenance of certain financial ratios.
In May 1996, the Company entered into a Note Purchase Agreement pursuant
to which the Company issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes bear interest at
13 1/3% per annum and mature in August 1996. The notes are guaranteed on a
senior secured basis by TransAmerican.
16. HEDGING AGREEMENTS
Beginning in April 1995, the Company entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. Pursuant to the Hedge Agreements, either the
Company or the counter party thereto is required to make a payment to the other
at the end of each month (the "Settlement Date"). The payments will equal the
product of a notional quantity ("Base Quantity") of natural gas and the
difference between a specified fixed price ("Fixed Price") and a market price
("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for the Company to make
payments to the counter party to the extent that the Floating Price exceeds the
Fixed Price, up to a maximum ("Maximum Floating Price") and for the counter
party to make payments to the Company to the extent that the Floating Price is
less than the Fixed Price. For the Transition Period, the Company made net
settlement payments totaling approximately $5.4 million to the counter party
pursuant to the Hedge Agreements. For the three months ended April 30, 1996, the
Company has incurred additional net settlement losses totaling approximately
$9.6 million. As of April 30, 1996, the Company has Hedge Agreements with
Settlement Dates ranging from May 1996 through April 1997 involving total Base
Quantities for all monthly periods of approximately 73.0 TBtu of natural gas.
Fixed Prices for these agreements range from $1.70 to $1.72 per MMBtu ($1.76 to
$1.78 per Mcf) up to a Maximum Floating Price of $2.20 per MMBtu ($2.28 per
Mcf). At April 30, 1996, the estimated cost to settle these Hedge Agreements
would have been approximately $31.1 million. These agreements are accounted for
as hedges and accordingly, any gains or losses are deferred and recognized in
the month the physical volumes are delivered. At April 30, 1996, the Company
maintained $13.9 million in margin accounts related to the Hedge Agreements. The
Company may be required to post additional cash margin whenever the daily
natural gas futures prices as reported on the NYMEX, for each of the months in
which the swap agreements are in place, exceed the Fixed Price. The maximum
margin call under each Hedge Agreement will never exceed the product of the Base
Quantity for the remaining months under such Hedge Agreement multiplied by the
difference between the Maximum Floating Price and the Fixed Price.
In June 1996, the Company entered into a Master Swap Agreement (the
"Master Swap Agreement") with one of its counter parties, which replaced a
previously existing master agreement governing the swap agreements between the
two parties. The Company's obligations under the Master Swap Agreement are
collateralized by a mortgage on a substantial portion of the Company's producing
properties. In accordance with the Indenture, the lien created by the mortgage
collateralizes obligations up to a maximum of $80.8 million (10% of the SEC PV10
of the Company's most recent reserve report). As contemplated by the Indenture,
the Trustee under the Indenture has subordinated the lien collateralizing the
Notes outstanding thereunder to the lien collateralizing the Company's
obligations under the Master Swap Agreement. The maximum amount of obligations
of the Company that could be collateralized by the mortgage, based on the swap
agreements in place under the Master Swap Agreement as of July 1, 1996, is
approximately $10 million. Subject to compliance with certain collateral
coverage tests, the Company is not required to provide additional cash margin
for any swap agreements now or hereafter subject to the Master Swap Agreement.
17. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning the Company's gas
and oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Estimates of the Company's proved reserves and proved developed reserves
were prepared by Netherland, Sewell & Associates, Inc., an independent firm of
petroleum engineers, based on data supplied to them by the Company. Such
estimates are inherently imprecise and may be subject to substantial revisions
as additional information such as reservoir performance, additional drilling,
technological advancements and other factors become available.
F-97
<PAGE> 223
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
JULY 31,
----------------------- JANUARY 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Proved properties $1,338,183 $1,481,875 $1,639,237
Unproved properties 23,889 139,386 136,360
---------- ---------- ----------
Total 1,362,072 1,621,261 1,775,597
Less accumulated depletion 987,775 1,109,400 1,165,943
---------- ---------- ----------
$ 374,297 $ 511,861 $ 609,654
========== ========== ==========
</TABLE>
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
------------------------------------ JANUARY 31,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Property acquisitions $ 3,715 $ 18,593 $ 124,956 $ 11,485
Exploration 84,317 114,266 84,201 27,039
Development 43,923 47,567 50,032 115,812
---------- ---------- ---------- -------------
$ 131,955 $ 180,426 $ 259,189 $ 154,336
========== ========== ========== =============
</TABLE>
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
------------------------------------ JANUARY 31,
1993 1994 1995 1996
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 294,753 $ 302,522 $ 275,627 $ 124,663
---------- ---------- ---------- ------------
Expenses:
Production costs 74,881 76,928 76,798 31,376
Depletion 89,126 107,727 121,625 56,543
General and administrative 10,546 21,039 14,349 3,601
Litigation settlement -- -- -- (18,300)
---------- ---------- ---------- ------------
Total operating expenses 174,553 205,694 212,772 73,220
---------- ---------- ---------- ------------
Income before income taxes 120,200 96,828 62,855 51,443
Income taxes 18,638 26,047 21,999 18,005
---------- ---------- ---------- ------------
$ 101,562 $ 70,781 $ 40,856 $ 33,438
========== ========== ========== ============
Depletion rate per net equivalent Mcf $ .73 $ .80 $ .81 $ .82
========== ========== ========== ============
</TABLE>
F-98
<PAGE> 224
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. All of the Company's
significant proved reserves are located in Webb and Zapata Counties, Texas.
Natural gas quantities represent wet gas volumes, which include amounts that
will be extracted as natural gas liquids. The Company's estimated net proved
reserves and proved developed reserves of natural gas (billions of cubic feet)
and condensate (millions of barrels) are shown in the table below.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
-------------------------------------------------------------- JANUARY 31,
1993 1994 1995 1996
------------------ ------------------ ------------------ ------------------
Gas Oil Gas Oil Gas Oil Gas Oil
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year 686.2 2.2 695.0 2.0 717.4 1.9 1,122.6 3.0
Increase (decrease) during
the year attributable to:
Revisions of previous
estimates (14.1) (.2) .5 .1 143.5 .5 43.0 --
Extensions, discoveries and
other additions 142.2 .5 152.8 .4 409.6 1.2 73.8 .2
Litigation settlement -- -- -- -- -- -- 9.5 --
Sale of volumetric production
payment -- -- -- -- -- -- (42.9) --
Production (119.3) (.5) (130.9) (.6) (147.9) (.6) (66.9) (.3)
------- ------- ------- ------- ------- ------- ------- -------
End of year 695.0 2.0 717.4 1.9 1,122.6 3.0 1,139.1 2.9
======= ======= ======= ======= ======= ======= ======= =======
Proved developed reserves:
Beginning of year 348.6 .8 384.2 1.1 442.2 1.1 476.6 1.1
End of year 384.2 1.1 442.2 1.1 476.6 1.1 425.3 .9
</TABLE>
Standardized Measure Information
The calculation of estimated future net cash flows in the following
table assumed the continuation of existing economic conditions and applied
year-end prices (except for future price changes as allowed by contract) of gas
and condensate to the expected future production of such reserves, less
estimated future expenditures (based on current costs) to be incurred in
developing and producing those proved reserves.
F-99
<PAGE> 225
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value of the
Company's gas and oil reserves. These estimates reflect proved reserves only
and ignore, among other things, changes in prices and costs, revenues that
could result from probable reserves which could become proved reserves in 1996
or later years, and the risks inherent in reserve estimates. The
standardized measure of discounted future net cash flows relating to proved gas
and oil reserves is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
-------------------------------------------- JANUARY 31,
1993 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Future cash inflows $ 1,420,937 $ 1,194,656 $ 1,591,011 $ 2,269,585
Future production costs (221,564) (219,485) (316,055) (427,482)
Future development costs (237,778) (243,991) (461,471) (582,798)
Future income taxes (260,740) (199,065) (196,942) (310,445)
------------ ------------ ------------ ------------
Future net cash flows 700,855 532,115 616,543 948,860
Annual discount (10%) for estimated timing
of cash flows (188,395) (136,541) (201,479) (340,002)
------------ ------------ ------------ ------------
Standardized measure of discounted future
net cash flows $ 512,460 $ 395,574 $ 415,064 $ 608,858
============ ============ ============ ============
</TABLE>
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, SIX MONTHS ENDED
-------------------------------------------- JANUARY 31,
1993 1994 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning of year $ 466,031 $ 512,460 $ 395,574 $ 415,064
Revisions:
Quantity estimates and production rates (60,339) (31,403) 122,771 31,712
Prices, net of lifting costs 72,130 (158,906) (155,257) 331,936
Estimated future development costs 39,064 26,667 (13,631) (128,584)
Additions, extensions, discoveries and
improved recovery 161,683 141,008 172,365 47,026
Net sales of production (219,330) (233,031) (198,829) (92,139)
Development costs incurred 29,351 35,285 49,873 115,812
Accretion of discount 56,515 63,824 54,439 27,382
Net changes in income taxes (32,645) 39,670 (16,722) (66,622)
Sale of a volumetric production payment -- -- -- (77,879)
Litigation settlement -- -- 4,481 5,150
------------ ------------ ------------ ------------
End of year $ 512,460 $ 395,574 $ 415,064 $ 608,858
============ ============ ============ ============
</TABLE>
Year-end wellhead prices received by the Company from sales of natural gas
including natural gas liquids' margins, were $2.00, $1.62, $1.37 and $1.95 per
Mcf for 1993, 1994, 1995 and 1996, respectively. Year-end condensate prices
were $16.15, $17.62, $16.27 and $18.34 per barrel for 1993, 1994, 1995 and
1996, respectively.
F-100
<PAGE> 226
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information With Respect to the Interim Periods
Ended April 30, 1995 and 1996 and Subsequently is Unaudited)
18. CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended July 31, 1995
--------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 81,450 $ 81,067 $ 72,828 $ 77,354
Operating income 14,108 14,576 12,932 9,874
Net income (loss) before
extraordinary item 316 (560) (3,844) (7,804)
Net income (loss) 316 (560) (3,844) (64,441)
Net income (loss) per share
before extraordinary item -- (.01) (.05) (.11)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended January 31,
1996
------------------------------
1ST 2ND
QUARTER QUARTER
---------- ----------
(Restated)
<S> <C> <C>
Revenues $ 66,336 $ 74,346
Operating income 30,893 7,881
Net income (loss) 11,529 (12,301)
Net income (loss) per share .16 (.17)
</TABLE>
Operating income for the fourth quarter of 1995 includes litigation
expense of $7.0 million.
During the fourth quarter of 1995, the Company recorded an extraordinary
loss of approximately $56.6 million ($0.51 per share), net of taxes, on the
early extinguishment of the Company's 10 1/2% Senior Secured Notes due 2000.
Operating income for the first quarter of 1996 includes a gain on
settlement of litigation of $18.3 million.
F-101
<PAGE> 227
GLOSSARY
ABBREVIATIONS
"Bbl" means a barrel of 42 U.S. gallons; "Bcf" means billion cubic feet;
"Bcfd" means billion cubic feet per day; "Bcfe" means billion cubic feet
equivalent; "BPD" means barrels per day; "Btu" or "British Thermal Unit" means
the quantity of heat required to raise the temperature of one pound of water by
one degree Fahrenheit; "dwt" means deadweight-ton; a designation for the size
or displacement of a ship; "FCC" means fluid catalytic cracking; "HDS" means
hydrodesulfurization; "Mcf" means thousand cubic feet; "KWH" means
kilowatt-hour; "LPG" means liquefied petroleum gas, primarily propane and
butane; "LSWR" means low sulfur waxy residual oil; "LTPD" means long tons per
day; "MBbls" means thousands of barrels; "MBPD" means thousands of barrels per
day; "Mcfe" means thousand cubic feet equivalent; "MMBPD" means millions of
barrels per day; "MMBbls" means million barrels; "MMBtu" means million Btus;
"MMcf" means million cubic feet; "MMcfd" means million cubic feet per day;
"MMcfe" means million cubic feet equivalent; "MMgals" means millions of
gallons; "MTBE" means methyl tertiary butyl ether, an oxygenated, high-octane
blending component which is used in the production of environmentally sensitive
low polluting gasoline. "mt/day" means metric tons per day; "NGLs" means
natural gas liquids, including ethane, propane, butane, natural gasoline and
other liquid hydrocarbons that are extracted from natural gas; "Tcf" means
trillion cubic feet; and "VGO" means vacuum gas oil. Unless otherwise indicated
in this Prospectus, natural gas volumes are stated at the legal pressure base
of the state or area in which the reserves are located and at 60# Fahrenheit.
REFINING TERMS
"Alkylation" is a process of combining light hydrocarbon molecules to form
high-octane gasoline using a catalyst. Propane, a by-product, is sold or used
as refinery fuel depending on economics.
"API Gravity" is an indication of density of crude oil or other liquid
hydrocarbons as measured by a system recommended by the American Petroleum
Institute (API), measured in degrees. The lower the API Gravity, the heavier
the compound. For example, asphalt has an API Gravity of 8# and gasoline has an
API Gravity of 50#.
"Catalytic reforming" is a process which produces high-octane blending stock
for the manufacture of gasoline.
"Coking" means the thermal destruction of vacuum residue to provide lighter
hydrocarbons, leaving behind a carbonaceous material called "coke."
"Complexity" is a measure of a refinery's downstream processing and upgrading
capacity. A higher complexity rating indicates a greater ability to upgrade
crude oil into higher valued products.
"Cutterstock" is a blending component used to reduce the viscosity of vacuum
residual for the production of residual fuel oil.
"Crude oil" means the oil as produced from the well; unrefined petroleum;
includes condensate.
"Crude oil capacity" means the crude oil processing capacity of the refinery.
"Crude slate" or "slate" is a listing of the various crudes that are processed
in a refinery.
"Distillate" means the mid-boiling range liquid hydrocarbons distilled from
crude oil or condensate, including kerosene, diesel fuel, and No. 2 fuel oil.
"Feedstocks" are hydrocarbons such as crude oil and natural gas liquids, that
are processed in a refinery or blended directly into refined products.
"Fluid catalytic cracking" or "FCC" is a refinery process for converting
vacuum gas oils or other intermediate feedstocks at high temperature in the
presence of a catalyst to produce lighter products such as gasoline and blend
stocks for home heating oil and fuel oil. Catalytic cracking greatly enhances
the efficiency of a refinery by converting a greater percentage of hydrocarbon
compounds to gasoline and other light distillates.
G-1
<PAGE> 228
"Hydrodesulfurization" or "HDS" is a refinery process for the removal of
sulfur from a hydrocarbon stream.
"Hydrotreating" is the process of removing sulfur from a hydrocarbon stream in
the presence of hydrogen and a catalyst.
"Isomerization" is a refinery process for converting chemical compounds into
their isomers, i.e., rearranging the structure of the molecules so as to
increase octane.
"Olefins" are a class of unsaturated hydrocarbons.
"Refinery conversion" refers to the ability of a refinery to convert low value
intermediate hydrocarbon streams to high-value refined products.
"Refinery gross margin" is the difference between the value of refined
products and the cost of feedstocks expressed in dollars per barrel of crude
oil processed.
"Refined products" means the products such as gasoline, diesel fuel, jet fuel,
and residual fuel, that are produced by a refinery.
"Sour Crude" means oil typically containing 2.0% weight of sulfur or more.
"Sweet Crude" means oil typically containing 0.5% weight of sulfur or less.
"Yield" means the percentage of refined products that are produced from
feedstocks.
EXPLORATION AND PRODUCTION TERMS
The term "gross" refers to the total acres or wells in which the Company has a
working interest, and "net" refers to gross acres or wells multiplied by the
percentage working interest owned by the Company. "Net production" means
production that is owned by the Company less royalties and production due
others. "Working interest" means the economic interest that gives the owner the
right to drill, produce, and conduct operating activities on the property and a
share of production.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates,
similar to crude oil, from natural gas when the gas is produced.
"Finding cost," expressed in dollars per Mcfe, is calculated by dividing the
amount of total capital expenditures (including all amounts paid with respect
to producing property acquisitions and excluding the cost of properties which
have not been evaluated) by the amount of proved reserves added as a result of
drilling activities during the same period (including the amount of any proved
reserves added from properties previously acquired and including reserve
revisions). The computation does not include any reserves transferred pursuant
to the El Paso litigation settlement.
"Lifting costs," expressed in dollars per Mcfe for a specified period of time,
means the sum of all costs incurred in connection with producing gas and oil
properties and includes (i) lease operating expenses, (ii) severance and
production taxes, and (iii) ad valorem taxes, during such period divided by the
number of Mcfe produced and sold during such period net of other interests
burdening such production.
"Natural gas equivalents" are determined using the ratio of six Mcf of natural
gas to one Bbl of condensate.
"NGLs" means natural gas liquids, including ethane, propane butane, natural
gasoline and other liquid hydrocarbons that are extracted from natural gas.
"Operator" means the individual or company responsible for the exploration,
development, and production of an oil or gas well or lease.
"Proved reserves" are estimated quantities of natural gas and condensate that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. "Proved developed reserves" are those reserves expected
to be recovered through existing wells with existing equipment and operating
methods. "Proved undeveloped reserves" are those reserves
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expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion.
"PV10" means the present value of estimated future net revenues before income
taxes discounted at 10%.
"SEC PV10" means the present value of estimated future net revenues before
income taxes discounted at 10%, prepared within the guidelines of the
Securities and Exchange Commission.
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<PAGE> 230
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THESE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
_______________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information............................................................................... 3
Prospectus Summary................................................................................... 4
Risk Factors......................................................................................... 10
The Company and TEC ................................................................................. 20
Use of Proceeds ..................................................................................... 22
Capitalization of the Company ....................................................................... 22
Combined Capitalization of TransTexas and the Company ............................................... 23
Selected Financial Data of the Company............................................................... 24
Selected Financial and Operating Data of TEC......................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company 26
Management's Discussion and Analysis of Financial Condition and Results of Operations of TEC......... 31
Business of the Company ............................................................................. 41
Business of TransTexas............................................................................... 54
Management of the Company............................................................................ 69
Management of TEC.................................................................................... 76
Certain Relationships and Related Transactions....................................................... 78
Description of the Notes............................................................................. 78
Description of the Warrants ......................................................................... 110
Description of Capital Stock of the Company ......................................................... 112
Certain Legal Considerations ........................................................................ 114
Determination of Offering Price ..................................................................... 121
Selling Securityholder .............................................................................. 122
Plan of Distribution ................................................................................ 122
Legal Matters ....................................................................................... 123
Independent Accountants ............................................................................. 123
Index to Financial Statements ....................................................................... F-1
Glossary............................................................................................. G-1
</TABLE>
UNTIL ________ 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
______________________
================================================================================
340,000 A UNITS CONSISTING
OF $340,000,000
GUARANTEED FIRST MORTGAGE DISCOUNT
NOTES DUE 2002
AND 5,811,773 COMMON STOCK
PURCHASE WARRANTS
100,000 B UNITS CONSISTING OF
$100,000,000
GUARANTEED FIRST MORTGAGE
NOTES DUE 2002
AND 1,683,540 COMMON STOCK
PURCHASE WARRANTS
TRANSAMERICAN
REFINING CORPORATION
TRANSAMERICAN
ENERGY CORPORATION
_______________________________
PROSPECTUS
_______________________________
DATED _______________, 1996
================================================================================
<PAGE> 231
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses payable by TransAmerican
Refining Corporation (the "Company") in connection with the issuance and
distribution of the securities being registered pursuant to this Registration
Statement, other than underwriting discounts:
<TABLE>
<CAPTION>
ITEM AMOUNT*
- ---- -------
<S> <C>
Securities and Exchange Commission fee..................................................... $146,329
National Association of Securities Dealers, Inc. (NASD) filing fee......................... 30,500
Printing and engraving fees and expenses................................................... 1,500,000
Legal fees and expenses ................................................................... 2,000,000
Engineering fees........................................................................... 450,000
Accounting fees and expenses............................................................... 575,000
Fees and expenses for qualification under state securities laws ........................... 40,000
Trustee's and Warrant Agent's fees and expenses ........................................... 30,000
Miscellaneous ............................................................................. 1,228,171
---------
Total..................................................................................... $6,000,000
==========
</TABLE>
_______________
* All expenses are estimated, except the registration and NASD fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that the directors of
the Company shall be indemnified by the Company to the fullest extent permitted
by Texas law. TEC's Certificate of Incorporation provide that the directors of
TEC shall be indemnified by the Company to the fullest extent permitted by
Delaware law. In addition, the Company's and TEC's Bylaws require it to
indemnify its directors and officers against any and all liability and
reasonable expense that may be incurred by them in connection with or resulting
from (i) any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative, (ii) an
appeal of such an action, suit or proceeding, or (iii) an inquiry or
investigation that could lead to such an action, suit or proceeding, all to the
fullest extent permitted by Texas law in the case of the Company and Delaware
law in the case of TEC. TEC's Certificate of Incorporation provides that the
right of directors of TEC other than independent directors to be indemnified is
subordinated to obligations of TEC under the Guarantee, and the right of
officers of TEC to be indemnified for claims arising from such officers'
consent to or participation in bankruptcy or insolvency proceeding is
subordinated to the obligations of TEC under the Guarantee.
The Company expects to enter into indemnification agreements with its
directors that will contractually provide for indemnification and expense
advancement and will include related provisions meant to facilitate the
indemnitees' receipt of such benefits. In addition, the Company expects to
purchase customary directors' and officers' liability insurance policies for
its directors and officers. The By-laws of the Company and agreements with
directors and officers also provide for indemnification for amounts (i) in
respect of the deductibles for such insurance policies and (ii) that exceed the
liability limits of such insurance policies. Such indemnification may be made
even though directors and officers would not otherwise be entitled to
indemnification under other provisions of the By-laws or such agreements.
ITEM 15. RECENT SALES OF UNREGISTERED STOCK.
No unregistered sales of securities were made by the Company during
the last three years. Other than 1,000 shares of common stock, $0.01 par value,
of TEC sold to TransAmerican Natural Gas Corporation on July 22, 1994 for
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<PAGE> 232
$1,000, TEC has not issued and sold any securities without registration under
the Securities Act. Such sale was effected in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
*1.1 -- Form of Underwriting Agreement between the Company
and Jefferies & Company, Inc.
2.1 -- Stock Transfer Agreement dated as of February 23,
1995, between TARC, the Company and TransAmerican
(previously filed as Exhibit 2 to TARC's and the
Company's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
*3.1(i) -- Articles of Incorporation of the Company
3.1(ii) -- By-laws of the Company (previously filed as
Exhibit 3.1(ii) to the Company's and TEC's
Registration Statement on Form S-1 (Registration
No. 33-82200) and incorporated herein by
reference)
*3.2(i) -- Certificate of Incorporation of TEC, as amended
3.2(ii) -- By-laws of TEC (previously filed as Exhibit
3.2(ii) to the Company's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200)
and incorporated herein by reference)
*3.2(iii) -- Form of Certificate of Designation of Series A
Preferred Stock of TEC
4.1 -- Indenture dated as of June 15, 1995, among
TransTexas, Transmission, and American Bank
National Association, as Trustee (the "Indenture
Trustee"), with respect to the Notes including the
forms of Note and Senior Secured Guarantee as
exhibits (previously filed as Exhibit 2 to
TransTexas' Current Report on Form 8-K filed with
the Securities and Exchange Commission in July
1995 and incorporated herein by reference)
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement,
effective as of June 23, 1995, from TransTexas to
James A. Taylor, as trustee for the benefit of the
Indenture Trustee (previously filed as Exhibit 3
to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in
July 1995 and incorporated herein by reference)
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment,
Security Agreement and Financing Statement, dated
as of June 20, 1995, from Transmission to James A.
Taylor, as trustee for the benefit of the
Indenture Trustee (previously filed as Exhibit 5
to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in
July 1995 and incorporated herein by reference)
4.4 -- Security Agreement, Pledge and Financing
Statement, dated as of June 20, 1995, by
TransTexas in favor of the Indenture Trustee
(previously filed as Exhibit 6 to TransTexas'
Current Report on Form 8-K filed with the
Securities and Exchange Commission in July 1995
and incorporated herein by reference)
4.5 -- Security Agreement, Pledge and Financing
Statement, dated as of June 20, 1995, by
Transmission in favor of the Indenture Trustee
(previously filed as Exhibit 7 to TransTexas'
Current Report on Form 8-K filed with the
Securities and Exchange Commission in July 1995
and incorporated herein by reference)
4.6 -- Cash Collateral and Disbursement Agreement, dated
as of June 20, 1995, among TransTexas, the
Indenture Trustee and the Disbursement Agent
(previously filed as Exhibit 9 to TransTexas'
Current Report on Form 8-K filed with the
Securities and Exchange Commission in July 1995
and incorporated herein by reference)
4.7 -- Indenture dated as of February 15, 1995, between
TARC, First Fidelity Bank, National Association,
as Trustee and the Company, with respect to the
Guaranteed First Mortgage Discount Notes and the
Guaranteed First Mortgage Notes (together,
</TABLE>
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<PAGE> 233
<TABLE>
<S> <C>
the "TARC Notes"), including the forms of TARC
Notes as exhibits (previously filed as Exhibit 3
to the Company's and TARC's Current Report on Form
8-K dated March 14, 1995 and incorporated herein
by reference)
4.8 -- Warrant Agreement dated as of February 23, 1995,
among the Company, TARC and First Fidelity Bank,
National Association, as Warrant Trustee, with
respect to the Common Stock Purchase Warrants
including the form of Warrant as an exhibit
(previously filed as Exhibit 4 to the Company's
and TARC's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
*5.1 -- Legal Opinion of Gardere & Wynne, L.L.P.
*8.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding
tax
*8.2 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding
substantive consolidation
10.1 -- Services Agreement dated August 24, 1993, by and
between TransTexas and TransAmerican (previously
filed as Exhibit 3 to TransTexas' Current Report
on Form 8-K filed with the SEC on October 4, 1993
and incorporated herein by reference)
10.2 -- Tax Allocation Agreement dated August 24, 1993, by
and among TransAmerican, TransTexas, and the other
direct and indirect subsidiaries of TransAmerican,
as amended (previously filed as Exhibit 10.4 to
TransTexas' Registration Statement on Form S-1
(Registration No. 33-75050), and incorporated
herein by reference)
10.3 -- Interruptible Gas Sales Terms and Conditions,
between TransTexas and TARC, as amended
(previously filed as Exhibit 10.4 to TARC's
Registration Statement on Form S-1 (Registration
No. 33-82200), and incorporated herein by
reference)
10.4 -- Bank Group Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the Bank
Group previously filed as Exhibit 4 to TransTexas'
Current Report on Form 8-K filed with the SEC on
October 4, 1993 and incorporated herein by
reference)
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and
between TransAmerican and The Coastal Corporation,
as amended by the Amendment to Gas Purchase
Agreement dated February 13, 1990, by and between
TransAmerican and Texcol Gas Services, Inc., as
successor to The Coastal Corporation (previously
filed as Exhibit 10.6 to TransTexas' Registration
Statement on Form S-1 (Registration No. 33-62740)
and incorporated herein by reference)
10.6 -- Gas Purchase Agreement dated October 29, 1987, by
and between TransAmerican and The Coastal
Corporation as amended by the Amendment to Gas
Purchase Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services,
Inc., successor to The Coastal Corporation
(previously filed as Exhibit 10.7 to TransTexas'
Registration Statement on Form S-1 (Registration
No. 33-62740) and incorporated herein by
reference)
10.7 -- Gas Transportation Agreement dated the Effective
Date (as therein defined), by and between
TransAmerican and The Coastal Corporation, as
amended by the Amendment to Gas Transportation
Agreement dated February 13, 1990, by and between
TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (previously
filed as Exhibit 10.8 to TransTexas' Registration
Statement on Form S-1 (Registration No. 33-62740)
and incorporated herein by reference)
10.8 -- Firm Natural Gas Sales Agreement dated September
30, 1993, by and between TransTexas and Associated
Natural Gas, Inc. (previously filed as Exhibit
10.1 to TransTexas' Quarterly Report on Form 10-Q
for the three months ended October 31, 1993 and
incorporated herein by reference)
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (previously
filed as Exhibit 6 to TransTexas' Current Report
on Form 8-K filed with the Securities and Exchange
Commission on October 4, 1993 and incorporated
herein by reference)
10.10 -- Gas Purchase Agreement dated November 1, 1985,
between TransAmerican and Washington Gas and Light
Company, Frederick Gas Company, Inc., and
Shenandoah Gas Company (previously filed as
Exhibit 10.13 to TransTexas' Registration
Statement on Form S-1 (Registration No. 33-75050)
and incorporated herein by reference)
</TABLE>
II-3
<PAGE> 234
<TABLE>
<S> <C>
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30,
1993 (previously filed as Exhibit 10.1 to
TransTexas' Quarterly Report on Form 10-Q for the
three months ended October 31, 1993 and
incorporated herein by reference)
10.12 -- Amendment Extending Gas Purchase Agreement between
TransTexas and Washington Gas Light Company, Inc.,
and Shenandoah Gas Company, as amended, dated
November 1, 1993 (previously filed as Exhibit 10.1
to TransTexas' Quarterly Report on Form 10-Q for
the three months ended January 31, 1994 and
incorporated herein by reference)
10.13 -- Agreement for Purchase of Production Payment
between TransTexas and Southern States
Exploration, Inc. dated April 1, 1994 (previously
filed as Exhibit 10.1 to the TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1994 and incorporated herein by
reference)
10.14 -- Assignment of Proceeds Production Payment
dated April 1, 1994, between TransTexas and
Southern States Exploration, Inc. (previously filed
as Exhibit 10.2 to the TransTexas' Quarterly Report
on Form 10-Q for the three months ended April 30,
1994 and incorporated herein by reference)
10.15 -- Transfer Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, Transmission, and
John R. Stanley (previously filed as Exhibit 1 to
the Company's Current Report on Form 8-K filed
with the SEC on October 4, 1993 and incorporated
herein by reference)
10.16 -- Employment Agreement dated June 26, 1995, between
the Company and Richard Bianchi (previously filed
as Exhibit 10.16 to TransTexas' Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.17 -- Amended and Restated Accounts Receivable
Management and Security Agreement dated as of
October 31, 1995, between TransTexas and BNY
Financial Corporation (previously filed as Exhibit
4.3 to TransTexas' Annual Report on Form 10-K for
the year ended July 31, 1994 and incorporated
herein by reference)
10.18 -- Processing Agreement dated March 20, 1996 by and
between TARC and J. Aron & Company (previously
filed as Exhibit 10.19 to TARC's Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.19 -- Stock Transfer Agreement dated as of February 23,
1995, between TARC, the Company and TransAmerican
(previously filed as Exhibit 2 to TARC's and the
Company's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
10.20 -- Employment Agreement dated November 12, 1995 by
and between TARC and Jeffery H. Siegel (previously
filed as Exhibit 10.21 to TARC's Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.21 -- Employment Agreement dated June 12, 1995 by and
between TARC and R. Glenn McGinnis (previously
filed as Exhibit 10.20 to TARC's Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.22 -- Indemnification Agreement by and between TARC and
each of its directors (previously filed as Exhibit
10.3 to the Company's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200)
and incorporated herein by reference)
10.23 -- Processing Agreement dated April 22, 1996 between
TARC and Glencore Ltd. (previously filed as Exhibit
10.1 to TARC's Quarterly Report on Form 10-Q for
the three months ended April 30, 1996 and
incorporated herein by reference)
10.24 -- Note Purchase Agreement dated as of May 10, 1996
among TransTexas, TCW Shared Opportunity Fund II,
L.P. and Jefferies & Company, Inc. (previously
filed as Exhibit 10.1 to TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1996 and incorporated herein by
reference)
10.25 -- Master Swap Agreement dated June 6, 1996 between
TransTexas and AIG Trading Corporation (previously
filed as Exhibit 10.2 to TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1996 and incorporated herein by
reference)
10.26 -- Purchase Agreement dated January 30, 1996 between
TransTexas and Sunflower Energy Finance Company
(previously filed as Exhibit 10.3 to TransTexas'
Quarterly Report on Form 10-Q for the three months
ended April 30, 1996 and incorporated herein by
reference)
10.27 -- Production Payment Conveyance executed on January
30, 1996 from TransTexas to Sunflower Energy
Finance Company (previously filed as Exhibit 10.4
to TransTexas' Quarterly Report on Form 10-Q for
the three months ended April 30, 1996 and
incorporated herein by reference)
10.28 -- First Supplement to Purchase Agreement dated as of
February 12, 1996 among TransTexas, Sunflower
Energy Finance Company and TCW Portfolio No. 1555
DR V Sub-Custody Partnership, L.P. (previously
filed as Exhibit 10.5 to TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1996 and incorporated herein by
reference)
10.29 -- First Supplement to Production Payment Conveyance
executed February 12, 1996 among TransTexas,
Sunflower Energy Finance Company and TCW Portfolio
No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as Exhibit 10.6 to TransTexas'
Quarterly Report on Form 10-Q for the three months
ended April 30, 1996 and incorporated herein by
reference)
10.30 -- Purchase Agreement dated May 14, 1996 among
TransTexas, TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. and Sunflower Energy Finance
Company (previously filed as Exhibit 10.7 to
TransTexas' Quarterly Report on Form 10-Q for the
three months ended April 30, 1996 and incorporated
herein by reference)
10.31 -- Production Payment Conveyance, executed on May 14,
1996 from TransTexas to TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (previously filed as Exhibit 10.8
to TransTexas' Quarterly Report on Form 10-Q for
the three months ended April 30, 1996 and
incorporated herein by reference)
**10.32 -- Processing Agreement dated July 22, 1996 between
TARC and Glencore Ltd.
21.1 -- List of the subsidiaries of the Company and TEC,
their state of incorporation and the name under
which such subsidiary does business (previously
filed as exhibit 21.1 to the Company's and TEC's
Registration Statement on Form S-1 (Registration
No. 33-82200) and incorporated herein by reference)
**12.1 -- Computation of Ratio of Earnings to Fixed Charges
**23.1 -- Consent of Coopers & Lybrand, L.L.P.
*23.2 -- Consent of Gardere & Wynne, L.L.P.
</TABLE>
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<PAGE> 235
<TABLE>
<S> <C>
**23.3 -- Consent of Netherland, Sewell & Associates, Inc.
*23.4 -- Consent of Baker & O'Brien, Inc.
24.1 -- Power of Attorney (set forth on page II-7 and II-8)
*25.1 -- Form T-1 Statement of Eligibility and
Qualification under the Trust Indenture Act of
1939 relating to the Notes
</TABLE>
_______________
* previously filed
** filed herewith
(b) Financial Statement Schedules
The following financial statement schedule is included in Part II of
the Registration Statement:
Schedule II Combined Valuation and Qualifying Accounts of TransTexas and TARC
All other schedules are omitted because they are inapplicable or the
requested information is shown in the financial statements or noted therein.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, or the Company has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Units being
registered, the Company will, unless in the opinion of its respective counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) The undersigned registrant hereby undertakes:
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<PAGE> 236
(a) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(b) That, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes to provide to
the underwriter at the closing specified in the underwriting
agreement, certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the
time it was declared effective.
(b) For the purpose of determining any liability
under the Securities Act of 1933, each post- effective
amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
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<PAGE> 237
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has
duly caused this Post-Effective Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, State of Texas, on August 9, 1996.
TRANSAMERICAN REFINING CORPORATION
By: /s/ JEFFREY H. SIEGEL
------------------------------------------
Jeffrey H. Siegel, Chief Financial Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints John R. Stanley and Jeffrey H.
Siegel, each as attorney and agent for the undersigned, with full power of
substitution, for and in the name, place, and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities Act
any and all amendments (including post- effective amendments) and exhibits to
this Registration Statement and any and all applications, instruments, and
other documents to be filed with the Securities and Exchange Commission
pertaining to the registration of the securities covered hereby, with full
power and authority to do and perform any and all acts and things whatsoever
requisite or desirable.
Pursuant to the requirements of the Securities Act, this
Post-Effective Amendment No. 4 to the Registration Statement has been signed by
the following persons in the capacities indicated on August 9, 1996.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ T. GERALD HARPER
----------------------------------------
T. Gerald Harper Director
/s/ DONALD B. HENDERSON
----------------------------------------
Donald B. Henderson Director
/s/ THOMAS B. MCDADE
---------------------------------------
Thomas B. McDade Director
/s/ JOHN R. STANLEY
----------------------------------------
John R. Stanley Director, President, and Chief
Executive Officer (Principal
Executive Officer)
/s/ JEFFREY H. SIEGEL
---------------------------------------
Jeffrey H. Siegel Chief Financial Officer (Principal Financial
</TABLE>
II-7
<PAGE> 238
SIGNATURES
Pursuant to the requirements of the Securities Act, TransAmerican
Energy Corporation has duly caused this Post- Effective Amendment No. 4 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on August 9, 1996.
TRANSAMERICAN ENERGY CORPORATION
By: /s/ JEFFREY H. SIEGEL
------------------------------------------
Jeffrey H. Siegel, Chief Financial Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints John R. Stanley and Jeffrey H.
Siegel, each as attorney and agent for the undersigned, with full power of
substitution, for and in the name, place, and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities Act
any and all amendments (including post- effective amendments) and exhibits to
this Registration Statement and any and all applications, instruments, and
other documents to be filed with the Securities and Exchange Commission
pertaining to the registration of the securities covered hereby, with full
power and authority to do and perform any and all acts and things whatsoever
requisite or desirable.
Pursuant to the requirements of the Securities Act, this
Post-Effective Amendment No. 4 to the Registration Statement has been signed by
the following persons in the capacities indicated on August 9, 1996.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ JOHN R. STANLEY Director, Chairman of the Board and
- ------------------------------------------------ Chief Executive Officer
John R. Stanley (Principal Executive Officer)
/s/ THOMAS B. MCDADE Director
- ------------------------------------------------
Thomas B. McDade
Director
- ------------------------------------------------
James V. Langston
Director
- ------------------------------------------------
John R. Blinn
/s/ DONALD B. HENDERSON Director
- ------------------------------------------------
Donald B. Henderson
/s/ KIM E. MORRIS Director
- ------------------------------------------------
Kim E. Morris
/s/ JEFFREY H. SIEGEL Chief Financial Officer
- ------------------------------------------------ (Principal Financial Officer and Accounting
Jeffrey H. Siegel Officer)
</TABLE>
II-8
<PAGE> 239
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransAmerican Energy Corporation:
Our report on the consolidated financial statements of TransAmerican Energy
Corporation and TAEC, predecessor to TransAmerican Energy Corporation, is
included in this Registration Statement. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in Item 16(b).
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
S-1
<PAGE> 240
Schedule II
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Transition Period ended
January 31, 1996:
Valuation allowance-
long-term receivables $ 952 $ 278 $ -- $ -- $ 1,230
=========== ============ =========== ======== =========
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
Year ended July 31, 1995:
Valuation allowance-
long-term receivables $ 531 $ 421 $ -- $ -- $ 952
=========== ============ =========== ======== =========
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
Year Ended July 31, 1994:
Valuation allowance -
long-term receivables $ -- $ 531 $ -- $ -- $ 531
=========== ============ =========== ======== =========
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
Year ended July 31, 1993:
Valuation allowance-
long-term receivable $ -- $ -- $ -- $ -- $ --
=========== ============ =========== ======== =========
</TABLE>
S-2
<PAGE> 241
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransTexas Gas Corporation:
Our report on the consolidated financial statements of TransTexas Gas
Corporation is included on this Registration Statement. In connection with our
audits of such financial statements, we have also audited the related
financial statement schedule listed in Item 16(b).
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 29, 1996
S-3
<PAGE> 242
Schedule II
TRANSTEXAS GAS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Transition Period ended
January 31, 1996:
Valuation allowance-
long-term receivables $ 952 $ 278 $ -- $ -- $ 1,230
=========== ============ =========== ======== =========
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
Year ended July 31, 1995:
Valuation allowance-
long-term receivables $ 531 $ 421 $ -- $ -- $ 952
=========== ============ =========== ======== =========
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
Year Ended July 31, 1994:
Valuation allowance-
long-term receivables $ -- $ 531 $ -- $ -- $ 531
=========== ============ =========== ======== =========
Balance at Balance at
Beginning Additions Other End
Description of Period at Costs Retirements Changes of Period
- --------------------- ----------- ------------ ----------- -------- ---------
Year ended July 31, 1993:
Valuation allowance-
long-term receivable $ -- $ -- $ -- $ -- $ --
=========== ============ =========== ======== =========
</TABLE>
S-4
<PAGE> 243
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. PAGE
------- ------------
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement between the Company
and Jefferies & Company, Inc.
2.1 -- Stock Transfer Agreement dated as of February 23,
1995, between TARC, the Company and TransAmerican
(previously filed as Exhibit 2 to TARC's and the
Company's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
*3.1(i) -- Articles of Incorporation of the Company
3.1(ii) -- By-laws of the Company (previously filed as
Exhibit 3.1(ii) to the Company's and TEC's
Registration Statement on Form S-1 (Registration
No. 33-82200) and incorporated herein by
reference)
*3.2(i) -- Certificate of Incorporation of TEC, as amended
3.2(ii) -- By-laws of TEC (previously filed as Exhibit
3.2(ii) to the Company's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200)
and incorporated herein by reference)
*3.2(iii) -- Form of Certificate of Designation of Series A
Preferred Stock of TEC
4.1 -- Indenture dated as of June 15, 1995, among
TransTexas, Transmission, and American Bank
National Association, as Trustee (the "Indenture
Trustee"), with respect to the Notes including the
forms of Note and Senior Secured Guarantee as
exhibits (previously filed as Exhibit 2 to
TransTexas' Current Report on Form 8-K filed with
the Securities and Exchange Commission in July
1995 and incorporated herein by reference)
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement,
effective as of June 23, 1995, from TransTexas to
James A. Taylor, as trustee for the benefit of the
Indenture Trustee (previously filed as Exhibit 3
to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in
July 1995 and incorporated herein by reference)
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment,
Security Agreement and Financing Statement, dated
as of June 20, 1995, from Transmission to James A.
Taylor, as trustee for the benefit of the
Indenture Trustee (previously filed as Exhibit 5
to TransTexas' Current Report on Form 8-K filed
with the Securities and Exchange Commission in
July 1995 and incorporated herein by reference)
4.4 -- Security Agreement, Pledge and Financing
Statement, dated as of June 20, 1995, by
TransTexas in favor of the Indenture Trustee
(previously filed as Exhibit 6 to TransTexas'
Current Report on Form 8-K filed with the
Securities and Exchange Commission in July 1995
and incorporated herein by reference)
4.5 -- Security Agreement, Pledge and Financing
Statement, dated as of June 20, 1995, by
Transmission in favor of the Indenture Trustee
(previously filed as Exhibit 7 to TransTexas'
Current Report on Form 8-K filed with the
Securities and Exchange Commission in July 1995
and incorporated herein by reference)
4.6 -- Cash Collateral and Disbursement Agreement, dated
as of June 20, 1995, among TransTexas, the
Indenture Trustee and the Disbursement Agent
(previously filed as Exhibit 9 to TransTexas'
Current Report on Form 8-K filed with the
Securities and Exchange Commission in July 1995
and incorporated herein by reference)
4.7 -- Indenture dated as of February 15, 1995, between
TARC, First Fidelity Bank, National Association,
as Trustee and the Company, with respect to the
Guaranteed First Mortgage Discount Notes and the
Guaranteed First Mortgage Notes (together,
</TABLE>
<PAGE> 244
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. PAGE
------- ------------
<S> <C> <C>
the "TARC Notes"), including the forms of TARC
Notes as exhibits (previously filed as Exhibit 3
to the Company's and TARC's Current Report on Form
8-K dated March 14, 1995 and incorporated herein
by reference)
4.8 -- Warrant Agreement dated as of February 23, 1995,
among the Company, TARC and First Fidelity Bank,
National Association, as Warrant Trustee, with
respect to the Common Stock Purchase Warrants
including the form of Warrant as an exhibit
(previously filed as Exhibit 4 to the Company's
and TARC's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
*5.1 -- Legal Opinion of Gardere & Wynne, L.L.P.
*8.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding
tax
*8.2 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding
substantive consolidation
10.1 -- Services Agreement dated August 24, 1993, by and
between TransTexas and TransAmerican (previously
filed as Exhibit 3 to TransTexas' Current Report
on Form 8-K filed with the SEC on October 4, 1993
and incorporated herein by reference)
10.2 -- Tax Allocation Agreement dated August 24, 1993, by
and among TransAmerican, TransTexas, and the other
direct and indirect subsidiaries of TransAmerican,
as amended (previously filed as Exhibit 10.4 to
TransTexas' Registration Statement on Form S-1
(Registration No. 33-75050), and incorporated
herein by reference)
10.3 -- Interruptible Gas Sales Terms and Conditions,
between TransTexas and TARC, as amended
(previously filed as Exhibit 10.4 to TARC's
Registration Statement on Form S-1 (Registration
No. 33-82200), and incorporated herein by
reference)
10.4 -- Bank Group Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the Bank
Group previously filed as Exhibit 4 to TransTexas'
Current Report on Form 8-K filed with the SEC on
October 4, 1993 and incorporated herein by
reference)
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and
between TransAmerican and The Coastal Corporation,
as amended by the Amendment to Gas Purchase
Agreement dated February 13, 1990, by and between
TransAmerican and Texcol Gas Services, Inc., as
successor to The Coastal Corporation (previously
filed as Exhibit 10.6 to TransTexas' Registration
Statement on Form S-1 (Registration No. 33-62740)
and incorporated herein by reference)
10.6 -- Gas Purchase Agreement dated October 29, 1987, by
and between TransAmerican and The Coastal
Corporation as amended by the Amendment to Gas
Purchase Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services,
Inc., successor to The Coastal Corporation
(previously filed as Exhibit 10.7 to TransTexas'
Registration Statement on Form S-1 (Registration
No. 33-62740) and incorporated herein by
reference)
10.7 -- Gas Transportation Agreement dated the Effective
Date (as therein defined), by and between
TransAmerican and The Coastal Corporation, as
amended by the Amendment to Gas Transportation
Agreement dated February 13, 1990, by and between
TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (previously
filed as Exhibit 10.8 to TransTexas' Registration
Statement on Form S-1 (Registration No. 33-62740)
and incorporated herein by reference)
10.8 -- Firm Natural Gas Sales Agreement dated September
30, 1993, by and between TransTexas and Associated
Natural Gas, Inc. (previously filed as Exhibit
10.1 to TransTexas' Quarterly Report on Form 10-Q
for the three months ended October 31, 1993 and
incorporated herein by reference)
10.9 -- Form of Indemnification Agreement by and between
TransTexas and each of its directors (previously
filed as Exhibit 6 to TransTexas' Current Report
on Form 8-K filed with the Securities and Exchange
Commission on October 4, 1993 and incorporated
herein by reference)
10.10 -- Gas Purchase Agreement dated November 1, 1985,
between TransAmerican and Washington Gas and Light
Company, Frederick Gas Company, Inc., and
Shenandoah Gas Company (previously filed as
Exhibit 10.13 to TransTexas' Registration
Statement on Form S-1 (Registration No. 33-75050)
and incorporated herein by reference)
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. PAGE
------- ------------
<S> <C> <C>
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30,
1993 (previously filed as Exhibit 10.1 to
TransTexas' Quarterly Report on Form 10-Q for the
three months ended October 31, 1993 and
incorporated herein by reference)
10.12 -- Amendment Extending Gas Purchase Agreement between
TransTexas and Washington Gas Light Company, Inc.,
and Shenandoah Gas Company, as amended, dated
November 1, 1993 (previously filed as Exhibit 10.1
to TransTexas' Quarterly Report on Form 10-Q for
the three months ended January 31, 1994 and
incorporated herein by reference)
10.13 -- Agreement for Purchase of Production Payment
between TransTexas and Southern States
Exploration, Inc. dated April 1, 1994 (previously
filed as Exhibit 10.1 to the TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1994 and incorporated herein by
reference)
10.14 -- Assignment of Proceeds Production Payment dated April 1,
1994, between TransTexas and Southern States Exploration,
Inc. (previously filed as Exhibit 10.2 to the TransTexas'
Quarterly Report on Form 10-Q for the three months ended
April 30, 1994 and incorporated herein by reference)
10.15 -- Transfer Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, Transmission, and
John R. Stanley (previously filed as Exhibit 1 to
the Company's Current Report on Form 8-K filed
with the SEC on October 4, 1993 and incorporated
herein by reference)
10.16 -- Employment Agreement dated June 26, 1995, between
the Company and Richard Bianchi (previously filed
as Exhibit 10.16 to TransTexas' Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.17 -- Amended and Restated Accounts Receivable
Management and Security Agreement dated as of
October 31, 1995, between TransTexas and BNY
Financial Corporation (previously filed as Exhibit
4.3 to TransTexas' Annual Report on Form 10-K for
the year ended July 31, 1994 and incorporated
herein by reference)
10.18 -- Processing Agreement dated March 20, 1996 by and
between TARC and J. Aron & Company (previously
filed as Exhibit 10.19 to TARC's Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.19 -- Stock Transfer Agreement dated as of February 23,
1995, between TARC, the Company and TransAmerican
(previously filed as Exhibit 2 to TARC's and the
Company's Current Report on Form 8-K dated March
14, 1995 and incorporated herein by reference)
10.20 -- Employment Agreement dated November 12, 1995 by
and between TARC and Jeffrey H. Siegel (previously
filed as Exhibit 10.21 to TARC's Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.21 -- Employment Agreement dated June 12, 1995 by and
between TARC and R. Glenn McGinnis (previously
filed as Exhibit 10.20 to TARC's Transition Report
on Form 10-K for the transition period ended
January 31, 1996 and incorporated herein by
reference)
10.22 -- Indemnification Agreement by and between TARC and
each of its directors (previously filed as Exhibit
10.3 to the Company's and TEC's Registration
Statement on Form S-1 (Registration No. 33-82200)
and incorporated herein by reference)
10.23 -- Processing Agreement dated April 22, 1996 between
TARC and Glencore Ltd. (previously filed as Exhibit
10.1 to TARC's Quarterly Report on Form 10-Q for
the three months ended April 30, 1996 and
incorporated herein by reference).
10.24 -- Note Purchase Agreement dated as of May 10, 1996
among TransTexas, TCW Shared Opportunity Fund II,
L.P. and Jefferies & Company, Inc. (previously
filed as Exhibit 10.1 to TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1996 and incorporated herein by
reference)
10.25 -- Master Swap Agreement dated June 6, 1996 between
TransTexas and AIG Trading Corporation (previously
filed as Exhibit 10.2 to TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1996 and incorporated herein by
reference)
10.26 -- Purchase Agreement dated January 30, 1996 between
TransTexas and Sunflower Energy Finance Company
(previously filed as Exhibit 10.3 to TransTexas'
Quarterly Report on Form 10-Q for the three months
ended April 30, 1996 and incorporated herein by
reference)
10.27 -- Production Payment Conveyance executed on January
30, 1996 from TransTexas to Sunflower Energy
Finance Company (previously filed as Exhibit 10.4
to TransTexas' Quarterly Report on Form 10-Q for
the three months ended April 30, 1996 and
incorporated herein by reference)
10.28 -- First Supplement to Purchase Agreement dated as of
February 12, 1996 among TransTexas, Sunflower
Energy Finance Company and TCW Portfolio No. 1555
DR V Sub-Custody Partnership, L.P. (previously
filed as Exhibit 10.5 to TransTexas' Quarterly
Report on Form 10-Q for the three months ended
April 30, 1996 and incorporated herein by
reference)
10.29 -- First Supplement to Production Payment Conveyance
executed February 12, 1996 among TransTexas,
Sunflower Energy Finance Company and TCW Portfolio
No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as Exhibit 10.6 to TransTexas'
Quarterly Report on Form 10-Q for the three months
ended April 30, 1996 and incorporated herein by
reference)
10.30 -- Purchase Agreement dated May 14, 1996 among
TransTexas, TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. and Sunflower Energy Finance
Company (previously filed as Exhibit 10.7 to
TransTexas' Quarterly Report on Form 10-Q for the
three months ended April 30, 1996 and incorporated
herein by reference)
10.31 -- Production Payment Conveyance, executed on May 14,
1996 from TransTexas to TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. and Sunflower Energy
Finance Company (previously filed as Exhibit 10.8
to TransTexas' Quarterly Report on Form 10-Q for
the three months ended April 30, 1996 and
incorporated herein by reference)
**10.32 -- Processing Agreement dated July 22, 1996 between
TARC and Glencore Ltd.
**12.1 -- Computation of Ratio of Earnings to Fixed Charges
21.1 -- List of the subsidiaries of the Company and TEC,
their state of incorporation and the name under
which such subsidiary does business (previously
filed as exhibit 21.1 to the Company's and TEC's
Registration Statement on Form S-1 (Registration
No. 33-82200) and incorporated herein by reference)
**23.1 -- Consent of Coopers & Lybrand, L.L.P.
*23.2 -- Consent of Gardere & Wynne, L.L.P.
</TABLE>
<PAGE> 246
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. PAGE
------- ------------
<S> <C> <C>
**23.3 -- Consent of Netherland, Sewell & Associates, Inc.
*23.4 -- Consent of Baker & O'Brien, Inc.
24.1 -- Power of Attorney (set forth on page II-7 and II-8)
*25.1 -- Form T-1 Statement of Eligibility and
Qualification under the Trust Indenture Act of
1939 relating to the Notes
</TABLE>
_______________
* previously filed
** filed herewith
<PAGE> 1
PROCESSING AGREEMENT
BY AND BETWEEN
TRANSAMERICAN REFINING CORPORATION
AND
GLENCORE LTD.
Effective July 22nd, 1996
<PAGE> 2
PROCESSING AGREEMENT PAGE 1
PROCESSING AGREEMENT
THIS PROCESSING AGREEMENT ("Processing Agreement"), effective as of the
date set forth herein, is by and between Glencore Ltd. ("GLENCORE") and
TransAmerican Refining Corporation ("TARC").
RECITALS
WHEREAS, TARC is engaged in the business of refining, storing and
distributing petroleum products of various types, including, but not limited
to, crude oil, cutter stock or other additives, Feedstock (as defined below)
and Products (as defined below) derived or refined therefrom (collectively
"Petroleum"); and
WHEREAS, TARC owns and operates a refinery and storage tanks for
Petroleum in or near NORCO, LA; and
WHEREAS, GLENCORE intends to store Petroleum in TARC's Storage Tanks
(as defined below) and
WHEREAS, TARC AND GLENCORE desire to enter into this Processing
Agreement whereby GLENCORE will deliver Feedstock (as defined below) to TARC'S
Refinery and Storage Tanks (as defined below) for processing by TARC into
Products and subsequent sale or other disposition by GLENCORE;
NOW, THEREFORE, for and in consideration of the premises, and the
mutual covenants and promises hereinafter set forth; the sufficiency of which
is hereby acknowledged, GLENCORE and TARC hereby agree as follows:
1. Definitions. When used in this Processing Agreement, the following
terms shall have the meanings herein set forth:
"Delivered Product" shall be the quantity of Feedstock delivered by
Glencore to TARC and processed into Products by TARC under this Processing
Agreement.
"Feedstock" shall mean approximately 305,000 barrels of straight run
residue to be delivered by MT "Romito" to the Refinery.
<PAGE> 3
PROCESSING AGREEMENT PAGE 2
"Processing" shall mean and include the converting of Feedstock to
Products.
"Products" shall mean VGO and VTB.
"Refinery" shall mean and include the refinery of TARC in or near
NORCO, Louisiana, including all towers, units and processes therein.
"Storage Tanks" and "Storage Facility" shall mean and include each
storage tank, and all related property and facilities, together with
modifications, alterations or additions thereto, listed in Schedule A attached
hereto.
"VGO" shall mean Vacuum Gas Oil
"VTB" shall mean Vacuum Tower Bottoms
2. Term. The term of this Processing Agreement shall commence upon
July 22nd 1996 and shall end on the third working day after Glencore has
removed all Products processed under this Agreement from the Refinery. The
basis for calculation of the number of barrels of processed Feedstock shall be
outturn received basis as determined by independent inspector.
3. Processing Fee.
(a) GLENCORE shall pay to TARC a Processing Fee of USD 1.30 per barrel
of Feedstock processed which fee shall be due and payable to TARC as agreed,
but no later than three (3) working days after all Feedstock is processed into
Products.
(b) The parties shall agree on guaranteed quantity and quality yields
for the cargo of Feedstock prior to processing. To the extent TARC fails to
meet the guaranteed quality and quantity yield, GLENCORE shall be entitled to a
credit against the Processing Fee due TARC equal to the economic benefit
(profit) GLENCORE would have realized had the yield been met as defined below.
If such credits exceed the total amount of Processing Fees due TARC, TARC shall
pay GLENCORE such excess amount within one (1) business day. Failing such
payment GLENCORE shall have the right to set-off such amount against any other
amount owed by GLENCORE to TARC.
(c) Prior to processing, the parties shall agree on a guaranteed
quantity and quality conversion factor from the cargo of Feedstock to finished
Product. To the extent TARC fails to meet a 99.5 percent conversion factor of
Feedstock into finished Product, GLENCORE shall be entitled to a credit against
the processing fee due TARC equal to the profit GLENCORE would have realized had
they sold the unconverted Feedstock to a third party at the time all Feedstocks
or should have been processed. If such credits exceed the processing fee due
TARC, TARC shall pay Glencore such excess amount within one business day.
Failing such payment GLENCORE
<PAGE> 4
PROCESSING AGREEMENT PAGE 3
shall have the right to set-off such amount against any other amount owed by
GLENCORE to TARC.
(d) The quantity yields for the VGO and VTB are calculated
separately for each cargo as follows unless otherwise agreed:
Cutter stock yield = to be agreed case by case.
VGO Yield = IBP to 1050 degrees F
VTB Yield = 1050 degrees F +
As determined by ASTM D-1160
Loss: 0.5 percent of the outturn received quantity maximum.
(e) GLENCORE shall pay TARC a storage fee of USD 0.22 per barrel
for any Products stored in the Storage Tanks in excess of 30 days from the date
of completion of processing the barrels delivered. This fee can be waived or
extended by mutual consent of TARC and GLENCORE.
4. Removal of Petroleum from Storage. TARC covenants and agrees to
follow the instructions of GLENCORE for the storage and delivery of Petroleum.
5. Scheduling Deliveries to and from Storage Tanks. Reasonable
efforts shall be used by GLENCORE and TARC to effect timely and efficient
delivery of Petroleum to and from the Storage Tanks.
6. Processing.
6.1. The Products of Processing including the quantities and
specifications thereof will be determined on a quantity and quality basis as
agreed to between the parties.
6.2. At the termination of this Processing Agreement, TARC
shall pay GLENCORE for any Petroleum of GLENCORE remaining in the Storage Tanks
and/or the Refinery at GLENCORE'S in tank cost and should TARC fail to do so
then GLENCORE is expressly granted a right of set-off against any sum due or
that may be due by GLENCORE to TARC. Prior to receipt by GLENCORE from TARC of
full payment for the said Petroleum, title to and possession of the Petroleum
in the Storage Tanks and in the Refinery shall be and remain with GLENCORE and
TARC understands and agrees that by the execution of this Processing Agreement
it does not have and it will not obtain any title to such Petroleum or any
legal or equitable interest therein.
7. Duties of TARC. TARC shall in a timely and efficient manner
receive and store Petroleum of GLENCORE subject to the following terms and
conditions:
7.1. TARC shall store the Petroleum owned by GLENCORE in the
segregated Storage Tanks.
7.2. TARC shall maintain the Storage Tanks in accordance with
general oil industry standards for safety and quality assurance. TARC
represents and warrants to
<PAGE> 5
PROCESSING AGREEMENT PAGE 4
GLENCORE that the Storage Tanks and related systems are clean, in good repair,
not ruptured, and satisfactory for the purpose of this Processing Agreement,
and the Storage Tanks will be so maintained by TARC throughout the Term. TARC
shall maintain all licenses, agreements, easements or other obligations
necessary and appropriate to attain and maintain the ability of the Storage
Tanks to operate at full capacity. TARC shall maintain the Storage Tanks in
such condition as to enable the Storage Tanks to operate at their full capacity
to receive, store and deliver Petroleum.
7.3. TARC shall handle and store Petroleum of GLENCORE in
accordance with general oil industry standards and in accordance with TARC's
status hereunder as bailee/warehouseman. Any barge/vessel demurrage or
detention incurred by or on behalf GLENCORE as a consequence of TARC being
unable to receive Feedstock or deliver Product shall be reimbursed by TARC to
GLENCORE. Any barge/vessel demurrage or detention directly attributable to
GLENCORE will be for account of GLENCORE or will be reimbursed by GLENCORE
to TARC.
7.4. Unless agreed otherwise in writing by GLENCORE, TARC
shall store Petroleum of GLENCORE in the identified Storage Tanks and shall not
commingle during storage or refining Petroleum of GLENCORE with Petroleum owned
by any other person or entity.
7.4.1. Title to Petroleum of GLENCORE shall remain
exclusively with GLENCORE and TARC shall not represent to any person or entity
that it is either the owner or consignee of Petroleum of GLENCORE. TARC is not
authorized to sell, pledge, exchange, remove, or otherwise dispose of Petroleum
of GLENCORE without the prior approval of GLENCORE or its authorized agent.
7.5. The quantity and quality of both Feedstock and Product
processed hereunder and of Products delivered from Storage Tanks to third
parties pursuant to GLENCORE's instructions shall be determined by gaugings and
samplings by a mutually agreed upon independent inspector immediately prior to
transfer of the Feedstock and Products to or from the Storage Tanks, as set
forth below. Unless otherwise specified by the independent inspector,
quantities delivered; (a) into or from tankers and barges shall be measured by
Storage Tanks tank gauges or if storage tanks are active by vessel/barge
figures adjusted for Vessel Equalization Factors as determined by independent
inspector; (b) into or from transport trucks shall be measured by calibration
tables or calibrated meters; (c) into or from tank cars shall be measured by
calibrated tank car tables or calibrated meters; (d) into or from pipelines
shall be measured by calibrated meters or Storage Tanks tank gauges; and (e)
from the processing units shall be measured by tank gauges. The parties shall
be bound by the results of such inspection in the absence of manifest error.
7.5.1. The mutually agreed upon independent
inspector, whose fees will be paid by GLENCORE will sample and analyze
Feedstock for quality (including but not limited to, when appropriate,
flashpoint, pourpoint, water, sediment, viscosity, gravity, and sulfur) prior
to discharge of the Feedstock from the transport vehicle, pipeline, or vessel
into the Storage
<PAGE> 6
PROCESSING AGREEMENT PAGE 5
Tanks. The parties shall be bound by the results of such inspection except in
the case of manifest error.
7.5.2. All such quantity determinations shall be
adjusted to net barrels at 60 degrees Fahrenheit in accordance with ASTM IP
Petroleum Measurement Tables (ASTM designation D1250) as then currently in
effect.
7.6. TARC shall provide the maintenance, labor, material and
equipment necessary to receive Petroleum for delivery to and release from the
Storage Tanks, and to operate the Storage Tanks at a capacity and level that
will serve the needs of GLENCORE hereunder and enable TARC to fulfill its
duties and obligations hereunder.
7.7. TARC shall comply with all reasonable requests by GLENCORE
with regard to monitoring quality and quantity, including daily tank
measurements, sealing off lines and tanks, daily inventory reconciliation, etc.
and shall provide GLENCORE or its agents access to the Refinery and the Storage
Tanks at any time.
8. Representation and Warranties of TARC to GLENCORE. TARC represents
and warrants to GLENCORE each of the following:
8.1. TARC owns each of the Storage Tanks and has full title
and authority to operate the Storage Tanks as contemplated herein. Each of the
Storage Tanks set forth in Schedule A is in good working condition and order;
is properly licensed and maintained; and has the capacity to receive, store,
through-put and distribute Petroleum in the volumes set forth in Schedule A.
8.2. TARC shall cause no liens or claims of lien to be filed
or asserted with respect to the Petroleum stored in the Storage Tanks where
Petroleum of GLENCORE will be stored, and TARC shall not permit any such
liens, except (i) liens either affirmatively granted by or in favor of GLENCORE
and (ii) liens arising in TARC's favor by operation of law in the event of
GLENCORE's default hereunder. TARC expressly disclaims all claims of ownership
over the Petroleum stored. TARC confirms the terms of this Agreement do not and
will not conflict with the terms of any other agreement to which TARC is a
party with the possible exception of a similar agreement with J.Aron and
Company provided however that GLENCORE shall be provided with a copy of such
agreement at least 3 business days prior to such agreement coming into effect
and GLENCORE shall have the right to contact J.Aron and Company to confirm no
conflict.
9. Duties of GLENCORE. GLENCORE shall cause Feedstock to be delivered
to TARC for storage at the Storage Tanks and Processing at the Refinery subject
to the following terms and conditions:
9.1. GLENCORE shall, at its own expense, procure and maintain
with a responsible insurance company or companies, "all risks" insurance on all
Petroleum of GLENCORE against physical loss or damage to such Petroleum.
<PAGE> 7
PROCESSING AGREEMENT PAGE 6
9.2. GLENCORE understands that the addition of cutterstock or
the injection of additives for third party sales into its Products is its own
exclusive responsibility. The cutterstock/additives will be purchased by
GLENCORE.
9.3. GLENCORE shall cause Feedstock to be delivered to TARC
for storage in the Storage Tanks and processing at the Refinery with all
reasonable dispatch subject to the terms and conditions contained herein.
10. Events of Default. Each of the following shall constitute an event
of default under this Processing Agreement:
10.1. Any representation or warranty contained herein shall
prove at any time to be false or misleading in any material respect.
10.2. Either party fails timely to perform any of its
obligations under this Processing Agreement, or fails otherwise to comply in
any material respect with this Processing Agreement.
10.3. There shall occur any material adverse change in TARC's
business, properties or condition, financial or otherwise as determined in
GLENCORE's discretion.
Upon the occurrence of any event of default under this Processing Agreement,
the non-defaulting party shall give written notice to the defaulting party of
the default; and the defaulting party shall have ten (10) days to cure the
default.
10.4. In the event of any occurrence of any event of default
under this Processing Agreement, without limiting any other remedy available to
TARC or without limiting any other remedy available to TARC or GLENCORE at law
or equity the non-defaulting party may, at its sole discretion, terminate this
Processing Agreement and take any or all such other or further action as it
deems reasonably necessary.
11. Rights Survive Termination. Upon expiration of this Processing
Agreement, by default or termination, either party may exercise any of its
rights which have theretofore accrued hereunder without prejudice to any other
rights it may have at law or in equity. Upon termination of this Agreement for
any reason GLENCORE shall have the right to require the removal of all
Petroleum then located at the Refinery. The costs of removal of the Petroleum
shall be borne by the party whose breach or default caused the termination of
this Processing Agreement.
12. Authority. Each party hereby represents and warrants that its
execution and delivery of this Processing Agreement and the performance of its
obligations hereunder will not violate its certificate of incorporation or
bylaws and will not conflict with or cause a breach under any agreement to
which it is party or by which its assets may be bound; and that it has the
power and authority to enter into this Processing Agreement and to carry out
its obligations thereunder.
<PAGE> 8
PROCESSING AGREEMENT PAGE 7
13. INDEMNIFICATION. EACH PARTY HEREBY COVENANTS AND AGREES TO SAVE,
DEFEND, INDEMNIFY AND HOLD THE OTHER PARTY HARMLESS FROM AND AGAINST ANY AND ALL
CLAIMS, SUITS, EXPENSES, COSTS, JUDGMENTS AND DAMAGES (EXCLUDING ANY INDIRECT,
CONSEQUENTIAL, OR SPECIAL DAMAGES) ARISING FROM ANY FAILURE BY THE INDEMNIFYING
PARTY OR ANY EMPLOYEE OR AGENT THEREOF TO COMPLY WITH ANY OBLIGATION OF SUCH
INDEMNIFYING PARTY UNDER THIS PROCESSING AGREEMENT, OR ARISING FROM ANY
NEGLIGENCE OR WRONGFUL ACT OF THE INDEMNIFYING PARTY, ITS EMPLOYEES, OR AGENTS
IN CONNECTION WITH THE MATTERS CONTEMPLATED BY THIS PROCESSING AGREEMENT, OR
ARISING FROM THE FAILURE OF ANY REPRESENTATION OR WARRANTY HEREIN TO BE TRUE
WHEN MADE OR WHEN EFFECTIVE HEREUNDER. WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, TARC SHALL SAVE, DEFEND AND INDEMNIFY GLENCORE FROM AND AGAINST ANY
AND ALL CLAIMS, FINES, ASSESSMENTS AND PENALTIES (INCLUDING BUT NOT LIMITED TO
CLAIMS FOR CLEAN-UP AND REHABILITATION OF THE ENVIRONMENT) RESULTING FROM ANY
POLLUTION OR OTHER DAMAGE CAUSED BY ITS WRONGFUL OR NEGLIGENT, ACT OR OMISSION,
CAUSING DISCHARGE OR RELEASE OF PETROLEUM PRODUCTS FROM EITHER THE REFINERY OR
THE STORAGE TANKS.
14. Compliance with Laws. TARC shall comply with, and use its best
efforts to ensure that third parties comply with, all applicable laws,
regulations, ordinances, mandates, and other requirements of any national,
state, regional or local government having jurisdiction over the
transportation, refining transfer or terminalling of Petroleum including,
without limitation, those regarding air, land and water pollution.
15. Relationship of Parties. Nothing in this Processing Agreement
shall be construed or interpreted as creating a joint venture, partnership,
agency or employment relationship between TARC and GLENCORE.
16. Successors and Assigns. This Processing Agreement shall be
binding upon and shall inure to the benefit of the successors and permitted
assigns of the parties hereto; provided, however, that this Processing
Agreement is personal to GLENCORE and TARC, and neither GLENCORE nor TARC shall
assign this Processing Agreement or any interest herein (either voluntarily or
by operation of law) without the other party's prior written consent.
17. Force Majeure. Neither TARC nor GLENCORE shall be responsible for
any failure to fulfill their respective obligations under this Processing
Agreement (other than the payment of money) if fulfillment has been delayed,
hindered, interfered with, curtailed, or prevented, by any circumstance
whatsoever which is not within the reasonable control of TARC or of GLENCORE as
the case may be, until the conditions preventing such party's performance of
this Processing Agreement are removed.
<PAGE> 9
PROCESSING AGREEMENT PAGE 8
17.1. By way of example, neither party will be responsible for
damages caused by delay or failure to perform its obligations in whole or in
part hereunder (other than its obligation to make accountings and payment
hereunder) if such delay or failure is attributable to a storm, flood,
hurricane or other act of God,
17.2. The party whose performance is affected by an event of
force majeure will make all reasonable efforts to remove the event of force
majeure or mitigate its effect. If an event of force majeure continues for a
period of more than one month, the party whose ability to perform is not
affected by such event shall have the right to terminate this Processing
Agreement on ten day's prior written notice.
18. Controlling Law. The interpretation, construction, and performance
of this Processing Agreement, and the rights and remedies of the parties
hereunder shall be governed by the laws of the State of New York without
reference to choice of law principles. Each party agrees that the New York
State Supreme Court located in New York county or the United States District
Court for the Southern District of New York shall have exclusive jurisdiction
to hear and determine any suit, action or proceeding arising out of or in
connection with this Processing Agreement and irrevocably submits to the
jurisdiction of such court.
19. Notices. Except as otherwise provided herein, all notices required
or permitted to be given hereunder shall be in writing and shall be deemed
delivered when personally delivered, or received from an overnight delivery
courier service, or when delivered by telex or telecopier addressed as follows
(or such other address as the party may, by written notice to the other party,
designate as the address for purposes of notice hereinafter):
If to GLENCORE: Glencore Ltd.
3 Stamford Plaza
301 Tresser Boulevard
Stamford, CT 06901
Telephone: (203) 328-4920
Fax No.: (203) 328-3177
Attn: David Porter
If to TARC: TransAmerican Refining Corporation
1300 East North Belt, Suite 320
Houston, Texas 77032
Telephone: (713) 986-8811
Fax No.: (713) 986-8820
Attn: Bill Hoffman
20. Severability. If any provisions of this Processing Agreement
shall be held invalid under applicable law, such invalidity shall not affect
any other provision of this Processing Agreement which can be given effect
without the invalid provision and, to this extent the provisions are severable.
<PAGE> 10
PROCESSING AGREEMENT PAGE 9
21. Non-Waiver. Neither GLENCORE nor TARC shall be deemed to have
waived or modified any of its rights hereunder, by course of conduct or
otherwise, or under any other writing unless such waiver or modification be in
writing as signed by its authorized officer and then such waiver or modification
shall be effective only for the period and under the terms and conditions as are
specifically set forth therein. No delay or omission on the part of TARC or
GLENCORE in exercising any right shall operate as a waiver or modification of
such right or any other right. No waiver of any default on one occasion shall
operate as a waiver of any other default or of the same default on a future or
different occasion. All TARC's and GLENCORE's rights and remedies, whether
evidenced hereby or by any other writing, shall be cumulative and may be
exercised from time to time singularly, concurrently, or successively.
22. Notwithstanding anything to the contrary in this or any other
agreement between TARC and GLENCORE, GLENCORE shall have the right to set-off
against any funds it holds for the account of TARC or that it may owe TARC under
this Agreement against any right or claim of GLENCORE as a result of TARC's non
compliance or breach of this Processing Agreement.
23. Entire Agreement. This Processing Agreement sets forth the
entire agreement between TARC and GLENCORE regarding the subject matter covered
herein, and supersedes any and all prior oral or written communications between
the parties regarding the subject matter covered herein, and may not be
modified and amended except in a writing signed by the party against whom the
modification or amendment is being enforced.
24. Audit. GLENCORE shall have the right to audit the books and
records of TARC relating to the performance, storage and Processing services.
Any errors discovered shall be immediately corrected by appropriate payment to
the injured party.
25. Grant of Precautionary Security Interest. Solely as a
precaution, in the event that a court of applicable jurisdiction should hold
for any reason that Glencore is not the owner of the Petroleum processed and/or
stored at the Refinery, the Storage Tanks or the Storage Facility
(collectively, "TARC's Facility"), TARC hereby grants and continues to grant
Glencore a security interest in and to all Petroleum owned by GLENCORE at
TARC's Facility and all products and proceeds therefrom. At Glencore's request,
there shall be filed, and TARC hereby agrees to execute and deliver, Uniform
Commercial Code financing statements (and all such other documents as Glencore
requests in its sole discretion) in such form and in such jurisdictions as
Glencore deems appropriate to evidence the granting of the security interest
by TARC in GLENCORE's Petroleum including but not limited to the Feedstock and
Products. TARC represents and warrants to Glencore that neither TARC nor any
affiliate of TARC has granted or suffered or permitted to exist (or will grant,
suffer or permit) any liens or encumbrances which could conflict with
Glencore's ownership of the Petroleum processed and/or stored at TARC's
Facility or with the security interest in such Petroleum granted to Glencore
hereby.
<PAGE> 11
PROCESSING AGREEMENT PAGE 10
IN WITNESS THEREOF, the parties hereto have caused this Processing Agreement to
be duly executed as of the day and year first above written.
TRANSAMERICAN REFINING CORPORATION
By: /s/ JOHN R. STANLEY
Name: JOHN R. STANLEY
Title: CHIEF EXECUTIVE OFFICER
ATTEST:
By: /s/ DOUGLAS WIDLASKI
GLENCORE LTD.
By: /s/ DAVID PORTER
Name: DAVID PORTER
Title: AUTHORIZED SIGNATORY
ATTEST:
By:
<PAGE> 12
PROCESSING AGREEMENT PAGE 11
ATTACHMENT A
Tank No. Nominal Capacity
-------- ----------------
425-1 425,000 bbls.
425-3 425,000 bbls.
425-4 425,000 bbls.
625-1 625,000 bbls.
150-7 150,000 bbls.
150-8 150,000 bbls.
55-8 55,000 bbls.
150-13 150,000 bbls.
150-15 150,000 bbls.
<PAGE> 1
EXHIBIT 12.1
TRANSAMERICAN REFINING CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(In thousands of dollars)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss before taxes $(11,967) $(14,905) $(19,373) $(17,353) $(64,337) $(23,150) $(26,071)
Add:
Equity in loss of TransTexas -- -- -- -- 13,925 -- 156
Interest expense, net of amounts
capitalized 26 21 17 14 12,504 31 5,978
Portion of rental expense
representative of an interest factor 223 188 186 357 790 360 378
-------- -------- -------- -------- -------- --------
Earnings (B) $(11,718) $(14,696) $(19,170) $(16,982) $(37,118) $(22,759) $(19,559)
======== ======== ======== ======== ======== ======== ========
Fixed charges:
Total interest 26 21 17 14 31,354 3,540 32,180
Portion of rental expense
representative of an interest factor 223 188 186 357 790 360 378
-------- -------- -------- -------- -------- -------- --------
Fixed charges (A) $ 249 $ 209 $ 203 $ 371 $ 32,144 $ 3,900 $ 32,558
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges
(B divided by A) -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ========
Earnings inadequate to cover fixed
charges $ 11,967 $ 14,905 $ 19,373 $ 17,353 $ 69,262 $ 26,659 $ 52,117
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Income (loss) before taxes $(10,351) $ 46,596
Add:
Equity in (income) loss of TransTexas 842 (1,001)
Interest expense, net of amounts capitalized 4,633 1,088
Portion of rental expense representative
of an interest factor 315 242
-------- --------
Earnings (B) $ (4,561) $ 46,925
======== ========
Fixed charges:
Total interest 11,221 17,705
Portion of rental expense representative
of an interest factor 315 242
-------- --------
Fixed charges (A) $ 11,536 $ 17,947
======== ========
Ratio of earnings to fixed charges (B divided by A) -- 2.6
======== ========
Earnings inadequate to cover fixed charges $ 16,097 $ --
======== ========
</TABLE>
<PAGE> 2
Exhibit 12.1 (Con't)
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
RATIO OF EARNINGS TO FIXED CHARGES
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months
Ended
YEAR ENDED JULY 31, January 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes $43,950 $ 41,778 $90,990 $11,783 $(64,762) $(23,525) $(27,193)
Add:
Interest expense, net of amounts capitalized 2,015 3,173 2,999 51,684 81,012 30,002 49,348
Portion of rental expense representative
of an interest factor 356 403 460 736 1,321 643 715
------- -------- ------- ------- -------- -------- --------
Earnings(B) $46,321 $ 45,354 $94,449 $64,203 $ 17,571 $ 7,120 $ 22,870
======= ======== ======= ======= ======== ======== ========
Fixed charges:
Total interest 2,015 3,173 2,999 52,394 100,745 33,511 82,931
Portion of rental expense representative
of an interest factor 356 403 460 736 1,321 643 715
------- -------- ------- ------- -------- -------- --------
Fixed charges (A) 2,371 $ 3,576 $ 3,459 $53,130 $102,066 34,154 $ 83,646
======= ======== ======= ======= ======== ======== =========
Ratio of earnings to fixed charges (B divided by A) 19.5 12.7 27.3 1.2 -- -- --
======= ======== ======= ======= ======== ======== =========
Earnings inadequate to cover fixed charges $ -- $ -- $ -- $ -- $ 84,495 $ 27,034 $ 60,776
======= ======== ======= ======= ======== ======== =========
</TABLE>
<TABLE>
Three Months Ended
April 30,
--------------------
1995 1996
-------- -------
<S> <C> <C>
Income (loss) before taxes $(11,434) $50,142
Add:
Interest expense, net of amounts capitalized 19,957 23,374
Portion of rental expense representative
of an interest factor 456 472
-------- -------
Earnings(B) $ 8,979 $73,988
======== =======
Fixed charges:
Total interest 27,428 43,674
Portion of rental expense representative
of an interest factor 456 472
-------- -------
Fixed charges (A) $ 27,884 $44,146
======== =======
Ratio of earnings to fixed charges (B divided by A) -- 1.7
======== =======
Earnings inadequate to cover fixed charges $ 18,905 $ --
======== =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the inclusion in this registration statement on Form S-1
(File No. 33-85930) of our reports on TransAmerican Refining Corporation and
TransAmerican Energy Corporation which include an explanatory paragraph
relating to each company's ability to continue as a going concern and our
report on TransTexas Gas Corporation all dated April 29, 1996 on our audits of
the financial statements and the financial statement schedule of each
respective company. We also consent to the reference to our firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 9, 1996
<PAGE> 1
Exhibit 23.3
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the filing of the Post-Effective Amendment No. 4
to the Registration Statement on Form S-1 (No. 33-85930) for TransAmerican
Refining Corporation and TransAmerican Energy Corporation in accordance with
the requirements of the Securities Act of 1933, with the inclusion in such
Registration Statement and related Prospectus of portions of our reserve report
incorporated therein, and references to our name in the form and context in
which they appear.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ DANNY D. SIMMONS
----------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
August 9, 1996
