TRANSAMERICAN REFINING CORP, 10-Q, 1996-09-16

TRANSAMERICAN REFINING CORP
10-Q, 1996-09-16
PETROLEUM REFINING

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

FORM 10-Q

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

For Quarterly Period Ended July 31, 1996

Registration Number 33-85930

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

TRANSAMERICAN REFINING CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 76-0229632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1300 EAST NORTH BELT
SUITE 320
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)

(713) 986-8811
(Registrant's telephone number, including area code)

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

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

The number of shares of common stock of the registrant outstanding on
September 16, 1996 is 30,000,000.

================================================================================
<PAGE> 2
TRANSAMERICAN REFINING CORPORATION

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements
Condensed Balance Sheet as of July 31, 1996 and January 31, 1996 . . . . . . . . . . . . . . . . 2
Condensed Statement of Operations for the three and six months ended July 31, 1996 and 1995 . . 3
Condensed Statement of Cash Flows for the six months ended July 31, 1996 and 1995 . . . . . . . 4
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 16-20

PART II.
OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>

1
<PAGE> 3
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRANSAMERICAN REFINING CORPORATION

CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1996 1996
---------- -----------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 472 $ 2,779
Long-term debt proceeds held in collateral account . . . . . . . . . . 404 14,840
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 109 121
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . 677 118
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,026 37,231
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,618 5,479
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 15,306 60,568
---------- -----------

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 513,960 430,858
Less accumulated depreciation and amortization . . . . . . . . . . . . . 13,561 10,244
---------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . 500,399 420,614
---------- -----------

Long-term debt proceeds held in collateral account . . . . . . . . . . . -- 9,565
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,612 27,576
---------- -----------
$ 541,317 $ 518,323
========== ===========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,818 $ 23,552
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . 3,341 2,957
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 14,882 14,560
Product financing arrangements . . . . . . . . . . . . . . . . . . . . 12,922 37,206
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 50,963 78,275
---------- -----------

Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 13,505 3,799
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,065 316,538
Investment in TransTexas . . . . . . . . . . . . . . . . . . . . . . . . 21,940 46,586
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 843 1,168
Commitments and contingencies (Note 6) . . . . . . . . . . . . . . . . . -- --
Stockholder's equity:
Common stock, $0.01 par value, authorized 100,000,000 shares, issued
and outstanding 30,000,000 shares . . . . . . . . . . . . . . . 300 300
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 248,513 248,513
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (134,812) (176,856)
---------- -----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . 114,001 71,957
---------- -----------
$ 541,317 $ 518,323
========== ===========
</TABLE>

See accompanying notes to condensed financial statements.

2
<PAGE> 4

TRANSAMERICAN REFINING CORPORATION

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales . . . . . . . . . . . . . . . . $ -- $ 68,435 $ 10,857 $ 68,993
Tank rentals . . . . . . . . . . . . . . . . -- 1 -- 1
----------- ----------- ----------- ------------
Total revenues . . . . . . . . . . . . . . -- 68,436 10,857 68,994
----------- ----------- ----------- ------------
Costs and expenses:
Costs of products sold . . . . . . . . . . . 921 74,139 12,441 75,225
Processing arrangements, net . . . . . . . . 1,459 -- 3,319 --
Operations and maintenance . . . . . . . . 3,544 4,846 6,600 4,572
Depreciation and amortization . . . . . . . . 1,816 1,773 3,620 3,149
General and administrative . . . . . . . . . 3,558 4,091 5,661 5,172
Taxes other than income taxes . . . . . . . . 2,479 1,041 2,878 2,082
----------- ----------- ----------- ------------
Total costs and expenses . . . . . . . . . 13,777 85,890 34,519 90,200
----------- ----------- ----------- ------------
Operating loss . . . . . . . . . . . . . . (13,777) (17,454) (23,662) (21,206)
----------- ----------- ----------- ------------

Other income (expense):
Interest income . . . . . . . . . . . . . . . 54 2,168 197 4,087
Interest expense, net . . . . . . . . . . . . (984) (7,871) (2,072) (12,504)
Equity in earnings (loss) of TransTexas . . . 10,090 (1,586) 11,091 (2,428)
Gain on sale of TransTexas stock . . . . . . -- -- 56,162 --
Other . . . . . . . . . . . . . . . . . . 65 5,404 328 2,361
----------- ----------- ----------- ------------
Total other income (expense) . . . . . . . . 9,225 (1,885) 65,706 (8,484)
----------- ----------- ----------- ------------
Income (loss) before extraordinary item . . (4,552) (19,339) 42,044 (29,690)
Extraordinary item:
Equity in extraordinary loss of TransTexas . -- (11,497) -- (11,497)
----------- ----------- ----------- ------------
Net income (loss) . . . . . . . . . . . . . $ (4,552) $ (30,836) $ 42,044 $ (41,187)
=========== =========== =========== ============

Net income (loss) per share:
Income (loss) before extraordinary item . . $ (0.15) $ (0.64) $ 1.40 $ (0.99)
Extraordinary item . . . . . . . . . . . . . -- (0.38) -- (0.38)
----------- ----------- ----------- ------------
Net income (loss) per share . . . . . . . . $ (0.15) $ (1.02) $ 1.40 $ (1.37)
=========== =========== =========== ============

Weighted average number of shares outstanding . 30,000,000 30,000,000 30,000,000 30,000,000
=========== =========== =========== ===========
</TABLE>

See accompanying notes to condensed financial statements.

3
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TRANSAMERICAN REFINING CORPORATION

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,044 $ (41,187)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 3,620 3,149
Amortization of discount on long-term debt . . . . . . . . . . . . . . . . . 40 7,673
Amortization of debt issue costs . . . . . . . . . . . . . . . . . . . . . . 3 552
Equity in (earnings) loss of TransTexas . . . . . . . . . . . . . . . . . . . (11,091) 13,925
Gain on sale of TransTexas stock . . . . . . . . . . . . . . . . . . . . . . (56,162) --
Inventory writedown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921 1,265
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (547) (2,331)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (11,312)
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,860 (7,023)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186) (2,585)
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 (449)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 2,246
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (2,688)
--------- ---------
Net cash used by operating activities . . . . . . . . . . . . . . . . . (16,542) (38,765)
--------- ---------

Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,587) (55,068)
--------- ---------

Financing activities:
Issuance of long-term debt and warrants . . . . . . . . . . . . . . . . . . . . -- 300,750
Net proceeds from sale of TransTexas stock . . . . . . . . . . . . . . . . . . . 42,607 --
Long-term debt and stock sale proceeds held in collateral account . . . . . . . (26,549) (173,000)
Withdrawals from collateral account . . . . . . . . . . . . . . . . . . . . . . 50,550 32,143
Advances from TransAmerican . . . . . . . . . . . . . . . . . . . . . . . . . . 11,656 635
Payment of advances to TransAmerican . . . . . . . . . . . . . . . . . . . . . . (1,925) (40,000)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (20,479)
Principal payments on capital lease obligations . . . . . . . . . . . . . . . . (517) (157)
--------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . 75,822 99,892
--------- -- ------

Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . (2,307) 6,059

Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 2,779 46
--------- ---------
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 472 $ 6,105
========= =========

Noncash financing and investing activities:
Accounts payable for property and equipment . . . . . . . . . . . . . . . . . . $ (3,547) $ 3,491
Product financing arrangements . . . . . . . . . . . . . . . . . . . . . . . . . (24,283) 27,671
Interest accretion on notes and discount notes capitalized in
property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,487 9,840
Contribution of TransTexas stock . . . . . . . . . . . . . . . . . . . . . . . . -- 37,176
Forgiveness of advances from TransAmerican . . . . . . . . . . . . . . . . . . . -- 71,170
</TABLE>

See accompanying notes to condensed financial statements.

4
<PAGE> 6
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made which are necessary to fairly state the
financial position of the Company as of July 31, 1996 and the results of its
operations and cash flows for the interim periods ended July 31, 1996 and 1995.
The results of operations for interim periods should not be regarded as
necessarily indicative of results that may be expected for the entire year.
The financial information presented herein should be read in conjunction with
the financial statements and notes included in the Company's annual report on
Form 10-K for the transition period ended January 31, 1996. The year-end
condensed balance sheet was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles. Unless otherwise noted, the term "Company" refers to TransAmerican
Refining Corporation and all other defined terms used herein are as defined in
the Company's annual report on Form 10-K for the transition period ended
January 31, 1996. Certain reclassifications have been made in the prior year's
financial statements to conform to the current year's presentation.

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, defined below,
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 3),
there can be no assurance that the Company will ultimately recover the cost of
the refinery.

2. ORGANIZATION

In 1994, TransAmerican Natural Gas Corporation ("TransAmerican") formed
TransAmerican Energy Corporation ("TEC"), a limited-purpose holding company, to
hold certain shares of common stock of TransTexas Gas Corporation ("TransTexas")
and all of the Company's capital stock. In February 1995, in connection with a
public offering of debt securities by the Company (the "TARC Notes"),
TransAmerican transferred 55 million shares (74.3% of outstanding shares) of
TransTexas' common stock to TEC. TEC then transferred 15 million of the shares
(20.3% of the total outstanding) to the Company. In March 1996, the Company
sold 4.55 million shares of TransTexas common stock (6.2% of the total
outstanding) in a public offering, for proceeds of $42.6 million, approximately
$26.6 million of the proceeds thereof were deposited in the cash collateral
account. The 50.45 million shares of TransTexas common stock held by TEC and
the Company are currently pledged as collateral for the TARC Notes.

3. 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 fluid catalytic cracking unit ("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

5
<PAGE> 7
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

and $26.6 million of the proceeds thereof were deposited in the cash collateral
account.

As of July 31, 1996, expenditures on the Capital Improvement Program
funded by or approved for reimbursement from the cash collateral account
totaled approximately $205 million. Approximately $0.4 million remained in
the cash collateral account as of July 31, 1996. 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 (described below). 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 or
loans 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 in the near future or if
significant engineering problems, work stoppages, personnel shortages 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. If required financing
is obtained on a timely basis, completion by February 15, 1997 will still prove
very difficult. The Company has identified and is considering certain steps to
optimize construction completion, including the retention of field supervisors,
direct hiring of field supervisors and field labor by the Company's major
contractors, adding additional shifts, and modularization and outsourcing of
certain construction items. Under the Indenture, the failure of the Company to
complete and test Phase I by February 15, 1997 would constitute an Event of
Default at such date. Such date, however, may be extended, without an Event of
Default, to May 15, 1997 or further extended to August 15, 1997 if the Company's
fixed charge coverage ratio is 1.25 to 1 for the three month periods ended
December 31, 1996 and March 31, 1997, respectively. The Company is actively
pursuing transactions that could allow it to meet the requisite ratio.

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 the
TARC 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 TARC Notes and accrued interest to be due and payable
immediately.

Prior to the declaration of acceleration of the TARC Notes, the Holders of
a majority in aggregate principal amount of the TARC 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 TARC 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 TARC Note affected.

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 TARC 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

6
<PAGE> 8
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 TARC 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 "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 of the Capital Improvement Program.

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 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
these facilities was 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 and processing arrangements due to
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 unless the Company is successful in its pursuit of fixed
fee crude processing transactions. 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. There is no
assurance that 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

7
<PAGE> 9
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

may not be recovered. The financial statements do not include any adjustments
as a result of such uncertainties.

8
<PAGE> 10
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

4. INVENTORIES

The major components of inventories are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
July 31, January 31,
1996 1996
----------- -----------
<S> <C> <C>
Refinery feedstocks and blendstocks . . . . . . . . . . . . . $ 7 $ 628
Intermediate and refined products . . . . . . . . . . . . . . 16 1,294
Purchase commitments - refinery feedstocks and blendstocks . . 12,003 3,767
Purchase commitments - intermediate and refined products . . . -- 31,542
----------- -----------
$ 12,026 $ 37,231
=========== ===========
</TABLE>

5. INVESTMENT IN TRANSTEXAS

The Company uses the equity method to account for its investment in
TransTexas and initially recorded this investment at TransAmerican's historical
basis. The equity in earnings or (loss) of TransTexas reflects the Company's
20.3% interest in TransTexas until March 1996, the date of the Company's sale
of 4.55 million shares of TransTexas stock, which decreased the Company's
interest in TransTexas to 14.1%. The Company continues to record its pro rata
share of income or losses due to the common control of TransTexas and the
Company by TransAmerican and TEC. The equity in extraordinary loss of
TransTexas for the three and six months 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. Summarized income statement information of TransTexas is as
follows (in thousands of dollars):

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
--------------------- ---------------------
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $ 86,732 $ 77,354 $ 182,690 $ 150,182
Operating costs and expenses . . . . . . . . . . (19,964) 67,480 50,196 127,376
--------- -------- --------- ---------
Operating income . . . . . . . . . . . . . . . 106,696 9,874 132,494 22,806
Other expense . . . . . . . . . . . . . . . . . . 28,973 21,881 50,125 36,738
--------- -------- --------- ---------
Income (loss) before income taxes . . . . . . 77,723 (12,007) 82,369 (13,932)

Income taxes . . . . . . . . . . . . . . . . . . 6,162 (4,203) 7,788 (2,284)
--------- -------- --------- ---------
Income (loss) before extraordinary item 71,561 (7,804) 74,581 (11,648)
Extraordinary item - loss on early extinguishment.
of debt, net of tax . . . . . . . . . . . . . . -- (56,637) -- (56,637)
--------- -------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . $ 71,561 $(64,441) $ 74,581 $ (68,285)
========= ======== ========= =========
Net income (loss) per share:
Income (loss) before extraordinary item $ 0.97 $ (0.10) $ 1.01 $ (0.15)
Extraordinary item . . . . . . . . . . . . . . -- (0.77) -- (0.77)
--------- -------- --------- ---------
$ 0.97 $ (0.87) $ 1.01 $ (0.92)
========= ======== ========= =========
</TABLE>

9
<PAGE> 11
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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 refused to issue
a complaint and the OCAW has appealed the decision to the NLRB General Counsel.

EEOC. On August 31, 1995, the Equal Employment Opportunity Commission
("EEOC") filed a Commissioner's charge and initiated a systematic investigation
into the Company's and Southeast Louisiana Contractors of Norco, Inc.'s
("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 allegation.

GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit
against the Company in the U.S. District Court, Eastern District of Louisiana,
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 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,
results of operations or cash flow. At July 31, 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 ("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. However, there is no assurance that the Company
will remain in compliance with environmental regulations.

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 has
incurred certain fines, as a result 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 of
its predecessor in interest, TransAmerican, or are no longer

10
<PAGE> 12
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 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.

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 the EPA regulations on the refinery. The
Louisiana Department of Environmental Quality has set applicable MACT
standards. The Company believes that it is in compliance with the Louisiana
MACT standards and has incorporated the standards into its Prevention of
Significant Deterioration permit.

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. 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
exceptions, to determine its compliance as of January 1, 1995, a refiner must
compare its post-1994 and 1990 average values of controlled fuel parameters and
emissions. The Gasoline Standards recognize that many gasoline refiners may
not be able to develop an individual 1990 baseline for a number of reasons,
including, for example, lack of adequate data, the absence or limited scope of
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. The EPA has denied the Company's request for an individual baseline
adjustment and other regulatory relief. The Company will continue to pursue
regulatory relief with the EPA. 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,

11
<PAGE> 13
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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, cash flows 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).

In 1991, the EPA performed a facility assessment at the Company's
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. In July 1996, the EPA and the
Louisiana Department of Environmental Quality (the "LDEQ") agreed that the LDEQ
would serve as the lead agency. The Company, under a voluntary initiative
approved by the LDEQ, is completing closure of three areas identified in the
EPA's assessment. The Company is unable to predict what the results of the
LDEQ investigations will be, or the effect that any further investigation or
remediation that would be required by the LDEQ 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 LDEQ 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 LDEQ's pending review. However, there can be no
assurance that the LDEQ will not require further work in this regard. The
Company is unable to estimate what the costs, if any, will be if the LDEQ 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 LDEQ
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's predecessor 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 LDEQ 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.

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,

12
<PAGE> 14
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 PRPs 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 was settled in 1990 for a nominal amount, and the Company
expects to incur no further liability in this matter. At a second Superfund
site, the EPA invited the Company to enter into negotiations, 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 liabilities 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 July 31, 1996, the Company had commitments for
refinery construction and maintenance of approximately $56.2 million. The
Company acts as general contractor and can generally cancel or postpone capital
projects.

PRICE MANAGEMENT ACTIVITIES

The Company 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 six months ended July 31, 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.

13
<PAGE> 15
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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. These arrangements are accounted for as
product financing arrangements and accordingly the inventory and related
obligations are recognized on the Company's balance sheet. In the event the
refinery is not operating, these cargos may be sold on the spot market. During
the six months ended July 31, 1996, approximately 1.1 million barrels of
feedstocks with a cost of $23 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 six months ended July 31, 1996, the
Company incurred a loss of approximately $1.9 million related to this 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. As of July 31, 1996, the
Company had completed processing approximately 4.3 million barrels of
feedstocks and is storing approximately 1.1 million barrels of intermediate and
refined products under this agreement. Upon sale of these barrels, the Company
and the third party will complete a settlement of the agreement. As of July
31, 1996, the Company recorded a loss of approximately $1.4 million related to
this processing agreement primarily as a result of price management decisions.

In July and September 1996, the Company entered into processing
agreements with a third party to process approximately 0.5 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.

7. TRANSACTIONS WITH AFFILIATES

The Company purchases natural gas from TransTexas on an interruptible
basis. The total cost of natural gas purchased for the six months ended July
31, 1996 and 1995 was approximately $1.5 million and $1.3 million,
respectively. The payable to TransTexas for natural gas purchased totaled
approximately $1.4 million and $0.1 million at July 31, 1996 and January 31,
1996, respectively.

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 for the six months ended July 31, 1996 and 1995 were $4.4 million
and $5.9 million, respectively, of which $0.9 million and $0.6 million were
payable July 31, 1996 and January 31, 1996, respectively.

14
<PAGE> 16
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

TransAmerican and its affiliates have provided the Company with
substantially all of its corporate services requirements, including insurance,
legal, accounting and treasury functions pursuant to the Services Agreement.
During the six months ended July 31, 1996 and 1995, TransAmerican and
TransTexas charged the Company approximately $0.2 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
expects its general and 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 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. The Company leases
office space from TransTexas on terms and conditions permitted by the
Indenture.

In July 1996, the Company executed a promissory note to TransAmerican for
up to $25 million. The note bears an interest rate of 15% per annum payable
quarterly, beginning October 31, 1996 with principal due July 31, 1998. As of
July 31, 1996, the Company had drawn $2.5 million against the note. Also in
July 1996, TransAmerican advanced $4.3 million to the Company. This advance
has now been included as borrowings under the note. At August 31, 1996, the
Company had $19.9 million outstanding under the note.

15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included elsewhere in this report.

RESULTS OF OPERATIONS

GENERAL

The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues were primarily from tank
rentals and its expenses were comprised of 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.

THREE MONTHS ENDED JULY 31, 1996, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1995

There were no total revenues for the three months ended July 31, 1996 due
to processing all of the refinery throughput for third parties pursuant to
processing agreements. For the same period in 1995, revenues were $68.4
million.

Costs of products sold for the three months ended July 31, 1996 consisted
of inventory writedowns. Costs of products sold declined to $0.9 million from
$74.1 million for the same period in 1995, primarily as a result of operating
under processing agreements with third parties whereby the Company had no
ownership of feedstocks.

Operations and maintenance expense for the three months ended July 31,
1996 decreased to $3.5 million from $4.9 million for the same period in 1995,
primarily due to decreases in salaries and tank rental charges.

Taxes other than income taxes for the three months ended July 31, 1996
increased $1.4 million to $2.5 million from $1.1 million for the same period in
1995, primarily due to increased property tax expense.

Interest income for the three months ended July 31, 1996 decreased $2.1
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 July 31, 1996
decreased $6.9 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the three months ended July 31, 1996,
the Company capitalized approximately $16.7 million of interest related to
property and equipment additions at the Company's refinery compared to $8.8
million for the three months ended July 31, 1995.

The equity in earnings (loss) of TransTexas for the three months ended
July 31, 1996, reflects the Company's 14.1% equity interest in TransTexas. The
Company's interest in TransTexas decreased from 20.3% as a result of the
Company's sale of 4.55 million shares of TransTexas stock in March 1996.

Other income for the three months ended July 31, 1995 was $5.4 million
which was primarily a result of trading gains on futures contracts.

16
<PAGE> 18
SIX MONTHS ENDED JULY 31, 1996, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1995

Total revenues for the six months ended July 31, 1996 decreased $58.1
million to $10.9 million from $69.0 million for the same period in 1995,
primarily as a result of processing the majority of refinery throughput for
third parties under processing agreements.

Costs of products sold for the six months ended July 31, 1996 decreased to
$12.4 million from $75.2 million for the same period in 1995, primarily as a
result of the Company's processing agreement with third parties under processing
agreements.

Operations and maintenance expense for the six months ended July 31, 1996
increased $2.0 million to $6.6 million from $4.6 million for the same period in
1995, primarily due to an increase in fuel costs and salaries.

Taxes other than income taxes for the six months ended July 31, 1996
increased $0.8 million to $2.9 million from $2.1 million for the same period in
1995 primarily due to increased property tax expense.

Interest income for the six months ended July 31, 1996 decreased $3.9
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 six months ended July 31, 1996
decreased $10.4 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the six months ended July 31, 1996,
the Company capitalized approximately $33.3 million of interest related to
property and equipment additions at the Company's refinery.

The equity in earnings (loss) of TransTexas for the six months ended July
31, 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%.

Other income for the six months ended July 31, 1995 was $2.4 million which
was primarily a result of trading gains on futures contracts.

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, personnel shortages and cost
overruns over which the Company may not have any control.

17
<PAGE> 19
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 or
TransAmerican. If this financing is not available in the near future or if
significant engineering problems, work stoppages, personnel shortages 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. If required
financing is obtained on a timely basis, completion by February 15, 1997 will
still prove very difficult. The Company has identified and is considering
certain steps to optimize construction completion, including the retention of
field supervisors, direct hiring of field supervisors and field labor by the
Company's major contractors, adding additional shifts, and modularization and
outsourcing of certain construction items. Under the Indenture, the failure of
the Company to complete and test Phase I by February 15, 1997 would constitute
an Event of Default at such date. Such date, however, may be extended, without
an Event of Default to May 15, 1997 or further extended to August 15, 1997 if
the Company's fixed charge coverage ratio is 1.25 to 1 for the three month
periods ended December 31, 1996 and March 31, 1997, respectively. The Company
is actively pursuing transactions that could allow it to meet the requisite
ratio.

As of July 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
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, the Company executed a promissory note to TransAmerican
for up to $25 million. As of July 31, 1996, the Company had drawn $2.5 million
against the note. Also in July 1996, TransAmerican advanced $4.3 million to the
Company. This advance has now been included as borrowings under the note. At
August 31, 1996, the Company had $19.9 million outstanding under 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. These and additional
borrowings 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 borrowings 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 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. A portion of these facilities was 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 flow from operations 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 and processing agreements due to financing costs and low
margins. Based on recent refining margins, recent projected levels of
operations and debt service requirements, such negative cash flows are likely
to continue unless the Company is successful in its pursuit of fixed fee crude
processing transactions. In order to operate the refinery and service its
debt, the Company

18
<PAGE> 20
must raise additional 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 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.

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. Such
sales may be necessary to raise funds required to complete the Capital
Improvement Program. TransAmerican's tax liability which could result from
deconsolidation is estimated to be approximately $35 million at July 31, 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 to maintain an available
supply of feedstocks. Typically, the Company enters into an agreement with a
third party to acquire a cargo of feedstock 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. During the six months ended July 31, 1996, approximately 1.1 million
barrels of feedstocks with a cost of $23 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 July and September 1996, the Company entered into processing agreements
with a third party to process approximately 0.5 million barrels of feedstocks
for a fixed price per barrel. Under the terms of the

19
<PAGE> 21
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 6 of Notes to Condensed 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 July 31, 1996, the Company has paid approximately $2.1 million of this
obligation.

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" indicate 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 scheduled, engineering problems, work stoppages,
cost overruns, personnel shortages, fluctuations in the commodity prices for
petroleum and refined products, casualty losses, conditions in the capital
markets and competition.

20
<PAGE> 22
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Notes 6 and 7 to the condensed financial statements for a discussion
of the Company's legal proceedings.

ITEM 5. OTHER INFORMATION

CAPITAL IMPROVEMENT PROGRAM

The Capital Improvement Program ("CIP") is designed to increase the
capacity and complexity of the refinery. The most significant projects include:
(i) completion of a delayed coking unit to process vacuum tower bottoms into
lighter petroleum products, (ii) reactivation and revamping of a FCC Unit to
increase gasoline production capacity, (iii) upgrading and expanding existing
hydrotreating and desulfurization units to increase sour crude processing
capacity and (iv) reactivation 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 CIP. The CIP includes expenditures necessary to
ensure that the refinery is in compliance with certain existing air and water
discharge regulations. 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 CIP. Each of these firms
was selected because of its specialized expertise in a particular process or
unit integral to the CIP.

The following table sets forth, as of July 31, 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 $ 55
Naphtha Pretreater 7 4
No. 2 Reformer 6 1
VGO HDS Unit 25 5
FCC Unit 75 36
FCC Upgrades 11 7
Alkylation Unit 20 9
MTBE Unit 2 --
Sulfur Recovery Units/Amine System 26 22
Additional Tank Storage Capacity 21 10
Offsite Facilities 22 24
Other 8 3
Engineering and Administrative 8 14
Contingencies 40* 9
------- ------
Total Phase I 309 199
------- ------

PHASE II:
Light Naphtha Isomerization Unit 5 3
No. 2 Fuel Oil HDS Unit 31 2
Sulfur Recovery Units/Amine System 17 --
Offsite Facilities 18 --
MTBE Unit Expansion 33** --
Other 2 --
Engineering and Administrative 3 --
Contingencies 16* 1
------- ------
Total Phase II 125 6
------- ------
Total Capital Improvement Program $ 434 $ 205
======= ======
</TABLE>

21
<PAGE> 23

- -----------------------
* To the extent that 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 July 31, 1996, approximately $25 million of the
contingencies have been allocated for expenditures on the Delayed Coking
Unit, Engineering and Administrative and Offsite Facilities. 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, personnel shortages and cost overruns over which the Company may
not have any control.

** The Company intends to reallocate these expenditures to other budgeted
items in accordance with the Disbursement Agreement.

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 July 31, 1996, expenditures on
the Capital Improvement Program funded by or approved for reimbursement from the
cash collateral account totaled approximately $205 million. Approximately $0.4
million remained in the cash collateral account as of July 31, 1996. 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 Port Commission tax
exempt bonds. As of July 31, 1996, the Company had commitments for refinery
construction and maintenance of approximately $56.2 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 or
loans 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 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, personnel shortages 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. If required financing is
obtained on a timely basis, completion by February 15, 1997 will still prove
very difficult. The Company has identified and is considering certain steps to
optimize construction completion, including the retention of field supervisors,
direct hiring of field supervisors and field labor by the Company's major
contractors, adding additional shifts, and modularization and outsourcing of
certain construction items. Under the Indenture, the failure of the Company to
complete and test Phase I by February 15, 1997 would constitute an Event of
Default at such date. Such date, however, may be extended, without an Event of
Default to May 15, 1997 or further extended to August 15, 1997 if the Company's
fixed charge coverage ratio is 1.25 to 1 for the three month periods ended
December 31, 1996 and March 31, 1997, respectively. The Company is actively
pursuing transactions that could allow it to meet the requisite ratio.

22
<PAGE> 24
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 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. A
portion of these facilities was 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 plans to complete the CIP in two phases as described below:

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 estimates
additional expenditures of between $270 million and $275 million will be
required to complete Phase I. 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
additional capital to complete Phase I.

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. Current plans do not include expansion of the MTBE Unit.
The Company anticipates that, following completion of Phase II, it will process
200,000 BPD of heavy, sour crude oil. The Company estimates that additional
expenditures of $104 million will be required to complete Phase II.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27.1 - Financial Data Schedule

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the three months ended July
31, 1996.

23
<PAGE> 25
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

TRANSAMERICAN REFINING CORPORATION
(Registrant)

By: /S/ JOHN R. STANLEY
---------------------------------------
John R. Stanley,
Chief Executive Officer

/S/ JEFFREY H. SIEGEL
---------------------------------------
Jeffrey H. Siegel,
Chief Financial Officer
(Principal Financial Officer and
Accounting Officer)

September 16, 1996

24
<PAGE> 26
INDEX TO EXHIBITS

EXHIBIT
NUMBER EXHIBIT
- ------ -------
27 Financial Data Schedule

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AT JULY 31, 1996 AND THE UNAUDITED CONDENSED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 876
<SECURITIES> 0
<RECEIVABLES> 786
<ALLOWANCES> 0
<INVENTORY> 12,026
<CURRENT-ASSETS> 15,306
<PP&E> 513,960
<DEPRECIATION> 13,561
<TOTAL-ASSETS> 541,317
<CURRENT-LIABILITIES> 50,963
<BONDS> 340,065
<COMMON> 300
0
0
<OTHER-SE> 113,701
<TOTAL-LIABILITY-AND-EQUITY> 541,317
<SALES> 10,857
<TOTAL-REVENUES> 10,857
<CGS> 12,441
<TOTAL-COSTS> 34,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,072
<INCOME-PRETAX> 42,044
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,044
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 0

</TABLE>