TRANSAMERICAN REFINING CORP, 424B3, 1997-07-16

TRANSAMERICAN REFINING CORP
424B3, 1997-07-16
PETROLEUM REFINING

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<PAGE> 1
Prospectus Supplement filed pursuant to Rule
424(b)(3), under the Securities Act of 1933,
as amended, relating to Prospectus dated
August 9, 1996, filed as part of
Post-Effective Amendment No. 4 to Form S-1 of
TransAmerican Refining Corporation and
TransAmerican Energy Corporation,
Registration No. 33-85930.

================================================================================

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

FORM 10-Q

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

For The Quarterly Period Ended April 30, 1997

Registration Number 33-85930

---------

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

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

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

(281) 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
June 19, 1997 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 April 30, 1997 and January 31, 1997 . . . . . . . . . . . . . . . 2
Condensed Statement of Operations for the three months ended April 30, 1997 and 1996 . . . . . . 3
Condensed Statement of Cash Flows for the three months ended April 30, 1997 and 1996 . . . . . . 4
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . 17

PART II.
OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</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>
APRIL 30, JANUARY 31,
1997 1997
---------- -----------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 1,307 $ 613
Debt proceeds held in collateral account . . . . . . . . . . . . . . . 14,037 --
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . 22 22
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 448 654
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 15,814 1,289
---------- -----------

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 585,949 555,816
Less accumulated depreciation and amortization . . . . . . . . . . . . . 18,528 16,930
---------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . 567,421 538,886
---------- -----------

Receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . 503 393
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,666 23,673
---------- -----------
$ 608,404 $ 564,241
========== ===========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,064 $ 20,033
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . 8,444 7,094
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 14,377 15,450
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 --
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 75,885 42,577
---------- -----------

Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 6,674 6,674
Notes payable to affiliate . . . . . . . . . . . . . . . . . . . . . . . 60,630 46,589
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,638 365,730
Investment in TransTexas . . . . . . . . . . . . . . . . . . . . . . . . 22,756 20,706
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505 602
Commitments and contingencies (Note 7) . . . . . . . . . . . . . . . . . -- --
Stockholder's equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
30,000,000 shares issued and outstanding . . . . . . . . . . . 300 300
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 248,513 248,513
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (186,497) (167,450)
---------- -----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . 62,316 81,363
---------- -----------
$ 608,404 $ 564,241
========== ===========
</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
APRIL 30,
----------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Product sales . . . . . . . . . . . . . . . $ -- $ 10,857
---------- ---------
Total revenues . . . . . . . . . . . . -- 10,857
---------- ---------

Costs and expenses:
Costs of products sold . . . . . . . . . . . -- 11,520
Processing arrangements, net . . . . . . . . (175) 1,860
Operations and maintenance . . . . . . . 3,613 3,056
Depreciation and amortization . . . . . . . 1,711 1,804
General and administrative . . . . . . . . . 2,725 2,103
Taxes other than income taxes . . . . . . . 903 399
Loss on purchase commitments . . . . . . . . 5,090 --
---------- ---------
Total costs and expenses . . . . . . . 13,867 20,742
---------- ---------
Operating loss . . . . . . . . . . . . (13,867) (9,885)
---------- ---------

Other income (expense): . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . 127 143
Interest expense, net . . . . . . . . . . . (3,296) (1,088)
Equity in earnings (loss) of TransTexas . . (2,050) 1,001
Gain on sale of TransTexas stock . . . . . . -- 56,162
Other . . . . . . . . . . . . . . . . . . 39 263
---------- ---------
Total other income (expense) . . . . . (5,180) 56,481
---------- ---------
Net income (loss) . . . . . . . . . . . $ (19,047) $ 46,596
========== =========

Net income (loss) per share . . . . . . . . . . $ (0.63) $ 1.24
========== =========
</TABLE>

See accompanying notes to condensed financial statements.

3
<PAGE> 5
TRANSAMERICAN REFINING CORPORATION

CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (19,047) $ 46,596
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 1,711 1,804
Amortization of debt issue costs . . . . . . . . . . . . . . . . . . . . . 287 --
Equity in (earnings) loss of TransTexas . . . . . . . . . . . . . . . . . . 2,050 (1,001)
Gain on the sale of TransTexas stock . . . . . . . . . . . . . . . . . . . -- (56,162)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (97)
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . . . 206 2,974
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (7)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 2,712
Payable to affiliates, net . . . . . . . . . . . . . . . . . . . . . . . 3,277 (1,062)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (951) (4,364)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 (606)
---------- ---------
Net cash used by operating activities . . . . . . . . . . . . . . . . (11,906) (9,213)
---------- ---------

Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,844) (45,252)
---------- ---------

Financing activities:
Issuance of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 --
Net proceeds from sale of TransTexas stock . . . . . . . . . . . . . . . . . . -- 42,607
Debt and stock sale proceeds held in collateral account . . . . . . . . . . . (34,920) (26,549)
Withdrawals from collateral account . . . . . . . . . . . . . . . . . . . . . 20,883 33,933
Advances from TransAmerican . . . . . . . . . . . . . . . . . . . . . . . . . 12,003 4,000
Payment of advances to TransAmerican . . . . . . . . . . . . . . . . . . . . . -- (1,925)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,303) --
Principal payments on capital lease obligations . . . . . . . . . . . . . . . (219) (245)
---------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . 31,444 51,821
---------- ---------

Increase (decrease) in cash and cash equivalents . . . . . . . . . . . 694 (2,644)
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 613 2,779
---------- ---------
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 1,307 $ 135
========== =========

Noncash financing and investing activities:
Accounts payable for property and equipment . . . . . . . . . . . . . . . . . $ 11,609 $ 12,075
Product financing arrangements . . . . . . . . . . . . . . . . . . . . . . . . -- (11,022)
Interest accretion on notes and discount notes capitalized in property and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,908 11,687
</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 that are necessary to fairly state the
financial position of TransAmerican Refining Corporation ("TARC") as of April
30, 1997 and the results of its operations and cash flows for the interim
periods ended April 30, 1997 and 1996. 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 TARC's annual report on Form 10-K for the fiscal year ended January 31,
1997. The condensed balance sheet as of January 31, 1997 was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. Certain reclassifications have been
made in the prior period's financial statements to conform to the current
period's presentation. These reclassifications did not affect previously
reported net income or stockholder's equity.

Unless otherwise noted, the terms "Company" and "TARC" refer to TARC and
all capitalized terms used herein but not otherwise defined are as defined in
TARC's annual report on Form 10-K for the fiscal year ended January 31, 1997.
TARC is a subsidiary of TransAmerican Energy Corporation ("TEC") and is
indirectly a subsidiary of TransAmerican Natural Gas Corporation
("TransAmerican"). TARC was formed in Texas in September 1987 to hold and
operate the refinery assets of TransAmerican. In 1994, TransAmerican formed
TEC, a limited-purpose holding company, to hold certain shares of common stock
of TransTexas Gas Corporation ("TransTexas") and all of TARC's capital stock.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128") and Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"). These statements will be
adopted by TARC effective January 31, 1998. SFAS 128 simplifies the
computation of earnings per share by replacing primary and fully diluted
presentations with the new basic and diluted disclosures. SFAS 129 establishes
standards for disclosing information about an entity's capital structure. TARC
does not believe the effect of adoption of these statements will have a
material impact on its financial statements.

In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. SOP 96-1
was adopted by TARC effective February 1, 1997. The adoption of SOP 96-1 did
not have a material impact on TARC's financial position, results of operations
or cash flows.

2. RECENT EVENTS

TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "TEC Notes Offering") of $475 million aggregate principal amount of
11 1/2% Senior Secured Notes due 2002 (the "TEC Senior Secured Notes") and
$1.13 billion aggregate principal amount of 13% Senior Secured Discount Notes
due 2002 (the "TEC Senior Secured Discount Notes" and, together with the TEC
Senior Secured Notes, the "TEC Notes") for net proceeds of approximately $1.3
billion. The TEC Notes are senior obligations of TEC, secured by a lien on
substantially all its existing and future assets, including the intercompany
loans described below.

INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the TEC
Notes Offering, TEC made intercompany loans to TransTexas in the principal
amount of $450 million (the "TransTexas Intercompany Loan") and to TARC in the
original amount of $676 million (the "TARC Intercompany Loan"). The promissory
note evidencing the TransTexas Intercompany Loan (i) bears interest at a rate of
10 7/8% per annum, payable semi-annually in cash in arrears and (ii) is secured
initially by a security interest in substantially all of the assets of
TransTexas other than inventory, receivables and equipment. The promissory note
evidencing the TARC Intercompany Loan (i) accretes principal at a rate of 16%
per annum, compounded semi-annually until June 15, 1999, to a final accreted
value of $920 million, and thereafter pays interest semi-annually in cash in
arrears on the accreted value thereof, at a rate of

5
<PAGE> 7
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

16% per annum and (ii) is secured initially by a security interest in
substantially all of TARC's assets including the Disbursement Account
(described below) but excluding inventory, receivables and equipment. The
Intercompany Loan agreements contain certain restrictive covenants, including,
among others, limitations on incurring additional debt, asset sales, dividends
and transactions with affiliates. Each Intercompany Loan will mature on June 1,
2002. TARC used approximately $103 million of the proceeds of the TARC
Intercompany Loan to repay certain indebtedness including senior secured notes
of TARC that were issued in March 1997 and debt owed to an affiliate, and to
complete the TARC Notes Tender Offer described below. Remaining proceeds will
be used for the Capital Improvement Program described below and for general
corporate purposes.

Upon the occurrence of a Change of Control (as defined in the indenture
governing the TEC Notes (the "TEC Notes Indenture")), TEC will be required to
make an offer to purchase all of the outstanding TEC Notes at a price equal to
101% of the principal amount thereof, together with accrued and unpaid interest,
if any, or, in the case of any such offer to purchase TEC Senior Secured
Discount Notes prior to June 15, 1999, at a price equal to 101% of the accreted
value thereof, in each case, to and including the date of purchase. Pursuant to
the terms of the Intercompany Loans, TEC may require TARC and TransTexas to pay
a pro rata share of the purchase price paid by TEC. See "Potential Effects
of a Change of Control" in Note 6.

TARC WARRANTS TENDER OFFER. On June 13, 1997, TEC completed a tender
offer for all of the outstanding common stock purchase warrants of TARC ("TARC
Warrants") at a price of $4.50 per warrant. Pursuant to the tender offer, TEC
purchased 7,335,452 TARC Warrants for an aggregate purchase price of
approximately $33 million. TARC intends to enter into a merger with one of its
affiliates pursuant to which each remaining warrant would become exercisable (at
an exercise price of $.01) to receive $4.51 of cash instead of one share of
common stock of TARC.

TARC EQUITY CONTRIBUTION. TEC intends to make a capital contribution to
TARC in the aggregate amount of $226 million from the proceeds of the TransTexas
dividend/share repurchase program (discussed below). The amount of this capital
contribution will be retained initially in the Disbursement Account and
contributed to TARC pursuant to the terms of the Disbursement Agreement. See
Note 4.

TARC NOTES TENDER OFFER. On June 13, 1997, TARC completed a tender offer
(the "TARC Notes Tender Offer") for the (i) TARC Mortgage Notes for 112% of
their principal amount (plus accrued and unpaid interest) and (ii) TARC Discount
Notes for 112% of their accreted value. In connection with the TARC Notes
Tender Offer, TARC has obtained consents from holders of the TARC Notes to
certain waivers under, and amendments to the indenture governing the TARC Notes
(the "TARC Notes Indenture"), which eliminate or modify certain of the covenants
and other provisions contained in the TARC Notes Indenture. Approximately $423
million aggregate principal amount of TARC Mortgage Notes and TARC Discount
Notes were tendered and accepted by TARC at a cost to TARC of approximately $437
million (including accrued interest and premiums). As a result of the TARC
Notes Tender Offer, TARC expects to record a pretax extraordinary charge of
approximately $85 million during the quarter ending July 31, 1997.

TRANSTEXAS DIVIDEND/SHARE REPURCHASE PROGRAM. TransTexas intends to
implement a dividend and/or stock repurchase program pursuant to which it plans
to pay a dividend on its common stock and/or repurchase common stock from its
public stockholders and from its affiliates, including TEC and TARC, in an
aggregate amount of approximately $400 million in dividends and the value of
stock purchased. To the extent that TransTexas purchases shares of its common
stock, it is anticipated that TransTexas will acquire four times the number of
shares from its affiliated stockholders that it acquires from its public
stockholders. Shares may be purchased through open market purchases, negotiated
transactions or tender offers, or a combination of the above. It is anticipated
that the price paid to affiliated stockholders will equal the weighted average
price paid to purchase shares from the public stockholders.

3. CAPITAL IMPROVEMENT PROGRAM

TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
refining margins by converting low-cost, heavy, sour crude oils into
high-value, light petroleum products including primarily gasoline and heating
oil.

In February 1995, TARC began a construction and expansion program designed
to reactive the refinery and increase its complexity. From February 1995
through April 1997, TARC spent approximately $245 million on the construction
and expansion program, procured a majority of the equipment required and
completed substantially all of the process design engineering and a substantial
portion of the remaining engineering necessary to complete this project.

6
<PAGE> 8
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

In connection with the TEC Notes Offering, the TARC Intercompany Loan and
the TARC Notes Tender Offer, TARC has adopted a revised capital improvement
program designed to increase the capacity and complexity of the refinery
("Capital Improvement Program"). The most significant projects include: (i)
conversion of the visbreaker unit to a delayed coking unit to process vacuum
tower bottoms into lighter petroleum products, (ii) modernization and upgrade of
a fluid catalytic cracking unit to increase gasoline production capacity and
allow the direct processing of low cost atmospheric residual feedstocks, and
(iii) upgrading and expanding hydrotreating, alkylation and sulfur recovery
units to increase sour crude processing capacity. In addition, TARC 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. TARC will act as general
contractor, but has engaged a number of specialty consultants and engineering
and construction firms to assist TARC 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.

The Capital Improvement Program will be executed in two phases. TARC
estimates that Phase I will be completed at a cost of $223 million, will be
tested and operational by September 30, 1998 and will result in the refinery
having the capacity to process up to 200,000 BPD of sour crude oil. Phase II
of the Capital Improvement Program includes the completion and start-up of the
Fluid Catalytic Cracking Unit utilizing state-of-the-art MSCC(SM) technology and
the installation of additional equipment expected to further improve operating
margins by allowing for a significant increase in the refinery's capacity to
produce gasoline. TARC estimates that Phase II will be completed at a cost of
$204 million and will be tested and operational by July 31, 1999. The proceeds
received or to be received by TARC from the TARC Intercompany Loan, the
TransTexas dividend/share repurchase program and the equity contribution from
TEC will include $427 million designated for use in the Capital Improvement
Program, which TARC believes is adequate to fund the completion of the project.
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 TARC may not have any control, and there can be no
assurance that any such projections or estimates will prove accurate.

TARC currently believes, based on estimates of refining margins and
current estimates for costs of the expansion and modification of the refinery,
that future undiscounted cash flows will be sufficient to recover the cost of
the refinery over its estimated useful life as well as the costs of related
identifiable intangible assets. 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 estimating future refining
margins, and in constructing and operating a large scale refinery, there can be
no assurance that TARC will ultimately recover the cost of the refinery.
Management believes that the book value of the refinery is in excess of its
current estimated fair market value.

4. DISBURSEMENT AND COLLATERAL ACCOUNTS

Pursuant to a disbursement agreement (the "Disbursement Agreement") among
TARC, TEC, the TEC Indenture Trustee, Firstar Bank of Minnesota, as disbursement
agent (the "Disbursement Agent"), and Baker & O'Brien, Inc., as construction
supervisor (the "Construction Supervisor"), $208 million of the net proceeds
from the sale of the TEC Notes was placed into accounts in the name of TARC and
TEC (together, the "Disbursement Account") to be held and invested by the
Disbursement Agent until disbursed. Proceeds to TEC and TARC of approximately
$300 million from the TransTexas dividend/share repurchase program will also be
deposited in the Disbursement Account. All funds in the Disbursement Account
are pledged as security for the repayment of the TEC Notes.

The Disbursement Agent will make disbursements for the Capital Improvement
Program out of the Disbursement Account in accordance with requests made by
TARC and approved by the Construction Supervisor. The Construction Supervisor
is required to review each such disbursement request by TARC. No disbursements
may be made from the Disbursement Account for purposes other than the Capital
Improvement Program other than (i) up to $1.5 million per month (except for
December 1997, in which disbursements may be up to $4.5 million) to fund
administrative costs and certain taxes and insurance payments, not in excess of
$25.5 million in the aggregate; provided, that if less than $1.5 million is
spent in any month (or less than $4.5 million is spent in December 1997) the
amounts which may be disbursed in one or more subsequent months will be
increased by the amount of such difference, (ii) up to $50 million for
feedstock upon certification by the Construction Supervisor of the Mechanical
Completion (as defined) of the Delayed Coking Unit and associated facilities,
(iii) up to $19 million to pay interest on, and to redeem, repurchase, defease
or otherwise retire the remaining TARC Notes and (iv) up to $7 million for
outstanding accounts payable. In addition, interest income from the
Disbursement Account may be used for the Capital Improvement Program or
disbursed to fund administrative and other costs of TARC and TEC.

In March 1997, TARC issued $36 million of 15% senior secured notes due
March 1998 to unaffiliated third parties. These notes were collateralized by a
pledge of 5 million shares of TransTexas common stock. Proceeds from the
issuance of these notes were deposited in a cash collateral account to be used
for refinery construction and general corporate purposes. These notes were
repaid in June 1997.

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TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

5. INVESTMENT IN TRANSTEXAS

TARC 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 TARC's 20.3% interest in
TransTexas until March 1996, when TARC's interest in TransTexas was reduced to
14.1% as a result of its sale of 4.55 million shares of TransTexas stock. TARC
continues to record its pro rata share of income or losses using the equity
method due to the common control of TransTexas and TARC by TransAmerican and
TEC. Summarized financial information of TransTexas is as follows (in
thousands of dollars):

<TABLE>
<CAPTION>
April 30, January 31,
1997 1997
---------- ----------
<S> <C> <C>
ASSETS
Total current assets . . . . . . . . . . . $ 187,343 $ 188,934
Property and equipment, net . . . . . . . . 909,481 846,393
Other assets . . . . . . . . . . . . . . . 17,436 17,825
---------- ----------
$1,114,260 $1,053,152
========== ==========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities . . . . . . . . . $ 179,778 $ 117,348
Total noncurrent liabilities . . . . . . . 1,040,537 1,086,599
Total stockholders' deficit . . . . . . . . (106,055) (150,795)
---------- ----------
$1,114,260 $1,053,152
========== ==========
</TABLE>

<TABLE>
<CAPTION>
Three Months Ended
April 30,
--------------- -----------
1997 1996
---------- ---------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 82,351 $ 95,958
Operating costs and expenses . . . . . . . . 81,053 70,160
---------- ---------
Operating income . . . . . . . . . . . . 1,298 25,798
Other expense . . . . . . . . . . . . . . . 23,664 21,152
---------- ---------
Net income (loss) before income taxes . . (22,366) 4,646
Income tax expense (benefit) . . . . . . . . (7,828) 1,626
---------- ---------
Net income (loss) . . . . . . . . . . . $ (14,538) $ 3,020
========== =========
Net income (loss) per share . . . . . . . . $ (0.20) $ 0.04
========== =========
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Commissioner's Charge against TARC and Southeast
Louisiana Contractors of Norco, Inc. (the "Commissioners Charge") pursuant to
Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended,
42 U.S.C. Section 2000e et seq. ("Title VII"). In the Commissioner's Charge,
the EEOC charged TARC and Southeast Louisiana Contractors of Norco, Inc.
("Southeast Contractors"), a subsidiary of TransAmerican, with engaging in
unlawful discriminatory

8
<PAGE> 10
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

hiring and promotion practices based on race and gender. Each violation of
Title VII, if proven, potentially could subject TARC and/or Southeast
Contractors to liability for (i) monetary damages for backpay and/or front pay
in an undetermined amount, and for compensatory damages and/or punitive damages
in an amount that should not exceed $300,000, (ii) injunctive relief, (iii)
attorney's fees, and/or (iv) interest. During the period covered by the
Commissioner's Charge, TARC and Southeast Contractors estimate that they
received a combined total of approximately 15,000 to 22,000 employment
applications and hired (or rehired) a combined total of approximately 1,500 to
2,200 workers. TARC and Southeast Contractors have responded to the
Commissioner's Charge and have denied engaging in any unlawful employment
practices. TARC and Southeast Contractors have been cooperating fully with the
EEOC in connection with its investigation. TARC and Southeast Contractors
intend to vigorously defend against the allegations contained in the
Commissioner's Charge in all proceedings before the EEOC and in any subsequent
litigation. If TARC and/or Southeast Contractors are found liable for
violations of Title VII based on the matters asserted in the Commissioner's
Charge, TARC can make no assurance that such liability would not have a
material adverse effect on the financial condition of TARC or TARC's ability to
pay interest or principal on its debt.

RINEHEART. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court,
Middle District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon
and Indian Village. TARC intends to vigorously defend this claim.

GENERAL. TARC 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, TARC does not expect these matters
to have a material adverse effect on its financial position, results of
operations or cash flow.

ENVIRONMENTAL MATTERS

COMPLIANCE MATTERS. TARC 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. 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 has incurred certain
fines, as a result 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 of its predecessor in interest, TransAmerican, or
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 flow or financial position.

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. TARC

9
<PAGE> 11
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

believes that compliance with the Benzene Waste NESHAPS will not have a
material adverse effect on its financial position, results of operations or
cash flow. However, until the refinery is in full operation, there can be no
assurance that the regulations will not have such an effect.

In addition, the Environmental Protection Agency ("EPA") promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organics NESHAPS") regulations for petroleum refineries under
the Clean Air Act in 1995, and subsequently has amended such regulations.
These regulations set "Maximum Achievable Control Technology ("MACT") standards
for petroleum refineries. The Louisiana Department of Environmental Quality
(the "LDEQ") has incorporated MACT standards into TARC's air permits under
federal and state air pollution prevention laws. TARC believes that compliance
with the Hazardous Organics NESHAPS will not have a material adverse effect on
TARC's financial position, results of operations or cash flow. However, until
the refinery is in full operation, there can be no assurance that the
regulations will not have such an effect.

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 sulfur,
olefins, 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 EPA's National Ambient Air Quality Standards
("NAAQS") proposals for particulate matter and ozone are implemented.
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 or 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.

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. The
EPA has denied TARC's request for an individual baseline adjustment and other
appropriate regulatory relief. TARC will continue to pursue regulatory relief
with the EPA. 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, cash
flows or financial position.

Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The deadline for a refinery to submit an Operating
Permit Application under the Louisiana program was October 12, 1996. TARC
timely submitted its Title V Operating Permit application and the LDEQ has
designated the application as being administratively complete. As yet, the
LDEQ has not responded further regarding the status of TARC's Title V Operating
Permit. TARC believes that its application will be approved. However, there
can be no assurance that additional expenditures required pursuant to Title V
Operating permit obligations will not have a material adverse effect on TARC's
financial position, results of operations or cash flow.

10
<PAGE> 12
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

CLEANUP MATTERS. TARC also is subject to federal, state, and local laws,
regulations, and ordinances that impose liability for the costs of clean up
relating to, 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 LDEQ 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 TARC'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 LDEQ agreed that the
LDEQ would serve as the lead agency with respect to the investigation and
remediation of areas of concern identified in the investigation. TARC, under a
voluntary initiative approved by the LDEQ, has submitted a work plan to the
LDEQ to determine which areas may require further investigation and
remediation. The LDEQ has not yet responded to TARC's submission or issued any
further requests relating to this matter. As a result, TARC is unable at this
time to estimate what the costs, if any, will be if the LDEQ does require
further investigation or remediation of the areas identified.

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 three 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 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.

At one Superfund site, TARC has submitted information to the EPA
indicating that it should have no liability for this matter, and negotiations
are continuing. With respect to the remaining two sites, TARC's liability for
each such matter has not been 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 at each such site), TARC 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.

11
<PAGE> 13
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

PURCHASE 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 April 30, 1997, TARC had commitments for refinery
construction and maintenance of approximately $50 million. TARC is acting as
general contractor and can generally cancel or postpone capital projects.

FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS

TARC enters into financing arrangements to maintain an available supply of
feedstocks. Typically, TARC enters into an agreement with a third party to
acquire a cargo of feedstock that is scheduled for delivery 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. 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.

In April 1997, TARC entered into a commitment to purchase 0.6 million
barrels of feedstock at $24.68 per barrel plus interest at 8.25%, demurrage,
bank fees and other related costs. TARC accrued a loss of approximately $5.1
million on this commitment as of April 30, 1997.

In April 1996, TARC entered into a processing agreement with another third
party to process feedstocks. For the three months ended April 30, 1997, TARC
processed approximately 6.4 million barrels of feedstocks and as of April 30,
1997 was storing approximately 1.0 million barrels of intermediate and refined
products under this agreement. TARC also entered into processing agreements
with this third party to process approximately 1.1 million barrels of the third
party's feedstocks for a fixed price per barrel. As of April 30, 1997, TARC
recorded a net margin of approximately $0.2 million related to these processing
arrangements, primarily as a result of income on the fixed fee processing
agreement.

POTENTIAL EFFECTS OF A CHANGE OF CONTROL

Pursuant to the terms of the TARC Intercompany Loan, upon the occurrence of
a Change of Control, TEC would have the right to require TARC to repay the
principal of the TARC Intercompany Loan in an amount equal to a pro rata share
of the amount TEC is required to pay under the TEC Indenture. Such pro rata
share would be calculated using the ratio of the accreted value of the
outstanding principal amount of the TARC Intercompany Loan to the sum of (i) the
outstanding principal amount of the TransTexas Intercompany Loan plus (ii) the
accreted value of the outstanding principal amount of the TARC Intercompany
Loan. A Change of Control would be deemed to occur under the TARC Intercompany
Loan in the case of certain changes or other events in respect of the ownership
or control of TEC, TARC or TransTexas including any circumstance pursuant to
which (i) any person or group, other than John R. Stanley and his wholly-owned
subsidiaries or the TEC Indenture Trustee is or becomes the beneficial owner of
more than 50% of the total voting power of TEC's then outstanding voting stock,
or (ii) TEC or any of its subsidiaries own some of TARC's or TransTexas' capital
stock, respectively, but less than 50% of the total voting stock or economic
value of TARC or TransTexas, respectively, unless (in the case of either (i) or
(ii) above) 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.

12
<PAGE> 14
TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

7. TRANSACTIONS WITH AFFILIATES

TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the three months ended April 30, 1997
and 1996 was approximately $0.2 million and $0.3 million, respectively. The
payable to TransTexas for natural gas purchased totaled approximately $3.1
million and $2.7 million at April 30, 1997 and January 31, 1997, respectively.

Southeast Contractors provides construction personnel to TARC in
connection with TARC's expansion and construction program. These construction
workers are temporary employees, and the number and composition of the
workforce will vary throughout TARC's expansion and construction program.
Southeast Contractors charges TARC for the direct costs it incurs (which
consist solely of employee payroll and benefits) plus administrative costs and
fees of up to $2.0 million per year. Total labor costs charged by Southeast
Contractors for the three months ended April 30, 1997 and 1996 were $2.2
million and $0.9 million, respectively, of which $2.0 million and $1.8 million
were payable at April 30, 1997 and January 31, 1997, respectively.

TransTexas has provided, pursuant to a services agreement, general
commercial legal services (including payroll, tax, and treasury services) to
TARC and TEC for a fee of $26,000 per month. TARC expects its general and
administrative expenses to increase significantly when the refinery commences
more complex operations. This services agreement was terminated in
June 1997.

On June 13, 1997, the Company entered into a new services agreement with
TransAmerican, TransTexas and TEC. Under the new agreement, TransTexas will
provide accounting, legal, administrative and other services to TARC, TEC and
TransAmerican and its affiliates. TransAmerican will provide advisory services
to TransTexas, TARC and TEC. TARC will pay TransTexas approximately $300,000
per month for services rendered to, and for allocated expenses paid by
TransTexas on behalf of, TARC and TEC. TEC and its subsidiaries will pay $2.5
million in the aggregate per year to TransAmerican for advisory services and
benefits provided by TransAmerican.

In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bore interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996. As of April 30, 1997, the entire $25
million was outstanding under the note. On November 1, 1996, TARC executed an
additional $25 million promissory note to TransAmerican which bore interest at
15% per annum, payable quarterly beginning December 31, 1996 (together with the
first promissory note, the "TransAmerican Notes"). In February 1997, the
November 1996 promissory note was replaced with a $50 million note bearing
interest at an annual rate of 15%. At April 30, 1997, TARC had approximately
$56.4 million in principal amount outstanding under both of these notes.
TransAmerican waived any default occurring as a result of TARC's failure to
make the scheduled interest payment provided for in the notes. All amounts
outstanding under the TransAmerican Notes were repaid on June 13, 1997.

13
<PAGE> 15
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

TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals
and its expenses consisted of maintenance and repairs, tank rentals, general
and administrative expenses and property taxes. TARC commenced partial
operations at the refinery in March 1994 and has operated the No. 2 Vacuum Unit
intermittently since that time. TARC may operate the No. 2 Crude Unit and the
No. 2 Vacuum Unit if market conditions are favorable. TARC's decision to
commence or suspend operations is based on the availability of working capital,
current operating margins and the need to tie-in units as they are completed.
TARC does not consider its historical results to be indicative of future
results.

TARC's results of operations are dependent on the operating status of
certain units within its refinery, 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 (defined below)
is designed to significantly change TARC's throughput capacity, the feedstocks
processed, and refined product yields.

THREE MONTHS ENDED APRIL 30, 1997, COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1996

There were no revenues for the three months ended April 30, 1997 as
compared to $10.9 million in revenues from the processing of feedstocks for
sale to third parties for the same period in 1996.

There were no costs of products sold for the three months ended April 30,
1997 as compared to $11.5 million for the same period in 1996 for the purchase
of feedstocks for processing.

Gross margins from processing arrangements were $0.2 million and ($1.9)
million for the three months ended April 30, 1997 and 1996, respectively. As
discussed below in "Liquidity and Capital Resources," positive margins were
primarily due to income from a fixed fee processing agreement and negative
margins were primarily due to price management activities.

Operations and maintenance expense for the three months ended April 30,
1997 increased to $3.6 million from $3.1 million for the same period in 1996,
primarily due to an increase in the utilization of outside labor.

Depreciation and amortization expense for the three months ended April 30,
1997 decreased to $1.7 million from $1.8 million for the same period in 1996,
primarily due to the full amortization of intangible assets during 1996.

General and administrative expenses increased to $2.7 million for the
three months ended April 30, 1997 from $2.1 million for the same period in
1996, primarily due to increased insurance expense.

Taxes other than income taxes for the three months ended April 30, 1997
increased to $0.9 million from $0.4 million for the same period in 1996,
primarily due to increased property tax expense.

14
<PAGE> 16
Loss on purchase commitment for the three months ended April 30, 1997
consists of a $5.1 million loss related to a commitment to purchase 0.6
million barrels of feedstock.

Interest income for the three months ended April 30, 1997 remained
consistent with the same period in 1996. Interest expense, net for the three
months ended April 30, 1997 increased $2.2 million, due primarily to interest
on the promissory notes to TransAmerican and the senior secured notes. During
the three months ended April 30, 1997, TARC capitalized approximately $18.8
million of interest related to property and equipment additions at TARC's
refinery compared to $16.6 million for the three months ended April 30, 1996.

The equity in earnings (loss) of TransTexas for the three months ended
April 30, 1997 and 1996 of ($2.1) million and $1.0 million, respectively,
reflects TARC's equity interest in TransTexas.

LIQUIDITY AND CAPITAL RESOURCES

TARC is not currently operating the completed units of the refinery
because market conditions make limited operations uneconomic. Although TARC
has no current plans to commence regular refinery operations before completion
of the Delayed Coking Unit, if market conditions become favorable, TARC could
resume limited processing operations. TARC, however, anticipates that, until
completion of the Delayed Coking Unit, its capital needs will be limited to
expenditures for the Capital Improvement Program, general and administrative
expenses and refinery maintenance costs.

In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes were secured
by a pledge of 5 million shares of TransTexas common stock. Proceeds from the
issuance of these notes have been or will be used for construction at the
refinery and general corporate purposes. These notes were repaid in June 1997.

On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.

With the proceeds of the TEC Notes Offering, TEC made an intercompany loan
to TARC in the original amount of $676 million. The TARC Intercompany Loan will
accrete principal at the rate of 16% per annum, compounded semi-annually until
June 15, 1999 to a final accreted value of $920 million, and cash interest will
thereafter accrue at a rate of 16% per annum, payable semi-annually. The
intercompany loan will mature on June 1, 2002. The TARC Intercompany Loan
Agreement contains certain restrictive covenants including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates. If TARC's cash flow from operations is
insufficient to pay interest as it becomes payable on the TARC Intercompany
Loan, TARC may be required to sell any shares of TransTexas common stock owned
by it or attempt to sell debt or equity securities of TARC. There can be no
assurance that proceeds from such sales would be adequate to pay interest due.
TARC used approximately $103 million of the proceeds from the intercompany loan
to repay certain indebtedness including senior secured notes issued in March
1997 and debt owed to an affiliate, and to complete the TARC Notes Tender Offer
described below. Remaining proceeds will be used for the Capital Improvement
Program described in Note 3 to Condensed Financial Statements and for general
corporate purposes. See Note 2 of Notes to Condensed Financial Statements.

15
<PAGE> 17
TEC intends to make a capital contribution to TARC in the aggregate amount
of $226 million from the proceeds of the TransTexas dividend/share repurchase
program (discussed below). The amount of this capital contribution will be
retained initially in the Disbursement Account (described in Note 4 to
Condensed Financial Statements) and contributed to TARC pursuant to the terms of
the Disbursement Agreement (described therein).

On June 13, 1997, TARC completed a tender offer (the "TARC Notes Tender
Offer") for the (i) TARC Mortgage Notes for 112% of their principal amount (plus
accrued and unpaid interest) and (ii) TARC Discount Notes for 112% of their
accreted value. Approximately $423 million aggregate principal amount of TARC
Mortgage Notes and TARC Discount Notes were tendered and accepted by TARC at a
cost to TARC of approximately $437 million (including accrued interest and
premiums). As a result of the TARC Notes Tender Offer, TARC expects to record
a pretax extraordinary charge of approximately $85 million during the quarter
ending July 31, 1997.

TransTexas intends to implement a dividend and/or stock repurchase program
pursuant to which it plans to pay a dividend on its common stock and/or
repurchase common stock from its public stockholders and from its affiliates,
including TEC and TARC, in an aggregate amount of approximately $400 million in
dividends and the value of stock purchased. To the extent that TransTexas
purchases shares of its common stock, it is anticipated that TransTexas will
acquire four times the number of shares from its affiliated stockholders that it
acquires from its public stockholders. Shares may be purchased through open
market purchases, negotiated transactions or tender offers, or a combination of
the above. It is anticipated that the price paid to affiliated stockholders will
equal the weighted average price paid to purchase shares from the public
stockholders.

Following completion of the transactions described in Note 2 to Notes to
Condensed Financial Statements, TARC and TEC will have deposited approximately
$529 million into accounts in the name of TARC and TEC (together, the
"Disbursement Account") from which disbursements will be made pursuant to a
disbursement agreement (the "Disbursement Agreement") among TARC, TEC, the TEC
Indenture Trustee, Firstar Bank of Minnesota, N.A., as Disbursement Agent, and
Baker and O'Brien, Inc., as Construction Supervisor. See Note 4 to Notes to
Condensed Financial Statements. Of these funds, $427 million will be available
only for the Capital Improvement Program, approximately $25.5 million will be
available for general and administrative expenses, $7 million will be available
for outstanding accounts payable, $50 million will be available for working
capital upon completion of the Delayed Coking Unit and certain supporting units
and approximately $19 million will be available for the payment of interest on,
or the redemption, purchase, defeasance or other retirement of, the outstanding
TARC Notes. TARC's estimated capital expenditures for the Capital Improvement
Program are $201 million, $210 million, and $16 million, respectively, during
the remainder of fiscal 1998, and the fiscal years ending January 31, 1999 and
2000. If engineering problems, cost overruns or delays occur and other
financing sources are not available, TARC may not be able to complete both
phases of the Capital Improvement Program.

The TEC Notes Indenture permits TARC to obtain a revolving credit facility
but places certain limitations on TARC's ability to incur other indebtedness.
In order to operate the refinery at expected levels after the completion of
Phase I of the Capital Improvement Program, TARC will require additional
working capital. TARC and a lender are currently discussing the terms of a
revolving credit facility, but there can be no assurance TARC will be able to
obtain such a facility.

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 for delivery 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. 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.

Environmental compliance and permitting issues are an integral part of the
capital expenditures anticipated in connection with the expansion and
modification of the refinery. TARC does not expect to incur any additional
significant expenses for environmental compliance during fiscal 1998 or fiscal
1999 other than those budgeted for 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 TARC's future results of operations,
cash flows or financial condition. TARC also has contingent liabilities with
respect to litigation matters as more fully described in Note 7 of Notes to
Condensed Financial Statements.

FORWARD-LOOKING STATEMENTS

Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Quarterly Report on Form 10-Q regarding TARC's
financial position, business strategy, plans and objectives of management for
future operations and expansion and modification of the refinery, including but
not limited to words such as "anticipates," "expects," "believes," "estimates,"
"intends," "projects" and "likely" indicate forward-looking statements. TARC's
management believes that its current views and expectations are based on

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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, without limitation, engineering problems, work stoppages,
cost overruns, personnel or materials shortages, fluctuations in commodity
prices for petroleum and refined products, casualty losses, conditions in the
capital markets and competition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

See Note 7 to the condensed financial statements for a discussion of
TARC's legal proceedings.

ITEM 2. CHANGES IN SECURITIES.

In connection with the TARC Notes Tender Offer, TARC obtained consents
from holders of the TARC Notes to certain waivers under, and amendments to the
TARC Notes Indenture, which eliminate or modify certain restrictive covenants
and other provisions contained in the TARC Notes Indenture.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

11.1 - Net income (loss) per share

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
April 30, 1997.

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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)

June 19, 1997 By: /S/ JOHN R. STANLEY
--------------------------------------------
John R. Stanley, Chief Executive Officer

June 19, 1997 By: /S/ ED DONAHUE
--------------------------------------------
Ed Donahue, Vice President and Secretary
(Principal Financial and Accounting Officer)