TRANSAMERICAN REFINING CORP, 424B3, 1997-09-17

TRANSAMERICAN REFINING CORP
424B3, 1997-09-17
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 a 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 July 31, 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
September 15, 1997 is 30,000,000.

================================================================================
<PAGE> 2

TRANSAMERICAN REFINING CORPORATION

TABLE OF CONTENTS

Page

PART I.
FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheet as of July 31, 1997 and January 31, 1997...................................... 2
Condensed Statement of Operations for the three and six months ended July 31, 1997 and 1996........... 3
Condensed Statement of Cash Flows for the six months ended July 31, 1997 and 1996..................... 4
Notes to Condensed Financial Statements............................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 18

PART II.
OTHER INFORMATION

Item 1. Legal Proceedings............................................................................... 19
Item 2. Changes in Securities and Use of Proceeds....................................................... 19
Item 6. Exhibits and Reports on Form 8-K................................................................ 19
Signatures................................................................................................. 20

</TABLE>

<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,
1997 1997
----------- ------------
ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 6,883 $ 613
Debt proceeds held in disbursement account .................. 14,148 --
Accounts receivable ......................................... 351 --
Receivable from affiliates .................................. -- 22
Other current assets ........................................ 1,231 654
--------- ---------
Total current assets .................................... 22,613 1,289
--------- ---------

Property and equipment .......................................... 644,234 555,816
Less accumulated depreciation and amortization .................. 20,133 16,930
--------- ---------
Net property and equipment .............................. 624,101 538,886
--------- ---------

Debt proceeds held in disbursement accounts...................... 89,869 --
Investment in TransTexas ........................................ 14,291 --
Receivable from affiliates ...................................... -- 393
Other assets, net ............................................... 30,922 23,673
--------- ---------
$ 781,796 $ 564,241
========= =========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable ............................................ $ 12,940 $ 20,033
Payable to affiliates ....................................... 9,160 7,094
Accrued liabilities ......................................... 7,964 15,450
Long-term debt .............................................. -- 365,730
--------- ---------
Total current liabilities ............................... 30,064 408,307
--------- ---------

Payable to affiliates ........................................... 13,402 6,674
Notes payable to affiliate ...................................... 690,053 46,589
Long-term debt .................................................. 15,682 --
Investment in TransTexas ........................................ -- 20,706
Other ........................................................... 373 602
Commitments and contingencies (Note 6) .......................... -- --
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 .................................. 273,406 248,513
Accumulated deficit ......................................... (241,484) (167,450)
--------- ---------
Total stockholder's equity .............................. 32,222 81,363
--------- ---------
$ 781,796 $ 564,241
========= =========
</TABLE>

See accompanying notes to condensed financial statements.

<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,
---------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- ---------

<S> <C> <C> <C> <C>
Revenues:
Product sales .............................. $ -- $ -- $ -- $ 10,857
-------- -------- -------- --------
Total revenues ......................... -- -- -- 10,857
-------- -------- -------- --------

Costs and expenses:
Costs of products sold ..................... -- 921 -- 12,441
Processing arrangements, net ............... (3,062) 1,459 (3,237) 3,319
Operations and maintenance ................. 4,249 3,544 7,862 6,600
Depreciation and amortization .............. 1,714 1,816 3,425 3,620
General and administrative ................. 2,280 3,558 5,005 5,661
Taxes other than income taxes .............. 903 2,479 1,806 2,878
(Gain)/loss on purchase commitments ........ (331) -- 4,759 --
-------- -------- -------- --------
Total costs and expenses ............... 5,753 13,777 19,620 34,519
-------- -------- -------- --------
Operating loss ......................... (5,753) (13,777) (19,620) (23,662)
-------- -------- -------- --------

Other income (expense):
Interest income ............................ 916 54 1,043 197
Interest expense, net ...................... (3,471) (984) (6,767) (2,072)
Equity in income of TransTexas
before extraordinary item ............... 47,215 10,090 45,165 11,091
Gain on sale of TransTexas stock ........... -- -- -- 56,162
Other ...................................... 696 65 735 328
-------- -------- -------- --------
Total other income (expense) ........... 45,356 9,225 40,176 65,706
-------- -------- -------- --------
Income (loss) before extraordinary items 39,603 (4,552) 20,556 42,044
Extraordinary items:
Equity in extraordinary item of TransTexas . (10,168) -- (10,168) --
Loss on the early extinguishment of debt ... (84,422) -- (84,422) --
-------- -------- -------- --------
Net income (loss) ...................... $(54,987) $ (4,552) $(74,034) $ 42,044
======== ======== ======== ========
Net income (loss) per share:
Income (loss) before extraordinary item .... $ 1.32 $ (0.15) $ 0.68 $ 1.12
Extraordinary item ......................... (3.15) -- (3.15) --
-------- -------- -------- --------
Net income (loss) per share .................... $ (1.83) $ (0.15) $ (2.47) $ 1.12
======== ======== ======== ========
Weighted average number of common and
common equivalent shares (thousands) ....... 30,000 30,000 30,000 37,458
======== ======== ======== ========

</TABLE>

See accompanying notes to condensed financial statements.

<PAGE> 5
TRANSAMERICAN REFINING CORPORATION

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

SIX MONTHS ENDED
JULY 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Operating activities:
Net income (loss) .................................................................. $ (74,034) $ 42,044
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Extraordinary item .............................................................. 84,422 --
Depreciation and amortization ................................................... 3,425 3,620
Amortization of discount on long-term debt ...................................... 4,627 40
Amortization of debt issue costs ................................................ 713 3
Equity in income and extraordinary item of TransTexas ........................... (34,997) (11,091)
Gain on the sale of TransTexas stock ............................................ -- (56,162)
Inventory writedown ............................................................. -- 921
Changes in assets and liabilities:
Accounts receivable ........................................................... (351) (547)
Prepayments and other ......................................................... (577) 3,860
Accounts payable .............................................................. (4,867) (186)
Payable to affiliates, net .................................................... 13,594 384
Accrued liabilities ........................................................... (7,276) 512
Other assets .................................................................. 205 60
--------- --------
Net cash used by operating activities ...................................... (15,116) (16,542)
--------- --------

Investing activities:
Capital expenditures ............................................................... (59,317) (61,587)
--------- --------

Financing activities:
Issuance of note payable to affiliate............................................... 675,649 --
Retirement of long-term debt ....................................................... (437,214) --
Issuance of note payable ........................................................... 36,000 --
Retirement of note payable ......................................................... (36,000) --
Net proceeds from sale of TransTexas stock ......................................... -- 42,607
Increase in debt proceeds held in disbursement accounts ............................ (170,020) (26,549)
Withdrawals from disbursement accounts ............................................. 66,003 50,550
Advances from affiliate ............................................................ 15,026 11,656
Repayment of advances and notes payable to affiliate................................. (66,000) (1,925)
Debt issue costs ................................................................... (2,303) --
Principal payments on capital lease obligations .................................... (438) (517)
--------- --------
Net cash provided by financing activities .................................. 80,703 75,822
--------- --------

Increase (decrease) in cash and cash equivalents ........................... 6,270 (2,307)
Beginning cash and cash equivalents ................................................... 613 2,779
--------- --------
Ending cash and cash equivalents ...................................................... $ 6,883 $ 472
========= ========

Noncash financing and investing activities:
Accounts payable for property and equipment ........................................ $ 9,116 $ (3,547)
Product financing arrangements ..................................................... -- (24,283)
Accretion on long-term debt capitalized in property and equipment .................. 30,426 23,487
Debt issue costs allocated from affiliate .......................................... 24,893 --
</TABLE>

See accompanying notes to condensed financial statements.

<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 July
31, 1997 and the results of its operations and cash flows for the interim
periods ended July 31, 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
and quarterly report on Form 10-Q for the quarter ended April 30, 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 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.

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 June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income,
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in financial statements. This statement
will be adopted by TARC effective February 1, 1998. TARC does not believe the
effect of adoption of this statement will have a material effect on its
financial statements.

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.

<PAGE> 7

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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
107/8% 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 16% per annum and (ii) is
secured initially by a security interest in substantially all of TARC's assets
other than 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 $36 million of senior
secured notes of TARC that were issued in March 1997 and $66 million of advances
and notes payable owed to an affiliate, and used approximately $437 million 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. TEC allocated $24.9 million of debt issuance costs to TARC
and $12.2 million to TransTexas which are reflected as a contribution of
capital. Such costs are being amortized over the term of the Intercompany Loans
using the interest method.

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, 159,861 at July 31, 1997,
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 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
("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 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. TARC Mortgage Notes
and TARC Discount Notes with an aggregate carrying value of $423 million were
tendered and accepted by TARC at a cost to TARC of approximately $437 million
(including accrued interest, premiums and other costs). As a result of the TARC
Notes Tender Offer, $17.2 million in debt issuance costs were written off and
TARC recorded a total extraordinary charge of approximately $84 million during
the quarter ending July 31, 1997. As of July 31, 1997, TARC Mortgage Notes and
TARC Discount Notes with a carrying value of $15.7 million remained
outstanding.

TRANSTEXAS SHARE REPURCHASE PROGRAM. TransTexas has implemented a stock
repurchase program pursuant to which it plans to repurchase common stock from
its public stockholders and from its affiliates, including TEC and TARC, in an
aggregate amount of approximately $399 million in value of stock purchased. It
is anticipated that TransTexas will acquire four times the number of shares
from its affiliated stockholders that it acquires from its public

<PAGE> 8

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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. As of July 31, 1997,
TransTexas had repurchased 3.1 million shares of common stock from public
stockholders for an aggregate purchase price of approximately $49.6 million. As
of September 15, 1997, approximately 0.8 million additional shares had been
purchased from public stockholders for an aggregate purchase price of
approximately $11.8 million, and approximately 12.6 million shares had been
purchased from TARC and TEC for an aggregate purchase price of approximately
$201 million.

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 reactivate 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.

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 MSCCSM 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 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. As of
July 31, 1997, TARC had spent approximately $24.1 million on the Capital
Improvement Program with commitments for another approximately $56.1 million.
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.

<PAGE> 9

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 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
($135 million) and TEC ($73 million) (together, the "Disbursement Account") to
be held and invested by the Disbursement Agent until disbursed. In addition,
anticipated proceeds to TEC and TARC of approximately $300 million from the
TransTexas share repurchase program have been or will be deposited in the
Disbursement Account as purchases are made. 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 that 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 $7.0 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. As of July
31, 1997, $24.9 million had been disbursed to TARC out of the Disbursement
Account for use in the Capital Improvement Program and $7.0 million for general
corporate purposes.

In March 1997, TARC issued $36 million of 15% senior 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.

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. As of
September 15, 1997, TransTexas repurchased 8.5 million shares from TARC, thereby
reducing TARC's ownership of TransTexas to 3.4%. 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):

<PAGE> 10

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

July 31, January 31,
1997 1997
---------- -----------

<S> <C> <C>
ASSETS
Total current assets ................................................. $ 104,180 $ 188,934
Property and equipment, net .......................................... 539,693 846,393
Other assets ......................................................... 367,939 17,825
---------- -----------
$1,011,812 $ 1,053,152
========== ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities ............................................ $ 101,777 $ 117,348
Total noncurrent liabilities ......................................... 656,600 1,086,599
Total stockholders' equity (deficit) ................................. 253,435 (150,795)
---------- -----------
$1,011,812 $ 1,053,152
========== ===========

</TABLE>

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------ -----------------------
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues ............................... $ 575,420 (1) $ 86,732 $ 657,771 (1) $182,690
Operating costs and expenses ........... 43,995 (19,964) 125,048 50,196
--------- --------- --------- --------
Operating income .................... 531,425 106,696 532,723 132,494
Other expense .......................... 16,252 28,973 39,916 50,125
--------- --------- --------- --------
Income before income taxes
and extraordinary item ............ 515,173 77,723 492,807 82,369
Income taxes ........................... 180,311 6,162 172,483 7,788
--------- --------- --------- --------
Income before extraordinary item..... 334,862 71,561 320,324 74,581
Extraordinary item ..................... (72,117) -- (72,117) --
--------- --------- --------- --------
Net income .......................... $ 262,745 $ 71,561 $ 248,207 $ 74,581
========= ========= ========= ========
Net income per share ................... $ 3.61 $ 0.97 $ 3.38 $ 1.01
========= ========= ========= ========
</TABLE>

(1) Revenues for the three months ended July 31, 1997 include a gain on sale of
properties of $532,929.

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. ss. 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 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

<PAGE> 11

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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, results of operations and cash flows 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.

SHELL OIL. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination
of Bayou Trapagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the plaintiffs during trial by purchasing their land
for $5 million. On June 27, 1997, Shell amended its third party action to bring
TARC back into the case. Shell has demanded $400,000 from TARC. TARC has
refused to pay such amount and is defending the case vigorously.

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

<PAGE> 12

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

compliance. TARC 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. Until the refinery is in full operation, however,
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. Until the refinery is
in full operation, however, 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.

<PAGE> 13

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
environmental 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.

<PAGE> 14

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 July 31, 1997, TARC had commitments for refinery
construction and maintenance of approximately $56 million. TARC is acting as
general contractor and can generally cancel or postpone capital projects.

In August 1997, TARC executed a letter of intent to purchase a tank
storage facility adjacent to the refinery. TARC made a nonrefundable deposit of
$5 million toward the purchase price of $40 million (subject to increase by
$7 million if an additional docking facility is included in the assets
purchased).

PROCESSING AGREEMENTS

In April 1996, TARC entered into a processing agreement with a third
party to process feedstocks. Under the terms of the agreement, the processing
fee earned by the third party 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. As of July 31, 1997, TARC has processed 6.4 million barrels
of feedstocks under this agreement. As of July 31, 1997 and January 31, 1997,
TARC was storing approximately 0.8 million and 1.0 million barrels,
respectively, of feedstock and intermediate or refined products. For the six
months ended July 31, 1997 and 1996, TARC recorded income (loss) from
processing agreements of $3.2 million and $(3.3) million, respectively.
Included in the 0.8 million barrels of product stored at the refinery as of
July 31, 1997, is approximately 0.6 million barrels of feedstock related to a
purchase commitment entered into in April 1997. The 0.6 million barrels have
been sold to the third party involved in the processing arrangement. For the
six months ended July 31, 1997, TARC incurred a loss of approximately $4.8
million related to this purchase commitment.

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 July 31, 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 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.

7. TRANSACTIONS WITH AFFILIATES

TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the six months ended July 31, 1997 and
1996 was approximately $0.3 million and $1.5 million, respectively. The payable
to TransTexas for natural gas purchased totaled approximately $3.0 million and
$2.7 million at July 31, 1997 and January 31, 1997, respectively.

<PAGE> 15

TRANSAMERICAN REFINING CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)

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 six months ended July 31, 1997 and 1996 were $9.7 million
and $4.4 million, respectively, of which $2.4 million and $1.8 million were
payable at July 31, 1997 and January 31, 1997, respectively.

On June 13, 1997, the Company entered into a services agreement with
TransAmerican, TransTexas and TEC. Under the 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. As of July 31, 1997, $0.4 million and $0.3
million was payable to TransTexas and TransAmerican, respectively, pursuant to
the services agreement.

In July 1997, TEC advanced $5 million to TARC. TARC anticipates a
further advance from TEC of up to $40 million in September 1997. All of the
advances will be governed by the terms of a promissory note that is due June
14, 2002 and bears interest at a rate of approximately 12.8% per annum.

<PAGE> 16

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 is designed to
significantly change TARC's throughput capacity, the feedstocks processed, and
refined product yields.

THREE MONTHS ENDED JULY 31, 1997, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1996

There were no costs of products sold for the three months ended July 31,
1997 as compared to $0.9 million for the same period in 1996, due to the sole
use in 1997 of processing arrangements pursuant to which TARC processed
feedstock owned by third parties (as opposed to TARC's purchase of feedstock
and sale of product).

Processing arrangements reflect income of $3.1 million and a loss of $1.5
million for the three months ended July 31, 1997 and 1996, respectively.
Income and losses were primarily due to price management activities.

Operations and maintenance expense for the three months ended July 31,
1997 increased to $4.2 million from $3.5 million for the same period in 1996,
primarily due to the increase of the Company's labor force in connection with
the Capital Improvement Program.

Depreciation and amortization expense for the three months ended July 31,
1997 decreased to $1.7 million from $1.8 million for the same period in 1996,
primarily due to the completion of amortization of certain intangible assets
during 1996.

General and administrative expenses decreased to $2.3 million for the
three months ended July 31, 1997 from $3.6 million for the same period in 1996,
primarily due to decreased insurance expense and professional fees.

Taxes other than income taxes for the three months ended July 31, 1997
decreased to $0.9 million from $2.5 million for the same period in 1996,
primarily due to decreased property tax expense.

TARC recognized a gain on purchase commitments of $0.3 million for the
three months ended July 31, 1997. There were no such commitments for the three
months ended July 31, 1996.

<PAGE> 17

Interest income for the three months ended July 31, 1997 increased to
$0.9 million as compared to the same period in 1996 primarily due to the
investment of proceeds from the TARC Intercompany Loan. Interest expense, net
for the three months ended July 31, 1997 increased $2.5 million, due primarily
to interest on the promissory notes to TransAmerican and other long-term debt.
During the three months ended July 31, 1997, TARC capitalized approximately
$22.8 million of interest related to property and equipment additions at TARC's
refinery compared to $16.7 million for the three months ended July 31, 1996.

Equity in income of TransTexas before extraordinary item for the three
months ended July 31, 1997 increased to $47.2 million as compared to $10.1
million for the same period in 1996, due primarily to a $533 million gain on
the sale by TransTexas of a subsidiary. TARC recognized equity in an
extraordinary item of $(10.2) million for the three months ended July 31, 1997.
The extraordinary loss of TransTexas is attributable to a loss on the early
extinguishment of debt as a result of the repurchase by TransTexas of its
Senior Secured Notes and the exchange of its Subordinated Notes.

SIX MONTHS ENDED JULY 31, 1997, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1996

There were no revenues for the six months ended July 31, 1997 as compared
to $10.9 million for the same period in 1996, primarily as a result of
processing the majority of refinery throughput for third parties under
processing agreements.

There were no costs of products sold for the six months ended July 31,
1997 as compared to $12.4 million for the same period in 1996, due primarily to
the Company's use in 1997 of processing arrangements pursuant to which TARC
processed feedstock owned by third parties (as opposed to TARC's purchase of
feedstock and sale of product).

Processing arrangements reflect income of $3.2 million and a loss of $3.3
million for the six months ended July 31, 1997 and 1996, respectively. Income
and losses were primarily due to price management activities.

Operations and maintenance expense for the six months ended July 31, 1997
increased $1.3 million to $7.9 million from $6.6 million for the same period in
1996, primarily due to the increase of the Company's labor force in connection
with the Capital Improvement Program.

Taxes other than income taxes for the six months ended July 31, 1997
decreased $1.1 million to $1.8 million from $2.9 million for the same period in
1996 primarily due to decreased property tax expense.

Loss on purchase commitments for the six months ended July 31, 1997
consists of a $4.8 million loss related to a commitment to purchase 0.6 million
barrels of feedstock. These barrels have been sold to a third party and are now
subject to a processing agreement.

Interest income for the six months ended July 31, 1997 increased $0.8
million as compared to the same period in 1996 primarily due to the investment
of proceeds from the TARC Intercompany Loan. Interest expense for the six
months ended July 31, 1997 increased $4.7 million, primarily due to interest on
the promissory notes to TransAmerican and other long-term debt. During the six
months ended July 31, 1997, the Company capitalized approximately $41.6 million
of interest related to property and equipment additions at the Company's
refinery compared to $33.3 million for the six months ended July 31, 1996.

Equity in income of TransTexas before extraordinary item for the six
months ended July 31, 1997 increased to $45.2 million as compared to $11.1
million for the same period in 1996, due primarily to a $533 million gain on
the sale by TransTexas of a subsidiary. TARC recognized equity in an
extraordinary item of $(10.2) million for the six months ended July 31, 1997.
The extraordinary loss of TransTexas is attributable to a loss on the early
extinguishment of debt as a result of the repurchase by TransTexas of its
Senior Secured Notes and the exchange of its Subordinated Notes.

LIQUIDITY AND CAPITAL RESOURCES

TARC is currently operating certain completed units of the refinery
pursuant to the processing agreements described in Note 6 to the condensed
financial statements. However, TARC has no current plans to commence regular
refinery operations before completion of the Delayed Coking Unit. TARC
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.

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.

<PAGE> 18
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").
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 TARC 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 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 TARC Intercompany Loan to repay certain indebtedness, including $36 million
of senior secured notes issued in March 1997 and $66 million of advances and
notes payable owed to an affiliate, and $437 million 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.

Following completion of the transactions described in Note 2 of 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 & 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 $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. As of July 31, 1997, $24.9 million
had been disbursed to TARC out of the Disbursement Account for use in the
Capital Improvement Program and $7.0 million for general corporate purposes.

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. TARC Mortgage Notes and TARC Discount Notes with an
aggregate carrying value of $423 million were tendered and accepted by TARC at a
cost to TARC of approximately $437 million (including accrued interest,
premiums and other costs). As a result of the TARC Notes Tender Offer, $17.2
million in debt issuance costs were written off and TARC recorded a total
extraordinary charge of approximately $84 million during the quarter ended July
31, 1997. As of July 31, 1997, TARC Mortgage Notes and TARC Discount Notes with
a carrying value of $15.7 million remained outstanding.

TransTexas has implemented a stock repurchase program pursuant to which
it plans to repurchase common stock from its public stockholders and from its
affiliates, including TEC and TARC, in an aggregate amount of approximately
$399 million in value of stock purchased. 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. As of July 31, 1997, TransTexas had repurchased 3.1
million shares of common stock from public stockholders for an aggregate
purchase price of approximately $49.6 million. As of September 15, 1997, 0.8
million additional shares had been purchased from public stockholders for an
aggregate purchase purchase price of approximately $11.8 million, and
approximately 12.6 million shares had been purchased from TARC and TEC for an
aggregate purchase price of approximately $201 million.

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. Although TARC and a lender

<PAGE> 19

have engaged in discussions concerning the terms of a revolving credit
facility, there can be no assurance TARC will be able to obtain such a
facility.

In April 1996, TARC entered into a processing agreement with a third
party to process feedstocks. Under the terms of the agreement, the processing
fee earned by the third party 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. As of July 31, 1997, TARC has processed 6.4 million barrels of
feedstocks under this agreement. As of July 31, 1997 and January 31, 1997, TARC
was storing approximately 0.8 million and 1.0 million barrels, respectively, of
feedstock and intermediate or refined products. For the six months ended July
31, 1997 and 1996, TARC recorded income (loss) from processing agreements of
$3.2 million and $(3.3) million, respectively. Included in the 0.8 million
barrels of product stored at the refinery as of July 31, 1997, is approximately
0.6 million barrels of feedstock related to a purchase commitment entered into
in April, 1997. The 0.6 million barrels have been sold to the third party
involved in the processing arrangement. For the six months ended July 31, 1997,
TARC incurred a loss of approximately $4.8 million related to this purchase
commitment.

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 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.

<PAGE> 20

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 AND USE OF PROCEEDS.

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. The TARC Intercompany Loan Agreement contains
certain restrictive covenants including, among others, limitations
on incurring additional debt, asset sales, the payment of dividends
and transactions with affiliates.

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

(a) Exhibits

4.1 - Second Supplemental Indenture dated June 13, 1997 between
the Company, as issuer, TransAmerican Energy Corporation,
as guarantor, and First Union National Bank, as trustee
(previously filed as an exhibit to the Company's current
report on Form 8-K dated June 13, 1997, and incorporated
herein by reference thereto).

4.2 - Loan Agreement dated June 13, 1997 between the Company and
TransAmerican Energy Corporation (previously filed as an
exhibit to the Company's current report on Form 8-K dated
June 13, 1997, and incorporated herein by reference
thereto).

4.3 - Security and Pledge Agreement dated June 13, 1997 by the
Company in favor of TransAmerican Energy Corporation
(previously filed as an exhibit to the Company's current
report on Form 8-K dated June 13, 1997, and incorporated
herein by reference thereto).

4.4 - Disbursement Agreement dated June 13, 1997 among the
Company, TransAmerican Energy Corporation, Firstar Bank of
Minnesota, N.A., as disbursement agent and trustee, and
Baker & O'Brien, Inc., as construction supervisor
(previously filed as an exhibit to the Company's current
report on Form 8-K dated June 13, 1997, and incorporated
herein by reference thereto).

4.5 - Form of Mortgage dated June 13, 1997 between the Company and
TransAmerican Energy Corporation.

10.1 - Services Agreement dated June 13, 1997 by and among TNGC
Holdings Corporation, TransAmerican Natural Gas
Corporation, TransAmerican Energy Corporation, TransTexas
Gas Corporation, TransTexas Drilling Services, Inc. and the
Company.

11.1 - Net Income (Loss) per Share

27.1 - Financial Data Schedule

(b) Reports on Form 8-K

On May 15, 1997, the Company filed a current report on Form 8-K dated
May 14, 1997 to report under Item 5 the announcement of the TARC
Notes Tender Offer.

On August 18, 1997, the Company filed a current report on Form 8-K
dated June 13, 1997 to report under Item 5 the completion of the TEC
Notes Offering and related transactions. Pro forma financial
statements giving effect to the TEC Notes Offering and related
transactions were included in the report.

<PAGE> 21

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)

September 15, 1997 By: /S/ JOHN R. STANLEY
-------------------------------
John R. Stanley,
Chief Executive Officer

September 15, 1997 By: /S/ ED DONAHUE
-------------------------------
Ed Donahue,
Vice President and Secretary
(Principal Financial and
Accounting Officer)