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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 1998
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 15, 1998 is 30,000,000.
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TRANSAMERICAN REFINING CORPORATION
TABLE OF CONTENTS
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Page
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PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheet as of April 30, 1998 and January 31, 1998............................. 2
Condensed Statement of Operations for the three months ended April 30, 1998 and 1997.......... 3
Condensed Statement of Cash Flows for the three months ended April 30, 1998 and 1997.......... 4
Notes to Condensed Financial Statements....................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 16
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 17
Item 2. Changes in Securities and Use of Proceeds....................................................... 17
Item 6. Exhibits and Reports on Form 8-K................................................................ 17
Signatures................................................................................................. 18
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TRANSAMERICAN REFINING CORPORATION
CONDENSED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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APRIL 30, JANUARY 31,
1998 1998
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ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 20,220 $ 10,021
Restricted cash held in disbursement accounts ......................... 50,478 71,563
Cash restricted for interest .......................................... 36,680 32,823
Investments held in trust ............................................. 9,426 9,114
Accounts receivable ................................................... 1,200 870
Other ................................................................. 1,409 1,346
----------- -----------
Total current assets .............................................. 119,413 125,737
----------- -----------
Property and equipment .................................................... 1,144,969 939,780
Less accumulated depreciation and amortization ............................ 27,931 25,257
----------- -----------
Net property and equipment ........................................ 1,117,038 914,523
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Restricted cash held in disbursement accounts ............................. -- 60,166
Cash restricted for interest .............................................. 19,175 16,348
Investments held in trust ................................................. -- 8,591
Receivable from affiliates ................................................ 1,778 1,655
Other assets, net ......................................................... 64,729 68,429
----------- -----------
$ 1,322,133 $ 1,195,449
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ...................................................... $ 47,098 $ 32,022
Payable to affiliates ................................................. 6,039 6,976
Accrued liabilities ................................................... 20,218 9,528
Current maturities of long-term debt .................................. 7,776 6,710
----------- -----------
Total current liabilities ......................................... 81,131 55,236
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Payable to affiliates ..................................................... 4,315 3,825
Long-term debt, less current maturities ................................... 227,218 210,666
Notes payable to affiliate ................................................ 787,833 760,266
Other ..................................................................... 4,964 5,048
Commitments and contingencies (Note 5) .................................... -- --
Stockholder's equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
30,000,000 shares issued and outstanding ............................ 300 300
Additional paid-in capital ............................................ 512,689 439,566
Accumulated deficit ................................................... (296,317) (279,458)
----------- -----------
Total stockholder's equity ........................................ 216,672 160,408
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$ 1,322,133 $ 1,195,449
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</TABLE>
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED
APRIL 30,
----------------------
1998 1997
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Revenues:
Other ........................................ $ 2,007 $ --
-------- --------
Total revenues ........................... 2,007 --
-------- --------
Costs and expenses:
Processing arrangements, net ................. -- (175)
Operations and maintenance ................... 2,852 3,613
Depreciation and amortization ................ 2,674 1,711
General and administrative ................... 6,102 2,725
Taxes other than income taxes ................ 1,001 903
Loss on purchase commitments ................. -- 5,090
-------- --------
Total costs and expenses ................. 12,629 13,867
-------- --------
Operating loss ........................... (10,622) (13,867)
-------- --------
Other income (expense):
Interest income .............................. 2,260 127
Interest expense, net ........................ (6,974) (3,296)
Equity in net loss of TransTexas ............. (229) (2,050)
Other ........................................ -- 39
-------- --------
Total other income (expense) ............. (4,943) (5,180)
-------- --------
Net loss before extraordinary item ....... (15,565) (19,047)
Extraordinary item:
Loss on the early extinguishment of debt ..... (1,294) --
-------- --------
Net loss ................................. $(16,859) $(19,047)
======== ========
Basic and diluted net loss per share:
Loss before extraordinary item ............... $ (0.52) $ (0.63)
Extraordinary item ........................... (0.04) --
-------- --------
$ (0.56) $ (0.63)
======== ========
Weighted average number of common shares
outstanding for basic and diluted
net loss per share (thousands) ............... 30,000 30,000
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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TRANSAMERICAN REFINING CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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THREE MONTHS ENDED
APRIL 30,
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1998 1997
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Operating activities:
Net loss .................................................................. $ (16,859) $ (19,047)
Adjustments to reconcile net loss to net cash used by operating activities:
Loss on early extinguishment of debt ................................... 1,294 --
Depreciation and amortization .......................................... 2,674 1,711
Amortization of discount on long-term debt ............................. 5,101 --
Amortization of debt issue costs ....................................... 216 287
Equity in net loss of TransTexas ....................................... 229 2,050
Changes in assets and liabilities:
Accounts receivable .................................................. (330) --
Other current assets ................................................. (63) 206
Accounts payable ..................................................... 755 278
Payable to affiliates, net ........................................... (570) 3,277
Accrued liabilities .................................................. 10,747 (951)
Other assets ......................................................... (317) 283
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Net cash provided (used) by operating activities ............. 2,877 (11,906)
--------- ---------
Investing activities:
Capital expenditures ...................................................... (165,104) (18,844)
Prepaid capital expenditures .............................................. 1,537 --
Increase in investments held in trust ..................................... (160) --
Decrease in investments held in trust ..................................... 8,439 --
--------- ---------
Net cash used by investing activities ......................... (155,288) (18,844)
--------- ---------
Financing activities:
Issuance of long-term debt ................................................ 26,625 36,000
Retirement of long-term debt .............................................. (7,792) --
Increase in debt proceeds held in disbursement accounts ................... -- (34,920)
Withdrawals from disbursement accounts .................................... 81,251 20,883
Increase in cash restricted for interest .................................. (6,684) --
Repayment of advances and notes payable to affiliate ...................... (1,646) --
Capital contributions from parent ......................................... 72,145 --
Advances from affiliate ................................................... -- 12,003
Debt issue costs .......................................................... (1,148) (2,303)
Principal payments on capital lease obligations ........................... (141) (219)
--------- ---------
Net cash provided by financing activities .................... 162,610 31,444
--------- ---------
Increase in cash and cash equivalents ........................ 10,199 694
Beginning cash and cash equivalents .......................................... 10,021 613
--------- ---------
Ending cash and cash equivalents ............................................. $ 20,220 $ 1,307
========= =========
Noncash financing and investing activities:
Accounts payable for property and equipment ............................... $ 38,535 $ 11,609
Accretion on long-term debt capitalized in property and equipment ......... 25,764 13,908
</TABLE>
See accompanying notes to condensed financial statements.
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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" or the
"Company") as of April 30, 1998 and the results of its operations and cash flows
for the interim periods ended April 30, 1998 and 1997. 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, 1998. Unless otherwise noted, 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, 1998. TARC is a subsidiary of TransAmerican Energy
Corporation ("TEC"), which is a wholly owned subsidiary of TransAmerican Natural
Gas Corporation ("TransAmerican"). TransTexas Gas Corporation ("TransTexas") is
a subsidiary of TEC.
Weighted average shares outstanding exclude potential common shares of
approximately 2,686,000 and 7,458,000 for the three months ended April 30, 1998
and 1997, respectively.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") 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
was adopted by TARC effective February 1, 1998. The adoption of this statement
did not have a material impact on TARC's financial statements.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start Up Activities,"
("SOP 98-5") which provides guidance on the financial reporting of start-up
costs and organization costs. This statement of position was adopted by TARC
effective February 1, 1998. Implementation of the statement requires start-up
activities, such as those related to the Capital Improvement Program, to be
expensed as incurred. The adoption of this statement did not have a material
impact on TARC's financial statements for the three months ended April 30, 1998.
2. 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 its
refining margins by converting low-cost, heavy, sour crude oils into light
petroleum products including primarily gasoline and heating oil.
In February 1995, TARC began a construction and expansion program (the
"1995 Program") designed to reactivate the refinery and increase its complexity.
From February 1995 through May 1997, TARC spent approximately $251 million on
the 1995 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 for its completion.
In June 1997, in connection with the TEC Notes Offering, the TARC
Intercompany Loan and the TARC Notes Tender Offer, TARC 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) converting the visbreaker unit into a delayed coking unit to
process vacuum tower bottoms into lighter petroleum products, (ii) modernizing
and upgrading 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
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
units to increase sour crude processing capacity. In addition, TARC is in the
process of expanding, modifying and adding 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 is acting as
general contractor, but has engaged a number of specialty consultants and
engineering and construction firms to assist it 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 is being executed in two phases. Phase I
of the Capital Improvement Program includes the completion and start-up of
several units, including the Delayed Coking Unit, one of the refinery's major
conversion units. 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. In June
1997, TARC estimated that Phase I would be completed at a cost of $223 million,
would be tested and operational by September 30, 1998 and would result in the
refinery having the capacity to process up to 200,000 Bpd of sour crude oil. In
June 1997, TARC estimated that Phase II would be completed at a cost of $204
million and would be tested and operational by July 31, 1999. TARC's current
estimates indicate that actual expenditures will exceed the budget by as much
as $45 million (of which $36 million is allocated to Phase I). Although there
can be no assurance, TARC believes that cash available in the TARC Disbursement
Account is sufficient to fund the projected remaining costs of Phase I and that
cash available in the TARC Disbursement Account, other cash on hand and
anticipated cash flow from operations of certain Phase I units will be
sufficient to fund the projected remaining costs of Phase II. TARC believes that
both Phase I and Phase II will be completed in advance of the Phase I
completion date required by the TEC Notes Indenture. TARC anticipates
Mechanical Completion of the Delayed Coking Unit, the HDS Unit and the related
portion of the Sulfur Recovery System in June 1998. Upon Mechanical Completion
of these units, TARC will be able to purchase feedstocks using funds in the
TARC Disbursement Account reserved for such purpose. TARC believes that the
remainder of Phase I (other than the No. 2 Reformer) will reach Mechanical
Completion during the second quarter of fiscal 1999. TARC intends to defer
additional expenditures on the No. 2 Reformer until the fourth quarter of
fiscal 1999. TARC spent approximately $359.6 million on the Capital Improvement
Program during the period between June 1997 and April 30, 1998. As of April 30,
1998, TARC had commitments to spend another $10.4 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.
TARC believes, based on current estimates of refining margins and 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. 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.
TARC has previously incurred losses and negative cash flow from operations
as a result of limited refinery operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements (including debt
service) and losses on refined product sales and processing arrangements. There
is no assurance that TARC can complete the Capital Improvement Program, fund its
future working capital requirements or achieve positive cash flow from
operations. As a result, there is substantial doubt about TARC's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
3. DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement dated June 13, 1997, as amended
December 30, 1997 (the "Disbursement Agreement") among TARC, TEC, Firstar Bank
of Minnesota, N.A., as trustee (the "TEC Indenture Trustee"), Firstar Bank of
Minnesota, N.A., 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 (collectively, the "TARC Disbursement Account") to be held and invested
by the Disbursement Agent until disbursed. In addition, proceeds to TEC and TARC
of approximately $201 million from the TransTexas share repurchase program were
deposited in the TARC Disbursement Account. On December 30, 1997, TARC deposited
$119 million of the net proceeds from the issuance of its Series A Senior
Subordinated Notes into the TARC Disbursement Account for use in the Capital
Improvement Program. All funds in the TARC Disbursement Account are pledged as
security for the repayment of the TEC Notes. TEC disbursements for TARC
expenditures are treated as capital contributions.
The Disbursement Agent makes disbursements for the Capital Improvement
Program out of the TARC 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. Disbursements from
the TARC Disbursement Account are generally restricted to reimbursement for
expenses incurred in connection with the Capital Improvement Program.
Disbursements for general and administrative expenses ($1.5 million monthly)
and, upon Mechanical Completion of certain units, for feedstock purchases (up to
a maximum aggregate of $50 million) are also permitted. Interest income from the
TARC Disbursement Account may be used for the Capital Improvement Program or
disbursed to fund administrative and other costs of TARC and TEC. As of April
30, 1998, $374 million had been disbursed to TARC out of the TARC Disbursement
Account for use in the Capital Improvement Program and $18 million for general
and administrative expenses. In addition, special disbursements have been made
in the amounts of $7 million to pay accounts payable and $19 million for
payments of interest on, and the redemption, repurchase and defeasance of the
TARC Notes.
4. LONG-TERM DEBT
On January 14, 1998, TARC called for redemption on February 17, 1998
approximately $7 million in aggregate principal amount of TARC Notes pursuant to
the terms of the indenture governing the TARC Notes. On January 16, 1998, TARC
deposited pursuant to an irrevocable trust agreement approximately $9.8 million
for defeasance of the remaining TARC Notes outstanding after the redemption. The
deposited funds are sufficient to pay the principal of the remaining TARC Notes
and interest thereon from the date of deposit to and including the final
redemption date of February 15, 1999, as well as a call premium of 6%. As of
April 30, 1998, TARC Mortgage Notes and TARC Discount Notes with an aggregate
carrying value of approximately $7.8 million remained outstanding.
On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of its 16% Series C
Senior Subordinated Notes due 2003 (the "Series C Notes") and 25,000 warrants
(the "March 1998 Warrants") to purchase 333,606 shares of TARC common stock.
Interest on the Series C Notes is payable semi-annually on June 30 and December
30, commencing June 30, 1998. Net proceeds to TARC, after deducting fees and
expenses of approximately $1.2 million, were approximately $26.2 million. Net
proceeds of approximately $2.8 million from the sale of the Units were allocated
to the March 1998 Warrants. TARC deposited $6.0 million into an interest reserve
account for interest payments on the Series C Notes through June 30, 1999. The
remaining $20.2 million of net proceeds has been or will be used for general
corporate purposes.
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
EEOC. On September 30, 1997, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Determination (the "Determination") as a result of
the Commissioner's Charge that had been filed in August 1995 against TARC and
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors")
pursuant to Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. ss.
2000e et seq. ("Title VII"). In the Determination, the EEOC stated that it found
reasonable cause to believe that each of TARC and Southeast Contractors had
discriminated based on race and gender in its hiring and promotion practices.
Each violation of Title VII (for each individual allegedly aggrieved), if
proven, potentially could subject TARC and Southeast Contractors to liability
for (i) monetary damages for backpay and front pay in an undetermined amount,
and for compensatory damages and punitive damages in an amount not to exceed
$300,000 per plaintiff, (ii) injunctive relief, (iii) attorney's fees, and (iv)
interest. During the period covered by the Commissioner's Charge and the
Determination, TARC and Southeast Contractors estimate that they received a
combined total of approximately 23,000 to 30,000 employment applications and
hired (or rehired) a combined total of approximately 3,400 to 4,100 workers,
although the total number of individuals who ultimately are covered in any
conciliation proposal or any subsequent lawsuit may be higher. TARC and
Southeast Contractors deny
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
engaging in any unlawful employment practices. TARC and Southeast Contractors
intend vigorously to defend against the allegations contained in the
Commissioner's Charge and the findings set forth in the Determination in any
proceedings in state or federal court. If TARC or Southeast Contractors is
found liable for violations of Title VII based on the matters asserted in the
Determination, TARC can make no assurance that such liability would not have a
material adverse effect on its financial position, results of operations or
cash flows.
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. However, TARC has not yet been served in the case. If
TARC is served, it will defend the case vigorously.
GENERAL. The litigation matters discussed above amount to significant
potential liability which, if adjudicated in a manner adverse to TARC in one
reporting period, could have a material adverse effect on TARC's financial
position, results of operations or cash flow for that period. TARC is also a
named defendant in other ordinary course, routine litigation incidental to its
business. Although the outcome of these 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 now, and has included
in the Capital Improvement Program sufficient capital additions to remain, in
substantial compliance with applicable Pollution Control Laws. However,
Pollution Control Laws that may be enacted in the future, as well as
increasingly strict enforcement of existing Pollution Control Laws, may require
TARC to make additional 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. However, there is no assurance that TARC will remain in compliance with
environmental regulations.
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 exceptions, 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 financial
position, results of operations or cash flow.
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TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
In September 1997, TARC purchased a tank storage facility located adjacent
to the refinery for a cash purchase price of $40 million (which does not include
a $3.1 million liability recorded for environmental remediation, as discussed
below). Environmental investigations conducted by the previous owner of the
facilities have indicated soil and groundwater contamination in several areas on
the property. As a result, the former owner submitted to the Louisiana
Department of Environmental Quality (the "LDEQ") plans for the remediation of
any significant indicated contamination in such areas. TARC has analyzed these
investigations and has carried out further Phase II Environmental Assessments to
verify their results. TARC intends to incorporate any required remediation into
its ongoing work at the refinery. In connection with the purchase of the
facilities, TARC agreed to indemnify the seller for all cleanup costs and
certain other damages resulting from contamination of the property, and created
a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessment, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination; however, because the LDEQ has not yet approved certain of the
remediation plans, there can be no assurance that the funds set aside in the
escrow account will be sufficient to pay all required remediation costs. As of
April 30, 1998, TARC has recognized a liability of $3.1 million for this
contingency.
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. TARC
believes that compliance with the Benzene Waste 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.
In addition, the EPA promulgated National Emission Standards for Hazardous
Air Pollutants for Hazardous Organics (the "Hazardous Organic 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
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 has 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 these regulations, only reformulated
gasoline can be sold in certain domestic geographic areas in which the EPA has
mandated or approved its use. Reformulated gasoline must contain a minimum
amount of oxygen, have a lower vapor pressure, and have reduced sulfur, olefins,
benzene and aromatics compared to the average 1990 gasoline. The EPA recently
promulgated final National Ambient Air Quality Standards ("NAAQS") that revise
the standards for particulate matter and ozone. The number and extent of the
areas subject to reformulated gasoline standards may increase in the future
after the NAAQS 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
9
<PAGE> 11
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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
regulatory relief. TARC will continue to pursue regulatory relief with the EPA.
However, there can be no assurance that regulatory relief will be granted. There
can be no assurance that any action taken by the EPA will not have a material
adverse effect on TARC's future financial position, results of operations or
cash flow.
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 Title V Operating Permit is necessary for TARC to
produce at projected levels upon completion of the Capital Improvement Program.
TARC has submitted its Title V Operating Permit Application covering the
refinery and the adjacent tank storage facility. TARC believes that its
application will be approved. However, there can be no assurance that it will be
approved as submitted or 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.
CLEANUP MATTERS. TARC also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of clean up
related 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 the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. In July 1996, the EPA and the 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 investigations. TARC, under a voluntary
initiative approved by the LDEQ, submitted a work plan to the LDEQ to determine
which areas may require further investigation and remediation. TARC submitted
further information in January 1998 which was requested by the LDEQ. Based on
the workplan submitted and additional requests by the LDEQ, TARC believes that
any further action will not have a material adverse effect on its financial
position, results of operations or cash flow.
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
10
<PAGE> 12
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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
with the EPA in this regard 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 or other
actions brought pursuant or relating 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 believes that its ultimate environmental liabilities will not be
significant; however, it is not possible to determine the ultimate environmental
liabilities, if any, that may arise from the matters discussed above.
PURCHASE COMMITMENTS
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, 1998, TARC had commitments for refinery construction
and maintenance of approximately $10.4 million. TARC is acting as general
contractor and can generally cancel or postpone capital projects.
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 from 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 April 30, 1998, TARC was storing approximately 0.7
million barrels of feedstock and intermediate or refined products pursuant to
this processing agreement. Included in the 0.7 million barrels of product
stored at the refinery as of April 30, 1998, are approximately 0.6 million
barrels of feedstock owned by a third party related to a purchase commitment
entered into in April 1997. For the three months ended April 30, 1998, TARC
incurred no income or loss related to this purchase commitment compared to a
$5.1 million loss for the three months ended April 30, 1997. During June 1998,
TARC completed processing these barrels pursuant to the processing agreement
described above. TARC expects to incur additional losses on this purchase
commitment in the second quarter of fiscal 1999.
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
11
<PAGE> 13
TRANSAMERICAN REFINING CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
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 (or his heirs, his
estate or any trust in which he or his immediate family members have, directly
or indirectly, a beneficial interest in excess of 50%) 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.
In the event of a change of control under the TEC Notes Indenture, there can be
no assurance that TransTexas or TARC will have sufficient funds to satisfy any
such payment obligations. A change of control or other event that results in
deconsolidation of TransTexas and TransAmerican for federal income tax purposes
could result in acceleration of a substantial amount of federal income taxes.
6. TRANSACTIONS WITH AFFILIATES
Southeast Contractors, a subsidiary of TransAmerican, provides
construction personnel to TARC in connection with the Capital Improvement
Program. These construction workers are temporary employees, and the number and
composition of the workforce will vary throughout the Capital Improvement
Program. Southeast Contractors charges TARC for the direct costs it incurs
(which consist solely of employee payroll and benefits) plus administrative
costs and fees of up to $2.0 million per year. Total labor costs charged by
Southeast Contractors for the three months ended April 30, 1998 and 1997 were
$37.5 million and $2.2 million, respectively, of which $5.1 million and $2.0
million were payable at April 30, 1998 and January 31, 1998, respectively.
On June 13, 1997, the Company entered into a services agreement with
TransAmerican, TransTexas and TEC. Under the agreement, TransTexas provides
accounting, legal, administrative and other services to TARC, TEC and
TransAmerican and its affiliates. TransAmerican provides 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. During the three months ended April 30, 1998, TARC recognized
$1.5 million in service agreement expense, of which $0.3 million and $2.2
million was payable to TransTexas and TransAmerican, respectively, as of April
30, 1998.
During the year ended January 31, 1998, TEC made advances to TARC pursuant
to a promissory note due June 14, 2002 which bears interest in an amount equal
to a fixed semi-annual interest payment of $2.8 million, prorated based on the
average outstanding balance of TARC's note to TEC and the average outstanding
balance of all notes between TransTexas and TEC. Interest payments are due and
payable each June 15 and December 15. During the three months ended April 30,
1998, TARC repaid $1.6 million of the advances to TEC. As of April 30, 1998, the
principal amount payable by TARC to TEC pursuant to the note was $13.4 million.
During the three months ended April 30, 1998, TEC contributed $4.5 million
to TARC for general corporate purposes and $67.6 million for use in the Capital
Improvement Program pursuant to the Disbursement Agreement.
In April 1998, TARC distributed all of its shares of TransTexas common
stock to TEC, resulting in a charge to additional paid-in capital of $1.8
million.
12
<PAGE> 14
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. The No. 2 Vacuum Unit was operated
intermittently between March 1994 and January 1997. TARC did not operate the No.
2 Vacuum Unit during the three months ended April 30, 1998. 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.
TARC believes, based on current estimates of refining margins and 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. 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.
THREE MONTHS ENDED APRIL 30, 1998, COMPARED WITH THE THREE MONTHS ENDED
APRIL 30, 1997
TARC's revenues for the three months ended April 30, 1998 consisted
primarily of rental income from TARC's tank storage facility acquired in
September 1997.
Operations and maintenance expense for the three months ended April 30,
1998 decreased to $2.9 million from $3.6 million for the same period in 1997,
primarily due to lower tank rental expense.
Depreciation and amortization expense for the three months ended April 30,
1998 increased to $2.7 million from $1.7 million for the same period in 1997,
primarily due to depreciation related to the tank storage facility acquired in
September 1997.
General and administrative expenses for the three months ended April 30,
1998 increased to $6.1 million from $2.7 million for the same period in 1997.
The increase was primarily due to increased salary expense resulting from
additional personnel added in anticipation of starting up refinery operations,
fees related to the services agreement entered into among TransAmerican, TEC,
TARC and TransTexas and increased professional fees.
Taxes other than income taxes for the three months ended April 30, 1998
increased to $1.0 million from $0.9 million for the same period in 1997,
primarily due to increased franchise tax expense.
TARC incurred no income or loss on purchase commitments for the three
months ended April 30, 1998 compared to a $5.1 million loss on purchase
commitments for the same period in 1997.
13
<PAGE> 15
Interest income for the three months April 30, 1998 increased to $2.3
million from $0.1 million for the same period in 1997, primarily due to the
investment of proceeds from the TARC Intercompany Loan and Senior Subordinated
Notes. Interest expense, net for the three months ended April 30, 1998 increased
to $7.0 million from $3.3 million for the same period in 1997, due primarily to
interest on the TARC Intercompany Loan and Senior Subordinated Notes. During the
three months ended April 30, 1998, TARC capitalized approximately $33.7 million
of interest related to property and equipment additions at TARC's refinery
compared to $18.8 million for the three months ended April 30, 1997.
The equity in loss of TransTexas for the three months ended April 30, 1998
and 1997 of $(0.2) million and $(2.1) million, respectively, reflects TARC's
equity interest in TransTexas. In April 1998, TARC distributed all of its shares
of TransTexas common stock to TEC.
The loss on the early extinguishment of debt of $1.3 million for the three
months ended April 30, 1998 is a result of the redemption of $7.0 million of
TARC Notes in February 1998.
LIQUIDITY AND CAPITAL RESOURCES
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 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.
TARC expects to commence the staged start-up of the No. 2 Vacuum Unit, the
No. 2 Crude Unit and the Delayed Coking Unit in June and July 1998. Upon
Mechanical Completion of the Delayed Coking Unit and related facilities
(expected in mid- to late June), TARC will have access to funds in the
Disbursement Account reserved for feedstock purchases. Because efficient
start-up will require feedstocks prior to Mechanical Completion of the Delayed
Coking Unit, TARC has purchased approximately 1.35 million barrels of feedstocks
financed by cash-backed letters of credit and letters of credit supported by the
credit of a third party. Under the third-party arrangement, if TARC is unable to
obtain feedstock disbursements from the TARC Disbursement Account prior to a
draw under the letters of credit, the third party will take title to the
feedstock and TARC will be required to buy the feedstock from the third party
at a price equal to the purchase price plus interest at a rate of 15% per annum.
TARC estimates that capital expenditures for the Capital Improvement
Program will be $256 million during the fiscal year ending January 31, 1999.
TARC currently estimates that Capital Improvement Program costs may increase by
as much as $45 million over the $427 million originally estimated. Although
there can be no assurance, TARC believes that it will have cash sufficient to
fund the remaining construction. See Note 2 of Notes to Condensed Financial
Statements. If engineering problems, further 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. TARC has historically incurred losses
and negative cash flow from operating activities as a result of limited refinery
operations that did not cover the fixed costs of maintaining the refinery,
increased working capital requirements (including debt service) and losses on
refined product sales and processing arrangements. There is no assurance that
TARC can complete the Capital Improvement Program, fund its future working
capital requirements or achieve positive cash flow from operations. As a result,
there is substantial doubt about TARC's ability to continue as a going concern.
The condensed financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As of April 30, 1998, TARC and TEC had deposited an aggregate of $529
million into accounts (collectively, the "TARC Disbursement Account") from which
disbursements are made pursuant to a disbursement agreement, as amended (the
"Disbursement Agreement") among TARC, TEC, Firstar Bank of Minnesota, N.A., as
trustee (the "TEC Indenture Trustee") under the indenture governing the TEC
Notes (the "TEC Notes Indenture"), Firstar Bank of Minnesota, N. A., as
Disbursement Agent, and Baker & O'Brien, Inc., as Construction Supervisor. See
Note 3 of Notes to Condensed Financial Statements. Of these funds, $427 million
was designated for the Capital Improvement Program, approximately $25.5 million
was designated for general and administrative expenses, $7 million was
designated for outstanding accounts payable, $50 million was designated for
working capital upon completion of the Delayed Coking Unit and certain
supporting units and $19 million was designated for the payment of interest on,
or the redemption, purchase, defeasance or other retirement of, the outstanding
TARC Notes. There is no assurance that the funds deposited in the TARC
Disbursement Account will be adequate for their designated purposes. As of April
30, 1998, $374 million had been disbursed to TARC out of the TARC Disbursement
Account for use in the Capital Improvement Program, $18 million for general and
administrative expenses $7 million for accounts payable and $19 million for the
payment of interest on, and the redemption, repurchase and defeasance of the
TARC Notes.
On January 14, 1998, TARC called for redemption on February 17, 1998
approximately $7 million in aggregate principal amount of TARC Notes pursuant to
the terms of the indenture governing the TARC Notes. On January 16, 1998, TARC
deposited pursuant to an irrevocable trust agreement approximately $9.8 million
for defeasance of the
14
<PAGE> 16
remaining TARC Notes outstanding after the redemption. The deposited funds are
sufficient to pay the principal of the remaining TARC Notes and interest thereon
from the date of deposit to and including the final redemption date of February
15, 1999, as well as a call premium of 6%. As of April 30, 1998, TARC Mortgage
Notes and TARC Discount Notes with an aggregate carrying value of approximately
$7.8 million remained outstanding.
On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of its 16% Series C
Senior Subordinated Notes due 2003 (the "Series C Notes") and 25,000 warrants
(the "March 1998 Warrants") to purchase 333,606 shares of TARC common stock. Net
proceeds to TARC, after deducting fees and expenses of approximately $1.2
million, were approximately $26.2 million. Net proceeds of approximately $2.8
million from the sale of the Units were allocated to the March 1998 Warrants.
TARC deposited $6.0 million into an interest reserve account for interest
payments on the Series C Notes through June 30, 1999. The remaining $20.2
million of net proceeds has been or will be used for general corporate purposes.
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 from 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 April 30, 1998, TARC was storing approximately 0.7
million barrels of feedstock and intermediate or refined products pursuant to
this processing agreement. Included in the 0.7 million barrels of product stored
at the refinery as of April 30, 1998, are approximately 0.6 million barrels of
feedstock owned by a third party related to a purchase commitment entered into
in April 1997. For the three months ended April 30, 1998, TARC incurred no
income or loss related to this purchase commitment compared to a $5.1 million
loss for the three months ended April 30, 1997. During June 1998, TARC completed
processing these barrels pursuant to the processing agreement described above.
TARC expects to incur additional losses on this purchase commitment in the
second quarter of fiscal 1999.
During the year ended January 31, 1998, TEC made advances to TARC pursuant
to a promissory note due June 14, 2002 which bears interest in an amount equal
to a fixed semi-annual interest payment of $2.8 million, prorated based on the
average outstanding balance of TARC's note to TEC and the average outstanding
balance of all notes between TransTexas and TEC. Interest payments are due and
payable each June 15 and December 15. During the three months ended April 30,
1998, TARC repaid $1.6 million of the advances to TEC. As of April 30, 1998, the
principal amount payable by TARC to TEC pursuant to the note was $13.4 million.
During the three months ended April 30, 1998, TEC contributed $4.5 million
to TARC for general corporate purposes and $67.6 million for use in the Capital
Improvement Program pursuant to the Disbursement Agreement.
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 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 financial condition, results of
operations or cash flow. TARC also has contingent liabilities with respect to
certain legal proceedings as more fully described in Note 5 of Notes to
Condensed Financial Statements.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue relates to computer programs or computer equipment
designed to use two digits rather than four digits to define the applicable
year. As a result, computer systems with time-sensitive software may not
accurately calculate, store or use a date subsequent to December 31, 1999. This
could result in system failures or miscalculations and disruptions of
operations, including among other things, a temporary inability to process
transactions or engage in other normal business activities.
In June 1997, management began a company-wide program to prepare its
computer systems for year 2000 compliance. In January 1998, TARC began
implementation of new client/server based systems which are anticipated to be
completed by January 1999. TARC estimates the cost of upgrading its computer
systems to be approximately $2 million. There can be no assurance that TARC will
timely complete the implementation of the new systems.
15
<PAGE> 17
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.
16
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 5 of Notes to Condensed Financial Statements for a discussion
of TARC's legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 17, 1998, the TARC Notes were defeased pursuant to the
indenture governing such notes. As a result of the defeasance, the collateral
securing repayment of the TARC Notes was released.
On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of its 16% Series C
Senior Subordinated Notes due 2003 (the "Series C Notes") and 25,000 warrants
(the "March 1998 Warrants" and, together with the December 1997 Warrants, the
"Warrants") to purchase an aggregate of 333,606 shares of TARC common stock.
Each Warrant is exercisable on or after December 30, 1998 to purchase 13.344257
shares of TARC's common stock at an exercise price of $0.01 per share. Net
proceeds to TARC, after deducting fees and expenses of approximately $1.2
million, were approximately $26.2 million. Net proceeds of approximately $2.8
million from the sale of the Units was allocated to the March 1998 Warrants. The
Units were sold to Jefferies & Company, Inc., as initial purchaser, and were
offered and sold to qualified institutional buyers in reliance on Rule 144A
under the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended April
30, 1998.
17
<PAGE> 19
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 15, 1998 By: /s/ R. GLENN MCGINNIS
------------------------------------------
R. Glenn McGinnis, Chief Executive Officer
June 15, 1998 By: /s/ ED DONAHUE
------------------------------------------
Ed Donahue, Vice President and Secretary
(Principal Financial and Accounting Officer)
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
27.1 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AT APRIL 30, 1998 AND THE UNAUDITED CONDENSED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 107,378
<SECURITIES> 0
<RECEIVABLES> 1,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 119,413
<PP&E> 1,144,969
<DEPRECIATION> 27,931
<TOTAL-ASSETS> 1,322,133
<CURRENT-LIABILITIES> 81,131
<BONDS> 1,015,051
0
0
<COMMON> 300
<OTHER-SE> 216,672
<TOTAL-LIABILITY-AND-EQUITY> 1,322,133
<SALES> 0
<TOTAL-REVENUES> 2,007
<CGS> 0
<TOTAL-COSTS> 12,629
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,974
<INCOME-PRETAX> (15,565)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,565)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,294)
<CHANGES> 0
<NET-INCOME> (16,859)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
