TRANSAMERICAN ENERGY CORP, 10-Q, 1996-06-14

TRANSAMERICAN ENERGY CORP
10-Q, 1996-06-14
PETROLEUM REFINING

Previous: TRANSAMERICAN REFINING CORP, 10-Q, 1996-06-14

Next: BABY SUPERSTORE INC, 10-Q, 1996-06-14

<PAGE>

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

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, 1996

Registration Number 33-85930

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

TRANSAMERICAN ENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<CAPTION>
DELAWARE 76-0441642
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

77032
1300 EAST NORTH BELT
SUITE 200
HOUSTON, TEXAS
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICER)

(713) 986-8822
(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
14, 1996 was 9,000.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
PART I.

FINANCIAL INFORMATION

<S> <C>
Introduction.............................................................
Item 1. Financial Statements.............................................
Condensed Consolidated Balance Sheet as of April 30, 1996 and January
31, 1996............................................................ 2
Condensed Consolidated Statement of Operations for the three months
ended April 30, 1996 and 1995....................................... 3
Condensed Consolidated Statement of Cash Flows for the three months
ended April 30, 1996 and 1995....................................... 4
Notes to Condensed Consolidated Financial Statements................. 5-22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 23-32

PART II.

OTHER INFORMATION

Item 1................................................................... 33
Item 5................................................................... 33-35
Item 6................................................................... 35
Signatures............................................................... 36
Index to Exhibits........................................................ 37
</TABLE>

1
<PAGE>

PART 1--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRANSAMERICAN ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1996 1996
---------- -----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 14,057 $ 14,114
Interest reserve account--TransTexas................ 46,000 46,000
Long-term debt proceeds held in collateral account--
TARC............................................... 12,075 14,840
Accounts receivable................................. 31,805 36,372
Receivable from affiliates.......................... 3,327 3,000
Inventories......................................... 37,998 48,652
Other current assets (Note 3)....................... 57,236 56,300
---------- -----------
Total current assets.............................. 202,498 219,278
---------- -----------
Property and equipment................................ 2,578,237 2,438,926
Less accumulated depreciation, depletion and
amortization......................................... 1,337,530 1,302,972
---------- -----------
Net property and equipment--based on the full cost
method of accounting for gas and oil properties of
which $141,944 and $136,360 was excluded from
amortization at April 30, 1996 and January 31,
1996, respectively................................. 1,240,707 1,135,954
---------- -----------
Long-term debt proceeds held in collateral account--
TARC................................................. 4,946 9,565
Due from affiliates................................... 27,825 26,846
Other assets, net..................................... 65,536 64,779
---------- -----------
$1,541,512 $1,456,422
========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt................ $ 4,311 $ 1,335
Accounts payable.................................... 74,946 63,302
Payable to affiliate................................ 1,034 2,260
Product financing arangements....................... 26,184 37,206
Accrued liabilities................................. 126,316 89,316
---------- -----------
Total current liabilities......................... 232,791 193,419
---------- -----------
Due to affiliates..................................... 10,263 18,992
Long-term debt, less current maturities............... 1,137,067 1,119,079
Revolving credit agreement............................ 20,684 20,365
Production payment.................................... 21,613 31,036
Deferred revenue...................................... 41,512 32,850
Deferred income taxes................................. 41,882 40,256
Other liabilities..................................... 36,691 36,358
Redeemable preferred stock $0.01 par value, 10,000
shares authorized; Series A--1,000 shares issued and
outstanding.......................................... 96 96
Commitments and contingencies (Note 2)................ -- --
Stockholders' deficit:
Common stock, $0.01 par value, 100,000 shares
authorized; 9,000 shares issued and outstanding.... -- --
Additional paid-in capital.......................... 161,445 175,019
Accumulated deficit................................. (162,532) (211,048)
---------- -----------
Total stockholders' deficit....................... (1,087) (36,029)
---------- -----------
$1,541,512 $ 1,456,422
========== ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

2
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
-----------------
1996 1995
------- --------
<S> <C> <C>
Revenues:
Gas, condensate and natural gas liquids................... $79,508 $ 63,805
Transportation............................................ 8,195 8,890
Product sales............................................. 10,857 558
Gains on sale of assets................................... 7,762 --
Other..................................................... 199 56
------- --------
Total revenues.......................................... 106,521 73,309
------- --------
Costs and expenses:
Operating................................................. 43,580 21,234
Depreciation, depletion and amortization.................. 31,903 32,249
General and administrative................................ 9,641 6,755
Taxes other than income taxes............................. 5,583 3,891
------- --------
Total costs and expenses................................ 90,707 64,129
------- --------
Operating income........................................ 15,814 9,180
------- --------
Other income (expense):
Interest income........................................... 1,277 2,386
Interest expense, net..................................... (23,374) (19,957)
Gain on sale of TransTexas stock.......................... 56,162 --
Other..................................................... 263 (3,043)
------- --------
Total other income (expense)............................ 34,328 (20,614)
------- --------
Income (loss) before income taxes....................... 50,142 (11,434)
Income tax expense........................................ 1,626 1,919
------- --------
Net income (loss)....................................... $48,516 $(13,353)
======= ========
Net income (loss) per common share.......................... $ 5,391 $ (1,902)
======= ========
Weighted average number of shares outstanding............... 9,000 7,022
======= ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss)...................................... $ 48,516 $ (13,353)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation, depletion and amortization.............. 31,904 32,435
Amortization of discount on long-term debt............ -- 7,063
Amortization of debt issue costs...................... 1,018 1,406
Gains on sale of assets............................... (7,762) --
Gain on sale of TransTexas stock...................... (56,162)
Deferred income taxes................................. 1,626 898
Proceeds from volumetric production payment........... 15,537 --
Amortization of deferred revenue...................... (6,875) --
Changes in assets and liabilities:
Accounts receivable.................................. 4,358 (6,254)
Inventories.......................................... (368) (16,426)
Other current assets................................. 1,657 (1,202)
Accounts payable..................................... 9,165 (23,754)
Accrued liabilities.................................. 30,702 (30,647)
Payable to affiliates................................ (13,127) 11,045
Other assets......................................... (1,694) (1,537)
Other liabilities.................................... (726) 5,924
--------- ---------
Net cash provided (used) by operating activities... 57,769 (34,402)
--------- ---------
Investing activities:
Capital expenditures................................... (117,868) (80,664)
Proceeds from sales of assets.......................... 7,779 --
Production payment from affiliate...................... -- 3,547
--------- ---------
Net cash used by investing activities.............. (110,089) (77,117)
--------- ---------
Financing activities:
Issuance of long-term debt and warrants................ 10,000 300,750
Principal payments on long-term debt................... (723) (455)
Long-term debt proceeds held in collateral account..... (26,549) (174,742)
Withdrawals from collateral account.................... 33,933 --
Issuance of preferred stock............................ -- 97
Issuance of dollar-denominated production payment...... -- 49,500
Repayments of production payment....................... (8,097) (2,992)
Net proceeds from sale of TransTexas stock............. 42,607 --
Principal payments on capital lease obligations........ (245) --
Revolving credit agreement, net........................ 319 2,521
Dividend payment on preferred stock.................... (19) --
Advances from TransAmerican and affiliates to TARC..... 2,075 --
Repayment of advances from TransAmerican to TARC....... -- (41,282)
Debt issue costs....................................... (1,038) (21,324)
--------- ---------
Net cash provided by financing activities.......... 52,263 112,073
--------- ---------
Increase (decrease) in cash and cash equivalents... (57) 554
Beginning cash and cash equivalents...................... 14,114 865
--------- ---------
Ending cash and cash equivalents......................... $ 14,057 $ 1,419
========= =========
Noncash financing and investing activities:
Accounts payable for property and equipment............ $ 2,479 $ (6,406)
Product financing arrangements......................... (11,022) --
Interest accretion on notes and discount notes
capitalized in property and equipment................. $ 11,687 $ 3,714
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. GENERAL

Organization. TransAmerican Energy Corporation (the "Company") was formed on
July 12, 1994 to hold 55 million shares of common stock (74.3% of outstanding
shares) of TransTexas Gas Corporation ("TransTexas") and all of the
outstanding capital stock of TransAmerican Refining Corporation ("TARC").
TransAmerican contributed 55 million shares of TransTexas common stock and all
of the capital stock of TARC to the Company in connection with the public
offering of TARC's senior secured notes (the "TARC Notes"). The Company then
contributed 15 million of these shares (20.3% of the total outstanding) of
TransTexas common stock to TARC. In March 1996, TARC sold 4.55 million shares
(6.2% of the total outstanding) of TransTexas common stock in public
offerings. The condensed consolidated financial statements include the
financial statements of TransTexas and TARC on a wholly-owned basis. Once
TransTexas is in a positive equity position, 19.8% of the results of its
operations will be allocated to nonaffiliates.

The respective bond indenture agreements of TransTexas and TARC each contain
restrictions which generally prevent the Company from using the assets of one
entity to satisfy the liabilities of the other and limit transactions between
affiliates. Accordingly, the condensed consolidated financial statements
should be read in conjunction with the separate condensed financial statements
of TransTexas and TARC filed on their respective Form 10-Qs for the three
months ended April 30, 1996.

Below is selected financial information for each consolidated entity (in
millions of dollars):

<TABLE>
<CAPTION>
APRIL 30, 1996
--------------------------------------------
CONSOLIDATED
BALANCE SHEET DATA TARC TRANSTEXAS ENTRIES CONSOLIDATED
- ------------------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Working capital................... $(13.0) $ (17.9) $ 0.6 $ (30.3)
Total assets...................... 539.8 1,002.5 (0.8) 1,541.5
Long-term debt.................... 328.2 813.2 -- 1,141.4
Long-term payable to affiliates
(1).............................. 5.9 4.2 0.2 10.3
Stockholders' equity (deficit).... 118.6 (151.4) 31.7 (1.1)
<CAPTION>
THREE MONTHS ENDED APRIL 30, 1996
--------------------------------------------
OPERATIONS DATA
- ---------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 10.9 $ 95.9 $(0.3) $ 106.5
Operating income (loss)........... (9.9) 25.8 (0.1) 15.8
Net income (loss)................. 46.6 3.0 (1.1) 48.5
<CAPTION>
CASH FLOW DATA
- --------------
<S> <C> <C> <C> <C>
Operating activities.............. $ (9.2) $ 67.0 $ -- $ 57.8
Investing activities.............. (45.3) (64.8) -- (110.1)
Financing activities.............. 51.8 0.5 -- 52.3
</TABLE>
- --------
(1) Excludes deferred taxes of TransTexas for $41.9 million payable to
TransAmerican

Interim Financial Information. The condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring accruals,
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods. Interim results of operations are not
necessarily indicative of the results that may be expected for the year ending
January 31, 1997. The financial information presented herein should be read in
conjunction with the financial statements and notes included in the Company's
Transition Report on Form 10-K, for the Transition Period ended January 31,
1996.

5
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

Liquidity. A primary source of funds to meet TransTexas' debt service and
capital requirements is net cash flow provided by operating activities, which
is extremely sensitive to the prices TransTexas receives for its natural gas.
TransTexas has entered into hedge agreements to reduce its exposure to price
risk in the spot market for natural gas. However, a substantial portion of
TransTexas' production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development,
lease acquisitions, pipeline and other equipment additions. Since July 31,
1995, TransTexas has utilized asset sales and various financings, in addition
to cash flow from operating activities, to meet its working capital
requirements. TransTexas anticipates that it will utilize additional financing
or sales of assets to fund planned levels of operations through January 1997.
No assurance, however, can be given that TransTexas' cash flow from operating
activities will be sufficient to meet planned capital expenditures, contingent
liabilities, and debt service in the future.

Pursuant to the Indenture governing TransTexas' Senior Secured Notes (the
"TransTexas Indenture"), if TransTexas' Working Capital, as defined in the
TransTexas Indenture, is less than $20 million at the end of any fiscal
quarter, TransTexas' Capital Expenditures, as defined, for the next succeeding
fiscal quarter may not exceed 90% of TransTexas' Consolidated EBITDA, as
defined, for such prior fiscal quarter minus TransTexas' Consolidated Fixed
Charges, as defined, for such prior fiscal quarter (the "Capital Expenditure
Limit"). TransTexas' Working Capital at April 30, 1996 was less than $20
million. As a result, TransTexas' Capital Expenditures for the quarter ending
July 31, 1996 may not exceed the Capital Expenditure Limit. TransTexas
anticipates that such restriction will not have a material effect on
development drilling for the current fiscal quarter. In addition, the
TransTexas Indenture permits TransTexas to fund the drilling of up to 30 wells
in any fiscal year pursuant to third-party drilling programs. Any costs
associated with these wells would not be included in Capital Expenditures.

TARC is currently engaged in an expansion of its refinery (the "Capital
Improvement Program"). The current budget for the Capital Improvement Program
calls for total expenditures of $434 million. TARC estimates that expenditures
of between $146 million and $151 million in addition to the current budget
will be required to complete the Capital Improvement Program. A significant
portion of the additional expenditures will relate to the Delayed Coking Unit,
the FCC Unit and the offsite facilities. In connection with the issuance of
the TARC Notes, $173 million of the proceeds thereof were deposited into a
cash collateral account, designated for use in the Capital Improvement
Program. In March 1996, TARC sold 4.55 million shares of TransTexas common
stock and $26.6 million of the proceeds thereof were deposited in the cash
collateral account.

As of April 30, 1996, expenditures on the Capital Improvement Program funded
or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Approximately $17 million remained in the cash
collateral account as of April 30, 1996. Giving effect to current estimates,
additional funding of $374 million to $379 million will be required to
complete the Capital Improvement Program, of which approximately $41 million
is anticipated to be funded by the South Louisiana Port Commission ("Port
Commission" ) tax exempt bonds. Additional funds necessary to complete the
Capital Improvement Program may be provided from (i) the sale of additional
shares of TransTexas common stock held by TARC, (ii) the sale of common stock
of TARC, (iii) equity investments in TARC (including the sale of preferred
stock of TARC to the Company, funded by the sale of TransTexas common stock
held by the Company), (iv) capital contributions by TransAmerican, or (v)
other sources of financing, the access to which could require the consent of
the holders of the TARC Notes. TARC has entered into preliminary discussions
with potential third party investors, including strategic equity investors,
financial investors and foreign producers of crude oil. Sales of shares of
TransTexas common stock may result in deconsolidation of TransTexas from the
consolidated group for federal income tax purposes. There is no assurance that
sufficient funds will be available from these sources on a timely basis or
upon terms acceptable to TARC or TransAmerican. If this financing is not
available or if significant engineering problems, work stoppages or cost
overruns occur, TARC likely will not be able to complete and test

6
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
Phase I of the Capital Improvement Program by February 15, 1997. Even if
required financing is obtained on a timely basis, completion by February 15,
1997 will still prove very difficult if personnel shortages prevent full
staffing during peak construction periods. TARC has identified and is
considering certain steps to minimize the impact of potential construction
worker shortages, including the retention of field supervisors, direct hiring
of field supervisors and field labor by TARC's major contractors, use of
adding a second shift, and modularization of certain construction items. There
can be no assurance that these steps will prove successful; however, TARC
believes that implementation of these steps will adequately address staffing
concerns. Under the indenture governing the TARC Notes (the "TARC Indenture"),
the failure of TARC to complete and test Phase I by February 15, 1997 (subject
to extension to August 15, 1997 if certain financial coverage ratios are met)
would constitute an event of default at such date.

TARC and the Port Commission have reached an agreement in principle which
would allow the issuance of approximately $75 million in Port Commission tax
exempt bonds, the proceeds of which may be used to construct tank storage
facilities, docks and air and waste water treatment facilities. A portion of
the air and waste water treatment facility is included in the Capital
Improvement Program at a estimated cost of $41 million. The issuance of the
tax exempt bonds could provide an alternate source of financing for the
construction of such facilities. The Port Commission would own the facilities
built with the proceeds of the bonds, and TARC would operate the facilities
pursuant to a long-term (30-year) lease. There can be no assurance that the
issuance of the tax-exempt bonds, which may require the consent of the holders
of the TARC Notes, will occur.

TARC has incurred losses and negative cash flows from operating activities
as a result of limited refining operations that did not cover the fixed costs
of maintaining the refinery, increased working capital requirements and losses
on refined product sales due to financing costs and low margins. Based on
recent refining margins and projected levels of operations, such negative cash
flows are likely to continue. In order to operate the refinery, TARC must
raise debt or equity capital in addition to the funds required to complete the
Capital Improvement Program. There is no assurance that additional capital
will be available. Without this additional capital being available when
needed, there is substantial doubt about TARC's continued existence. If TARC
(i) does not complete the Capital Improvement Program timely, (ii) incurs
significant cost overruns, (iii) does not ultimately achieve profitable
operations, or (iv) ceases to continue operations, TARC's investment in the
refinery may not be recovered. The financial statements do not include any
adjustments as a result of such uncertainties.

Recently Issued Pronouncement. In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." The Company adopted the requirements of SFAS
No. 121 as of February 1, 1996. Based on the Company's estimates as of April
30, 1996, there have been no events or changes in circumstances that would
require the recognition of an impairment loss. Gas and oil properties
accounted for under the full cost method will continue to be subject to a
ceiling test limitation.

2. COMMITMENTS AND CONTINGENCIES

As part of the transfer of the natural gas exploration, production and
transmission businesses of TransAmerican to TransTexas (the "Transfer"),
TransTexas has succeeded to the potential liability, if any, of TransAmerican
and certain subsidiaries in connection with the lawsuits described below.
TransTexas has assumed liability for the disputed claim described under
"Ginther/Warren" and liability for other litigation up to $15 million plus the
difference, if any, between $10 million and the costs (if less than $10
million) incurred to resolve the disputed claims. Pursuant to an agreement
among TransTexas, TransAmerican and certain of its subsidiaries, as amended
(the "Transfer Agreement"), TransAmerican will indemnify TransTexas against
all losses incurred by TransTexas in excess of $25 million in connection with
(a) disputed claims in

7
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
TransAmerican's bankruptcy and (b) other litigation assumed by TransTexas and
other agreements related to TransAmerican's plan of reorganization (other than
settlements and judgments paid from escrowed cash established in connection
with TransAmerican's plan of reorganization). Effective with the settlement of
the Terry/Penrod litigation described in Note 7, TransAmerican will be
required to indemnify TransTexas for all future losses incurred in connection
with litigation or bankruptcy claims assumed in the Transfer. Any
indemnification payments received from TransAmerican for which TransTexas is
the primary obligor will be considered a contribution of capital. There can be
no assurance that TransAmerican will have the financial ability to meet all of
its indemnification obligations.

Finkelstein. On April 15, 1990, H.S. Finkelstein and Medallion Oil Company
filed suit against TransAmerican in the 49th Judicial District Court, Zapata
County, Texas, alleging that TransAmerican failed to pay royalties and
improperly marketed oil and gas produced from certain leases. On September 27,
1994, the plaintiffs added TransTexas as an additional defendant. On January
6, 1995, a judgment against TransAmerican and TransTexas was entered for
approximately $18 million in damages, interest and attorneys' fees. TransTexas
and TransAmerican have posted a supersedeas bond and appealed the judgment to
the Fourth Court of Appeals, San Antonio, Texas. The Fourth Court of Appeals
affirmed the judgment on April 3, 1996. TransTexas and TransAmerican have
filed a motion for rehearing. On April 22, 1991, the plaintiffs filed another
suit against TransAmerican and various affiliates in the 49th Judicial
District Court, Zapata County, Texas, alleging an improper calculation of
overriding royalties allegedly owed to the plaintiffs and seeking damages in
an unspecified amount. On November 18, 1993, the plaintiffs added TransTexas
as an additional defendant. The parties have agreed to binding arbitration in
this matter.

Ginther/Warren. Wilbur L. Ginther and Howard C. Warren conveyed a portion of
a lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas Supreme
Court upheld a judgment in favor of Messrs. Ginther and Warren against Taub's
interest in the lease. The lower court judgment had awarded a portion of the
lease to Messrs. Ginther and Warren because Taub's attorney had defrauded
Messrs. Ginther and Warren with respect to their interest in the lease. On
November 26, 1986, the estates of Messrs. Ginther and Warren filed an
adversary proceeding in the United States Bankruptcy Court for the Southern
District of Texas, Houston Division (the "Bankruptcy Court") against
TransAmerican, seeking damages and claiming that TransAmerican had
constructive notice of their disputes but continued to pay royalties and
proceeds of production to Taub. TransAmerican filed an interpleader action in
the Bankruptcy Court and deposited the disputed funds accruing from and after
November 1984 into the registry of the court. On September 30, 1993, the
Bankruptcy Court entered a judgment against TransAmerican in the amount of
$6.3 million plus post judgment interest. TransAmerican obtained a stay
pending its appeal of the judgment by posting a supersedeas bond. TransTexas
previously set aside, in escrow, the majority of the funds needed for the
bond. On September 15, 1995, the U.S. District Court for the Southern District
of Texas entered an order reversing the award of interest to Taub and
affirming the final judgment in all other respects. TransTexas appealed the
judgment to the Fifth Court of Appeals.

Coastal. On October 28, 1991, Coastal filed an action against TransAmerican
that was consolidated in the 49th Judicial District Court, Webb County, Texas,
alleging breach of contract and tortious interference related to two gas sales
contracts and a transportation agreement, seeking unspecified actual and
punitive damages and injunctive relief. On April 22, 1994, the court entered a
judgment adverse to TransAmerican and TransTexas requiring them to pay $1.3
million plus $0.7 million in attorney's fees to Coastal. On May 29, 1996, the
Court of Appeals affirmed the judgments. TransAmerican and TransTexas continue
to appeal this judgment. Coastal has abstracted the judgment in Webb and
Zapata Counties. While this matter is being judicially resolved, TransTexas is
continuing to furnish gas to Coastal.

8
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
Alameda. On May 22, 1993, Alameda Corporation ("Alameda") sued TransAmerican
and Mr. Stanley in the 215th Judicial District Court of Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a settlement during 1990 of litigation with
El Paso Natural Gas Company ("El Paso") and that TransAmerican has been
unjustly enriched by its failure to share these proceeds with Alameda. The
court granted Mr. Stanley's motion for summary judgment. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda has
appealed to the Fourteenth Court of Appeals.

Aspen. TransAmerican brought suit, on September 29, 1993, against Aspen
Services, ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts
received by Aspen. Aspen, under provisions of the parties' drilling agreement,
requested that TransAmerican's audit be made subject to arbitration, and the
court agreed. While the audit was in progress, Aspen asserted additional costs
that it contended should be added to the production payment account. One
category of such costs, relating to overhead expenses, amounted to
approximately $2.6 million. The arbitrators are in the process of deciding the
validity of those expenses as well as the audit exceptions taken by
TransAmerican, which amount to approximately $3.5 million. Aspen also filed,
in the court proceeding, on July 19, 1995, a counterclaim and third party
claim against TransAmerican, TransTexas, and affiliated entities, asserting,
among other things, that these entities failed to make certain payments and
market gas from these wells. Aspen is seeking damages in an unspecified
amount, as well as certain equitable claims. TransTexas and its affiliates are
vigorously contesting this claim. The parties' drilling contract was not
transferred to TransTexas in the Transfer. The properties relating to the
drilling contract, however, were transferred to TransTexas. TransAmerican is
entitled to any settlement or damages awarded to it in this matter.

Kathryn M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred
to the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in the La Perla Ranch
leases, are entitled to receive a portion of the settlement proceeds received
by TransAmerican from El Paso. TransAmerican intends to vigorously defend this
action.

U.S. Customs Service. On August 20, 1991, the U.S. Customs Service filed
suit against TransAmerican in the Bankruptcy Court. The Bankruptcy Court
entered a judgment against TransAmerican. TransAmerican appealed to the U.S.
District Court for the Southern District of Texas. On August 29, 1995, the
U.S. District Court ruled in favor of the U.S. Customs Service and upheld the
Bankruptcy Court determination. TransAmerican anticipates that it will have to
pay approximately $540,000 which includes interest.

NLRB Proceeding. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union filed unfair labor practices charges against TARC with the
New Orleans Regional Office of the National Labor Relations Board ("NLRB").
The charge alleges that TARC refused to reinstate 22 former employees because
of their union membership. The NLRB has not taken any action.

EEOC. On August 31, 1995, the Equal Employment Opportunity Commission
("EEOC") initiated a systematic investigation into TARC's and Southeast
Louisiana Contractors of Norco, Inc.'s ("Southeast Contractors") employment
practices. The EEOC is investigating whether TARC is discriminating on the
basis of sex and race. TARC intends to vigorously defend this action.

9
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

General. TransTexas and TARC are also named defendants in other ordinary
course, routine litigation incidental to their businesses. While the outcome
of these other lawsuits cannot be predicted with certainty, the Company does
not expect these matters to have a material adverse effect on its financial
position. At April 30, 1996, the possible range of estimated losses related to
all of the aforementioned claims in addition to the estimates accrued by
TransTexas and TARC is $0 to $64 million. The resolution in any reporting
period of one or more of these matters in a manner adverse to TARC or
TransTexas could have a material adverse impact on the Company's results of
operations or cash flows for that period.

Environmental Matters. TransTexas' operations and properties are subject to
extensive federal, state, and local laws and regulations relating to the
generation, storage, handling, emission, transportation, and discharge of
materials into the environment. Permits are required for various of
TransTexas' operations, and these permits are subject to revocation,
modification, and renewal by issuing authorities. TransTexas also is subject
to federal, state, and local laws and regulations that impose liability for
the cleanup or remediation of property which has been contaminated by the
discharge or release of hazardous materials or wastes into the environment.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines or injunctions, or both. It
is not anticipated that TransTexas will be required in the near future to
expend amounts that are material to the financial condition or operations of
TransTexas by reason of environmental laws and regulations, but because such
laws and regulations are frequently changed, and as a result may impose
increasingly strict requirements, TransTexas is unable to predict the ultimate
cost of complying with such laws and regulations.

Compliance Matters. TARC is subject to federal, state, and local laws,
regulations, and ordinances ("Pollution Control Laws"), that 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,
changes in 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. 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 incurred certain
fines as a result, arising out of certain of TARC's operations. TARC also was
previously subject to enforcement proceedings relating to its prior production
of leaded gasoline and air emissions. TARC believes that, with minor
exception, all of these past matters were resolved prior to or in connection
with the resolution of the bankruptcy proceedings of its predecessors 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 flows or financial
position.

Pending Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean
Air Act, regulate benzene emissions from numerous industries, including
petroleum refineries. The Benzene Waste NESHAPS require all existing, new,
modified, or reconstructed sources to reduce benzene emissions to a level that
will provide an ample margin of safety to protect public health. TARC will be
required to comply with the Benzene Waste NESHAPS as its refinery operations
start up. At this time, TARC cannot estimate the costs of such compliance.
Although TARC does not believe that such costs will be material, there can be
no assurance that such costs will not have a material adverse effect on its
financial position.

10
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

As a result of the Environmental Protection Agency's ("EPA") adoption on
August 18, 1995 of Hazardous Organic NESHAPS regulations for refineries under
the Clean Air Act, TARC may be required to spend additional funds in order to
comply with these regulations which could have a material adverse effect on
TARC. The Clean Air Act requires the EPA to set "Maximum Achievable Control
Technology" standards for all categories of major sources of hazardous air
pollutants by November 15, 2000. As of the present time, the EPA has
promulgated standards for the chemical manufacturing industry; similar
standards are expected to be set by both the EPA and the Louisiana Department
of Environmental Quality for the petroleum refining industry. TARC cannot
estimate at this time what the effect may be of any such regulations on the
refinery.

The EPA promulgated federal regulations pursuant to the Clean Air Act to
control fuels and fuel additives (the "Gasoline Standards") that could have a
material adverse effect on 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 benzene and
aromatics compared to the average 1990 gasoline. The number and extent of the
areas subject to reformulated gasoline standards may increase in the future if
the applicable laws and regulations become more stringent or other areas
become subject to the existing program. Conventional gasoline may be used in
all other domestic markets; however, a refiner's post-1994 average
conventional gasoline must not be more polluting than it was in 1990. With
limited exceptions, to determine its compliance as of January 1, 1995, a
refiner must compare its post-1994 and 1990 average values of controlled fuel
parameters and emissions. The Gasoline Standards recognize that many gasoline
refiners may not be able to develop an individual 1990 baseline for a number
of reasons, including, for example, lack of adequate data, the absence or
limited scope of operations in 1990. Under such circumstances, the refiner
must use a statutory baseline reflecting the 1990 industry average. The EPA
has authority, upon a showing of extenuating circumstances by a refiner, to
grant an individual adjusted baseline or other appropriate regulatory relief
to that refiner.

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
TARC cannot predict at this time when or whether the EPA will grant TARC other
appropriate regulatory relief. In correspondence to TARC, the EPA has
expressed willingness to consider whether different standards should apply to
refineries that are now commencing operations. If the EPA fails to grant
appropriate regulatory relief, TARC will be restricted in the amount of
gasoline it will be able to sell domestically or will incur additional
gasoline blending costs until the Capital Improvement Program is completed.
Upon completion of the Capital Improvement Program, TARC believes that it will
be able to produce conventional gasoline and, to a limited extent,
reformulated gasoline that meets the Gasoline Standards. There can be no
assurance that any action taken by the EPA will not have a material adverse
effect on TARC's future results of operations, cash flows or financial
position.

Cleanup Matters. TARC also is subject to federal, state, and local laws,
regulations, and ordinances that impose liability for the costs of cleaning
up, and certain damages resulting from, past spills, disposals, or other
releases of hazardous substances ("Hazardous Substance Cleanup Laws"). Over
the past several years, TARC has been, and to a limited extent continues to
be, engaged in environmental cleanup or remedial work relating to or arising
out of operations or activities at the refinery. In addition, TARC has been
engaged in upgrading its solid waste facilities, including the closure of
several waste management units. Similar to numerous other industrial sites in
the state, the refinery has been listed by the Louisiana Department of
Environmental Quality on the Federal Comprehensive Environmental Response,
Compensation and Liability Information System, as a result of TARC's prior
waste management activities (as discussed below).

11
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

In 1991, the EPA performed a refinery facility assessment ("RFA") at the
refinery pursuant to the Federal Resource Conservation and Recovery Act
("RCRA") and issued a report of its RFA investigation. The EPA has not made a
formal request of TARC to implement any corrective actions based on the
investigations; however, TARC has voluntarily initiated remedial actions at
some of the solid waste management units and other areas of concern. TARC is
unable to predict what effect any further investigation or remediation
required by the EPA will have on TARC's financial position. As part of the
facility assessment, in March 1993 TARC submitted a "Closure Equivalency
Demonstration" for the former sludge drying beds at the refinery. The EPA has
not yet made a determination regarding TARC's submission or issued any further
requests relating to this matter. TARC believes that the sludge drying beds
were properly closed in 1985 in accordance with applicable law and should not
require further remediation as a result of the EPA's pending review. However,
there can be no assurance that the EPA will not require further work in this
regard. TARC is unable to estimate what the costs, if any, will be if the EPA
does require further remediation or closure activities.

TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at four Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup
of sites from which there has been a "release" or threatened release of
"hazardous substances" (as such terms are defined under CERCLA). CERCLA
requires the EPA to include sites needing long-term study and cleanup on the
NPL based on their potential effect on public health or the environment.
CERCLA authorizes the EPA to take any necessary response actions at NPL sites
and, in certain circumstances, to order PRP's liable for the release to take
such actions. PRPs are broadly defined under CERCLA to include past and
present owners and operators of a site, as well as generators and transporters
of wastes to a site from which hazardous substances are released.

The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning
up a site from other responsible parties. Thus, if one party is required to
clean up an entire site, that party can seek contribution or recovery of such
costs from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.

TARC's liability at one of the four Superfund sites at which it has been
named a PRP has been settled for a nominal amount, and TARC expects to incur
no further liability in this matter. With respect to the remaining three
sites, TARC's liability for each such matter has not been finally determined,
and TARC anticipates that it may incur costs related to the cleanup (and
possibly including additional costs arising in connection with any recovery
action brought pursuant to such matters) at each such site. After a review of
the data available to TARC regarding the basis of TARC's alleged liability at
each site, and based on various factors, which depend on the circumstances of
the particular Superfund site (including, for example, the relationship of
TARC to each such site, the volume of wastes TARC is alleged to have
contributed to each such site in comparison to other PRPs without giving
effect to the ability of any other PRPs to contribute to or pay for any
liabilities incurred, and the range of likely cleanup costs at each such site)
TARC does not believe its ultimate liabilities will be significant; however,
it is not possible to determine the ultimate environmental liabilities, if
any, that may arise from the matters discussed above.

12
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

Purchase Commitments

TARC has various purchase commitments for materials, supplies and services
incidental to the ordinary course of business and for the Capital Improvement
Program. As of April 30, 1996, TARC had commitments for refinery construction
and maintenance of approximately $64 million. TARC acts as general contractor
and can generally cancel or postpone capital projects.

Price Management Activities

TARC enters into futures contracts, options on futures, and swap agreements
and forward sales agreements with the intent to protect against a portion of
the price risk associated with price declines from holding inventory of
feedstocks and refined products or fixed price purchase commitments. For the
three months ended April 30, 1996, TARC indirectly entered into price
management activities through the third party processing agreement discussed
below.

Financing Arrangements and Processing Agreement

TARC enters into financing arrangements to maintain an available supply of
feedstocks. Typically, TARC enters into an agreement with a third party to
acquire a cargo of feedstock that is scheduled for delivery to TARC's
refinery. TARC pays through the third party all transportation costs, related
taxes and duties and letter of credit fees for the cargo, plus a negotiated
commission. Prior to arrival at the refinery, another third party purchases
the cargo, and TARC commits to purchase, at a later date, the cargo at an
agreed price plus commission and costs. TARC also places margin deposits with
the third party to permit the third party to hedge its price risk. TARC
purchases these cargos in quantities sufficient to maintain expected
operations and is obligated to purchase all of the cargos delivered pursuant
to these arrangements. In the event the refinery is not operating, these
cargos may be sold on the spot market. These arrangements are accounted for as
product financing arrangements and accordingly the inventory and related
obligations are recognized on TARC's balance sheet. During the three months
ended April 30, 1996, approximately 0.4 million barrels of feedstocks with a
cost of $8 million were sold by a third party on the spot market prior to
delivery to TARC without a material gain or loss to TARC.

In March 1996, TARC entered into a processing agreement with a third party
for the processing of various feedstocks at the refinery. Under the terms of
the agreement, the processing fee earned by TARC is based on the margin earned
by the third party, if any, after deducting all of its related costs such as
feedstock acquisition, hedging, transportation, processing and inspections
plus a commission for each barrel processed. This agreement provides for TARC
to process approximately 1.1 million barrels of feedstocks. For the three
months ended April 30, 1996, TARC incurred a loss of approximately $1.9
million related to the processing agreement, primarily as a result of price
management decisions. In April 1996, TARC entered into a similar processing
agreement with another third party to process feedstocks. Recently, TARC has
agreed to process approximately 4.3 million barrels of feedstocks under this
agreement.

Gas Sales Commitments

In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for
future sales under the amended contract. In consideration, TransAmerican
agreed to pay the buyer approximately $0.4 million per month through June
1997. This commitment was assumed by TransTexas.

TransTexas and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which TransTexas
will deliver 100,000 MMBtu of natural gas per day through August 1997. The
selling price for this gas is determined by certain industry averages as
defined in the contract.

13
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

TransTexas and MidCon Texas Pipeline Corp. entered into a long-term gas
purchase contract on January 10, 1996, under which TransTexas is required to
deliver a total of 100,000 MMBtu per day to four specified delivery points for
a period of five years. The purchase price is determined by an industry index
less $0.09 per MMBtu. Deliveries shall commence upon the earlier of completion
of pipeline construction or ninety days after the acquisition of all rights of
way, permits and construction drawings.

Production Payments

On February 28, 1995, TransTexas sold to TCW Portfolio No. 1555 Sub-Custody
Partnership, L.P. ("TCW"), a term royalty in the form of a dollar-denominated
production payment in certain of TransTexas' properties for proceeds of $49.5
million, less closing costs of approximately $2 million. This production
payment was terminated in May 1996 with a portion of the proceeds of the
volumetric production payment described below.

In January 1996, TransTexas sold to an unaffiliated third party a term
royalty interest in the form of a volumetric production payment on certain of
its producing properties. For net proceeds of approximately $33 million,
TransTexas conveyed to the third party a royalty on approximately 29 Bcf of
natural gas, which amount can increase if certain minimum monthly volumes are
not delivered to the production payment interest. In February 1996, TransTexas
and the third party amended this purchase agreement to include an additional
14 Bcf which were sold to the third party for a purchase price of
approximately $16 million.

In May 1996, TransTexas sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production on certain of
TransTexas' producing properties. For net proceeds of approximately $43
million, TransTexas conveyed to the third party a royalty on approximately 37
Bcf of natural gas, which amount can increase if certain minimum monthly
volumes are not delivered to the production payment interest. TransTexas used
approximately $25 million of these net proceeds to terminate the dollar-
denominated production payment described above.

Hedging Agreements

Beginning in April 1995, TransTexas entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in
the spot market for natural gas. Pursuant to the Hedge Agreements, either
TransTexas or the counterparty thereto is required to make a payment to the
other at the end of each month (the "Settlement Date"). The payments will
equal the product of a notional quantity ("Base Quantity") of natural gas and
the difference between a specified fixed price ("Fixed Price") and a market
price ("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for TransTexas to make
payments to the counterparty to the extent that the Floating Price exceeds the
Fixed Price, up to a maximum ("Maximum Floating Price") and for the
counterparty to make payments to TransTexas to the extent that the Floating
Price is less than the Fixed Price. For the three months ended April 30, 1996,
TransTexas incurred net settlement losses pursuant to the Hedge Agreements
totaling approximately $9.6 million. As of April 30, 1996, TransTexas has
Hedge Agreements with Settlement Dates ranging from May 1996 through April
1997 involving total Base Quantities for all monthly periods of approximately
73.0 TBtu of natural gas. Fixed Prices for these agreements range from $1.70
to $1.72 per MMBtu ($1.76 to $1.78 per Mcf) up to a Maximum Floating Price of
$2.20 per MMBtu ($2.28 per Mcf). At April 30, 1996, the estimated cost to
settle all of the Hedge Agreements would have been approximately $31.1
million. These agreements are accounted for as hedges and accordingly, any
gains or losses are deferred and recognized in the month the physical volumes
are delivered. At April 30, 1996, TransTexas maintained $13.9 million in
margin accounts related to the Hedge Agreements. TransTexas may be required to
post additional cash margin whenever the daily natural gas futures prices as

14
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
reported on the NYMEX, for each of the months in which the swap agreements are
in place, exceed the Fixed Price. The maximum margin call under each Hedge
Agreement will never exceed the product of the Base Quantity for the remaining
months under such Hedge Agreement multiplied by the difference between the
Maximum Floating Price and the Fixed Price.

In June 1996, TransTexas entered into a Master Swap Agreement (the "Master
Swap Agreement") with one of its swap counterparties, which replaced a
previously existing master agreement governing the swaps between the two
parties. TransTexas' obligations under the Master Swap Agreement are
collateralized by a mortgage on a substantial portion of TransTexas' producing
properties. In accordance with the TransTexas Indenture, the lien created by
the mortgage collateralized obligations up to a maximum of $80.8 million (10%
of the SEC PV10 of TransTexas' most recent reserve report). As contemplated by
the TransTexas Indenture, the Trustee under the TransTexas Indenture has
subordinated the lien collateralizing the TransTexas Notes outstanding
thereunder to the lien collateralizing TransTexas' obligations under the
Master Swap Agreement. The maximum amount of obligations of TransTexas that
could be collateralized by the mortgage, based on the swaps in place under the
Master Swap Agreement as of the date hereof, is approximately $12 million.
Subject to compliance with certain collateral coverage tests, TransTexas is
not required to provide additional cash margin for any swaps now or hereafter
subject to the Master Swap Agreement.

Possible Federal Tax Liability

Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of
this debt cancellation is excluded from its income under the cancellation of
indebtedness provisions of the Internal Revenue Code of 1986, as amended ("COD
Exclusion"). TransAmerican expects that its tax attributes (including its net
operating loss and credit carryforwards) will be substantially reduced as a
consequence of the COD Exclusion. Although TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness, due to factual
and legal uncertainties there can be no assurance that the IRS will not
challenge this position, or that TransTexas' position would be upheld. Under
the Tax Allocation Agreement, TransTexas has agreed to pay an amount equal to
any federal tax liability (which would be approximately $25.4 million)
attributable to the inapplicability of the COD Exclusion. Any such tax would
be offset in future years by alternative minimum tax credits and retained loss
and credit carryforwards to the extent recoverable from TransAmerican.

Potential Effects of a Change of Control

15
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
a partnership, limited partnership or other group. In addition, certain
changes or other events in respect of the ownership or control of TransTexas
that do not constitute a Change of Control under the TransTexas Indenture may
result in a "change of control" of TransTexas under the terms of TransTexas'
credit facility (the "BNY Facility") and certain equipment financing. Such an
occurrence could create an obligation for TransTexas to repay such other
indebtedness. At April 30, 1996, TransTexas had approximately $30.2 million of
indebtedness (excluding the TransTexas Notes) subject to such right of
repayment or repurchase. In the event of a Change of Control under the
TransTexas Indenture or a "change of control" under the terms of other
outstanding indebtedness, there can be no assurance that TransTexas will have
sufficient funds to satisfy any such payment obligations.

In February 1995, TARC issued the TARC Notes that were initially
collateralized by, among other things, 55 million shares of TransTexas' common
stock. In March 1996, TARC sold 4.55 million shares of TransTexas common stock
to provide additional financing for the Capital Improvement Program. TARC will
require additional financing of $374 million to $379 million over the course
of the remaining construction period to complete the Capital Improvement
Program. If this financing is not available on a timely basis, or if
significant engineering problems, work stoppages or cost overruns or delays
occur, TARC likely will not be able to complete and test the first phase of
the Capital Improvement Program by February 15, 1997. Even if required
financing is obtained on a timely basis, completion by February 15, 1997 will
still prove very difficult if personnel shortages prevent full staffing during
peak construction periods. TARC has identified and is considering certain
steps to minimize the impact of potential construction worker shortages,
including the retention of field supervisors, direct hiring of field
supervisors and field labor by TARC's major contractors, use of adding a
second shift, and modularization of certain construction items. There can be
no assurance that these steps will prove successful; however, TARC believes
that implementation of these steps will adequately address staffing concerns.
Under the TARC Indenture, the failure of TARC to complete and test the first
phase of its Capital Improvement Program by February 15, 1997 (subject to
extension to August 15, 1997 if certain financial coverage ratios are met)
would constitute an event of default at such date. Any such event of default
could result in the sale, following the occurrence of such event of default,
of some or all of the remaining 50.45 million shares of TransTexas common
stock pledged to collateralize the TARC Notes. A foreclosure on such shares
would constitute a "change of control" of TransTexas under the BNY Facility,
which may create an obligation for TransTexas to repay amounts outstanding
thereunder, but would not constitute a Change of Control under the TransTexas
Indenture. A sale of such shares following a foreclosure could result in a
Change of Control under the TransTexas Indenture.

3. INVENTORIES AND OTHER CURRENT ASSETS

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

<TABLE>
<CAPTION>
APRIL
30, JANUARY 31,
1996 1996
------- -----------
<S> <C> <C>
Refinery feedstocks and blendstocks..................... $ 13 $ 628
Intermediate and refined products....................... 19 1,294
Purchase commitments--refinery feedstocks and
blendstocks............................................ 21,639 3,767
Purchase commitments--intermediate and refined products. 4,545 31,542
Tubular goods and other................................. 11,782 11,421
------- -------
$37,998 $48,652
======= =======
</TABLE>

16
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

The major components of other current assets are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
APRIL JANUARY 31,
30, 1996 1996
-------- -----------
<S> <C> <C>
Prepayments:
Trade................................................. $ 3,770 $ 2,394
Drilling.............................................. 1,464 2,070
Insurance............................................. 3,375 2,457
Margin................................................ 1,092 4,452
Properties held for sale................................ 6,000 6,000
Restricted cash......................................... 7,368 7,368
Settlement values of commodity price swap agreements.... 33,910 31,317
Other................................................... 257 242
-------- --------
$ 57,236 $ 56,300
======== ========
</TABLE>

4. ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
APRIL 30, JANUARY
1996 31, 1996
--------- --------
<S> <C> <C>
Royalties................................................. $ 13,105 $ 9,793
Taxes other than income taxes............................. 8,184 3,054
Accrued interest.......................................... 38,240 19,365
Payroll................................................... 6,370 6,153
Litigation settlements.................................... 5,833 9,553
Settlement values of commodity price swap agreements...... 36,638 31,317
Insurance................................................. 3,618 1,628
Deferred revenue.......................................... 10,367 4,000
Maintenance turnarounds................................... 1,336 1,145
Other..................................................... 2,625 3,308
--------- --------
$ 126,316 $ 89,316
========= ========
</TABLE>

17
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

5. SUMMARY FINANCIAL INFORMATION

The following summary financial information of TransTexas Transmission
Corporation ("TTC"), a wholly-owned subsidiary of TransTexas, reflects its
financial position as of April 30, 1996 and January 31, 1996 and its results
of operations for the three months ended April 30, 1996 and 1995 (in thousands
of dollars):

<TABLE>
<CAPTION>
JANUARY
APRIL 31,
30, 1996 1996
-------- -------
ASSETS
------
<S> <C> <C>
Total current assets....................................... $ 6,324 $ 811
Property and equipment, net................................ 76,776 70,273
Other assets............................................... 3 3
-------- -------
$ 83,103 $71,087
======== =======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C>
Total current liabilities.................................. $ 5,565 $ 6,191
Total noncurrent liabilities............................... 28,995 21,016
Total equity............................................... 48,543 43,880
-------- -------
$ 83,103 $71,087
======== =======
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
----------------
1996 1995
-------- -------
<S> <C> <C>
Revenues................................................... $ 31,153 $22,710
Operating costs and expenses............................... 23,979 17,981
-------- -------
Operating income (loss) 7,174 4,729
Other income (expense)..................................... -- (47)
-------- -------
Income before income taxes................................. 7,174 4,682
Income taxes............................................... 2,511 1,639
-------- -------
Net income............................................... $ 4,663 $ 3,043
======== =======
</TABLE>

Operating expenses for the three months ended April 30, 1996 increased by
approximately $6.0 million from the comparable prior year period primarily due
to increases in the spot market price of natural gas, which resulted in
increases in NGL and compressor fuel costs. Revenues for the three months
ended April 30, 1996 include a gain of approximately $7.5 million on the sale
of TransTexas' interest in the MidCon Texas pipeline and net gains on the
disposition of other equipment.

TTC conducts significant intercompany activities with TransTexas and
TransAmerican. Included in the results of operations of TTC are the following
transactions with affiliates (in thousands of dollars).

<TABLE>
<CAPTION>
THREE MONTHS
ENDED OCTOBER
31,
-------------
1996 1995
------ ------
<S> <C> <C>
Revenues...................................................... $6,586 $8,530
Operating costs and expenses.................................. 18,149 13,697
</TABLE>

18
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)

Affiliated operating costs and expenses for the three months ended April 30,
1996 and 1995 include the cost of natural gas purchased from TransTexas of
approximately $12 million and $10 million, respectively. Nonaffiliated
revenues for the respective periods include the sales of natural gas liquids
and condensate extracted from this purchased gas of $14 million and $13
million.

6. INCOME TAXES

Total income tax expense differs from amounts computed by applying the
statutory Federal income tax rate to income before income taxes. The items
accounting for this difference are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
----------------
1996 1995
------- -------
<S> <C> <C>
Federal income tax expense (benefit) at the statutory
rate.................................................... $16,981 $(4,674)
Increase (decrease) in tax resulting from:
Net operating losses (utilized) not utilizable......... (15,355) 4,000
Accrual adjustment..................................... -- 2,593
------- -------
$ 1,626 $ 1,919
======= =======
</TABLE>

Income tax expense for the three months ended April 30, 1995 includes an
adjustment of $2.6 million to reconcile TransTexas' fiscal 1994 tax accrual to
the tax return.

Under certain circumstances, TransAmerican, TransDakota Oil Corporation
("TDOC"), a subsidiary of TransAmerican, TARC or the Company may sell or
otherwise dispose of shares of common stock of TransTexas. If, as a result of
any sale or other disposition of TransTexas' common stock, the direct and
indirect ownership of TransTexas by TransAmerican is less than 80% (measured
by voting power and value), TransTexas will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the
"TransAmerican Consolidated Group") and, with certain exceptions, will no
longer be obligated under the terms and conditions of the Tax Allocation
Agreement (as defined below) ("Deconsolidation"). Further, if the Company or
TARC sells or otherwise transfers any stock of TARC, or issues any options,
warrants or other similar rights relating to such stock, outside of the
TransAmerican Consolidated Group, then a Deconsolidation of both TARC and
TransTexas from the TransAmerican Consolidated Group would occur. For the
taxable year during which Deconsolidation of TransTexas occurs, which would
also be the final year that TransTexas is a member of the TransAmerican
Consolidated Group, TransAmerican would recognize a previously deferred gain
of approximately $266.3 million associated with the Transfer and would be
required to pay federal income tax on this gain (the tax is estimated to be
between $29 million and $56 million if Deconsolidation occurs in fiscal 1997
and between $24 million and $45 million if Deconsolidation occurs in fiscal
1998). This analysis is based on TransTexas' position that the gain from the
Transfer, which occurred in 1993, was deferred under the consolidated return
regulations. The deferred gain generally is being included in TransAmerican's
taxable income in a manner that corresponds (as to timing and amount) with the
realization by the Company of (and, thus, will be offset by) the tax benefits
(i.e., additional depreciation, depletion and amortization on, or reduced gain
or increased loss from a sale of, the transferred assets) arising from the
additional basis. If, under the terms of the TARC Notes, it was reasonably
certain when the TARC Notes were issued that a sufficient amount of
TransTexas' stock would be disposed in the future to cause a Deconsolidation
of TransTexas from the TransAmerican Consolidated Group, it is possible that
the Deconsolidation of TransTexas would be treated as occurring as of the date
the TARC Notes were issued. However, TARC has advised the Company that it
believes that when the TARC Notes were issued it was not reasonably certain
that a Deconsolidation of TransTexas would

19
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
occur in the future. Under the Tax Allocation Agreement, TransTexas is
required to pay TransAmerican each year an amount equal to the lesser of (i)
the reduction in taxes paid by TransTexas for such year as a result of any
increase in the tax basis of assets acquired by TransTexas from TransAmerican
that is attributable to the Transfer and (ii) the increase in taxes paid by
TransAmerican for such year and all prior years attributable to gain
recognized by TransAmerican in connection with the contribution of assets by
TransAmerican to TransTexas (less certain amounts paid by TransTexas for all
prior years). TransTexas estimates that if Deconsolidation occurs in fiscal
1997 or 1998, the amount reimbursed to TransAmerican by TransTexas would be
between $9 million and $16 million and between $7 million and $13 million,
respectively. The remaining amount of the tax relating to the gain would be
paid to TransAmerican over the lives of the assets transferred. In addition,
TransTexas could be liable for additional taxes pursuant to the Tax Allocation
Agreement and the several liability provisions of federal tax law.

Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TransAmerican Consolidated Group,
then TransTexas is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent TransTexas has taxable
income, remains a member of the TransAmerican Consolidated Group, and the
other group members have the ability to pay such taxes. If TARC, TDOC,
TransAmerican or the Company transfers shares of TransTexas (or transfers
options or other rights to acquire such shares) and, as a result of such
transfer, Deconsolidation of TransTexas occurs, TransTexas would not receive
any benefit pursuant to the Tax Allocation Agreement for net operating losses
of TransTexas used by other members of the TransAmerican Consolidated Group
prior to the Deconsolidation of TransTexas.

Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the Internal Revenue Service (the "IRS") for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that TransAmerican will have the ability to satisfy the above
tax obligation at the time due and, therefore, TransTexas, TARC or the Company
may be required to pay the tax.

Under the Tax Allocation Agreement, TransTexas will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.

A change of control or other event that results in deconsolidation of
TransTexas from the TransAmerican Consolidated Group for federal income tax
purposes could result in the acceleration of payment of a substantial amount
of federal income taxes. The Company and TARC, both subsidiaries of
TransAmerican, currently own approximately 54% and 14%, respectively, of the
outstanding common stock of TransTexas. These shares are pledged as collateral
for the TARC Notes. A decision by either the Company or TARC to sell shares of
TransTexas could result in deconsolidation. Had deconsolidation occurred at
April 30, 1996, TransTexas would owe between $30 million and $50 million to
TransAmerican pursuant to the tax allocation agreement with TransAmerican.

7. LITIGATION SETTLEMENTS

Terry/Penrod. TransAmerican and a group of TransAmerican's former bank
lenders (the "Bank Group") were parties to a consolidated suit filed December
6, 1991, in the United States District Court for the Southern District of
Texas, Houston Division, relating to the interpretation of two third-party
drilling agreements. Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling
Corporation, Terry Oilfield Supply Co., Inc. and Terry Resources, Inc.
("Terry") sued TransAmerican for approximately $50 million in actual damages
and punitive damages of not less than five times actual damages. On April 5,
1996, the court entered a final judgment against

20
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
TransAmerican, TransTexas and several of their affiliates, in the amount of
approximately $43 million, plus interest. On April 18, 1996, the court entered
a separate judgment against the same parties for Terry's attorneys' fees of $2
million. In May 1996, TransTexas paid Terry approximately $19 million and
caused escrowed funds held for the benefit of the Bank Group of approximately
$22 million to be paid to Terry. Upon payment of the settlement amount, Terry
released the judgments, released all liens and reassigned to TransTexas a
production payment in certain properties. Terry dismissed an unrelated
administrative proceeding upon payment of the settlement amount described
above.

Frito-Lay. On June 24, 1993, Frito-Lay, Inc. ("Frito-Lay") filed suit
against TransAmerican and TARC in the Supreme Court of the State of New York,
County of New York, alleging that TransAmerican and TARC failed to make
indemnification payments to Frito-Lay in the amounts and at the times required
under the tax benefit transfer sale-leaseback agreements executed by
TransAmerican and Frito-Lay in November and December 1981 relating to
equipment located at TARC's refinery. TARC assumed the obligations of
TransAmerican under these sale-leaseback agreements when the refinery was
transferred to TARC in 1987. Frito-Lay sought actual damages of not less than
$7 million. In the Transfer, TransTexas assumed certain liabilities for this
matter subject to certain indemnifications. On December 13, 1995, this suit
was settled and dismissed with prejudice. The liabilities will be allocated
among TransTexas, TARC and TransAmerican, in accordance with the Tax
Allocation Agreement and other relevant documents.

8. CREDIT AGREEMENTS

TransTexas and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement, as of October
31, 1995, for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of TransTexas and is
guaranteed by John R. Stanley. The amounts which may be advanced to TransTexas
under this line of credit are based on a percentage of TransTexas' natural gas
receivables from unaffiliated third parties. The amount outstanding under the
line of credit as of April 30, 1996 was $20.7 million. Based upon foreseeable
accounts receivable levels, TransTexas estimates the maximum amount available
at any one time under this facility will be approximately $26 million.

Under the terms of this agreement, TransTexas' net loss (including any
extraordinary losses) may not exceed $5 million for each fiscal quarter ending
after January 31, 1996 ($10 million for each six-month period). This line of
credit is also subject to certain other covenants which relate to, among other
things, the maintenance of certain financial ratios.

In May, 1996, TransTexas entered into a Note Purchase Agreement pursuant to
which TransTexas issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes bear interest at 13
1/3% per annum and mature in August 1996. The notes are guaranteed on a senior
secured basis by TransAmerican.

9. TRANSACTIONS WITH AFFILIATES

During 1995, TransAmerican acquired an office building which it renovated
and subsequently sold to TransTexas in February 1996. TransAmerican advanced
$4 million of the proceeds from this sale to TARC for working capital. TARC
leases office space from TransTexas on terms and conditions permitted by the
TARC Indenture.

TransAmerican and its affiliates have provided TARC with substantially all
of its corporate services requirements, including insurance, legal, accounting
and treasury functions pursuant to the Services Agreement.

21
<PAGE>

TRANSAMERICAN ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(UNAUDITED)
During each of the three months ended April 30, 1996 and 1995, TransAmerican
and TransTexas charged TARC approximately $0.1 million to cover its costs of
providing these services, which management believes to be reasonable based on
the limited services provided. TARC expects its general and administrative
expenses to increase significantly when the refinery commences more complex
operations. In addition, third party charges incurred by TransAmerican and its
affiliates have been charged directly or allocated to TARC on usage or other
methods that management believes are reasonable. All significant transactions
with affiliates to the extent unpaid are recorded in the "Payable to
Affiliates" account.

Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors"), a
subsidiary of TransAmerican, provides construction personnel to TARC in
connection with the Capital Improvement Program. These construction workers
are temporary employees, and the number and composition of the workforce will
vary throughout the Capital Improvement Program. Southeast Contractors charges
TARC for the direct costs it incurs (which consist solely of employee payroll
and benefits) plus administrative costs and fees; such administrative costs
and fees charged to TARC are $1.2 million per year. Total labor costs paid to
Southeast Contractors for the three months ended April 30, 1996 and 1995 were
$0.9 million and $1.8 million, respectively, of which $0.9 million and $2.3
million were payable April 30, 1996 and January 31, 1996, respectively. No
labor costs were paid to Southeast Contractors in prior years

In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $10.4
million and $2.6 million, respectively, for the three months ended April 30,
1996 and 1995. TransTexas' receivable from TransAmerican for natural gas sales
totaled approximately $10.5 million at April 30, 1996.

TransTexas sells natural gas to TARC under an interruptible long-term sales
contract. Revenues from TARC under this contract totaled approximately $0.3
million and $0.1 million for the three months ended April 30, 1996 and 1995,
respectively. TransTexas' receivable from TARC for natural gas sales totaled
approximately $0.3 million at April 30, 1996. The receivable from TARC for
natural gas sales at January 31, 1996 was immaterial.

In January 1996, TransTexas and TransTexas Exploration Corporation, as a
wholly-owned subsidiary of TransTexas ("TTEX") entered into a Drilling
Program, as defined in the TransTexas Indenture. Pursuant to the Drilling
Program, TTEX will receive a portion of revenues from certain of TransTexas'
wells. TTEX has paid TransTexas approximately $5.4 million pursuant to this
Drilling Program as of April 30, 1996 and will pay TransTexas an additional
$18.3 million during fiscal 1997. This transaction does not affect the
consolidated cash flow of TransTexas.

Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified TransTexas for substantially all of TransTexas' liability in
connection with the settlement of the Terry/Penrod litigation (See Note 7). In
order to facilitate the settlement, TransTexas has advanced to TransAmerican
$16.4 million of the settlement in exchange for a note receivable. The note is
due in installments and partially collateralized by certain of TransAmerican's
oil and gas properties. In connection with the litigation settlement,
TransTexas received from Terry the reversionary interest in certain producing
properties. TransTexas and TransAmerican had intended that such interests
would revert to TransAmerican under the Transfer Agreement. TransTexas and
TransAmerican have agreed in principle that TransTexas will retain such
interests in partial satisfaction of TransAmerican's indemnity obligations.

22
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

TransTexas conducts its operations through two industry segments:
exploration and production ("E&P"), and gas transportation ("Transportation").
The E&P segment explores for, develops, produces and markets natural gas,
condensate and natural gas liquids. The Transportation segment engages in
intrastate natural gas transportation and marketing. TARC's single business
segment is refining and storage operations ("Refining"). As described in Note
1 to the condensed consolidated financial statements, transactions between
TransTexas and TARC are significantly restricted. The following discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto of the Company included elsewhere in this report.

E&P AND TRANSPORTATION

Results of Operations

TransTexas' results of operations are dependent upon natural gas production
volumes and unit prices from sales of natural gas, condensate, and natural gas
liquids ("NGLs"). The profitability of TransTexas also depends on the volume
of natural gas it gathers and transports, its ability to minimize finding and
lifting costs and maintaining its reserve base while maximizing production.

TransTexas' operating data for the three months ended April 30, 1996 and
1995, is as follows:

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED APRIL
30,
------------
1996 1995
----- -----
<S> <C> <C>
Sales volumes:
Gas (Bcf) (1)................................................ 36.2 35.8
NGLs (MMgal)................................................. 48.2 52.3
Condensate (MBbls)........................................... 164 176
Average prices:
Gas (dry) (per Mcf) (2)...................................... $2.03 $1.34
NGLs (per gallon)............................................ .31 .26
Condensate (per Bbl)......................................... 20.03 17.67
Number of gross wells drilled................................ 45 18
Percentage of wells completed................................ 84% 83%
</TABLE>
- --------
(1) Sales volumes for the three months ended April 30, 1996 include 5.9 Bcf
delivered pursuant to a volumetric production payment.
(2) Average price for the three months ended April 30, 1996 includes amounts
delivered under volumetric production payments. The average gas price for
TransTexas' undedicated production for this period was $2.18 per Mcf. Gas
prices do not include the effect of hedging agreements.

A summary of TransTexas' operating expenses is set forth below (in millions
of dollars):

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED APRIL
30,
-----------
1996 1995
----- -----
<S> <C> <C>
Operating costs and expenses:
Lease......................................................... $ 6.7 $ 4.0
Pipeline...................................................... 8.2 5.3
Natural gas liquids........................................... 12.5 10.2
----- -----
27.4 19.5
Taxes other than income taxes (1).............................. 5.2 3.9
----- -----
Total......................................................... $32.6 $23.4
===== =====
</TABLE>
- --------
(1) Taxes other than income taxes include severance, property, and other
taxes.

23
<PAGE>

The Company's average depletion rates have been as follows:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
---------------
1996 1995
------- -------
<S> <C> <C>
Depletion rates (per Mcf)................................... $ .90 $ .78
</TABLE>

TransTexas' Consolidated EBITDA, as defined in the TransTexas Indenture,
which consists of TransTexas' earnings before consolidated fixed charges
(including $3.9 million and $1.0 million of capitalized interest and the
interest component of rent expense for the quarters ended April 30, 1996 and
1995, respectively), income taxes, depreciation, depletion, and amortization
are set forth below (in millions of dollars):

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED APRIL
30,
-----------
1996 1995
----- -----
<S> <C> <C>
EBITDA........................................................... $60.9 $45.3
</TABLE>

Three Months Ended April 30, 1996, Compared with the Three Months Ended
April 30, 1995

Gas, condensate and NGLs revenues for the three months ended April 30, 1996
increased by $15.9 million from the comparable period of the prior year, due
primarily to increases in gas, condensate and NGL prices, offset in part by
decreases in condensate and NGL sales volumes. The average monthly prices
received per Mcf of gas, excluding amounts dedicated to volumetric production
payments, ranged from $2.04 to $2.45 in the three months ended April 30, 1996,
compared to a range of $1.29 to $1.43 in the same period in the prior year. As
of April 30, 1996, TransTexas had a total of 1,024 producing wells compared to
936 at April 30, 1995. NGL sales volumes decreased primarily due to the
decrease in the volumes of natural gas processed. Transportation revenues
decreased by $0.7 million for the quarter ended April 30, 1996, due to
decreases in volumes transported through TransTexas' pipeline system.
TransTexas currently transports a portion of its production from the Bob West
and Bob West North development areas through a third-party pipeline.

Lease operating expenses for the quarter ended April 30, 1996 increased by
$2.7 million over the comparable prior year period primarily due to the
increase in producing wells and the initiation of a program to increase flow
rates on certain of TransTexas' wells through the installation of wellhead
compressors. TransTexas estimates that rental of these compressors will add
approximately $0.9 million to lease operating expenses in fiscal 1997.
Pipeline operating expenses increased by $2.9 million due primarily to
increases in compressor fuel costs and chemicals used in the operation of
TransTexas' amine plants. NGLs cost increased by $2.3 million from the first
quarter in the prior year due to the increase in the cost of natural gas
processed. Depreciation, depletion and amortization expense for the three
months ended April 30, 1996 decreased by $0.8 million due to a decrease in
TransTexas' undedicated natural gas production, offset by a $0.12 increase in
the depletion rate. General and administrative expenses increased by $1.8
million in the three months ended April 30, 1996, due primarily to increases
in wages and benefits and outside services.

Interest income for the three months ended April 30, 1996 increased by
approximately $0.7 million over the comparable prior year period due to
increased cash balances resulting from the issuance of the TransTexas Notes in
June 1995. Interest expense increased by $7.0 million over the same period of
the prior year primarily as a result of interest accrued on the TransTexas
Notes, offset in part by the capitalization of approximately $3.7 million of
interest in connection with the acquisition of certain of TransTexas' gas and
oil properties.

Cash provided by operating activities for the three months ended April 30,
1996 increased by $56.9 million from the comparable prior year period due
primarily to the increase in prices received for TransTexas' gas, condensate
and NGLs and the sale of a volumetric production payment in the three months
ended April 30, 1996. Cash provided by operating activities for the three
months ended April 30, 1995 reflects an interest payment of $26.2 million on
TransTexas' Senior Secured Notes.

24
<PAGE>

Liquidity and Capital Resources

A primary source of funds to meet TransTexas' capital and debt service
requirements is net cash flow provided by operating activities, which is
dependent on the prices TransTexas receives for the volumes of natural gas
TransTexas produces. TransTexas has entered into hedge agreements to reduce a
portion of its exposure to natural gas prices. See Note 2 of Notes to
Condensed Consolidated Financial Statements included elsewhere herein.

TransTexas makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. TransTexas has
financed these expenditures primarily with cash from operations, public
offerings of debt and equity securities, the sale of production payments and
other financings. For the three months ended April 30, 1996, total capital
expenditures were $92 million, including $5 million for lease acquisitions,
$71 million for drilling and development and $16 million for TransTexas' gas
gathering and pipeline system and other equipment. Pursuant to the TransTexas
Indenture, if TransTexas' Working Capital, as defined in the TransTexas
Indenture, is less than $20 million at the end of any fiscal quarter,
TransTexas' Capital Expenditures, as defined, for the next succeeding fiscal
quarter may not exceed 90% of TransTexas' Consolidated EBITDA for such prior
fiscal quarter minus TransTexas' Consolidated Fixed Charges for such prior
fiscal quarter (the "Capital Expenditure Limit"). TransTexas' Working Capital
at April 30, 1996 was less than $20 million. As a result, TransTexas' Capital
Expenditures for the quarter ending July 31, 1996 may not exceed the Capital
Expenditure Limit. TransTexas anticipates that such restriction will not have
a material effect on development drilling for the current fiscal quarter. In
addition, the TransTexas Indenture permits TransTexas to fund the drilling of
up to 30 wells in any fiscal year pursuant to third-party drilling programs.
Any costs associated with these wells would not be included in Capital
Expenditures.

TransTexas anticipates total capital expenditures of approximately $210
million in each of fiscal 1997 and fiscal 1998, subject to TransTexas
Indenture requirements and available cash flow, of which approximately $175
million will be used for drilling and development, $15 million for lease
acquisitions and $20 million for TransTexas' gas gathering and pipeline system
(including pipeline expansion into the La Grulla development area) and other
equipment. If revenues decrease, certain contingent obligations of TransTexas
become fixed or TransTexas' level of capital expenditures remains limited by
the TransTexas Indenture, TransTexas may not have sufficient funds for, or may
be restricted in maintaining the level of, capital expenditures necessary to
replace its reserves or to maintain production at current levels and, as a
result, production may decrease over time. Although cash from operating
activities for the three months ended April 30, 1996 has increased, net cash
provided by operating activities declined over the three and one-half years
ended January 31, 1996. No assurance can be given that TransTexas' cash flow
from operating activities will be sufficient to meet planned capital
expenditures, contingent liabilities and debt service in the future. Since
July 31, 1995, TransTexas has utilized asset sales and various financings, in
addition to cash flow from operating activities, to meet its working capital
requirements. TransTexas anticipates that it will utilize additional financing
or sales of assets to fund planned levels of operations and to meet its
obligations, including its obligations under the TransTexas Indenture, through
January 1997.

In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas in a legal proceeding. Prior to this transaction, the
supersedeas bond had been collateralized by other letters of credit. These
letters of credit were collateralized by $20 million in cash, which has been
released to TransTexas. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days.

In January and February 1996, TransTexas completed both a financing and a
sale-leaseback transaction, each in the amount of $3 million, related to its
operating equipment. Both the financing, which has an interest rate of 9 1/2%
per annum, and the sale-leaseback transaction, which has a monthly lease
payment of approximately $56,400, have a 36-month term. In February 1996,
TransTexas completed an additional financing collateralized by its operating
equipment in the amount of $10 million at an interest rate of 12 1/2% per
annum and a 36-month term.

25
<PAGE>

In January 1996, TransTexas sold to an unaffiliated third party a term
overriding royalty interest in the form of a production payment carved out of
its interests in certain of its producing properties. For net proceeds of
approximately $33 million, TransTexas conveyed to the third party a term
overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional
net proceeds of approximately $15.5 million, TransTexas supplemented the
production payment to subject a percentage of its interests in certain
additional producing properties to the production payment and to include
additional volumes of approximately 14 Bcf of natural gas within the base
volume subject to the production payment.

In March 1996, TransTexas sold its 41.67% interest in the 76-mile, 24-inch
MidCon Texas pipeline that runs from TransTexas' Thompsonville compressor
station to Agua Dulce for $7.5 million. TransTexas believes that its existing
transportation capacity in this area is adequate for TransTexas' production
and does not anticipate any material constraints on the transportation of its
natural gas as a result of this sale.

In May 1996, TransTexas sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production payment on
certain of TransTexas' producing properties. For net proceeds of approximately
$43 million, TransTexas conveyed to the third party a royalty on approximately
37 Bcf of natural gas, which amount can increase if certain minimum monthly
volumes are not delivered to the production payment interest. TransTexas used
approximately $25 million of these net proceeds to terminate an existing
dollar-denominated production payment.

In May 1996, TransTexas entered into a Note Purchase Agreement pursuant to
which TransTexas issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes bear interest at 13
1/3% per annum and mature in August 1996. The notes are guaranteed on a senior
secured basis by TransAmerican.

In May 1996, TransTexas entered into an agreement with one of its swap
counterparties as a result of which TransTexas, subject to compliance with
certain collateral coverage tests, will not be required to make cash margin
deposits with respect to the swaps covered by such agreement. See Note 7 to
the accompanying Condensed Consolidated Financial Statements.

TransTexas has engaged an investment banking firm to assist in the potential
sale or sale/leaseback of all or a portion of the Pipeline System, without
disrupting the pipeline capacity available to TransTexas. TransTexas has also
engaged an investment banking firm to assist in the sale of its interest in
the Lodgepole area and three separate packages of producing properties in the
Lobo Trend containing a total of approximately 200 Bcfe of natural gas
reserves.

TransTexas currently has a $40 million credit facility with BNY Financial
Corporation (the "BNY Facility") pursuant to which it may borrow funds based
on the amount of its accounts receivable. At April 30, 1996, the outstanding
balance under the BNY Facility was $20.7 million. TransTexas does not
anticipate that it will be able to borrow more than $26 million under the BNY
Facility during fiscal 1997, based on the expected amount of its accounts
receivable. The BNY Facility requires TransTexas to maintain certain financial
ratios and includes certain covenants. Under the terms of the BNY Facility,
TransTexas' net loss (including any extraordinary losses) may not exceed $5
million for each fiscal quarter ending after January 31, 1996 ($10 million for
each six-month period).

Pursuant to the TransTexas Indenture, TransTexas maintains an account (the
"Interest Reserve Account") from which funds may only be disbursed in
accordance with the terms of a Cash Collateral and Disbursement Agreement (the
"Disbursement Agreement"). TransTexas has deposited into the Interest Reserve
Account funds sufficient to pay the aggregate amount of the next ensuing
interest payment due in respect of the TransTexas Notes. Funds in the Interest
Reserve Account may be invested, at the direction of TransTexas (except as
provided below), only in cash and Cash Equivalents as defined in the
Disbursement Agreement, and any interest income thereon will be added to the
balance of the Interest Reserve Account. TransTexas must maintain a balance
(the "Requisite Balance") in the Interest Reserve Account at least equal to
the amount necessary to satisfy

26
<PAGE>

TransTexas' obligation to pay interest in respect of all then outstanding
TransTexas Notes on the next Interest Payment Date; provided, however, that
if, pursuant to the Disbursement Agreement, any funds in the Interest Reserve
Account are applied to the payment of interest on the TransTexas Notes,
TransTexas shall not be obligated to maintain the Requisite Balance during the
period of 60 days immediately following the Interest Payment Date in respect
of which such payment was made.

TransTexas may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date,
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement provides that if TransTexas fails to pay an installment of interest
on the TransTexas Notes on any Interest Payment Date, then all investments in
the Interest Reserve Account will be immediately liquidated and all funds in
the Interest Reserve Account will be deposited with the Indenture Trustee. If
TransTexas has not paid such installment of interest within five days after
such Interest Payment Date, or if TransTexas so instructs the Indenture
Trustee, the Indenture Trustee will apply such deposited funds to the payment
of interest on the TransTexas Notes. The Disbursement Agreement provides that
funds may be disbursed from the Interest Reserve Account and released to
TransTexas only to the extent that the balance thereof exceeds the Requisite
Balance.

Deconsolidation for Federal Income Tax Purposes

Under certain circumstances, TransAmerican, TDOC, the Company or TARC may
sell or otherwise dispose of shares of common stock of TransTexas. If, as a
result of any sale or other disposition of TransTexas' common stock, the
direct and indirect ownership of TransTexas by TransAmerican is less than 80%
(measured by voting power and value), TransTexas will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the
"TransAmerican Consolidated Group") and, with certain exceptions, will no
longer be obligated under the terms and conditions of the Tax Allocation
Agreement (as defined below) ("Deconsolidation"). Further, if the Company or
TARC sells or otherwise transfers any stock of TARC, or issues any options,
warrants or other similar rights relating to such stock, outside of the
TransAmerican Consolidated Group, then a Deconsolidation of both TARC and
TransTexas from the TransAmerican Consolidated Group would occur. For the
taxable year during which Deconsolidation of TransTexas occurs, which would
also be the final year that TransTexas is a member of the TransAmerican
Consolidated Group, TransAmerican would recognize a previously deferred gain
of approximately $266.3 million associated with the Transfer and would be
required to pay federal income tax on this gain (the tax is estimated to be
between $29 million and $56 million if Deconsolidation occurs in fiscal 1997
and between $24 million and $45 million if Deconsolidation occurs in fiscal
1998). This analysis is based on TransTexas' position that the gain from the
Transfer, which occurred in 1993, was deferred under the consolidated return
regulations. The deferred gain generally is being included in TransAmerican's
taxable income in a manner that corresponds (as to timing and amount) with the
realization by TransTexas of (and, thus, will be offset by) the tax benefits
(i.e., additional depreciation, depletion and amortization on, or reduced gain
or increased loss from a sale of, the transferred assets) arising from the
additional basis. If, under the terms of the TARC Notes, it was reasonably
certain when the TARC Notes were issued that a sufficient amount of
TransTexas' stock would be disposed in the future to cause a Deconsolidation
of TransTexas from the TransAmerican Consolidated Group, it is possible that
the Deconsolidation of TransTexas would be treated as occurring as of the date
the TARC Notes were issued. However, TARC has advised the Company that it
believes that when the TARC Notes were issued it was not reasonably certain
that a Deconsolidation of TransTexas would occur in the future. Under the Tax
Allocation Agreement, TransTexas is required to pay TransAmerican each year an
amount equal to the lesser of (i) the reduction in taxes paid by TransTexas
for such year as a result of any increase in the tax basis of assets acquired
by TransTexas from TransAmerican that is attributable to the Transfer and (ii)
the increase in taxes paid by TransAmerican for such year and all prior years
attributable to gain recognized by TransAmerican in connection with the
contribution of assets by TransAmerican to TransTexas (less certain amounts
paid by TransTexas for all prior years). TransTexas estimates that if
Deconsolidation occurs in fiscal 1997 or 1998, the amount reimbursed to
TransAmerican would be between $9 million and $16 million and between $7
million and $13 million, respectively. The remaining amount of the tax
relating to the gain would be paid over the lives of the

27
<PAGE>

assets transferred. In addition, TransTexas could be liable for additional
taxes pursuant to the Tax Allocation Agreement and the several liability
provisions of federal tax law.

Generally, under the Tax Allocation Agreement, if net operating losses of
TransTexas are used by other members of the TransAmerican Consolidated Group,
then TransTexas is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent TransTexas has taxable
income, remains a member of the TransAmerican Consolidated Group, and the
other group members have the ability to pay such taxes. If the Company, TARC
or TDOC transfers shares of TransTexas (or transfers options or other rights
to acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not receive any benefit pursuant to the
Tax Allocation Agreement for net operating losses of TransTexas used by other
members of the TransAmerican Consolidated Group prior to the Deconsolidation
of TransTexas.

Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the IRS for the consolidated federal income tax
liability of the consolidated group. There can be no assurance that
TransAmerican will have the ability to satisfy the above tax obligation at the
time due and, therefore, TransTexas, TARC or the Company may be required to
pay the tax.

Contingent Liabilities

TransTexas has significant contingent liabilities, including liabilities
with respect to litigation matters, indemnification obligations relating to
certain tax benefit transfer sale-leaseback transactions, and other
obligations assumed in the Transfer. These matters, individually and in the
aggregate, amount to significant potential liability which, if adjudicated in
a manner adverse to TransTexas in one reporting period, could have a material
adverse effect on TransTexas' cash flow or operations for that period.
Although the outcome of these lawsuits cannot be predicted with certainty,
TransTexas does not expect these matters to have a material adverse effect on
its financial position. TransTexas has delivered letters of credit and placed
into escrow cash, which letters of credit and cash total approximately $50
million, to be applied to certain potential litigation claims. In addition, a
change of control or other event that results in deconsolidation of TransTexas
and TransAmerican for federal income tax purposes could also result in
acceleration of a substantial amount of federal income taxes. See Note 6 to
the Condensed Consolidated Financial Statements included elsewhere herein.

Potential Effects of Change of Control

The TransTexas Indenture provides that, upon the occurrence of a Change of
Control (as such term is defined in the TransTexas Indenture), each holder of
the TransTexas Notes will have the right to require TransTexas to repurchase
such holder's TransTexas Notes at 101% of the principal amount thereof plus
accrued and unpaid interest. A Change of Control would be deemed to occur
under the TransTexas Indenture in the case of certain changes or other events
in respect of the ownership or control of TransTexas, including any
circumstance pursuant to which any person or group, other than John R. Stanley
and his wholly-owned subsidiaries or the trustee under the TARC Indenture is
or becomes the beneficial owner of more than 50% of the total voting power of
TransTexas' then outstanding voting stock, unless the TransTexas Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or
instrumentality of a government and also includes a "group," which is defined
as two or more persons acting as a partnership, limited partnership or other
group. In addition, certain changes or other events in respect of the
ownership or control of TransTexas that do not constitute a Change of Control
under the TransTexas Indenture may result in a "change of control" of
TransTexas under the terms of the BNY Facility and certain equipment
financing. Such an occurrence could create an obligation for TransTexas to
repay such other indebtedness. At April 30, 1996, TransTexas had approximately
$30.2 million of indebtedness (excluding the TransTexas Notes)

28
<PAGE>

subject to such right of repayment or repurchase. In the event of a Change of
Control under the TransTexas Indenture or a "change of control" under the
terms of other outstanding indebtedness, there can be no assurance that
TransTexas will have sufficient funds to satisfy any such payment obligations.

In February 1995, TARC issued the TARC Notes that were initially
collateralized by, among other things, 55 million shares of TransTexas' common
stock. In March 1996, TARC sold 4.55 million shares of TransTexas common stock
to provide additional financing for the Capital Improvement Program. TARC will
require additional financing of approximately $374 million to $379 million
over the course of the remaining construction period to complete the Capital
Improvement Program of which approximately $41 million is anticipated to be
funded by the Port Commission tax exempt bonds. If this financing is not
available on a timely basis, or if significant engineering problems, work
stoppages or cost overruns occur, TARC likely will not be able to complete the
first phase of the Capital Improvement Program by February 15, 1997. Even if
required financing is obtained on a timely basis, completion by February 15,
1997 will still prove very difficult if personnel shortages prevent full
staffing during peak construction periods. TARC has taken steps to minimize
the impact of construction worker shortages, including the retention of field
supervisors, direct hiring of field supervisors and field labor by major
contractors, use of adding a second shift, and modularization of certain
construction items. There can be no assurance that these steps will prove
successful; however, TARC believes that implementation of these steps will
adequately address staffing concerns. Under the TARC Indenture, the failure of
TARC to complete the first phase of its Capital Improvement Program by
February 15, 1997 (subject to extension to August 15, 1997 if certain
financial coverage ratios are met) would constitute an event of default at
such date. Any such event of default could result in the sale, following the
occurrence of such event of default, of some or all of the remaining 50.45
million shares of common stock owned by the Company and TARC that are pledged
to secure their obligations under the TARC Notes. A foreclosure on the shares
of common stock that have been pledged to secure the TARC Notes would
constitute a "change of control" of TransTexas under the BNY Facility and
certain equipment financing, which may create an obligation for TransTexas to
repay amounts outstanding thereunder. A sale of such shares following a
foreclosure might also result in a Change of Control under the TransTexas
Indenture.

REFINING

General

TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were primarily from tank rentals and its
expenses were comprised of maintenance and repairs, tank rentals, general and
administrative expenses and property taxes. TARC commenced partial operations
at the refinery in March 1994 and has operated the refinery intermittently
since then. 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 its
refinery equipment, which determines the types of feedstocks processed and
refined product yields. The results are also affected by the unit costs of
purchased feedstocks and the unit prices of refined products, which can vary
significantly. The Capital Improvement Program is designed to significantly
change TARC's throughput capacity, the feedstocks processed, and refined
product yields.

Three Months Ended April 30, 1996, Compared with the Three Months Ended April
30, 1995

Total revenues for the three months ended April 30, 1996 increased $10.3
million to $10.9 million from $0.6 million for the same period in 1995,
primarily as a result of increased sales volume.

Costs of products sold for the three months ended April 30, 1996 increased
$12.3 million to $13.4 million from $1.1 million for the same period in 1995,
primarily as a result of increased sales volume and a loss of approximately
$1.9 million related to a processing agreement.

29
<PAGE>

Operations and maintenance expense for the three months ended April 30, 1996
increased $3.3 million to $3.0 million from $(0.3) million for the same period
in 1995, primarily due to an increase in the number of days the vacuum unit
was operating.

Depreciation and amortization expense for the three months ended April 30,
1996 increased $0.4 million to $1.8 million from $1.4 million for the same
period in 1995, primarily due to the placing in service of certain terminal
facilities and tankage equipment.

General and administrative expense for three months ended April 30, 1996
increased $1.0 million to $2.1 million from $1.1 million for the same period
in 1995, primarily due to increases in wages, outside services and
professional fees.

Taxes other than income taxes for the three months ended April 30, 1996
decreased $0.6 million to $0.4 million from $1.0 million for the same period
in 1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.

Interest income for the three months ended April 30, 1996 decreased $1.8
million as compared to the same period in 1995 primarily due to interest
earned in 1995 on the initial $173 million long-term debt proceeds held in the
Collateral Account. Interest expense for the three months ended April 30, 1996
decreased $3.5 million, primarily due to a larger portion of interest
capitalized in 1996 versus 1995. During the three months ended April 30, 1996,
TARC capitalized approximately $16.6 million of interest related to property
and equipment additions at TARC's refinery.

Other expense for the three months ended April 30, 1995 was $3.0 million
which was primarily a result of trading losses on futures contracts.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the issuance of the TARC Notes, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. The current budget for the Capital
Improvement Program calls for total expenditures of $434 million; however,
TARC estimates that expenditures of approximately $146 million to $151 million
in addition to the current budget will be required to complete the Capital
Improvement Program. The foregoing estimates, as well as other estimates and
projections herein, are subject to substantial revision upon the occurrence of
future events, such as unavailability of, or delays in, financing, engineering
problems, work stoppages and cost overruns over which TARC may not have any
control.

As of April 30, 1996, expenditures on the Capital Improvement Program funded
by or approved for reimbursement from the cash collateral account totaled
approximately $189 million. Approximately $17 million remained in the cash
collateral account as of April 30, 1996. TARC sold 4.55 million shares of
TransTexas common stock in March 1996, and deposited approximately $26.6
million of the proceeds of such sale into the cash collateral account in
accordance with the requirements of the TARC Indenture. Giving effect to
current estimates, additional funding of $374 million to $379 million will be
required to complete the Capital Improvement Program, of which approximately
$41 million is anticipated to be funded by the Port Commission tax exempt
bonds. As of April 30, 1996, TARC had commitments for refinery construction
and maintenance of approximately $64 million. Additional funds necessary to
complete the Capital Improvement Program may be provided from (i) the sale of
additional shares of TransTexas common stock held by TARC, (ii) the sale of
common stock of TARC, (iii) equity investments in TARC (including the sale of
preferred stock of TARC to the Company, funded by the sale of TransTexas
common stock held by the Company), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the TARC Notes. TARC has entered into
preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. There is no assurance that

30
<PAGE>

sufficient funds will be available from these sources on a timely basis or
upon terms acceptable to TARC and TransAmerican. If this financing is not
available or if significant engineering problems, work stoppages or cost
overruns occur, TARC likely will not be able to complete and test Phase I of
the Capital Improvement Program by February 15, 1997. Even if required
financing is obtained on a timely basis, completion by February 15, 1997 will
still prove very difficult if personnel shortages prevent full staffing during
peak construction periods. TARC has identified and is considering certain
steps to minimize the impact of potential construction worker shortages,
including the retention of field supervisors, direct hiring of field
supervisors and field labor by TARC's major contractors, use of adding a
second shift, and modularization of certain construction items. There can be
no assurance that these steps will prove successful; however, TARC believes
that implementation of these steps will adequately address staffing concerns.
Under the TARC Indenture, the failure of TARC to complete and test Phase I by
February 15, 1997 (subject to extension to August 15, 1997 if certain
financial coverage ratios are met) would constitute an event of default at
such date.

TARC and the Port Commission have reached an agreement in principle which
would allow for the issuance of approximately $75 million in Port Commission
tax exempt bonds, the proceeds of which may be used to construct tank storage
facilities, docks and air and waste water treatment facilities. The air and
waste water treatment facility are included in the Capital Improvement Program
at an estimated cost of $41 million. The issuance of the tax exempt bonds
could provide an alternate source of financing for the construction of such
facilities. The Port Commission would own the facilities built with the
proceeds of the bonds, and TARC would operate the facilities pursuant to a
long-term (30-year) lease. There can be no assurance that the issuance of the
tax-exempt bonds, which may require the consent of the holders of the TARC
Notes, will occur.

TARC has incurred losses and negative cash flow from operations as a result
of limited refining operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to financing costs and low margins. Based on recent
refining margins, recent projected levels of operations and debt service
requirements, such negative cash flows are likely to continue. In order to
operate the refinery and service its debt, TARC must raise additional debt or
equity capital in addition to the funds required to complete the Capital
Improvement Program. TransAmerican, the Company or TARC may sell securities to
raise funds for additional working capital. There is no assurance that
additional capital will be available.

Without additional funding on a timely basis to complete Phase I of the
Capital Improvement Program and to provide working capital for operations and
debt service, there is substantial doubt about TARC's continued existence. If
TARC (i) does not complete the Capital Improvement Program timely, (ii) incurs
significant cost overruns, (iii) does not ultimately achieve profitable
operations, or (iv) ceases to continue operations, TARC's investment in the
refinery may not be recovered. The financial statements do not include any
adjustments for such uncertainties.

A change of control or other event that results in deconsolidation of TARC
from TransAmerican's consolidated group for federal income tax purposes could
result in the acceleration of payment of a substantial amount of federal
income taxes by TransAmerican. Each member of a consolidated group filing a
consolidated federal income tax return is severally liable for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that TransAmerican will have the ability to satisfy the above
tax obligation at the time due and, therefore, TARC or other members may be
required to pay the tax. A decision by the Company or TARC to sell TransTexas
shares could result in Deconsolidation of TransTexas for tax purposes. Such
sales may be necessary to raise funds required to complete the Capital
Improvement Program. The tax liability to TransAmerican at April 30, 1996 that
would result from Deconsolidation is estimated to be approximately $40
million.

31
<PAGE>

cargo, and TARC commits to purchase, at a later date, the cargo at an agreed
price plus commission and costs. TARC also places margin deposits with the
third party to permit the third party to hedge its price risk. TARC purchases
these cargos in quantities sufficient to maintain expected operations and is
obligated to purchase all of the cargos delivered pursuant to these
arrangements. In the event the refinery is not operating, these cargos may be
sold on the spot market. During the three months ended April 30, 1996,
approximately 0.4 million barrels of feedstocks with a cost of $8 million were
sold by a third party on the spot market prior to delivery to TARC without a
material gain or loss to TARC.

In March 1996, TARC entered into a processing agreement with a third party
for the processing of various feedstocks at the refinery. Under the terms of
the agreement, the processing fee earned by TARC is based on the margin earned
by the third party, if any, after deducting all of its related costs such as
feedstock acquisition, hedging, transportation, processing and inspections
plus a commission for each barrel processed. This agreement provides for TARC
to process a total of approximately 1.1 million barrels of feedstock. For the
three months ended April 30, 1996, TARC incurred a loss of approximately $1.9
million related to the processing agreement primarily as a result of price
management decisions. In April 1996, TARC entered into a similar processing
agreement with another third party to process feedstocks. Recently, TARC has
agreed to process approximately 4.3 million barrels of feedstocks under this
agreement.

Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years TARC does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on
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 2 of Notes to Condensed Consolidated Financial
Statements.

On December 13, 1995, litigation with Frito-Lay, Inc. was settled. TARC
intends to pay $2.5 million to Frito-Lay, Inc. during fiscal year 1997 in
accordance with the Tax Allocation Agreement and other relevant documents. As
of April 30, 1996, TARC has paid approximately $0.7 million of this
obligation.

FORWARD-LOOKING STATEMENTS

Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. Words such as "anticipates," "expects,"
"believes" and "likely" indicate forward-looking statements. 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
TARC's success in raising additional capital to complete the Capital
Improvement Program (as defined below) as scheduled, engineering problems,
work stoppages, cost overruns, fluctuations in the commodity prices for
petroleum and refined products, casualty losses, conditions in the capital
markets and competition.

32
<PAGE>

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Notes 2 and 7 to the condensed consolidated financial statements for a
discussion of the Company's legal proceedings.

ITEM 5. OTHER INFORMATION

CAPITAL IMPROVEMENT PROGRAM

The Capital Improvement Program ("CIP"), designed to increase the capacity
and complexity of the refinery, is currently scheduled to be completed and
tested by February 1997 for Phase I and February 1998 for Phase II. The most
significant projects include: (i) completion of a delayed coking unit to
process vacuum tower bottoms into lighter petroleum products, (ii)
reactivation and revamp of a fluid catalytic cracking unit to increase
gasoline production capacity, (iii) upgrading and expanding existing
hydrotreating and desulfurization units to increase sour crude processing
capacity and (iv) reactivation and expansion of the MTBE unit. In addition,
TARC plans to expand, modify, and add other processing units, tankage, and
offsite facilities as part of the CIP. The CIP includes expenditures necessary
to ensure that the refinery is in compliance with certain existing air and
water discharge regulations and that gasoline produced will comply with
federal standards. TARC has engaged a number of specialty consultants and
engineering and construction firms to assist TARC in completing the individual
projects that comprise the CIP. Each of these firms was selected because of
its specialized expertise in a particular process or unit integral to the CIP.

The following table sets forth, as of April 30, 1996, TARC's capital budget
for, and expenditures on the Capital Improvement Program (in millions of
dollars):

<TABLE>
<CAPTION>
CAPITAL
BUDGET EXPENDITURES
------- ------------
<S> <C> <C>
PHASE I:
Delayed Coking Unit................................... $ 38 $ 53
Naphtha Pretreater.................................... 7 4
No. 2 Reformer........................................ 6 1
VGO HDS Unit.......................................... 25 5
FCC Unit.............................................. 75 33
FCC Upgrades.......................................... 11 7
Alkylation Unit....................................... 20 9
MTBE Unit............................................. 2 --
Sulfur Recovery Units/Amine System.................... 26 19
Additional Tank Storage Capacity...................... 21 10
Offsite Facilities.................................... 22 18
Other................................................. 8 4
Engineering and Administrative........................ 8 12
Contingencies......................................... 40* 8
----- ----
Total Phase I....................................... 309 183
----- ----
PHASE II:
Light Naphtha Isomerization Unit...................... 5 2
VGO HDS Unit.......................................... 31 2
Sulfur Recovery Units/Amine System.................... 17 --
Offsite Facilities.................................... 18 --
MTBE Unit Expansion................................... 33 --
Other................................................. 2 --
Engineering and Administrative........................ 3 --
Contingencies......................................... 16* 2
----- ----
Total Phase II...................................... 125 6
----- ----
Total Capital Improvement Program................... $ 434 $189
===== ====
</TABLE>
- --------
* To the extent that expenditures exceed the approved capital budget for a
unit or units, the contingencies portion of the budget will be allocated to
specific units. As of April 30, 1996, approximately $19 million of the

33
<PAGE>

contingencies have been allocated for expenditures on the Delayed Coking Unit
and Engineering and Administrative. The foregoing estimates, as well as other
estimates and projections herein, are subject to substantial revision upon
the occurrence of future events, such as unavailability of, or delays in
financing, engineering problems, work stoppages and cost overruns over which
TARC may not have any control.

TARC estimates that expenditures of between $146 million and $151 million in
addition to the current budget of $434 million will be required to complete
the Capital Improvement Program. As of April 30, 1996, expenditures on the
Capital Improvement Program funded by or approved for reimbursement from the
cash collateral account totaled approximately $189 million. Approximately $17
million remained in the cash collateral account as of April 30, 1996. Giving
effect to current estimates, additional funding of $374 million to $379
million will be required to complete the Capital Improvement Program of which
approximately $41 million is anticipated to be funded by the Port Commission
tax exempt bonds. As of April 30, 1996, TARC had commitments for refinery
construction and maintenance of approximately $64 million. Additional funds
necessary to complete the Capital Improvement Program may be provided from (i)
the sale of additional shares of TransTexas common stock held by TARC, (ii)
the sale of common stock of TARC, (iii) equity investments in TARC (including
the sale of preferred stock of TARC to the Company, funded by the sale of
TransTexas common stock held by the Company), (iv) capital contributions by
TransAmerican, or (v) other sources of financing, the access to which could
require the consent of the holders of the TARC Notes. TARC has entered into
preliminary discussions with potential third party investors, including
strategic equity investors, financial investors and foreign producers of crude
oil. There is no assurance that sufficient funds will be available from these
sources on a timely basis or upon terms acceptable to TARC and TransAmerican.
If this financing is not available when needed or if significant engineering
problems, work stoppages or cost overruns occur, TARC may not be able to
complete and test Phase I of the Capital Improvement Program by February 15,
1997. Even if required financing is obtained on a timely basis, completion by
February 15, 1997 will still prove very difficult if personnel shortages
prevent full staffing during peak construction periods. TARC has taken steps
to minimize the impact of construction worker shortages, including the
retention of field supervisors, direct hiring of field supervisors and field
labor by major contractors, use of adding a second shift, and modularization
of certain construction items. There can be no assurance that these steps will
prove successful; however, TARC believes that implementation of these steps
will adequately address staffing concerns. Under the TARC Indenture, the
failure of TARC to complete and test Phase I by February 15, 1997 (subject to
extension to August 15, 1997 if certain financial coverage ratios are met)
would constitute an event of default at such date.

TARC and the Port Commission have reached an agreement in principle which
would allow for the issuance of approximately $75 million in Port Commission
tax exempt bonds, the proceeds of which may be used to construct tank storage
facilities, docks and air and waste water treatment facilities. The air and
waste water treatment facilities are included in the Capital Improvement
Program at an estimated cost of $41 million. The issuance of the tax exempt
bonds could provide an alternate source of financing for the construction of
such facilities. The Port Commission would own the facilities built with the
proceeds of the bonds, and TARC would operate the facilities pursuant to a
long-term (30-year) lease. There can be no assurance that the issuance of the
tax-exempt bonds, which may require the consent of the holders of the TARC
Notes, will occur.

TARC plans to complete the CIP in two phases as described below:

Phase I

Phase I is expected to be completed and tested in February 1997 subject to
timely availability of financing (see "Liquidity and Capital Resources").
Phase I will involve completion or reactivation of a delayed coking unit, a
naphtha pretreater, a catalytic reformer, a vacuum gas oil
hydrodesulfurization unit, a fluid catalytic cracking unit, an alkylation
plant, an MTBE unit and sulfur recovery facilities. TARC anticipates that
following completion of Phase I, it will be processing low-cost, sour crude
oil in combination with sweet crude oil and atmospheric tower bottoms.
Products from this phase are expected to include all the products produced
prior to Phase I plus conventional gasoline and petroleum coke. TARC must
raise additional capital to complete Phase I.

34
<PAGE>

Phase II

Phase II is expected to be completed and tested in February 1998 subject to
timely availability of financing (see "Liquidity and Capital Resources"). In
Phase II of the Capital Improvement Program, TARC will expand
hydrodesulfurization capacity, add a naphtha isomerization unit and add sulfur
recovery facilities. TARC anticipates that, following completion of Phase II,
it will process 200,000 BPD of heavy, sour crude oil. TARC must raise
additional capital to complete Phase II.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

<TABLE>
<C> <S>
*10.1 --Note Purchase Agreement, dated as of May 10, 1996, among TransTexas
Gas Corporation, TCW Shared Opportunity Fund II, L.P. and Jefferies &
Company, Inc.
*10.2 --Master Swap Agreement, dated June 6, 1996, between TransTexas Gas
Corporation and AIG Trading Corporation.
*10.3 --Purchase Agreement, dated January 30, 1996, between TransTexas Gas
Corporation and Sunflower Energy Finance Company.
*10.4 --Production Payment Conveyance, executed on January 30, 1996, from
TransTexas Gas Corporation to Sunflower Energy Finance Company.
*10.5 --First Supplement to Purchase Agreement, dated as of February 12, 1996,
among TransTexas Gas Corporation, Sunflower Energy Finance Company and
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
*10.6 --First Supplement to Production Payment Conveyance, executed February
12, 1996, among TransTexas Gas Corporation, Sunflower Energy Finance
Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
*10.7 --Purchase Agreement, dated May 14, 1996, among TransTexas Gas
Corporation, TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
and Sunflower Energy Finance Company.
*10.8 --Production Payment Conveyance, executed May 14, 1996, from TransTexas
Gas Corporation to TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P. and Sunflower Energy Finance Company.
10.9 --Processing Agreement dated April 22, 1996 between TransAmerican
Refining Corporation and Glencore Ltd. (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q of TransAmerican Refining Corporation for
the period ended April 30, 1996, and incorporated herein by reference).
</TABLE>
- --------
* Filed as an exhibit, under the same exhibit number, to the Quarterly Report
on Form 10-Q of TransTexas Gas Corporation for the period ended April 30,
1996, and incorporated herein by reference.

(b) REPORTS ON FORM 8-K

The following report on Form 8-K was filed during the three months ended
April 30, 1996.

<TABLE>
<CAPTION>
FINANCIAL
ITEM STATEMENTS
DATE OF REPORT REPORTED FILED
-------------- -------- ----------
<S> <C> <C>
February 5, 1996 Item 8 None
</TABLE>

35
<PAGE>

SIGNATURE

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 ENERGY CORPORATION
(Registrant)

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

June 14, 1996 /S/ JEFFREY H. SIEGEL
-------------------------------------
Jeffrey H. Siegel, Chief Financial
Officer
(Principal Financial Officer and
Accounting Officer)

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed balance sheet at April 30, 1996 and the unaudited condensed
statement of operations for the three months ended April 30, 1996 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-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 72,132
<SECURITIES> 0
<RECEIVABLES> 31,805
<ALLOWANCES> 0
<INVENTORY> 37,998
<CURRENT-ASSETS> 202,498
<PP&E> 2,578,237
<DEPRECIATION> 1,337,530
<TOTAL-ASSETS> 1,541,512
<CURRENT-LIABILITIES> 232,791
<BONDS> 1,157,751
96
0
<COMMON> 0
<OTHER-SE> (1,087)
<TOTAL-LIABILITY-AND-EQUITY> 1,541,512
<SALES> 98,127
<TOTAL-REVENUES> 106,521
<CGS> 0
<TOTAL-COSTS> 90,707
<OTHER-EXPENSES> (57,702)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,374
<INCOME-PRETAX> 50,142
<INCOME-TAX> 1,626
<INCOME-CONTINUING> 48,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,516
<EPS-PRIMARY> 5,391
<EPS-DILUTED> 0

</TABLE>