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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended July 31, 1997
Registration Number 33-85930
---------------
TRANSAMERICAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0441642
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 200
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 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
September 15, 1997 is 9,000.
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TRANSAMERICAN ENERGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I.
FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of July 31, 1997 and January 31, 1997................... 2
Condensed Consolidated Statement of Operations for the three and six months ended July 31, 1997
and 1996...................................................................................... 3
Condensed Consolidated Statement of Cash Flows for the six months ended July 31, 1997 and 1996.. 4
Notes to Condensed Consolidated Financial Statements............................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 30
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 31
Item 2. Changes in Securities and Use of Proceeds....................................................... 31
Item 6. Exhibits and Reports on Form 8-K................................................................ 31
Signatures................................................................................................. 32
</TABLE>
1
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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>
JULY 31, JANUARY 31,
1997 1997
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 113,659 $ 24,179
Cash restricted for interest - TransTexas -- 46,000
Debt proceeds held in disbursement account - TARC 14,148 --
Accounts receivable 31,628 78,660
Inventories 15,105 12,481
Other current assets 16,588 25,638
---------- ----------
Total current assets 191,128 186,958
---------- ----------
Property and equipment 1,851,647 2,836,696
Less accumulated depreciation, depletion and amortization 702,195 1,451,417
---------- ----------
Net property and equipment -- based on the full cost method of accounting
for gas and oil properties of which $147,080 and $158,973 was excluded
from amortization at July 31, 1997 and January 31, 1997, respectively 1,149,452 1,385,279
---------- ----------
Cash restricted for share repurchases - TransTexas 349,685 --
Debt proceeds held in disbursement accounts 137,662 --
Other assets, net 138,222 41,498
---------- ----------
$1,966,149 $1,613,735
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,542 $ 5,787
Revolving credit agreement 6,249 --
Accounts payable 58,378 48,202
Payable to affiliate 2,397 1,604
Accrued liabilities 49,416 98,861
Long-term debt -- 365,730
---------- ----------
Total current liabilities 125,982 520,184
---------- ----------
Due to affiliates 4,743 26,295
Notes payable to affiliate -- 46,589
Long-term debt, less current maturities 1,513,932 910,469
Revolving credit agreement -- 26,268
Production payments, less current portion 11,218 11,931
Deferred revenue -- 54,554
Deferred income taxes 53,909 31,367
Other liabilities 11,493 32,991
Redeemable preferred stock $0.01 par value, 10,000 shares authorized;
Series A - 1,000 shares issued and outstanding at January 31, 1997 -- 96
Commitments and contingencies (Note 5) -- --
Stockholder's equity (deficit):
Common stock, $0.01 par value, 100,000 shares authorized; 9,000 shares issued
and outstanding -- --
Additional paid-in capital 269,647 158,535
Accumulated deficit (24,775) (148,508)
---------- ----------
244,872 10,027
Advances to affiliates -- (57,036)
---------- ----------
Total stockholder's equity (deficit) 244,872 (47,009)
---------- ----------
$1,966,149 $1,613,735
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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TRANSAMERICAN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids..... $ 39,199 $ 76,737 $111,848 $156,245
Transportation.............................. 2,764 8,675 12,055 16,870
Product sales .............................. -- -- -- 10,857
Gain on the sale of assets ................. 532,929 -- 532,929 7,762
Other....................................... 517 158 617 357
-------- -------- -------- --------
Total revenues ......................... 575,409 85,570 657,449 192,091
-------- -------- -------- --------
Costs and expenses:
Operating................................... 12,450 29,810 47,887 73,390
Depreciation, depletion and amortization.... 22,129 33,262 57,397 65,165
General and administrative ................. 11,915 16,022 29,767 25,663
Taxes other than income taxes............... 3,417 9,672 9,535 15,255
Litigation settlement....................... -- (96,000) -- (96,000)
-------- -------- -------- --------
Total costs and expenses................ 49,911 (7,234) 144,586 83,473
-------- -------- -------- --------
Operating income ....................... 525,498 92,804 512,863 108,618
-------- -------- -------- --------
Other income (expense):
Interest income ............................ 7,293 844 9,114 2,121
Interest expense, net ...................... (41,278) (30,747) (69,932) (54,121)
Gain on the sale of TransTexas stock ....... -- -- -- 56,162
Other, net ................................. 696 65 735 328
-------- -------- -------- --------
Total other income (expense) ........... (33,289) (29,838) (60,083) 4,490
-------- -------- -------- --------
Income before income taxes and
extraordinary item ................... 492,209 62,966 452,780 113,108
Income taxes ................................... 180,311 6,162 172,483 7,788
-------- -------- -------- --------
Income before extraordinary item ............... 311,898 56,804 280,297 105,320
Extraordinary item - early extinguishment
of debt (net of income tax benefit
of $38,833) .................................. (156,539) -- (156,539) --
-------- -------- -------- --------
Net income before preferred
stock dividend ....................... $155,359 $ 56,804 $123,758 $105,320
======== ======== ======== ========
Series A preferred stock dividend............... $ -- $ -- $ 19 $ 19
======== ======== ======== ========
Net income available for common stockholders.... $155,359 $ 56,804 $123,739 $105,301
======== ======== ======== ========
Net income per common share:
Income before extraordinary item ............. $ 34,655 $ 6,312 $ 31,142 $ 11,700
Extraordinary item ........................... (17,393) -- (17,393) --
-------- -------- -------- --------
$ 17,262 $ 6,312 $ 13,749 $ 11,700
======== ======== ======== ========
Weighted average number of shares outstanding... 9,000 9,000 9,000 9,000
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TRANSAMERICAN ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Operating activities:
Net income ......................................................................... $ 123,758 $ 105,320
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Extraordinary item............................................................... 156,539 --
Depreciation, depletion and amortization ........................................ 57,397 65,165
Amortization of discount on long-term debt ...................................... 17,863 40
Amortization of discount on subordinated notes .................................. 4,941 --
Amortization of debt issue costs ................................................ 2,175 7,002
Gain on the sale of assets ...................................................... (532,929) (7,762)
Deferred income taxes ........................................................... 172,483 (11,244)
Gain on the sale of TransTexas stock ............................................ -- (56,162)
Inventory writedown ............................................................. -- 921
Proceeds from volumetric production payments .................................... -- 58,621
Repayment of volumetric production payments ..................................... (45,134) --
Amortization of deferred revenue ................................................ (9,420) (16,087)
Changes in assets and liabilities:
Accounts receivable ........................................................... 47,032 (3,508)
Inventories ................................................................... (2,621) (5,578)
Other current assets .......................................................... 5,050 22,899
Accounts payable .............................................................. 11,885 (1,406)
Accrued liabilities ........................................................... (51,106) (3,125)
Transactions with affiliates, net ............................................. (955) (11,763)
Other assets .................................................................. 259 (2,161)
Other liabilities ............................................................. 1,867 (16,452)
--------- ---------
Net cash provided (used) by operating activities ........................... (40,916) 124,720
--------- ---------
Investing activities:
Capital expenditures ............................................................... (293,412) (191,354)
Proceeds from the sale of assets ................................................... 1,030,032 69,971
Increase in cash restricted for interest............................................ -- (46,000)
Withdrawals from cash restricted for interest....................................... 46,000 46,000
Increase in cash restricted for TransTexas share repurchases ....................... (399,284) --
Withdrawals from cash restricted for TransTexas share repurchases .................. 49,599 --
Advances to affiliate............................................................... (13,304) (9,500)
Payment of advances by affiliate ................................................... 56,354 --
Purchase of TARC warrants .......................................................... (33,010) --
Purchases of treasury stock - TransTexas ........................................... (49,599) --
--------- --------
Net cash provided (used) by investing activities ........................... 393,376 (130,883)
--------- ---------
Financing activities:
Issuance of long-term debt.......................................................... 1,367,706 25,000
Retirement of long-term debt ....................................................... (1,329,214) --
Principal payments on long-term debt ............................................... (5,428) (17,044)
Increase in debt proceeds held in disbursement accounts ............................ (217,813) (26,549)
Withdrawals from disbursement account .............................................. 66,003 50,550
Issuance of note payable ........................................................... 36,000 --
Retirement of note payable ......................................................... (36,000) --
Issuance of production payments .................................................... 20,977 --
Principal payments on production payments .......................................... (23,909) (32,800)
Net proceeds from the sale of TransTexas stock ..................................... -- 42,607
Principal payments on capital lease obligations .................................... (438) (517)
Revolving credit agreement, net .................................................... (20,019) (12,417)
Dividend payment on preferred stock ................................................ (19) (19)
Advances from TransAmerican and affiliates to TARC ................................. 15,026 11,656
Repayment of advances from TransAmerican by TARC ................................... (66,000) (1,925)
Dividend to TransAmerican .......................................................... (23,000) --
Debt issue costs ................................................................... (46,746) (4,256)
Redemption of Series A preferred stock ............................................. (106) --
--------- ---------
Net cash provided (used) by financing activities ........................... (262,980) 34,286
--------- ---------
Increase in cash and cash equivalents ...................................... 89,480 28,123
Beginning cash and cash equivalents ................................................... 24,179 14,114
--------- ---------
Ending cash and cash equivalents ...................................................... $ 113,659 $ 42,237
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
TransAmerican Energy Corporation (the "Company" or "TEC") 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
Natural Gas Corporation ("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. Capitalized terms used
herein and not otherwise defined are as defined in the respective Annual
Reports on Form 10-K of TransTexas, TARC and the Company for the fiscal year
ended January 31, 1997. 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,
1998. The financial information presented herein should be read in conjunction
with the financial statements and notes included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income,
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in financial statements. This statement
will be adopted by TEC effective February 1, 1998. TEC does not believe the
effect of adoption of this statement will have a material effect on its
financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128") and Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"). These statements will be
adopted by the Company effective January 31, 1998. SFAS 128 simplifies the
computation of earnings per share by replacing primary and fully diluted
presentations with the new basic and diluted disclosures. SFAS 129 establishes
standards for disclosing information about an entity's capital structure. The
Company does not believe the effect of adoption of these statements will have a
material impact on its financial statements.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities ("SOP
96-1"), which establishes new accounting and reporting standards for the
recognition and disclosure of environmental remediation liabilities. SOP 96-1
was adopted by the Company effective February 1, 1997. The Company does not
believe the effect of adoption of SOP 96-1 will have a material impact on its
financial position, results of operations or cash flows.
As of July 31, 1997, the TEC Notes Indenture contained restrictions
that could substantially limit the Company's ability to use the assets of one
subsidiary to satisfy the liabilities of the other. 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 quarterly reports on Form 10-Q for the six months ended July 31,
1997.
5
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Below is selected financial information for each consolidated entity
(in millions of dollars):
<TABLE>
<CAPTION>
July 31, 1997
---------------------------------------------------------------------
Consolidation
Balance Sheet Data TARC TransTexas TEC Entries Consolidated
------- ----- ---- -------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ (7.5) $ 2.4 $ 61.1 $ 9.1 $ 65.1
Total assets 781.8 1,011.8 1,589.3 (1,466.3) 1,916.6
Long-term debt 705.7 580.4 1,367.9 (1,140.1) 1,513.9
Stockholder's equity (deficit) 32.2 253.4 214.0 (304.3) 195.3
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended July 31, 1997
-----------------------------------------------------------------------
Consolidation
Operations Data TARC TransTexas TEC Entries Consolidated
--------------- -------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ -- $ 657.8 $ -- $ (0.3) $ 657.5
Operating income (loss) (19.6) 532.7 (0.2) -- 512.9
Net income (loss) (74.0) 248.2 (1.1) (49.3) 123.8
Cash Flow Data
--------------
Operating (15.1) (12.9) (11.0) (16.2) (55.2)
Investing (59.3) 533.4 (1,195.8) 1,179.0 457.3
Financing 80.7 (505.8) 1,275.3 (1,162.8) (312.6)
</TABLE>
Following consummation of the TEC Notes Offering and the transactions
described below, TEC's only source of funds for its holding company operations
and debt service will be from approximately $50 million in working capital
currently held by TEC, payments on the Intercompany Loans (described below),
dividends from its subsidiaries, interest on funds on the Disbursement Account
(defined below), payments made by TARC on behalf of TEC pursuant to the Services
Agreement (as defined) and, in limited circumstances as permitted by the TEC
Notes Indenture, sales of stock TEC holds in its subsidiaries.
During the two years following the TEC Notes Offering, TEC anticipates
that its annual cash needs for holding company operations will be approximately
$2.0 million, which TEC expects to be paid on its behalf by TARC pursuant to
the Services Agreement, and TEC's annual cash interest expense will be
approximately $54.6 million. In addition, TEC and its subsidiaries will pay
$2.5 million in the aggregate per year to TransAmerican for advisory services
and other benefits provided by TransAmerican. TransTexas will be required to
pay TEC approximately $48.9 million in interest annually on the TransTexas
Intercompany Loan. TEC expects to use this interest income together with
income generated from its working capital and, to the extent necessary, its
working capital to satisfy its cash needs, including its cash interest
payments. If TEC incurs unforeseen expenses, there is no assurance that its
capital resources will be sufficient to fund those expenses in addition to
anticipated holding company expenses and debt service.
The TEC Notes Indenture prohibits TEC from selling stock of TransTexas
and TARC during the two years following consummation of the TEC Notes Offering
unless the proceeds from such sales would be used to make an offer to purchase
the TEC Notes. Consequently, during the two years following the consummation
of the TEC Notes Offering, unless holders of the TEC Notes rejected all or a
portion of any such offer to purchase, sales of such stock would not be a
source of funds to supplement TEC's other resources in order to pay unforeseen
expenses.
2. RECENT EVENTS
TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "TEC Notes Offering") of $475 million aggregate principal amount of
11 1/2% Senior Secured Notes due 2002 (the "TEC Senior Secured Notes") and
$1.13 billion aggregate principal amount of 13% Senior Secured Discount Notes
due 2002 (the "TEC Senior Secured Discount Notes" and, together with the TEC
Senior Secured Notes, the "TEC Notes") for net proceeds of approximately $1.3
billion. The TEC Notes are senior obligations of TEC, secured by a lien on
substantially all its existing and future assets, including the intercompany
loans described below. The TEC Notes Indenture contains certain restrictive
covenants including, among others, limitations on incurring additional debt,
assets sales, dividends and transactions with affiliates.
6
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
The TEC Senior Secured Notes bear interest at a rate of 11 1/2% per
annum payable semi-annually in cash in arrears on June 15 and December 15 of
each year, commencing December 15, 1997. Principal on the TEC Senior Secured
Discount Notes will accrete to 100% of the face value thereof by June 15, 1999.
Commencing December 15, 1999, cash interest on the TEC Senior Secured Discount
Notes will be payable semi-annually in arrears on June 15 and December 15 of
each year at a rate of 13% per annum. The TEC Notes will mature on June 15,
2002. The TEC Notes are not redeemable prior to June 15, 2000, except that the
Company may redeem, at its option, prior to June 15, 2000, up to 35% of the
original aggregate principal amount of the TEC Senior Secured Notes and up to
35% of the accreted value of the TEC Senior Secured Discount Notes, at the
redemption prices set forth in the indenture governing the TEC Notes (the "TEC
Notes Indenture"), plus accrued and unpaid interest, if any, to and including
the date of redemption, with the net proceeds of any equity offering. On or
after June 15, 2000, the Notes will be redeemable at the option of TEC, in
whole or in part, at the redemption prices set forth in the TEC Notes
Indenture, plus accrued and unpaid interest, if any, to and including the date
of redemption. Upon the occurrence of a Change of Control (as defined), TEC
will be required to make an offer to purchase all of the outstanding TEC Notes
at a price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest, if any, or, in the case of any such offer to purchase TEC
Senior Secured Discount Notes prior to June 15, 1999, at a price equal to 101%
of the accreted value thereof, in each case, to and including the date of
purchase. In addition, TEC will be obligated, subject to certain conditions,
to make an offer to purchase TEC Notes with Excess Cash (as defined) at a price
equal to 105% of the principal amount of accreted value thereof, as applicable,
if such purchase occurs on or prior to December 31, 1997, at a price equal to
108% of the principal amount or accreted value thereof, as applicable, if such
purchase occurs during the period from January 1, 1998 through June 14, 2000,
and thereafter at the redemption prices set forth in the TEC Notes Indenture in
each case, together with accrued and unpaid interest, if any, to and including
the date of purchase.
INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the TEC
Notes Offering, TEC made intercompany loans to TransTexas in the principal
amount of $450 million (the "TransTexas Intercompany Loan") and to TARC in the
original amount of $676 million (the "TARC Intercompany Loan" and, together
with the TransTexas Intercompany Loan, the "Intercompany Loans"). The promissory
note evidencing the TransTexas Intercompany Loan (i) bears interest at a rate of
10 7/8% per annum, payable semi-annually in cash in arrears and (ii) is secured
initially by a security interest in substantially all of the assets of
TransTexas other than inventory, receivables and equipment. The promissory note
evidencing the TARC Intercompany Loan (i) accretes principal at a rate of 16%
per annum, compounded semi-annually until June 15, 1999 to a final accreted
value of $920 million, and thereafter pays interest semi-annually in cash in
arrears on the accreted value thereof, at a rate of 16% per annum and (ii) is
secured initially by a security interest in substantially all of TARC's assets
other than inventory, receivables and equipment. The Intercompany Loan
agreements contain certain restrictive covenants including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates. Each Intercompany Loan will mature on June 1,
2002. TARC used approximately $103 million of the proceeds of the TARC
Intercompany Loan to repay certain indebtedness, including $36 million of senior
secured notes of TARC that were issued in March 1997 and $66 million of advances
and notes payable owed to an affiliate, and used approximately $437 million to
complete the TARC Notes Tender Offer described below. Remaining proceeds will be
used for the Capital Improvement Program described below and for general
corporate purposes.
Upon the occurrence of a Change of Control (as defined in the TEC Notes
Indenture), TEC will be required to make an offer to purchase all of the
outstanding TEC Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, or, in the case of any such
offer to purchase TEC Senior Secured Discount Notes prior to June 15, 1999, at
a price equal to 101% of the accreted value thereof, in each case, to and
including the date of purchase. Pursuant to the terms of the Intercompany
Loans, TEC may require TARC and TransTexas to pay a pro rata share of the
purchase price paid by TEC. See "Potential Effects of a Change of Control" in
Note 5.
TARC WARRANTS TENDER OFFER. On June 13, 1997, TEC completed a tender offer
for all of the outstanding common stock purchase warrants of TARC ("TARC
Warrants") at a price of $4.50 per warrant. Pursuant to the tender offer, TEC
purchased 7,335,452 TARC Warrants for an aggregate purchase price of
approximately $33 million. TARC intends to enter into a merger with one of its
affiliates pursuant to which each remaining warrant, 159,861 at July 31, 1997,
would become exercisable (at an exercise price of $.01) to receive $4.51 of cash
instead of one share of common stock of TARC.
TARC EQUITY CONTRIBUTION. TEC intends to make a capital contribution to
TARC in the aggregate amount of $226 million from the proceeds of the
TransTexas share repurchase program (discussed below). The amount of this
capital contribution will be retained initially in the Disbursement Account and
contributed to TARC pursuant to the terms of the Disbursement Agreement. See
Note 4.
7
<PAGE> 9
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
DIVIDEND TO TRANSAMERICAN. TEC paid a dividend to TransAmerican in the
amount of $23 million. A portion of the dividend was used to repay the debt of
an affiliate, which had been secured by a pledge of 3.7 million shares of
TransTexas common stock. In connection with the TEC Notes Offering,
TransAmerican contributed the 3.7 million shares of TransTexas common stock to
TEC.
TEC PREFERRED STOCK REDEMPTION. On June 17, 1997, TEC redeemed all of
its outstanding preferred stock for an aggregate amount of $100,000, plus
accrued and unpaid dividends.
LOBO SALE. On May 29, 1997, TransTexas entered into and consummated a
stock purchase agreement with an unaffiliated buyer (the "Lobo Sale
Agreement"), with an effective date of March 1, 1997, to effect the sale (the
"Lobo Sale") of the stock of TransTexas Transmission Corporation ("TTC"), its
subsidiary that owned substantially all of TransTexas' Lobo Trend producing
properties and related pipeline transmission system, for a sales price of
approximately $1.1 billion, subject to adjustments as provided for in the Lobo
Sale Agreement. Purchase price adjustments were made for, among other things:
the value of certain NGLs and stored hydrocarbons; the value of gas in TTC's
pipeline; prepaid expenses relating to post-effective date operations;
post-closing expenses related to pre-closing operations; the value of oil and
gas produced and sold between the effective date of the Lobo Sale Agreement and
closing (approximately $44 million); property defects; and estimated costs
associated with liabilities incurred before closing. Purchase price adjustments
made at the closing of the Lobo Sale are subject to a review, reconciliation
and resolution process. With proceeds from the Lobo Sale, TransTexas repaid
certain indebtedness and other obligations, including production payments, in
an aggregate amount of approximately $84 million. The remaining net proceeds
have been or will be used for the repurchase or redemption of the Senior
Secured Notes and for general corporate purposes.
Pursuant to the Lobo Sale, TransTexas is required to indemnify the buyer
for certain liabilities related to the assets owned by TTC. Although
TransTexas does not anticipate that it will incur any material indemnity
liability, no assurance can be given that TransTexas will have sufficient funds
to satisfy any such indemnity obligation or that any payment thereof will not
have a material adverse effect on its ability to fund its debt service, capital
expenditure and working capital requirements.
TRANSTEXAS SENIOR SECURED NOTES TENDER OFFER. On June 13, 1997,
TransTexas completed the Tender Offer for its Senior Secured Notes for
111 1/2% of their principal amount (plus accrued and unpaid interest).
Approximately $785.4 million principal amount of Senior Secured Notes were
tendered and accepted by TransTexas. The Senior Secured Notes remaining
outstanding were called for redemption on June 30, 1997 pursuant to the terms
of the Senior Secured Notes Indenture.
TRANSTEXAS SUBORDINATED NOTES EXCHANGE OFFER. On June 19, 1997, TransTexas
completed an exchange offer, pursuant to which it exchanged approximately $115.8
million aggregate principal amount of its 13 3/4% Senior Subordinated Notes due
2001 (the "TransTexas Subordinated Exchange Notes") for all of its 13 1/4%
Senior Subordinated Notes due 2003 (the "TransTexas Subordinated Notes"). The
indenture governing the Subordinated Exchange Notes (the "Subordinated Notes
Indenture") includes certain restrictive covenants, including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates.
As a result of the Lobo Sale, the Tender Offer and the Exchange Offer,
TransTexas recorded a $533 million pretax gain and a $72 million after tax
extraordinary charge during the quarter ended July 31, 1997.
TRANSTEXAS SHARE REPURCHASE PROGRAM. TransTexas has implemented a stock
repurchase program pursuant to which it plans to repurchase common stock from
its public stockholders and from its affiliates, including TEC and TARC, in an
aggregate amount of approximately $399 million in value of stock purchased. It
is anticipated that TransTexas will acquire four times the number of shares
from its affiliated stockholders that it acquires from its public
8
<PAGE> 10
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
stockholders. Shares may be purchased through open market purchases, negotiated
transactions or tender offers, or a combination of the above. It is anticipated
that the price paid to affiliated stockholders will equal the weighted average
price paid to purchase shares from the public stockholders. As of July 31, 1997,
TransTexas had repurchased 3.1 million shares of common stock from public
stockholders for an aggregate purchase price of approximately $49.6 million. As
of September 15, 1997, approximately 0.8 million additional shares had been
purchased from public stockholders for an aggregate purchase price of
approximately $11.8 million, and approximately 12.6 million shares had been
purchased from TARC and TEC for an aggregate purchase price of approximately
$201 million.
TARC NOTES TENDER OFFER. On June 13, 1997, TARC completed a tender offer
("TARC Notes Tender Offer") for the (i) TARC Mortgage Notes for 112% of their
principal amount (plus accrued and unpaid interest) and (ii) TARC Discount
Notes for 112% of their accreted value. In connection with the TARC Notes
Tender Offer, TARC obtained consents from holders of the TARC Notes to certain
waivers under, and amendments to the indenture governing the TARC Notes (the
"TARC Notes Indenture"), which eliminate or modify certain of the covenants and
other provisions contained in the TARC Notes Indenture. TARC Mortgage Notes
and TARC Discount Notes with an aggregate carrying value of $423 million were
tendered and accepted by TARC at a cost to TARC of approximately $437 million
(including accrued interest, premiums and other costs). As a result of the TARC
Notes Tender Offer, $17.2 million in debt issuance costs were written off and
TARC recorded a total extraordinary charge of approximately $84 million during
the quarter ending July 31, 1997. As of July 31, 1997, TARC Mortgage Notes and
TARC Discount Notes with a carrying value of $15.7 million remained
outstanding.
3. CAPITAL IMPROVEMENT PROGRAM
TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
refining margins by converting low-cost, heavy, sour crude oils into
high-value, light petroleum products including primarily gasoline and heating
oil.
In February 1995, TARC began a construction and expansion program
designed to reactivate the refinery and increase its complexity. From February
1995 through April 1997, TARC spent approximately $245 million on the
construction and expansion program, procured a majority of the equipment
required and completed substantially all of the process design engineering and
a substantial portion of the remaining engineering necessary to complete this
project.
In connection with the TEC Notes Offering, the TARC Intercompany Loan and
the TARC Notes Tender Offer, TARC has adopted a revised capital improvement
program designed to increase the capacity and complexity of the refinery
("Capital Improvement Program"). The most significant projects include: (i)
conversion of the visbreaker unit to a delayed coking unit to process vacuum
tower bottoms into lighter petroleum products, (ii) modernization and upgrade
of a fluid catalytic cracking unit to increase gasoline production capacity and
allow the direct processing of low cost atmospheric residual feedstocks, and
(iii) upgrading and expanding hydrotreating, alkylation and sulfur recovery
units to increase sour crude processing capacity. In addition, TARC plans to
expand, modify and add other processing units, tankage and offsite facilities
as part of the Capital Improvement Program. The Capital Improvement Program
includes expenditures necessary to ensure that the refinery is in compliance
with certain existing air and water discharge regulations and that gasoline
produced will comply with federal standards. TARC will act as general
contractor, but has engaged a number of specialty consultants and engineering
and construction firms to assist TARC in completing the individual projects
that comprise the Capital Improvement Program. Each of these firms was selected
because of its specialized expertise in a particular process or unit integral
to the Capital Improvement Program.
The Capital Improvement Program will be executed in two phases. TARC
estimates that Phase I will be completed at a cost of $223 million, will be
tested and operational by September 30, 1998 and will result in the refinery
having the capacity to process up to 200,000 BPD of sour crude oil. Phase II of
the Capital Improvement Program includes the completion and start-up of the
Fluid Catalytic Cracking Unit utilizing state-of-the-art MSCCSM technology and
the installation of additional equipment expected to further improve operating
margins by allowing for a significant increase in the refinery's capacity to
produce gasoline. TARC estimates that Phase II will be completed at a cost of
$204 million and will be tested and operational by July 31, 1999. The proceeds
received or to be received by TARC from the TARC Intercompany Loan, the
TransTexas share repurchase program and the equity contribution from TEC will
include $427 million designated for use in the Capital Improvement Program,
which TARC believes is adequate to fund the completion of the project. As of
July 31, 1997, TARC had spent approximately $24.1 million on the Capital
Improvement Program with commitments for another approximately $56.1 million.
The foregoing estimates, as well as other estimates and projections herein, are
subject to substantial revision upon the occurrence of future events, such as
unavailability of financing, engineering problems, work stoppages and cost
overruns over which TARC may not have any control, and there can be no assurance
that any such projections or estimates will prove accurate.
9
<PAGE> 11
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
4. DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement (the "Disbursement Agreement") among
TARC, TEC, the TEC Indenture Trustee, Firstar Bank of Minnesota, as disbursement
agent (the "Disbursement Agent"), and Baker & O'Brien, Inc., as construction
supervisor (the "Construction Supervisor"), $208 million of the net proceeds
from the sale of the TEC Notes was placed into accounts in the name of TARC
($135 million) and TEC ($73 million) (together, the "Disbursement Account") to
be held and invested by the Disbursement Agent until disbursed. In addition,
anticipated proceeds to TEC and TARC of approximately $300 million from the
TransTexas share repurchase program have been or will be deposited in the
Disbursement Account as purchases are made. All funds in the Disbursement
Account are pledged as security for the repayment of the TEC Notes.
The Disbursement Agent will make disbursements for the Capital
Improvement Program out of the Disbursement Account in accordance with requests
made by TARC and approved by the Construction Supervisor. The Construction
Supervisor is required to review each such disbursement request by TARC. No
disbursements may be made from the Disbursement Account for purposes other than
the Capital Improvement Program other than (i) up to $1.5 million per month
(except for December 1997, in which disbursements may be up to $4.5 million) to
fund administrative costs and certain taxes and insurance payments, not in
excess of $25.5 million in the aggregate; provided, that if less than $1.5
million is spent in any month (or less than $4.5 million is spent in December
1997) the amounts that may be disbursed in one or more subsequent months will
be increased by the amount of such difference, (ii) up to $50 million for
feedstock upon certification by the Construction Supervisor of the Mechanical
Completion (as defined) of the Delayed Coking Unit and associated facilities,
(iii) up to $19 million to pay interest on, and to redeem, repurchase, defease,
or otherwise retire the remaining TARC Notes and (iv) up to $7.0 million for
outstanding accounts payable. In addition, interest income from the
Disbursement Account may be used for the Capital Improvement Program or
disbursed to fund administrative and other costs of TARC and TEC. As of July
31, 1997, $24.9 million had been disbursed to TARC out of the Disbursement
Account for use in the Capital Improvement Program and $7.0 million for general
corporate purposes.
Pursuant to a disbursement agreement (the "TransTexas Disbursement
Agreement") among TransTexas, TEC, the TEC Indenture Trustee and the Firstar
Bank of Minnesota, N.A. as disbursement agent, approximately $399 million of the
proceeds of the TransTexas Intercompany Loan was placed in an account (the
"TransTexas Disbursement Account") to be held and invested by the disbursement
agent until disbursed. Funds in the TransTexas Disbursement Account will be
disbursed to TransTexas as needed to fund the Share Repurchase Program.
TransTexas may at any time request disbursement of interest earned on the funds
in the TransTexas Disbursement Account. The TransTexas Disbursement Account is
classified as "cash restricted for share repurchases" in the accompanying
condensed consolidated balance sheet. As of July 31, 1997, approximately $49.6
million had been disbursed for use in the Share Repurchase Program.
In March 1997, TARC issued $36 million of 15% senior notes due March 1998
to unaffiliated third parties. These notes were collateralized by a pledge of 5
million shares of TransTexas common stock. Proceeds from the issuance of these
notes were deposited in a cash collateral account and used for refinery
construction and general corporate purposes. These notes were repaid in June
1997.
10
<PAGE> 12
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican in the 234th Judicial District Court, Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a 1990 settlement of litigation with El Paso
Natural Gas Company ("El Paso"), and that TransAmerican has been unjustly
enriched by its failure to share such proceeds with Alameda. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda appealed
to the Fourteenth Court of Appeals, which affirmed the trial court judgment in
favor of TransAmerican. Alameda filed a motion for rehearing on April 10, 1997
and TransAmerican responded. The court denied Alameda's motion, and Alameda
has appealed to the Texas Supreme Court.
ASPEN. TransAmerican brought suit on September 29, 1993 against Aspen
Services, Inc. ("Aspen"), seeking an audit and accounting of drilling costs
that Aspen had charged while providing drilling services to TransAmerican.
This suit is pending in the 215th Judicial District Court, Harris County,
Texas. 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. On July 19, 1995, Aspen filed 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 properly market the gas from these wells. Aspen sought damages
in an unspecified amount, as well as certain equitable claims. In April 1997,
the trial court ruled against Aspen on all of its claims and counterclaims.
BRIONES. In an arbitration proceeding, Jesus Briones, a lessor,
claimed that one of TransTexas' wells on adjacent lands had been draining
natural gas from a portion of his acreage leased to TransTexas on which no well
had been drilled. On October 31, 1995, the arbitrator decided that drainage
had occurred. On June 3, 1996, the arbitrator issued a letter indicating that
drainage damages would be awarded to Briones in the amount of approximately
$1.4 million. The arbitrator entered his award of damages on June 27, 1996.
On July 3, 1996, TransTexas filed a petition in the 49th Judicial District
Court, Zapata County, Texas, to vacate the arbitrator's award. Briones also
filed a petition to confirm the arbitrator's award. In April 1997, the court
granted Briones' motion for summary judgment. In August 1997, the court
entered a final judgment for Briones in the amount of approximately $1.6
million. TransTexas intends to file a motion for new trial.
FINKELSTEIN. On April 15, 1990, H.S. Finkelstein 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
plaintiff 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
appealed the judgment to the Fourth Court of Appeals, San Antonio, Texas, which
affirmed the judgment on April 3, 1996. TransTexas and TransAmerican filed a
motion for rehearing. On August 14, 1996, the Fourth Court of Appeals reversed
the trial court judgment and rendered judgment in favor of TransAmerican and
TransTexas. On August 29, 1996, Finkelstein filed a motion for stay and a
motion for rehearing with the court. On October 9, 1996, the court denied
Finkelstein's rehearing request. In November 1996, Finkelstein filed an
application for writ of error with the Supreme Court of Texas.
On April 22, 1991, Finkelstein filed a separate 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 plaintiff and seeking damages and attorneys' fees in
excess of $33.7 million. On November 18, 1993, the plaintiff added TransTexas
as an additional defendant. The parties arbitrated this matter in January 1997.
A partial decision from the arbitration panel has been rendered in favor of
Finkelstein. Although the amount of damages has yet to be determined under the
panel's decision, such amount will be substantially less than that sought by
plaintiff.
ARABIAN OFFSHORE PARTNERS. On June 27, 1997, Arabian Offshore
Partners filed a lawsuit against TransTexas in the 14th Judicial District
Court, Dallas County, Texas, seeking $20 million in damages in connection with
TransTexas' refusal to proceed with the acquisition of two jack-up drilling
rigs. TransTexas has filed its answer and is preparing a motion for summary
judgment.
EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Commissioner's Charge against TARC and Southeast
Louisiana Contractors of Norco, Inc. (the "Commissioners Charge") pursuant to
Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended,
42 U.S.C. ss. 2000e et seq. ("Title VII"). In the Commissioner's Charge, the
EEOC charged TARC and Southeast Louisiana Contractors of Norco, Inc.
("Southeast Contractors"), a subsidiary of TransAmerican, with engaging in
unlawful discriminatory hiring and promotion practices based on race and
gender. Each violation of Title VII, if proven, potentially could subject TARC
and/or Southeast Contractors to liability for (i) monetary damages for backpay
and/or front pay in an undetermined amount, and for compensatory damages and/or
punitive damages in an amount that should not exceed $300,000, (ii) injunctive
relief, (iii) attorney's fees, and/or (iv) interest. During the period covered
by the Commissioner's Charge, TARC and Southeast Contractors estimate that they
received a combined total of approximately 15,000 to 22,000 employment
applications and hired (or rehired) a combined total of approximately 1,500 to
2,200 workers. TARC and Southeast Contractors have responded to the
Commissioner's Charge and have
11
<PAGE> 13
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
denied engaging in any unlawful employment practices. TARC and Southeast
Contractors have been cooperating fully with the EEOC in connection with its
investigation. TARC and Southeast Contractors intend to vigorously defend
against the allegations contained in the Commissioner's Charge in all
proceedings before the EEOC and in any subsequent litigation. If TARC and/or
Southeast Contractors are found liable for violations of Title VII based on the
matters asserted in the Commissioner's Charge, TARC can make no assurance that
such liability would not have a material adverse effect on the financial
condition, results of operations and cash flows of TARC or TARC's ability to
pay interest or principal on its debt.
RINEHEART. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court,
Middle District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon
and Indian Village. TARC intends to vigorously defend this claim.
SHELL OIL. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination
of Bayou Trapagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the plaintiffs during trial by purchasing their land
for $5 million. On June 27, 1997, Shell amended its third party action to bring
TARC back into the case. Shell has demanded $400,000 from TARC. TARC has
refused to pay such amount and is defending the case vigorously.
GENERAL. 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 July 31, 1997, 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 $36 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 that 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"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, will require TARC to make capital expenditures
in order to comply with such laws and regulations. To ensure continuing
compliance, TARC has made environmental compliance and permitting issues an
integral part of its refinery's start-up plans and has budgeted for such
capital expenditures in the Capital Improvement Program.
TARC uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes, that are or may
be deemed hazardous substances or wastes. In the past, the refinery has been
the subject of certain environmental enforcement actions, and has incurred
certain fines, as a result of certain of TARC's operations. TARC also was
previously subject to enforcement proceedings relating to its prior production
of leaded gasoline and air emissions. TARC believes that, with minor exception,
all of these past matters were resolved prior to or in connection with the
resolution of the bankruptcy proceedings of its predecessor in interest,
TransAmerican, or are no longer applicable to TARC's operations. As a result,
TARC believes that such matters will not have a material adverse effect on
TARC's future results of operations, cash flow or financial position.
REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. At
this time, TARC cannot estimate the costs of such
12
<PAGE> 14
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
compliance. TARC believes that compliance with the Benzene Waste NESHAPS will
not have a material adverse effect on its financial position, results of
operations or cash flow. Until the refinery is in full operation, however,
there can be no assurance that the regulations will not have such an effect.
In addition, the Environmental Protection Agency ("EPA") promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organics NESHAPS") regulations for petroleum refineries under
the Clean Air Act in 1995, and subsequently has amended such regulations. These
regulations set "Maximum Achievable Control Technology ("MACT") standards for
petroleum refineries. The Louisiana Department of Environmental Quality (the
"LDEQ") has incorporated MACT standards into TARC's air permits under federal
and state air pollution prevention laws. TARC believes that compliance with the
Hazardous Organics NESHAPS will not have a material adverse effect on TARC's
financial position, results of operations or cash flow. Until the refinery is
in full operation, however, there can be no assurance that the regulations will
not have such an effect.
The EPA recently promulgated federal regulations pursuant to the Clean
Air Act to control fuels and fuel additives (the "Gasoline Standards") that
could have a material adverse effect on TARC. Under the new regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced sulfur,
olefins, benzene and aromatics compared to the average 1990 gasoline. The
number and extent of the areas subject to reformulated gasoline standards may
increase in the future if the EPA's National Ambient Air Quality Standards
("NAAQS") proposals for particulate matter and ozone are implemented.
Conventional gasoline may be used in all other domestic markets; however, a
refiner's post-1994 average conventional gasoline must not be more polluting
than it was in 1990. With limited exceptions, to determine its compliance as of
January 1, 1995, a refiner must compare its post-1994 and 1990 average values
of controlled fuel parameters and emissions. The Gasoline Standards recognize
that many gasoline refiners may not be able to develop an individual 1990
baseline for a number of reasons, including, for example, lack of adequate data
or the absence or limited scope of operations in 1990. Under such
circumstances, the refiner must use a statutory baseline reflecting the 1990
industry average. The EPA has authority, upon a showing of extenuating
circumstances by a refiner, to grant an individual adjusted baseline or other
appropriate regulatory relief to that refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The
EPA has denied TARC's request for an individual baseline adjustment and other
appropriate regulatory relief. TARC will continue to pursue regulatory relief
with the EPA. There can be no assurance that any action taken by the EPA will
not have a material adverse effect on TARC's future results of operations, cash
flows or financial position.
Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The deadline for a refinery to submit an Operating
Permit Application under the Louisiana program was October 12, 1996. TARC
timely submitted its Title V Operating Permit application and the LDEQ has
designated the application as being administratively complete. As yet, the LDEQ
has not responded further regarding the status of TARC's Title V Operating
Permit. TARC believes that its application will be approved. However, there can
be no assurance that additional expenditures required pursuant to Title V
Operating permit obligations will not have a material adverse effect on TARC's
financial position, results of operations or cash flow.
13
<PAGE> 15
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
CLEANUP MATTERS. TARC also is subject to federal, state, and local laws,
regulations, and ordinances that impose liability for the costs of clean up
relating to, and certain damages resulting from, past spills, disposals, or
other releases of hazardous substances ("Hazardous Substance Cleanup Laws").
Over the past several years, TARC has been, and to a limited extent continues
to be, engaged in environmental cleanup or remedial work relating to or arising
out of operations or activities at the refinery. In addition, TARC has been
engaged in upgrading its solid waste facilities, including the closure of
several waste management units. Similar to numerous other industrial sites in
the state, the refinery has been listed by the LDEQ on the Federal
Comprehensive Environmental Response, Compensation and Liability Information
System, as a result of TARC's prior waste management activities (as discussed
below).
In 1991, the EPA performed a facility assessment at TARC's refinery
pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The
EPA performed a follow up assessment in March 1996, but has not yet issued a
report of its investigations. In July 1996, the EPA and LDEQ agreed that the
LDEQ would serve as the lead agency with respect to the investigation and
remediation of areas of concern identified in the investigation. TARC, under a
voluntary initiative approved by the LDEQ, has submitted a work plan to the
LDEQ to determine which areas may require further investigation and
remediation. The LDEQ has not yet responded to TARC's submission or issued any
further requests relating to this matter. As a result, TARC is unable at this
time to estimate what the costs, if any, will be if the LDEQ does require
further investigation or remediation of the areas identified.
TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA
to include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRPs liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs
for a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also
may be imposed.
At one Superfund site, TARC has submitted information to the EPA
indicating that it should have no liability for this matter, and negotiations
are continuing. With respect to the remaining two sites, TARC's liability for
each such matter has not been determined, and TARC anticipates that it may
incur costs related to the cleanup (and possibly including additional costs
arising in connection with any recovery action brought pursuant to such
matters) at each such site. After a review of the data available to TARC
regarding the basis of TARC's alleged liability at each site, and based on
various factors, which depend on the circumstances of the particular Superfund
site (including, for example, the relationship of TARC to each such site, the
volume of wastes TARC is alleged to have contributed to each such site in
comparison to other PRPs without giving effect to the ability of any other PRPs
to contribute to or pay for any liabilities incurred, and the range of likely
cleanup costs at each such site), TARC does not believe its ultimate
environmental liabilities will be significant; however, it is not possible to
determine the ultimate environmental liabilities, if any, that may arise from
the matters discussed above.
14
<PAGE> 16
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 July 31, 1997, TARC had commitments for refinery
construction and maintenance of approximately $56 million. TARC is acting as
general contractor and can generally cancel or postpone capital projects.
In August 1997, TARC executed a letter of intent to purchase a tank
storage facility adjacent to the refinery. TARC made a nonrefundable deposit of
$5 million toward the purchase price of $40 million (subject to increase by
$7 million if an additional docking facility is included in the assets
purchased).
PROCESSING AGREEMENTS
In April 1996, TARC entered into a processing agreement with a third
party to process feedstocks. Under the terms of the agreement, the processing
fee earned by the third party is based on the margin earned by the third party,
if any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. As of July 31, 1997, TARC has processed 6.4 million barrels
of feedstocks under this agreement. As of July 31, 1997 and January 31, 1997,
TARC was storing approximately 0.8 million and 1.0 million barrels,
respectively, of feedstock and intermediate or refined products. For the six
months ended July 31, 1997 and 1996, TARC recorded income (loss) from
processing agreements of $3.2 million and $(3.3) million, respectively.
Included in the 0.8 million barrels of product stored at the refinery as of
July 31, 1997, is approximately 0.6 million barrels of feedstock related to a
purchase commitment entered into in April 1997. The 0.6 million barrels have
been sold to the third party involved in the processing arrangement. For the
six months ended July 31, 1997, TARC incurred a loss of approximately $4.8
million related to this purchase commitment.
TARC also entered into processing agreements with this third party to
process approximately 1.1 million barrels of the third party's feedstocks for a
fixed price per barrel. As of July 31, 1997, TARC recorded a net margin of
approximately $0.2 million related to these processing arrangements, primarily
as a result of income on the fixed fee processing agreement.
PRODUCTION PAYMENTS
In April 1997, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $20 million.
The production payment calls for the repayment of the primary sum plus an
amount equivalent to a 16% annual interest rate on the unpaid portion of such
primary sum.
HEDGING AGREEMENTS
From time to time, TransTexas enters into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. The Hedge Agreements are accounted for as
hedges if the pricing of the hedge agreement correlates with the pricing
of the natural gas production hedged. Accordingly, gains or losses are
deferred and recorded as assets or liabilities and recognized as an increase or
decrease in revenues in the respective month the physical volumes are sold.
For the three and six months ended July 31, 1997, TransTexas incurred net
settlement losses pursuant to the Hedge Agreements of approximately $2.8
million and $7.4 million, respectively. As of July 31, 1997, TransTexas had no
Hedge Agreements outstanding.
LETTER OF CREDIT
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. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days. TransTexas
has agreed to issue up to 8.6 million shares of its common stock to the third
party if this contingent obligation to such third party becomes fixed and
remains unpaid for 60 days. TransTexas does not believe that this contingency
will occur. If the obligation becomes fixed, and alternative sources of
capital are not available, TransTexas could elect to sell shares of TransTexas'
common stock prior to the maturity of the obligation and use the proceeds of
such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
POTENTIAL 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 (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no
15
<PAGE> 17
TRANSTEXAS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
assurance that the IRS will not challenge this position, or that such challenge
would not be upheld. Under an agreement between TransTexas, TransAmerican and
certain of TransAmerican's subsidiaries (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. As a member of the
TNGC Consolidated Group (defined below), each of TransTexas, TEC and TARC will
be severally liable for any tax liability resulting from the above-described
transactions. The IRS has commenced an audit of the consolidated federal
income tax returns of the TNGC Consolidated Group for its taxable years ended
July 31, 1994 and 1995. Because the audit is in its initial stages, it is not
possible to predict the scope of the IRS' review or whether any tax
deficiencies will be proposed by the IRS as a result of its review.
Based upon independent legal advice, TransTexas has determined that it
will not report any significant federal income tax liability as a result of the
Lobo Sale. There are, however, significant uncertainties regarding TransTexas'
tax position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been
or will be obtained from the IRS regarding the Lobo Sale by any member of the
TNGC Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $250 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that TransAmerican
would be able to fund any such payment at the time due and the other members of
the TNGC Consolidated Group, thus, may be required to pay the tax. TransTexas
has reserved approximately $75 million with respect to the potential tax
liability for financial reporting purposes to reflect a portion of the federal
tax liability that TransAmerican might not be able to pay. If TransTexas were
required to pay this tax deficiency, it is likely that it would be required to
sell significant assets or raise additional debt or equity capital to fund the
payment.
Under certain circumstances, TransAmerican or TEC may sell or
otherwise dispose of shares of common stock of the Company. If, as a
result of any sale or other disposition of the Company's common stock, the
aggregate ownership of TransTexas by members of the TNGC Consolidated Group
(excluding TransTexas) is less than 80% (measured by voting power and value),
TransTexas will no longer be a member of the TNGC Consolidated Group for
federal tax purposes ("Deconsolidation") and, with certain exceptions, will no
longer be obligated under the terms and conditions of, or entitled to the
benefits of, the Tax Allocation Agreement. Further, if TEC 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 TNGC Consolidated
Group, which represents more than 20% of the voting power or equity value of
TARC, then a Deconsolidation of TARC would occur. A Deconsolidation of TARC
would result in a Deconsolidation of TransTexas if the TNGC Consolidated Group,
excluding TARC, does not then own at least 80% of the voting power and equity
value of TransTexas. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred
during the fiscal year ending January 31, 1998, the aggregate amount of this
tax liability is estimated to be between $50 million and $100 million,
assuming no reduction for tax attributes of the TNGC Consolidated Group.
However, such tax liability generally would be substantially reduced or
eliminated in the event that the IRS successfully challenged TransTexas'
position on the Lobo Sale. 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 each TNGC Consolidated Group member will have the ability
to satisfy any tax obligation attributable to the Transactions at the time due
and, therefore, other members of the group, including TEC, TransTexas or TARC,
may be required to pay the tax.
16
<PAGE> 18
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TARC or TEC transfers
shares of common stock 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 thereafter receive any benefit pursuant
to the Tax Allocation Agreement for net operating losses of TransTexas used by
other members of the TNGC Consolidated Group prior to the Deconsolidation of
TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of
a Change of Control, each holder of the TransTexas Subordinated Exchange Notes
will have the right to require TransTexas to repurchase such holder's notes at
101% of the principal amount thereof plus accrued and unpaid interest. Pursuant
to the terms of the TransTexas Intercompany Loan, upon the occurrence of a
Change of Control, TEC would have the right to require TransTexas and TARC to
repay the principal of the TransTexas Intercompany Loan in an amount equal to a
pro rata share of the amount TEC is required to pay under the TEC Notes
Indenture. Such pro rata share would be calculated using the ratio of the
outstanding principal amount of the TransTexas Intercompany Loan (or, for TARC,
the accreted value of the outstanding principal amount of the TARC Intercompany
Loan) to the sum of (i) the outstanding principal amount of the TransTexas
Intercompany Loan plus (ii) the accreted value of the outstanding principal
amount of the TARC Intercompany Loan. A Change of Control would be deemed to
occur under the Subordinated Notes Indenture in the case of certain changes or
other events in respect of the ownership of TransTexas, including any
circumstances pursuant to which any person or group other than John R. Stanley
and his subsidiaries or the TEC Indenture Trustee is or become the beneficial
owner of more than 50% of the total voting power of TransTexas' then outstanding
voting stock and during the 90-day period thereafter the rating on the notes is
downgraded or withdrawn. A Change of Control would be deemed to occur under the
TEC Notes Indenture, the TransTexas Intercompany Loan and the TARC Intercompany
Loan in the case of certain changes or other events in respect of the ownership
or control of TEC, TransTexas, or TARC including any circumstance pursuant to
which (i) any person or group, other than John R. Stanley and his subsidiaries
or the TEC Indenture Trustee is or becomes the beneficial owner of more than 50%
of the total voting power of TEC's then outstanding voting stock, or (iii) TEC
or any of its subsidiaries own some of TransTexas' or TARC's capital stock,
respectively, but less than 50% of the total voting stock or economic value of
TransTexas or TARC, respectively, unless the TEC 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 Subordinated Notes Indenture or the TEC
Notes 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 July 31, 1997, TransTexas had approximately
$26.6 million of indebtedness (excluding the Senior Secured Notes and the
TransTexas Subordinated Exchange Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under the TEC Notes Indenture
or a "change of control" under the terms of other outstanding indebtedness,
there can be no assurance that TransTexas or TARC will have sufficient funds to
satisfy any such payment obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. 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 contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position.
17
<PAGE> 19
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
----------- -----------
<S> <C> <C>
Prepayments:
Trade $ 10,566 $ 9,580
Insurance 3,865 2,913
Deferred loss on commodity price swap agreements -- 8,276
Other 2,157 4,869
---------- ----------
$ 16,588 $ 25,638
========== ==========
</TABLE>
7. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
--------- -----------
<S> <C> <C>
Royalties $ 11,326 $ 27,607
Taxes other than income taxes 7,623 13,501
Interest 12,382 20,978
Payroll 6,167 6,012
Litigation settlements and other -- 1,263
Settlement values of commodity price swap agreements -- 13,276
Insurance 6,269 7,840
Other 5,649 8,384
--------- ----------
$ 49,416 $ 98,861
========= ==========
</TABLE>
Included in litigation settlements and other at January 31, 1997 are
certain non-recurring costs associated with the Lobo Sale.
8. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
---------- -----------
<S> <C> <C>
Litigation settlements and accruals $ 10,008 $ 9,641
Short-term obligations expected to be refinanced:
Litigation settlements -- 2,500
Accrued capital expenditures -- 19,738
Other 1,485 1,112
---------- ----------
$ 11,493 $ 32,991
========== ==========
</TABLE>
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million, of
which approximately $21.0 million remains outstanding as of July 31, 1997.
Proceeds from these transactions, net of current maturities, were used to pay
the obligations listed above under the caption "Short-term obligations expected
to be refinanced" at January 31, 1997 and for general corporate purposes.
18
<PAGE> 20
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
Six Months Ended
July 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Accounts payable for property and equipment $ 36,825 $ 53,803
Interest accretion on TARC Notes capitalized
in property and equipment 30,426 11,687
Product financing arrangements -- (11,022)
Exchange of Subordinated Notes 115,815 --
</TABLE>
19
<PAGE> 21
10. LITIGATION SETTLEMENTS
BENTSEN. On August 13, 1990, Calvin R. Bentsen, et al. filed suit against
TransAmerican and Mr. Stanley in the 139th Judicial District Court, Hidalgo
County, Texas, seeking a portion of the El Paso settlement proceeds, and an
accounting of monies allegedly owed to them, claiming that TransAmerican
produced gas that belonged to them without their knowledge and that
TransAmerican entered into an oral agreement with them which entitled them to
receive a portion of the El Paso settlement proceeds. This case was settled in
April 1997.
COASTAL. On October 28, 1991, The Coastal Corporation ("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 attorneys'
fees to Coastal. On May 29, 1996, the Court of Appeals affirmed the judgment.
In December 1996, the Supreme Court of Texas declined to hear the appeal. The
judgment was paid on May 27, 1997. Coastal executed a Release of Judgment and
Judgment Lien which has been recorded in Webb and Zapata Counties.
FROST. On November 10, 1994, Frost National Bank filed suit against
TransTexas in the 111th Judicial District Court, Webb County, Texas, seeking a
declaratory judgment determination that TransTexas failed to properly and
accurately calculate royalties under a lease. The plaintiff had demanded $10
million plus interest. This case was settled in May 1997.
FARIAS. On February 15, 1996, Celita Suzana Farias filed a wrongful
death action in the 93rd District Court, Hidalgo County, Texas, against
TransTexas and one of its contractors for fatal injuries suffered by the
plaintiff's husband at the Yzaguirre Heirs #3 Well on February 13, 1996. The
plaintiff alleges the defendants operated a crane in such a manner that they
were negligent and grossly negligent. The plaintiff seeks unspecified damages.
On March 7, 1996, the mother of the deceased TransTexas employee filed a
petition in intervention also alleging negligence, gross negligence and malice
and seeking unspecified damages. This litigation was settled in August 1997.
11. CREDIT AGREEMENTS
TransTexas and BNY Financial Corporation are parties to an Amended and
Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 31, 1995 and amended in December 1996. In
connection with the Lobo Sale, the TEC Notes Offering and the Transactions
described in Note 2, TransTexas and BNY entered into a waiver of the BNY
Facility, pursuant to which advances under the BNY Facility are made at the sole
discretion of the lender and the lender may require repayment of principal and
interest at any time. As of July 31, 1997, outstanding advances under the BNY
Facility totaled approximately $6.2 million. Interest accrues on advances at
the rate of (i) the higher of (a) the prime rate of The Bank of New York or (b)
the Federal Funds Rate plus 1/2 of 1% plus (ii) 1/2 of 1%. Obligations under
the BNY Facility are secured by liens on TransTexas' receivables and inventory.
TransTexas is currently negotiating an amendment and restatement of the BNY
Facility.
12. TRANSACTIONS WITH AFFILIATES
In June 1997, certain affiliates repaid approximately $65 million owed to
TransTexas.
TARC purchases natural gas from TransTexas on an interruptible basis. The
total cost of natural gas purchased for the six months ended July 31, 1997 and
1996 was approximately $0.3 million and $1.5 million, respectively. The payable
to TransTexas for natural gas purchased totaled approximately $3.0 million at
July 31, 1997.
20
<PAGE> 22
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
On June 13, 1997, the Transfer Agreement was amended to eliminate
TransAmerican's indemnification obligations to TransTexas other than for tax
liabilities.
Southeast Contractors provides construction personnel to TARC in
connection with TARC's expansion and construction program. These construction
workers are temporary employees, and the number and composition of the
workforce will vary throughout TARC's expansion and construction program.
Southeast Contractors charges TARC for the direct costs it incurs (which
consist solely of employee payroll and benefits) plus administrative costs and
fees of up to $2.0 million per year. Total labor costs charged by Southeast
Contractors for the six months ended July 31, 1997 and 1996 were $9.7 million
and $4.4 million, respectively, of which $2.4 million and $1.8 million were
payable at July 31, 1997 and January 31, 1997, respectively.
On June 13, 1997, a services agreement was entered into among
TransAmerican, TransTexas, TARC and TEC. Under the agreement, TransTexas will
provide accounting, legal, administrative and other services to TARC, TEC and
TransAmerican and its affiliates. TransAmerican will provide advisory services
to TransTexas, TARC and TEC. TARC will pay TransTexas approximately $300,000
per month for services rendered to, and for allocated expenses paid by
TransTexas on behalf of, TARC and TEC. TEC and its subsidiaries will pay
$2.5 million in the aggregate per year to TransAmerican for advisory services
and benefits provided by TransAmerican. As of July 31, 1997, $0.4 million and
$0.3 million was payable by TARC to TransTexas and TransAmerican, respectively,
pursuant to the services agreement.
In July 1997, TEC advanced $5 million to TARC. TARC anticipates a
further advance from TEC of up to $40 million in September 1997. All of the
advances will be governed by the terms of a promissory note that is due June
14, 2002 and bears interest at a rate of approximately 12.8% per annum.
As a result of the $23 million dividend to TransAmerican described in Note
2, the assumption of net tax liabilities of $126 million described in Note 5 and
certain other transfers of assets between the Company and TransAmerican totaling
$8 million, additional paid in capital increased from $158.6 million as of
January 31, 1997 to $269.6 million as of July 31, 1997.
21
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The consolidated financial statements of TEC reflect the results of
operations of TEC's wholly and majority owned subsidiaries, TARC and TransTexas.
As of July 31, 1997, TransTexas' operations consisted of exploration and
production of natural gas, condensate and natural gas liquids ("E&P"). TARC's
business 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.
TRANSTEXAS
RESULTS OF OPERATIONS
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
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. On May
29, 1997, TransTexas entered into and consummated a stock purchase agreement
with an unaffiliated buyer (the "Lobo Sale Agreement"), with an effective date
of March 1, 1997, to effect the sale (the "Lobo Sale") of the stock of
TransTexas Transmission Corporation ("TTC"), its subsidiary that owned
substantially all of TransTexas' Lobo Trend producing properties and related
pipeline transmission system, for a sales price of approximately $1.1 billion,
subject to adjustments as provided for in the Lobo Sale Agreement.
Accordingly, the Company's reported results for the three and six months ended
July 31, 1997 include the effect of reduced volumes attributable to the
producing properties sold as part of the Lobo Sale.
TransTexas' operating data for the three months and six months ended
July 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf) (1) 17.8 38.1 53.2 74.3
NGLs (MMgal) 14.3 41.1 61.7 89.3
Condensate (MBbls) 151 116 426 280
Average prices:
Gas (dry) (per Mcf) (2) $ 2.06 $ 1.95 $ 1.80 $ 1.99
NGLs (per gallon) .26 .31 .29 .31
Condensate (per Bbl) 18.33 19.62 19.46 19.86
Number of gross wells drilled 26 13 55 58
Percentage of wells completed 54% 38% 58% 74%
</TABLE>
- ----------------------
(1) Sales volumes for six months ended July 31, 1997 include 7.3 Bcf
delivered pursuant to volumetric production payments.
(2) Average prices for the three and six months ended July 31, 1997 includes
amounts delivered under volumetric production payments. The average gas
price for TransTexas' undedicated production for these periods was $2.06
per Mcf and $1.91 per Mcf, respectively. Gas prices do not include the
effect of hedging agreements.
22
<PAGE> 24
A summary of TransTexas' operating expenses is set forth below (in millions
of dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Lease $ 4.9 $ 6.2 $ 12.9 $ 13.0
Pipeline 3.2 8.1 11.4 16.3
Natural gas liquids 3.6 10.7 14.5 23.2
-------- -------- -------- --------
11.7 25.0 38.8 52.5
Taxes other than income taxes (1) 2.5 7.2 7.7 12.4
-------- -------- -------- --------
Total $ 14.2 $ 32.2 $ 46.5 $ 64.9
======== ======== ======== ========
</TABLE>
- ----------
(1) Taxes other than income taxes include severance, property, and other
taxes.
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Depletion rates (per Mcfe) $ 1.02 $ 0 .94 $ 1.04 $ 0.92
=========== ========== ======== =========
</TABLE>
TransTexas' Consolidated EBITDA, as defined in the Indenture,
is set forth in the table below (in millions of dollars). EBITDA consists of
TransTexas' earnings before consolidated fixed charges (excluding capitalized
interest), income taxes, depreciation, depletion, and amortization. EBITDA is
not intended to represent cash flow or any other measure of financial
performance in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated EBITDA $ 557.4 $ 143.1 $ 594.3 $ 204.0
=========== ========== ======== =========
</TABLE>
THREE MONTHS ENDED JULY 31, 1997, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1996
Gas, condensate and NGLs revenues for the three months ended July 31,
1997 decreased $38.6 million from the comparable prior year quarter, due
primarily to lower prices for and decreased volumes of natural gas and NGLs,
primarily in the second quarter. The average monthly prices received per Mcf
of gas, excluding amounts dedicated to volumetric production payments, ranged
from $2.02 to $2.17 in the three months ended July 31, 1997, compared to a
range of $2.04 to $2.37 in the same period in the prior year. The decrease in
natural gas sales volumes resulted primarily from the sale of approximately 207
Bcfe of TransTexas' reserves in the Lobo Trend. As of July 31, 1997,
TransTexas had a total of 105 producing wells compared to 861 at July 31,
1996. NGL sales volumes decreased as a result of decreases in the volumes of
natural gas processed. Transportation revenues decreased $5.9 million over the
prior year quarter due to the sale of the pipeline system.
As a result of the Lobo Sale, the Tender Offer and the Exchange Offer,
TransTexas recorded a $533 million pretax gain and a $72 million after tax
extraordinary charge during the quarter ended July 31, 1997.
Primarily as a result of the Lobo Sale, lease operating expenses,
pipeline operating expenses and NGLs cost for the quarter ended July 31, 1997
decreased $1.3 million, $4.9 million and $7.1 million, respectively, over the
comparable prior year period. Depreciation, depletion and amortization expense
for the three months ended July 31, 1997 decreased $11.0 million due to a
decrease in TransTexas' undedicated natural gas production as a result of the
Lobo sale, offset by a $0.08 increase in the depletion rate. General and
administrative expenses decreased approximately $3.0 million in the three months
ended July 31, 1997, due primarily to lower professional fees and litigation
expenses.
Interest income for the three months ended July 31, 1997 increased
approximately $4.8 million over the comparable prior year period due to
increased cash balances in the current quarter. Interest expense decreased
$7.9 million over the same period of the prior year primarily as a
result of the retirement of the Senior Secured Notes, offset in part by an
increase in the amount of interest capitalized in connection with the
acquisition of undeveloped leasehold acreage.
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SIX MONTHS ENDED JULY 31, 1997, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1996
Gas, condensate and NGL revenues for the six months ended July 31, 1997
decreased by $45.5 million from the comparable period of the prior year, due
primarily by decreases in gas, condensate and NGLs sales prices and gas sales
volumes, offset in part by increases in condensate sales volumes. The average
monthly prices received per Mcf of gas, excluding amounts dedicated to
volumetric production payments, ranged from $2.29 to $1.49 in the six months
ended July 31, 1997, compared to a range of $2.02 to $2.45 in the same period
in the prior year. The increase in condensate sales volumes is due primarily
to increased production from Trans Texas' new development areas, offset in part
by the normal decline in natural gas production from the TransTexas Lobo Trend
wells and the sale of the TransTexas producing properties in the Lobo Trend.
NGLs sales volumes decreased as a result of decreases in the volumes of natural
gas processed. Transportation revenues decreased by $4.8 million for the six
months ended July 31, 1997, due primarily to decreases in volumes transported
and the sale of the pipeline system.
Lease operating expenses in the six months ended July 31, 1997 decreased by
$0.1 million from the prior year period due primarily to decreases in the number
of producing wells during the second quarter offset partially by an increase in
salt water disposal and the initiation of a program to increase flow rates on
certain TransTexas' wells through increased workovers and the installation of
leased wellhead compressors. Pipeline operating expenses decreased by $4.9 due
primarily to the sale of the pipeline system as part of the Lobo sale. NGLs
cost decreased by $8.7 million from the comparable period in the prior year due
to increases in the cost of natural gas used in NGL processing, offset by a
decrease in volumes of natural gas processed. Depreciation, depletion and
amortization expense for the six months ended July 31, 1997 decreased by $7.9
million due to the decrease in TransTexas' undedicated natural gas production
partially offset by a $0.12 increase in the depletion rate. General and
administrative expenses increased by $4.7 million due primarily to increases in
wages and benefits and litigation expense. Taxes other than income taxes
decreased by $4.6 million over the comparable prior year period due primarily to
a decrease in ad valorem and excise taxes.
Interest income for the six months ended July 31, 1997 increased by
approximately $5.4 million over the comparable period of the prior year due to
increased average cash balances. Interest expense decreased by $4.8 million
primarily as a result of the retirement of the Senior Secured Notes offset in
part by the accretion on subordinated notes.
Cash flow from operating activities for the six months ended July 31, 1997
decreased by approximately $154.2 million from the prior-year period due
primarily to lower net income from gas and oil production activities and
repayment of production payments in connection with the Lobo Sale.
Cash used in investing activities increased by $602.7 million due to
proceeds from the sale of certain TransTexas producing properties offset in
part by the increase in cash restricted for share repurchases.
Cash flow from financing activities decreased by approximately $464.3
million due primarily to the retirement of the Senior Secured Notes offset in
part by the TransTexas Intercompany Loan of $450 million.
24
<PAGE> 26
TARC
RESULTS OF OPERATIONS
TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals
and its expenses consisted of maintenance and repairs, tank rentals, general
and administrative expenses and property taxes. TARC commenced partial
operations at the refinery in March 1994 and has operated the No. 2 Vacuum Unit
intermittently since that time. TARC may operate the No. 2 Crude Unit and the
No. 2 Vacuum Unit if market conditions are favorable. TARC's decision to
commence or suspend operations is based on the availability of working capital,
current operating margins and the need to tie-in units as they are completed.
TARC does not consider its historical results to be indicative of future
results.
TARC's results of operations are dependent on the operating status of
certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the unit
costs of purchased feedstocks and the unit prices of refined products, which
can vary significantly. The Capital Improvement Program is designed to
significantly change TARC's throughput capacity, the feedstocks processed, and
refined product yields.
TARC currently believes, based on estimates of refining margins and
current estimates for costs of the expansion and modification of the refinery,
that future undiscounted cash flows will be sufficient to recover the cost of
the refinery over its estimated useful life as well as the costs of related
identifiable intangible assets. Management believes there have been no events
or changes in circumstances that would require the recognition of an impairment
loss. However, due to the inherent uncertainties in estimating future refining
margins, and in constructing and operating a large scale refinery, there can be
no assurance that TARC will ultimately recover the cost of the refinery.
Management believes that the book value of the refinery is in excess of its
current estimated fair market value.
THREE MONTHS ENDED JULY 31, 1997, COMPARED WITH THE THREE MONTHS ENDED JULY 31,
1996
There were no costs of products sold for the three months ended July 31,
1997 as compared to $0.9 million for the same period in 1996, due to the sole
use in 1997 of processing arrangements pursuant to which TARC processed
feedstock owned by third parties (as opposed to TARC's purchase of feedstock
and sale of product).
Processing arrangements reflect income of $3.1 million and a loss of $1.5
million for the three months ended July 31, 1997 and 1996, respectively.
Income and losses were primarily due to price management activities.
Operations and maintenance expense for the three months ended July 31,
1997 increased to $4.2 million from $3.5 million for the same period in 1996,
primarily due to the increase of the Company's labor force in connection with
the Capital Improvement Program.
Depreciation and amortization expense for the three months ended July 31,
1997 decreased to $1.7 million from $1.8 million for the same period in 1996,
primarily due to the completion of amortization of certain intangible assets
during 1996.
25
<PAGE> 27
General and administrative expenses decreased to $2.3 million for the
three months ended July 31, 1997 from $3.6 million for the same period in 1996,
primarily due to decreased insurance expense and professional fees.
Taxes other than income taxes for the three months ended July 31, 1997
decreased to $0.9 million from $2.5 million for the same period in 1996,
primarily due to decreased property tax expense.
TARC recognized a gain on purchase commitments of $0.3 million for the
three months ended July 31, 1997. There were no such commitments for the three
months ended July 31, 1996.
Interest income for the three months ended July 31, 1997 increased to
$0.9 million as compared to the same period in 1996 primarily due to the
investment of proceeds from the TARC Intercompany Loan. Interest expense, net
for the three months ended July 31, 1997 increased $2.5 million, due primarily
to interest on the promissory notes to TransAmerican and other long-term debt.
During the three months ended July 31, 1997, TARC capitalized approximately
$22.8 million of interest related to property and equipment additions at TARC's
refinery compared to $16.7 million for the three months ended July 31, 1996.
Equity in income of TransTexas before extraordinary item for the three
months ended July 31, 1997 increased to $47.2 million as compared to $10.1
million for the same period in 1996, due primarily to a $533 million gain on
the sale by TransTexas of a subsidiary. TARC recognized equity in an
extraordinary item of $(10.2) million for the three months ended July 31, 1997.
The extraordinary loss of TransTexas is attributable to a loss on the early
extinguishment of debt as a result of the repurchase by TransTexas of its
Senior Secured Notes and the exchange of its Subordinated Notes.
SIX MONTHS ENDED JULY 31, 1997, COMPARED WITH THE SIX MONTHS ENDED JULY 31,
1996
There were no revenues for the six months ended July 31, 1997 as compared
to $10.9 million for the same period in 1996, primarily as a result of
processing the majority of refinery throughput for third parties under
processing agreements.
There were no costs of products sold for the six months ended July 31,
1997 as compared to $12.4 million for the same period in 1996, due primarily to
the Company's use in 1997 of processing arrangements pursuant to which TARC
processed feedstock owned by third parties (as opposed to TARC's purchase of
feedstock and sale of product).
Processing arrangements reflect income of $3.2 million and a loss of $3.3
million for the six months ended July 31, 1997 and 1996, respectively. Income
and losses were primarily due to price management activities.
Operations and maintenance expense for the six months ended July 31, 1997
increased $1.3 million to $7.9 million from $6.6 million for the same period in
1996, primarily due to the increase of the Company's labor force in connection
with the Capital Improvement Program.
Taxes other than income taxes for the six months ended July 31, 1997
decreased $1.1 million to $1.8 million from $2.9 million for the same period in
1996 primarily due to decreased property tax expense.
Loss on purchase commitments for the six months ended July 31, 1997
consists of a $4.8 million loss related to a commitment to purchase 0.6 million
barrels of feedstock. These barrels have been sold to a third party and are now
subject to a processing agreement.
26
<PAGE> 28
Interest income for the six months ended July 31, 1997 increased $0.8
million as compared to the same period in 1996 primarily due to the investment
of proceeds from the TARC Intercompany Loan. Interest expense for the six
months ended July 31, 1997 increased $4.7 million, primarily due to interest on
the promissory notes to TransAmerican and other long-term debt. During the six
months ended July 31, 1997, the Company capitalized approximately $41.6 million
of interest related to property and equipment additions at the Company's
refinery compared to $33.3 million for the six months ended July 31, 1996.
Equity in income of TransTexas before extraordinary item for the six
months ended July 31, 1997 increased to $45.2 million as compared to $11.1
million for the same period in 1996, due primarily to a $533 million gain on
the sale by TransTexas of a subsidiary. TARC recognized equity in an
extraordinary item of $(10.2) million for the six months ended July 31, 1997.
The extraordinary loss of TransTexas is attributable to a loss on the early
extinguishment of debt as a result of the repurchase by TransTexas of its
Senior Secured Notes and the exchange of its Subordinated Notes.
LIQUIDITY AND CAPITAL RESOURCES
On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.
On May 29, 1997, TransTexas entered into and consummated a stock
purchase agreement with an unaffiliated buyer (the "Lobo Sale Agreement"), with
an effective date of March 1, 1997, to effect the sale (the "Lobo Sale") of
the stock of TTC, its subsidiary that owned substantially all of TransTexas'
Lobo Trend producing properties and related pipeline transmission system, for a
sales price of approximately $1.1 billion, subject to adjustments as provided
for in the Lobo Sale Agreement. Purchase price adjustments were made for,
among other things: the value of certain NGLs and stored hydrocarbons; the
value of gas in TTC's pipeline; prepaid expenses relating to post-effective
date operations; post- closing expenses related to pre-closing operations; the
value of oil and gas produced and sold between the effective date of the Lobo
Sale Agreement and closing (approximately $44 million); property defects; and
estimated costs associated with liabilities discovered before closing.
Purchase price adjustments made at the closing of the Lobo Sale are subject to
a review, reconciliation and resolution process. With proceeds from the Lobo
Sale, TransTexas repaid certain indebtedness and other obligations, including
production payments, in an aggregate amount of approximately $84 million. The
remaining net proceeds have been or will be used for the redemption or
repurchase of the Senior Secured Notes and for general corporate purposes.
27
<PAGE> 29
With the proceeds of the TEC Notes Offering, TEC made intercompany
loans to TransTexas in the principal amount of $450 million (the "TransTexas
Intercompany Loan") and to TARC in the original amount of $676 million (the
"TARC Intercompany Loan" and, together with the TransTexas Intercompany Loan,
the "Intercompany Loans"). The promissory note evidencing the TransTexas
Intercompany Loan (i) bears interest at a rate of 10 7/8% per annum, payable
semi-annually in cash in arrears and (ii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than
inventory, receivables and equipment. The promissory note evidencing the TARC
Intercompany Loan (i) accretes principal at the rate of 16% per annum,
compounded semi-annually, until June 15, 1999 to a final accreted value of $920
million, and thereafter pays interest semi-annually in cash in arrears on the
accreted value thereof, at a rate of 16% per annum and (ii) is secured
initially by a security interest in substantially all of TARC's assets other
than inventory, receivables and equipment. The Intercompany Loans will mature
on June 1, 2002. The Intercompany Loan Agreements contain certain restrictive
covenants including, among others, limitations on incurring additional debt,
asset sales, dividends and transactions with affiliates. Upon the occurrence
of a Change of Control (as defined), TEC will be required to make an offer to
purchase all of the outstanding TEC Notes at a price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any,
or, in the case of any such offer to purchase the TEC Senior Secured Discount
Notes prior to June 15, 1999, at a price equal to 101% of the accreted value
thereof, in each case, to and including the date of purchase. Pursuant to the
terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay a
pro rata share of the purchase price paid by TEC. See " Potential Effects of a
Change of Control."
On June 13, 1997, TransTexas completed a tender offer for its Senior
Secured Notes for 111 1/2% of their principal amount (plus accrued and unpaid
interest). Approximately $785.4 million principal amount of Senior Secured
Notes were tendered and accepted by TransTexas. The Senior Secured Notes
remaining outstanding were called for redemption on June 30, 1997 pursuant to
the terms of the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer, pursuant to
which it exchanged approximately $115.8 million aggregate principal amount of
its 13 3/4% Senior Subordinated Notes due 2001 (the "Subordinated Exchange
Notes") for all of the Subordinated Notes. The Subordinated Exchange Notes pay
interest in cash semi-annually in arrears on each June 30 and December 31
commencing December 31, 1997. The indenture governing the Subordinated
Exchange Notes includes certain restrictive covenants, including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates.
TransTexas has implemented a stock repurchase program pursuant to
which it plans to repurchase common stock from its public stockholders and from
its affiliates, including TEC and TARC, in an aggregate amount of approximately
$399 million in value of stock purchased. It is anticipated that TransTexas
will acquire four times the number of shares from its affiliated stockholders
than it acquires from its public stockholders. Shares may be purchased through
open market purchases, negotiated transactions or tender offers, or a
combination of the above. It is anticipated that the price paid to affiliated
stockholders will equal the weighted average price paid to purchase shares from
the public stockholders. As of July 31, 1997, approximately 3.1 million shares
had been repurchased from public stockholders for an aggregate purchase price of
approximately $49.6 million. As of September 15, 1997, approximately 0.8
million additional shares had been repurchased from public stockholders for an
aggregate purchase price of approximately $11.8 million, and approximately 12.6
million shares had been repurchased from TARC and TEC for an aggregate purchase
price of approximately $201 million.
28
<PAGE> 30
On June 13, 1997, TARC completed a tender offer (the "TARC Notes Tender
Offer") for the (i) TARC Mortgage Notes for 112% of their principal amount
(plus accrued and unpaid interest) and (ii) TARC Discount Notes for 112% of
their accreted value. TARC Mortgage Notes and TARC Discount Notes with an
aggregate carrying value of $423 million were tendered and accepted by TARC at a
cost to TARC of approximately $437 million (including accrued interest,
premiums and other costs). As a result of the TARC Notes Tender Offer, $17.2
million in debt issuance costs were written off and TARC recorded a total
extraordinary charge of approximately $84 million during the quarter ended July
31, 1997. As of July 31, 1997, TARC Mortgage Notes and TARC Discount Notes with
a carrying value of $15.7 million remained outstanding.
On June 13, 1997, TEC completed a tender offer for all of the
outstanding common stock purchase warrants of TARC ("TARC Warrants") at a price
of $4.50 per warrant. Pursuant to the tender offer, TEC purchased 7,335,452 TARC
Warrants for an aggregate purchase price of approximately $33 million. TARC
intends to enter into a merger with one of its affiliates pursuant to which each
remaining warrant, 159,861 at July 31, 1997, would become exercisable (at an
exercise price of $.01) to receive $4.51 of cash instead of one share of common
stock of TARC.
TEC paid a dividend to TransAmerican in the amount of $23 million. A
portion of the dividend was used to repay the debt of an affiliate, which had
been secured by a pledge of 3.7 million shares of TransTexas common stock. In
connection with the TEC Notes Offering, TransAmerican contributed the 3.7
million shares of TransTexas common stock to TEC.
Following consummation of the TEC Notes Offering and the transactions
described in Note 2 to the condensed consolidated financial statements, TEC's
only source of funds for its holding company operations and debt service will be
from approximately $50 million in working capital currently held by TEC,
payments on the Intercompany Loans, dividends from its subsidiaries, interest on
funds on the Disbursement Account, payments made by TARC on behalf of TEC
pursuant to the Services Agreement and, in limited circumstances as permitted by
the TEC Notes Indenture, sales of stock TEC holds in its subsidiaries.
During the two years following the TEC Notes Offering, TEC anticipates
that its annual cash needs for holding company operations will be approximately
$2.0 million, which TEC expects to be paid on its behalf by TARC pursuant to
the Services Agreement, and TEC's annual cash interest expense will be
approximately $54.6 million. In addition, TEC and its subsidiaries will pay
$2.5 million in the aggregate per year to TransAmerican for advisory services
and other benefits provided by TransAmerican. TransTexas will be required to
pay TEC approximately $48.9 million in interest annually on the TransTexas
Intercompany Loan. TEC expects to use this interest income together with
income generated from its working capital and, to the extent necessary, its
working capital to satisfy its cash needs, including its cash interest
payments. If TEC incurs unforeseen expenses, there is no assurance that its
capital resources will be sufficient to fund those expenses in addition to
anticipated holding company expenses and debt service.
The TEC Notes Indenture prohibits TEC from selling stock of TransTexas
and TARC during the two years following consummation of the TEC Notes Offering
unless the proceeds from such sales would be used to make an offer to purchase
the TEC Notes. Consequently, during the two years following the consummation
of the TEC Notes Offering, unless holders of the TEC Notes rejected all or a
portion of any such offer to purchase, sales of such stock would not be a
source of funds to supplement TEC's other resources in order to pay unforeseen
expenses.
29
<PAGE> 31
TransTexas and BNY Financial Corporation are parties to an Amended
and Restated Accounts Receivable Management and Security Agreement (the "BNY
Facility"), dated as of October 31, 1995 and amended in December 1996. In
connection with the Lobo Sale, the TEC Notes Offering and the Transactions
described in Note 2 of Notes to Condensed Consolidated Financial Statements,
TransTexas and BNY entered into a waiver of the BNY Facility, pursuant to which
advances under the BNY Facility are made at the sole discretion of the lender
and the lender may require repayment of principal and interest at any time. As
of July 31, 1997, outstanding advances under the BNY Facility totaled
approximately $6.2 million. Interest accrues on advances at the rate of (i)
the higher of (a) the prime rate of The Bank of New York or (b) the Federal
Funds Rate plus 1/2 of 1% plus (ii) 1/2 of 1%. Obligations under the BNY
Facility are secured by liens on TransTexas' receivables and inventory.
TransTexas is currently negotiating an amendment and restatement of the BNY
Facility.
The TEC Notes Indenture permits TARC to obtain a revolving credit
facility but places certain limitations on TARC's ability to incur other
indebtedness. In order to operate the refinery at expected levels after the
completion of Phase I of the Capital Improvement Program, TARC will require
additional working capital. Although TARC and a lender have engaged in
discussions concerning the terms of a revolving credit facility, there can be
no assurance TARC will be able to obtain such a facility.
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million, of
which approximately $21.0 million remains outstanding. Proceeds from these
transactions, net of current maturities, were used to pay certain short-term
obligations outstanding at January 31, 1997.
TransTexas makes substantial capital expenditures for the exploration,
development and production of natural gas. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements from
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, its accounts
receivable revolving credit facility and other financings. Cash flow from
operations is sensitive to the prices TransTexas receives for its natural gas.
TransTexas from time to time enters into commodity price swap agreements to
reduce its exposure to price risk in the spot market for natural gas. Proceeds
from natural gas sales are received at approximately the same time that
production related burdens, such as royalties, production taxes and drilling
program obligations are payable. TransTexas' leverage and debt covenants may
limit its ability to obtain additional financings.
For the six months ended July 31, 1997, total capital expenditures
were $206 million, including $41 million for lease acquisitions, $129 million
for drilling and development and $36 million for TransTexas' gas
gathering and pipeline system and other equipment and seismic acquisitions.
During this period, TransTexas accelerated its exploration and development
drilling program which included the successful exploration efforts in Galveston
Bay, Goliad County and Brazoria County and, as a result, its capital
expenditures for fiscal 1998 will significantly exceed its original anticipated
amount of $220 million. Anticipated capital expenditures in fiscal 1998,
including the development of the successful exploration areas will require
supplementing cash flow from operations with asset sales or financings.
30
<PAGE> 32
TARC is currently operating certain completed units of the refinery
pursuant to the processing agreements described in Note 5 to the condensed
consolidated financial statements. However, TARC has no current plans to
commence regular refinery operations before completion of the Delayed Coking
Unit. TARC anticipates that, until completion of the Delayed Coking Unit, its
capital needs will be limited to expenditures for the Capital Improvement
Program, general and administrative expenses and refinery maintenance costs.
Following completion of the transactions described in Note 2 of Notes to
Condensed Consolidated Financial Statements, TARC and TEC will have deposited
approximately $529 million into accounts in the name of TARC and TEC (together,
the "Disbursement Account") from which disbursements will be made pursuant to a
disbursement agreement (the "Disbursement Agreement") among TARC, TEC, the TEC
Indenture Trustee, Firstar Bank of Minnesota, N. A., as Disbursement Agent, and
Baker & O'Brien, Inc., as Construction Supervisor. See Note 4 to Notes to
Condensed Consolidated Financial Statements. Of these funds, $427 million will
be available only for the Capital Improvement Program, approximately $25.5
million will be available for general and administrative expenses, $7 million
will be available for outstanding accounts payable, $50 million will be
available for working capital upon completion of the Delayed Coking Unit and
certain supporting units and $19 million will be available for the payment of
interest on, or the redemption, purchase, defeasance or other retirement of, the
outstanding TARC Notes. TARC's estimated capital expenditures for the Capital
Improvement Program are $201 million, $210 million, and $16 million,
respectively, during the remainder of fiscal 1998, and the fiscal years ending
January 31, 1999 and 2000. If engineering problems, cost overruns or delays
occur and other financing sources are not available, TARC may not be able to
complete both phases of the Capital Improvement Program. As of July 31, 1997,
$24.9 million had been disbursed to TARC out of the Disbursement Account for use
in the Capital Improvement Program and $7.0 million for general corporate
purposes.
In April 1996, TARC entered into a processing agreement with a third
party to process feedstocks. Under the terms of the agreement, the processing
fee earned by the third party is based on the margin earned by the third party,
if any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. As of July 31, 1997, TARC has processed 6.4 million barrels of
feedstocks under this agreement. As of July 31, 1997 and January 31, 1997, TARC
was storing approximately 0.8 million and 1.0 million barrels, respectively, of
feedstock and intermediate or refined products. For the six months ended July
31, 1997 and 1996, TARC recorded income (loss) from processing agreements of
$3.2 million and $(3.3) million, respectively. Included in the 0.8 million
barrels of product stored at the refinery as of July 31, 1997, is approximately
0.6 million barrels of feedstock related to a purchase commitment entered into
in April, 1997. The 0.6 million barrels have been sold to the third party
involved in the processing arrangement. For the six months ended July 31, 1997,
TARC incurred a loss of approximately $4.8 million related to this purchase
commitment.
TARC also entered into processing agreements with this third party to
process approximately 1.1 million barrels of the third party's feedstocks for a
fixed price per barrel. As of July 31, 1997, TARC recorded a net margin of
approximately $0.2 million related to these processing arrangements, primarily
as a result of income on the fixed fee processing agreement.
In August 1997, TARC executed a letter of intent to purchase a tank
storage facility adjacent to the refinery. TARC made a nonrefundable deposit of
$5 million toward the purchase price of $40 million (subject to increase by
$7 million if an additional docking facility is included in the assets
purchased).
Environmental compliance and permitting issues are an integral part of
the capital expenditures anticipated in connection with the expansion and
modification of the refinery. TARC does not expect to incur any additional
significant expenses for environmental compliance during fiscal 1998 or fiscal
1999 other than those budgeted for the Capital Improvement Program. There is no
assurance, however, that costs incurred to comply with environmental laws will
not have a material adverse effect on TARC's future results of operations, cash
flows or financial condition. TARC also has contingent liabilities with respect
to litigation matters as more fully described in Note 5 of Notes to Condensed
Consolidated Financial Statements.
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<PAGE> 33
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including
liabilities with respect to litigation matters as described above. 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
contingencies or the probability of the occurrence of these contingencies
cannot be predicted with certainty, TransTexas does not expect these matters to
have a material adverse effect on its financial position. TransTexas has
caused delivery of a letter of credit to secure potential liabilities totaling
approximately $20 million in connection with certain litigation described
above.
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. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days. TransTexas
has agreed to issue up to 8.6 million shares of common stock of TransTexas to
the third party if this contingent obligation to such third party becomes fixed
and remains unpaid for 60 days. TransTexas does not believe that this
contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, TransTexas could elect to sell shares of
TransTexas' common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
Pursuant to the Lobo Sale Agreement, TransTexas is required to
indemnify the buyer for certain liabilities related to the assets owned by TTC.
Although TransTexas does not anticipate that it will incur any material
indemnity liability, no assurance can be given that TransTexas will have
sufficient funds to satisfy any such indemnity obligation or that any payment
thereof will not have a material adverse effect on its ability to fund its debt
service, capital expenditure and working capital requirements.
POTENTIAL 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 (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will
not challenge this position, or that such challenge would not be upheld. Under
an agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (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. As a member of the TNGC Consolidated Group (defined below),
each of TransTexas, TEC and TARC will be severally liable for any tax liability
resulting from the above-described transactions. The IRS has commenced an
audit of the consolidated federal income tax returns of the TNGC Consolidated
Group for its taxable years ended July 31, 1994 and 1995. Because the audit is
in its initial stages, it is not possible to predict the scope of the IRS'
review or whether any tax deficiencies will be proposed by the IRS as a result
of its review.
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Based upon independent legal advice, TransTexas has determined that it
will not report any significant federal income tax liability as a result of the
Lobo Sale. There are, however, significant uncertainties regarding TransTexas'
tax position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been
or will be obtained from the IRS regarding the Lobo Sale by any member of the
TNGC Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $250 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that TransAmerican
would be able to fund any such payment at the time due and the other members of
the TNGC Consolidated Group, thus, may be required to pay the tax. TransTexas
has reserved approximately $75 million with respect to the potential tax
liability for financial reporting purposes to reflect a portion of the federal
tax liability that TransAmerican might not be able to pay. If TransTexas were
required to pay this tax deficiency, it is likely that it would be required to
sell significant assets or raise additional debt or equity capital to fund the
payment.
Under certain circumstances, TransAmerican or TEC may sell or
otherwise dispose of shares of common stock of the Company. If, as a
result of any sale or other disposition of the Company's common stock, the
aggregate ownership of TransTexas by members of the TNGC Consolidated Group
(excluding TransTexas) is less than 80% (measured by voting power and value),
TransTexas will no longer be a member of the TNGC Consolidated Group for
federal tax purposes ("Deconsolidation") and, with certain exceptions, will no
longer be obligated under the terms and conditions of, or entitled to the
benefits of, the Tax Allocation Agreement. Further, if TEC 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 TNGC Consolidated
Group, which represents more than 20% of the voting power or equity value of
TARC, then a Deconsolidation of TARC would occur. A Deconsolidation of TARC
would result in a Deconsolidation of TransTexas if the TNGC Consolidated Group,
excluding TARC, does not then own at least 80% of the voting power and equity
value of TransTexas. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred
during the fiscal year ending January 31, 1998, the aggregate amount of this
tax liability is estimated to be between $50 million and $100 million,
assuming no reduction for tax attributes of the TNGC Consolidated Group.
However, such tax liability generally would be substantially reduced or
eliminated in the event that the IRS successfully challenged TransTexas'
position on the Lobo Sale. 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 each TNGC Consolidated Group member will have the ability
to satisfy any tax obligation attributable to the Transactions at the time due
and, therefore, other members of the group, including TEC, TransTexas or TARC,
may be required to pay the tax.
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Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TEC, or TARC transfers
shares of common stock 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 thereafter receive any benefit
pursuant to the Tax Allocation Agreement for net operating losses of TransTexas
used by other members of the TNGC Consolidated Group prior to the
Deconsolidation of TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay
any Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Exchange Notes will have the
right to require TransTexas to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the
terms of the TransTexas Intercompany Loan, upon the occurrence of a Change of
Control, TEC would have the right to require TransTexas to repay the principal
of the TransTexas Intercompany Loan in an amount equal to a pro rata share of
the amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount of
the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of Control
would be deemed to occur under the Subordinated Notes Indenture in the case of
certain changes or other events in respect of the ownership of TransTexas,
including any circumstances pursuant to which any person or group other than
John R. Stanley and his subsidiaries or the TEC Indenture Trustee is or become
the beneficial owner of more than 50% of the total voting power of TransTexas'
then outstanding voting stock, and during the 90 days thereafter, the rating
of the notes is downgraded or withdrawn. A Change of Control would be deemed to
occur under the TransTexas Intercompany Loan in the case of certain changes or
other events in respect of the ownership or control of TEC, TransTexas, or TARC
including any circumstance pursuant to which (i) any person or group, other than
John R. Stanley and his subsidiaries or the TEC Indenture Trustee is or becomes
the beneficial owner of more than 50% of the total voting power of TEC's then
outstanding voting stock, or (ii) TEC or any of its subsidiaries own some of
TransTexas' or TARC's capital stock, respectively, but less than 50% of the
total voting stock or economic value of TransTexas or TARC, respectively, unless
the TEC 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 TEC
Notes 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 July 31, 1997, TransTexas had approximately
$26.6 million of indebtedness (excluding the Senior Secured Notes and the
Subordinated Notes) subject to such right of repayment or repurchase. In the
event of a Change of Control under the Subordinated Notes Indenture or the TEC
Notes 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.
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<PAGE> 36
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. 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 contingencies or the probability of
the occurrence of these contingencies cannot be predicted with certainty,
TransTexas does not expect these matters to have a material adverse effect on
its financial position.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Quarterly Report on Form 10-Q regarding TARC's
financial position, business strategy, plans and objectives of management for
future operations, including but not limited to words such as "anticipates,"
"expects," "believes," "estimates," "intends," "projects" and "likely" indicate
forward-looking statements. TEC's management believes that its current views and
expectations are based on reasonable assumptions; however, there are significant
risks and uncertainties that could significantly affect expected results.
Factors that could cause actual results to differ materially from those in the
forward-looking statements include, without limitation, fluctuations in the
commodity prices for natural gas, crude oil, condensate and natural gas liquids,
the extent of TransTexas' success in discovering, developing and producing
reserves, engineering problems, work stoppages, cost overruns, personnel or
materials shortages, fluctuations in commodity prices for petroleum and refined
products, casualty losses, conditions in the equity and capital markets, the
ultimate resolution of litigation and competition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 5 and 10 to the condensed consolidated financial statements
for a discussion of the Company's legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes"). The TEC Notes were sold to Jefferies & Company, Inc., as initial
purchaser, and offered and sold to qualified institutional buyers in reliance
on Rule 144A under the Securities Act. The aggregate offering price was
approximately $1.35 billion and the discount to the initial purchaser was
approximately $33.8 million.
The TEC Notes Indenture contains certain restrictive covenants
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 - Certificate of Amendment dated June 5, 1997 to Certificate of
Incorporation of the Company (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
3.2 - Certificate of Amendment dated July 2, 1997 to Certificate of
Incorporation of the Company (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.1 - Second Supplemental Indenture dated June 13, 1997 among TARC,
as issuer, the Company, as guarantor, and First Union
National Bank, as trustee (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.2 - Indenture dated June 13, 1997 among the Company, as issuer,
and Firstar Bank of Minnesota, as trustee (filed as an
exhibit to the Company's current report on Form 8-K dated
June 13, 1997, and incorporated herein by reference thereto).
4.3 - Security and Pledge Agreement dated June 13, 1997 by the
Company in favor of Firstar Bank of Minnesota, as trustee
(filed as an exhibit to the Company's current report on Form
8-K dated June 13, 1997, and incorporated herein by reference
thereto).
4.4 - Registration Rights Agreement dated June 5, 1997 (filed as an
exhibit to the Company's current report on Form 8-K dated
June 13, 1997, and incorporated herein by reference thereto).
4.5 - Loan Agreement dated June 13, 1997 between TransTexas and the
Company (filed as an exhibit to the Company's current report
on Form 8-K dated June 13, 1997, and incorporated herein by
reference thereto).
4.6 - Loan Agreement dated June 13, 1997 between TARC and the
Company (filed as an exhibit to the Company's current report
on Form 8-K dated June 13, 1997, and incorporated herein by
reference thereto).
4.7 - Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of the Company (filed as an exhibit to
the Company's current report on Form 8-K dated June 13, 1997,
and incorporated herein by reference thereto).
4.8 - Security and Pledge Agreement dated June 13, 1997 by TARC in
favor of the Company (filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.9 - Disbursement Agreement dated June 13, 1997 among TARC, the
Company, Firstar Bank of Minnesota, as disbursement agent and
trustee, and Baker & O'Brien, as construction supervisor
(filed as an exhibit to the Company's current report on Form
8-K dated June 13, 1997, and incorporated herein by reference
thereto).
4.10 - Disbursement Agreement dated June 13, 1997 among TransTexas,
the Company and Firstar Bank of Minnesota, as disbursement
agent and trustee (filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.11 - Forms of Mortgage dated June 13, 1997 between TransTexas and
TransAmerican Energy Corporation, (filed as Exhibit 4.6 to
TransTexas' registration statement on Form S-4 (333-33803),
and incorporated herein by reference thereto).
4.12 - Form of Mortgage dated June 13, 1997 between TARC and
TransAmerican Energy Corporation (filed as an exhibit to
TARC's quarterly report for the quarter ended July 31, 1997,
and incorporated herein by reference thereto).
4.13 - Intercreditor and Collateral Agency Agreement dated June 13,
1997 among Firstar Bank of Minnesota, TEC and TransTexas.
4.14 - Intercreditor and Collateral Agency Agreement dated June 13,
1997, among Firstar Bank of Minnesota, First Union National
Bank, TEC, and TARC.
10.1 - Stock Purchase Agreement dated May 29, 1997 by and between
TransTexas and First Union Bank of Connecticut (filed as an
exhibit to TransTexas' Current Report on Form 8-K dated May
29, 1997, and incorporated herein by reference thereto).
10.2 - Services Agreement dated June 13, 1997 among TNGC Holdings
Corporation, TransAmerican, TEC, TARC, TransTexas and TTXD
(filed as an exhibit to TransTexas' Quarterly Report on Form
10-Q for the quarter ended July 31, 1997, and incorporated
herein by reference thereto).
10.3 - Amendment No. 3 to Tax Allocation Agreement dated May 29,
1997. (filed as an exhibit to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference thereto)
10.4 - Amendment No. 4 to Tax Allocation Agreement dated June 13,
1997 (filed as an exhibit to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference thereto).
27.1 - Financial Data Schedule
99.1 - Financial statements of TransTexas dated July 31, 1997 (filed
as part of TransTexas' Quarterly Report on Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by
reference thereto).
99.2 - Financial statements of TARC dated July 31, 1997 (filed as
part of TARC's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1997, and incorporated herein by reference
thereto).
(b) REPORTS ON FORM 8-K
On May 15, 1997, TEC filed a current report on Form 8-K dated May
14, 1997 to report under Item 5 of the announcement of the TEC Notes Offering
and TARC Warrants Tender Offer.
On August 18, 1997, TEC filed a current report on Form 8-K dated
June 13, 1997 to report under Item 5 the completion of the TEC Notes Offering
and related transactions. Pro forma financial statements giving effect to the
TEC Notes Offering and related transactions were included in the report.
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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/ED DONAHUE
-----------------------------------
Ed Donahue, Vice President and
Chief Financial Officer
September 18, 1997
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<PAGE> 39
INDEX TO EXHIBITS
Exhibits Description
-------- -----------
3.1 - Certificate of Amendment dated June 5, 1997 to Certificate of
Incorporation of the Company (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
3.2 - Certificate of Amendment dated July 2, 1997 to Certificate of
Incorporation of the Company (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.1 - Second Supplemental Indenture dated June 13, 1997 among TARC,
as issuer, the Company, as guarantor, and First Union
National Bank, as trustee (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.2 - Indenture dated June 13, 1997 among the Company, as issuer,
and Firstar Bank of Minnesota, as trustee (filed as an
exhibit to the Company's current report on Form 8-K dated
June 13, 1997, and incorporated herein by reference thereto).
4.3 - Security and Pledge Agreement dated June 13, 1997 by the
Company in favor of Firstar Bank of Minnesota, as trustee
(filed as an exhibit to the Company's current report on Form
8-K dated June 13, 1997, and incorporated herein by reference
thereto).
4.4 - Registration Rights Agreement dated June 5, 1997 (filed as an
exhibit to the Company's current report on Form 8-K dated
June 13, 1997, and incorporated herein by reference thereto).
4.5 - Loan Agreement dated June 13, 1997 between TransTexas and the
Company (filed as an exhibit to the Company's current report
on Form 8-K dated June 13, 1997, and incorporated herein by
reference thereto).
4.6 - Loan Agreement dated June 13, 1997 between TARC and the
Company (filed as an exhibit to the Company's current report
on Form 8-K dated June 13, 1997, and incorporated herein by
reference thereto).
4.7 - Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of the Company (filed as an exhibit to
the Company's current report on Form 8-K dated June 13, 1997,
and incorporated herein by reference thereto).
4.8 - Security and Pledge Agreement dated June 13, 1997 by TARC in
favor of the Company (filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.9 - Disbursement Agreement dated June 13, 1997 among TARC, the
Company, Firstar Bank of Minnesota, as disbursement agent and
trustee, and Baker & O'Brien, as construction supervisor
(filed as an exhibit to the Company's current report on Form
8-K dated June 13, 1997, and incorporated herein by reference
thereto).
4.10 - Disbursement Agreement dated June 13, 1997 among TransTexas,
the Company and Firstar Bank of Minnesota, as disbursement
agent and trustee (filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference thereto).
4.11 - Forms of Mortgage dated June 13, 1997 between TransTexas and
TransAmerican Energy Corporation, (filed as Exhibit 4.6 to
TransTexas' registration statement on Form S-4 (333-33803),
and incorporated herein by reference thereto).
4.12 - Form of Mortgage dated June 13, 1997 between TARC and
TransAmerican Energy Corporation (filed as an exhibit to
TARC's quarterly report for the quarter ended July 31, 1997,
and incorporated herein by reference thereto).
4.13 - Intercreditor and Collateral Agency Agreement dated June 13,
1997 among Firstar Bank of Minnesota, TEC and TransTexas.
4.14 - Intercreditor and Collateral Agency Agreement dated June 13,
1997, among Firstar Bank of Minnesota, First Union National
Bank, TEC, and TARC.
10.1 - Stock Purchase Agreement dated May 29, 1997 by and between
TransTexas and First Union Bank of Connecticut (filed as an
exhibit to TransTexas' Current Report on Form 8-K dated May
29, 1997, and incorporated herein by reference thereto).
10.2 - Services Agreement dated June 13, 1997 among TNGC Holdings
Corporation, TransAmerican, TEC, TARC, TransTexas and TTXD
(filed as an exhibit to TransTexas' Quarterly Report on Form
10-Q for the quarter ended July 31, 1997, and incorporated
herein by reference thereto).
10.3 - Amendment No. 3 to Tax Allocation Agreement dated May 29,
1997. (filed as an exhibit to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference thereto)
10.4 - Amendment No. 4 to Tax Allocation Agreement dated June 13,
1997 (filed as an exhibit to TransTexas' Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference thereto).
27.1 - Financial Data Schedule
99.1 - Financial statements of TransTexas dated July 31, 1997 (filed
as part of TransTexas' Quarterly Report on Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by
reference thereto).
99.2 - Financial statements of TARC dated July 31, 1997 (filed as
part of TARC's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1997, and incorporated herein by reference
thereto).
<PAGE> 1
EXHIBIT 4.13
INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT
Intercreditor and Collateral Agency Agreement, dated as of June 13,
1997, by and among Firstar Bank of Minnesota, N.A., in its capacity as
Collateral Agent (as hereinafter defined) and, separately, in it capacity as
TransTexas Note Trustee (as hereinafter defined), Firstar Bank of Minnesota,
N.A., as TEC Note Trustee (as hereinafter defined), TransAmerican Energy
Corporation, a Delaware corporation ("TEC"), as payee of the New Note (as
hereinafter defined), and TransTexas Gas Corporation, a Delaware corporation
(the "Issuer").
WITNESSETH:
WHEREAS, the Issuer, TransTexas Transmission Corporation, a
Delaware corporation and formerly a Subsidiary of the Issuer ("TTC"), and
American Bank National Association, as Trustee, have entered into an Indenture,
dated as of June 15, 1995, as heretofore amended (as heretofore amended and as
the same may hereafter be amended, modified or supplemented from time to time
in accordance with its terms, the "TransTexas Note Indenture"), pursuant to
which the Issuer has issued its 11 1/2% Senior Secured Notes due 2002 (the
"TransTexas Notes") in the aggregate principal amount of $800,000,000;
WHEREAS, Firstar Bank of Minnesota, N.A., is the successor by
merger (effective July 12, 1996) to American Bank National Association, and, by
reason thereof, is the successor TransTexas Note Trustee;
WHEREAS, the Issuer and TTC have entered into certain security
agreements and instruments set forth on Schedule I hereto (as such documents
may be amended, modified or supplemented from time to time, collectively, the
"TransTexas Note Security Documents"), granting a security interest in certain
assets (the "TransTexas Note Collateral") in favor of the TransTexas Note
Trustee for the benefit of the TransTexas Note Holders (as hereinafter
defined);
WHEREAS, concurrently herewith, the Issuer and TEC are entering
into a Loan Agreement, dated as of the date hereof (as the same may be amended,
modified or supplemented from time to time, the "New Note Loan Agreement"),
pursuant to which the Issuer is issuing its promissory note, bearing interest
at the rate of 10-7/8% per annum, payable to the order of TEC in the principal
amount of $450,000,000, and maturing on June 1, 2002 (the "New Note");
WHEREAS, the Issuer has entered into certain security agreements
and instruments set forth on Schedule II hereto (as such documents may be
amended, modified or supplemented from time to time, collectively, the "New
Note Security Documents"), granting a security interest in certain assets (the
"New Note Collateral") in favor of and for the benefit of the New Note Holder;
and
WHEREAS, substantially all of the New Note Collateral is included
in the TransTexas Note Collateral and the Secured Creditors (as hereinafter
defined) desire to set forth their understanding with respect to the Collateral
Agent's duties regarding the New Note Collateral and certain agreements among
the Secured Creditors regarding their interest in the New Note Collateral;
WHEREAS, concurrently herewith, TEC and the TEC Note Trustee are
entering into a Security and Pledge Agreement, dated as of the date hereof (as
the same may be amended, modified or supplemented from time to time, the "TEC
Pledge Agreement"), pursuant to which the New Note, together with all of TEC's
rights and interests under the New Note Security Documents, will be assigned
and transferred to, and subjected to a security interest in favor of, the TEC
Note Trustee pursuant to the TEC Note Indenture as security for the TEC Notes
for the benefit of the TEC Note Holders;
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<PAGE> 2
NOW THEREFORE, in consideration for the premises, covenants and
agreements contained herein, the parties hereto agree as follows:
Section 1. Definitions. As used herein, the following terms shall
have the meanings herein specified and all terms used herein and not otherwise
defined herein shall have the meanings provided therefor in the TransTexas Note
Indenture. Defined terms in this Agreement shall include in the singular
number the plural and in the plural number the singular.
"Acceleration Notice" shall have the meaning specified in Section
5(a) hereof.
"Acceptable Bank" shall mean a bank or trust company in good
standing and incorporated under the laws of the United States or any
State thereof or the District of Columbia, with its principal corporate
trust office within the United States, with capital, surplus and
undistributed profits of not less than $50,000,000.
"Agreement" shall mean this Intercreditor and Collateral Agency
Agreement, as the same may be amended, modified or supplemented from
time to time.
"Collateral Agent" shall mean Firstar Bank of Minnesota, N.A., in
its capacity as Collateral Agent under this Agreement or, upon the
resignation or removal of Firstar Bank of Minnesota, N.A. as Collateral
Agent, any successor Collateral Agent appointed pursuant to the
provisions of Section 9 of this Agreement.
"Collateral Documents" shall mean, collectively, the TransTexas
Note Security Documents and the New Note Security Documents.
"Companies" shall mean TEC, the Issuer and any Guarantor under
either of the Primary Documents and/or the TEC Note Indenture.
"Default" shall, with respect to each Primary Document, have the
meaning provided in such Primary Document.
"Event of Default" shall, with respect to each Primary Document,
have the meaning provided in such Primary Document.
"Holders" shall mean, collectively, the New Note Holder and the
TransTexas Note Holders.
"Issuer" shall have the meaning provided in the first paragraph
hereof.
"Junior Obligations" shall mean all indebtedness and other
monetary obligations, including, without limitation, all principal,
interest, fees, premium, if any, costs and expenses payable, of the
Companies to the Junior Secured Creditor under the New Note, the New
Note Loan Agreement, the New Note Security Documents, and any
instruments, documents or agreements executed by any of the Companies in
connection therewith.
"Junior Secured Creditor" shall mean the New Note Holder.
"New Note" shall have the meaning provided in the fourth recital
hereof.
"New Note Collateral" shall have the meaning provided in the
fifth recital hereof.
"New Note Holder" shall mean the holder from time to time of the
New Note, and, until such time as the New Note is released and
discharged from the TEC Pledge Agreement by instrument in writing
executed by the TEC Note Trustee, the term "New Note Holder" shall mean
the TEC Note Trustee.
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<PAGE> 3
"New Note Loan Agreement" shall have the meaning provided in the
fourth recital hereof.
"New Note Security Documents" shall have the meaning provided in
the fifth recital hereof.
"Obligations" shall mean, collectively, the Senior Obligations
and the Junior Obligations.
"Primary Documents" shall mean, collectively, the TransTexas Note
Indenture and the New Note Loan Agreement.
"Pro Rata Share" shall mean, when calculating a Senior Secured
Creditor's portion of any distribution or amount, that amount (expressed
as a percentage) equal to a fraction the numerator of which is the then
outstanding amount of such Senior Secured Creditor's Senior Obligations
(immediately before such distribution) and the denominator of which is
the then outstanding amount of all Senior Obligations which are entitled
to be paid with such distribution pursuant to the terms of this
Agreement.
"Required Secured Creditors" shall mean (a) the holders of at
least 50% in aggregate principal amount of the outstanding Securities or
(b) the New Note Holder and the TransTexas Note Trustee, on behalf of
the TransTexas Note Holders.
"Requisite Holders" shall mean the New Note Holder or the Holders
of 25% in aggregate principal amount of then outstanding TransTexas
Notes.
"Secured Creditors" shall mean, collectively, the Senior Secured
Creditors and the Junior Secured Creditor.
"Securities" shall mean, collectively, the New Note and the
TransTexas Notes.
"Senior Obligations" shall mean all indebtedness and other
monetary obligations, including, without limitation, all principal,
interest, fees, premium, if any, costs and expenses payable, of the
Companies to the Senior Secured Creditor under the TransTexas Notes, the
TransTexas Note Indenture, the TransTexas Note Security Documents, and
any instruments, documents or agreements executed by any of the
Companies in connection therewith.
"Senior Secured Creditors" shall mean the TransTexas Note
Trustee, together with the TransTexas Note Holders.
"Shared Collateral" means Collateral that is subject to the liens
and security interests of any one or more of the New Note Security
Documents and the liens and security interests of any one or more of the
TransTexas Note Security Documents.
"TEC Notes" shall mean, collectively, the $475,000,000 aggregate
principal amount of 11 1/2% Senior Secured Notes due 2002 and the
$1,130,000,000 aggregate principal amount of 13% Senior Secured Discount
Notes due 2002, issued by TEC pursuant to the TEC Note Indenture.
"TEC Note Holders" shall mean, collectively, the holders from
time to time of the TEC Notes.
"TEC Note Indenture" shall mean the Indenture, dated as of June
13, 1997, between TEC and the TEC Note Trustee, pursuant to which TEC
has issued the TEC Notes.
"TEC Note Pledge Agreement" shall have the meaning provided in
the seventh recital hereof.
"TEC Note Trustee" shall mean Firstar Bank of Minnesota, N.A., in
its capacity as Trustee under the TEC
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Note Indenture or, upon the resignation or removal of Firstar Bank of
Minnesota, N.A., as TEC Note Trustee, any successor Trustee appointed
pursuant to the provisions of Article VII of the TEC Note Indenture.
"TransTexas Note Collateral" shall have the meaning provided in
the third recital hereof.
"TransTexas Note Holders" shall mean, collectively, the holders
from time to time of the TransTexas Notes.
"TransTexas Note Indenture" shall have the meaning provided in
the first recital hereof.
"TransTexas Note Security Documents" shall have the meaning
provided in the third recital hereof.
"TransTexas Note Trustee" shall mean Firstar Bank of Minnesota,
N.A., in its capacity as Trustee under the TransTexas Note Indenture or,
upon its resignation or removal as TransTexas Note Trustee, any
successor Trustee appointed pursuant to the provisions of Section 7.8 of
the TransTexas Note Indenture.
"TransTexas Notes" shall have the meaning provided in the first
recital hereof.
"Trustees" shall mean the New Note Holder and the TransTexas Note
Trustee.
Section 2. Appointment. TEC, as payee of the New Note, the TEC Note
Trustee, for the benefit of the TEC Note Holders, and the TransTexas Note
Trustee, for the benefit of the TransTexas Note Holders, hereby jointly
designate and appoint the Collateral Agent, and the Collateral Agent hereby
accepts such appointment, to act as collateral agent and representative of the
New Note Holder, for the benefit of the TEC Note Holders, and the TransTexas
Note Trustee, for the benefit of the TransTexas Note Holders, in the manner and
upon the terms and conditions set forth herein. Subject to Sections 11, 12(a)
and 13, from and after the date hereof, any New Note Collateral in the
possession of either of the Trustees (or any of its agents) shall be held by
such Trustee (or agent) as an agent and representative of the Collateral Agent
hereunder. Concurrently with the execution of this Agreement, or as soon as
practicable thereafter, each of the Trustees shall deliver any and all New Note
Collateral in its possession (or the possession of any of its agents), as of
the date hereof or at any time thereafter, to the Collateral Agent, who shall
hold such New Note Collateral on behalf of the Trustees for the benefit of the
Holders with notice of their respective security interests therein. TEC and
the TEC Note Trustee, on behalf of the New Note Holder, and the TransTexas Note
Trustee, on behalf of the TransTexas Note Holders, each hereby irrevocably
authorizes, and each Secured Creditor, by its acceptance of any Security, shall
be deemed irrevocably to have authorized, the Collateral Agent to (a) take such
action on behalf of the New Note Holder and on behalf of the TransTexas Note
Trustee, for the benefit of the TransTexas Note Holders, under the provisions
of this Agreement and any of the Collateral Documents and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of the Collateral Agent by the terms hereof and
thereof and such other powers as are reasonably incidental thereto, and (b)
exercise, on behalf of the New Note Holder and on behalf of the TransTexas Note
Trustee, for the benefit of the TransTexas Note Holders, all remedies available
to the Trustees under the Collateral Documents, including, without limitation,
the right to foreclose or otherwise realize upon any of the New Note Collateral
and to initiate, prosecute and defend any and all legal proceedings against the
Companies or any other party to any Collateral Document to the extent that such
legal proceedings relate to or affect the New Note Collateral or the interests
of the Secured Creditors. The Collateral Agent may perform any of its duties
hereunder by or through its agents or employees.
Section 3. Nature of Duties. The Collateral Agent shall have no
duties or responsibilities except those expressly set forth or described herein
or in the Collateral Documents. Neither the Collateral Agent nor any of its
officers, directors, employees or agents shall be liable for any claims,
losses, damages, penalties, actions, judgments, suits, liabilities,
obligations, costs or expenses of any kind or nature whatsoever resulting from
any action taken or omitted by it as such hereunder or under any Collateral
Document or in connection herewith or therewith, unless caused by its or their
gross negligence, bad faith or willful misconduct. The Collateral Agent shall
not have, by reason of this Agreement or any Collateral Document, a fiduciary
relationship in respect of any Secured Creditor,
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and nothing in this Agreement or any Collateral Document, expressed or implied,
is intended to or shall be so construed as to impose upon the Collateral Agent
any obligations in respect of any Collateral Document except as expressly set
forth herein.
Section 4. Lack of Reliance on the Collateral Agent. The Collateral
Agent shall have no duty or responsibility, either initially or on a continuing
basis, to provide any Trustee or Secured Creditor with any credit or other
information with respect to any of the Companies, whether currently in its
possession or coming into its possession at any time or times hereafter, except
to the extent specifically provided in this Agreement.
Section 5. Exercise of Remedies under Collateral Documents.
(a) Trustee's Notices. If either Trustee has notice of a Default or
Event of Default, such Trustee shall give notice to the other Trustee and to
the Collateral Agent within three Business Days after such notice of Default or
Event of Default. If a Trustee or the Requisite Holders by notice to the
Issuer declare all unpaid principal and accrued interest to the date of
acceleration on the New Note or the TransTexas Notes then outstanding to be due
and payable, or if such principal and interest ipso facto becomes due and
payable pursuant to Section 8.1(e) or Section 8.1(f) of the New Note Loan
Agreement or Section 6.2 of the TransTexas Note Indenture, the New Note Holder,
if the New Note becomes due and payable, or the TransTexas Note Trustee, if the
TransTexas Notes become due and payable, shall give notice to the Collateral
Agent and the other Trustee of such acceleration (an "Acceleration Notice")
within three Business Days after such acceleration. Upon receipt by the
Collateral Agent of an Acceleration Notice or upon receipt by the Collateral
Agent of notice of an Event of Default under the TransTexas Note Indenture or
the New Note Loan Agreement, together with instructions from the Required
Secured Creditors as to the actions to be taken by the Collateral Agent, the
Collateral Agent shall, within three Business Days after receipt of such notice
and instructions, commence the taking of such actions toward collection or
enforcement of any Collateral Document and the New Note Collateral (or any
portion thereof), including, without limitation, action toward foreclosure upon
any New Note Collateral, as instructed by the Required Secured Creditors. If
any Default or Event of Default which was the basis for the giving of a notice
to the Collateral Agent shall be cured or waived, and, in the case where there
has been an acceleration, rescission of such acceleration has occurred, in
accordance with the terms of the TransTexas Note Indenture or the New Note Loan
Agreement, any direction to the Collateral Agent to take any action in
connection with such notice shall be deemed rescinded upon notification by the
TransTexas Note Trustee or the New Note Holder given to the Collateral Agent of
such cure or waiver and rescission of acceleration, if applicable.
(b) Duty to Instruct. If the Obligations under one of the TransTexas
Note Indenture or the New Note Loan Agreement have been accelerated or an Event
of Default has occurred or is continuing under the TransTexas Note Indenture or
New Note Loan Agreement and the TransTexas Note Trustee or the New Note Holder,
as applicable, has notice thereof, such Trustee shall send written notice
thereof to the Collateral Agent and shall instruct the Collateral Agent as to
the actions, if any, toward foreclosure on the New Note Collateral that such
Trustee deems appropriate in its discretion.
(c) Rights of Collateral Agent.
(i) Right to Rely. The Collateral Agent may rely on any
document reasonably believed by it to be genuine and to have been signed
or presented by the proper person. The Collateral Agent need not
investigate any fact or matter stated in any such document. Before the
Collateral Agent acts or refrains from acting it may consult with
counsel and may require an Officers' Certificate or an Opinion of
Counsel, which shall conform to Section 14.4 or 14.5 (as the case may
be) of the TransTexas Note Indenture. The Collateral Agent shall not be
liable for any action it takes or omits to take in good faith in
reliance on any such certificate or opinion.
(ii) Attorneys/Agents. The Collateral Agent may act through
its attorneys and agents and shall not be responsible for the misconduct
or negligence of any agent appointed with due care.
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(iii) Good Faith Belief in Authority, Rights or Powers. The
Collateral Agent shall not be liable for any action it takes or omits to
take in the good faith belief that such act or omission was authorized
or within its rights or powers.
(iv) No Investigation. The Collateral Agent shall not be bound
to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, notice,
request, direction, consent, order, bond, debenture or other paper or
document, but the Collateral Agent, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may
see fit.
(v) Obligation to Act upon Instructions. The Collateral Agent
shall be under no obligation to exercise any of the rights or powers
vested in it by this Agreement and/or any Collateral Document at the
request, order or direction of any of the Secured Creditors, pursuant to
the provisions of this Agreement and/or the TransTexas Note Indenture or
the New Note Loan Agreement or any Collateral Document, unless such
Secured Creditors shall have offered to the Collateral Agent reasonable
security or indemnity against the costs, expenses and liabilities which
may be incurred therein or thereby. Upon receipt of such reasonable
security or indemnity, however, the Collateral Agent shall act upon the
instructions of the Required Secured Creditors. Notwithstanding the
foregoing, the Collateral Agent shall not take or refrain from taking
such action if so taking or refraining from taking such action, as the
case may be, would violate applicable law or the terms of the Collateral
Documents or the Primary Documents.
(vi) Requests for Instructions. If the Collateral Agent shall
request instructions from the Secured Creditors with respect to any act
or action (including failure to act) in connection with this Agreement
or any Collateral Document, the Collateral Agent shall be entitled to
refrain from such act or taking such action unless and until the
Collateral Agent shall have received instructions from the Required
Secured Creditors, and the Collateral Agent shall not incur liability to
any person by reason of so refraining. Without limiting the foregoing,
no Secured Creditor shall have any right of action whatsoever against
the Collateral Agent as a result of the Collateral Agent acting or
refraining from acting hereunder or under any Collateral Document in
accordance with the instructions of the Required Secured Creditors in
accordance with this Agreement and the Collateral Documents.
Notwithstanding the foregoing, the Collateral Agent may not refuse to
perform the duties expressly required of it by the terms of this
Agreement.
Section 6. Compensation and Indemnification.
(a) Compensation and Expenses. The Companies agree, jointly and
severally, to pay to the Collateral Agent from time to time upon demand,
reasonable compensation for the services of the Collateral Agent hereunder and
all reasonable fees, out-of-pocket costs and expenses of the Collateral Agent
(including, without limitation, the reasonable fees and disbursements of
counsel) (A) arising in connection with the preparation, execution, delivery,
modification and termination of this Agreement or the enforcement of any of the
provisions hereof or of any Collateral Document, or (B) incurred or required to
be advanced in connection with the sale or other disposition of any New Note
Collateral pursuant to any Collateral Document and the preservation, protection
or defense of the Collateral Agent's rights hereunder and/or under the
Collateral Documents and in and to the New Note Collateral.
(b) Stamp and Other Taxes. The Companies hereby agree, jointly and
severally, to the extent permitted by applicable law, to indemnify the
Collateral Agent, each Trustee and each Secured Creditor for, and hold each of
them harmless against, any present or future claim for liability for any stamp
or other similar tax and any penalties or interest with respect thereto, which
may be assessed, levied or collected by any jurisdiction in connection with any
Collateral Document or any New Note Collateral (other than taxes on the income
of the Collateral Agent or franchise taxes imposed on the Collateral Agent).
(c) Filing Fees, Excise Taxes, Etc. The Companies hereby agree,
jointly and severally, to the extent permitted by applicable law, to pay or to
reimburse the Collateral Agent for any and all amounts in respect of all
search, filing, recording and registration fees, taxes, excise taxes and other
similar imposts which may be payable or determined to be payable in respect of
the execution, delivery, performance and enforcement of this Agreement
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or any Collateral Document (other than taxes on the income of the Collateral
Agent or franchise taxes imposed on the Collateral Agent).
(d) Indemnification of Collateral Agent. The Companies shall,
jointly and severally, indemnify the Collateral Agent for, and hold it harmless
against, any and all claims, demands, expenses (including, but not limited to,
reasonable compensation, disbursements and expenses of the Collateral Agent's
agents and counsel), losses or liabilities incurred by it without negligence,
bad faith or willful misconduct on its part in any way arising out of or in
connection with the acceptance and administration of this Agreement and its
rights or duties hereunder or under any Collateral Document. The Collateral
Agent shall notify the Companies promptly of any claim asserted against the
Collateral Agent for which it may seek indemnity. The Companies shall defend
any such claim and the Collateral Agent shall provide reasonable cooperation at
the Companies' expense in such defense. The Collateral Agent may have separate
counsel and the Companies shall pay the reasonable fees and expenses of such
counsel; provided, that the Companies will not be required to pay such fees and
out-of-pocket expenses if it assumes the Collateral Agent's defense and
provides the Collateral Agent with an Opinion of Counsel that there is no
conflict of interest between the Companies and the Collateral Agent in
connection with such defense. The Companies need not pay for any settlement
made without its written consent. The Companies need not reimburse any expense
or indemnify against any loss or liability to the extent incurred by the
Collateral Agent through its negligence, bad faith or willful misconduct. When
the Collateral Agent incurs expenses or renders services after an Event of
Default specified in Section 6.1(e) or (f) of the TransTexas Note Indenture
occurs, such expenses and the compensation for such services are intended to
constitute expenses of administration under any Bankruptcy Law.
(e) Survival of Obligations. All obligations set forth in this
Section 6 shall survive the execution, delivery and termination of this
Agreement and the other Collateral Documents and the payment of all other
Obligations.
(f) Lien on Shared Collateral. To secure the obligations of the
Companies set forth in this Section 6, the Collateral Agent shall have a Lien
pari passu with that of the TransTexas Note Trustee, in the case in which there
are any Senior Obligations outstanding under the TransTexas Note Indenture, or
a lien prior to that of the New Note Holder, in the case in which there are no
Obligations outstanding under the TransTexas Note Indenture, but there are any
Obligations outstanding under the New Note Loan Agreement, on all New Note
Collateral held or collected by the Collateral Agent in its capacity as such.
Section 7. Collateral Agent's Dealings with the Companies. The
Collateral Agent may accept deposits from, lend money to, or generally engage
in any kind of banking, trust or other business with the Companies or any of
their Affiliates, in each case, as if it were not the Collateral Agent
hereunder.
Section 8. Holders. The Collateral Agent may deem and treat the TEC
Note Trustee as the Holder of the New Note for all purposes hereunder, and the
TEC Note Trustee shall be deemed to be the registered owner of the New Note for
all purposes hereunder. The Collateral Agent may deem and treat the registered
owner of any of the Securities as the owner thereof for all purposes hereunder.
Any request, authority or consent of any person or entity who, at the time of
making such request or giving such authority or consent, is the registered
owner of any Security, shall be conclusive and binding upon any subsequent
holder, transferee, assignee or endorsee, as the case may be, of such Security
or any security issued in exchange therefor. Upon the written or telephonic
request of the Collateral Agent, the TransTexas Note Trustee agrees to furnish
to the Collateral Agent a list of the registered owners of all Securities
issued under the TransTexas Note Indenture and the outstanding principal amount
of each and all such Securities within 10 Business Days after any request
therefor from the Collateral Agent, and the New Note Holder shall also notify
the Collateral Agent as to the outstanding balance of the New Note. The
Collateral Agent shall be entitled to rely on such information as being
accurate and complete.
Section 9. Resignation by or Removal of the Collateral Agent.
(a) Resignation; Removal. The Collateral Agent may resign from the
performance of all of its functions and duties hereunder by giving 20 Business
Days' prior written notice to the Companies and the Trustees.
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The Required Secured Creditors may, at any time, remove the Collateral Agent by
giving 20 Business Days' prior written notice to the Companies, the Trustees
and the Collateral Agent. Such resignation or removal shall take effect upon
the appointment of a successor Collateral Agent pursuant to paragraph (b) or
(c) below or as otherwise provided below.
(b) Appointment of Successor. Upon any such notice of resignation or
removal, the Required Secured Creditors shall appoint a successor Collateral
Agent hereunder who shall be an Acceptable Bank. If a successor Collateral
Agent shall not have been so appointed within the period specified in Section
9(a), the Collateral Agent, with the consent of the Companies, shall then
appoint a successor Collateral Agent which shall serve as Collateral Agent
hereunder until such time, if any, as the Required Secured Creditors appoint a
successor Collateral Agent as provided above.
(c) Effectiveness of Resignation or Removal. A successor Collateral
Agent shall deliver a written acceptance of its appointment to the retiring
Collateral Agent and to the Companies. Immediately thereafter, the retiring
Collateral Agent shall transfer all property held by it as Collateral Agent to
the successor Collateral Agent, subject to the Lien provided in Section 6(f),
and shall execute and deliver to the successor Collateral Agent such documents
as are necessary to perfect or maintain the security interests of the Trustees
in the New Note Collateral, including any documents necessary to assign or
transfer all interests of the retiring Collateral Agent in the New Note
Collateral to the successor Collateral Agent, in the form or forms adequate for
proper filing or recording in such offices and such jurisdictions as are
necessary to put the successor Collateral Agent in the same position as was the
retiring Collateral Agent with respect to the New Note Collateral. Thereafter,
the resignation or removal of the retiring Collateral Agent shall become
effective and the successor Collateral Agent shall have all the rights, powers
and duties of the Collateral Agent under this Agreement. A successor
Collateral Agent shall give notice of its succession to each Secured Creditor.
(d) Consolidation, Merger, Etc. If the Collateral Agent consolidates
with, merges or converts into, or transfers all or substantially all of its
corporate trust business to, another corporation, the resulting, surviving or
transferee corporation without any further act shall, if such resulting,
surviving or transferee corporation is an Acceptable Bank, be the successor
Collateral Agent. The transferring, merging or converting Collateral Agent
shall have all documents necessary to perfect or maintain the security interest
of the Trustees in the New Note Collateral, including any documents necessary
to assign or transfer all interests of the transferring, merging or converting
Collateral Agent in the New Note Collateral, executed and delivered to it in
the form or forms adequate for proper filing or recording in such offices and
such jurisdictions as are necessary to put the successor Collateral Agent in
the same position as the transferring, merging or converting Collateral Agent
with respect to the New Note Collateral.
(e) Compensation Continuing. Any person or entity acting as
Collateral Agent shall continue to be entitled to receive compensation as
provided in Section 6 hereof so long as such person or entity acts as
Collateral Agent hereunder.
Section 10. Release or Substitution of New Note Collateral. The
Collateral Agent shall, at any time and from time to time, release or
substitute all or any portion of the New Note Collateral in accordance with and
upon receipt of written instructions from the Required Secured Creditors. The
Secured Creditors agree that each such release or substitution shall be binding
and conclusive upon them and hereby waive all rights and claims with respect to
such release or substitution.
Section 11. First and Prior Rights of Senior Secured Creditors; Second
Rights of Junior Secured Creditor.
(a) As long as all or any portion of the Senior Obligations remains
outstanding, unpaid or unsatisfied, each of the Junior Secured Creditor agrees
that (i) except as expressly set forth in this Section 11(a), the Junior
Obligations shall be and hereby are subordinated and the payment thereof is
deferred until the full and final payment in cash of the Senior Obligations,
(ii) its interest in the New Note Collateral shall, irrespective of the time,
order or method of perfection or creation of any security interests or liens in
the New Note Collateral on behalf of any
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Secured Creditor, or the recording of mortgages or filing of financing
statements or any other recordings or filings, be junior and subordinated, and
inferior in priority, operation and effect, to the interests of the Senior
Secured Creditors in the New Note Collateral to the extent and in the manner
provided herein, and (iii) it shall refrain from taking any action to foreclose
upon, take possession of, liquidate or otherwise proceed against the New Note
Collateral, whether under the New Note Security Documents or otherwise, except
as expressly set forth herein. Notwithstanding the preceding provisions of
this Section 11(a), the Companies shall be permitted to pay, and the Junior
Secured Creditor shall be permitted to receive, any regularly scheduled payment
of interest or principal on the New Note so long as at the time of such
payment, or after giving effect thereto, no Default or Event of Default shall
have occurred and be continuing under the TransTexas Note Indenture or would
occur thereunder after giving effect to such payment.
(b) The Junior Secured Creditor will hold in trust and immediately pay
over to the TransTexas Note Trustee, in the same form of payment received, with
appropriate endorsements, for application to the Senior Obligations, any cash
amount that any of the Companies pays to the Junior Secured Creditor with
respect to the New Note, or, as collateral for the Senior Obligations, any
other assets of any of the Companies that the Junior Secured Creditor may
receive with respect to the Junior Obligations, in each case, except with
respect to payments expressly permitted pursuant to Section 11(a).
Section 12. Bankruptcy, Etc.
(a) At any meeting of creditors of the Issuer or in the event of any
case or proceeding, voluntary or involuntary, for the distribution, division or
application of all or part of the assets of the Issuer or the proceeds thereof,
whether such case or proceeding is for the liquidation, dissolution or winding
up of the Issuer or its business, a receivership, insolvency or bankruptcy case
or proceeding, an assignment for the benefit of creditors or a proceeding by or
against the Issuer for relief under the Bankruptcy Law, the Collateral Agent is
hereby irrevocably authorized at any such meeting or in any such proceeding to
receive or collect any cash or other assets of the Issuer distributed, divided
or applied by way of dividend or payment, or any securities issued on account
of any Junior Obligation, and turn over such cash or such other assets or
securities to the TransTexas Note Trustee as collateral for the Senior
Obligations, and to have applied to the Senior Obligations any cash proceeds of
any realization upon such other assets or securities until all of the Senior
Obligations shall have been paid in full in cash, rendering to the Junior
Secured Creditor any surplus to which such Junior Secured Creditor are then
entitled.
(b) At any such meeting of creditors or in the event of any such case
or proceeding, the Junior Secured Creditor shall retain the right to vote and
otherwise act with respect to the Junior Obligations (including, without
limitation, the right to vote to accept or reject any plan of partial or
complete liquidation, reorganization, arrangement, composition or extension),
provided, that the Junior Secured Creditor shall not vote with respect to any
such plan or take any other action in any way so as to contest (i) the validity
of any Senior Obligation or any TransTexas Note Collateral therefor or
guaranties thereof, (ii) the relative rights and duties of any TransTexas Note
Holder established in any instruments or agreements creating or evidencing any
of the Senior Obligations with respect to any of such New Note Collateral or
guaranties or (iii) the Junior Secured Creditor's obligations and agreements
set forth in this Agreement.
Section 13. Application of Payments Received from Realization on the
New Note Collateral.
(a) Upon the occurrence of any event described in Section 12, all monies
received by the Collateral Agent from the sale, liquidation or otherwise of the
New Note Collateral shall be distributed as provided below:
(i) first, to pay the reasonable costs and expenses of the
Collateral Agent in obtaining such proceeds;
(ii) to the extent proceeds remain after the distribution
pursuant to clause (i) above, an amount equal to the outstanding Senior
Obligations held by the Senior Secured Creditors shall be paid to such
Senior Secured Creditors, with each Senior Secured Creditor receiving an
amount equal to its outstanding
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Senior Obligations or, if the proceeds are insufficient for the payment
in full of all Senior Obligations held by the Senior Secured Creditors,
its Pro Rata Share of the amount available to be distributed pursuant to
this clause (ii);
(iii) to the extent proceeds remain after the applications
required by clauses (i) and (ii) above, such proceeds shall be paid to
the New Note Holder for application to the Junior Obligations; and
(iv) to the extent proceeds remain after the applications
required by clauses (i), (ii) and (iii) above, such proceeds shall be
paid to the Issuer or its successors or assigns.
(b) Except upon the occurrence of any event described in Section 12,
all monies received by the Collateral Agent from the sale, liquidation or
otherwise of the New Note Collateral shall be applied, (i) if no Event of
Default under the TransTexas Note Indenture shall have occurred and be
continuing or shall result thereunder from the payment of the Junior
Obligations, to the payment of the Obligations so as not to impair or affect
the right of the TransTexas Note Holders to receive payments on the Senior
Obligations as and when due, and (ii) to the payment of the Senior Obligations
if an Event of Default under the TransTexas Note Indenture shall have occurred
and be continuing or shall result thereunder from the payment of the Junior
Obligations. Notwithstanding anything to the contrary in this Section 13(b),
at all times other than during periods in which an Event of Default shall have
occurred and is continuing, the Collateral Agent may release Collateral to one
or more of the Companies from time to time as permitted in the Primary
Documents.
(c) Nothing contained in this Agreement shall or shall be construed
to prohibit, limit or otherwise affect the rights of the Issuer to transfer,
dispose of or otherwise deal with its properties and assets included within the
New Note Collateral, and the proceeds thereof, in any manner permitted under
the Primary Documents.
(d) Nothing contained in this Agreement shall or shall be construed
to impair or affect the right of the TransTexas Note Holders to receive
payments of principal of and interest on the TransTexas Notes as and when due
or the right of the Holder of any TransTexas Note to institute suit for the
enforcement of any payment thereon as and when due.
Section 14. Further Assurances. Each party hereto covenants to
execute and deliver such further instruments and to take such further action as
the Collateral Agent or the Required Secured Creditors may at any time or times
reasonably request in order to carry out the provisions and intent of this
Agreement.
Section 15. Notices. Any notice or other communication in connection
with this Agreement shall be effective if made in writing, addressed to such
party at its address set forth opposite its signature below, and delivered or
mailed postage prepaid, or at such other addresses as the addressee shall have
specified by notice given in compliance with this Section 15. All notices to
any Holder shall be given by delivering or mailing such notice to the New Note
Holder or the TransTexas Note Trustee, as the case may be. Notices shall be
deemed given upon the earlier to occur of (i) the third day following deposit
thereof in the U.S. Mail, first class postage prepaid, or (ii) receipt by the
party to whom such notice is directed.
Section 16. Benefit of Agreement; Obligations Several. This Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective heirs, administrators, successors and assigns of the parties hereto.
The obligations of each of the parties to this Agreement are several and not
joint, it being expressly agreed that no Trustee shall be liable for the
failure of any other Trustee to perform its obligations hereunder. Each
Secured Creditor, including without limitation, each Holder by its acceptance
of a Security, hereby consents to and agrees to be bound by the provisions
hereof applicable to such Secured Creditor.
Section 17. Governing Law. This Agreement and the rights and
obligations of the parties hereunder shall be construed in accordance with and
be governed by the laws of the State of New York. Any legal action or
proceeding with respect to this Agreement may be brought in courts of the State
of New York or of the United States of America for the Southern District of New
York and, by execution and delivery of this Agreement, each party
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hereto hereby accepts for itself and in respect of its property, generally and
unconditionally, the non-exclusive jurisdiction of the aforesaid courts.
Section 18. Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument. A complete set of counterparts shall be lodged with the Collateral
Agent.
Section 19. Effectiveness. This Agreement shall become effective on
the date on which all of the parties hereto shall have signed a copy hereof
(whether the same or different copies) and shall have delivered the same to the
Collateral Agent at its address set forth opposite its signature below. This
Agreement shall remain effective until all of the Senior Obligations are
irrevocably paid in full (or deemed to have been paid and discharged pursuant
to Article Eight of the TransTexas Note Indenture), provided, that once the
Obligations owed to any Secured Creditor shall have been irrevocably paid in
full and its rights and obligations under the Primary Documents, as the case
may be, have been terminated, such Secured Creditor shall have no further
rights or obligations hereunder.
Section 20. Headings Descriptive. The headings of the several
sections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
Section 21. Amendment or Waiver. This Agreement may be amended,
changed, waived or terminated with the written consent of the Required Secured
Creditors, provided, that such amendment, waiver, modification or termination
shall not impair or affect the right of the TransTexas Note Holders to receive
payments of principal of and interest on the TransTexas Notes as and when due
or the right of the Holder of any TransTexas Note to institute suit for the
enforcement of any payment thereon as and when due; and provided further, that
the provisions of Sections 11, 12 and 13 shall not be amended, changed, waived,
or terminated without the prior written consent of the majority of holders of
the outstanding principal amount of the Senior Obligations, provided, however,
that no such consent of any Secured Creditor shall be required if the
Obligations to such Secured Creditor shall have been irrevocably paid in full
and are no longer outstanding.
Section 22. Survival. All indemnities set forth herein shall survive
the execution and delivery of this Agreement and the repayment of all
Obligations.
Section 23. Inconsistent Provisions. If any provision of this
Agreement shall be inconsistent with, or contrary to, any provision in any
Collateral Document, the provision in this Agreement shall be controlling, and
shall supersede such inconsistent provision to the extent necessary to give
full effect to all provisions contained in this Agreement.
Section 24. Shared Collateral. Notwithstanding anything to the
contrary contained in the New Note Security Documents or the TransTexas Note
Security Documents, Shared Collateral in the possession of the Collateral Agent
pursuant to this Agreement, in the possession of TEC or the TEC Note Trustee
pursuant to any of the New Note Security Documents, or in the possession of the
TransTexas Note Trustee pursuant to any of the TransTexas Note Security
Documents shall, pursuant to Section 9-305 of the Uniform Commercial Code as in
effect in the State of New York, be held by such party in possession for its
own account to the extent of its interest therein, and as pledgeholder and
bailee for each of the other Secured Creditors, so that each of the Secured
Creditors shall be deemed to have possession of such Shared Collateral. Each
Secured Creditor is authorized and directed by the Issuer to deliver to the
Collateral Agent for the benefit of the Secured Creditors pursuant to this
Agreement any Shared Collateral now or hereafter in the possession of such
Secured Creditor, and none of such Shared Collateral shall be released or
distributed to the Issuer without the prior written consent of the TEC Note
Trustee, on behalf of the Junior Secured Creditor, and the TransTexas Note
Trustee, on behalf of the Senior Secured Creditors.
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IN WITNESS WHEREOF, the Collateral Agent, the Trustees and the Companies
have caused this Agreement to be duly executed as of the day and year first
above written.
COLLATERAL AGENT
----------------
FIRSTAR BANK OF MINNESOTA, N.A., as Collateral
Agent
By: /s/ FRANK P. LESLIE, III
------------------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
TRANSTEXAS NOTE TRUSTEE
-----------------------
FIRSTAR BANK OF MINNESOTA, N.A., as TransTexas Note
Trustee
By: /s/ FRANK P. LESLIE, III
------------------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
TEC NOTE TRUSTEE
----------------
FIRSTAR BANK OF MINNESOTA, N.A., as TEC Note
Trustee
By: /s/ FRANK P. LESLIE, III
------------------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
COMPANIES
---------
TRANSAMERICAN ENERGY CORPORATION
By: /s/ ED DONAHUE
------------------------------------------------
Name: Ed Donahue
Title: Vice President
TRANSTEXAS GAS CORPORATION
By: /s/ ED DONAHUE
------------------------------------------------
Name: Ed Donahue
Title: Vice President
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Schedule I
TransTexas Note Security Documents
1. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated June 18, 1995, executed by TransTexas
Gas Corporation ("TTGC"), as Mortgagor, to James A. Taylor, trustee for the
benefit of American Bank National Association as Indenture Trustee (the
"Trustee").
2. First Amendment and Supplement to Mortgage Deed of Trust,
Assignment of Production, Security Agreement and Financing Statement dated as
of June 20, 1995, executed by TTGC, as Mortgagor, for the benefit of the
Trustee.
3. Amendment to Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement dated October 16, 1995, executed by
TTGC, as Mortgagor, for the benefit of the Trustee.
4. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated June 6, 1996, executed by TTGC, as
Mortgagor, to James A. Taylor, trustee for the benefit of the Trustee.
5. Supplement to Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement dated as of April 29, 1996, executed
by TTGC, as Mortgagor, for the benefit of the Trustee.
6. Security Agreement, Pledge and Financing Statement dated June 20,
1995, by TTGC in favor of the Trustee.
7. Pipeline Mortgage, Deed of Trust, Assignment, Security Agreement
and Financing Statement (the "Pipeline Mortgage") dated June 18, 1995, executed
by TransTexas Transmission Corporation ("TTTC") for the benefit of the Trustee.
8. Notice of Utility Security Instrument, covering the Pipeline
Mortgage, dated June 18, 1995, executed by TTTC for the benefit of the Trustee.
9. Security Agreement, Pledge and Financing Statement dated June 20,
1995, by TTTC in favor of the Trustee.
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Schedule II
New Note Security Documents
1. Security and Pledge Agreement dated as of June 13, 1997, made by
TransTexas Energy Corporation ("TransTexas") in favor of Firstar Bank of
Minnesota, N.A., as collateral agent (in such capacity, the "Collateral
Agent");
2. Disbursement Agreement dated as of June 13, 1997 by and among
TransTexas Energy Corporation, TransTexas, and Firstar Bank of Minnesota, N.A.,
as disbursement agent (the "TransTexas Disbursement Agreement");
3. Act of Mortgage, Security Agreement and Financing Statement dated
as of June 13, 1997, executed by TransTexas in favor of TransTexas Energy
Corporation (the "TransTexas Louisiana Mortgage");
4. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of June 13, 1997 executed by
TransTexas in favor of James A. Taylor, as trustee for the benefit of
TransTexas Energy Corporation (the "TransTexas Texas Mortgage");
5. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of June 13, 1997 executed by
TransTexas in favor of James A. Taylor, as trustee for the benefit of
TransTexas Energy Corporation (the "TransTexas Mississippi Mortgage");
6. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of June 13, 1997 executed by
TransTexas in favor of James A. Taylor, as trustee for the benefit of
TransTexas Energy Corporation (the "TransTexas Alabama Mortgage");
7. Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement dated as of June 13, 1997 executed by
TransTexas in favor of TransTexas Energy Corporation (the "TransTexas North
Dakota Mortgage");
8. Security and Pledge Agreement dated as of June 13, 1997 (the
"TransTexas Pledge") executed by TransTexas in favor of TransTexas Energy
Corporation;
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<PAGE> 1
EXHIBIT 4.14
INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT
Intercreditor and Collateral Agency Agreement, dated as of June 13,
1997, by and among First Union National Bank, in its capacity as Collateral
Agent (as hereinafter defined) and, separately, in it capacity as TARC Note
Trustee (as hereinafter defined), Firstar Bank of Minnesota, N.A., as TEC Note
Trustee (as hereinafter defined), TransAmerican Energy Corporation, a Delaware
corporation ("TEC"), as payee of the New Note (as hereinafter defined), and
TransAmerican Refining Corporation, a Texas corporation (the "Issuer").
WITNESSETH:
WHEREAS, the Issuer, TEC and First Fidelity Bank, National
Association, as Trustee, have entered into an Indenture, dated as of February
15, 1995, as heretofore amended (as heretofore amended and as the same may
hereafter be amended, modified or supplemented from time to time in accordance
with its terms, the "TARC Note Indenture"), pursuant to which the Issuer has
issued its $340,000,000 Guaranteed First Mortgage Discount Notes due 2002 and
its $100,000,000 Guaranteed First Mortgage Notes due 2002 (collectively, the
"TARC Notes") in the aggregate original principal amount of $440,000,000;
WHEREAS, First Union National Bank, is the successor to First
Fidelity Bank, National Association, and, by reason thereof, is successor TARC
Note Trustee;
WHEREAS, the Issuer and TEC have entered into certain security
agreements and instruments set forth on Schedule I hereto (as such documents
may be amended, modified or supplemented from time to time, collectively, the
"TARC Note Security Documents"), granting a security interest in certain assets
(the "TARC Note Collateral") in favor of the TARC Note Trustee for the benefit
of the TARC Note Holders (as hereinafter defined);
WHEREAS, TEC and the TEC Note Trustee have entered into the TEC
Note Indenture pursuant to which TEC has issued the TEC Notes;
WHEREAS, concurrently herewith, the Issuer and TEC are entering
into a Loan Agreement, dated as of the date hereof (as the same may be amended,
modified or supplemented from time to time, the "New Note Loan Agreement"),
pursuant to which the Issuer is issuing its promissory note, accreting original
issue discount for two years from date of issuance and thereafter bearing
interest, in each case at the rate of 16% per annum, payable to the order of
TEC in the principal amount of $920,000,000, and maturing on June 1, 2002 (the
"New Note");
WHEREAS, the Issuer has entered into certain security agreements
and instruments set forth on Schedule II hereto (as such documents may be
amended, modified or supplemented from time to time, collectively, the "New
Note Security Documents"), granting a security interest in certain assets (the
"New Note Collateral") in favor of and for the benefit of the New Note Holder;
and
WHEREAS, certain of the New Note Collateral and certain of the
TEC Note Collateral (as defined below) is included in the TARC Note Collateral
and the Secured Creditors (as hereinafter defined) desire to set forth their
understanding with respect to the Collateral Agent's duties regarding the
Shared Collateral (as defined below) and certain agreements among the Secured
Creditors regarding their interest in the Shared Collateral;
WHEREAS, concurrently herewith, TEC and the TEC Note Trustee are
entering into a Security and Pledge Agreement, dated as of the date hereof (as
the same may be amended, modified or supplemented from time to time, the "TEC
Pledge Agreement"), granting a security interest in, among other things, the
common stock of the Issuer (the "TEC Note Collateral") in favor of the TEC Note
Trustee for the benefit of the TEC Note Holders
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<PAGE> 2
and pursuant to which the New Note, together with all of TEC's rights and
interests under the New Note Security Documents, will be assigned and
transferred to, and subjected to a security interest in favor of, the TEC Note
Trustee pursuant to the TEC Note Indenture as security for the TEC Notes for
the benefit of the TEC Note Holders;
NOW THEREFORE, in consideration for the premises, covenants and
agreements contained herein, the parties hereto agree as follows:
Section 1. Definitions. As used herein, the following terms shall
have the meanings herein specified and all terms used herein and not otherwise
defined herein shall have the meanings provided therefor in the TARC Note
Indenture. Defined terms in this Agreement shall include in the singular
number the plural and in the plural number the singular.
"Acceleration Notice" shall have the meaning specified in Section
5(a) hereof.
"Acceptable Bank" shall mean a bank or trust company in good
standing and incorporated under the laws of the United States or any
State thereof or the District of Columbia, with its principal corporate
trust office within the United States, with capital, surplus and
undistributed profits of not less than $50,000,000.
"Agreement" shall mean this Intercreditor and Collateral Agency
Agreement, as the same may be amended, modified or supplemented from
time to time.
"Collateral Agent" shall mean First Union National Bank, in its
capacity as Collateral Agent under this Agreement or, upon the
resignation or removal of First Union National Bank as Collateral Agent,
any successor Collateral Agent appointed pursuant to the provisions of
Section 9 of this Agreement.
"Collateral Documents" shall mean, collectively, the TEC Pledge
Agreement, the TARC Note Security Documents and the New Note Security
Documents.
"Companies" shall mean TEC, the Issuer and any Guarantor under
either of the Primary Documents and/or the TEC Note Indenture.
"Default" shall, with respect to each Primary Document, have the
meaning provided in such Primary Document.
"Event of Default" shall, with respect to each Primary Document,
have the meaning provided in such Primary Document.
"Holders" shall mean, collectively, the New Note Holder, the TEC
Note Holders and the TARC Note Holders.
"Issuer" shall have the meaning provided in the first paragraph
hereof.
"Junior Obligations" shall mean all indebtedness and other
monetary obligations, including, without limitation, all principal,
interest, fees, premium, if any, costs and expenses payable, of the
Companies to the Junior Secured Creditor under the New Note, the New
Note Loan Agreement, the New Note Security Documents, and any
instruments, documents or agreements executed by any of the Companies in
connection therewith.
"Junior Secured Creditor" shall mean the New Note Holder.
"New Note" shall have the meaning provided in the fifth recital
hereof.
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<PAGE> 3
"New Note Collateral" shall have the meaning provided in the
sixth recital hereof.
"New Note Holder" shall mean the holder from time to time of the
New Note, and, until such time as the New Note is released and
discharged from the TEC Pledge Agreement by instrument in writing
executed by the TEC Note Trustee, the term "New Note Holder" shall mean
the TEC Note Trustee.
"New Note Loan Agreement" shall have the meaning provided in the
fifth recital hereof.
"New Note Security Documents" shall have the meaning provided in
the sixth recital hereof.
"Obligations" shall mean, collectively, the Senior Obligations
and the Junior Obligations.
"Primary Documents" shall mean, collectively, the TARC Note
Indenture and the New Note Loan Agreement.
"Pro Rata Share" shall mean, when calculating a Senior Secured
Creditor's portion of any distribution or amount, that amount (expressed
as a percentage) equal to a fraction the numerator of which is the then
outstanding amount of such Senior Secured Creditor's Senior Obligations
(immediately before such distribution) and the denominator of which is
the then outstanding amount of all Senior Obligations which are entitled
to be paid with such distribution pursuant to the terms of this
Agreement.
"Required Secured Creditors" shall mean (a) the holders of at
least 50% in aggregate principal amount of the outstanding Securities or
(b) the New Note Holder and the TARC Note Trustee, on behalf of the TARC
Note Holders.
"Requisite Holders" shall mean the New Note Holder or the Holders
of 25% in aggregate principal amount of then outstanding TARC Notes.
"Secured Creditors" shall mean, collectively, the TEC Note
Trustee, together with the TEC Note Holders, the Senior Secured
Creditors and the Junior Secured Creditor.
"Securities" shall mean, collectively, the New Note and the TARC
Notes.
"Senior Obligations" shall mean all indebtedness and other
monetary obligations, including, without limitation, all principal,
interest, fees, premium, if any, costs and expenses payable, of the
Companies to the Senior Secured Creditor under the TARC Notes, the TARC
Note Indenture, the TARC Note Security Documents, and any instruments,
documents or agreements executed by any of the Companies in connection
therewith.
"Senior Secured Creditors" shall mean the TARC Note Trustee,
together with the TARC Note Holders.
"Shared Collateral" means Collateral that is subject to the liens
and security interests of any one or more of the New Note Security
Documents or the TEC Pledge Agreement and the liens and security
interests of any one or more of the TARC Note Security Documents.
"TARC Note Collateral" shall have the meaning provided in the
third recital hereof.
"TARC Note Holders" shall mean, collectively, the holders from
time to time of the TARC Notes.
"TARC Note Indenture" shall have the meaning provided in the
first recital hereof.
"TARC Note Security Documents" shall have the meaning provided in
the third recital hereof.
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<PAGE> 4
"TARC Note Trustee" shall mean First Union National Bank, in its
capacity as Trustee under the TARC Note Indenture or, upon its
resignation or removal as TARC Note Trustee, any successor Trustee
appointed pursuant to the provisions of Section 7 of the TARC Note
Indenture.
"TARC Notes" shall have the meaning provided in the first recital
hereof.
"TEC Notes" shall mean, collectively, the $475,000,000 aggregate
principal amount of 11 1/2% Senior Secured Notes due 2002 and the
$1,130,000,000 aggregate principal amount of 13% Senior Secured Discount
Notes due 2002, issued by TEC pursuant to the TEC Note Indenture.
"TEC Note Holders" shall mean, collectively, the holders from
time to time of the TEC Notes.
"TEC Note Indenture" shall mean the Indenture, dated as of June
13, 1997, between TEC and the TEC Note Trustee, pursuant to which TEC
has issued the TEC Notes.
"TEC Note Pledge Agreement" shall have the meaning provided in
the eighth recital hereof.
"TEC Note Trustee" shall mean Firstar Bank of Minnesota, N.A., in
its capacity as Trustee under the TEC Note Indenture or, upon the
resignation or removal of Firstar Bank of Minnesota, N.A., as TEC Note
Trustee, any successor Trustee appointed pursuant to the provisions of
Section 7.8 of the TEC Note Indenture.
"TEC Pledge Agreement" shall have the meaning provided in the
seventh recital hereof.
"Trustees" shall mean the TEC Note Trustee, the New Note Holder
and the TARC Note Trustee.
Section 2. Appointment. TEC, as payee of the New Note, the TEC Note
Trustee, for the benefit of the TEC Note Holders, and the TARC Note Trustee,
for the benefit of the TARC Note Holders, hereby jointly designate and appoint
the Collateral Agent, and the Collateral Agent hereby accepts such appointment,
to act as collateral agent and representative of the TEC Note Trustee and New
Note Holder, for the benefit of the TEC Note Holders, and the TARC Note
Trustee, for the benefit of the TARC Note Holders, in the manner and upon the
terms and conditions set forth herein. Subject to Sections 11, 12(a) and 13,
from after the date hereof, any Shared Collateral in the possession of either
of the Trustees (or any of its agents) shall be held by such Trustee (or agent)
as an agent and representative of the Collateral Agent hereunder. Concurrently
with the execution of this Agreement, or as soon as practicable thereafter,
each of the Trustees shall deliver any and all Shared Collateral in its
possession (or the possession of any of its agents), as of the date hereof or
at any time thereafter, to the Collateral Agent, who shall hold such Shared
Collateral on behalf of the Trustees for the benefit of the Holders with notice
of their respective security interests therein. The TEC Note Trustee on behalf
of the TEC Note Holders, TEC and the TEC Note Trustee, on behalf of the New
Note Holder, and the TARC Note Trustee, on behalf of the TARC Note Holders,
each hereby irrevocably authorizes, and each Secured Creditor, by its
acceptance of any Security, shall be deemed irrevocably to have authorized, the
Collateral Agent to (a) take such action on behalf of the TEC Note Trustee and
on behalf of the TARC Note Trustee, for the benefit of the TARC Note Holders,
under the provisions of this Agreement and any of the Collateral Documents and
to exercise such powers and to perform such duties hereunder and thereunder as
are specifically delegated to or required of the Collateral Agent by the terms
hereof and thereof and such other powers as are reasonably incidental thereto,
and (b) exercise, on behalf of the TEC Note Trustee for the benefit of the TEC
Note Holders, on behalf of the New Note Holder and on behalf of the TARC Note
Trustee, for the benefit of the TARC Note Holders, all remedies available to
the Trustees under the Collateral Documents, including, without limitation, the
right to foreclose or otherwise realize upon any of the Shared Collateral and
to initiate, prosecute and defend any and all legal proceedings against the
Companies or any other party to any Collateral Document to the extent that such
legal proceedings relate to or affect the Shared Collateral or the interests of
the Secured Creditors. The Collateral Agent may perform any of its duties
hereunder by or through its agents or employees.
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<PAGE> 5
Section 3. Nature of Duties. The Collateral Agent shall have no
duties or responsibilities except those expressly set forth or described herein
or in the Collateral Documents. Neither the Collateral Agent nor any of its
officers, directors, employees or agents shall be liable for any claims,
losses, damages, penalties, actions, judgments, suits, liabilities,
obligations, costs or expenses of any kind or nature whatsoever resulting from
any action taken or omitted by it as such hereunder or under any Collateral
Document or in connection herewith or therewith, unless caused by its or their
gross negligence, bad faith or willful misconduct. The Collateral Agent shall
not have, by reason of this Agreement or any Collateral Document, a fiduciary
relationship in respect of any Secured Creditor, and nothing in this Agreement
or any Collateral Document, expressed or implied, is intended to or shall be so
construed as to impose upon the Collateral Agent any obligations in respect of
any Collateral Document except as expressly set forth herein.
Section 4. Lack of Reliance on the Collateral Agent. The Collateral
Agent shall have no duty or responsibility, either initially or on a continuing
basis, to provide any Trustee or Secured Creditor with any credit or other
information with respect to any of the Companies, whether currently in its
possession or coming into its possession at any time or times hereafter, except
to the extent specifically provided in this Agreement.
Section 5. Exercise of Remedies under Collateral Documents.
(a) Trustee's Notices. If any Trustee has notice of a Default or
Event of Default, such Trustee shall give notice to the other Trustees and to
the Collateral Agent within three Business Days after such notice of Default or
Event of Default. If a Trustee or the Requisite Holders by notice to the
Issuer declare all unpaid principal and accrued interest to the date of
acceleration on the TEC Note, the New Note or the TARC Notes then outstanding
to be due and payable, or if such principal and interest ipso facto becomes due
and payable pursuant to Section 6.2 of the TEC Note Indenture, Section 8.1(e)
or Section 8.1(f) of the New Note Loan Agreement or Section 6.2 of the TARC
Note Indenture, the TEC Note Trustee, if the TEC Notes become due and payable,
the New Note Holder, if the New Note becomes due and payable, or the TARC Note
Trustee, if the TARC Notes become due and payable, shall give notice to the
Collateral Agent and the other Trustees of such acceleration (an "Acceleration
Notice") within three Business Days after such acceleration. Upon receipt by
the Collateral Agent of an Acceleration Notice or upon receipt by the
Collateral Agent of notice of an Event of Default under the TEC Note Indenture,
the TARC Note Indenture or the New Note Loan Agreement, together with
instructions from the Required Secured Creditors as to the actions to be taken
by the Collateral Agent, the Collateral Agent shall, within three Business Days
after receipt of such notice and instructions, commence the taking of such
actions toward collection or enforcement of any Collateral Document and the
Shared Collateral (or any portion thereof), including, without limitation,
action toward foreclosure upon any Shared Collateral, as instructed by the
Required Secured Creditors. If any Default or Event of Default which was the
basis for the giving of a notice to the Collateral Agent shall be cured or
waived, and, in the case where there has been an acceleration, rescission of
such acceleration has occurred, in accordance with the terms of the TEC Note
Indenture, the TARC Note Indenture or the New Note Loan Agreement, any
direction to the Collateral Agent to take any action in connection with such
notice shall be deemed rescinded upon notification by the TEC Note Trustee,
TARC Note Trustee or the New Note Holder given to the Collateral Agent of such
cure or waiver and rescission of acceleration, if applicable.
(b) Duty to Instruct. If the Obligations under one of the TEC Note
Indenture, the TARC Note Indenture or the New Note Loan Agreement have been
accelerated or an Event of Default has occurred or is continuing under the TEC
Note Indenture, the TARC Note Indenture or New Note Loan Agreement and the TARC
Note Trustee or the New Note Holder, as applicable, has notice thereof, such
Trustee shall send written notice thereof to the Collateral Agent and shall
instruct the Collateral Agent as to the actions, if any, toward foreclosure on
the Shared Collateral that such Trustee deems appropriate in its discretion.
(c) Rights of Collateral Agent.
(i) Right to Rely. The Collateral Agent may rely on any
document reasonably believed by it to be genuine and to have been signed
or presented by the proper person. The Collateral Agent need not
investigate any fact or matter stated in any such document. Before the
Collateral Agent acts or refrains
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<PAGE> 6
from acting it may consult with counsel and may require an Officers'
Certificate or an Opinion of Counsel, which shall conform to Section
13.4 or 14.5 (as the case may be) of the TEC Note Indenture or TARC Note
Indenture. The Collateral Agent shall not be liable for any action it
takes or omits to take in good faith in reliance on any such certificate
or opinion.
(ii) Attorneys/Agents. The Collateral Agent may act through
its attorneys and agents and shall not be responsible for the misconduct
or negligence of any agent appointed with due care.
(iii) Good Faith Belief in Authority, Rights or Powers. The
Collateral Agent shall not be liable for any action it takes or omits to
take in the good faith belief that such act or omission was authorized
or within its rights or powers.
(iv) No Investigation. The Collateral Agent shall not be bound
to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, notice,
request, direction, consent, order, bond, debenture or other paper or
document, but the Collateral Agent, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may
see fit.
(v) Obligation to Act upon Instructions. The Collateral Agent
shall be under no obligation to exercise any of the rights or powers
vested in it by this Agreement and/or any Collateral Document at the
request, order or direction of any of the Secured Creditors, pursuant to
the provisions of this Agreement and/or the TARC Note Indenture, the TEC
Note Indenture or the New Note Loan Agreement or any Collateral
Document, unless such Secured Creditors shall have offered to the
Collateral Agent reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby. Upon
receipt of such reasonable security or indemnity, however, the
Collateral Agent shall act upon the instructions of the Required Secured
Creditors. Notwithstanding the foregoing, the Collateral Agent shall
not take or refrain from taking such action if so taking or refraining
from taking such action, as the case may be, would violate applicable
law or the terms of the Collateral Documents or the Primary Documents.
(vi) Requests for Instructions. If the Collateral Agent shall
request instructions from the Secured Creditors with respect to any act
or action (including failure to act) in connection with this Agreement
or any Collateral Document, the Collateral Agent shall be entitled to
refrain from such act or taking such action unless and until the
Collateral Agent shall have received instructions from the Required
Secured Creditors, and the Collateral Agent shall not incur liability to
any person by reason of so refraining. Without limiting the foregoing,
no Secured Creditor shall have any right of action whatsoever against
the Collateral Agent as a result of the Collateral Agent acting or
refraining from acting hereunder or under any Collateral Document in
accordance with the instructions of the Required Secured Creditors in
accordance with this Agreement and the Collateral Documents.
Notwithstanding the foregoing, the Collateral Agent may not refuse to
perform the duties expressly required of it by the terms of this
Agreement.
Section 6. Compensation and Indemnification.
(a) Compensation and Expenses. The Companies agree, jointly and
severally, to pay to the Collateral Agent from time to time upon demand,
reasonable compensation for the services of the Collateral Agent hereunder and
all reasonable fees, out-of-pocket costs and expenses of the Collateral Agent
(including, without limitation, the reasonable fees and disbursements of
counsel) (A) arising in connection with the preparation, execution, delivery,
modification and termination of this Agreement or the enforcement of any of the
provisions hereof or of any Collateral Document, or (B) incurred or required to
be advanced in connection with the sale or other disposition of any Shared
Collateral pursuant to any Collateral Document and the preservation, protection
or defense of the Collateral Agent's rights hereunder and/or under the
Collateral Documents and in and to the Shared Collateral.
(b) Stamp and Other Taxes. The Companies hereby agree, jointly and
severally, to the extent permitted by applicable law, to indemnify the
Collateral Agent, each Trustee and each Secured Creditor for, and hold each of
them harmless against, any present or future claim for liability for any stamp
or other similar tax and any penalties
6
<PAGE> 7
or interest with respect thereto, which may be assessed, levied or collected by
any jurisdiction in connection with any Collateral Document or any Shared
Collateral (other than taxes on the income of the Collateral Agent or franchise
taxes imposed on the Collateral Agent).
(c) Filing Fees, Excise Taxes, Etc. The Companies hereby agree,
jointly and severally, to the extent permitted by applicable law, to pay or to
reimburse the Collateral Agent for any and all amounts in respect of all
search, filing, recording and registration fees, taxes, excise taxes and other
similar imposts which may be payable or determined to be payable in respect of
the execution, delivery, performance and enforcement of this Agreement or any
Collateral Document (other than taxes on the income of the Collateral Agent or
franchise taxes imposed on the Collateral Agent).
(d) Indemnification of Collateral Agent. The Companies shall,
jointly and severally, indemnify the Collateral Agent for, and hold it harmless
against, any and all claims, demands, expenses (including, but not limited to,
reasonable compensation, disbursements and expenses of the Collateral Agent's
agents and counsel), losses or liabilities incurred by it without negligence,
bad faith or willful misconduct on its part in any way arising out of or in
connection with the acceptance and administration of this Agreement and its
rights or duties hereunder or under any Collateral Document. The Collateral
Agent shall notify the Companies promptly of any claim asserted against the
Collateral Agent for which it may seek indemnity. The Companies shall defend
any such claim and the Collateral Agent shall provide reasonable cooperation at
the Companies' expense in such defense. The Collateral Agent may have separate
counsel and the Companies shall pay the reasonable fees and expenses of such
counsel; provided, that the Companies will not be required to pay such fees and
out-of-pocket expenses if it assumes the Collateral Agent's defense and
provides the Collateral Agent with an Opinion of Counsel that there is no
conflict of interest between the Companies and the Collateral Agent in
connection with such defense. The Companies need not pay for any settlement
made without its written consent. The Companies need not reimburse any expense
or indemnify against any loss or liability to the extent incurred by the
Collateral Agent through its negligence, bad faith or willful misconduct. When
the Collateral Agent incurs expenses or renders services after an Event of
Default specified in Section 6.1(e) or (f) of the TARC Note Indenture occurs,
such expenses and the compensation for such services are intended to constitute
expenses of administration under any Bankruptcy Law.
(e) Survival of Obligations. All obligations set forth in this
Section 6 shall survive the execution, delivery and termination of this
Agreement and the other Collateral Documents and the payment of all other
Obligations.
(f) Lien on Shared Collateral. To secure the obligations of the
Companies set forth in this Section 6, the Collateral Agent shall have a Lien
pari passu with that of the TARC Note Trustee, in the case in which there are
any Senior Obligations outstanding under the TARC Note Indenture, or a lien
prior to that of the TEC Note Trustee and the New Note Holder, in the case in
which there are no Obligations outstanding under the TARC Note Indenture, but
there are any Obligations outstanding under the TEC Note Indenture or the New
Note Loan Agreement, on all Shared Collateral held or collected by the
Collateral Agent in its capacity as such.
Section 7. Collateral Agent's Dealings with the Companies. The
Collateral Agent may accept deposits from, lend money to, or generally engage
in any kind of banking, trust or other business with the Companies or any of
their Affiliates, in each case, as if it were not the Collateral Agent
hereunder.
Section 8. Holders. The Collateral Agent may deem and treat the TEC
Note Trustee as the Holder of the New Note for all purposes hereunder, and the
TEC Note Trustee shall be deemed to be the registered owner of the New Note for
all purposes hereunder. The Collateral Agent may deem and treat the registered
owner of any of the Securities as the owner thereof for all purposes hereunder.
Any request, authority or consent of any person or entity who, at the time of
making such request or giving such authority or consent, is the registered
owner of any Security, shall be conclusive and binding upon any subsequent
holder, transferee, assignee or endorsee, as the case may be, of such Security
or any security issued in exchange therefor. Upon the written or telephonic
request of the Collateral Agent, the TARC Note Trustee agrees to furnish to the
Collateral Agent a list of the registered owners of all Securities issued under
the TARC Note Indenture and the outstanding principal amount of each and all
such
7
<PAGE> 8
Securities within 10 Business Days after any request therefor from the
Collateral Agent, and the New Note Holder shall also notify the Collateral
Agent as to the outstanding balance of the New Note. The Collateral Agent
shall be entitled to rely on such information as being accurate and complete.
Section 9. Resignation by or Removal of the Collateral Agent.
(a) Resignation; Removal. The Collateral Agent may resign from the
performance of all of its functions and duties hereunder by giving 20 Business
Days' prior written notice to the Companies and the Trustees. The Required
Secured Creditors may, at any time, remove the Collateral Agent by giving 20
Business Days' prior written notice to the Companies, the Trustees and the
Collateral Agent. Such resignation or removal shall take effect upon the
appointment of a successor Collateral Agent pursuant to paragraph (b) or (c)
below or as otherwise provided below.
(b) Appointment of Successor. Upon any such notice of resignation or
removal, the Required Secured Creditors shall appoint a successor Collateral
Agent hereunder who shall be an Acceptable Bank. If a successor Collateral
Agent shall not have been so appointed within the period specified in Section
9(a), the Collateral Agent, with the consent of the Companies, shall then
appoint a successor Collateral Agent which shall serve as Collateral Agent
hereunder until such time, if any, as the Required Secured Creditors appoint a
successor Collateral Agent as provided above.
(c) Effectiveness of Resignation or Removal. A successor Collateral
Agent shall deliver a written acceptance of its appointment to the retiring
Collateral Agent and to the Companies. Immediately thereafter, the retiring
Collateral Agent shall transfer all property held by it as Collateral Agent to
the successor Collateral Agent, subject to the Lien provided in Section 6(f),
and shall execute and deliver to the successor Collateral Agent such documents
as are necessary to perfect or maintain the security interests of the Trustees
in the Shared Collateral, including any documents necessary to assign or
transfer all interests of the retiring Collateral Agent in the Shared
Collateral to the successor Collateral Agent, in the form or forms adequate for
proper filing or recording in such offices and such jurisdictions as are
necessary to put the successor Collateral Agent in the same position as was the
retiring Collateral Agent with respect to the Shared Collateral. Thereafter,
the resignation or removal of the retiring Collateral Agent shall become
effective and the successor Collateral Agent shall have all the rights, powers
and duties of the Collateral Agent under this Agreement. A successor
Collateral Agent shall give notice of its succession to each Secured Creditor.
(d) Consolidation, Merger, Etc. If the Collateral Agent consolidates
with, merges or converts into, or transfers all or substantially all of its
corporate trust business to, another corporation, the resulting, surviving or
transferee corporation without any further act shall, if such resulting,
surviving or transferee corporation is an Acceptable Bank, be the successor
Collateral Agent. The transferring, merging or converting Collateral Agent
shall have all documents necessary to perfect or maintain the security interest
of the Trustees in the Shared Collateral, including any documents necessary to
assign or transfer all interests of the transferring, merging or converting
Collateral Agent in the Shared Collateral, executed and delivered to it in the
form or forms adequate for proper filing or recording in such offices and such
jurisdictions as are necessary to put the successor Collateral Agent in the
same position as the transferring, merging or converting Collateral Agent with
respect to the Shared Collateral.
(e) Compensation Continuing. Any person or entity acting as
Collateral Agent shall continue to be entitled to receive compensation as
provided in Section 6 hereof so long as such person or entity acts as
Collateral Agent hereunder.
Section 10. Release or Substitution of Shared Collateral. The
Collateral Agent shall, at any time and from time to time, release or
substitute all or any portion of the Shared Collateral in accordance with and
upon receipt of written instructions from the Required Secured Creditors. The
Secured Creditors agree that each such release or substitution shall be binding
and conclusive upon them and hereby waive all rights and claims with respect to
such release or substitution.
8
<PAGE> 9
Section 11. First and Prior Rights of Senior Secured Creditors; Second
Rights of Junior Secured Creditor.
(a) As long as all or any portion of the Senior Obligations remains
outstanding, unpaid or unsatisfied, each of the Junior Secured Creditor agrees
that (i) except as expressly set forth in this Section 11(a), the Junior
Obligations shall be and hereby are subordinated and the payment thereof is
deferred until the full and final payment in cash of the Senior Obligations,
(ii) its interest in the Shared Collateral shall, irrespective of the time,
order or method of perfection or creation of any security interests or liens in
the Shared Collateral on behalf of any Secured Creditor, or the recording of
mortgages or filing of financing statements or any other recordings or filings,
be junior and subordinated, and inferior in priority, operation and effect, to
the interests of the Senior Secured Creditors in the Shared Collateral to the
extent and in the manner provided herein, and (iii) it shall refrain from
taking any action to foreclose upon, take possession of, liquidate or otherwise
proceed against the Shared Collateral, whether under the New Note Security
Documents or otherwise, except as expressly set forth herein. Notwithstanding
the preceding provisions of this Section 11(a), the Companies shall be
permitted to pay, and the Junior Secured Creditor shall be permitted to
receive, any regularly scheduled payment of interest or principal on the New
Note so long as at the time of such payment, or after giving effect thereto, no
Default or Event of Default shall have occurred and be continuing under the
TARC Note Indenture or would occur thereunder after giving effect to such
payment.
(b) The Junior Secured Creditor will hold in trust and immediately
pay over to the TARC Note Trustee, in the same form of payment received, with
appropriate endorsements, for application to the Senior Obligations, any cash
amount that any of the Companies pays to the Junior Secured Creditor with
respect to the New Note, or, as collateral for the Senior Obligations, any
other assets of any of the Companies that the Junior Secured Creditor may
receive with respect to the Junior Obligations, in each case, except with
respect to payments expressly permitted pursuant to Section 11(a).
Section 12. Bankruptcy, Etc.
(a) At any meeting of creditors of the Issuer or in the event of any
case or proceeding, voluntary or involuntary, for the distribution, division or
application of all or part of the assets of the Issuer or the proceeds thereof,
whether such case or proceeding is for the liquidation, dissolution or winding
up of the Issuer or its business, a receivership, insolvency or bankruptcy case
or proceeding, an assignment for the benefit of creditors or a proceeding by or
against the Issuer for relief under the Bankruptcy Law, the Collateral Agent is
hereby irrevocably authorized at any such meeting or in any such proceeding to
receive or collect any cash or other assets of the Issuer distributed, divided
or applied by way of dividend or payment, or any securities issued on account
of any Junior Obligation, and turn over such cash or such other assets or
securities to the TARC Note Trustee as collateral for the Senior Obligations,
and to have applied to the Senior Obligations any cash proceeds of any
realization upon such other assets or securities until all of the Senior
Obligations shall have been paid in full in cash, rendering to the Junior
Secured Creditor any surplus to which such Junior Secured Creditor are then
entitled.
(b) At any such meeting of creditors or in the event of any such case
or proceeding, the Junior Secured Creditor shall retain the right to vote and
otherwise act with respect to the Junior Obligations (including, without
limitation, the right to vote to accept or reject any plan of partial or
complete liquidation, reorganization, arrangement, composition or extension),
provided, that the Junior Secured Creditor shall not vote with respect to any
such plan or take any other action in any way so as to contest (i) the validity
of any Senior Obligation or any TARC Note Collateral therefor or guaranties
thereof, (ii) the relative rights and duties of any TARC Note Holder
established in any instruments or agreements creating or evidencing any of the
Senior Obligations with respect to any of such Shared Collateral or guaranties
or (iii) the Junior Secured Creditor's obligations and agreements set forth in
this Agreement.
Section 13. Application of Payments Received from Realization on the
Shared Collateral.
(a) Upon the occurrence of any event described in Section 12, all
monies received by the Collateral Agent from the sale, liquidation or otherwise
of the Shared Collateral shall be distributed as provided below:
9
<PAGE> 10
(i) first, to pay the reasonable costs and expenses of the
Collateral Agent in obtaining such proceeds;
(ii) to the extent proceeds remain after the distribution
pursuant to clause (i) above, an amount equal to the outstanding Senior
Obligations held by the Senior Secured Creditors shall be paid to such
Senior Secured Creditors, with each Senior Secured Creditor receiving an
amount equal to its outstanding Senior Obligations or, if the proceeds
are insufficient for the payment in full of all Senior Obligations held
by the Senior Secured Creditors, its Pro Rata Share of the amount
available to be distributed pursuant to this clause (ii);
(iii) to the extent proceeds remain after the applications
required by clauses (i) and (ii) above, such proceeds shall be paid to
the New Note Holder for application to the Junior Obligations; and
(iv) to the extent proceeds remain after the applications
required by clauses (i), (ii) and (iii) above, such proceeds shall be
paid to the Issuer or its successors or assigns.
(b) Except upon the occurrence of any event described in Section 12,
all monies received by the Collateral Agent from the sale, liquidation or
otherwise of the Shared Collateral shall be applied, (i) if no Event of Default
under the TARC Note Indenture shall have occurred and be continuing or shall
result thereunder from the payment of the Junior Obligations, to the payment of
the Obligations so as not to impair or affect the right of the TARC Note
Holders to receive payments on the Senior Obligations as and when due, and (ii)
to the payment of the Senior Obligations if an Event of Default under the TARC
Note Indenture shall have occurred and be continuing or shall result thereunder
from the payment of the Junior Obligations. Notwithstanding anything to the
contrary in this Section 13(b), at all times other than during periods in which
an Event of Default shall have occurred and is continuing, the Collateral Agent
may release Collateral to one or more of the Companies from time to time as
permitted in the Primary Documents.
(c) Nothing contained in this Agreement shall or shall be construed
to prohibit, limit or otherwise affect the rights of the Issuer to transfer,
dispose of or otherwise deal with its properties and assets included within the
Shared Collateral, and the proceeds thereof, in any manner permitted under the
Primary Documents.
(d) Nothing contained in this Agreement shall or shall be construed
to impair or affect the right of the TARC Note Holders to receive payments of
principal of and interest on the TARC Notes as and when due or the right of the
Holder of any TARC Note to institute suit for the enforcement of any payment
thereon as and when due.
Section 14. Further Assurances. Each party hereto covenants to
execute and deliver such further instruments and to take such further action as
the Collateral Agent or the Required Secured Creditors may at any time or times
reasonably request in order to carry out the provisions and intent of this
Agreement.
Section 15. Notices. Any notice or other communication in connection
with this Agreement shall be effective if made in writing, addressed to such
party at its address set forth opposite its signature below, and delivered or
mailed postage prepaid, or at such other addresses as the addressee shall have
specified by notice given in compliance with this Section 15. All notices to
any Holder shall be given by delivering or mailing such notice to the New Note
Holder or the TARC Note Trustee, as the case may be. Notices shall be deemed
given upon the earlier to occur of (i) the third day following deposit thereof
in the U.S. Mail, first class postage prepaid, or (ii) receipt by the party to
whom such notice is directed.
Section 16. Benefit of Agreement; Obligations Several. This Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective heirs, administrators, successors and assigns of the parties hereto.
The obligations of each of the parties to this Agreement are several and not
joint, it being expressly agreed that no Trustee shall be liable for the
failure of any other Trustee to perform its obligations hereunder. Each
Secured Creditor, including without limitation, each Holder by its acceptance
of a Security, hereby consents to and agrees to be bound by the provisions
hereof applicable to such Secured Creditor.
10
<PAGE> 11
Section 17. Governing Law. This Agreement and the rights and
obligations of the parties hereunder shall be construed in accordance with and
be governed by the laws of the State of New York. Any legal action or
proceeding with respect to this Agreement may be brought in courts of the State
of New York or of the United States of America for the Southern District of New
York and, by execution and delivery of this Agreement, each party hereto hereby
accepts for itself and in respect of its property, generally and
unconditionally, the non-exclusive jurisdiction of the aforesaid courts.
Section 18. Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument. A complete set of counterparts shall be lodged with the Collateral
Agent.
Section 19. Effectiveness. This Agreement shall become effective on
the date on which all of the parties hereto shall have signed a copy hereof
(whether the same or different copies) and shall have delivered the same to the
Collateral Agent at its address set forth opposite its signature below. This
Agreement shall remain effective until all of the Senior Obligations are
irrevocably paid in full (or deemed to have been paid and discharged pursuant
to Article Eight of the TARC Note Indenture), provided, that once the
Obligations owed to any Secured Creditor shall have been irrevocably paid in
full and its rights and obligations under the Primary Documents, as the case
may be, have been terminated, such Secured Creditor shall have no further
rights or obligations hereunder.
Section 20. Headings Descriptive. The headings of the several
sections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
Section 21. Amendment or Waiver. This Agreement may be amended,
changed, waived or terminated with the written consent of the Required Secured
Creditors, provided, that such amendment, waiver, modification or termination
shall not impair or affect the right of the TARC Note Holders to receive
payments of principal of and interest on the TARC Notes as and when due or the
right of the Holder of any TARC Note to institute suit for the enforcement of
any payment thereon as and when due; and provided further, that the provisions
of Sections 11, 12 and 13 shall not be amended, changed, waived, or terminated
without the prior written consent of the majority of holders of the outstanding
principal amount of the Senior Obligations, provided, however, that no such
consent of any Secured Creditor shall be required if the Obligations to such
Secured Creditor shall have been irrevocably paid in full and are no longer
outstanding.
Section 22. Survival. All indemnities set forth herein shall survive
the execution and delivery of this Agreement and the repayment of all
Obligations.
Section 23. Inconsistent Provisions. If any provision of this
Agreement shall be inconsistent with, or contrary to, any provision in any
Collateral Document, the provision in this Agreement shall be controlling, and
shall supersede such inconsistent provision to the extent necessary to give
full effect to all provisions contained in this Agreement.
Section 24. Shared Collateral. Notwithstanding anything to the
contrary contained in the TEC Pledge Agreement, the New Note Security Documents
or the TARC Note Security Documents, Shared Collateral in the possession of the
Collateral Agent pursuant to this Agreement, in the possession of TEC or the
TEC Note Trustee pursuant to any of the New Note Security Documents, or in the
possession of the TARC Note Trustee pursuant to any of the TARC Note Security
Documents shall, pursuant to Section 9-305 of the Uniform Commercial Code as in
effect in the State of New York, be held by such party in possession for its
own account to the extent of its interest therein, and as pledgeholder and
bailee for each of the other Secured Creditors, so that each of the Secured
Creditors shall be deemed to have possession of such Shared Collateral. Each
Secured Creditor is authorized and directed by the Issuer to deliver to the
Collateral Agent for the benefit of the Secured Creditors pursuant to this
Agreement any Shared Collateral now or hereafter in the possession of such
Secured Creditor, and none of such Shared Collateral shall be released or
distributed to TEC or the Issuer without the prior written consent of the TEC
Note Trustee, on behalf of the TEC Note Holders or the Junior Secured Creditor,
and the TARC Note Trustee, on behalf of the Senior Secured Creditors.
11
<PAGE> 12
IN WITNESS WHEREOF, the Collateral Agent, the Trustees and the Companies
have caused this Agreement to be duly executed as of the day and year first
above written.
COLLATERAL AGENT
----------------
FIRST UNION NATIONAL BANK, as Collateral Agent
By: /s/ W. JEFFREY KRAMER
-------------------------------------------------------
Name: W. JEFFREY KRAMER
-----------------------------------------------------
Title: VICE PRESIDENT
----------------------------------------------------
TARC NOTE TRUSTEE
-----------------
FIRST UNION NATIONAL BANK, as TARC Note Trustee
By: /s/ W. JEFFREY KRAMER
-------------------------------------------------------
Name: W. JEFFREY KRAMER
-----------------------------------------------------
Title: VICE PRESIDENT
----------------------------------------------------
TEC NOTE TRUSTEE
----------------
FIRSTAR BANK OF MINNESOTA, N.A., as TEC Note Trustee
By: /s/ [ILLEGIBLE]
-------------------------------------------------------
Name: [ILLEGIBLE]
-----------------------------------------------------
Title: Vice President
----------------------------------------------------
COMPANIES
---------
TRANSAMERICAN ENERGY CORPORATION
By: /s/ ED DONAHUE
-------------------------------------------------------
Name: ED DONAHUE
-----------------------------------------------------
Title: Vice President
----------------------------------------------------
TRANSAMERICAN REFINING CORPORATION
By: /s/ ED DONAHUE
-------------------------------------------------------
Name: ED DONAHUE
-----------------------------------------------------
Title: Vice President
----------------------------------------------------
12
<PAGE> 13
Schedule I
TARC Note Security Documents
1. Pledge Agreement dated February 23, 1995, between TransAmerican
Energy Corporation ("TEC") and First Fidelity Bank, National Association, as
Trustee.
2. Pledge Agreement dated February 23, 1995, between TransAmerican
Refining Corporation ("TARC") and First Fidelity Bank, National Association, as
Trustee.
3. Security Agreement dated February 23, 1995, between TARC and
First Fidelity Bank, National Association, as Trustee.
4. Cash Collateral and Disbursement Agreement dated as of February
23, 1997, among TARC, First Fidelity Bank, National Association, as Trustee,
First Fidelity Bank, National Association, as Disbursement Agent, and Baker &
O'Brien, Inc., as Construction Supervisor.
5. Mortgage, Assignment of Leases and Rents, Security Agreement and
Financing Statement dated February 21, 1995, from TARC to First Fidelity Bank,
National Association, a national banking association, as Indenture Trustee.
13
<PAGE> 14
Schedule II
New Note Security Documents
1. Security and Pledge Agreement dated as of June 13, 1997, made by
TransTexas Energy Corporation ("TransTexas") in favor of Firstar Bank of
Minnesota, N.A., as collateral agent.
2. Act of Mortgage, Security Agreement and Financing Statement dated
as of June 13, 1997, executed by TARC for the benefit of TransTexas Energy
Corporation (the "TransTexas Louisiana Mortgage").
3. Security and Pledge Agreement dated as of June 13, 1997 (the
"TARC Pledge") executed by TARC in favor of TransAmerican Energy Corporation.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AT JULY 31, 1997 AND THE UNAUDITED CONDENSED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 127,807
<SECURITIES> 0
<RECEIVABLES> 31,628
<ALLOWANCES> 0
<INVENTORY> 15,105
<CURRENT-ASSETS> 191,128
<PP&E> 1,851,647
<DEPRECIATION> 702,195
<TOTAL-ASSETS> 1,966,149
<CURRENT-LIABILITIES> 125,982
<BONDS> 1,513,932
0
0
<COMMON> 0
<OTHER-SE> 244,872
<TOTAL-LIABILITY-AND-EQUITY> 1,966,149
<SALES> 123,903
<TOTAL-REVENUES> 657,449
<CGS> 47,887
<TOTAL-COSTS> 96,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,932
<INCOME-PRETAX> 452,780
<INCOME-TAX> 172,483
<INCOME-CONTINUING> 280,297
<DISCONTINUED> 0
<EXTRAORDINARY> (156,539)
<CHANGES> 0
<NET-INCOME> 123,758
<EPS-PRIMARY> 13,749
<EPS-DILUTED> 0
</TABLE>
