<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
REGISTRATION NO.333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
TRANSAMERICAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1311;2911 76-0441642
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Number)
1300 NORTH SAM HOUSTON PARKWAY EAST, SUITE 200, HOUSTON, TEXAS 77032-2949,
(281) 987-8600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
ED DONAHUE, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
1300 NORTH SAM HOUSTON PARKWAY EAST, SUITE 200, HOUSTON, TEXAS 77032-2949,
(281) 987-8600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------
copy to:
C. ROBERT BUTTERFIELD
GARDERE & WYNNE, L.L.P.
3000 THANKSGIVING TOWER
DALLAS, TEXAS 75201
(214) 999-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
Title Of Each Class Of Amount To Be Proposed Maximum Proposed Maximum Amount of
Securities To Be Registered Registered Offering Price Per Note Aggregate Offering Price Registration Fee(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 1/2% Senior Secured Notes due 2002 $ 475,000,000 100% $ 475,000,000 $143,939.39
- ------------------------------------------------------------------------------------------------------------------------------
13% Senior Secured Discount Notes
due 2002 $1,130,000,000 100% $1,130,000,000 $342,424.24
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,605,000,000 100% $1,605,000,000 $486,363.64
==============================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(f)(2). For purposes of this calculation,
the Offering Price per Note was assumed to be the principal amount as
shown on the face of the Exchange Notes.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
Subject to Completion, dated October 10, 1997
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING AND ALL OUTSTANDING
11 1/2% SENIOR SECURED 13% SENIOR SECURED DISCOUNT
NOTES DUE 2002 NOTES DUE 2002
($475,000,000 PRINCIPAL ($1,130,000,000 PRINCIPAL AMOUNT
AMOUNT OUTSTANDING) FOR OUTSTANDING AS SHOWN ON THE FACE THEREOF)
11 1/2% SERIES B SENIOR SECURED FOR 13% SERIES B SENIOR SECURED
NOTES DUE 2002 DISCOUNT NOTES DUE 2002
($475,000,000 PRINCIPAL AMOUNT) ($1,130,000,000 PRINCIPAL AMOUNT
AS SHOWN ON THE FACE THEREOF)
OF
TRANSAMERICAN ENERGY CORPORATION
----------------------
The Exchange Offer will expire at 5:00 p.m., New York City time on
, 1997, unless extended.
----------------------
TransAmerican Energy Corporation, a Delaware corporation (the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange (i) up to an aggregate
principal amount of $475,000,000 of its 11 1/2% Series B Senior Secured Notes
due 2002 (the "Senior Secured Exchange Notes") for an equal principal amount of
its 11 1/2% Senior Secured Notes due 2002 (the "Outstanding Senior Secured
Notes" and, together with the Senior Secured Exchange Notes, the "Senior
Secured Notes") and (ii) up to an aggregate principal amount of $1,130,000,000
(as shown on the face thereof) of its 13% Series B Senior Secured Discount
Notes due 2002 (the "Senior Secured Discount Exchange Notes" and, together with
the Senior Secured Exchange Notes, the "Exchange Notes") for an equal principal
amount (as shown on the face thereof) of its outstanding 13% Senior Secured
Discount Notes due 2002 (the "Outstanding Senior Secured Discount Notes,"
together with the Outstanding Senior Secured Notes, the "Outstanding Notes"
and, collectively with the Exchange Notes, the "Notes"), in integral multiples
of $1,000. The Exchange Notes will be senior secured obligations of the
Company and are substantially identical (including principal amount, interest
rate, maturity and redemption rights) to the Outstanding Notes for which they
may be exchanged pursuant to this Exchange Offer, except for certain transfer
restrictions and registration rights relating to the Outstanding Notes and
except for certain interest provisions relating to such rights. The
Outstanding Notes have been, and the Exchange Notes will be, issued under an
Indenture dated as of June 13, 1997 (the "Indenture" or "TEC Notes Indenture"),
among the Company and Firstar Bank of Minnesota, N.A., as trustee (the
"Trustee"). See "Description of the Exchange Notes." There will be no proceeds
to the Company from this offering; however, pursuant to a Registration Rights
Agreement dated as of June 5, 1997 (the "Registration Rights Agreement") among
the Company and the original purchaser of the Outstanding Notes (the "Initial
Purchaser"), the Company will bear certain offering expenses.
(Cover text continued on next page)
<PAGE> 3
----------------------
SEE "RISK FACTORS" ON PAGE 15 FOR A DISCUSSION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN
INVESTMENT IN THE EXCHANGE NOTES.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
The date of this Prospectus is , 1997.
<PAGE> 4
The Company will accept for exchange any and all Outstanding Notes
validly tendered on or prior to 5:00 p.m., New York City time on , 1997,
unless extended (the "Expiration Date"). Tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time on the Expiration
Date; otherwise such tenders are irrevocable. Firstar Bank of Minnesota, NA is
acting as Exchange Agent in connection with the Exchange Offer. The Exchange
Offer is not conditioned upon any minimum principal amount of Outstanding Notes
being tendered for exchange, but is otherwise subject to certain customary
conditions.
The Senior Secured Notes will 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 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 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 Notes will mature on June 15, 2002.
The 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 Senior Secured Notes and up to 35% of the
Accreted Value (as defined) of the Outstanding Senior Secured Discount Notes
and the Senior Secured Discount Exchange Notes (together, the "Senior Secured
Discount Notes"), at the redemption prices set forth therein, plus accrued and
unpaid interest, if any, to and including the date of redemption, with the net
proceeds of any Equity Offering (as defined). On or after June 15, 2000, the
Notes will be redeemable at the option of the Company, in whole or in part, at
the redemption prices set forth therein, plus accrued and unpaid interest, if
any, to and including the date of redemption. Upon the occurrence of a Change
of Control (as defined), the Company will be required to make an offer to
purchase all of the outstanding 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 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, the Company will be
obligated, subject to certain conditions, to make an offer to purchase Notes
with Excess Cash (as defined) at a price equal to 105% of the principal amount
or 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 under "Description of the Exchange Notes --
Optional Redemption" herein, in each case, together with accrued and unpaid
interest, if any, to and including the date of purchase.
The Exchange Notes will be senior obligations of the Company, secured by a
lien on substantially all existing and future assets of the Company, which
currently include (w) all of the capital stock of TransTexas Gas Corporation
("TransTexas") owned by the Company, (x) all of the outstanding common stock of
TransAmerican Refining Corporation ("TARC"), (y) a promissory note from
TransTexas to the Company in the principal amount of $450 million secured by a
mortgage on substantially all of TransTexas' assets, other than Inventory,
Receivables and Equipment (each as defined) and (z) a promissory note from TARC
to the Company in the principal amount of $920 million secured by a mortgage on
substantially all of TARC's assets, including all of the capital stock of
TransTexas owned by TARC, but excluding Inventory, Receivables and Equipment.
The liens on certain TEC assets securing the Notes and on the TARC assets
(other than the TARC Disbursement Account (as defined)) securing the promissory
notes to the Company will be subject to the liens securing the outstanding TARC
Notes (as defined) that were not retired pursuant to the TARC Notes Tender
Offer (as defined) until they are redeemed, repurchased or repaid. Under
certain circumstances, Collateral (as defined) may be released from the liens
granted for the direct or indirect benefit of holders of the Notes and such
liens may be subordinated to liens granted to other creditors of the Company's
subsidiaries. See "Description of the Exchange Notes -- Collateral and
Security."
The Outstanding Notes were sold by the Company on June 13, 1997 to the
Initial Purchaser in a transaction not registered under the Securities Act of
1933, as amended (the "Securities Act"), in reliance upon the exemption
provided by Section 4(2) of the Securities Act. The Initial Purchaser
subsequently placed the Outstanding Notes with qualified institutional buyers
in reliance upon Rule 144A under the Securities Act. Accordingly, the
Outstanding Notes may not be reoffered, resold or otherwise transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange
Notes are being offered hereunder in order to satisfy the obligations of the
Company under the Registration Rights Agreement between the Company and the
Initial Purchaser. See "The Exchange Offer."
ii
<PAGE> 5
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer may be offered for resale, resold and otherwise transferred by a
holder who is not an affiliate of the Company without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in its ordinary course of
business and is not participating in and has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes. Persons wishing to exchange Outstanding
Notes in the Exchange Offer must represent to the Company that such conditions
have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
Exchange Notes. The Letter of Transmittal for the Exchange Offer states that
by so acknowledging and delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Outstanding Notes where such
Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
to make this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale for a period of up to 180 days from the date of
consummation of the Exchange Offer. See "Plan of Distribution."
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading on The Nasdaq
Stock Market. The Initial Purchaser has advised the Company that it intends to
make a market in the Exchange Notes; however, it is not obligated to do so and
any market-making activities may be discontinued at any time without notice.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of or the trading
market for the Exchange Notes.
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes of other holders
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. Following
consummation of the Exchange Offer, the holders of Outstanding Notes will
continue to be subject to the existing restrictions upon transfer thereof.
----------------------
iii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Special Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . v
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Selected Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 42
Business of TransTexas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Business of TARC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Management of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . 89
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Certain Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Certain Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Description of Existing Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Description of the Exchange Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Reserve Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Pro Forma Condensed Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . PF-1
Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Reports of Netherland, Sewell & Associates, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
iv
<PAGE> 7
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act with respect to the securities offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration
Statement and exhibits and schedules relating thereto for further information
with respect to the Company and the securities offered by this Prospectus. The
Company, TransTexas and TARC are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports and other information with the Commission.
Such reports and other information are available for inspection at, and copies
of such materials may be obtained upon payment of the fees prescribed therefor
by the rules and regulations of the Commission from the Commission at its
principal offices located at Judiciary Plaza, 450 Fifth Street, Room 1024,
Washington, D.C. 20549, and at the Regional Offices of the Commission located
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at 7 World Trade Center, Suite 1300, New York, New
York 10048. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding the Company, TransTexas, TARC and other registrants
that file electronically with the Commission. In addition, the Common Stock of
TransTexas is traded on the National Market tier of The Nasdaq Stock Market
under the symbol TTXG, and such reports, proxy statements and other information
may be inspected at the offices of The Nasdaq National Market, 1735 K Street
N.W., Washington, D.C. 20006.
So long as the Company is subject to the periodic reporting requirements
of the Exchange Act, it is required to furnish the information required to be
filed with the Commission to the Trustee and the holders of the Notes. The
Company has agreed that, even if it is entitled under the Exchange Act not to
furnish such information to the Commission, it will nonetheless continue to
furnish information that would be required to be furnished by the Company by
Section 13 of the Exchange Act to the Trustee and the holders of the Notes as
if it were subject to such periodic reporting requirements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: The forward-looking statements provided throughout this document
(collectively, "Forward-Looking Statements") involve certain risks and
uncertainties that could cause actual results to differ materially from those
projected in the Forward-Looking Statements. The Company cautions that the
Forward-Looking Statements are subject to all the risks and uncertainties
discussed under the captions "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." See "Risk Factors
- -- General Risk Factors -- Risks Related to Forward Looking Statements and
Estimates."
v
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including notes thereto) included
elsewhere in this Prospectus. Unless the context indicates otherwise,
references in this Prospectus to the "Company" or "TEC" are to TransAmerican
Energy Corporation, references to "TransTexas" are to TransTexas Gas
Corporation and its subsidiaries and the business and assets that were
transferred to TransTexas on August 24, 1993, by its parent, TransAmerican
Natural Gas Corporation (together with its predecessors, "TransAmerican"), and
references to "TARC" are to TransAmerican Refining Corporation and the business
and assets that were transferred to it on or before February 23, 1995. In
January 1996, the Board of Directors of each of the Company, TransTexas and
TARC elected to change its fiscal year end for financial reporting purposes
from July 31 to January 31. As a result, all references herein to fiscal 1996
are to the six-month period ended January 31, 1996, and all references herein
to fiscal 1997 are to the fiscal year ended January 31, 1997.
THE COMPANY
As of September 15, 1997, the Company owned, directly or indirectly,
approximately 72% of the outstanding capital stock of TransTexas and all of the
outstanding common stock of TARC. The Company, through its subsidiaries,
conducts operations in two segments of the energy industry: exploration and
production of natural gas and petroleum refining.
TRANSTEXAS
TransTexas is engaged in the exploration for and development and
production of natural gas, primarily in South Texas. Since 1973, TransTexas has
drilled over 1,400 wells and discovered over 3.5 Tcfe of natural gas.
TransTexas' business strategy is to utilize its extensive experience gained
from over 20 years of drilling and operating wells in South Texas, to continue
to find, develop and produce reserves at a low cost. TransTexas has
traditionally performed most of its own well site preparation, drilling,
workover, completion, pipeline and production services.
In 1994, as part of its strategy to expand its productive reserves beyond
the Lower Wilcox Lobo Trend (the "Lobo Trend") in Webb and Zapata counties in
South Texas, TransTexas began evaluating prospects that exhibited the potential
to add proved reserves of at least 50 Bcfe of natural gas per development area.
Since that time, TransTexas has evaluated over 300 potential areas and its
development of certain of these areas has resulted in substantial additions to
its reserves and production.
In May 1997, TransTexas 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 were used for the
repurchase or redemption of TransTexas' 11 1/2% Senior Secured Notes due 2002
(the "TransTexas Senior Secured Notes") and for general corporate purposes.
1
<PAGE> 9
As of February 1, 1997, TransTexas' net proved reserves in properties
remaining after the Lobo Sale (the "Continuing Operations"), as estimated by
Netherland, Sewell & Associates, Inc., were 404 Bcfe. As of July 31, 1997,
after giving effect to the Lobo Sale, TransTexas owned approximately 650,000
gross (475,000 net) acres of mineral interests.
TransTexas' average net daily natural gas production for the year ended
January 31, 1997, was approximately 420 MMcfd, for a total net production of
153.6 Bcf of natural gas. After giving effect to the Lobo Sale, TransTexas'
average net daily production for the six months ended July 31, 1997 was
approximately 164 MMcfd of natural gas and 2,013 Bpd of crude oil and
condensate, for a total net production of 31.1 Bcfe.
TransTexas' integrated drilling services division provides oil field
services including drilling, oil and natural gas well workover, stimulation and
completion, drilling fluids provision, pipeline construction and equipment
repair and maintenance to TransTexas. As of September 30, 1997, the assets of
this division included 25 land drilling rigs, nine workover rigs and two
fracture stimulation fleets. Complementary drilling, completion and workover
service equipment includes a ready-mix concrete plant, twin cementing trucks, a
coiled tubing unit, a snubbing unit, electric line and logging units, slickline
units, tag units and an extensive fleet of construction, inspection and other
rolling stock.
TransTexas may contribute the assets of its drilling services division to
its wholly owned subsidiary, TransTexas Drilling Services, Inc. ("TTXD").
TransTexas is evaluating alternatives to maximize stockholder value with
respect to TTXD, including options such as a spin-off, a sale to a third party,
a merger or another business combination. In connection with the Lobo Sale,
TransTexas entered into a long-term agreement, which can be transferred to
TTXD, pursuant to which it will provide drilling and certain other services to
the new operator of the Lobo Trend properties divested in the Lobo Sale.
TransTexas has also recently begun to provide drilling services to other third
parties.
The address of the Company's principal executive offices is 1300 North
Sam Houston Parkway East, Suite 200, Houston, Texas 77032-2949 and its
telephone number at that address is (281) 986-8822.
TARC
TARC owns a large petroleum refinery strategically located in the Gulf
Coast region along the Mississippi River, approximately 20 miles from New
Orleans, Louisiana. TARC's business strategy is to modify, expand and
reactivate its refinery and to maximize its gross 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 this program, procured a majority of the
essential equipment required and completed substantially all of the process
design engineering and a substantial portion of the remaining engineering
necessary to complete this project.
The transactions described below in "--Recent Events" (the
"Transactions"), when completed, will result in proceeds to TARC in excess of
the $427 million estimated budget for a modified two-phase construction and
expansion program (the "Capital Improvement Program"), which is designed to
reactivate the refinery and increase its complexity. Phase I of the Capital
Improvement Program includes the completion and start-up of several units,
including the Delayed Coking Unit, one of the refinery's major conversion
units. 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
milli-second catalytic cracking ("MSCC((SM))") technology and the installation
of additional equipment expected to further improve operating margins by
allowing for a significant increase in the refinery's capacity to produce
gasoline. TARC estimates that Phase II will be completed at a cost of $204
million and will be tested and operational by July 31, 1999. After completion
of the Capital Improvement Program, TARC will own and operate one of the
largest independent refineries in the Gulf Coast region, with a replacement
cost estimated by management to be approximately $1.4 billion.
2
<PAGE> 10
RECENT EVENTS
TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "Original Notes Offering") of $475 million aggregate principal amount of
the Outstanding Senior Secured Notes and $1.13 billion aggregate principal
amount of the Outstanding Senior Secured Discount Notes for net proceeds of
approximately $1.3 billion. The Outstanding Notes are senior obligations of
TEC, secured by a lien on substantially all of its existing and future assets,
including the intercompany loans described below.
The Outstanding 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 Outstanding 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 Outstanding 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 Outstanding Notes will
mature on June 15, 2002. The Outstanding 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 Outstanding
Senior Secured Notes and up to 35% of the accreted value of the Outstanding
Senior Secured Discount Notes, at the redemption prices set forth in the
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 Outstanding Notes will be redeemable at the option of TEC, in
whole or in part, at the redemption prices set forth in the 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 then outstanding Outstanding 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
Outstanding 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 Outstanding 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 Indenture in each case, together with accrued and unpaid interest, if
any, to and including the date of purchase. The Exchange Notes are
substantially identical to the Outstanding Notes in the above respects.
INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the
Original Notes Offering, TEC made intercompany loans to TransTexas (the
"TransTexas Intercompany Loan") and TARC (the "TARC Intercompany Loan" and,
together with the TransTexas Intercompany Loan, the "Intercompany Loans"). The
TransTexas Intercompany Loan (i) is in the principal amount of $450 million,
(ii) bears interest at a rate of 10 7/8% per annum, payable semi-annually in
cash in arrears and (iii) is currently secured by a security interest in
substantially all of the assets of TransTexas, excluding Inventory,
Receivables and Equipment. The TARC Intercompany Loan (i) is in the original
amount of $676 million, (ii) accretes principal at 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 (iii) is currently secured 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 agreements governing the Intercompany Loans (the "Intercompany Loan
Agreements") contain certain restrictive covenants, including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates. 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
and for general corporate purposes. Upon the occurrence of a Change of Control
(as defined), TEC will be required to make an offer to purchase all of the
outstanding 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 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.
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<PAGE> 11
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.
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. TEC or TARC may repurchase additional TARC
Warrants, and TARC intends to enter into a merger with one of its affiliates
pursuant to which each remaining TARC Warrant would become exercisable (at an
exercise price of $.01) to receive $4.51 of cash instead of one share of common
stock of TARC.
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 (the "TEC Preferred Stock Redemption").
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 were used for the repurchase or redemption of the
TransTexas Senior Secured Notes and for general corporate purposes.
TRANSTEXAS SENIOR SECURED NOTES TENDER OFFER. On June 13, 1997,
TransTexas completed the Tender Offer for the TransTexas Senior Secured Notes
for 111 1/2% of their principal amount (plus accrued and unpaid interest).
Approximately $785.4 million principal amount of TransTexas Senior Secured
Notes were tendered and accepted by TransTexas. The TransTexas Senior Secured
Notes remaining outstanding were called for redemption on June 30, 1997
pursuant to the terms of the indenture governing such notes.
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 Notes") for all of
its 13 1/4% Senior Subordinated Notes due 2003 (the "Old TransTexas
Subordinated Notes"). The indenture governing the TransTexas Subordinated
Notes includes certain restrictive covenants, including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates.
SHARE REPURCHASE PROGRAM. TransTexas has implemented a share repurchase
program (the "Share Repurchase Program") pursuant to which it plans to
repurchase common stock from its public stockholders and from its affiliates,
including TEC and TARC, in an aggregate amount of approximately $399 million in
value of stock purchased. It is anticipated that TransTexas will acquire four
times the number of shares from its affiliated stockholders that it acquires
from its public stockholders. Shares may be purchased through open market
purchases, negotiated transactions or tender offers, or combination of the
above. It is anticipated that the price paid to affiliated stockholders will
equal the
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<PAGE> 12
weighted average price paid to purchase shares from the public stockholders.
As of September 30, 1997, approximately 3.9 million shares had been repurchased
from public stockholders for an aggregate purchase price of approximately
$61.4 million and approximately 12.6 million shares had been repurchased from
TARC and TEC for an aggregate purchase price of $201 million.
TRANSTEXAS DISBURSEMENT ACCOUNT. Pursuant to a disbursement agreement
(the "TransTexas Disbursement Agreement") among TransTexas, TEC, the Trustee,
and Firstar Bank of Minnesota, N.A. as disbursement agent (the "TransTexas
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 have been and 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.
TARC NOTES TENDER OFFER. On June 13, 1997, TARC completed a tender offer
(the "TARC Notes Tender Offer") for its (i) Guaranteed First Mortgage Notes due
2002 (the "TARC Mortgage Notes") for 112% of their principal amount (plus
accrued and unpaid interest) and (ii) Guaranteed First Mortgage Discount Notes
due 2002 (the "TARC Discount Notes" and, together with the TARC Mortgage Notes,
the "TARC 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 eliminated or modified 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 of
July 31, 1997, TARC Mortgage Notes and TARC Discount Notes with an aggregate
carrying value of $15.7 million remained outstanding.
DISBURSEMENT ACCOUNT. Pursuant to a disbursement agreement (the "TARC
Disbursement Agreement") among TARC, TEC, the Trustee, Firstar Bank of
Minnesota, N.A. as disbursement agent (the "Disbursement Agent"), and Baker &
O'Brien, Inc., as construction supervisor (the "Construction Supervisor"), $208
million of the net proceeds from the sale of the Outstanding Notes was placed
into accounts in the name of TARC ($135 million) and TEC ($73 million)
(together, the "TARC 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 Share Repurchase Program have
been or will be deposited in the TARC Disbursement Account as purchases are
made. All funds in the TARC Disbursement Account are pledged as security for
the repayment of the Notes.
The Disbursement Agent will make disbursements for the Capital
Improvement Program out of the TARC Disbursement Account in accordance with
requests made by TARC and approved by the Construction Supervisor. The
Construction Supervisor is required to review each such disbursement request by
TARC. No disbursements may be made from the TARC 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.
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<PAGE> 13
THE EXCHANGE OFFER
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The Outstanding Notes . . . . . The Outstanding Notes were sold by the Company on June 13, 1997, to the Initial
Purchaser pursuant to a Note Purchase Agreement dated June 5, 1997 (the "Purchase
Agreement").
Registration Requirements . . . Pursuant to the Purchase Agreement, the Company and the Initial Purchaser entered
into the Registration Rights Agreement, which grants the holders of the
Outstanding Notes certain exchange and registration rights. The Exchange Offer is
intended to satisfy such exchange and registration rights. If applicable law or
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, or if certain other conditions apply, the
Company has agreed to file a shelf registration statement (the "Shelf Registration
Statement") covering resales of the Outstanding Notes. See "The Exchange Offer --
Shelf Registration Statement."
The Exchange Offer . . . . . . The Company is offering to exchange $1,000 principal amount (as shown on the face
thereof) of the Exchange Notes for each $1,000 principal amount (as shown on the
face thereof) of Outstanding Notes. As of the date hereof, $475,000,000 aggregate
principal amount of the Outstanding Senior Secured Notes are outstanding and
$1,130,000,000 aggregate principal amount (as shown on the face thereof) of
Outstanding Senior Secured Discount Notes are outstanding. The Company will issue
the Exchange Notes to holders of Outstanding Notes on , 1997
(the "Exchange Date").
Based on an interpretation of the staff of the Commission set forth in no-action
letters issued to third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Outstanding Notes may be offered
for resale, resold and otherwise transferred by any holder thereof (other than any
such holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and that such holder
does not intend to participate and has no arrangement or understanding with any
person to participate in the distribution of such Exchange Notes.
Each Participating Broker-Dealer must acknowledge that it will deliver a
prospectus in connection with any resale of Exchange Notes. The Letter of
Transmittal for the Exchange Offer states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
to make this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale for a period of up to 180 days from the
consummation of the Exchange Offer. See "Plan of Distribution."
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<PAGE> 14
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Any holder who tenders in the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of the Exchange Notes cannot
rely on the position of the staff of the Commission enunciated in Exxon Capital
Holdings Corporation (available April 13, 1989) or similar no-action letters and,
in the absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with the
resale transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liability under the Securities Act for which the
holder is not indemnified by the Company.
Expiration Date . . . . . . . . 5:00 p.m., New York City time on , 1997.
Procedures for Tendering
Outstanding Notes . . . . . . Each holder of Outstanding Notes wishing to accept the Exchange Offer must
complete, sign and date the accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and therein, and
mail or otherwise deliver such Letter of Transmittal, or such facsimile, together
with the Outstanding Notes and any other required documentation to the Exchange
Agent at the address set forth herein or otherwise comply with the procedures for
tendering set forth in "The Exchange Offer -- Procedures for Tendering." By
tendering Outstanding Notes, each holder will represent to the Company that, among
other things, the holder or the person receiving such Exchange Notes, whether or
not such person is the holder, is acquiring the Exchange Notes in the ordinary
course of business and that neither the holder nor any such other person has any
arrangement or understanding with any person to participate in the distribution of
such Exchange Notes. In lieu of physical delivery of the certificates
representing Outstanding Notes, tendering holders may transfer Outstanding Notes
pursuant to the procedures for book-entry transfer as set forth under "The
Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners . . . . . . Any beneficial owner whose Outstanding Notes are registered in the name of a
broker-dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact such registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and delivering
its Outstanding Notes, either make appropriate arrangements to register ownership
of the Outstanding Notes in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures . . . . . . . . . Holders of Outstanding Notes who wish to tender their Outstanding Notes and whose
Outstanding Notes are not immediately available or who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date must tender their Outstanding
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
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<PAGE> 15
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Withdrawal Rights . . . . . . . Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time on the
Expiration Date pursuant to the procedures described under "The Exchange Offer --
Withdrawal of Tenders."
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes . . . . . . . Subject to certain conditions, the Company will accept for exchange any and all
Outstanding Notes that are properly tendered in the Exchange Offer prior to 5:00
p.m., New York City time on the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on the Exchange Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Federal Income Tax
Consequences . . . . . . . . The exchange pursuant to the Exchange Offer should not be a taxable event for
federal income tax purposes. See "Certain Federal Income Tax Consequences."
Effect on Holders of
Outstanding Notes . . . . . . As a result of the making of this Exchange Offer, the Company will have fulfilled
one of its obligations under the Registration Rights Agreement, and, with certain
exceptions noted below, holders of Outstanding Notes who do not tender their
Outstanding Notes will not have any further registration rights under the
Registration Rights Agreement or otherwise. Such holders will continue to hold
the untendered Outstanding Notes and will be entitled to all the rights and
subject to all the limitations applicable thereto under the Indenture, except to
the extent such rights or limitations, by their terms, terminate or cease to have
further effectiveness as a result of the Exchange Offer. All untendered
Outstanding Notes will continue to be subject to certain restrictions on transfer.
Accordingly, if any Outstanding Notes are tendered and accepted in the Exchange
Offer, the trading market of the untendered Outstanding Notes could be adversely
affected. See "Risk Factors -- Exchange Offer Procedures."
Private Exchange Notes . . . . The Registration Rights Agreement provides that if, prior to consummation of the
Exchange Offer, the Initial Purchaser holds any Outstanding Notes acquired by it
and having the status of an unsold allotment in the initial distribution, the
Company upon the request of such Initial Purchaser shall, simultaneously with the
delivery of the Exchange Notes in the Exchange Offer, issue and deliver to the
Initial Purchaser, in exchange (the "Private Exchange") for such Outstanding Notes
held by the Initial Purchaser a like principal amount of debt securities of the
Company that are identical in all material respects to the Exchange Notes (the
"Private Exchange Notes") (and which were issued pursuant to the same indenture as
the Exchange Notes). The Private Exchange Notes are not covered by the
registration statement of which this Prospectus is a part and are not being
offered hereby. Any Private Exchange Notes will be entitled to all the rights and
subject to all the limitations applicable thereto under the Indenture, and will be
subject to the same restrictions on transfer applicable to untendered Outstanding
Notes. See "The Exchange Offer -- Consequences of Failure to Exchange." Pursuant
to the Registration Rights Agreement, however, holders of Private Exchange Notes
have certain rights to require the Company to file and maintain a shelf
registration statement that would allow resale of such Private Exchange Notes.
Exchange Agent . . . . . . . . Firstar Bank of Minnesota, N.A.
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<PAGE> 16
SUMMARY OF TERMS OF THE EXCHANGE NOTES
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Securities Offered . . . . . . $475,000,000 aggregate principal amount of 11 1/2% Series B Senior Secured Notes
due 2002 and $1,130,000,000 aggregate principal amount (as shown on the face
thereof) of 13% Series B Senior Secured Discount Notes due 2002.
Maturity Date . . . . . . . . . June 15, 2002 (the "Maturity Date").
Interest on Senior Secured
Exchange Notes . . . . . . . . The Senior Secured Exchange Notes will bear interest at a rate of 11 1/2% per
annum. Interest will accrue from the most recent date on which interest has been
paid or, if no interest has been paid, the issue date of the Outstanding Senior
Secured Notes. Interest on the Senior Secured Exchange Notes will be payable
semi-annually in cash in arrears on June 15 and December 15 of each year,
commencing December 15, 1997.
Interest on Senior Secured
Discount Notes . . . . . . . . The Senior Secured Discount Exchange Notes will accrete at a rate of 13% per
annum (compounded semi-annually on June 15 and December 15 of each year) to 100% of the
face value thereof by June 15, 1999. On their issue date the Senior Secured
Discount Exchange Notes will have the same Accreted Value as the Outstanding
Senior Secured Discount Notes on that date. Cash interest on the Senior Secured
Discount Exchange Notes will be payable semi-annually in arrears on June 15 and
December 15 of each year, commencing December 15, 1999, at a rate of 13% per
annum. For federal income tax purposes, the Senior Secured Discount Exchange
Notes will be issued with original issue discount. The amount of original issue
discount will be equal to the difference between the issue price of the
Outstanding Senior Secured Discount Notes and the sum of all payments provided
for under the terms of the Senior Secured Discount Notes (whether denominated as
principal or interest), less the amount of original issue discount that will have
accrued on the Outstanding Senior Secured Discount Notes until the Exchange Date.
Holders of Senior Secured Discount Exchange Notes generally will be required to
include original issue discount in ordinary income over the period commencing
upon the issuance of the Senior Secured Discount Exchange Notes until June 15,
1999 that they hold the Senior Secured Discount Exchange Notes in advance of the
receipt of cash attributable thereto. See "Certain Federal Income Tax
Considerations--Taxation of the Notes."
Ranking . . . . . . . . . . . . The Notes will be senior indebtedness of the Company. Immediately after
consummation of the Exchange Offer, the Notes will be the only outstanding
indebtedness of the Company, other than the Company's guaranty of the TARC Notes
that remain outstanding. The Indenture restricts the Company's and its
subsidiaries' abilities to incur other indebtedness and restricts the Company's
and its subsidiaries' abilities to grant additional liens on their assets except
for Permitted Liens (as defined), in each case with certain exceptions. The Notes
will be effectively subordinated to the indebtedness and other liabilities of the
Company's subsidiaries, except to the extent that the Company is recognized as a
creditor of such entity. As of July 31, 1997, TransTexas and TARC had
approximately $159.4 million (excluding the TransTexas Intercompany Loan) and
$16.6 million (excluding the TARC Intercompany Loan) of indebtedness and other
liabilities, respectively, that ranked senior to the Notes. See "Description of
the Exchange Notes--Covenants--Limitation on Incurrences of Additional Debt and
Issuances of Disqualified Capital Stock" and "Description of the Exchange
Notes--Covenants--Limitation on Liens."
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Optional Redemption . . . . . . The 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 Senior Secured Notes and up to 35% of the
Accreted Value of the Senior Secured Discount Notes, at the redemption prices set
forth herein, 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 the Company, in whole or in
part, at the redemption prices set forth herein, plus accrued and unpaid
interest, if any, to and including the date of redemption.
Mandatory Redemption . . . . . None.
Change of Control . . . . . . . Upon the occurrence of a Change of Control, the Company will be required to make
an offer to purchase all of the outstanding 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 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.
Offer to Purchase . . . . . . . The Company will be obligated, subject to certain conditions, to make an offer to
purchase Notes with Excess Cash. Any such offer to purchase will be made at a
price equal to 105% of the principal amount or Accreted Value thereof, as
applicable, if such purchase occurs on or prior to December 31, 1997, 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 under "Description of the
Exchange Notes--Optional Redemption" herein, in each case together with accrued
and unpaid interest, if any, to and including the date of purchase.
Security . . . . . . . . . . . The Outstanding Notes are and the Exchange Notes will be senior obligations of
the Company, secured by a lien on substantially all existing and future assets of
the Company, which currently includes (w) all of the capital stock of TransTexas
owned by the Company, (x) all of the outstanding common stock of TARC, (y) the
TransTexas Intercompany Loan in the principal amount of $450 million, secured by
a mortgage on substantially all of TransTexas' assets, other than Inventory,
Receivables and Equipment and (z) the TARC Intercompany Loan in the principal
amount of $920 million, secured by a mortgage on substantially all of TARC's
assets, including all of the common stock of TransTexas owned by TARC, but
excluding Inventory, Receivables and Equipment. The liens on certain TEC assets
securing the Notes and on the TARC assets (other than the TARC Disbursement
Account) securing the TARC Intercompany Loan will be subject to the liens
securing any outstanding TARC Notes until they are redeemed, repurchased,
defeased or repaid. See "Description of the Exchange Notes--Collateral and
Security." The Indenture prohibits the Company and certain of its subsidiaries
from incurring or permitting any liens on their assets and properties other than
Permitted Liens. See "Description of the Exchange Notes--Covenants--Limitation on
Liens."
The TransTexas Intercompany Loan pays interest at a rate of 10 7/8% per annum,
payable semi-annually in cash in arrears. The TARC Intercompany Loan will accrete
for two years from the date made and will thereafter bear cash interest, both at
a rate of 16% per annum, compounded semi-annually. The Intercompany Loans each
will mature on June 1, 2002.
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Disbursement Accounts . . . . . Following completion of the Transactions, TARC and TEC will have deposited
approximately $529 million into the TARC Disbursement Account from which
disbursements will be made pursuant to the TARC Disbursement Agreement.
See Note 4 to Notes to Condensed Financial Statements. Of these funds, $427
million will be available only for the Capital Improvement Program, approximately
$25.5 million will be available for general and administrative expenses, $7
million will be available for outstanding accounts payable, $50 million will be
available for working capital upon completion of the Delayed Coking Unit and
certain supporting units and $19 million will be available for the payment of
interest on, or the redemption, purchase, defeasance or other retirement of, the
outstanding TARC Notes. Also, approximately $399 million was placed in the
TransTexas Disbursement Account to be held and invested by the TransTexas
Disbursement Agent for use by TransTexas solely to make share repurchases
pursuant to the Share Repurchase Program. As of September 30, 1997,
approximately $262.4 million had been disbursed from the TransTexas Disbursement
Account. Any funds remaining in the TransTexas Disbursement Account after the
Phase II Completion Date (as defined) may be used by TransTexas for general
corporate purposes. The disbursement agents will disburse funds from the
disbursement accounts only upon the satisfaction of the disbursement conditions
set forth in the disbursement agreements.
Certain Covenants . . . . . . . The Indenture contains certain covenants, including covenants that limit:
(i) indebtedness; (ii) restricted payments; (iii) transactions with affiliates;
(iv) liens; (v) asset sales; (vi) dividends and other payment restrictions
affecting restricted subsidiaries; (vii) line of business and (viii) mergers,
consolidations and sales of assets. See "Description of the Exchange
Notes--Covenants" and "Description of the Exchange Notes--Limitation on Merger,
Sale or Consolidation."
</TABLE>
RISK FACTORS
For a discussion of certain risks that should be carefully considered
in connection with the Exchange Offer and in evaluating an investment in the
Notes, see "Risk Factors."
11
<PAGE> 19
SUMMARY FINANCIAL AND OPERATING DATA
On January 30, 1996, TEC changed its fiscal year end for financial
reporting purposes from July 31 to January 31. The following table sets forth
selected financial and operating data of TEC and its predecessor for and at the
end of each of the four years ended July 31, 1995, the six months ended January
31, 1995 and 1996, the years ended January 31, 1996 and 1997 and the six months
ended July 31, 1996 and 1997. The financial data for the years ended July 31,
1992, 1993, 1994 and 1995, the six months ended January 31, 1996 and the year
ended January 31, 1997, are derived from the audited financial statements of
TEC. The financial data for the six months ended January 31, 1995, the year
ended January 31, 1996 and the six months ended July 31, 1996 and 1997 are
derived from the unaudited financial statements of TEC and contain all
adjustments (consisting only of normal recurring accruals) necessary, in the
opinion of management of TEC, for a fair presentation thereof. The financial
data for fiscal years ended July 31, 1992 and 1993 represent the results of
operations and financial position of TEC's predecessor prior to the reactivation
of the refinery. During these periods, TARC had only maintenance expenses and
lease income for storage facilities. The data for the year ended July 31, 1994
reflects the limited operations of the refinery commenced in March 1994 and
expenses related to reactivation of portions of the refinery. Subsequent to
March 1994, TARC has operated the No. 2 Vacuum Unit intermittently. TARC does
not consider its historical results to be indicative of future results.
12
<PAGE> 20
<TABLE>
<CAPTION>
Six Months Ended
Year Ended July 31, January 31,
---------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share and per unit amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Gas, condensate, and
NGL revenue ................... $ 227,208 $ 294,753 $ 300,210 $ 273,092 $ 142,070 $ 123,253
Refining revenues .............. -- -- 174,143 140,027 71,035 107,237
Transportation revenues ........ 30,749 30,816 33,240 36,787 19,161 15,892
Gain on sale of assets ......... -- -- -- -- -- 474
Other revenues ................. 3,402 5,425 3,192 837 603 127
----------- ----------- ----------- ----------- ----------- -----------
261,359 330,994 510,785 450,743 232,869 246,983
Operating costs and
expenses ...................... 87,109 113,220 285,766 262,331 133,336 162,830
Depreciation, depletion,
and amortization .............. 96,523 95,016 116,447 135,819 73,051 64,053
General and
administrative expenses ....... 34,912 34,954 44,807 45,592 21,037 21,213
Net interest expense ........... 1,724 2,457 50,131 74,214 29,086 44,151
Income taxes and other ......... 3,587 11,103 7,231 (4,866) (247) (18,487)
Extraordinary loss, net of
taxes ........................ -- -- -- 56,637 -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)(9) ........... $ 37,504 $ 74,244 $ 6,403 $ (118,984) $ (23,394) $ (26,777)
=========== =========== =========== =========== =========== ===========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item ........... $ (13,901) $ (2,975)
Extraordinary item ............. (12,628) --
----------- -----------
$ (26,529) $ (2,975)
=========== ===========
Ratio of earnings to fixed
charges(2) ................... 12.7x 27.3x 1.2x -- -- --
OPERATING DATA OF
TRANSTEXAS:
Gas sales volumes (Bcf) ....... 128.4(3) 119.3 130.9 147.9 76.9 66.9
Average gas prices (dry)
(per Mcf) ..................... $ 1.36 $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65
Average lifting costs (per
Mcfe) ......................... $ .19 $ .22 $ .24 $ .21 $ .21 $ .23
Number of gross wells
drilled ....................... 71 103 140 97 60 65
Percentage of wells drilled
completed ..................... 82% 85% 83% 77% 78% 74%
Net proved reserves(6):
Gas (Bcf) ..................... 686.2 695.0 717.4 1,122.6 943.4 1,139.1
Condensate (mBbls) ............ 2,171 1,968 1,935 3,049 2,637 2,903
SEC PV10 ...................... $ 623,173 $ 701,434 $ 544,387 $ 547,646 $ 533,281 $ 808,062
<CAPTION>
Year Ended Six Months Ended
January 31, July 31,
--------------------------- -----------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(dollars in thousands, except per share and per unit amounts)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Gas, condensate, and
NGL revenue ................... $ 254,275 $ 360,740 $ 156,245 $ 111,848
Refining revenues .............. 176,229 10,857 10,857 --
Transportation revenues ........ 33,518 34,423 16,870 12,055
Gain on sale of assets ......... 474 7,856 7,762 532,929
Other revenues ................. 361 297 357 617
----------- ----------- ----------- -----------
464,857 414,173 192,091 657,449
Operating costs and
expenses ...................... 291,825 181,085 88,645 57,422
Depreciation, depletion,
and amortization .............. 126,821 139,678 65,165 57,397
General and
administrative expenses ....... 45,768 57,500 25,663 29,767
Net interest expense ........... 89,615 95,922 52,000 60,818
Income taxes and other ......... (23,106) (126,489) (144,702) 171,748
Extraordinary loss, net of
taxes ........................ 56,637 -- -- 156,539
----------- ----------- ----------- -----------
Net income (loss)(9)............ $ (122,703) $ 66,477 $ 105,320 $ 123,758
=========== =========== =========== ===========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item ........... $ (7,341) $ 7,384 $ 11,700 $ 31,142
Extraordinary item ............. (6,293) -- -- (17,393)
----------- ----------- ----------- -----------
$ (13,634) $ 7,384 $ 11,700 $ 13,749
=========== =========== =========== ===========
Ratio of earnings to fixed
charges(2) ................... -- -- 1.8x 4.9x
OPERATING DATA OF
TRANSTEXAS:
Gas sales volumes (Bcf) ....... 137.9 153.6(4) 74.3 53.2
Average gas prices (dry)
(per Mcf) ..................... $ 1.51 $ 2.14(5) $ 1.99(5) $ 1.80
Average lifting costs (per
Mcfe) ......................... $ .23 $ .29 $ .30 $ .35
Number of gross wells
drilled ....................... 102 151 58 55
Percentage of wells drilled
completed ..................... 75% 68% 74% 58%
Net proved reserves(6):
Gas (Bcf) ..................... 1,139.1 919.7 N/A N/A
Condensate (mBbls) ............ 2,903 5,738 N/A N/A
SEC PV10 ...................... $ 808,062 $ 1,449,068(7) N/A N/A
</TABLE>
13
<PAGE> 21
<TABLE>
<CAPTION>
July 31, January 31,
---------------------------------------------------- --------------------------------------
1992 1993 1994 1995 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(8) ... $ (36,244) $ (58,443) $ (25,702) $ 112,998 $ (92,258) $ 25,859 $ (333,226)
Total assets ................... 377,421 431,141 758,664 1,325,656 823,726 1,456,422 1,613,735
Total long-term debt ........... 3,246 8,270 500,000 1,094,963 510,000 1,140,779 1,308,254
Stockholder's equity (deficit) . 198,957 230,418 15,262 (9,156) (8,133) (35,933) (47,009)
<CAPTION>
July 31,
------------------------
1996 1997
---------- ----------
BALANCE SHEET DATA:
<S> <C> <C>
Working capital (deficit)(8) ... $ 37,514 $ 65,146
Total assets ................... 1,482,229 1,966,149
Total long-term debt ........... 1,159,845 1,523,474
Stockholder's equity (deficit) . 21,234 244,872
</TABLE>
- ----------
(1) Per share data for years prior to July 31, 1995 is omitted because
TEC's predecessor was not a separate entity with its own capital
structure.
(2) Earnings were inadequate to cover fixed charges by $138.7 million,
$26.9 million, $60.4 million, $172.5 million and $18.3 million for the
year ended July 31, 1995, for the six months ended January 31, 1995
and 1996 and the years ended January 31, 1996 and 1997, respectively.
(3) Includes a 3.5 Bcf adjustment resulting from a favorable litigation
settlement.
(4) Sales volumes for the year ended January 31, 1997 and the six months
ended July 31, 1997, include 32.0 Bcf and 7.3 Bcf, respectively,
delivered pursuant to volumetric production payments
(5) Average price calculations for the year ended January 31, 1997 and
the six months ended July 31, 1997, include prices for amounts
delivered to third parties under volumetric production payments. The
average gas prices for TransTexas' undedicated production for these
periods were $2.39 per Mcf and $1.91 per Mcf, respectively. The gas
price does not include the effect of hedging.
(6) These reserve data are estimates of TransTexas' proved reserves as of
August 1, 1992, 1993, 1994 and 1995 and February 1, 1996 and 1997, as
evaluated by Netherland Sewell & Associates, Inc. No reserve estimates
were made for the six-month periods ended July 31, 1996 and 1997. See
"Risk Factors-- General Risk Factors -- Risks Related to Forward
Looking Statements and Estimates."
(7) As of February 1, 1997, the sales price used for purposes of
estimating TransTexas' proved reserves and the future net cash flow
from those reserves was $3.17 Mcf of natural gas and $23.99 per Bbl of
condensate and oil.
(8) For all periods prior to the Asset Transfer (as defined), data
excludes all cash and accounts receivable because those assets were
not transferred to TransTexas in the Asset Transfer. Working capital
at July 31, 1995 and 1996, and January 31, 1996 and 1997, includes
$44.7 million, $46.0 million, $46.0 million and $46.0 million,
respectively, in a restricted interest reserve account pursuant
to the Indenture governing the TransTexas Senior Secured Notes.
(9) Net income (loss) is prior to the preferred stock dividends of
$19,000 for the year ended January 31, 1997 and the six months
ended July 31, 1996 and 1997.
14
<PAGE> 22
RISK FACTORS
Prospective investors in the Exchange Notes should carefully consider
the risk factors set forth below as well as the other information contained in
this Prospectus or incorporated by reference herein.
GENERAL RISK FACTORS
SIGNIFICANT LEVERAGE. At July 31, 1997, the Company's total short- and
long-term debt was approximately $1,529.7 million, which represented
approximately 86.2% of the total capitalization of the Company. In addition,
the accretion of original issue discount on the Senior Secured Discount Notes
will increase the indebtedness represented by the Notes to approximately $1.6
billion by June 15, 1999.
At July 31, 1997, the total short- and long-term debt of TransTexas
was approximately $596.1 million, which represented approximately 70.2% of the
total capitalization of TransTexas. The total long-term debt of TARC was
approximately $705.7 million, which represented approximately 95.6% of the
total capitalization of TARC. In addition, the accretion of value on the TARC
Intercompany Loan will increase the indebtedness represented thereby to $920
million by June 15, 1999. Further, earnings adjusted to eliminate certain
non-recurring gains of TransTexas and TARC for the year ended January 31, 1997,
after giving effect to the Transactions, would have been inadequate to cover
pro forma fixed charges by approximately $61.2 million and $123.6 million,
respectively. The high degree of leverage of TransTexas and TARC will have
significant consequences, including (i) a substantial portion of TransTexas'
and TARC's net cash provided by operations will be committed to the payment of
their interest expense and principal repayment obligations, (ii) TransTexas'
cash flow will be more sensitive to fluctuations in natural gas prices than
less highly leveraged companies, (iii) TARC's cash flow will be more sensitive
to fluctuations in feedstock costs and refined product prices than less highly
leveraged companies and (iv) TransTexas and TARC will be more highly leveraged
than other companies in their industries, which may place them at a competitive
disadvantage.
The Company is the sole obligor with respect to the Outstanding Notes
and will be the sole obligor with respect to the Exchange Notes, and the Notes
are not obligations of, nor are they guaranteed by, any of the Company's
subsidiaries. The Company is a holding company with no business operations, and
its only sources of liquidity will be payments on the Intercompany Loans or
other loans to its subsidiaries, dividends on stock of its subsidiaries,
interest on funds in the TARC Disbursement Account and, in limited
circumstances as permitted by the Indenture, sales of stock of its
subsidiaries. The Company's holding company structure could adversely affect
the Company's ability to meet its obligations to the holders of the Notes.
There can be no assurance that TransTexas or TARC will generate sufficient cash
flow from operations to pay interest on or repay the principal amount of the
Intercompany Loans when such amounts become due. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." In addition, any right of the Company to receive assets of
TransTexas, TARC, TTXD or any of their subsidiaries upon their liquidation or
recapitalization (and the consequent right of holders of the Notes to
participate in those assets) will be subordinate to the claims of creditors of
TransTexas, TARC, TTXD or any of their subsidiaries, as applicable, except to
the extent that the Company is itself recognized as a creditor of such entity.
TARC's ability to satisfy its principal and interest obligations on the TARC
Intercompany Loan from its cash flow from operations will depend on its ability
to complete its refinery and attain an adequate level of profitability. There
can be no assurance that the Company's subsidiaries will be legally permitted
to pay dividends to the Company prior to the Maturity Date of the Notes.
Further, it is anticipated that any credit facility entered into by any of the
Company's subsidiaries will restrict such subsidiary's ability to pay dividends
to the Company. The Company, TransTexas and TARC may require sources of
liquidity other than cash flow from operations, including asset sales or equity
or debt financings, to retire or otherwise refinance the principal amount of
the Notes, the TransTexas Intercompany Loan and the TARC Intercompany Loan,
respectively, on or prior to maturity.
ADEQUACY OF COLLATERAL; RISKS OF FORECLOSURE. The Company has granted
and pledged to the Trustee, for the ratable benefit of the holders of the
Notes, a security interest in substantially all of the assets of the Company,
including without limitation the Intercompany Loans and the stock of TransTexas
and TARC owned by the Company. The Intercompany Loans are secured obligations
of each obligor. The TransTexas Intercompany Loan is secured by a mortgage on
substantially all of TransTexas' assets, other than Inventory, Receivables and
Equipment and the TARC Intercompany Loan is secured by a mortgage on
substantially all of TARC's assets, other than Inventory, Receivables and
Equipment (collectively, with the assets of the Company, the "Collateral").
15
<PAGE> 23
There can be no assurance that the Trustee will be able to foreclose
on or dispose of any of the Collateral without substantial delays and other
risks, or that the proceeds obtained therefrom will be sufficient to pay all
amounts owing to holders of the Notes. TransTexas intends to file a shelf
registration statement and any of the Company's other subsidiaries whose stock
is pledged to the Trustee will be required to grant registration rights with
respect to such stock, in each case to allow the Trustee to be able to sell the
pledged shares of their common stock publicly. Circumstances beyond the control
of the Company, however, may delay the availability of a current prospectus.
There is currently no public market for the shares of TARC common stock and
there can be no assurance that there will be any public market for the common
stock of any other subsidiary of the Company. The market prices of the common
stock of the Company's subsidiaries for which there is a public market may be
influenced by many factors, including, among others, investor perception of the
subsidiary, conditions in the subsidiary's industry, fluctuations in quarterly
results, the potential public sale of the shares pledged to secure the Notes
and general economic and market conditions. In addition, the stock market has
experienced substantial price and volume fluctuations in recent years. These
fluctuations have had a significant effect on the market price of the stock of
many companies, often unrelated to the operating performance of the companies.
Upon completion of the Capital Improvement Program, management of TARC
estimates that TARC's refinery will have a replacement cost of approximately
$1.4 billion. However, if the Trustee forecloses on the refinery, the proceeds
from the sale of refinery assets may be significantly less than such
replacement cost. Although TARC and its predecessors have previously invested
in excess of $1.1 billion in capital improvements, if the refinery does not
achieve profitable operations, management of TARC estimates that the components
of the refinery, excluding land, would have a liquidation value of only $125
million to $200 million after expenditure of the funds budgeted for completion
of the Capital Improvement Program. Further, TARC may be subject to liability
under applicable Pollution Control Laws (as defined) and Hazardous Substance
Cleanup Laws (as defined). If the Trustee forecloses on the Collateral, it
could incur liability in certain circumstances for the environmental
liabilities of TARC. See "Business of TARC -- Environmental Matters."
The Collateral will be subject to liens securing certain other
indebtedness and liens arising pursuant to certain other existing or future
obligations may be entitled to priority over the Trustee's lien thereon. See
"-- Lien Priority."
TARC and TransAmerican are parties to tax benefit transfer ("TBT")
leases relating to certain items of property that are part of the refinery. If,
upon an Event of Default (as defined), the refinery were sold in lieu of
foreclosure and the transferee(s) of those items of property did not agree to
take those items of property subject to the TBT leases, TARC and TransAmerican
would be obligated to indemnify the lessors for the loss of related tax
benefits to the extent provided in the TBT leases. TARC estimates that the
aggregate indemnity obligations under the TBT leases in that event would be
approximately $39 million in September 1997 and would decrease by approximately
$6 million each year thereafter. If the refinery were sold in a
court-supervised foreclosure or transferred as a part of a bankruptcy
proceeding, the lessors could elect to continue the TBT leases in effect for
tax purposes. In that case, the transferee(s) of those items of property might
be required to amortize the purchase price of those items for tax purposes in a
manner that would be less advantageous than if the TBT leases were not deemed
to continue in effect for tax purposes. These adverse tax consequences may
result in a reduced price for the refinery if it were sold.
In addition, if the Company becomes a debtor in a case under the
United States Bankruptcy Code (the "Bankruptcy Code"), the automatic stay
imposed by the Bankruptcy Code would prevent the Trustee from selling or
otherwise disposing of the Collateral without bankruptcy court authorization.
In that case, the foreclosure might be delayed indefinitely. Moreover, the
bankruptcy of any entity related to the Company might result in a similar delay
if the Company were "substantively consolidated" with the related entity. See "
- -- Certain Bankruptcy Considerations."
RISKS RELATED TO FORWARD LOOKING STATEMENTS AND ESTIMATES. This
Prospectus includes "forward-looking statements" as defined in Section 27A of
the Securities Act and Section 21E of the Exchange Act. All statements other
than statements of historical facts included in this Prospectus regarding the
Company's and its subsidiaries' financial positions, business strategies, plans
and objectives of management for future operations and indebtedness covenant
compliance, including but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely,"
16
<PAGE> 24
are forward-looking statements. Management of the Company and its subsidiaries
believe that their current views and expectations are based on reasonable
assumptions; however, there are significant risks and uncertainties that could
significantly affect expected results. Important factors that could cause
actual results to differ materially from those in the forward-looking
statements are disclosed throughout this Prospectus and include, without
limitation, engineering problems, work stoppages, cost overruns, personnel or
materials shortages, fluctuations in the commodity prices for petroleum and
refined products, casualty losses, the success of TransTexas' exploration and
production activities, conditions in the capital markets and competition. The
Company does not intend to update or otherwise revise the forward-looking
statements contained herein to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of TransTexas. The
reserve data included in this Prospectus represent only estimates prepared by
Netherland, Sewell & Associates, Inc. ("Netherland Sewell"). Gas reserve
assessment is a subjective process of estimating the recovery from underground
accumulations of gas that cannot be measured in an exact way, and estimates by
other persons might differ materially from those of Netherland Sewell. Certain
events, including production, acquisitions and future drilling and development
could result in increases or decreases in estimated quantities of proved
reserves. In addition, estimates of TransTexas' future net revenues from proved
reserves and the present value thereof are based on certain assumptions
regarding future natural gas prices, production levels, production and ad
valorem taxes and operating and development costs that may not prove to be
correct over time.
LIEN PRIORITY. The mortgage securing the TransTexas Intercompany Loan
creates a lien on substantially all of TransTexas' assets, other than
Inventory, Receivables and Equipment, subject to exceptions permitted under the
security documents relating thereto. The mortgage securing the TARC
Intercompany Loan creates a lien on substantially all of TARC's assets, other
than Inventory, Receivables and Equipment, subject to exceptions permitted
under the security documents relating thereto, including the lien securing any
TARC Notes that remain outstanding after consummation of the TARC Notes Tender
Offer until they are redeemed, repurchased, defeased or repaid.
Certain types of subsequent encumbrances (such as tax liens,
mechanics' and materialmen's liens, and environmental liens) are entitled to
priority over the liens of the mortgages as a matter of law. The title policy
insuring the lien of the mortgage on the refinery real property contains
exceptions from coverage for these and other matters. See "Business of TARC --
Title Insurance." The Trustee has entered into an intercreditor agreement with
the trustee under the TARC Notes Indenture that provides among other things
that (i) the TARC Intercompany Loan will be subordinated in right of payment
(except regularly scheduled payments, provided no default under the TARC Notes
Indenture exists or would result therefrom) and lien priority to the TARC
Notes, (ii) (A) in the event of any liquidation or reorganization of TARC, any
cash or other assets paid or distributed on account of the TARC Intercompany
Loan will be applied, after payment of reasonable costs and expenses relating
to obtaining such proceeds, to the payment of the TARC Notes and, only after
the TARC Notes have been paid in full, to the payment of the TARC Intercompany
Loan, and (B) in any other event, any such proceeds will be applied so as not
to impair or affect the right of the holders of the TARC Notes to receive
payments as and when due (but nothing contained in the intercreditor agreement
shall be construed to prohibit, limit or otherwise affect the rights of TARC to
transfer, dispose of or otherwise deal with its properties and assets included
within the Collateral securing both the TARC Notes and the TARC Intercompany
Loan (the "TARC Shared Collateral"), and the proceeds thereof, in any manner
permitted under the TARC Notes Indenture or the security documents relating to
the TARC Intercompany Loan) and (iii) determinations regarding the exercise of
remedies against the TARC Shared Collateral will be made by a majority of the
outstanding principal amount of the TARC Notes and the TARC Intercompany Loan.
It is anticipated that the principal amount of the TARC Intercompany Loan will
remain such that determinations under the intercreditor agreement regarding
enforcement of remedies and dispositions of the TARC Shared Collateral will be
controlled by the Trustee, as the assignee of the TARC Intercompany Loan, and
thus, indirectly, by the holders of the Notes, except that, and the
intercreditor agreement so provides, nothing contained in the intercreditor
agreement will impair or affect the right of the holders of any TARC Notes,
respectively, to institute suit for the enforcement of any payment thereon as
and when due.
17
<PAGE> 25
The Indenture and the Security Documents (as defined) provide that the
security interest of the Trustee in the Collateral securing the TransTexas
Intercompany Loan will be subordinated to debt or other obligations secured by
(a) pledges of (i) assets or deposits of cash or cash equivalents to secure the
performance of bids, trade contracts (other than borrowed money), leases,
statutory obligations, surety bonds, performance bonds and other obligations of
a like nature in an aggregate amount outstanding at any time not in excess of a
certain percentage of TransTexas' SEC PV10 or (ii) assets, the fair market
value of which is not in excess of $40 million, or deposits of cash or cash
equivalents, in each case, to secure appeal or supersedeas bonds (or to secure
reimbursement obligations or letters of credit in support of such bonds); (b)
Liens encumbering initial deposits and margin deposits securing Swap
Obligations or Permitted Hedging Transactions (each as defined); (c) certain
pledges of assets to secure margin obligations, settlement obligations,
reimbursement obligations or letters of credit in connection with Permitted
Hedging Transactions; (d) encumbrances or title defects on real property which,
in the aggregate, are not material; (e) pledges or deposits in connection with
social security legislation, property insurance and liability insurance; (f)
certain Liens granted in connection with the Presale of Gas (as defined); (g)
certain Liens created on acreage drilled or to be drilled pursuant to Drilling
Programs (as defined), on Hydrocarbons (as defined) produced therefrom and on
the proceeds of such Hydrocarbons to secure TransTexas' obligations thereunder;
(h) Liens securing (i) Royalty Payment Obligations (as defined) and (ii)
Permitted Production Payment Obligations (as defined); (i) Liens that secure
certain Unrestricted Non-Recourse Debt (as defined); and in certain instances
(j) Liens on the proceeds of any property subject to a Permitted TransTexas
Lien or on deposit accounts containing any such proceeds. The Indenture and the
Security Documents further provide that the security interest of the Trustee in
the Collateral securing the TARC Intercompany Loan will be subordinated to debt
or other obligations secured by (a) deposits of cash or Cash Equivalents to
secure (i) the performance of bids, trade contracts (other than borrowed
money), leases, statutory obligations, surety bonds, performance bonds, and
other obligations of a like nature (or to secure reimbursement obligations or
letters of credit issued to secure such performance or other obligations) in an
aggregate amount outstanding at any one time not in excess of $5 million or
(ii) appeal or supersedeas bonds (or to secure reimbursement obligations or
letters of credit in support of such bonds); (b) encumbrances or title defects
on real property which, in the aggregate, are not material; (c) pledges or
deposits made in connection with social security legislation, property
insurance and liability insurance; (d) certain Liens on real or personal
property, acquired after the Issue Date (as defined); (e) non-material leases
or subleases granted to others; (f) certain Liens securing reimbursement
obligations with respect to letters of credit that encumber documents relating
to such letters of credit and the products and proceeds thereof; (g) Liens
encumbering initial deposits and margin deposits securing Swap Obligations or
Permitted Hedging Transactions; (h) Liens on cash deposits to secure
reimbursement obligations with respect to letters of credit after the Delayed
Coking Unit is completed; (i) Liens that secure certain Unrestricted
Non-Recourse Debt; and in certain instances (j) Liens on the proceeds of any
property subject to a Permitted TARC Lien or on deposit accounts containing any
such proceeds. In certain circumstances, the Indenture may require the Trustee
to release Collateral with respect to the foregoing clauses. See "Description
of the Exchange Notes -- Collateral and Security."
POTENTIAL TAX LIABILITIES. 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 carry forwards) 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 is 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 or
any of the other related companies 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.
DECONSOLIDATION FOR FEDERAL INCOME TAX PURPOSES. As of September 15,
1997, TEC and TARC, both subsidiaries of TransAmerican, owned approximately
68.9% and 3.4%, respectively, of the outstanding common stock of TransTexas.
These shares are pledged as collateral for TEC's outstanding debt securities.
Under certain circumstances, TransAmerican, TARC or TEC may sell or
otherwise dispose of shares of common stock of TransTexas. If, as a result
of any sale or other disposition of TransTexas' common stock, the 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 members of 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 foregoing transactions at the time due and,
therefore, other members of the group, including TEC, TransTexas or TARC, may
be required to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas or TARC are used by other members of the TNGC Consolidated
Group, then TransTexas and TARC are entitled to the benefit (through reduced
current taxes payable) of such losses in later years to the extent TransTexas
or TARC 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 TARC (or
transfers options or other rights to acquire such shares) and, as a result of
such transfer, Deconsolidation of TransTexas or TARC occurs, TransTexas and
TARC would not thereafter receive any benefit pursuant to the Tax Allocation
Agreement for net operating losses of TransTexas and TARC used by other members
of the TNGC Consolidated Group prior to the Deconsolidation of TransTexas or
TARC.
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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 TransTexas Subordinated
Notes Indenture provides that, upon the occurrence of a change of control (as
defined therein), each holder of the TransTexas Subordinated 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 Intercompany Loans, 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 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 TransTexas
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 (or his heirs, his estate
or any trust in which he or his immediate family members have, directly or
indirectly, a beneficial interest in excess of 50%) and his subsidiaries or the
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 Indenture and the Intercompany Loans
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 (or his heirs, his
estate or any trust in which he or his immediate family members have, directly
or indirectly, a beneficial interest in excess of 50%) and his subsidiaries
or the 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 Notes have an investment grade rating for the
period of 120 days thereafter. The term "person," as used in the definition of
change of control, means a natural person, company, government or political
subdivision, agency or instrumentality of a government and also includes a
"group," which is defined as two or more persons acting as a partnership,
limited partnership or other group. In addition, certain changes or other
events in respect of the ownership or control of TransTexas that do not
constitute a "change of control" under the TransTexas Subordinated Notes
Indenture or the 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 TransTexas
Intercompany Loan and the TransTexas Subordinated Notes) subject to such right
of repayment or repurchase. In the event of a change of control under the
Indenture or a "change of control" under the terms of the TransTexas
Subordinated Notes Indenture or 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. See
"--Deconsolidation for Federal Income Tax Purposes."
ORIGINAL ISSUE DISCOUNT. The Senior Secured Discount Exchange Notes
will be issued with original issue discount for federal income tax purposes
("OID"). Consequently, holders of the Senior Secured Discount Exchange Notes
generally will be required to include OID over the period commencing on the
issuance of the Senior Secured Discount Exchange Notes until June 15, 1999 that
they hold the Senior Secured Discount Notes in ordinary income for federal
income tax purposes in advance of the receipt of the cash attributable thereto.
See "Certain Federal Income Tax Considerations" for a more detailed discussion
of the federal income tax consequences of the purchase, ownership and
disposition of the Senior Secured Discount Notes.
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If a bankruptcy case is commenced by or against the Company under the
Bankruptcy Code after the issuance of the Senior Secured Discount Notes, the
claim of a holder of Senior Secured Discount Notes with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i)
the initial offering price and (ii) that portion of the OID (if any) that is
deemed not to constitute "unmatured interest" for purposes of the Bankruptcy
Code. Any OID that was not amortized as of any such bankruptcy filing would
constitute "unmatured interest."
CERTAIN BANKRUPTCY CONSIDERATIONS. An investment in the Exchange Notes
involves certain risks in the event that the Company or any of its related
entities becomes the debtor in a case under the Bankruptcy Code, including
substantive consolidation and fraudulent transfer risks, as well as risks
discussed elsewhere herein. If any of John R. Stanley, TNGC, TransAmerican,
TransTexas, TARC, TTXD or any other related entity becomes a debtor in a case
under the Bankruptcy Code, and if the bankruptcy court enters an order
"substantively consolidating" the Company, TransTexas or TARC and the debtor in
that case, payment of the Notes could be delayed or impaired. In a substantive
consolidation, the assets and liabilities of the affected entities are
combined, so that the creditors of all entities share in the consolidated pool
of assets. Such a consolidation would expose the holders of the Notes not only
to the usual impairments resulting from bankruptcy, such as a stay of the
Trustee's right to foreclose, but also to potential dilution of the amount
recoverable because of the larger creditor base. See "-- Adequacy of
Collateral; Risks of Foreclosure" and "-- Original Issue Discount."
It should be noted that TransAmerican and its affiliates filed a
voluntary bankruptcy petition in 1975 and began operating pursuant to a
confirmed plan of reorganization in May 1980. TransAmerican filed a voluntary
bankruptcy petition again in 1983 and emerged from bankruptcy in 1987. In both
of those cases, TransAmerican's creditors received less than the amounts to
which they were otherwise entitled.
FRAUDULENT TRANSFER CONSIDERATIONS. The Company's obligations under
the Notes, TransTexas' obligations under the TransTexas Intercompany Loan,
TARC's obligations under the TARC Intercompany Loan, the security interests in
TransTexas' assets and TARC's assets to secure the TransTexas Intercompany Loan
and the TARC Intercompany Loan, respectively, and the obligations of any future
subsidiary of TransTexas or TARC as guarantors of the TransTexas Intercompany
Loan and the TARC Intercompany Loan, respectively, may in each case be subject
to review under state or federal fraudulent transfer laws in the event of the
bankruptcy or other financial difficulty of the Company, TransTexas, TARC or
any future subsidiary of TransTexas or TARC. The Company believes that the
Transactions will not constitute a fraudulent transfer; however, there can be
no assurance that a court would reach a similar conclusion.
Under those laws, if a court, in a lawsuit by an unpaid creditor or
representative of creditors of a debtor, such as a trustee in bankruptcy or the
debtor as a Chapter 11 debtor in possession, were to find that at the time of a
transfer by the debtor (including the grant of a security interest in the
debtor's assets) or the incurrence of an obligation by the debtor, such debtor
(1) made the transfer or incurred the obligation with actual intent to hinder,
delay or defraud creditors or (2) (a) received less than fair consideration or
reasonably equivalent value for the transfer or the incurrence of the
obligation and (b) either (i) was or was rendered insolvent, (ii) was engaged
in a business or transaction for which its remaining unencumbered assets
constituted unreasonably small capital or (iii) intended to incur or believed
that it would incur debts beyond its ability to pay such debts as they mature,
the court could avoid the transfer or the obligation, as the case may be. In
the event of an avoided obligation, the court could direct the return of any
amounts paid thereunder to the debtor or to a fund for the benefit of its
creditors.
A court is likely to hold that an obligor did not receive fair
consideration or reasonably equivalent value to the extent that the proceeds of
its borrowing were distributed by dividend or otherwise to its shareholders.
Thus, the Company will likely be deemed not to have received reasonably
equivalent value for its obligations under the Notes to the extent that the
proceeds were used for the TEC Preferred Stock Redemption. Similarly, a court
may hold that TransTexas did not receive reasonably equivalent value for its
obligations under the TransTexas Intercompany Loan to the extent that the
proceeds thereof are deemed to have been used in the Share Repurchase Program.
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The measure of insolvency for purposes of the foregoing will vary
depending on the law of the jurisdiction being applied. Generally, however, an
entity would be considered insolvent if the sum of its debts (including
contingent or unliquidated debts) is greater than all of its property at a fair
valuation or if the present fair salable value of its assets is less than the
amount that will be required to pay its probable liability on its existing
debts as they become absolute and matured.
If a court found that at the time of the Transactions, clause (1) or
(2) above applied to the Company's obligations under the Notes, to TransTexas'
or TARC's respective obligations under the TransTexas Intercompany Loan or the
TARC Intercompany Loan, to the grant of the security interests securing the
TransTexas Intercompany Loan and the TARC Intercompany Loan, or to the
obligations of any guarantor of the TransTexas Intercompany Loan or the TARC
Intercompany Loan, the court could avoid the obligations or the grant of the
security interest, as the case may be.
The liability of any future subsidiary of TransTexas and TARC under
their respective guarantees of the TransTexas Intercompany Loan and the TARC
Intercompany Loan will in each case be limited to the guarantor's "Adjusted Net
Assets," the maximum amount that the guarantor could pay without (among other
things) becoming insolvent. This limitation is intended to protect the
guarantees from avoidance as fraudulent transfers, although there can be no
assurance that it will successfully do so. There can also be no assurance that
such limited amounts will suffice to pay amounts owed under the Intercompany
Loans in full. As explained above, if any guarantor pays any amount under its
guarantee for the benefit of the holders of the Notes, and if a court
thereafter finds that the payment exceeded the guarantee's maximum amount, the
court could direct that the payment be repaid to the guarantor or to a fund for
the benefit of its creditors.
CONTROL BY SOLE STOCKHOLDER; POTENTIAL CONFLICTS OF INTEREST.
TransAmerican is the sole holder of common stock of the Company. As a member of
the board of directors and chief executive officer of TransAmerican, the
Company, TransTexas and TARC, and sole stockholder, chairman of the board and
chief executive officer of TNGC, John R. Stanley is in a position to control or
significantly influence the management and operations of the Company,
TransTexas and TARC, including actions with respect to pending and future
litigation. The directors generally will have fiduciary obligations to
TransAmerican, the sole holder of common stock of the Company, and not to the
holders of the Notes. There can be no assurance that conflicts will not arise
between TNGC, TransAmerican, the Company, TransTexas, TARC, Mr. Stanley in his
various capacities and the holders of the Notes. In addition, Mr. Stanley has
guaranteed certain indemnity obligations of TransAmerican and TransTexas and
certain debt of TransTexas. The Company's, TransTexas' or TARC's response to
any litigation or any indemnification demand may be influenced by TransAmerican
or Mr. Stanley in a manner that could be adverse to the holders of the Notes.
TNGC, TransAmerican and its existing subsidiaries, including the
Company, TransTexas and TARC, are parties to a tax allocation agreement, the
general terms of which will provide for TNGC and all of its subsidiaries to
file federal income tax returns as members of a consolidated group. The tax
allocation agreement requires the Company, TransTexas and TARC to make certain
payments to TNGC to enable TNGC to pay its federal or alternative minimum tax.
In the event of an IRS audit or examination, the tax allocation agreement gives
TNGC the authority to compromise or settle disputes and to control litigation,
subject to the approval of the Company, TransTexas or TARC, as the case may be,
where such compromise or settlement affects the determination of the separate
tax liability of that company. See "Certain Relationships and Related
Transactions."
MATERIAL PROCEEDINGS. TransTexas and TARC have been and continue to be
involved in a number of legal proceedings. The adverse resolution in any
reporting period of one or more of any such matters could have a material
adverse impact on the results of operations of TransTexas or TARC and the
Company for that period. See "Business of TransTexas -- Legal Proceedings" and
"Business of TARC -- Legal Proceedings."
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ABSENCE OF PUBLIC MARKET FOR THE NOTES. The Outstanding Notes have not
been registered under the Securities Act, are subject to significant
restrictions on resale and have no established trading markets. The Company
does not intend to apply for listing of the Outstanding Notes or the Exchange
Notes on any securities exchange or to seek the admission thereof to trading in
The Nasdaq Stock Market. The Initial Purchaser has informed the Company that
it currently intends to make a market in the Exchange Notes. However, it is
not so obligated, and any such market making may be discontinued at any time
without notice. In addition, such market making activity will be subject to
the limits imposed by the Securities Act and the Exchange Act and may be
limited during the Exchange Offer or the pendency of the Shelf Registration
Statement. See "Description of the Exchange Notes -- Registration Rights."
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes.
If a market for the Exchange Notes does not develop, purchasers may
not be able to resell any of the Notes for an extended period of time, if at
all. If a market for the Exchange Notes does develop, the Exchange Notes may
trade at a discount from their initial offering price, depending upon
prevailing interest rates, results of operations of TransTexas or TARC, the
market for similar securities and other factors. There can be no assurance that
a holder of Notes will be able to sell such securities in the future or that
such sale will be at a price equal to or greater than the initial offering
price of the Outstanding Notes.
EXCHANGE OFFER PROCEDURES. Issuance of the Exchange Notes in exchange
for Outstanding Notes pursuant to the Exchange Offer will be made only after
timely receipt by the Company of such Outstanding Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents.
Therefore, holders of the Outstanding Notes desiring to tender such Outstanding
Notes in exchange for Exchange Notes should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects
or irregularities with respect to the tenders of Outstanding Notes for
exchange. Outstanding Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. Upon consummation
of the Exchange Offer, the registration rights under the Registration Rights
Agreement will terminate except that if any holder notifies the Company within
six months of consummation of the Exchange Offer that (i) due to a change in
law or policy it was not entitled to participate in the Exchange Offer or (ii)
such holder received Exchange Notes that may not be sold without material
restriction under state and federal securities laws, then the Company has
agreed to file and maintain for a period of two years the Shelf Registration
Statement. The Company has also agreed to file and maintain a Shelf
Registration Statement after consummation of a Private Exchange, if the Initial
Purchaser so requests within one year after the closing of the TEC Notes
Offering. In addition, any holder of Outstanding Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Outstanding Notes, where such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Outstanding Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Outstanding Notes
could be adversely affected. See "The Exchange Offer."
RISK FACTORS RELATED TO TRANSTEXAS
SUBSTANTIAL CAPITAL REQUIREMENTS. TransTexas makes substantial capital
expenditures for the exploration, development and production of its natural gas
reserves. Historically, TransTexas has financed capital expenditures and
serviced its debt with cash from operations, public and private offerings of
debt and equity securities, the sale of production payments, asset sales and
other financings. TransTexas intends to use cash flow from operations, together
with the proceeds it received pursuant to the Transactions, to fund its cash
requirements in fiscal 1998. If capital expenditures are higher than
anticipated, cash flow from operations is lower than anticipated or certain
contingent obligations of TransTexas become fixed, TransTexas may not have
sufficient funds for capital expenditures necessary to replace its reserves, to
maintain production at current levels or to attain increased production levels
and, as a result, production from operations may decrease over time. No
assurance can be given that TransTexas' cash flow from
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operating activities will be sufficient to meet actual capital expenditures,
contingent liabilities and debt service in the future. TransTexas anticipates
that it will be required to supplement its cash flow from operations with asset
sales or other financings in order to meet its capital expenditure requirements
for fiscal 1998, although no assurance can be given that such sources of
capital will be available.
LIMITED OPERATING HISTORY IN CONTINUING OPERATIONS. Prior to the Lobo
Sale, TransTexas derived a substantial amount of its revenues from gas produced
from its Lobo Trend producing properties. TransTexas' experience in the
drilling and operation of wells in areas outside of the Lobo Trend is limited,
its completion rate in such areas is substantially lower and its average
lifting costs in such areas are higher. Accordingly, results of operations from
the Continuing Operations or from properties acquired in the future might
differ materially from those in the Lobo Trend.
ABILITY TO REPLACE SHORT-LIVED RESERVES. TransTexas' principal
producing properties are characterized by high initial production followed by a
steep decline in production rates, with wells typically having a half-life of
less than two years and an economic life of approximately ten years. As a
result, TransTexas must find and develop or acquire new natural gas reserves to
replace those being depleted by production. Without successful drilling and
exploration or acquisition activities, TransTexas' reserves and production will
decline rapidly. TransTexas' business strategy is to add reserves by pursuing
an active drilling program on its existing undeveloped properties and on
properties that it may acquire in the future. There can be no assurance that
production from new wells will be sufficient to replace production from
existing wells.
NATURAL GAS PRICE FLUCTUATIONS AND MARKETS. TransTexas' results of
operations and the value of its gas and oil properties are highly dependent
upon the prices TransTexas receives for its natural gas. Substantially all of
TransTexas' sales of natural gas are made in the spot market, or pursuant to
contracts based on spot market prices, and not pursuant to long-term,
fixed-price contracts. Accordingly, the prices received by TransTexas for its
natural gas production are dependent upon numerous factors beyond the control
of TransTexas, including the level of consumer product demand, the North
American supply of natural gas, government regulations and taxes, the price and
availability of alternative fuels, the level of foreign imports of oil and
natural gas, and the overall economic environment. Demand for natural gas is
seasonal, with demand typically higher during the summer and winter, and lower
during the spring and fall, with concomitant changes in price. During the
quarter ended July 31, 1997, the average gas price for the Continuing
Operations was $2.04 per Mcf.
Any significant decline in current prices for natural gas could have a
material adverse effect on TransTexas' financial condition, results of
operations and quantities of reserves recoverable on an economic basis. In
order to mitigate its vulnerability to natural gas price volatility, TransTexas
has entered into and may continue to enter into commodity price swap agreements
to reduce its exposure to price risk in the spot market for natural gas. See
"Business of TransTexas -- Hedging." However, all of TransTexas' current
production remains subject to natural gas price fluctuations. Based on an
assumed average daily net production level of 230 MMcfd (after giving effect to
the Lobo Sale), TransTexas estimates that a $0.10 per MMBtu change in average
gas prices received would change annual operating income by approximately $6.4
million.
COMPETITION. TransTexas competes in the highly competitive areas of
natural gas exploration, development and production. Many of TransTexas'
competitors have substantially larger financial resources, staffs and
facilities than TransTexas.
DRILLING RISKS. Drilling activities are subject to numerous risks,
including mechanical risk and the risk that no commercially productive
reservoirs will be encountered. There can be no assurance that new wells
drilled by TransTexas will be productive or that TransTexas will recover all or
any portion of its investment. The cost of drilling, completing and operating
wells is often uncertain. TransTexas' drilling operations may be curtailed,
delayed or canceled as a result of numerous factors, many of which are beyond
TransTexas' control, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment and services.
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TRANSPORTATION. As a result of the Lobo Sale, TransTexas no longer
owns the pipeline assets held by TTC, which assets are used to transport
natural gas from certain of the Continuing Operations. Although TransTexas has
entered into a transportation agreement to provide it access to such pipeline,
there can be no assurance that this agreement will provide sufficient access or
capacity or that the terms thereof will remain competitive with market rates.
RISKS RELATED TO LOBO SALE. The Lobo Sale Agreement contains
representations and warranties by TransTexas typical for the sale of an oil and
gas exploration, production and transmission company, including the following:
representations and warranties relating to the accuracy of financial
information; liabilities under employee benefit plans; payment of taxes;
existence of litigation or other claims; compliance with laws, including
environmental laws; condition of personal property; existence of contracts,
commitments and contingent liabilities; and title to properties. TransTexas
has indemnified the buyer for certain liabilities related to the assets of TTC,
including judgment liens, costs to remediate conditions that may result in
environmental liability and liabilities and costs related to inaccuracies in
representations and warranties (without regard to TransTexas' knowledge of such
inaccuracy) with respect to which no purchase price adjustment was made at the
closing or as part of the post-closing reconciliation. TransTexas does not
anticipate that it will be responsible for any material amount of post-closing
indemnity obligations under the Lobo Sale Agreement, but there can be no
assurance that such liabilities will not significantly reduce the benefits to
be obtained by TransTexas from the Lobo Sale.
OPERATING HAZARDS AND UNINSURED RISKS. TransTexas' operations are
subject to hazards and risks inherent in drilling for, and the production,
processing and transportation of, natural gas, such as fires, explosions,
encountering formations with abnormal pressures, blowouts, cratering, pipeline
ruptures and spills, any of which can result in loss of hydrocarbons,
environmental pollution, personal injury claims and other damage to properties
of TransTexas and others. TransTexas' insurance coverage includes, among other
things, operator's extra expense, physical damage on certain assets, employer's
liability, comprehensive general liability, automobile and workers'
compensation insurance. TransTexas believes that its insurance is adequate and
customary for companies of a similar size engaged in operations similar to
those of TransTexas, but losses can occur for uninsurable or uninsured risks or
in amounts in excess of existing insurance coverage.
GOVERNMENT REGULATIONS. TransTexas' business is subject to certain
federal, state and local laws and regulations relating to the exploration for
and the development, production and transportation of natural gas, as well as
environmental and safety matters. Many of these laws and regulations have
become more stringent in recent years, often imposing greater liability on a
larger number of potentially responsible parties. Because the requirements
imposed by such laws and regulations are frequently changed, TransTexas is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations. See "Business of TransTexas -- Environmental
Matters."
RISK FACTORS RELATED TO TARC
LIMITED OPERATING HISTORY. TARC has a limited operating history.
TARC's predecessor and indirect parent corporation, TransAmerican, acquired the
refining facility in 1971 and, between 1978 and 1983, invested approximately
$900 million in capital improvements to expand capacity and increase refining
complexity. The refinery operated at a loss in fiscal 1981 and 1982, and in
January 1983, financial difficulties prevented TransAmerican from completing
certain units of the refinery and forced a shutdown of operations. See "--
General Risk Factors -- Certain Bankruptcy Considerations." TARC recommenced
partial operations at the refinery in March 1994 and has operated the No. 2
Vacuum Unit intermittently since that time. TARC has incurred losses and
negative cash flows from operating activities as a result of limited refining
operations that did not cover the fixed costs of operating the refinery,
increased working capital requirements and losses on refined product sales due
to financing costs and low operating margins. TARC intends to commence
operation of the Delayed Coking Unit and certain supporting units once they are
mechanically complete. In addition, subject to certain exceptions, TARC could
operate the No. 2 Crude Unit and/or the No. 2 Vacuum Unit for a third party as
part of a processing arrangement that TARC reasonably believes will provide a
positive contribution to operating profit after recovering all direct operating
costs. TARC's decision to commence or suspend operations will be based on the
availability of financing, current operating margins and the need to tie-in
units as they are completed. No assurance can be given that such operations
prior to completion of Phase I will not generate losses and negative cash flow,
that the projections contained herein will prove accurate or that TARC will
ultimately achieve profitable operations at the refinery.
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CAPITAL IMPROVEMENT PROGRAM REQUIREMENTS; CONSTRUCTION RISKS. Major
construction projects, such as the Capital Improvement Program, entail
significant risks, including possible unanticipated shortages of materials or
skilled labor, unforeseen engineering or environmental problems, work
stoppages, weather interference, unanticipated cost increases and regulatory
problems. Adverse developments in any of these areas could delay the project or
increase its costs. Expenditures necessary to complete the Capital Improvement
Program are budgeted at approximately $427 million. The Transactions are
expected to fully fund the budget for the Capital Improvement Program. If
engineering problems, cost overruns or delays occur, TARC may not be able to
complete the entire Capital Improvement Program without cash provided from
operations or the incurrence of additional indebtedness. Although TARC expects
to have a credit facility to meet its working capital needs in place by the
completion of Phase I, TARC currently does not have such facility in place.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
TARC has engaged a number of specialty consultants and engineering and
construction firms to assist it in completing the individual projects that
comprise the Capital Improvement Program. However, TARC will act as the general
contractor for the Capital Improvement Program, and TARC or one of its
affiliates will construct certain portions of the facilities. TARC's
predecessor commenced two major construction projects in the 1970s, one of
which involved the refinery, neither of which was completed. In addition,
expenditures incurred in connection with the construction and expansion program
begun in February 1995 substantially exceeded the budget therefor, partially
because of changes in the scope of such program.
VOLATILITY OF GROSS REFINING MARGINS; CURRENT MARKET CONDITIONS.
TARC's income and cash flow will be derived from the difference between its
costs to obtain and refine crude oil and other feedstocks and the price for
which it can sell its refined products. TARC will buy crude oil and other
feedstocks and sell refined petroleum products on the spot market. TARC will
maintain inventories of crude oil, other feedstocks, intermediate products and
refined products, the values of which are subject to fluctuations in market
prices. Factors that are beyond the control of TARC may cause the cost of crude
oil and other feedstocks purchased by TARC and the price of refined products
sold by TARC to fluctuate widely. Although prices of crude oil and refined
petroleum products generally move in the same direction, prices of refined
products often do not respond immediately to changes in crude oil costs. An
increase in market prices for crude oil and other feedstocks, or a decrease in
market prices for refined products, could have an adverse impact on TARC's
income and cash flow.
In order to manage its exposure to price risks in the marketing of its
refined products, TARC expects to enter into fixed price delivery contracts,
financial swaps and futures contracts as hedging devices. To ensure a fixed
price for its products, TARC may sell a futures contract and thereafter either
(i) make physical delivery of its product to comply with such contract or (ii)
buy a matching futures contract to unwind its futures position and sell its
products to a customer. Such contracts may restrict the ability of TARC to
benefit from unexpected increases in refined product prices. Hedging by TARC
has in the past resulted in financial losses and may in the future expose TARC
to the risk of financial loss in certain circumstances. There can be no
assurance that hedging devices utilized by TARC will protect against its
exposure to price risk.
DEPENDENCE ON SINGLE SITE OF OPERATIONS. All of TARC's refining
activities are conducted at one location. The refining operations are subject
to inherent risks including fires, floods, accidents, explosions and chemical
releases into the air and water. As a result, the operations of TARC could be
subject to significant interruption if the refinery or the pipelines that it
utilizes were to experience a fire, flood, major accident, shutdown or
equipment failure, or if it were damaged by severe weather or other natural
disaster. Although TARC expects to have sufficient insurance at all times,
there can be no assurance that TARC can obtain increased coverage amounts in
the future at rates or on terms it considers reasonable or acceptable or that
all losses from business interruption and damages or liability for an accident
will be covered by insurance. The occurrence of significant events against
which TARC is not fully insured or of a number of lesser events against which
TARC is fully insured but subject to substantial deductibles could materially
and adversely affect TARC's operations and financial condition. See "Business
of TARC -- Insurance." In addition, the refinery will receive substantially all
of its crude oil and other feedstocks at its dock on the Mississippi River. The
weather or any obstruction of the river could interrupt supplies of crude oil
feedstock, shipments of refined products or otherwise materially affect
operations.
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COMPETITION. The industry in which TARC operates is highly
competitive. Since the United States imports significant quantities of refined
petroleum products, TARC views offshore refiners as its primary competition.
However, TARC also competes with refiners in the Gulf Coast region, many of
which are owned by large, integrated oil companies that because of their more
diverse operations, stronger capitalizations or crude oil supply arrangements,
are better able than TARC to withstand volatile industry conditions, including
shortages or excesses of crude oil or refined products or intense price
competition. The principal competitive factors affecting TARC's refining
operations are the quality, quantity and delivered costs of crude oil and other
refinery feedstocks, refinery processing efficiency, mix of refined products,
refined product prices and the cost of delivering refined products to markets.
Competition also exists between the petroleum refining industry and other
industries supplying energy and fuel to industrial, commercial and individual
consumers. See "Business of TARC -- Competition."
ENVIRONMENTAL MATTERS
COMPLIANCE MATTERS. TARC is subject to federal, state and local laws,
regulations and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, may require TARC to make additional capital
expenditures in order to comply with such laws and regulations. To ensure
continuing compliance, TARC has made environmental compliance and permitting
issues an integral part of its refinery's start-up plans and has budgeted for
such capital expenditures in the Capital Improvement Program.
TARC uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes that are or may be
deemed hazardous substances or wastes. In the past, the refinery has been the
subject of certain environmental enforcement actions, and incurred certain
fines, as a result 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. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a
material adverse effect on TARC's financial position, results of operations or
cash flows. 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.
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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 these regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced sulfur,
olefins, benzene and aromatics compared to the average 1990 gasoline. The EPA
recently promulgated final National Ambient Air Quality Standards ("NAAQS") that
revise the standards for particulate matter and ozone. The number and extent of
the areas subject to reformulated gasoline standards may increase in the future
after the NAAQS are implemented. Conventional gasoline may be used in all other
domestic markets; however, a refiner's post-1994 average conventional gasoline
must not be more polluting than it was in 1990. With limited exceptions, to
determine its compliance as of January 1, 1995, a refiner must compare its
post-1994 and 1990 average values of controlled fuel parameters and emissions.
The Gasoline Standards recognize that many gasoline refiners may not be able to
develop an individual 1990 baseline for a number of reasons, including, for
example, lack of adequate data or the absence or limited scope of operations in
1990. Under such circumstances, the refiner must use a statutory baseline
reflecting the 1990 industry average. The EPA has authority, upon a showing of
extenuating circumstances by a refiner, to grant an individual adjusted baseline
or other appropriate regulatory relief to that refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The
EPA has denied TARC's request for an individual baseline adjustment and other
regulatory relief. TARC will continue to pursue regulatory relief with the EPA.
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 it will be approved as submitted or that additional
expenditures required pursuant to Title V Operating Permit obligations will not
have a material adverse effect on TARC's financial position, results of
operations or cash flow.
CLEANUP MATTERS. TARC also is subject to federal, state and local
laws, regulations and ordinances that impose liability for the costs of clean
up 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 the LDEQ agreed that
the LDEQ would serve as the lead agency with respect to the investigation and
remediation of areas of concern identified in the investigations. TARC, under a
voluntary initiative approved by the LDEQ, 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.
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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
with the EPA in this regard are continuing. With respect to the remaining two
sites, TARC's liability for each such matter has not been determined, and TARC
anticipates that it may incur costs related to the cleanup (and possibly
including additional costs arising in connection with any recovery or other
actions brought pursuant or relating to such matters) at each such site. After
a review of the data available to TARC regarding the basis of TARC's alleged
liability at each site, and based on various factors, which depend on the
circumstances of the particular Superfund site (including, for example, the
relationship of TARC to each such site, the volume of wastes TARC is alleged to
have contributed to each such site in comparison to other PRPs without giving
effect to the ability of any other PRPs to contribute to or pay for any
liabilities incurred, and the range of likely cleanup costs at each such site)
TARC 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.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on June 13, 1997 to the
Initial Purchaser pursuant to the Purchase Agreement. As a condition of the
purchase of the Outstanding Notes by the Initial Purchaser, the Company entered
into the Registration Rights Agreement with the Initial Purchaser, which
requires, among other things, that the Company file with the Commission a
registration statement under the Securities Act with respect to an offer by the
Company to the holders of the Outstanding Notes to issue and deliver to such
holders, in exchange for Outstanding Notes, a like principal amount of Exchange
Notes. The Company is required to use its best efforts to cause the
Registration Statement relating to the Exchange Offer to be declared effective
by the Commission under the Securities Act and commence the Exchange Offer.
The Exchange Notes are to be issued without a restrictive legend and may be
reoffered and resold by the holder without restrictions or limitations under
the Securities Act (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act). A copy of
the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The term "Holder"
with respect to the Exchange Offer means any person in whose name the
Outstanding Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and
all Outstanding Notes validly tendered and not withdrawn prior to 5:00 p.m.,
New York City time, on the Expiration Date. On the Exchange Date, the Company
will issue $1,000 principal amount of Exchange Notes in exchange for $1,000
principal amount of Outstanding Notes accepted in the Exchange Offer. Holders
may tender some or all of their Outstanding Notes pursuant to the Exchange
Offer. However, Outstanding Notes may be tendered only in integral multiples
of $1,000.
The forms and terms of the Exchange Notes are substantially the same
as the form and terms of the Outstanding Notes except that (i) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (ii) the holders of the Exchange
Notes will not be entitled to certain rights under the Registration Rights
Agreement. The Exchange Notes will evidence the same debt as the Outstanding
Notes and will be entitled to the benefits of the Indenture.
The Company has fixed the close of business on , 1997
as the record date for the Exchange Offer for purposes of determining the
persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially.
Holders of Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder, including Rule
14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered
Outstanding Notes when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. The Exchange Agent will act as agent for the
tendering Holders for the purpose of receiving the Exchange Notes from the
Company.
If any tendered Outstanding Notes are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, the certificates for any such unaccepted Outstanding Notes
will be returned, without expense, to the tendering Holder thereof as promptly
as practicable after the Expiration Date.
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Holders who tender outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "-- Fees and Expenses."
INTEREST ON THE EXCHANGE NOTES
The Senior Secured Notes bear interest at a rate of 11 1/2% per
annum. Interest on the Senior Secured Exchange Notes will accrue from the most
recent date on which interest has been paid or, if no interest has been paid,
from the issue date of the Outstanding Senior Secured Notes. Interest on the
Senior Secured Notes will be payable semi- annually in cash in arrears on June
15 and December 15 of each year, commencing December 15, 1997. The Senior
Secured Discount Notes will accrete at a rate of 13% per annum (compounded
semi-annually on June 15 and December 15 of each year) to 100% of the face
value thereof by June 15, 1999. On their issue date the Senior Secured
Discount Notes will have the same Accreted Value as the Outstanding Senior
Secured Discount Notes on that date. Cash interest on the Senior Secured
Discount Notes will be payable semi-annually in arrears on June 15 and December
15 of each year, commencing December 15, 1999, at a rate of 13% per annum.
PROCEDURES FOR TENDERING
Only a Holder of Outstanding Notes may tender such Outstanding Notes
in the Exchange Offer. To tender in the Exchange Offer, a Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the Letter of Transmittal and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Outstanding Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
The Company is not asking any Holder for a proxy, and no Holder is requested to
send the Company a proxy. To be tendered effectively, the Outstanding Notes,
Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the
Outstanding Notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representations set forth below in the second paragraph under the
heading "-- Resale of Exchange Notes."
The tender by a Holder and the acceptance thereof by the Company will
constitute an agreement between such Holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING
NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
such registered Holder to tender on such beneficial owner's behalf.
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Signatures on the Letter of Transmittal or a notice of withdrawal, as
the case may be, must be by an Eligible Institution (as defined below) unless
the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by a properly completed bond power,
signed by such registered Holder as such registered Holder's name appears on
such Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect
to the Exchange Notes at the DTC (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of the Outstanding
Notes by causing such Book-Entry Transfer Facility to transfer such Outstanding
Notes into the Exchange Agent's account with respect to the Outstanding Notes
in accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Outstanding Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures; provided, however,
that a participant in DTC's book-entry system may, in accordance with DTC's
Automated Tender Offer Program procedures and in lieu of physical delivery to
the Exchange Agent of a Letter of Transmittal, electronically acknowledge its
receipt of, and agreement to be bound by, the terms of the Letter of
Transmittal. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Outstanding Notes not properly tendered or any Outstanding Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Outstanding Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Outstanding Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Outstanding Notes will not
be deemed to have been made until such defects or irregularities have been
cured or waived. Any Outstanding Notes received by the Exchange Agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the Exchange Agent to the tendering
Holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available, (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the
Holder, the certificate number(s) of such Outstanding Note(s)
tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof), together with the certificate(s)
representing the Outstanding Notes (or a confirmation of book-
entry transfer of such Outstanding Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility) and any
other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent;
and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing
all tendered Outstanding Notes in proper form for transfer and
all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to Holders who wish to tender their Outstanding Notes according to
the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may
be withdrawn at any time prior to 5:00 P.M., New York City time, on the
Expiration Date.
To withdraw a tender of Outstanding Notes in the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Outstanding Notes to be
withdrawn (the "Depositor"), (ii) identify the Outstanding Notes to be
withdrawn (including the certificate number(s) and principal amount of such
Outstanding Notes or, in the case of Outstanding Notes transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such
Outstanding Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Outstanding Notes register the transfer of such Outstanding
Notes into the name of the person withdrawing the tender, (iv) specify the
name in which any such Outstanding Notes are to be registered, if different
from that of the Depositor, and (v) if applicable because the Outstanding Notes
have been tendered pursuant to book-entry procedures, specify the name and
number of the participant's account at DTC to be credited, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Outstanding
Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Outstanding Notes so withdrawn are validly
retendered. Any Outstanding Notes which have been tendered but which are not
accepted for exchange will be returned to the Holder thereof without cost to
such Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described above under "Procedures
for Tendering" at any time prior to the Expiration Date.
33
<PAGE> 41
EXCHANGE AGENT
Firstar Bank of Minnesota, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
By Registered or Certified Mail: By Overnight Mail or Hand: By Facsimile:
<S> <C> <C>
Firstar Bank of Minnesota, N.A. Firstar Bank of Minnesota, N.A. Firstar Bank of Minnesota, N.A.
101 East Fifth Street 101 East Fifth Street Attn: Corporate Trust Department
St. Paul, MN 55101-1860 St. Paul, MN 55101-1860 Facsimile No. (612) 229-6415
Attn: Corporate Trust Department Attn: Corporate Trust Department Confirm by Telephone No.
(612) 298-6050
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will
be borne by the Company. The principal solicitation is being made by mail;
however, additional solicitation may be made by telegraph, telephone, facsimile
or in person by officers and regular employees of the Company and its
affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and registration expenses,
including fees and expenses of the Trustee, filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the
exchange of the Outstanding Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Outstanding Notes for the
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be issued in the name of, any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of the Outstanding Notes pursuant to the Exchange Offer, then
the amount of any such transfer taxes (whether imposed on the registered Holder
or any other person) will be payable by the tendering Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes as reflected in the Company's accounting records on the date
of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold and otherwise transferred by any holder of
such Exchange Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating,
in a distribution of the Exchange Notes may not rely on the position of the
staff of the Commission enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989) and Morgan Stanley & Co., Incorporated (June 5,
1991), or similar no-action letters, but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale
transaction should be covered by
34
<PAGE> 42
an effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K of the Securities Act. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Outstanding Notes, where such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is a Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and (iii) the Holder and such other person acknowledge that if
they participate in the distribution of the Exchange Notes (a) they must, in
the absence of an exemption therefrom, comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on the no-action letters
referenced above and (b) failure to comply with such requirements in such
instance could result in such Holder incurring liability under the Securities
Act for which such Holder is not indemnified by the Company. Further, by
tendering in the Exchange Offer, each Holder that may be deemed an "affiliate"
(as defined under Rule 405 of the Securities Act) of the Company will represent
to the Company that such Holder understands and acknowledges that the Exchange
Notes may not be offered for resale, resold or otherwise transferred by that
Holder without registration under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely
on the foregoing interpretations of the staff of the Commission with respect to
resales of the Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act.
PRIVATE EXCHANGE NOTES
The Registration Rights Agreement provides that if, prior to
consummation of the Exchange Offer, the Initial Purchaser holds any Outstanding
Notes acquired by it and having, or which are reasonably likely to be
determined to have, the status of an unsold allotment in the initial
distribution, or any other holder of Outstanding Notes is not entitled to
participate in the Exchange Offer, the Company upon the request of such Initial
Purchaser or any such holder shall, simultaneously with the delivery of the
Exchange Notes in the Exchange Offer, issue and deliver to such Initial
Purchaser and any such holder, in exchange (the "Private Exchange") for such
Outstanding Notes held by such Initial Purchaser and any such holder, Private
Exchange Notes. Any Private Exchange Notes will be issued pursuant to the same
Indenture as the Exchange Notes. The Private Exchange Notes are not covered by
the registration statement of which this Prospectus is a part and are not being
offered hereby. Any Private Exchange Notes will be entitled to all the rights
and subject to all the limitations applicable thereto under the Indenture, and
will be subject to the same restrictions on transfer applicable to untendered
Outstanding Notes. However, pursuant to the Registration Rights Agreement,
holders of Private Exchange Notes have certain rights to require the Company to
file and maintain a shelf registration statement that would allow resales of
such Private Exchange Notes owned by such holders. See "-- Shelf Registration
Statement."
SHELF REGISTRATION STATEMENT
If (i) prior to the consummation of the Exchange Offer, either the
Company or the holders of a majority in aggregate principal amount of
Outstanding Notes determines in its or their reasonable judgment that (A) the
Exchange Notes would not, upon receipt, be tradeable by the holders thereof
without restriction under the Securities Act and the Exchange Act and without
material restrictions under applicable Blue Sky or state securities laws, or
(B) the interests of the holders under the Registration Rights Agreement, taken
as a whole, would be materially adversely affected by the consummation of the
Exchange Offer, (ii) applicable interpretations of the staff of the Commission
would not permit the consummation of the Exchange Offer prior to 90 days after
the effectiveness date of this Registration Statement, (iii) subsequent to the
consummation of a Private Exchange but within one year of the closing date of
the Original Notes Offering, the Initial Purchaser so requests, (iv) the
Exchange Offer is not consummated within 270 days of the Original
35
<PAGE> 43
Notes Offering for any reason or (v) in the case of any holder not permitted to
participate in the Exchange Offer or of any holder participating in the
Exchange Offer that receives Exchange Notes that may not be sold without
material restriction under state and federal securities laws (other than due
solely to the status of such holder as an affiliate of the Company within the
meaning of the Securities Act) and, in either case contemplated by this clause
(v), such holder notifies the Company within six months of consummation of the
Exchange Offer, then the Company has agreed to file and maintain a registration
statement that would allow resales of transfer restricted Outstanding Notes,
Exchange Notes or Private Exchange Notes owned by such holders.
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders of the Outstanding Notes are
urged to consult their financial and tax advisors in making their own decision
on what action to take.
The Company may in the future seek to acquire untendered Outstanding
Notes in open market or privately negotiated transactions through subsequent
exchange offers or otherwise. The Company has no present plans to acquire any
Outstanding Notes that are not tendered in the Exchange Offer or to file a
registration statement to permit resales of any untendered Outstanding Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
contemplated in this Prospectus, the Company will receive Outstanding Notes in
like principal amount, the form and terms of which are substantially similar to
the form and terms of the Exchange Notes, except as otherwise described herein.
The Outstanding Notes surrendered in exchange for Exchange Notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase or decrease in the indebtedness
of the Company.
36
<PAGE> 44
THE COMPANY
GENERAL
TransAmerican Energy Corporation is a holding company formed in 1994
that conducts operations through its subsidiaries, TransTexas and TARC, in two
segments of the energy industry: exploration and production of natural gas and
petroleum refining. The Company, TransTexas and TARC are all direct or indirect
subsidiaries of TransAmerican and its parent company, TNGC. In August 1993,
TransAmerican and its subsidiaries transferred their natural gas exploration,
production and transmission businesses to TransTexas. In October 1987,
TransAmerican transferred its refinery's net assets to TARC. The address of the
Company's principal executive offices is 1300 North Sam Houston Parkway East,
Suite 200, Houston, Texas 77032, and its telephone number at that address is
(281) 986-8822.
BACKGROUND
Founded in 1958 by John R. Stanley with a single gas station,
TransAmerican grew rapidly and by the mid-1970s had developed a chain of over
200 independent gasoline stations in New England and New York. In the early
1970s, TransAmerican sought to vertically integrate its retail gasoline
operations by purchasing a refinery in Louisiana. In a further effort to
vertically integrate during this period, TransAmerican also entered the
exploration and production business by acquiring certain oil and gas properties
in South Texas and becoming one of the earliest significant developers of the
Lobo Trend. As a result of its successful gas drilling program in South Texas,
in 1974 TransAmerican began constructing pipeline systems for gathering and
transmission of its natural gas.
TRANSTEXAS
TransTexas is engaged in the exploration for and development and
production of natural gas, primarily in South Texas. Since 1973, TransTexas has
drilled over 1,400 wells and discovered over 3.5 Tcfe of natural gas.
TransTexas' business strategy is to utilize its extensive experience gained
from over 20 years of drilling and operating wells in South Texas, to continue
to find, develop and produce reserves at a low cost. TransTexas has
traditionally performed most of its own well site preparation, drilling,
workover, completion, pipeline and production services.
In 1994, as part of its strategy to expand its productive reserves
beyond the Lower Wilcox Lobo Trend (the "Lobo Trend") in Webb and Zapata
counties in South Texas, TransTexas began evaluating prospects that exhibited
the potential to add proved reserves of at least 50 Bcfe of natural gas per
development area. Since that time, TransTexas has evaluated over 300 potential
areas and its development of certain of these areas has resulted in substantial
additions to its reserves and production.
In May 1997, TransTexas consummated the sale 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 (the "Lobo
Sale"). As of February 1, 1997, the Lobo Trend producing properties divested
by the sale of the stock of TTC had proved reserves of approximately 550 Bcfe.
As of February 1, 1997, TransTexas' net proved reserves in the Continuing
Operations, as estimated by Netherland, Sewell & Associates, Inc., were 404
Bcfe. As of July 31, 1997, after giving effect to the Lobo Sale, TransTexas
owned approximately 650,000 gross (475,000 net) acres of mineral interests.
TransTexas' average net daily natural gas production for the year
ended January 31, 1997, was approximately 420 MMcfd, for a total net production
of 153.6 Bcf of natural gas. After giving effect to the Lobo Sale, TransTexas'
average daily net production for the six months ended July 31, 1997 was
approximately 164 MMcfd of natural gas and 2,013 Bpd of crude oil and
condensate, for a total net production of 31.14 Bcfe.
37
<PAGE> 45
TransTexas' integrated drilling services division provides oil field
services including drilling, oil and natural gas well workover, stimulation and
completion, drilling fluids provision, pipeline construction and equipment
repair and maintenance to TransTexas. As of September 30, 1997, the assets of
this division included 25 land drilling rigs, nine workover rigs and two
fracture stimulation fleets. Complementary drilling, completion and workover
service equipment includes a ready-mix concrete plant, twin cementing trucks, a
coiled tubing unit, a snubbing unit, electric line and logging units, slickline
units, tag units and an extensive fleet of construction, inspection and other
rolling stock.
TransTexas may contribute the assets of its drilling services division
to its wholly owned subsidiary, TransTexas Drilling Services, Inc. ("TTXD").
TransTexas is evaluating alternatives to maximize stockholder value with
respect to TTXD, including options such as a spin-off, a sale to a third party,
a merger or another business combination. In connection with the Lobo Sale,
TransTexas has entered into a long-term agreement, which can be transferred to
TTXD, pursuant to which it will provide drilling and certain other services to
the new operator of the Lobo Trend properties divested in the Lobo Sale.
TransTexas has also recently begun to provide drilling services to other third
parties.
TARC
TARC owns a large petroleum refinery strategically located in the Gulf
Coast region along the Mississippi River, approximately 20 miles from New
Orleans, Louisiana. TARC's business strategy is to modify, expand and
reactivate its refinery and to maximize its gross 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 this program, procured a majority of the
essential equipment required and completed substantially all of the process
design engineering and a substantial portion of the remaining engineering
necessary to complete this project.
The Transactions, when completed, will result in proceeds to TARC in
excess of the $427 million estimated budget for the Capital Improvement
Program, which is designed to reactivate the refinery and increase its
complexity. Phase I of the Capital Improvement Program includes the completion
and start-up of several units, including the Delayed Coking Unit, one of the
refinery's major conversion units. 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 milli-second catalytic cracking
("MSCC(SM)") technology and the installation of additional equipment expected
to further improve operating margins by allowing for a significant increase in
the refinery's capacity to produce gasoline. TARC estimates that Phase II will
be completed at a cost of $204 million and will be tested and operational by
July 31, 1999. After completion of the Capital Improvement Program, TARC will
own and operate one of the largest independent refineries in the Gulf Coast
region, with a replacement cost estimated by management to be approximately
$1.4 billion.
38
<PAGE> 46
SELECTED FINANCIAL AND OPERATING DATA
On January 30, 1996, TEC changed its fiscal year end for financial
reporting purposes from July 31 to January 31. The following table sets forth
selected financial and operating data of TEC and its predecessor for and at the
end of each of the four years ended July 31, 1995, the six months ended January
31, 1995 and 1996, the years ended January 31, 1996 and 1997 and the six months
ended July 31, 1996 and 1997. The financial data for the years ended July 31,
1992, 1993, 1994 and 1995, the six months ended January 31, 1996 and the year
ended January 31, 1997, are derived from the audited financial statements of
TEC. The financial data for the six months ended January 31, 1995, the year
ended January 31, 1996 and the six months ended July 31, 1996 and 1997 are
derived from the unaudited financial statements of TEC and contain all
adjustments (consisting only of normal recurring accruals) necessary, in the
opinion of management of TEC, for a fair presentation thereof. The financial
data for fiscal years ended July 31, 1992 and 1993 represent the results of
operations and financial position of TEC's predecessor prior to the reactivation
of the refinery. During these periods, TARC had only maintenance expenses and
lease income for storage facilities. The data for the year ended July 31, 1994
reflects the limited operations of the refinery commenced in March 1994 and
expenses related to reactivation of portions of the refinery. Subsequent to
March 1994, TARC has operated the No. 2 Vacuum Unit intermittently. TARC does
not consider its historical results to be indicative of future results.
39
<PAGE> 47
<TABLE>
<CAPTION>
Six Months Ended
Year Ended July 31, January 31,
---------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share and per unit amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Gas, condensate, and
NGL revenue ................... $ 227,208 $ 294,753 $ 300,210 $ 273,092 $ 142,070 $ 123,253
Refining revenues .............. -- -- 174,143 140,027 71,035 107,237
Transportation revenues ........ 30,749 30,816 33,240 36,787 19,161 15,892
Gain on sale of assets ......... -- -- -- -- -- 474
Other revenues ................. 3,402 5,425 3,192 837 603 127
----------- ----------- ----------- ----------- ----------- -----------
261,359 330,994 510,785 450,743 232,869 246,983
Operating costs and
expenses ...................... 87,109 113,220 285,766 262,331 133,336 162,830
Depreciation, depletion,
and amortization .............. 96,523 95,016 116,447 135,819 73,051 64,053
General and
administrative expenses ....... 34,912 34,954 44,807 45,592 21,037 21,213
Net interest expense ........... 1,724 2,457 50,131 74,214 29,086 44,151
Income taxes and other ......... 3,587 11,103 7,231 (4,866) (247) (18,487)
Extraordinary loss, net of
taxes ........................ -- -- -- 56,637 -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)(9) ........... $ 37,504 $ 74,244 $ 6,403 $ (118,984) $ (23,394) $ (26,777)
=========== =========== =========== =========== =========== ===========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item ........... $ (13,901) $ (2,975)
Extraordinary item ............. (12,628) --
----------- -----------
$ (26,529) $ (2,975)
=========== ===========
Ratio of earnings to fixed
charges(2) ................... 12.7x 27.3x 1.2x -- -- --
OPERATING DATA OF
TRANSTEXAS:
Gas sales volumes (Bcf) ....... 128.4(3) 119.3 130.9 147.9 76.9 66.9
Average gas prices (dry)
(per Mcf) ..................... $ 1.36 $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65
Average lifting costs (per
Mcfe) ......................... $ .19 $ .22 $ .24 $ .21 $ .21 $ .23
Number of gross wells
drilled ....................... 71 103 140 97 60 65
Percentage of wells drilled
completed ..................... 82% 85% 83% 77% 78% 74%
Net proved reserves(6):
Gas (Bcf) ..................... 686.2 695.0 717.4 1,122.6 943.4 1,139.1
Condensate (mBbls) ............ 2,171 1,968 1,935 3,049 2,637 2,903
SEC PV10 ...................... $ 623,173 $ 701,434 $ 544,387 $ 547,646 $ 533,281 $ 808,062
<CAPTION>
Year Ended Six Months Ended
January 31, July 31,
--------------------------- -----------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(dollars in thousands, except per share and per unit amounts)
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Gas, condensate, and
NGL revenue ................... $ 254,275 $ 360,740 $ 156,245 $ 111,848
Refining revenues .............. 176,229 10,857 10,857 --
Transportation revenues ........ 33,518 34,423 16,870 12,055
Gain on sale of assets ......... 474 7,856 7,762 532,929
Other revenues ................. 361 297 357 617
----------- ----------- ----------- -----------
464,857 414,173 192,091 657,449
Operating costs and
expenses ...................... 291,825 181,085 88,645 57,422
Depreciation, depletion,
and amortization .............. 126,821 139,678 65,165 57,397
General and
administrative expenses ....... 45,768 57,500 25,663 29,767
Net interest expense ........... 89,615 95,922 52,000 60,818
Income taxes and other ......... (23,106) (126,489) (144,702) 171,748
Extraordinary loss, net of
taxes ........................ 56,637 -- -- 156,539
----------- ----------- ----------- -----------
Net income (loss)(9)............ $ (122,703) $ 66,477 $ 105,320 $ 123,758
=========== =========== =========== ===========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item ........... $ (7,341) $ 7,384 $ 11,700 $ 31,142
Extraordinary item ............. (6,293) -- -- (17,393)
----------- ----------- ----------- -----------
$ (13,634) $ 7,384 $ 11,700 $ 13,749
=========== =========== =========== ===========
Ratio of earnings to fixed
charges(2) ................... -- -- 1.8x 4.9x
OPERATING DATA OF
TRANSTEXAS:
Gas sales volumes (Bcf) ....... 137.9 153.6(4) 74.3 53.2
Average gas prices (dry)
(per Mcf) ..................... $ 1.51 $ 2.14(5) $ 1.99(5) $ 1.80
Average lifting costs (per
Mcfe) ......................... $ .23 $ .29 $ .30 $ .35
Number of gross wells
drilled ....................... 102 151 58 55
Percentage of wells drilled
completed ..................... 75% 68% 74% 58%
Net proved reserves(6):
Gas (Bcf) ..................... 1,139.1 919.7 N/A N/A
Condensate (mBbls) ............ 2,903 5,738 N/A N/A
SEC PV10 ...................... $ 808,062 $ 1,449,068(7) N/A N/A
</TABLE>
40
<PAGE> 48
<TABLE>
<CAPTION>
July 31, January 31,
---------------------------------------------------- --------------------------------------
1992 1993 1994 1995 1995 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(8) ... $ (36,244) $ (58,443) $ (25,702) $ 112,998 $ (92,258) $ 25,859 $ (333,226)
Total assets ................... 377,421 431,141 758,664 1,325,656 823,726 1,456,422 1,613,735
Total long-term debt ........... 3,246 8,270 500,000 1,094,963 510,000 1,140,779 1,308,254
Stockholder's equity (deficit) . 198,957 230,418 15,262 (9,156) (8,133) (35,933) (47,009)
<CAPTION>
July 31,
------------------------
1996 1997
---------- ----------
BALANCE SHEET DATA:
<S> <C> <C>
Working capital (deficit)(8) ... $ 37,514 $ 65,146
Total assets ................... 1,482,229 1,966,149
Total long-term debt ........... 1,159,845 1,523,474
Stockholder's equity (deficit) . 21,234 244,872
</TABLE>
- ----------
(1) Per share data for years prior to July 31, 1995 is omitted because
TEC's predecessor was not a separate entity with its own capital
structure.
(2) Earnings were inadequate to cover fixed charges by $138.7 million,
$26.9 million, $60.4 million, $172.5 million and $18.3 million for the
year ended July 31, 1995, for the six months ended January 31, 1995
and 1996 and the years ended January 31, 1996 and 1997, respectively.
(3) Includes a 3.5 Bcf adjustment resulting from a favorable litigation
settlement.
(4) Sales volumes for the year ended January 31, 1997 and the six months
ended July 31, 1997, include 32.0 Bcf and 7.3 Bcf, respectively,
delivered pursuant to volumetric production payments
(5) Average price calculations for the year ended January 31, 1997 and
the six months ended July 31, 1997, include prices for amounts
delivered to third parties under volumetric production payments. The
average gas prices for TransTexas' undedicated production for these
periods were $2.39 per Mcf and $1.91 per Mcf, respectively. The gas
price does not include the effect of hedging.
(6) These reserve data are estimates of TransTexas' proved reserves as of
August 1, 1992, 1993, 1994 and 1995 and February 1, 1996 and 1997, as
evaluated by Netherland Sewell & Associates, Inc.. No reserve
estimates were made for the six-month periods ended July 31, 1996 and
1997. See "Risk Factors-- General Risk Factors -- Risks Related to
Forward Looking Statements and Estimates."
(7) As of February 1, 1997, the sales price used for purposes of
estimating TransTexas' proved reserves and the future net cash flow
from those reserves was $3.17 Mcf of natural gas and $23.99 per Bbl of
condensate and oil.
(8) For all periods prior to the Asset Transfer (as defined), data
excludes all cash and accounts receivable because those assets were
not transferred to TransTexas in the Asset Transfer. Working capital
at July 31, 1995 and 1996, and January 31, 1996 and 1997, includes
$44.7 million, $46.0 million, $46.0 million and $46.0 million,
respectively, in a restricted interest reserve account pursuant
to the Indenture governing the TransTexas Senior Secured Notes.
(9) Net income (loss) is prior to the preferred stock dividends of
$19,000 for the year ended January 31, 1997 and the six months
ended July 31, 1996 and 1997.
41
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Historically, TEC has conducted its operations through its operating
subsidiaries in three segments of the energy industry: exploration and
production of natural gas, natural gas transportation and petroleum refining.
After consummation of the Lobo Sale, TEC no longer conducts operations in the
natural gas transportation segment. TEC's only sources of liquidity and cash
flow will be payments on the Intercompany Loans and other loans to TEC's
subsidiaries, and dividends from and sales of stock of its subsidiaries. Until
March 1994, the exploration, production and transportation operations of
TransTexas constituted substantially all of the operations of the Company. This
discussion should be read in conjunction with the consolidated financial
statements of TEC and its predecessor included in this Prospectus. The
financial data for the six months ended January 31, 1995, the year ended
January 31, 1996, and the six months ended July 31, 1996 and 1997 are derived
from the unaudited financial statements of TEC. All of TEC's operations are
conducted through TransTexas and TARC.
Business segment information for TEC and its predecessor for the years
ended July 31, 1994 and 1995, the six months ended January 31, 1995 and 1996,
the years ended January 31, 1996 and 1997 and the six months ended July 31,
1996 and 1997 is as follows:
42
<PAGE> 50
<TABLE>
<CAPTION>
DEPRECIATION,
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended July 31, 1994
Exploration and production . . . $300,210 $ 96,828 $107,727 $180,426 $ 462,951
Gas transportation . . . . . . . 33,240 (2,257) 5,913 35,763 66,019
Refining . . . . . . . . . . . . 177,178 (14,526) 2,589 84,295 176,327
Other . . . . . . . . . . . . . . 157 (15,280) 218 34,522 53,367
-------- -------- -------- -------- ----------
$510,785 $ 64,765 $116,447 $335,006 $ 758,664
======== ======== ======== ======== ==========
Year Ended July 31, 1995
Exploration and production . . . $273,092 $ 62,855 $121,625 $259,189 $ 712,322
Gas transportation . . . . . . . 36,787 2,827 8,041 10,105 60,916
Refining . . . . . . . . . . . . 140,579 (44,446) 5,855 116,654 499,879
Other . . . . . . . . . . . . . . 285 (14,235) 298 12,786 52,539
-------- -------- -------- -------- ----------
$450,743 $ 7,001 $135,819 $398,734 $1,325,656
======== ======== ======== ======== ==========
Six Months Ended January 31, 1995
Exploration and production . . . $142,070 $ 32,860 $ 66,175 $ 99,672 $ 483,511
Gas transportation . . . . . . . 19,161 2,796 4,031 6,366 63,541
Refining . . . . . . . . . . . . 71,586 (23,239) 2,706 58,093 229,462
Other . . . . . . . . . . . . . . 52 (6,972) 139 11,855 47,213
-------- -------- -------- -------- ----------
$232,869 $ 5,445 $ 73,051 $175,986 $ 823,727
======== ======== ======== ======== ==========
Six Months Ended January 31, 1996
Exploration and production . . . $123,253 $ 51,443 $ 56,543 $176,386 $ 738,648
Gas transportation . . . . . . . 15,892 (4,393) 4,194 13,266 72,815
Refining . . . . . . . . . . . . 107,237 (21,971) 3,159 150,238 518,205
Other . . . . . . . . . . . . . . 601 (7,892) 157 16,904 126,754
-------- -------- -------- -------- ----------
$246,983 $ 17,187 $ 64,053 $356,794 $1,456,422
======== ======== ======== ======== ==========
Year Ended January 31, 1996
Exploration and production . . . $254,275 $ 81,438 $111,993 $335,903 $ 738,648
Gas Transportation . . . . . . . 33,518 (4,362) 8,204 17,005 72,815
Refining . . . . . . . . . . . . 176,230 (43,178) 6,308 208,799 518,205
Other . . . . . . . . . . . . . . 834 (15,155) 316 17,835 126,754
-------- -------- -------- -------- ----------
$464,857 $ 18,743 $126,821 $579,542 $1,456,422
======== ======== ======== ======== ==========
Year Ended January 31, 1997
Exploration and production . . . $360,740 $230,560 $122,570 $314,013 $ 881,390
Gas transportation . . . . . . . 42,200 (9,018) 8,466 33,636 98,903
Refining . . . . . . . . . . . . 10,857 (54,995) 7,225 127,123 563,826
Other . . . . . . . . . . . . . . 376 (34,637) 1,417 11,165 69,616
-------- -------- -------- -------- ----------
$414,173 $131,910 $139,678 $485,937 $1,613,735
======== ======== ======== ======== ==========
Six Months Ended July 31, 1996
Exploration and production . . . $156,245 $143,593 $ 56,683 $106,021 $ 799,792
Gas transportation . . . . . . . 24,632 1,315 4,263 9,650 80,520
Refining . . . . . . . . . . . . 10,857 (22,206) 3,620 83,102 541,317
Other . . . . . . . . . . . . . . 357 (14,084) 599 6,272 60,600
-------- -------- -------- -------- ----------
$192,091 $108,618 $ 65,165 $205,045 $1,482,229
======== ======== ======== ======== ==========
Six Months Ended July 31, 1997
Exploration and production . . . $538,191 $450,901 $ 49,263 $173,850 $ 566,198
Gas transportation . . . . . . . 118,641 100,494 4,103 6,040 --
Refining . . . . . . . . . . . . -- (19,298) 3,425 77,514 756,601
Other . . . . . . . . . . . . . . 617 (19,234) 606 22,388 643,350
-------- -------- -------- -------- ----------
$657,449 $512,863 $ 57,397 $279,792 $1,966,149
======== ======== ======== ======== ==========
</TABLE>
43
<PAGE> 51
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 six months ended July 31, 1997 include the
effect of reduced volumes attributable to the producing properties divested as
part of the Lobo Sale.
TransTexas' operating data for the years ended July 31 1994 and 1995,
the six months ended January 31, 1995 and 1996, the years ended January 31,
1996 and 1997 and the six months ended July 31, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended Six Months Ended
July 31, January 31, January 31, July 31,
---------------- ----------------- ---------------- ----------------
1994 1995 1995 1996 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf) (1) . . . . . . . . 130.9 147.9 76.9 66.9 137.9 153.6 74.3 53.2
NGLs (MMgal) . . . . . . . . . 164.0 225.3 121.3 65.3 169.2 174.2 89.3 61.7
Condensate and oil (MBbls). . . 650 638 354 259 543 604 280 426
Average prices: . . . . . . .
Gas (dry) (per Mcf) (2). . . . $1.96 $1.40 $1.41 $1.65 $1.51 $2.14 $1.99 $1.80
NGLs (per gallon) . . . . . . . .27 .26 .27 .30 .27 .36 .31 .29
Condensate and oil (per Bbl). . 15.13 17.22 16.50 17.39 17.76 21.54 19.86 19.46
Number of gross wells drilled . . 140 97 60 65 102 151 58 55
Percentage of wells completed . . 83% 77% 78% 74% 75% 68% 74% 58%
</TABLE>
- ----------------------
(1) Sales volumes for the year ended January 31, 1997 and the six months
ended July 31, 1997 include 32.0 Bcf and 7.3 Bcf, respectively, delivered
pursuant to volumetric production payments.
(2) Average prices for the year ended January 31, 1997 and the six months
ended July 31, 1997 includes amounts delivered under volumetric
production payments. The average gas prices for TransTexas' undedicated
production for these periods were $2.39 per Mcf and $1.91 per Mcf,
respectively. Gas prices do not include the effect of hedging agreements.
44
<PAGE> 52
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended Six Months Ended
July 31, January 31, January 31, July 31,
--------------- ---------------- -------------- ----------------
1994 1995 1995 1996 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Lease . . . . . . . . . . . . . $ 19.8 $19.6 $10.3 $ 9.4 $ 18.7 $ 27.5 $ 13.0 $12.9
Pipeline . . . . . . . . . . . 25.5 21.2 9.8 13.0 24.4 37.2 16.3 11.4
Natural gas liquids . . . . . . 44.8 44.4 24.5 15.6 35.5 49.3 23.2 14.5
Well service . . . . . . . . . .1 .1 -- .1 .2 .4 -- --
------- ----- ----- ----- ------ ------ ------ -----
90.2 85.3 44.6 38.1 78.8 114.4 52.5 38.8
Taxes other than income taxes (1). 13.2 14.0 6.3 7.5 15.2 22.6 12.4 7.7
------- ----- ----- ----- ------ ------ ------ -----
Total . . . . . . . . . . . . . $ 103.4 $99.3 $50.9 $45.6 $ 94.0 $137.0 $ 64.9 $46.5
======= ===== ===== ===== ====== ====== ====== =====
</TABLE>
- -----------------
(1) Taxes other than income taxes include severance, property and other taxes.
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended Six Months Ended
July 31, January 31, January 31, July 31,
---------------- ----------------- ---------------- ----------------
1994 1995 1995 1996 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depletion rates (per Mcfe) $.80 $.81 $.84 $.82 $ .79 $.96 $ .92 $1.04
==== ==== ==== ==== ===== ==== ===== =====
</TABLE>
TransTexas' Consolidated EBITDA, as defined in the Indenture, is set
forth 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>
Year Ended Six Months Ended Year Ended Six Months Ended
July 31, January 31, January 31, July 31,
---------------- ----------------- ---------------- ----------------
1994 1995 1995 1996 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated EBITDA . . $195.0 $184.7 $100.2 $103.4 $187.9 $326.0 $204.0 $594.3
</TABLE>
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 to 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 $1.49 to $2.29 in the six months
ended July 31, 1997, compared to a range of $2.02 to $2.45 in the same period
of the prior year. The increase in condensate sales volumes is due primarily to
increased production from TransTexas' new development areas, offset in part by
the normal decline in natural gas production from the TransTexas Lobo Trend
wells and the disposition of such wells as a result of the Lobo Sale. 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
disposition of the pipeline system as a result of the Lobo Sale.
45
<PAGE> 53
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 expense and the initiation of a program to
increase flow rates on certain of TransTexas' wells through increased workovers
and the installation of leased wellhead compressors. Pipeline operating
expenses decreased by $4.9 due primarily to the disposition of the pipeline
system as a result 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 TransTexas Senior Secured Notes
offset in part by the accretion on the TransTexas 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 TransTexas Senior Secured Notes
offset in part by the TransTexas Intercompany Loan of $450 million.
YEAR ENDED JANUARY 31, 1997, COMPARED WITH THE YEAR ENDED JANUARY 31, 1996
Gas, condensate and NGL revenues for the year ended January 31, 1997,
increased by $106.5 million from the year ended January 31, 1996, primarily due
to higher prices for and increased volumes of natural gas, condensate, oil and
NGLs, primarily in the fourth quarter. The average monthly prices received for
natural gas, excluding amounts delivered to third parties under volumetric
production payments, ranged from $1.71 to $3.74 per Mcf during the year ended
January 31, 1997, compared to prices ranging from $1.29 to $1.95 per Mcf in the
year ended January 31, 1996. The increase in natural gas sales volumes resulted
primarily from increased production from TransTexas' Bob West North development
area, offset in part by the normal decline in natural gas production from
TransTexas' Lobo Trend wells and the sale of approximately 207 Bcfe of
TransTexas' reserves in the Lobo Trend. NGLs sales volumes increased as a
result of increases in the volumes of natural gas processed. Transportation
revenues increased by $0.9 million for the year ended January 31, 1997,
primarily due to increased volumes of natural gas transported.
Lease operating expenses for the year ended January 31, 1997 increased
by $8.8 million from the year ended January 31, 1996 primarily due to increases
in repairs and maintenance and workover expenses attributable to an increase in
the number of producing wells prior to the sale of certain of TransTexas' Lobo
Trend properties and the initiation in the first quarter of fiscal 1997 of a
program to increase flow rates on certain wells. This program included the
installation of leased wellhead compressors and additional workover projects.
Pipeline operating expenses increased by $12.8 million, primarily due to
increases in compressor fuel costs, compressor rentals, chemicals used in the
operation of TransTexas' amine plants and volumetric losses. NGLs cost
increased by $13.8 million from the year ended January 31, 1996 due to
increases in the cost of natural gas used in NGL processing. Depreciation,
depletion and amortization expense for the year ended January 31, 1997
increased by $11.9 million due to a $0.17 increase in the depletion rate,
offset in part by a decrease in TransTexas' undedicated natural gas production.
The depletion rate increased for the year ended January 31, 1997 primarily due
to higher costs associated with TransTexas' expanded
46
<PAGE> 54
exploration activities. General and administrative expenses increased by $12.6
million in the year ended January 31, 1997, due primarily to increases in
litigation accruals and wages and benefits. Taxes other than income taxes
increased by $7.3 million over the year ended January 31, 1996 due primarily to
an increase in severance taxes, including an accrual of $2.7 million as a
result of a severance tax audit adjustment, offset in part by a reduction in ad
valorem taxes.
Interest income for the year ended January 31, 1997, increased by
approximately $0.8 million from the year ended January 31, 1996 due to higher
average cash balances in fiscal 1997. Interest expense increased by $15.1
million primarily as a result of interest incurred on the TransTexas Senior
Secured Notes and the amortization of related debt issue costs, offset in part
by an increase of $7.6 million of interest capitalized in connection with the
acquisition of TransTexas' unevaluated gas and oil properties.
Litigation settlements for the year ended January 31, 1997, increased
by $77.7 million as a result of the settlement with Tennessee Gas Pipeline
Company of which TransTexas' share of the proceeds was $96 million.
Income tax expense for the year ended January 31, 1997, was $12.5
million compared to an income tax benefit of $4.2 million in the prior year.
Income tax expense for the year ended January 31, 1997 is net of a decrease in
a valuation allowance of $13.6 million relating to the utilization of net
operating loss carryforwards and tight sands credits of $7.4 million. Income
tax benefit for the year ended January 31, 1996 is net of a valuation allowance
of $13.6 million relating to net operating loss carryforwards and an adjustment
relating to tight sands credits of $7.8 million.
Cash flow from operating activities for the year ended January 31,
1997, increased by approximately $148.9 million from the prior year primarily
due to increased net income, the settlement of take-or-pay litigation in the
second quarter of fiscal 1997 and proceeds from the sale of volumetric
production payments, partially offset by increases in working capital.
Cash used in investing activities decreased by $67.9 million due to
the sale of approximately 207 Bcfe of TransTexas' reserves, offset in part by
advances to an affiliate and increased capital spending. Capital expenditures
for fiscal 1997 included $47.7 million for purchases of oil and gas properties
from TransAmerican.
Cash flow from financing activities decreased by approximately $214.9
million from the year ended January 31, 1996 due primarily to the issuance of
the TransTexas Senior Secured Notes in June 1995, offset in part by the
issuance of the TransTexas Subordinated Notes in fiscal 1997.
SIX MONTHS ENDED JANUARY 31, 1996, COMPARED WITH THE SIX MONTHS ENDED
JANUARY 31, 1995
Gas, condensate and NGL revenues for the six months ended January 31,
1996, decreased by $18.6 million from the comparable period of the prior year,
due primarily to decreases in gas, condensate and NGL sales volumes, partly
offset by increases in gas, condensate and NGL prices. The decrease in gas
sales volumes reflects the normal decline in natural gas production from
TransTexas' Lobo Trend wells, offset in part by production from TransTexas' new
development areas. The average monthly prices received per Mcf of gas ranged
from $1.33 to $1.95 in the six months ended January 31, 1996, compared to a
range of $1.32 to $1.52 in the same period in the prior year. NGL sales volumes
decreased primarily due to the decrease in the volumes of natural gas
processed. Transportation revenues decreased by $3.3 million for the six months
ended January 31, 1996, due primarily to decreases in volumes transported.
Lease operating expenses in the six months ended January 31, 1996,
decreased by $0.9 million from the prior year period as increases in repairs
and maintenance expenses attributable to the increase in the number of
producing wells were offset by a decrease in workover expense due to fewer
workovers performed. Pipeline operating expenses increased by $3.2 million due
primarily to increases in repairs and maintenance expenses, compressor fuel
costs and pipeline loss. Also contributing to the increase in pipeline
operating expenses were costs incurred by TransTexas to remove carbon dioxide
from natural gas produced from certain of TransTexas' new development areas.
NGL costs decreased by $8.9 million from the comparable period in the prior
year due to the decrease in volumes of natural gas processed. Depreciation,
depletion and amortization expense for the six months ended January 31, 1996,
decreased by
47
<PAGE> 55
$9.4 million due to the decrease in natural gas production and a $0.02 decrease
in the depletion rate. General and administrative expenses increased by $1.1
million in the six months ended January 31, 1996, due primarily to costs
associated with the relocation of TransTexas' corporate offices, offset in part
by decreases in consulting and professional fees. The gain on litigation
settlement of $18.3 million represents the value of properties received in a
litigation settlement.
Interest income for the six months ended January 31, 1996, increased
by approximately $2 million over the comparable period of the prior year due to
increased cash balances resulting from the issuance of the TransTexas Senior
Secured Notes. Interest expense increased by $13.4 million primarily as a
result of interest accrued on the TransTexas Senior Secured Notes and a
dollar-denominated production payment, offset in part by the capitalization of
approximately $7.4 million of interest in connection with the acquisition of
TransTexas' unevaluated gas and oil properties.
Cash flow from operating activities for the six months ended January
31, 1996, decreased by approximately $21.2 million from the prior year period
primarily due to decreased production, offset in part by net proceeds of $32.9
million from the sale of a volumetric production payment.
Cash used in investing activities increased by $31.4 million due to
increases in lease acquisitions and drilling activity, and the purchase and
installation of three amine plants to treat gas produced from certain of
TransTexas' new discovery areas. These increases were offset by cash proceeds
from the sale of a portion of TransTexas' Lodgepole properties and a
sale-leaseback of drilling equipment.
Cash flow from financing activities decreased by approximately $5.2
million due primarily to repayments of TransTexas' dollar-denominated
production payment, offset in part by increases in long-term borrowings.
YEAR ENDED JULY 31, 1995, COMPARED WITH THE YEAR ENDED JULY 31, 1994
Gas, condensate and NGL revenues decreased by $26.9 million, due
primarily to the decline in prices for natural gas, offset in part by increases
in NGL and natural gas production. The average monthly prices received per Mcf
of gas ranged from a low of $1.29 to a high of $1.52 in the year ended July 31,
1995, compared to a low of $1.71 to a high of $2.21 in fiscal 1994. The
increase in gas sales volumes was due to a net increase in producing wells to
947 at July 31, 1995 from 865 at July 31, 1994. NGL production increased due to
increased volumes of TransTexas' natural gas processed at the Exxon King Ranch
Plant. Transportation revenues for the year ended July 31, 1995, increased by
$3.5 million compared to fiscal 1994 due primarily to increases in volumes
transported.
Lease operating expenses decreased by $0.2 million, primarily as a
result of a decrease in operating materials and supplies expense. The decrease
in NGL cost of $0.4 million reflects the decrease in the cost of natural gas
used in NGL processing, offset in part by increased NGL production. Pipeline
operating expenses decreased by $4.3 million as increases in repair and
maintenance expenses associated with higher volumes transported were offset by
a decrease in compressor fuel costs. Depreciation, depletion and amortization
expenses increased by $16.1 million in the year ended July 31, 1995 over the
prior year due to the increase in natural gas production and a $0.01 increase
in the depletion rate. General and administrative expenses decreased by $8.4
million compared to the prior year due primarily to a $6.0 million decrease in
litigation accruals and a corresponding reduction in legal fees. Litigation
accruals totaled $7.0 million in the year ended July 31, 1995, compared to
$13.0 million in 1994.
Interest expense for the year ended July 31, 1995, increased by $16.8
million over the prior year as a result of the increase in principal amount and
interest rate on the TransTexas Senior Secured Notes as compared to TransTexas'
previous indebtedness, along with interest accrued on TransTexas' production
payment, short-term borrowings and certain litigation settlements.
48
<PAGE> 56
Income tax benefit for the year ended July 31, 1995, is net of a
valuation allowance of $13.6 million relating to net operating loss
carryforwards and an adjustment relating to tight sands credits of $7.8
million. Income tax expense for the year ended July 31, 1994 includes $5.8
million of tax benefits that became available as a result of a change in tax
status of the TNGC Consolidated Group to an integrated oil company.
TransTexas recorded an extraordinary loss of approximately $56.6
million, net of taxes, on the retirement of TransTexas' previous indebtedness.
This loss consists of $40.0 million in premium and consent fees paid to the
holders of TransTexas' previous indebtedness, $2.5 million in underwriting fees
and expenses and the recognition of approximately $15.6 million of unamortized
deferred financing costs, less a related income tax benefit of approximately
$1.5 million.
Capital expenditures for the year ended July 31, 1995, increased by
$37.2 million to $278.5 million from $241.3 million for the prior year,
primarily due to an increase in lease acquisitions, offset in part by the
completion of a major pipeline expansion project in July 1994.
INFLATION AND CHANGES IN PRICES
TransTexas' results of operations and the value of its gas properties
are highly dependent upon the prices TransTexas receives for its natural gas.
Substantially all of TransTexas' sales of natural gas are made in the spot
market, or pursuant to contracts based on spot market prices, and not pursuant
to long-term, fixed-price contracts. Accordingly, the prices received by
TransTexas for its natural gas production are dependent upon numerous factors
beyond the control of TransTexas, including the level of consumer product
demand, the North American supply of natural gas, government regulations and
taxes, the price and availability of alternative fuels, the level of foreign
imports of oil and natural gas and the overall economic environment. Demand for
natural gas is seasonal, with demand typically higher during the summer and
winter, and lower during the spring and fall, with concomitant changes in
price. Although certain of TransTexas' costs and expenses are affected by the
level of inflation, inflation has not had a significant effect on TransTexas'
results of operations during the year ended January 31, 1997.
Any significant decline in current prices for natural gas could have a
material adverse effect on TransTexas' financial condition, results of
operations and quantities of reserves recoverable on an economic basis. Based
on an assumed average net daily production level of 230 MMcfd (after giving
effect to the Lobo Sale), TransTexas estimates that a $0.10 per MMBtu change in
average gas prices received would change annual operating income by
approximately $6.4 million.
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.
49
<PAGE> 57
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.
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 the recent period under
processing agreements with third parties.
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
TARC'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 TARC's labor force in
connection with the Capital Improvement Program.
Taxes other than income taxes for the six months ended July 31, 1997
decreased $1.1 million to $1.8 million from $2.9 million for the same period in
1996 primarily due to decreased property tax expense.
Loss on purchase commitments for the six months ended July 31, 1997
consists of a $4.8 million loss related to a commitment to purchase 0.6 million
barrels of feedstock. These barrels have been sold to a third party and are now
subject to a processing agreement.
Interest income for the six months ended July 31, 1997 increased $0.8
million as compared to the same period in 1996 primarily due to the investment
of proceeds from the TARC Intercompany Loan. Interest expense for the six
months ended July 31, 1997 increased $4.7 million, primarily due to interest on
promissory notes to TransAmerican and other long-term debt. During the six
months ended July 31, 1997, TARC capitalized approximately $41.6 million of
interest related to property and equipment additions at TARC'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 the TransTexas Senior Secured Notes
and the exchange of the TransTexas Subordinated Notes for the Old TransTexas
Subordinated Notes.
YEAR ENDED JANUARY 31, 1997, COMPARED WITH THE YEAR ENDED JANUARY 31, 1996
Total revenues for the year ended January 31, 1997, decreased to $10.9
million from $176.2 million for the same period in 1996, due primarily to a
significant drop in the processing of purchased feedstocks for sales to third
parties compared to the prior year.
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Cost of products sold for the year ended January 31, 1997, decreased
to $11.5 million from $185.3 million for the same period in 1996, due primarily
to a significant drop in the purchase of feedstocks for processing compared to
the prior year.
Losses from processing arrangements of $7.1 million for the year ended
January 31, 1997, were primarily due to price management activities. See
"Business of TARC -- Financing Arrangements and Processing Agreements."
Operations and maintenance expenses for the year ended January 31,
1997, increased to $23.9 million from $12.5 million for the same period in
1996, primarily due to a write-off of approximately $6.5 million for assets
included in construction work in process that will not be used in the overall
Capital Improvement Program, an increase in fuel costs during the first six
months of fiscal 1997, and higher contract labor costs.
Depreciation and amortization expense for the year ended January 31,
1997, increased $0.9 million to $7.2 million from $6.3 million for the same
period in 1996, primarily due to the reclassification of construction work in
process to depreciable assets during 1997.
Taxes other than income taxes for the year ended January 31, 1997,
increased to $4.2 million from $2.7 million for the same period in 1996,
primarily due to increased property tax expense.
General and administrative expenses for the year ended January 31,
1997, decreased to $11.8 million from $12.6 million for the same period in
1996, primarily due to decreased litigation expense.
Interest income for the year ended January 31, 1997, decreased by $6.1
million as compared to the same period in 1996, primarily due to interest
earned in 1996 on a higher balance held in the collateral account pursuant to
the TARC Notes Indenture. Interest expense, net, for the year ended January 31,
1997, decreased $13.8 million, primarily due to a larger portion of interest
being capitalized as well as a reduction of product financing costs in 1997
versus 1996 due to lower volumes of feedstock purchases. During the year ended
January 31, 1997, TARC capitalized approximately $68.8 million of interest
related to construction activities at TARC's refinery, compared to $41.5
million for the year ended January 31, 1996.
The equity in income of TransTexas for the year ended January 31,
1997, of $12.3 million reflects TARC's 20.3% equity interest in TransTexas
until TARC's sale of 4.55 million shares of TransTexas common stock in March
1996 and its 14.1% interest thereafter. This compares to $2.6 million equity in
loss of TransTexas for the year ended January 31, 1996. The increase is a
result of higher gas prices and a favorable litigation settlement at
TransTexas.
Other income for the year ended January 31, 1997, was $56.5 million,
which was primarily a result of the $56.2 million gain on the sale of 4.55
million shares of TransTexas common stock in March 1996. Other income for the
year ended January 31, 1996, was $2.1 million, primarily resulting from trading
gains on futures contracts.
SIX MONTHS ENDED JANUARY 31, 1996, COMPARED WITH THE SIX MONTHS ENDED
JANUARY 31, 1995
Total revenues for the six months ended January 31, 1996, increased
$35.6 million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.
Cost of products sold for the six months ended January 31, 1996,
increased $36.2 million to $110.1 million from $73.9 million for the same
period in 1995, primarily due to an increase in the volume of products sold,
partially offset by a decrease in the average price of feedstocks purchased.
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Operations and maintenance expenses for the six months ended January
31, 1996, increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the No. 2
Vacuum Unit was operating.
Depreciation and amortization expenses for the six months ended
January 31, 1996, increased $0.5 million to $3.2 million from $2.7 million for
the same period in 1995, primarily due to the transfer of certain terminal
facilities and tankage equipment from construction in progress to depreciable
assets during the 1996 period.
General and administrative expenses for the six months ended January
31, 1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a $2.5 million reduction in litigation
accruals, partially offset by an increase in payroll of $1.1 million arising
from operations support requirements.
Taxes other than income taxes for the six months ended January 31,
1996, decreased $1.4 million to $0.7 million from $2.1 million for the same
period in 1995, primarily due to lower property tax expense for the six months
ended January 31, 1996.
Interest income for the six-month period ended January 31, 1996,
increased $2.3 million compared to the same period in 1995 due primarily to
interest earned on long-term debt proceeds held in the collateral account under
the TARC Notes Indenture. Interest expense for the six-month period ended
January 31, 1996, increased $28.6 million due to interest accrued on long-term
debt issued in February 1995, amortization of debt issue costs and financing
costs associated with product purchases. During the six months ended January
31, 1996, TARC capitalized $26.2 million of interest related to property and
equipment associated with the construction and expansion program begun in 1995.
YEAR ENDED JULY 31, 1995, COMPARED WITH THE YEAR ENDED JULY 31, 1994
Total revenues for the year ended July 31, 1995, decreased $36.6
million to $140.6 million from $177.2 million in the same period in 1994,
primarily due to a decrease in the volume of products sold which was partially
offset by an increase in the average price of products sold.
Cost of products sold for the year ended July 31, 1995, decreased
$19.8 million to $149.1 million from $168.9 million for the same period in
1994, primarily as a result of a decrease in volume of products sold, partially
offset by an increase in the average price of feedstocks purchased and a
contract cancellation loss of approximately $3.8 million.
Operations and maintenance expenses for the year ended July 31, 1995,
increased $0.2 million to $12.3 million from $12.1 million for the same period
in 1994, primarily as a result of an increase in the number of days the No. 2
Vacuum Unit was operating.
Depreciation and amortization expense for the year ended July 31,
1995, increased $3.3 million to $5.9 million from $2.6 million for the same
period in 1994, primarily as a result of increased depreciation expense being
recorded for refinery assets which were taken out of discontinued operations
during 1994.
General and administrative expenses for the year ended July 31, 1995,
increased $9.1 million to $13.6 million from $4.5 million in the same period in
1994, primarily as a result of a litigation accrual of $4.5 million and
increases in legal and consulting fees and insurance costs as a result of
expanded refinery operations.
Taxes other than income taxes for the year ended July 31, 1995,
increased $0.5 million to $4.2 million from $3.7 million for the same period in
1994, primarily as a result of an increase in property taxes assessed.
Interest income for the year ended July 31, 1995, increased $4.1
million compared to the same period in 1994 due primarily to interest earned on
long-term debt proceeds held in the collateral account under the TARC Notes
Indenture. Interest expense for the year ended July 31, 1995, increased $31.3
million due to interest accrued on long- term debt issued during 1995,
amortization of debt issue costs and financing costs associated with product
purchases. During the year ended July 31, 1995, TARC capitalized $18.9 million
of interest related to construction activities associated with TARC's
construction and expansion program.
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Other income for the year ended July 31, 1995, was $2.5 million
compared to other expense of $2.9 million for the same period in 1994 primarily
as a result of trading gains on futures contracts in 1995.
For the year ended July 31, 1995, the loss before an extraordinary
item increased $35.5 million over the same period in 1994, primarily due to
interest associated with TARC's long-term debt and amortization of debt issue
costs.
In February 1995, TransAmerican contributed 55 million shares of
TransTexas common stock to TEC. TEC then contributed 15 million of these shares
of TransTexas common stock to TARC. The equity in the loss of TransTexas for
the year ended July 31, 1995, reflects TARC's 20.3% equity interest in
TransTexas' loss before an extraordinary item from the date of acquisition. The
equity in extraordinary loss of TransTexas represents TARC's equity in a charge
recorded by TransTexas in the fourth quarter for the early retirement of $500
million of its 10 1/2% Senior Secured Notes due 2000 from the proceeds of the
issuance by TransTexas in June 1995 of the TransTexas Senior Secured Notes.
INFLATION AND CHANGES IN PRICES
TARC's revenues and feedstock costs have been and will continue to be
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on
refining margins, which are subject to significant seasonal, cyclical and other
fluctuations that are beyond TARC's control.
From time to time, TARC enters into futures contracts, options on
futures, swap agreements and forward sale agreements for crude and refined
products intended to protect against a portion of the price risk associated
with price declines from holding inventory of feedstocks and refined products,
or for fixed price purchase commitments. TARC's policy is not to enter into
fixed price or other purchase commitments in excess of anticipated processing
requirements. TARC believes that these current and anticipated futures
transactions do not and will not constitute speculative trading as specified
under and prohibited by the Indenture.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
establishes standards for reporting information about operating segments. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement will be adopted by the
Company effective February 1, 1998. The Company does not believe the effect of
adoption of this statement will have a material effect on its financial
position.
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 the Company effective February 1, 1998. The Company 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 TARC effective January 31, 1998. SFAS 128 simplifies the computation
of earnings per share by replacing primary and fully diluted presentations with
the new basic and diluted disclosures. SFAS 129 establishes standards for
disclosing information about an entity's capital structure. TARC has not
determined the impact of these pronouncements 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. TARC does not believe the effect of adoption of SOP 96-1 in 1998
will have a material impact on TARC's financial position, results of operations
or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
TEC completed the Original Notes Offering on June 13, 1997 of $475
million aggregate principal amount of Outstanding Senior Secured Notes and
$1.13 billion aggregate principal amount of Outstanding Senior Secured Discount
Notes for net proceeds of approximately $1.3 billion.
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With the proceeds of the Original Notes Offering, TEC made the
TransTexas Intercompany Loan in the principal amount of $450 million and the
TARC Intercompany Loan in the original amount of $676 million. 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
currently secured 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
currently secured by a security interest in substantially all of TARC's assets,
including the shares of TransTexas stock owned by TARC, but excluding
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 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 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, 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. TEC
or TARC may repurchase additional TARC Warrants, and TARC intends to enter into
a merger with one of its affiliates pursuant to which each remaining TARC
Warrant would become exercisable (at an exercise price of $.01) to receive
$4.51 of cash instead of one share of common stock of TARC.
TEC paid a dividend to TransAmerican in the amount of $23 million on
June 13, 1997. 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 Original Notes Offering,
TransAmerican contributed the 3.7 million shares of TransTexas common stock to
TEC.
TEC's only source of funds for its holding company operations and debt
service will be payments on the Intercompany Loans and other loans to
subsidiaries, dividends from its subsidiaries, interest on funds in the TARC
Disbursement Account, payments made by TARC on behalf of TEC and, in limited
circumstances as permitted by the Indenture, sales of stock TEC holds in its
subsidiaries.
During the two years following the Original 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
working capital and interest income from other intercompany advances 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 Indenture prohibits TEC from selling stock of TransTexas and TARC
during the two years following consummation of the Original Notes Offering
unless the proceeds from such sales would be used to make an offer to purchase
the Notes. Consequently, during the two years following the consummation of the
Original Notes Offering, unless holders of the 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.
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On May 29, 1997, TransTexas consummated the Lobo Sale Agreement, with
an effective date of March 1, 1997, to effect the Lobo Sale, 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 TransTexas Senior Secured Notes and for general corporate
purposes.
On June 13, 1997, TransTexas completed a tender offer for the
TransTexas Senior Secured Notes for 111 1/2% of their principal amount (plus
accrued and unpaid interest). Approximately $785.4 million principal amount of
TransTexas Senior Secured Notes were tendered and accepted by TransTexas. The
TransTexas Senior Secured Notes remaining outstanding were called for
redemption on June 30, 1997 pursuant to the terms of the indenture governing
such notes.
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
Notes") for all of the Old TransTexas Subordinated Notes. The TransTexas
Subordinated Notes pay interest in cash semi- annually in arrears on each June
30 and December 31 commencing December 31, 1997. The indenture governing the
TransTexas Subordinated Notes (the "TransTexas Subordinated Notes Indenture")
includes certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
TransTexas has implemented the Stock Repurchase Program pursuant to
which it plans to repurchase common stock from its public stockholders and from
its affiliates, including TEC and TARC, in an aggregate amount of approximately
$399 million in value of stock purchased. It is anticipated that TransTexas
will acquire four times the number of shares from its affiliated stockholders
that it acquires from its public stockholders. Shares may be purchased through
open market purchases, negotiated transactions or tender offers, or a
combination of the above. It is anticipated that the price paid to affiliated
stockholders will equal the weighted average price paid to purchase shares from
the public stockholders. As of September 30, 1997, approximately 3.9 million
shares had been repurchased from public stockholders for an aggregate purchase
price of approximately $61.4 million, and approximately 12.6 million shares had
been repurchased from TARC and TEC for an aggregate purchase price of
approximately $201 million.
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.
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.
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TransTexas makes substantial capital expenditures for the exploration
for and development and production of natural gas. TransTexas historically has
financed its capital expenditures, debt service and working capital
requirements with 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. All of
its current production, however, remains subject to price risk. 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 for
TransTexas 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.
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.
The Indenture permits TARC to obtain a revolving credit facility but
places certain limitations on TARC's ability to incur other indebtedness. In
order to operate the refinery at expected levels after the completion of Phase
I of the Capital Improvement Program, TARC will require additional working
capital. Although TARC and a lender have engaged in discussions concerning the
terms of a revolving credit facility, there can be no assurance TARC will be
able to obtain such a facility.
TARC intermittently operates certain completed units of the refinery
pursuant to certain processing agreements. 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, TARC and TEC will have
deposited approximately $529 million into the TARC Disbursement Account from
which disbursements will be made pursuant to the TARC Disbursement Agreement.
See Note 4 to Notes to Condensed Financial Statements. Of these funds, $427
million will be available only for the Capital Improvement Program,
approximately $25.5 million will be available for general and administrative
expenses, $7 million will be available for outstanding accounts payable, $50
million will be available for working capital upon completion of the Delayed
Coking Unit and certain supporting units and $19 million will be available for
the payment of interest on, or the redemption, purchase, defeasance or other
retirement of, the outstanding TARC Notes. TARC's estimated capital
expenditures for the Capital Improvement Program are $201 million, $210
million, and $16 million, respectively, during the remainder of fiscal 1998,
and the fiscal years ending January 31, 1999 and 2000. If engineering problems,
cost overruns or delays occur and other financing sources are not available,
TARC may not be able to complete both phases of the Capital Improvement
Program. As of July 31, 1997, $24.9 million had been disbursed to TARC out of
the TARC Disbursement Account for use in the Capital Improvement Program and
$7.0 million for general corporate purposes.
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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 September 1997, TARC purchased a tank storage facility adjacent to
the refinery for a purchase price of $40 million.
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 the Condensed Consolidated
Financial Statements included elsewhere in this Prospectus.
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.
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<PAGE> 65
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.
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
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<PAGE> 66
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.
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 TransTexas Subordinated Notes Indenture provides that, upon the
occurrence of a Change of Control, each holder of the TransTexas Subordinated
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 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 TransTexas 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 (or his heirs, his estate or any
trust in which he or his immediate family members have, directly or indirectly,
a beneficial interest in excess of 50%) and his subsidiaries or the 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 (or his heirs, his estate or any trust in
which he or his immediate family members have, directly or indirectly, a
beneficial interest in excess of 50%) and his subsidiaries or the 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 Notes have an investment
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<PAGE> 67
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 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 TransTexas Intercompany Loan and the TransTexas Subordinated Notes) subject
to such right of repayment or repurchase. In the event of a Change of Control
under the TransTexas Subordinated Notes Indenture or the 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.
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.
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<PAGE> 68
BUSINESS OF TRANSTEXAS
TransTexas is engaged in the exploration for and development and
production of natural gas, primarily in South Texas. Since 1973, TransTexas has
drilled over 1,400 wells and discovered over 3.5 Tcfe of natural gas.
TransTexas' business strategy is to utilize its extensive experience gained
from over 20 years of drilling and operating wells in South Texas, to continue
to find, develop and produce reserves at a low cost. TransTexas has
traditionally performed most of its own well site preparation, drilling,
workover, completion, pipeline and production services.
In 1994, as part of its strategy to expand its productive reserves
beyond the Lobo Trend, TransTexas began evaluating prospects that exhibited the
potential to add proved reserves of at least 50 Bcfe of natural gas per
development area. Since that time, TransTexas has evaluated over 300 potential
areas and its development of certain of these areas has resulted in substantial
additions to its reserves and production.
In May 1997 TransTexas consummated the sale 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. As of February 1, 1997, the Lobo Trend producing properties divested
by the sale of the stock of TTC had proved reserves of approximately 550 Bcfe.
As of February 1, 1997 TransTexas' net proved reserves for the Continuing
Operations, as estimated by Netherland, Sewell & Associates, were 404 Bcfe. As
of July 31, 1997, after giving effect to the Lobo Sale, TransTexas owned
approximately 650,000 gross (475,000 net) acres of mineral interests.
TransTexas' average net daily natural gas production for the year
ended January 31, 1997, was approximately 420 MMcfd, for a total net production
of 153.6 Bcf of natural gas. After giving effect to the Lobo Sale, TransTexas'
average daily net production for the six months ended July 31, 1997 was
approximately 164 MMcfd of natural gas and 2,013 Bpd of crude oil and
condensate, for a total net production of 31.1 Bcfe.
OPERATING AREAS
TransTexas' primary areas of operations are discussed below:
BOB WEST NORTH. In late 1994, TransTexas made a natural gas discovery
in the Bob West North area of southern Zapata County, Texas. As of July 31,
1997, TransTexas has drilled 51 wells and completed 47 wells in the area.
TransTexas' mineral interests in Bob West North consist of a 98% working
interest in 17,700 gross (14,810 net) acres and a 90% net profits interest in
660 gross acres. The Bob West North area surpassed the Lobo Trend in net daily
natural gas production to TransTexas by the end of fiscal 1997. On July 31,
1997, TransTexas was drilling two wells in Bob West North and was in the
process of completing one well. For the six months ended July 31, 1997,
TransTexas produced 31.3 Bcf (22.7 net Bcf) from the Bob West North area for
average net daily production of 126 MMcfd. For the twelve months ended January
31, 1997, TransTexas produced 45.7 Bcf (32.6 net Bcf) from the Bob West North
area. Recent drilling results indicate the potential for a new productive fault
block of the structure that previously had not been drilled.
FANDANGO SOUTH. TransTexas is developing an additional natural gas
discovery located in the Lower Wilcox sands in Jim Hogg County, Texas known as
the Fandango South area. As of July 31, 1997, TransTexas had drilled five
wells, and completed three wells in Fandango South. TransTexas was also
completing a fourth well and drilling 2 additional wells in the area.
TransTexas' Fandango South properties are currently producing primarily from
the Travis Ward sands of the Wilcox formation. As a result of carbon-dioxide
levels in the natural gas from this formation, production is currently
constrained by transmission pipeline carbon-dioxide standards. TransTexas is
installing amine treatment facilities to lower carbon-dioxide levels.
TransTexas is also drilling wells to the Hinnant sands of the Wilcox formation,
from which natural gas is of higher quality, and blending the production. For
the six months ended July 31, 1997, TransTexas produced 2.4 Bcf gross (1.7 Bcf
net) of natural gas from Fandango South, at an average net daily rate of 9.4
MMcfd. As of July 31, 1997, TransTexas held a 97% working interest in
approximately 5,430 gross (5,430 net) acres in Fandango South.
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GALVESTON BAY. In November 1996, TransTexas reached agreement with an
unaffiliated third party to jointly conduct exploration of geological
prospects. The parties have identified six prospects in Galveston Bay that they
intend to drill and have commenced drilling on two of these prospects.
On September 16, 1997, TransTexas announced that it had concluded
drilling of the State Tract 331#1 well on the Eagle Point prospect in Galveston
Bay, located approximately one mile off the coast of San Leon, Texas, in a water
depth of less than ten feet. Electric logs indicated the presence of high
quality hydrocarbon-bearing pay. TransTexas had previously encountered
difficulties with controlling the wellbore pressure when drilling through the
potential pay zone, and recovered low gravity condensate in the drilling returns
from the zone. TransTexas intends to conduct a flow test of the State Tract
331#1 well as soon as practicable. TransTexas owns a 75% working interest
covering approximately 2,800 gross acres (2,640 net acres) in the area.
TransTexas is also drilling a second well, the State Tract 88A#1, in
Galveston Bay on the Virginia Point Prospect. TransTexas owns a 75% working
interest in approximately 2,760 gross acres (2,490 net acres) in the Virginia
Point prospect.
TransTexas owns a 75% working interest in a total of 9,430 gross acres
(6,890 net acres) in four other prospects in the Galveston Bay area that it
intends to drill.
GOLIAD & VICTORIA COUNTIES. TransTexas entered into an agreement with
an unaffiliated third party to develop 3- D seismic prospects in Goliad and
Victoria Counties, Texas. The discovery well, the Strong #1, which logged 82
net feet of pay from five zones between the depths of 10,800 and 13,800 feet,
has been flowing into a third-party pipeline since August 16, 1997. The well,
which is temporarily constrained by pipeline capacity to 5 MMcfd, has flowed at
a rate of 7.6 MMcfd.
Recently, drilling of a key delineation well, the Dorris #2, was
completed and electric logs have indicated the presence of multiple pay zones.
TransTexas expects to complete this well and commence production by early
October 1997. An earlier well, the Dorris #1, was lost due to mechanical
problems that resulted from a tubular failure. TransTexas expects to complete
two additional wells in Goliad County, the Strong #2 and Dorris #3, in October.
TransTexas is also drilling the Huber #1 in adjacent Victoria County, in what
is believed to be an extension of the prospect. TransTexas owns a 100% working
interest in approximately 4,240 gross acres (3,180 net acres) in Goliad and
Victoria Counties.
WHARTON COUNTY. In 1995, TransTexas entered into an agreement with an
unaffiliated third party to jointly develop the mineral rights in Frio and
Miocene sands in Wharton County, Texas. TransTexas is not the operator of this
interest but interprets data from a dedicated 3-D seismic program to select
drilling locations in which prior production has not depleted the shallow
reservoirs. As of July 31, 1997, 51 wells had been drilled in shallow
formations in the area, 22 of which had been completed. For the six months
ended July 31, 1997, TransTexas' Wharton County properties produced 2.1 Bcf
(1.4 Bcf net) of natural gas at an average gross daily rate of 11.6 MMcfd (7.5
MMcfd net).
TransTexas also acquired mineral rights covering deep prospective
production of the Wilcox formation in Wharton County. TransTexas has drilled and
completed two wells, the Joel Hudgins #1 and the Guenther #1, and is finalizing
pipeline transmission arrangements. The Joel Hudgins #1 well began production on
August 25, 1997 at a rate of 4.0 MMcfd. The Gunther #1, located three miles
northwest of the Joel Hudgins #1, has flow tested at a rate of 5.3 MMcfd from 65
feet of net pay and is awaiting a pipeline connection to a carbon-dioxide
treatment plant. A third well, the Rees-Gifford #1, is located approximately 14
miles southwest of the Joel Hudgins #1, and has logged a total of 75 feet of net
Wilcox pay. As of July 31, 1997, TransTexas held a 75% working interest in the
shallow mineral rights in approximately 43,110 gross (34,570 net) acres in
Wharton County and a 100% working interest in the deep mineral rights in
approximately 2,580 gross (2,570 net) acres.
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LODGEPOLE, NORTH DAKOTA. In late 1996, TransTexas announced the
discovery of a Lodgepole carbonate reef oil field in Dickinson, North Dakota
with the Heart River #1, which flow tested at a daily rate of 6,836 Bpd.
TransTexas has conducted or participated in a series of 3-D seismic surveys
covering more than 270 square miles in Stark and Dunn counties, North Dakota.
TransTexas holds an average working interest of 80% in approximately 198,800
gross (98,400 net) acres in the Lodgepole. As of July 31, 1997, TransTexas had
drilled a total of eleven wells in the Lodgepole, three of which had been
completed. Effective March 1997, all producing wells in the field are
restricted to a State-mandated allowable daily rate of approximately 500 Bpd
per well. In the six months ended July 31, 1997, TransTexas' Lodgepole
properties produced 481,450 barrels of crude oil (308,130 barrels net) at a
gross average daily rate of 2,660 Bpd (1,702 Bpd net).
TransTexas believes that its interests in the Lodgepole do not fit its
long term strategic plan as a core producing property. In September 1997
TransTexas engaged First Union Corporation to solicit interest in its Lodgepole
properties, with the ultimate intent of divesting its producing properties in
North Dakota.
OTHER AREAS. TransTexas has also made discoveries of natural gas and
oil in other prospects that, as of July 31, 1997, have undergone less
development drilling, but which management believes could add material reserves
and production.
TransTexas has entered into a separate venture with its Galveston Bay
co-venturer covering prospects in South Louisiana. TransTexas owns a 25%
working interest in a discovery well in Vermillion Parish that is currently
being completed for production. TransTexas' strategy in South Louisiana is to
interpret 3-D seismic data and develop exploration prospects for drilling.
TransTexas expects eventually to participate in more than 350 square miles of
3-D data. As of September 25, 1997, TransTexas believes that it has identified
eight individual exploration prospects in South Louisiana that it intends to
drill and as of July 31, 1997, owned a 69% working interest in 13,180 gross
acres (9,840 net acres).
TransTexas owns an 82% working interest in 1,320 gross acres (790 net
acres) in Brazoria County, Texas. As of July 31, 1997, TransTexas was drilling
a test well in an area adjacent to existing production areas.
TransTexas owns a 100% working interest in 5,180 gross acres (2,690
net acres) in Chambers County. Texas. As of July 31, 1997, TransTexas had
drilled two wells in Chambers County that it was completing and was in the
process of drilling two additional wells.
TransTexas owns a 94% working interest in approximately 6,960 gross
(3,190 net) acres in Wayne County, Mississippi, in which it has drilled and
completed two wells. As of July 31, 1997, TransTexas was completing a third
well. For the six months ended July 31, 1997, TransTexas' properties in
Mississippi produced 2,480 barrels of condensate (1,740 barrels net) at a gross
average daily rate of 14 Bpd (10 Bpd net).
TransTexas holds a 92% working interest in approximately 35,270 gross
(32,370 net) acres in the Cuba Libre area of Webb County, Texas. For the six
months ended July 31, 1997, TransTexas produced 1.3 Bcf (.8 Bcf net) at an
average daily rate of 7.0 MMcfd (4.7 MMcfd net) from a total of 20 wells
drilled in Cuba Libre, of which 10 wells had been completed by TransTexas.
In 1996 TransTexas implemented a strategy consisting of the evaluation
of the potential for horizontal drilling in the Austin Chalk Formation. As of
July 31, 1997, TransTexas had drilled two horizontal wells in Walker County,
Texas and held a 100% working interest in approximately 54,390 gross (52,210
net) acres in the Austin Chalk.
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TransTexas holds a 95% working interest in approximately 103,460 gross
(81,890 net) acres in the La Grulla area of Starr County, Texas. As of July 31,
1997, TransTexas had drilled a total of 34 wells in La Grulla, of which 17
wells had been completed. For the six months ended July 31, 1997, TransTexas'
La Grulla properties produced 1.3 Bcf (1.0 Bcf net) at an average rate of 7.0
MMcfd (5.4 MMcfd net).
EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of TransTexas consist of
geological evaluation of current and prospective leased properties, the
acquisition of mineral leases or other interests in prospects and the
development and operation of leased properties for the production and sale of
natural gas, condensate and crude oil. TransTexas focuses upon adding proved
reserves of at least 50 Bcfe per development area. TransTexas' technical staff
consists of geologists, geophysicists and engineers whose prognoses of drilling
locations may be enhanced with the use of 3-D seismic workstations, which
TransTexas owns and operates at its Houston headquarters. TransTexas' technical
staff selects drilling locations based on either 3-D or 2-D seismic data
interpretation and their knowledge of well control from drilling experience in
the area. TransTexas operates substantially all of its producing properties.
TransTexas believes that this experience is especially important in South
Texas, which is geologically complex.
During the five years ended January 31, 1997, TransTexas completed
approximately 78% of 591 wells drilled at an average finding cost of
approximately $0.76 per Mcfe. As of September 25, 1997, TransTexas was drilling
13 gross wells (13 net wells). As of July 31, 1997, TransTexas had a total of
99 producing wells. TransTexas had a working interest in the following numbers
of wells that were drilled during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JULY 31, ENDED
--------------------------------- JANUARY 31,
1994 1995 1996
------------- ------------ -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Productive(1) . . . . . . . 4 4 13 13 12 11
Non-Productive . . . . . . 1 1 7 6 13 12
% Productive . . . . . . . 80% 80% 65% 68% 48% 48%
Development Wells:
Productive(1) . . . . . . . 112 112 63 63 36 36
Non-Productive . . . . . . 23 23 15 15 4 4
% Productive . . . . . . . 83% 83% 81% 81% 90% 90%
<CAPTION>
SIX MONTHS
YEAR ENDED SIX MONTHS ENDED
YEAR ENDED JANUARY 31, ENDED JULY 31,
JANUARY 31, 1997 JULY 31, 1997
1997 (PRO FORMA)(2) 1997 (PRO FORMA)(2)
-------------- -------------- --------------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Productive(1) . . . . . . . 36 33 36 33 11 7 11 7
Non-Productive . . . . . . 45 41 45 41 7 4 7 4
% Productive . . . . . . . 44% 45% 44% 45% 61% 64% 61% 64%
Development Wells:
Productive(1) . . . . . . . 67 66 23 23 21 19 14 13
Non-Productive . . . . . . 3 3 -- -- 16 14 16 14
% Productive . . . . . . . 96% 96% 100% 100% 57% 58% 47% 48%
</TABLE>
- --------------------------
(1) Productive well consist producing wells and wells capable production,
including well awaiting pipeline connection. Wells that are complete
more than one producing zone are counted as one well.
(2) Gives effect to the Lobo Sale as of February 1, 1996.
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NET PRODUCTION, UNIT PRICES AND COSTS
The following table sets forth information with respect to net
production and average unit prices and costs for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED SIX MONTHS SIX MONTHS
JULY 31, ENDED YEAR ENDED JANUARY 31, ENDED ENDED
--------------------- JANUARY 31, JANUARY 31, 1997 JULY 31, JULY 31, 1997
1994 1995 1996 1997 (PRO FORMA)(4) 1997 (PRO FORMA)(4)
---------- -------- ---------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Production:
Gas (Bcf) .................... 130.9 147.9 66.8 153.6(1) 54.6 53.2 27.4
NGLs (MMgals) ................ 164.0 225.3 65.3 174.2 N/A 61.7 N/A
Condensate and oil (MBbls) ... 650 638 258 604 142 426 278
Average sales prices:
Gas (dry) (per Mcf) .......... $ 1.96 $ 1.40 $ 1.65 $ 2.14(2) $ 2.51 $ 1.80 1.96
NGLs (per gallon) ............ .27 .26 .30 .36 N/A .29 N/A
Condensate and oil (per Bbl) . 15.13 17.22 17.39 21.54 22.88 19.46 19.37
Average lifting cost per Mcfe(3) .24 .21 .23 .29 .27 0.35 .35
</TABLE>
- ----------
(1) Net gas production volume for the year ended January 31, 1997, and the
six months ended July 31, 1997, includes 32.0 Bcf and 7.3 Bcf,
respectively, delivered to third parties under volumetric production
payments.
(2) Average prices for the year ended January 31, 1997, and the six months
ended July 31, 1997, includes prices for amounts delivered to third
parties under volumetric production payments. The average gas price
for TransTexas' undedicated production for these periods were $2.39
and $1.91 per Mcf, respectively. The gas prices do not include the
effect of hedging.
(3) Condensate and oil are converted to a common unit of measure on the
basis of six Mcf of natural gas to one barrel of condensate or oil.
The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors. The
calculation of average lifting cost per Mcfe for the year ended
January 31, 1997, gives effect to volumes delivered to third parties
under volumetric production payments.
(4) Gives effect to the Lobo Sale as of February 1, 1996.
DRILLING SERVICES DIVISION
TransTexas currently performs substantially all of its own drilling
and oil field services through its drilling services division, which has an
extensive operating history in South Texas and utilizes operating processes
developed as an integrated division of TransTexas for the past 12 years. During
the fiscal year ended January 31, 1997, TransTexas drilled 151 wells,
substantially all of which were drilled by this division. The activities that
this division performs for TransTexas include drilling, oil and natural gas
well workover and completion services, as well as a variety of other support
services required for the successful exploration and production of natural gas.
As of September 30, 1997, the assets of this division included 25 land
drilling rigs, nine workover rigs and two fracture stimulation fleets.
Complementary drilling, completion and workover service equipment includes a
ready-mix concrete plant, twin cementing trucks, a coiled tubing unit, a
snubbing unit, electric line and logging units, slickline units, tag units and
an extensive fleet of construction, inspection and other rolling stock.
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Increased activity in the contract drilling industry and related oil
services businesses has led to improved market valuations for contract drilling
and oil services companies. To capitalize on these trends, TransTexas may
contribute the assets of its drilling services division to its wholly owned
subsidiary, TTXD. TTXD is expected to be an integrated provider of a broad
range of oil field services including contract drilling, oil and natural gas
well workover, stimulation and completion, drilling fluids provision, pipeline
construction, trucking services, equipment repair and rental, tubular
inspection, pumping services, snubbing services, open hole logging and
maintenance services. TransTexas is evaluating alternatives to maximize
stockholder value with respect to TTXD, including options such as a spin-off, a
sale to a third party, a merger or another business combination. In connection
with the Lobo Sale, TransTexas has entered into a long-term agreement, which
can be transferred to TTXD, pursuant to which it would provide drilling and
certain other services to the new operator of the Lobo Trend properties
divested in the Lobo Sale. TransTexas has also recently begun to provide
drilling services to other third parties.
NATURAL GAS TRANSPORTATION
As part of the Lobo Sale, TransTexas divested the majority of its
pipeline assets. Effective March 1, 1997, TransTexas entered into two
agreements with Lobo Pipeline Company for intrastate and interstate gas
transportation from its Bob West North field to the Agua Dulce marketing hub or
to the Exxon King Ranch for gas processing. The agreements are for a term of
approximately ten years and allow for the transportation of up to a combined
total of 400 MMcf per day. TransTexas has retained ownership of its pipeline
systems within the Bob West North and Fandango South fields. TransTexas
believes that there is currently adequate pipeline transportation capacity for
TransTexas' hydrocarbon production in all of its operating areas. TransTexas
intends to build additional pipeline capacity as future needs require. However,
there can be no assurance that TransTexas will have funds available to build
additional pipeline capacity.
RESERVES
The following table sets forth certain information with respect to
TransTexas' proved reserves and the present value (discounted at 10%) of
estimated future net revenues before income taxes, as estimated by Netherland
Sewell, TransTexas' independent petroleum engineers, as of the dates indicated.
For additional information regarding TransTexas' proved reserves at February 1,
1997, see the reports of Netherland Sewell attached as Annex B to this
Prospectus.
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<TABLE>
<CAPTION>
AT AUGUST 1, AT FEBRUARY 1,
-------------------------- ------------------------ AT FEBRUARY 1,
1997 (PRO
1994 1995 1996 1997 FORMA)(3)
----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proved Developed Reserves:
Gas (MMcf)(1) ..................... 442,157 476,582 425,317 381,527 121,655
Condensate (MBbls) ................ 1,109 1,073 880 2,388 1,881
Estimated future net revenues(2) .. $514,567 $ 457,982 $ 572,882 $ 951,435 $350,333
Present value of estimated future
net revenues discounted at
10%(2) ......................... $405,414 $ 351,428 $ 416,205 $ 683,282 $292,823
Proved Undeveloped Reserves:
Gas (MMcf) ........................ 275,210 646,063 713,810 538,191 257,480
Condensate (MBbls) ................ 826 1,976 2,023 3,350 2,330
Estimated future net revenues(2) .. $216,613 $ 355,502 $ 686,423 $1,133,754 $510,544
Present value of estimated future
net revenues discounted at
10%(2) ......................... $138,973 $ 196,218 $ 391,857 $ 765,786 $339,857
Total Proved Reserves:
Gas (MMcf) ........................ 717,367 1,122,645 1,139,127 919,718 379,135
Condensate (MBbls) ................ 1,935 3,049 2,903 5,738 4,211
Estimated future net revenues(2) .. $731,180 $ 813,484 $1,259,305 $2,085,189 $860,877
Present value of estimated future
net revenues discounted at
10%(2) ......................... $544,387 $ 547,646 $ 808,062 $1,449,068 $ 632,680
</TABLE>
- --------------------
(1) Excludes approximately 47 Bcf and 43 Bcf as of February 1, 1997 and
1996, respectively, attributable to volumetric production payments.
(2) Before income taxes.
(3) Gives effect to the Lobo Sale.
In accordance with applicable guidelines of the Commission, the
estimates of TransTexas' proved reserves and future net revenues therefrom set
forth herein are made using gas, condensate and oil sales prices in effect as
of the date of such reserve estimates and are held constant throughout the life
of the properties (except for fixed and determinable price escalations as
provided by contract). Estimated quantities of proved reserves and future net
revenues therefrom are affected by changes in gas, condensate and oil prices.
Prices have fluctuated widely in recent years. TransTexas has entered into
hedging transactions to mitigate a portion of such natural gas price
volatility. As of August 1, 1994 and 1995, February 1, 1996 and 1997, and as of
February 1, 1997 after giving effect to the Lobo Sale, the sales prices used
for purposes of estimating TransTexas' proved reserves and the future net
revenues from those reserves were $1.62, $1.37, $1.95, $3.17 and $3.03 per Mcf,
respectively, and $17.62, $16.27, $18.34, $23.99 and $24.13 per Bbl of
condensate and crude oil, respectively. During the quarter ended July 31, 1997,
average gas prices for the Continuing Operations were significantly lower than
$3.03.
Proved reserves are the estimated quantities of natural gas,
condensate and oil that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
proved reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods. The estimation of reserves
requires substantial judgment on the part of petroleum engineers, resulting in
imprecise determinations, particularly with respect to recent discoveries. The
accuracy of any reserve estimate depends on the quality of available data and
engineering and geological interpretation and judgment. Results of drilling,
testing and production after the date of the estimate may
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<PAGE> 75
result in revisions of the estimate. Accordingly, estimates of reserves are
often materially different from the quantities of natural gas, condensate and
oil that are ultimately recovered, and these estimates will change as future
production and development information becomes available. The reserve data
represent estimates only and should not be construed as being exact.
The present value of estimated future net revenues relating to proved
reserves are presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities," except income taxes have been omitted. In computing these data,
assumptions and estimates have been used, and TransTexas cautions against
viewing this information as a forecast of future economic conditions. The
future net revenues are determined by using estimated quantities of proved
reserves and the periods in which they are expected to be developed and
produced based on economic conditions at the date of the estimates. The
estimated future production is based on prices in effect at the date of the
estimates, except where fixed and determinable price escalations are provided
by contract. The resulting estimated future gross revenues are reduced by
estimated future costs to develop and produce the proved reserves based on cost
levels in effect at the date of the estimates, but not for debt service, income
taxes and general and administrative expenses (except to the extent such
general and administrative expenses constitute overhead costs incurred at the
district or field level that are allowed under joint operating agreements). The
present value of proved reserves set forth herein should not be construed as
the current market value of the estimated proved reserves attributable to
TransTexas' properties.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, TransTexas performs only
a preliminary title investigation before leasing undeveloped properties.
Accordingly, working interest percentages and gross and net acreage set forth
herein for undeveloped properties are preliminary. However, a title opinion is
obtained before the commencement of drilling operations and any material
defects in title are remedied prior to the time actual drilling of a well on
the lease is commenced. TransTexas believes that it has satisfactory title to
developed properties in accordance with standards generally accepted in the oil
and gas industry. TransTexas' properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens which TransTexas believes do not materially interfere with the
use of or affect the value of such properties. In addition, several litigants
against TransTexas have filed claims that affect certain of TransTexas'
properties. TransTexas does not expect these claims to interfere with the use
of, or affect the value of, its properties in any material way.
ACREAGE
The following table sets forth TransTexas' total developed and
undeveloped acreage and productive wells at July 31, 1997:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)
-------- ----------- --------
<S> <C> <C> <C>
Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,602 638,014 99
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,099 463,401 96
</TABLE>
- ----------
(1) Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connection. Of the
total productive wells, 96 gross (94 net) were gas wells and three
gross (two net) were oil wells. Wells that are completed in more than
one producing zone are counted as one well. As of July 31, 1997,
TransTexas had interests in a total of 99 productive wells, six of
which had multiple completions.
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<PAGE> 76
NATURAL GAS MARKETING
TransTexas sells its natural gas on the spot market on an
interruptible basis or pursuant to long-term contracts at market prices.
TransTexas and MidCon Texas Pipeline Corp. ("MidCon") entered into a
long-term gas purchase contract on January 10, 1996, under which TransTexas is
required to deliver a total of 100,000 MMBtu per day to four specified delivery
points for a period of five years. The purchase price is determined by an
industry index less $0.09 per MMBtu. Deliveries commenced on September 1, 1996.
In connection with this transaction, TransTexas built a 24-inch pipeline for
MidCon that spans approximately 68 miles from the Bob West North field to
MidCon's 30-inch pipeline in Webb County, Texas. Pursuant to a related
agreement, TransTexas will earn a 50% interest in a 28-mile segment of the new
pipeline after five years.
HEDGING
From time to time, TransTexas has entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. For the fiscal year ended January 31, 1997, and
six months ended July 31, 1997, TransTexas made net settlement payments
totaling approximately $37 million and $7.4 million, respectively, to the
counterparty pursuant to the Hedge Agreements. As of July 31, 1997, TransTexas
had no active Hedge Agreements. The Hedge Agreements are accounted for as
hedges and, accordingly, any gains and losses are deferred and recognized in
the respective month as physical volumes are sold.
COMPETITION
TransTexas encounters intense competition from major oil and gas
companies and independent operators in the acquisition of desirable undeveloped
natural gas leases and in the sale of natural gas. Many of its competitors are
large, well-established companies with substantially larger operating staffs
and greater capital resources than TransTexas' and which, in many instances,
have been engaged in the energy business for a much longer time than
TransTexas.
The primary bases for competition in the natural gas and oil
exploration and production businesses are the costs involved in the finding and
development of such resources combined with commodity sales prices and market
access. TransTexas places considerable emphasis upon the expertise of its
exploration personnel and believes that its strategy of seeking undeveloped
acreage that it believes holds exploration and production potential allows it
to leverage this expertise into low finding and development costs.
EMPLOYEES
As of September 30, 1997, TransTexas had approximately 2,660
employees, including approximately 2,200 field employees related to its natural
gas exploration, production and service businesses. TransTexas will employ
additional personnel as required by its operations and may engage the services
of independent geological, engineering, land and other consultants from time to
time. None of TransTexas' employees are parties to a collective bargaining
agreement.
GOVERNMENTAL REGULATION
TransTexas' gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the gas industry increases
TransTexas' cost of doing business and affects its profitability. Because such
rules and regulations are frequently amended or reinterpreted, TransTexas is
unable to predict the future cost or impact of complying with such laws.
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The State of Texas (through the Texas Railroad Commission) and many
other states, including North Dakota, require permits for drilling operations,
drilling bonds and reports concerning operations, and impose other requirements
related to the exploration and production of gas. Such states also have
statutes or regulations addressing conservation matters, including provisions
for the unitization or pooling of gas properties, the establishment of maximum
rates of production from oil or gas wells and the regulation of spacing,
plugging and abandonment of such wells. The statutes and regulations of the
State of Texas limit the rate at which gas can be produced from TransTexas'
properties. However, these statutes and regulations have not materially
impacted TransTexas' results of operations; however, there can be no assurance
that such statutes and regulations will not affect TransTexas' operating
results in the future.
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") since 1985 that affect the economics of
natural gas production, transportation and sales. In addition, the FERC
continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry, most notably
interstate natural gas transmission companies, that remain subject to the
FERC's jurisdiction. These initiatives may also affect the intrastate
transportation of gas under certain circumstances. The stated purpose of many
of these regulatory changes is to promote competition among the various sectors
of the gas industry. The ultimate impact on TransTexas of these complex and
overlapping rules and regulations, many of which are repeatedly subjected to
judicial challenge and interpretation, cannot be predicted.
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. Certain aspects of TransTexas' operations may not be
in compliance with applicable environmental laws and regulations, and such
noncompliance may give rise to compliance costs and administrative penalties.
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.
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
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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
has filed 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.
GENERAL. TransTexas is also a named defendant in other ordinary
course, routine litigation incidental to its business. Although the outcome of
these other lawsuits cannot be predicted with certainty, TransTexas 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 is $0 to $36 million. The resolution in any reporting period of one
or more of these matters in a manner adverse to TransTexas could have a
material impact on TransTexas' results of operations and cash flows for that
period. Litigation expense, including legal fees, totaled approximately $9.4
million and $7.3 million for the six months ended July 31, 1997 and 1996.
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BUSINESS OF TARC
GENERAL
TARC was formed in 1987 to hold and operate the refinery assets of
TransAmerican and is engaged in the refining and storage of crude oil and
petroleum products. TransAmerican acquired the refining facility in 1971 and,
between 1978 and 1983, invested approximately $900 million in capital
improvements to expand capacity and increase refining complexity. In January
1983, financial difficulties prevented TransAmerican from completing certain
units of the refinery and forced a shutdown of operations. From 1983 to August
1993, TransAmerican and TARC spent approximately $125 million on maintenance
and capital expenditures at the refinery.
TARC's business strategy is to modify, expand and reactivate its
refinery and to maximize its gross 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 1, 1995 through April, 1997, TARC spent approximately
$245 million on this program, procured a majority of the essential equipment
required and completed substantially all of the process design engineering and a
substantial portion of the remaining engineering necessary to complete this
project.
TARC will receive approximately $427 million in proceeds pursuant to
the Transactions to pursue the Capital Improvement Program, which is designed
to reactivate the refinery and increase its complexity. The design and
estimated timing and cost of the Capital Improvement Program are based on
substantial input from several prominent engineering and construction firms
(including ABB Lummus Crest, Inc., Belco Technologies Corporation, Fluor
Daniel, Inc., Black & Veatch Pritchard Inc., Stratco Inc., Raytheon Engineers &
Constructors and PCI Engineers, Inc.). TARC has contracted with these firms
during the past two years to perform design engineering and construction
management services. Phase I of the Capital Improvement Program includes the
completion and start-up of several units, including the Delayed Coking Unit,
one of the refinery's major conversion units. TARC estimates that Phase I will
be completed at a cost of $223 million, will be tested and operational by
September 30, 1998 and will result in the refinery having the capacity to
process up to 200,000 Bpd of sour crude oil. Phase II of the Capital
Improvement Program includes the completion and start-up of the Fluid Catalytic
Cracking Unit utilizing state-of-the-art MSCC(SM) technology and the
installation of additional equipment expected to further improve operating
margins by allowing for a significant increase in the refinery's capacity to
produce gasoline. TARC estimates that Phase II will be completed at a cost of
$204 million and will be tested and operational by July 31, 1999. After
completion of the Capital Improvement Program, TARC will own and operate one of
the largest independent refineries in the Gulf Coast region, with a replacement
cost estimated by management to be approximately $1.4 billion. 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.
INDUSTRY OVERVIEW
Total growth in United States refining capacity has remained very low
over the past several years. Over the same period, however, demand for refined
products has substantially increased. As a result, capacity utilization has
increased to approximately 93.5% in 1996 from approximately 77.6% in 1985,
reflecting the significant increase in demand for refined products. The
refinery utilization rate is an important factor in achieving and maintaining
refining profitability. Management of TARC believes that over the next several
years domestic demand for refined products will continue to increase while
refining capacity growth will remain slow, causing United States refining
utilization rates to remain high. In addition, management of TARC believes that
increased foreign demand, particularly in the Far East, combined with more
stringent domestic product specifications, should limit the availability of
imported refined products. Management believes that these factors, together
with relatively low prices expected by it for heavy, sour crude oil, should
have a positive effect on TARC's refining margins.
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DOMESTIC REFINING CAPACITY
UTILIZATION RATES, AND DEMAND FOR REFINED PRODUCTS
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ----- ----- ----- ---- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capacity (MMBpd) . . . . . . . . . . 15.7 15.5 15.6 15.9 15.6 15.6 15.7 15.7 15.1 15.0 15.4 15.3
Utilization . . . . . . . . . . . . . 77.6% 82.9% 83.1% 84.7% 86.6% 87.1% 86.0% 87.9% 91.5% 92.6% 91.9% 93.5%
Demand for refined products
(MMBpd) . . . . . . . . . . . . . . 15.7 16.3 16.7 17.3 17.3 17.0 16.7 17.0 17.2 17.7 17.7 18.2
</TABLE>
- ----------
Source: Energy Information Administration.
BACKGROUND OF THE REFINERY
Operations at TARC's refining site began in 1967 with the installation
of a 7,000 Bpd "topping" facility to process light crude and condensate
available in South Louisiana. A few years later, a 4,000 Bpd naphtha reformer
was added and crude processing capacity was increased to 10,000 Bpd of light,
sweet crude. In 1971, TransAmerican purchased the refinery and over the next
eight years expanded it to 100,000 Bpd of medium, sour crude capacity, and
added significant additional downstream processing. In 1979, TransAmerican
began an expansion and modernization program in response to a need for
additional United States refining capacity. This program was designed to permit
the refinery to process up to 300,000 Bpd of heavy, sour crude oil into a high
proportion of high-value, light petroleum products.
In 1982, high oil prices and a general economic recession led to
reduced product demand and a large surplus of refining capacity, which in turn
caused a significant drop in refining margins. In addition, TransAmerican's
cash flow was adversely affected by reduced sales to natural gas customers due
to proration and by the interest expense on its floating rate debt, which
exceeded 20%. As a result, in January 1983, before completion of the
construction program and after expenditures of approximately $900 million,
these financial difficulties prevented completion of a delayed coking unit and
certain other units of the refinery necessary to economically process heavy,
sour crude oil, and forced a shutdown of operations.
CURRENT OPERATIONS
In March 1994, TARC commenced partial operations at the refinery with
the start-up of the No. 2 Vacuum Unit. This unit has been operating
intermittently since that time. Modifications and tie-ins to the No. 2 Crude
Unit have been completed. Although both units are operational, TARC is not
currently operating these units due to the low level of operating margins
obtainable for these units on a stand-alone basis. TARC currently has one cargo
in its inventory.
The following is a brief description of TARC's No. 2 Vacuum Unit and
No. 2 Crude Unit:
NO. 2 VACUUM UNIT. TARC believes that the No. 2 Vacuum Unit has a
capacity in excess of 200,000 Bpd. TARC reactivated the No. 2 Vacuum Unit in
March 1994. The No. 2 Vacuum Unit is designed to process atmospheric tower
bottoms into VGO and, with the addition of cutterstocks, into No. 6 residual
fuel oil. When the No. 2 Crude Unit is placed into operation, the No. 2 Vacuum
Unit will process bottoms from the No. 2 Crude Unit. When the Delayed Coking
Unit is complete, the No. 2 Vacuum Unit tower bottoms are expected to be
processed through the Delayed Coking Unit into lighter, more valuable products.
Upon completion of Phase II, VGO is expected to be upgraded in the Fluid
Catalytic Cracking Unit to gasoline and No. 2 fuel oil.
NO. 2 CRUDE UNIT. The No. 2 Crude Unit was designed to process heavy,
sour crude oil and, prior to the 1983 shutdown, demonstrated a capacity of
175,000 Bpd. Upon completion of the Capital Improvement Program, the No. 2
Crude Unit is expected to process up to 200,000 Bpd of a mix of crude oils into
naphtha, kerosene, No. 2 fuel oil, atmospheric gas oil and atmospheric residual
oil.
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CAPITAL IMPROVEMENT PROGRAM
The Capital Improvement Program is designed to increase the capacity
and complexity of the refinery. 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,
described as follows:
PHASE I
Phase I includes the Delayed Coking Unit, the HDS Unit, the Naphtha
Pretreater, the No. 2 Reformer, both Sulfur Plants and the supporting Offsite
Facilities. Completion of Phase I, along with the Crude and Vacuum Units, will
enable the refinery to process heavy crude and purchased feedstocks into
finished and intermediate products. Products from this phase are expected to
include NGLs, naphtha, conventional gasoline, No. 2 fuel oil, VGO, sulfur and
petroleum coke. The following is a brief description of the units and offsite
facilities that are scheduled to be added or improved during Phase I and TARC's
plans and expectations therefor:
DELAYED COKING UNIT. TARC's Visbreaking Unit is being converted to a
Delayed Coking Unit. The process engineering for this conversion has been
completed by ABB Lummus Crest Inc. Detailed design engineering has been
substantially completed by INDTECH INC., and all major equipment has been
purchased and installed. Fluor Daniel, Inc. will manage the remaining
construction, which will consist primarily of the installation of piping and
instrumentation systems. Field construction is approximately 55% complete. The
Delayed Coking Unit is expected to be able to process approximately 75,000 Bpd
of vacuum tower bottoms produced from the No. 2 Vacuum Unit. Products from this
unit will include light gas, naphtha, coker distillate, and coker gas oil,
which can all be further upgraded by TARC's refinery or sold to other refiners
for upgrading.
NAPHTHA PRETREATER. TARC has purchased a used naphtha pretreater,
which it has disassembled and moved to the refinery site. The process
engineering for this unit has been completed by PCI Engineers Inc., and total
engineering is approximately 50% complete. Construction has commenced with the
installation of piling and foundations. Upon re- assembly, this unit will
produce desulfurized heavy naphtha, to be processed by the No. 2 Reformer into
reformate for blending into gasoline, and light naphtha for gasoline blending
or sales. The Naphtha Pretreater is designed to process up to 30,000 Bpd of
naphtha feedstock produced by the No. 2 Crude Unit and the Delayed Coking Unit.
NO. 2 REFORMER. The No. 2 Reformer was purchased by TARC's predecessor
and relocated to the refinery during the 1980s expansion. Although re-assembly
is not complete, all major equipment is installed. PCI Engineers Inc. is
performing the process and detailed design engineering. Field construction will
include reconditioning of equipment plus installation of piping and
instrumentation systems. The No. 2 Reformer will process desulfurized heavy
naphtha to raise its octane level to that suitable for gasoline blending. The
unit is designed to process up to 12,000 Bpd of feedstock to produce high
octane reformate for gasoline blending. This unit will also provide a portion
of the hydrogen required for operation of the Naphtha Pretreater and the HDS
Unit.
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HYDRODESULFURIZATION (HDS) UNIT. In the early 1980s, TARC's
predecessor designed and commenced construction of a two-train distillate HDS
Unit with a common fractionation section. During Phase I, TARC will install two
new reactors, both of which have been purchased and fabricated, and add another
fractionation section to permit independent operation of both trains. Other
major equipment required is in place. When completed, each train will be
capable of treating either distillate or VGO depending on unit or product
requirements.
SULFUR RECOVERY SYSTEM. Sulfur is captured in various refining
processes, primarily cracking and hydrodesulfurization, in the form of hydrogen
sulfide which is absorbed into an amine solution or into sour water streams.
The hydrogen sulfide is stripped from these streams and processed in a series
of reactors into elemental sulfur. TARC will reactivate and expand an existing
sulfur unit to a capacity of 150 LT/D and construct a 220 LT/D unit, and
construct ancillary facilities to support these units. These plants will have a
combined base capacity of 370 LT/D of sulfur, which can be increased to 510
LT/D of sulfur with oxygen enrichment.
ADDITIONAL TANK STORAGE CAPACITY. TARC will require additional tankage
to store crude oil and refined products in connection with the refinery's
increased throughput after completion of Phase I. TARC has purchased an
adjacent storage terminal and also plans to construct or lease additional
storage facilities in order to conduct refinery operations at expected levels.
Pressurized tanks with a storage capacity of 127,500 barrels will be
constructed for LPG and butane.
OFFSITE FACILITIES. TARC will add steam-generating capacity, air
compression equipment and new electrical equipment during Phase I. A marine
vapor recovery system will also be installed at the terminal docks. TARC is
adding equipment necessary to load petroleum coke at the GATX No. 2 dock. TARC
is performing the engineering on these facilities with support from specialty
engineering firms such as River Consulting Inc., Lanier and Associates, ABB
Combustion Engineering Systems and RPM Engineering Inc.
OTHER. Additional equipment will be installed to enhance waste water
treatment and reduce the generation of solid waste. TARC is required to perform
Hazardous Operation ("HAZOP") analysis of the refinery process units as
required by Occupational Safety and Health Administration ("OSHA") regulations.
PHASE II
Phase II includes the FCC Unit, FCC Upgrades, Alkylation Unit and some
additional Offsite Facilities. Startup of these facilities will increase the
refinery's output of higher margin finished products, primarily gasoline and
No. 2 fuel oil. TARC anticipates that, following completion of Phase II, it
will have the capacity to process in excess of 200,000 Bpd of combined heavy,
sour crude oil and atmospheric residual oil. The following is a brief
description of the units and offsite facilities that are scheduled to be added
or improved during Phase II and TARC's plans and expectations therefor:
FLUID CATALYTIC CRACKING (FCC) UNIT. TARC's FCC Unit will process gas
oil feedstocks directly from the No. 2 Crude Unit, the No. 2 Vacuum Unit, the
Delayed Coking Unit, or from outside purchases of VGO or atmospheric residual
oil. Before being fed to the FCC Unit, some of the VGO will be desulfurized in
the HDS Unit in order to meet environmental guidelines and improve product
quality from the FCC Unit. Modernization of the FCC Unit includes
reconfiguration of the fractionation plant.
The FCC Unit will have an initial capacity of 100,000 Bpd and will
incorporate the state-of-the-art MSCC(SM) technology licensed by UOP, formerly
Universal Oil Products ("UOP"). The MSCC(SM) technology is currently being used
at a major U.S. refinery. TARC believes that this technology will improve
product yields and quality in comparison to conventional catalytic cracking
processes. TARC also plans to add a catalyst cooler, which will make the unit
capable of processing significant quantities of atmospheric residual
feedstocks.
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The FCC Unit produces refinery fuel, propane, butane, light olefins,
gasoline blendstock, No. 2 fuel oil, and a residual product (decant/slurry
oil). Light olefins will be processed in the Alkylation Unit for further
upgrade. Other materials will be blended to finished products or consumed in
the refinery.
Process engineering for the MSCC(SM) technology has been completed by
UOP. Raytheon Engineers and Constructors Inc. ("Raytheon") is providing
detailed design engineering. Most major equipment has been procured and is
being fabricated by a number of major pressure vessel fabricators. Raytheon has
commenced the process engineering of the gas recovery section, and field
inspection and testing of the existing equipment is underway. Raytheon is
providing construction management services for the FCC Unit.
FCC FLUE GAS SCRUBBER. TARC plans to install a scrubber for the FCC
flue gases to reduce particulate and sulfur dioxide emissions. The flue gas
scrubber has been designed and fabricated by Belco Technologies Inc., and will
be erected under a fixed price contract.
ALKYLATION UNIT. Light olefins from the FCC Unit are converted to high
octane gasoline blendstock (alkylate) in the Alkylation Unit. Alkylate is a
relatively clean burning fuel component important in the production of
environmentally sensitive gasolines. The Alkylation Unit will be reactivated
and expanded to an ultimate capacity of approximately 26,000 Bpd of alkylate
product by installing four new contactors and two new settlers designed by
Stratco Inc. Remaining work includes inspection and testing of the equipment in
the existing unit and installation of a new electronic instrumentation system.
Raytheon is providing engineering and construction management services for this
work.
OFFSITE FACILITIES/TANKAGE. Additional capacity will be installed for
cooling water, steam, plant air, instrument air and electrical distribution.
Construction of nine tanks, with aggregate capacity of one million barrels,
will be completed. Other piping, electrical and instrumentation equipment will
be installed to connect the Phase II process units with the refinery and new
storage tanks.
OTHER. TARC is required to perform HAZOP analysis of the refinery
process units added during Phase II as required by OSHA regulations.
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CAPITAL BUDGET AND EXPENDITURES
The following table sets forth certain information with respect to the
Capital Improvement Program, including the budget and current expenditures:
<TABLE>
<CAPTION>
BUDGET EXPENDITURES DAILY PRINCIPAL OUTSIDE
TO COMPLETE(1) TO DATE(2) CAPACITY CONTRACTOR
-------------- ------------ -------- -----------------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS) (BPD)
<S> <C> <C> <C> <C>
PHASE I:
Crude Unit . . . . . . . . . . . . . $ 3 $ 0.4 200,000 --
Delayed Coking Unit . . . . . . . . . 27 14.2 75,000 Fluor
Naphtha Pretreater . . . . . . . . . 12 0.9 30,000 PCI
No. 2 Reformer . . . . . . . . . . . 9 0.1 12,000 PCI
HDS Unit . . . . . . . . . . . . . . 24 2.6 60,000 PCI
Sulfur Recovery System . . . . . . . 53 7.9 370(4) Pritchard
Offsite Facilities/Tankage . . . . . 46 10.3 N/A --
Other . . . . . . . . . . . . . . . . 3 0.1 N/A --
Engineering and Administrative. . . . 7 2.6 N/A --
Contingencies(3) . . . . . . . . . . 39 -- N/A --
---- ------
Total Phase I . . . . . . . . $223 $ 39.1
---- ------
PHASE II:
FCC Unit . . . . . . . . . . . . . . $115 $ 19.6 100,000 Raytheon/UOP
FCC Flue Gas Scrubber . . . . . . . . 14 1.9 N/A Belco
Alkylation Unit . . . . . . . . . . . 24 1.4 26,000 Raytheon/Stratco
Offsite Facilities/Tankage . . . . . 26 0.2 N/A --
Other . . . . . . . . . . . . . . . . 2 -- N/A --
Engineering and Administrative. . . . 3 -- N/A --
Contingencies(3) . . . . . . . . . . 20 -- N/A --
---- ------
Total Phase II . . . . . . . . $204 $ 23.1
---- ------
Total Phase I and
Phase II . . . . . . . . . . $427 $ 62.2
==== ======
</TABLE>
- ----------
(1) Estimated as of June 13, 1997.
(2) From June 13, 1997 to September 19, 1997.
(3) To the extent expenditures exceed the approved capital budget for a
unit or units, the contingencies portion of the budget will be
allocated to specific units.
(4) Units are LT/D. Capacity can be increased to 510 LT/D with oxygen
enrichment.
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PORT COMMISSION BONDS
TARC and the Port Commission have entered into a preliminary agreement
for the issuance of revenue bonds, which, if issued, are expected to provide
proceeds to TARC of approximately $50 million. Proceeds of such bonds would be
used to construct tank storage facilities, docks, and air and waste water
treatment facilities included in the Capital Improvement Program budget. The
Port Commission would own the facilities built with the proceeds of the bonds,
and TARC would operate the facilities pursuant to a long-term (25-year) lease.
TARC is currently working with an underwriter to structure an offering of
revenue bonds pursuant to this preliminary agreement. There can be no
assurance, however, that the issuance of any such tax-exempt bonds will occur.
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
TARC historically has entered into financing arrangements in order to
maintain an available supply of feedstocks. Typically, TARC enters into an
agreement with a third party to acquire a cargo of feedstock which is scheduled
for delivery to TARC's refinery. TARC pays through the third party all
transportation costs, related taxes and duties and letter of credit fees for
the cargo, plus a negotiated commission. Prior to arrival at the refinery,
another third party purchases the cargo, and TARC commits to purchase, at a
later date, the cargo at an agreed price plus commission and costs. TARC also
places margin deposits with the third party to permit the third party to hedge
its price risk. TARC purchases these cargos in quantities sufficient to
maintain expected operations and is obligated to purchase all of the cargos
delivered pursuant to these arrangements. In the event the refinery is not
operating, these cargos may be sold on the spot market.
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 TARC is based on the margin, if any, earned by the third party
from product sales, 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.
PRICE MANAGEMENT ACTIVITIES
In order to mitigate the commodity price risks associated with the
refining business, TARC has previously entered, and may in the future enter,
into futures contracts, options on futures, swap agreements and forward sale
agreements commensurate with its inventory levels and feedstock requirements
and as permitted under the Indenture. If TARC believes it can capitalize on
favorable market conditions, it will attempt to utilize the futures market to
fix a portion of its crude oil costs and refined products values. This hedging
strategy is designed to retain the value of a portion of its work-in-process
inventory.
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CRUDE OIL AND FEEDSTOCK SUPPLY
TARC purchases feedstocks on the spot market but has no long-term
supply contracts. TARC believes that it will have access to adequate supplies
of the crude oil it intends to process. Upon completion of the Capital
Improvement Program, TARC expects to purchase heavy, sour crude oil produced in
countries such as Venezuela and Mexico. In addition, TARC expects to be able to
take advantage of anticipated increases in production of sour crude oil from
the Gulf of Mexico or the Persian Gulf.
The refinery has a variety of supply channels. The Mississippi River
permits delivery of feedstocks from both barge and ocean-going vessels. With
the purchase of the adjacent terminal, TARC has four ship docks and a barge
dock. TARC's title to and continued use of these facilities is subject to the
rights of the government and public use. TARC's ship dock can accommodate
100,000 deadweight ton ("dwt") tankers that draw less than 45 feet of water, or
up to 200,000 dwt tankers that have been partially offloaded and draw less than
45 feet of water. The barge dock provides access to smaller cargos of
intermediate feedstocks such as VGOs or atmospheric residuals. Additionally,
TARC is connected to a Shell Oil Company ("Shell") crude pipeline that provides
access to Louisiana Offshore Oil Port's 24-inch pipeline network, thereby
permitting TARC to receive large quantities of foreign crude oil. This pipeline
also provides access to Louisiana and other domestic crudes. See "-- Title
Insurance."
TARC has no crude oil reserves and is not engaged in the exploration
for crude oil and plans to obtain all its crude oil requirements from
unaffiliated sources. TARC believes that it will be able to obtain adequate
supplies of crude oil and feedstocks at generally competitive prices for the
foreseeable future. Crude oil prices are affected by a variety of factors that
are beyond the control of TARC. The principal factors currently influencing
prices include the pricing and production policies of members of the
Organization of Petroleum Exporting Countries, the availability to world
markets of production from Kuwait, Iraq and Russia and the worldwide and
domestic demand for oil and refined products. Oil pricing will continue to be
unpredictable and greatly influenced by governmental and political forces.
PRODUCT DISTRIBUTION
TARC previously sold its refined products pursuant to a processing
agreement with a third party, but currently has no long-term sales contracts.
Major market areas for TARC's refined products will include the Gulf Coast
region, the Mississippi River Valley and the East Coast of the United States,
as well as foreign markets. TARC's refined products will be transported by
pipeline, rail tanker, ocean-going vessel and tank truck. TARC's refinery is
connected, through third-party pipelines, to two major Gulf Coast common
carrier pipelines, the Colonial and the Plantation, which will permit
transportation of the refinery's products to East Coast markets. Products can
be discharged into these pipelines at rates of up to 15,000 Bbls per hour. TARC
is also connected to several pipelines designed to transfer refined products to
a nearby refinery operated by Shell. Railroad lines serve the refinery and
adjacent industries. TARC's barge and ship docks provide access to the
Mississippi River and the intracoastal waterway.
FOREIGN TRADE ZONE
The refinery is approved for purposes of processing foreign crude to
operate as a foreign trade zone. This allows the refinery to realize the
benefits of processing foreign crude and exporting the products duty free or
deferring the duty on products sold domestically.
INSURANCE
TARC maintains insurance in accordance with customary industry
practices to cover some, but not all, risks. TARC currently maintains property
insurance for the refinery in an amount and with deductibles that management
believes will allow TARC to survive damage to the refinery. TARC plans to
increase insurance coverage amounts from time to time as it completes certain
portions of the Capital Improvement Program.
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SEASONALITY
TARC anticipates that its operations will be subject to significant
fluctuations in seasonal demand. In TARC's markets, demand for gasoline is
typically higher during the first and second quarters of TARC's fiscal year.
During winter months, demand for heating oil increases. The refinery is
designed, upon completion of the Capital Improvement Program, to change its
product yields to take advantage of seasonal demands.
FLUCTUATION IN PRICES
Factors that are beyond the control of TARC may cause the cost of
crude oil purchased by TARC and the price of refined products sold by TARC to
fluctuate widely. Although prices of crude oil and refined petroleum products
generally move in the same direction, prices of refined products often do not
respond immediately to changes in crude oil costs. An increase in market prices
for crude oil or a decrease in market prices for refined products could have an
adverse impact on TARC's earnings and cash flow.
COMPETITION
The industry in which TARC operates is highly competitive. Since the
United States imports significant quantities of refined petroleum products,
TARC views offshore refiners as its primary competition. However, TARC also
competes with refiners in the Gulf Coast region, many of which are owned by
large, integrated oil companies that because of their more diverse operations,
stronger capitalizations or crude oil supply arrangements, are better able than
TARC to withstand volatile industry conditions, including shortages or excesses
of crude oil or refined products or intense price competition. The principal
competitive factors affecting TARC's refining operations are the quality,
quantity and delivered costs of crude oil and other refinery feedstocks,
refinery processing efficiency, mix of refined products, refined product prices
and the cost of delivering refined products to markets. Competition also exists
between the petroleum refining industry and other industries supplying energy
and fuel to industrial, commercial and individual consumers.
EMPLOYEES
As of September 30, 1997, TARC had approximately 270 employees and
will employ additional personnel as required by its operations and may engage
the services of engineering and other consultants from time to time. Currently,
none of TARC's employees is a party to a collective bargaining agreement. The
Equal Employment Opportunity Commission (the "EEOC") has initiated an
investigation into the employment practices of TARC and Southeast Louisiana
Contractors of Norco, Inc. ("Southeast Contractors"), a subsidiary of
TransAmerican, alleging discriminatory hiring and promotion practices. See "--
Legal Proceedings."
Since July 1994, Southeast Contractors has provided construction
personnel to TARC in connection with construction at the refinery. Southeast
Contractors will provide construction personnel to TARC as required to
implement the Capital Improvement Program. These construction workers are
temporary employees, and the number and composition of the workforce will vary
throughout the reactivation of the refinery during the Capital Improvement
Program. Southeast Contractors charges TARC for the direct costs it incurs,
which consist solely of employee payroll and benefits plus administrative costs
and fees; such administrative costs and fees charged to TARC may be up to $2
million per year.
ENVIRONMENTAL MATTERS
COMPLIANCE MATTERS. TARC is subject to federal, state and local laws,
regulations and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is
now, and has included in the Capital Improvement Program sufficient capital
additions to remain, in substantial compliance with applicable Pollution
Control Laws. However, Pollution Control Laws that may be enacted in the
future, as well as increasingly strict enforcement of existing Pollution
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Control Laws, may require TARC to make additional capital expenditures in order
to comply with such laws and regulations. To ensure continuing compliance, TARC
has made environmental compliance and permitting issues an integral part of its
refinery's start-up plans and has budgeted for such capital expenditures in the
Capital Improvement Program. However, there is no assurance that TARC will
remain in compliance with environmental regulations.
TARC uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes, that are or may
be deemed hazardous substances or wastes. In the past, the refinery has been
the subject of certain environmental enforcement actions, and has incurred
certain fines, as a result of certain of TARC's operations. TARC also was
previously subject to enforcement proceedings relating to its prior production
of leaded gasoline and air emissions. TARC believes that, with minor 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. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a
material adverse effect on TARC's financial position, results of operations or
cash flows. Until the refinery is in full operation, however, there can be no
assurance that the regulations will not have such an effect.
In addition, the EPA promulgated National Emission Standards for
Hazardous Air Pollutants for Hazardous Organics (the "Hazardous Organic
NESHAPS") regulations for petroleum refineries under the Clean Air Act in 1995,
and subsequently has amended such regulations. These regulations set "Maximum
Achievable Control Technology" ("MACT") standards for petroleum refineries. The
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 promulgated federal regulations pursuant to the Clean Air Act
to control fuels and fuel additives (the "Gasoline Standards") that could have
a material adverse effect on TARC. Under these regulations, only reformulated
gasoline can be sold in certain domestic geographic areas in which the EPA has
mandated or approved its use. Reformulated gasoline must contain a minimum
amount of oxygen, have a lower vapor pressure, and have reduced sulfur,
olefins, benzene and aromatics compared to the average 1990 gasoline. The EPA
recently promulgated final National Ambient Air Quality Standards ("NAAQS")
that revise the standards for particulate matter and ozone. The number and
extent of the areas subject to reformulated gasoline standards may increase in
the future after the NAAQS are implemented. Conventional gasoline may be used
in all other domestic markets; however, a refiner's post-1994 average
conventional gasoline must not be more polluting than it was in 1990. With
limited exceptions, to determine its compliance as of January 1, 1995, a
refiner must compare its post-1994 and 1990 average values of controlled fuel
parameters and emissions. The Gasoline Standards recognize that many gasoline
refiners may not be able to develop an individual 1990 baseline for a number of
reasons, including, for example, lack of adequate data or the absence or
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
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denied TARC's request for an individual baseline adjustment and other
regulatory relief. TARC will continue to pursue regulatory relief with the EPA.
However, the projections included herein assume that regulatory relief will not
be granted. There can be no assurance that any action taken by the EPA will not
have a material adverse effect on TARC's future 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 it will be approved as submitted or that additional
expenditures required pursuant to Title V Operating Permit obligations will not
have a material adverse effect on TARC's financial position, results of
operations or cash flow.
CLEANUP MATTERS. TARC also is subject to federal, state and local
laws, regulations and ordinances that impose liability for the costs of clean
up related to, and certain damages resulting from, past spills, disposals or
other releases of hazardous substances ("Hazardous Substance Cleanup Laws").
Over the past several years, TARC has been, and to a limited extent continues
to be, engaged in environmental cleanup or remedial work relating to or arising
out of operations or activities at the refinery. In addition, TARC has been
engaged in upgrading its solid waste facilities, including the closure of
several waste management units. Similar to numerous other industrial sites in
the state, the refinery has been listed by the LDEQ on the Federal
Comprehensive Environmental Response, Compensation and Liability Information
System, as a result of TARC's prior waste management activities (as discussed
below).
In 1991, the EPA performed a facility assessment at the refinery
pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The
EPA performed a follow up assessment in March 1996, but has not yet issued a
report of its investigations. In July 1996, the EPA and the LDEQ agreed that
the LDEQ would serve as the lead agency with respect to the investigation and
remediation of areas of concern identified in the investigations. TARC, under a
voluntary initiative approved by the LDEQ, 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.
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At one Superfund site, TARC has submitted information to the EPA
indicating that it should have no liability for this matter, and negotiations
with the EPA in this regard are continuing. With respect to the remaining two
sites, TARC's liability for each such matter has not been determined, and TARC
anticipates that it may incur costs related to the cleanup (and possibly
including additional costs arising in connection with any recovery or other
actions brought pursuant or relating to such matters) at each such site. After
a review of the data available to TARC regarding the basis of TARC's alleged
liability at each site, and based on various factors, which depend on the
circumstances of the particular Superfund site (including, for example, the
relationship of TARC to each such site, the volume of wastes TARC is alleged to
have contributed to each such site in comparison to other PRPs without giving
effect to the ability of any other PRPs to contribute to or pay for any
liabilities incurred, and the range of likely cleanup costs at each such site)
TARC 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.
OTHER GOVERNMENTAL REGULATIONS
TARC must also comply with federal and state laws and regulations
promulgated by the Department of Transportation for the movement of volatile
and flammable materials, the U.S. Coast Guard for marine operations and oil
spill prevention and OSHA for worker and job site safety. To comply with OSHA
regulations, TARC must conduct extensive Process Safety Management and
Hazardous Operations reviews prior to placing units into service. TARC has
budgeted funds in the Capital Improvement Program to comply with all of these
requirements.
PROPERTIES
With the purchase of the adjacent terminal facility, TARC owns the
approximately 457-acre site on which the refinery and terminal are located.
TARC also owns approximately 500 acres of wetlands adjacent to the refinery
site. TARC leases office space in Houston, Texas from TransTexas.
TITLE INSURANCE
TARC has obtained a lender's title insurance policy in the amount of
approximately $840 million for the benefit of the Trustee to insure against
certain claims made against title to the refinery parcel site. The title
insurance policy is expected to be reinsured through various title insurance
companies in the United States. The ability to successfully recover under the
policy is dependent on the creditworthiness of the title company and its
reinsurers at the time of the claim and any defenses that the title insurers
and its reinsurers may have. The title insurance policy will not insure TARC or
the Trustee for defects, liens, encumbrances, adverse claims or other matters
known to TARC that affect the validity of the mortgage or title to the
refinery. There can be no assurance that the amount of title insurance will be
sufficient to cover any losses incurred by TARC or the Trustee as a result of a
title defect impairing the ability to use the refinery site or that the title
insurers will be able to fulfill their financial obligations under the title
insurance policy. The title insurance policy contains customary exceptions to
coverage, including taxes not yet due and payable, riparian rights and numerous
servitudes, rights of way, rights of access and other encroachments in favor of
utilities, railroads, pipelines and adjacent refineries and tank farms, as well
as exceptions for (i) government claims with respect to, and public rights to
use, TARC's property located between the Mississippi River and the road upon
which pipe racks and TARC's docking facilities are located, (ii) a right of
first refusal in favor of an adjacent landowner with respect to a certain
portion of property which, in the event exercised, may require TARC to relocate
at its expense certain pipelines that connect various refinery parcels, (iii)
tax benefits that have been conveyed to certain tax lessors, (iv) the priority
of liens that may be filed by materialmen and mechanics in connection with the
Capital Improvement Program and (v) any rights of creditors pursuant to federal
or state bankruptcy and insolvency laws, which rights may affect the
enforceability of the mortgage securing the TARC Intercompany Loan.
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LEGAL PROCEEDINGS
EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Commissioner's Charge against TARC and Southeast
Louisiana Contractors of Norco, Inc. (the "Commissioners Charge") pursuant to
Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended,
42 U.S.C. Section 2000e et seq. ("Title VII"). In the Commissioner's Charge,
the EEOC charged TARC and Southeast Louisiana Contractors of Norco, Inc.
("Southeast Contractors"), a subsidiary of TransAmerican, with engaging in
unlawful discriminatory hiring and promotion practices based on race and
gender. Each violation of Title VII, if proven, potentially could subject TARC
and/or Southeast Contractors to liability for (i) monetary damages for backpay
and/or front pay in an undetermined amount, and for compensatory damages and/or
punitive damages in an amount that should not exceed $300,000, (ii) injunctive
relief, (iii) attorney's fees, and/or (iv) interest. During the period covered
by the Commissioner's Charge, TARC and Southeast Contractors estimate that they
received a combined total of approximately 15,000 to 22,000 employment
applications and hired (or rehired) a combined total of approximately 1,500 to
2,200 workers. TARC and Southeast Contractors have responded to the
Commissioner's Charge and have denied engaging in any unlawful employment
practices. TARC and Southeast Contractors have been cooperating fully with the
EEOC in connection with its investigation. TARC and Southeast Contractors
intend to vigorously defend against the allegations contained in the
Commissioner's Charge in all proceedings before the EEOC and in any subsequent
litigation. If TARC and/or Southeast Contractors are found liable for
violations of Title VII based on the matters asserted in the Commissioner's
Charge, TARC can make no assurance that such liability would not have a
material adverse effect on the financial condition, results of operations and
cash flows of TARC or TARC's ability to pay interest or principal on its debt.
RINEHEART. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court,
Middle District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon
and Indian Village. TARC intends to vigorously defend this claim.
SHELL OIL. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination
of Bayou Trapagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the plaintiffs during trial by purchasing their land
for $5 million. On June 27, 1997, Shell amended its third party action to bring
TARC back into the case. Shell has demanded $400,000 from TARC. TARC has
refused to pay such amount and is defending the case vigorously.
GENERAL. TARC is also a named defendant in other ordinary course,
routine litigation incidental to its business. While the outcome of these other
lawsuits cannot be predicted with certainty, TARC does not expect these matters
to have a material adverse effect on its financial position, results of
operations or cash flow.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ------------------ ------------------------------------------ ---
<S> <C> <C>
John R. Stanley Chairman of the Board and Chief Executive Officer 58
Edwin B. Donahue Vice President, Chief Financial Officer and Secretary 46
Arnold H. Brackenridge President and Chief Operating Officer of TransTexas 64
R. Glenn McGinnis Vice President of Manufacturing of TARC 48
Richard P. Bianchi Vice President and General Counsel of TransTexas 45
John R. Blinn Director 54
Donald B. Henderson Director 48
James V. Langston Director 73
Thomas B. McDade Director 74
</TABLE>
Set forth below is a description of the backgrounds of the directors
and executive officers of the Company.
JOHN R. STANLEY has served as Chairman of the Board and Chief
Executive Officer of the Company since July 1994. Mr. Stanley has been a
director and Chief Executive Officer of TARC since September 1987 and has been
a director and Chief Executive Officer of TransTexas since May 1993. Mr.
Stanley is the founder, Chairman of the Board, Chief Executive Officer, and
sole stockholder of TNGC, which is the sole stockholder of TransAmerican. He
has operated TransAmerican since 1958.
EDWIN B. DONAHUE has served as Vice President and Secretary of TEC
since February 1997 and as Chief Financial Officer of TEC since June 1997. Mr.
Donahue also serves as Vice President, Chief Financial Officer and Secretary of
TransTexas and as Vice President and Secretary of TransAmerican and TARC. Mr.
Donahue has been employed in various positions with TransAmerican or its
affiliates for over 20 years.
ARNOLD H. BRACKENRIDGE has served as President and Chief Operating
Officer of TransTexas since May 1993. Mr. Brackenridge also serves as
Executive Vice President of TransAmerican. From 1984 until June 1992, Mr.
Brackenridge served as President and Chief Executive Officer of Wintershall
Energy, a business group of BASF Corporation. Mr. Brackenridge has worked in
the domestic and international oil and gas industry for over 38 years.
R. GLENN MCGINNIS has been the Vice President of Manufacturing of TARC
since July 1995. Prior to joining TARC, Mr. McGinnis held senior refining and
supply positions in Canada with Imperial Oil Limited, an affiliate of Exxon
Corporation. Mr. McGinnis was with Imperial Oil Limited for 23 years.
RICHARD P. BIANCHI has served as Vice President and General Counsel of
TransTexas since June 1995. From 1990 to June 1995, he served as Judge of the
333rd State District Court in Harris County, Texas. Prior to 1990, he was a
partner in Bivin and Bianchi, a business and civil litigation firm in Houston,
Texas.
JOHN R. BLINN became a director of the Company in September 1995. Mr.
Blinn is Of Counsel to the law firm of Leonard, Hurt, Terry & Blinn. Prior
thereto, he was in private practice, and he served as U.S. Bankruptcy Judge for
the Southern District of Texas from 1975 to 1982. Mr. Blinn previously served
as a director of TransAmerican until his resignation in 1995.
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DONALD B. HENDERSON has been a director of the Company since July
1994. He also serves as a director of TARC. Mr. Henderson is a partner in the
law firm of Blackburn & Henderson and is a director of Colonial Casualty
Insurance Co. From 1972 to 1978, Mr. Henderson was a member of the Texas House
of Representatives. Mr. Henderson has been a member of the Texas Senate since
1982. Mr. Henderson served as a director of TransAmerican from 1985 until his
resignation in February 1995.
JAMES V. LANGSTON has been a director of the Company since February
1995. Mr. Langston is the Chairman and Chief Executive Officer of Arctic
Offshore Technology Company. From 1977 to 1984 he was President, Director, and
Chief Operating Officer of Dual Drilling Company. Prior thereto, he was with
Exxon, USA for 29 years and served as Manager of Exploration and Production
Drilling. Mr. Langston was a director of TransAmerican from 1986 to 1995.
THOMAS B. MCDADE has been a director of the Company since July 1994.
He is also a director of TransTexas and TARC. Mr. McDade is primarily engaged
in managing his personal investments and providing consulting services in
Houston, Texas. Mr. McDade served as a director of TransAmerican from 1985
until his resignation in February 1995. Prior to 1989, he served as a
consultant to Texas Commerce Bancshares, Inc. and prior to July 1985 he served
as Vice Chairman and director of Texas Commerce Bancshares, Inc. and Vice
Chairman and Advisory Director of Texas Commerce Bank. Mr. McDade served as a
director and trustee of eleven registered investment companies from 1985 to
1995 for which John Hancock Funds serves as investment advisor in Boston,
Massachusetts. Mr. McDade is a former director of Houston Industries, Inc. and
Houston Lighting & Power Company. He is also a former member of the Board of
Managers of the Harris County Hospital District and former Chairman of the
State Securities Board of Texas.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid during the fiscal
years ended July 31, 1994 and 1995, the transition period ended January 31,
1996 and the fiscal year ended January 31, 1997 to the Chief Executive Officer
and certain executive officers of the Company and its subsidiaries ("Named
Executive Officers"):
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<PAGE> 94
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION FISCAL OTHER ANNUAL
IN THE COMPANY YEAR SALARY BONUS COMPENSATION(a)
<S> <C> <C> <C> <C>
John R. Stanley(b) . . . . . . . . . . . 1994 $350,000 $ -- $ 4,620
Chief Executive Officer of 1995 350,000 -- 4,620
the Company, TransTexas and TARC 1996* 175,000 -- 807
1997 397,117 -- 5,154
Arnold H. Brackenridge(b). . . . . . . . 1994 $175,000 $ -- $ 80
President and Chief Operating Officer 1995 221,154 -- 1,454
of TransTexas 1996* 137,500 85,397(c) 721
1997 294,808 111,089(d) 2,435
Edwin B. Donahue(b). . . . . . . . . . . 1994 $134,234 $ -- $ 3,997
Vice President, Chief Financial 1995 149,423 -- 4,364
Officer and Secretary of the 1996* 90,384 85,397(c) 1,110
Company and TransTexas; 1997 215,385 113,885(d) 4,731
Vice President and Secretary of TARC
Richard Bianchi (b)(e) . . . . . . . . . 1995 $ 11,538 $ -- $ --
Vice President and General Counsel 1996* 100,000 -- --
of TransTexas 1997 214,154 -- 777
Glenn McGinnis(f). . . . . . . . . . . . 1995 $ 8,654 $ -- $ --
Vice President of Manufacturing of 1996* 116,937 -- --
TARC 1997 233,653 -- 727
</TABLE>
- -----------------------------
* Six months ended January 31, 1996 ("Transition Period")
(a) Reflects amounts contributed under the Company's Savings Plan. Certain of
the executive officers receive personal benefits in addition to salary
and cash bonuses. The aggregate amount of such personal benefits,
however, does not exceed the lesser of $50,000 or 10% of the total of the
annual salary and bonus reported for the named executive officer and
accordingly, such amounts have been excluded from the table.
(b) Compensated by TransTexas.
(c) These bonuses were paid in fiscal 1997 for services rendered during the
Transition Period.
(d) These bonuses were paid in fiscal 1998 for services rendered in fiscal
1997.
(e) Mr. Bianchi joined TransTexas in June 1995.
(f) Compensated by TARC. Mr. McGinnis joined TARC in July 1995.
EMPLOYMENT AGREEMENTS
In October 1997, TransTexas and Mr. Bianchi entered into an
employment agreement that provides for an annual salary of $214,000 and
terminates on August 12, 1998. This employment agreement provides that if Mr.
Bianchi's employment is terminated prior to the term of the agreement,
TransTexas is required to pay Mr. Bianchi his salary for the remaining term of
the agreement plus an additional six months' salary.
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<PAGE> 95
SAVINGS PLAN
The Company maintains a long-term savings plan (the "Savings Plan") in
which eligible employees of the Company and certain of its affiliates may elect
to participate. Each employee becomes eligible to participate in the Savings
Plan on January 1 or July 1 following the completion of one year of service
with the Company or its participating affiliates and attainment of age 21. The
Savings Plan is intended to constitute a qualified plan under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and contains a
salary reduction arrangement described in Section 401(k) of the Code.
Each participant may elect to reduce his compensation by a percentage
equal to 2% to 15% and the Company will contribute that amount to the Savings
Plan on a pre-tax basis on behalf of the participant. The Code limits the
annual amount that a participant may elect to have contributed on his behalf on
a pre-tax basis to the Savings Plan. For 1997, this limit is $9,500. The
Company presently makes a matching contribution in an amount equal to 10%, 20%,
or 50% of the amount elected to be contributed by each participant on a pre-tax
basis, up to a maximum of 3% of each participant's compensation, depending on
whether the employee has been a participant in the Savings Plan for one year,
two years, or three years. Each participant also may elect to contribute up to
10% of his compensation to the Savings Plan on an after-tax basis. The Code
imposes nondiscrimination tests on contributions made to the Savings Plan
pursuant to participant elections and on the Company's matching contributions,
and limits amounts which may be allocated to a participant's Savings Plan
account each year. In order to satisfy the nondiscrimination tests,
contributions made on behalf of certain highly compensated employees (as
defined in the Code) may be limited. Contributions made to the Savings Plan
pursuant to participant elections and matching contributions are at all times
100% vested. Contributions to the Savings Plan are invested, according to
specified investment options selected by the participants, in investment funds
maintained by the trustee of the Savings Plan. Generally, a participant's
vested benefits will be distributed from the Savings Plan as soon as
administratively practicable following a participant's retirement, death,
disability, or other termination of employment. In addition, a participant may
elect to withdraw his after-tax contributions from the Savings Plan prior to
his termination of employment, and subject to strict limitations and
exceptions, the Savings Plan provides for withdrawals of a participant's
pre-tax contributions prior to a participant's termination of employment, in
the event of the participant's severe financial hardship or attainment of age
59 1/2. The Savings Plan may be amended or terminated by the Board of Directors
of the Company. As of September 30, 1997, approximately 1,590 employees were
eligible to participate in the Savings Plan, including Messrs.
Stanley, Brackenridge, Donahue, Bianchi and McGinnis.
DIRECTOR COMPENSATION
Each director of the Company is paid an annual director's fee of $75,000
plus $750 for each board meeting and committee meeting attended (excluding
committee meetings occurring on the same day as board meetings).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not directly compensate any of its executive officers.
The Company does not have a Compensation Committee. During the fiscal year
ended January 31, 1997, none of the members of the compensation committees of
TransTexas or TARC was an officer or employee of the Company or any of its
subsidiaries, and none had any relationship with the Company requiring
disclosure under Item 404 of Regulation S-K. See "Certain Relationships and
Related Transactions."
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's common stock is owned 100% by TransAmerican. TransAmerican
is owned 100% by TNGC, and TNGC is owned 100% by John R. Stanley. No other
officer or director of the Company owns any common stock of the Company. As of
July 31, 1997, there were 9,000 shares of common stock outstanding and no
shares of preferred stock outstanding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the asset transfer agreement (the "Asset Transfer Agreement")
among TransAmerican, TransTexas, TTC and Mr. Stanley, TransAmerican assigned
and transferred to TransTexas (the "Asset Transfer") all operating assets
relating to its natural gas exploration, production and transportation
business, subject to the existing liens on those assets, other than (i) certain
mineral interests that were subject to restriction on transfer pursuant to the
terms of the instruments evidencing those interests, (ii) capital stock of any
of its subsidiaries and (iii) cash and accounts receivable in the amount of $37
million.
TransTexas assumed substantially all liabilities relating to
TransAmerican's natural gas exploration, production and transportation
business. On June 13, 1997, the Asset Transfer Agreement was amended to
eliminate any indemnity obligations of TransAmerican to TransTexas with respect
to such liabilities.
TransTexas has provided accounting and legal services to TARC and TEC and
drilling and workover, administrative and procurement, accounting, legal, lease
operating, and gas marketing services to TransAmerican pursuant to a services
agreement. TransTexas has provided general commercial legal services and
certain accounting services (including payroll, tax, and treasury services) to
TARC and TEC for a fee of $26,000 per month. TARC expects its general and
administrative expenses to increase significantly when the refinery commences
more complex operations. At TransAmerican's request, TransTexas, at its
election, has provided drilling and workover services. In June 1997, the
receivable from TransAmerican under the services agreement was paid and the
services agreement was terminated.
On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services 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 to TransTexas
approximately $300,000 per month for services rendered to, and for allocated
expenses paid by TransTexas on behalf of, TARC and TEC. TEC and its
subsidiaries will pay $2.5 million in the aggregate per year to TransAmerican
for advisory services and benefits provided by TransAmerican.
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $14.8
million, $11.1 million, $11.7 million, and $11.7 million for the year ended
July 31, 1995, the six months ended January 31, 1996, the year ended July 31,
1997 and the six months ended July 31, 1996 and 1997, respectively.
TransAmerican did not purchase any gas from TransTexas for the six months ended
July 31, 1997. All amounts owed under the agreement were paid on June 13, 1997.
In July 1995, TransTexas acquired certain oil leases in the Lodgepole
Prospect in North Dakota from TransAmerican for approximately $6.3 million,
which amount represented TransAmerican's cost for such leases. TransTexas
continued to acquire additional leases in the area. In October 1995, TransTexas
sold an undivided interest in its Lodgepole leases to TransDakota Oil
Corporation ("TDOC"), a subsidiary of TransAmerican. The sales price was
approximately $16.1, which amount represented the cost to TransTexas of the
interest sold. In September 1996, TransTexas purchased these and other oil and
gas leasehold interests in the Lodgepole area from TDOC for approximately $20.0
million. TransTexas believes that the combination of these interests, together
with TransTexas'
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<PAGE> 97
other interests in the Lodgepole area, will produce a more marketable property
package. The purchase price was $3.9 million greater than TDOC's basis in the
properties.
In September 1995, TransTexas made advances to TransAmerican in the
aggregate amount of $4.7 million. In October 1995, TransAmerican repaid the
full amount of these advances with interest at an annualized rate of 13%.
In October 1995, Mr. Stanley guaranteed TransTexas' $40 million line of
credit with BNY Financial Corporation.
As of January 1996, TransTexas and TransTexas Exploration Corporation, a
wholly owned subsidiary of TransTexas ("TTEX"), entered into a Drilling
Program, as defined in the TransTexas Senior Secured Notes Indenture. Pursuant
to the Drilling Program, TTEX received a portion of revenues, in the form of a
production payment, from certain of TransTexas' wells. The production payment
was transferred in consideration of a note payable in the amount of $23.7
million issued by TTEX. In July 1996, TTEX transferred this production payment
to TransTexas in the form of a dividend, and TransTexas forgave the $13.2
million remaining balance of the note payable.
Since July 1996, TTEX has made advances to TransAmerican pursuant to the
terms of a $25 million promissory note due July 31, 1998 that bears interest,
payable quarterly, at 15% per annum. This note was repaid on June 13, 1997.
During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital.
In order to facilitate the settlement of certain litigation in May 1996,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. All amounts outstanding under this note were
repaid on June 13, 1997.
In September 1996, TransTexas and TransAmerican entered into an agreement
pursuant to which TransTexas obtained an $11.5 million dollar-denominated
production payment, subsequently increased to $19 million, bearing interest at
17% per annum, burdening certain oil and gas interests owned by TransAmerican
as a source of repayment for certain of the receivables from TransAmerican
discussed above. At January 31, 1997, $59 million of remaining related-party
receivables has been recorded as a contra-stockholder equity account due to
uncertainties regarding the repayment terms for such receivables. TransTexas
has agreed to defer any interest payments due from TransAmerican until 1998. On
January 31, 1997, TransAmerican conveyed at historical cost certain oil and gas
properties to TransTexas for a purchase price of $31.6 million. A portion of
the purchase price was used to offset obligations under the September 1996
production payment.
TransTexas has made various advances to TransAmerican in an aggregate
amount of approximately $7 million for lease purchases and other corporate
expenses. This amount was repaid on June 13, 1997.
In January 1997, an affiliate of TransTexas contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with
a book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TTC. Also in January 1997, TransTexas
contributed substantially all of its Lobo Trend properties to TTC.
Certain refinery assets held by TransAmerican or its subsidiaries,
including the real property on which TARC's refinery is located, were
transferred to TARC in fiscal 1994 at TransAmerican's net book value of
approximately $25 million.
In July 1994, JRS Ventures, Inc. ("JRS"), owned by John R. Stanley,
conveyed to TARC a portion of the real property on which TARC's refinery is
located. TARC paid JRS $25,000 in October 1997, which is the amount for which
JRS purchased the land in August 1993 from Lynn (as defined).
A former affiliate of TransAmerican owed $205,000 to Lynn Petroleum
Storage and Transport Co., Inc. ("Lynn"), a company owned by Mr. Stanley's
children. This liability was assumed by TARC in conjunction with the transfer
of refinery assets described above. In May 1995, TARC paid this obligation and
an obligation arising from the purchase
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of a cryogenic gas processing unit and butane tanks from Lynn at Lynn's
undepreciated book value of such assets of $492,200. TARC believes that the
purchase price for the cryogenic gas processing unit is fair and reasonable to
TARC and on terms no less favorable than could be obtained from an unrelated
third party.
Pursuant to the stock transfer agreement (the "Stock Transfer Agreement")
among TransAmerican, the Company and TARC, TransAmerican contributed to the
capital of the Company (the "Stock Transfer") (i) all of the outstanding
capital stock of TARC, and (ii) 55 million shares of common stock of
TransTexas; and the Company then contributed 15 million of these shares of
TransTexas common stock to TARC.
Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily
operations and capital expenditures were advanced by TransAmerican. In October
1994, TransAmerican sold 5.25 million shares of TransAmerican common stock.
TransAmerican advanced approximately $50 million of the proceeds from these
stock sales to TARC, of which approximately $20 million was used by TARC to
repay a portion of the intercompany debt owed to TransAmerican, and the
remaining $30 million of the net proceeds was used for working capital and
general corporate purposes. TARC used approximately $30 million of the net
proceeds of the sale of the TARC Notes to repay additional intercompany debt to
TransAmerican. TransAmerican contributed to the capital of TARC (through TEC)
all but $10 million of the remainder of TARC's intercompany debt owed to
TransAmerican. In April 1995, TARC repaid the remaining $10 million of
intercompany indebtedness owed to TransAmerican. In August 1995, TARC received
an advance of $3 million from TransTexas which TARC used to settle its
remaining portion of certain litigation. In September 1995, TARC received an
advance of $1.7 million from TransAmerican which TARC used to purchase
feedstock. In October 1995, TARC repaid these advances without interest.
Additionally in October 1995, TARC received an advance of approximately $4
million from TransAmerican for working capital which it repaid in June 1997.
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 $2.2 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 was
payable at July 31, 1997, respectively.
TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.3 million and $1.5 million for the six months ended July 31, 1997 and 1996,
respectively. The receivable from TARC for natural gas sales totaled
approximately $3.0 million at July 31, 1997.
In September 1995, TARC received an advance of $1 million from TransTexas
which TARC used to purchase feedstock. This advance was repaid by TARC without
interest. In December 1995, TARC advanced $1 million to TransTexas. This
advance was repaid to TARC with interest in December 1995.
In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bore interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996. On November 1, 1996, TARC executed an
additional $25 million promissory note to TransAmerican which bore interest at
15% per annum, payable quarterly beginning December 31, 1996 (together with the
first promissory note, the "TransAmerican Notes"). In February 1997, the
November 1996 promissory note was replaced with a $50 million note bearing
interest at an annual rate of 15%. TransAmerican waived any default occurring
as a result of TARC's failure to make the scheduled interest payment provided
for in the notes. All amounts outstanding under the TransAmerican Notes were
repaid on June 13, 1997.
In July 1997, TEC advanced $5 million to TARC. TEC advanced an additional
$41 million in September 1997. All of the advances will be governed by the
terms of a promissory note due June 14, 2002 bearing interest at a rate that,
when added to the interest paid by TransTexas on the TransTexas Intercompany
Loan, will equal the amount of interest payable on the Notes.
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TransAmerican, its existing subsidiaries, including TARC, TEC and
TransTexas, entered into a tax allocation agreement (the "Tax Allocation
Agreement"), the general terms of which require TransAmerican and all of its
subsidiaries to file federal income tax returns as members of a consolidated
group to the extent permitted by law. Filing on a consolidated basis allows
income and tax of one member to be offset by losses and credits of another and
allows deferral of certain intercompany gains; however, each member is
severally liable for the consolidated federal income tax liability of the
consolidated group.
The Tax Allocation Agreement requires each of TransAmerican's subsidiaries
to pay to TransAmerican each year its allocable share of the federal income tax
liabilities of the consolidated group ("Allocable Share"). The Tax Allocation
Agreement provides for a reallocation of the group's consolidated federal
income tax liabilities among the members if the IRS or the courts ultimately
re-determine the group's regular tax or alternative minimum tax liability. In
the event of an IRS audit or examination, the Tax Allocation Agreement
generally gives TransAmerican the authority to compromise or settle disputes
and to control litigation, subject to the approval of TARC, TEC or TransTexas,
as the case may be, where such compromise or settlement affects the
determination of the separate tax liability of that company.
Under the Tax Allocation Agreement, each subsidiary's Allocable Share for
each tax year will generally equal the amount of federal income tax it would
have owed had it filed a separate federal income tax return for each year
except that each subsidiary will be able to utilize net operating losses and
credits of TransAmerican and the other members of the consolidated group
effectively to defer payment of tax liabilities that it would have otherwise
owed had it filed a separate federal income tax return. Each subsidiary will
essentially pay the deferred taxes at the time TransAmerican (or the member
whose losses or credits are utilized by such subsidiary) begins generating
taxable income or tax. This will have the effect of deferring a portion of such
subsidiary's tax liability to future years. The parties to the Tax Allocation
Agreement amended such agreement in connection with the Lobo Sale to include
additional affiliates as parties, and further amended the Tax Allocation
Agreement, in connection with the Transactions, to allocate to TransAmerican,
as among the parties, any tax liability associated with the Lobo Sale.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the anticipated material United
States federal income tax consequences of the exchange of Outstanding Notes for
Exchange Notes issued pursuant to the Exchange Offer. This discussion is based
upon the Code, its legislative history, existing and proposed regulations
thereunder, published rulings and court decisions, all as in effect and
existing on the date hereof and all of which are subject to change at any time,
which change may be retroactive. This discussion applies only to those persons
who purchased their Outstanding Notes from the Initial Purchaser and hold the
Notes as capital assets and does not address the tax consequences to taxpayers
who are subject to special rules (such as financial institutions, tax-exempt
organizations and insurance companies) or aspects of federal income taxation
that may be relevant to a prospective investor based upon such investor's
particular tax situation. Accordingly, holders of the Outstanding Notes should
consult their tax advisors with respect to the particular consequences to them
of the acquisition, ownership and disposition of the Exchange Notes including
the applicability of any state, local or foreign tax laws to which they may be
subject as well as with respect to the possible effects of changes in federal
and other tax laws.
ISSUANCE OF EXCHANGE NOTES
The issuance of the Exchange Notes to Holders of the Outstanding Notes
pursuant to the terms set forth in this Prospectus should not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss should be recognized by Holders of the Outstanding Notes upon receipt of
the Exchange Notes. For purposes of determining gain or loss upon the
subsequent sale or exchange of the Exchange Notes, a Holder's basis in the
Exchange Notes should be the same as such Holder's basis in the Outstanding
Notes exchanged therefor. Holders should be considered to have held the
Exchange Notes from the time of their original acquisition of the Outstanding
Notes.
Treasury regulations relating to the tax treatment of debt instruments
with original discount contain provisions for determining the yield and
maturity of debt instruments having one or more contingencies that could result
in the acceleration or deferral of amounts due under the debt (including
optional redemption). The Company will follow the general rule of these
provisions, which is to ignore contingencies, as it is more likely than not
that payments will be made under the Exchange Notes under the stated payment
schedule, and thus plans to accrue and report interest on the Exchange Notes
under the stated payment schedule.
A holder who does not tender his Outstanding Notes will not recognize
any gain or loss for United States Federal income tax purposes from the
Exchange Offer.
TAXATION OF THE NOTES
ORIGINAL ISSUE DISCOUNT. During the period that a holder owns a Senior
Secured Discount Exchange Note, the holder will be required to include OID in
income as if such holder continued to own the Outstanding Senior Secured
Discount Note that was exchanged therefor. Because the Outstanding Senior
Secured Discount Notes were issued at a discount from their "stated redemption
price at maturity," the Senior Secured Discount Notes had OID for federal income
tax purposes. No OID exists with respect to the Senior Secured Notes and, thus,
the Senior Secured Exchange Notes will not be issued with OID. The amount of OID
attributable to each Outstanding Senior Secured Discount Note equals the excess
of the "stated redemption price at maturity" over its "issue price." The issue
price of the Outstanding Senior Secured Discount Notes was the first price at
which a substantial amount of such notes were initially sold. The stated
redemption price at maturity of an Outstanding Senior Secured Discount Note is
the sum of all payments to be made on such Outstanding Senior Secured Discount
Note, including the amount of all stated interest payments. Although the
Outstanding Senior Secured Discount Notes do not provide for the payment of
interest in cash until 1999, a holder of an Outstanding Senior Secured Discount
Note will be required to include OID in gross income in advance of the receipt
of cash attributable to such income during the initial approximate two-year
period during which the Outstanding Senior Secured Discount Notes are
outstanding. The amount and timing of such OID during this period should
correspond to the increase in the Accreted Value of the Outstanding Senior
Secured Discount Note, which is based on the semi-annual interest rate of 13%
per annum. Subsequent to the initial approximate two-year period of the
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Outstanding Senior Secured Discount Notes, the amount of OID required to be
included by the holder of an Outstanding Senior Secured Discount Note should be
equal to the amount of scheduled interest payments received. Outstanding Senior
Secured Discount Notes issued in certificated form contain a legend that sets
forth various information concerning OID.
More specifically, a holder of an Outstanding Senior Secured Discount
Note with OID must include in gross income for federal income tax purposes the
sum of the daily portions of OID with respect to the Outstanding Senior Secured
Discount Note for each day during the taxable year or portion of a taxable year
on which such holder holds the Outstanding Senior Secured Discount Note (such
sum, "Accrued OID"). The daily portion is determined by allocating to each day
of any accrual period within a taxable year a pro rata portion of an amount
equal to the adjusted issue price of the Outstanding Senior Secured Discount
Note at the beginning of the accrual period multiplied by the yield to maturity
of the Outstanding Senior Secured Discount Note. For purposes of computing OID,
the Company will use six-month accrual periods that end on the days in the
calendar year corresponding to the maturity date of the Outstanding Senior
Secured Discount Notes and the date six months prior to such maturity date,
with the possible exception of the initial accrual period for the Outstanding
Senior Secured Discount Notes. The adjusted issue price of an Outstanding
Senior Secured Discount Note at the beginning of any accrual period is the
issue price of the Outstanding Senior Secured Discount Note increased by the
Accrued OID for all prior accrual periods (less all payments of stated
principal and interest made on the Outstanding Senior Secured Discount Notes).
DISPOSITION OF EXCHANGE NOTES. Generally, any sale, redemption or other
disposition of Exchange Notes will result in taxable gain or loss equal to the
difference between (i) the amount of cash and the fair market value of other
property received and (ii) the holder's adjusted tax basis in the Exchange
Note. In the case of a holder who purchased an Outstanding Note from the
Initial Purchaser, the adjusted tax basis of an Exchange Note will initially
equal the purchase price of the Outstanding Note and in the case of a Senior
Secured Discount Exchange Note will be increased by any Accrued OID includable
in such holder's gross income and decreased by all payments (including stated
principal and interest) received by such holder on the Exchange Note. Any gain
or loss upon a sale or other disposition of an Exchange Note will generally be
capital gain or loss, which will be long-term if the Exchange Note has been
held by the holder for more than eighteen months.
SUBSEQUENT PURCHASERS. The foregoing does not discuss special rules
which may affect the treatment of purchasers that acquire Exchange Notes other
than from a seller who did not initially acquire an Outstanding Note from the
Initial Purchaser, including those provisions of the Code relating to the
treatment of "market discount," "acquisition premium" and "amortizable bond
premium." For example, the market discount provisions of the Code may require a
subsequent purchaser of an Exchange Note at a market discount to treat all or a
portion of any gain recognized upon sale or other disposition of the Exchange
Notes as ordinary income and to defer a portion of any interest expense that
would otherwise be deductible on any indebtedness incurred or maintained to
purchase or carry such Exchange Notes until the holder disposes of the Exchange
Notes in a taxable transaction.
FOREIGN HOLDERS. The following discussion is a summary of certain
United States federal income tax consequences to a Foreign Person that holds an
Exchange Note. The term "Foreign Person" means a nonresident alien individual
or foreign corporation, but only if the income or gain on the Exchange Note is
not "effectively connected with the conduct of a trade or business within the
United States." If the income or gain on the Exchange Note is "effectively
connected with the conduct of a trade or business within the United States,"
then the nonresident alien individual or foreign corporation will be subject to
tax on such income or gain in essentially the same manner as a United States
citizen or resident or a domestic corporation, as discussed above, and in the
case of a foreign corporation, may also be subject to the branch profits tax.
Under the "portfolio interest" exception to the general rules for the
withholding of tax on interest and original issue discount paid to a Foreign
Person, a Foreign Person will not be subject to United States tax (or to
withholding) on interest or original issue discount on an Exchange Note,
provided that (i) the Foreign Person does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote and is not a controlled foreign corporation with
respect to the United States that is related to the Company through
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stock ownership, and (ii) the Company, its paying agent or the person who would
otherwise be required to withhold tax receives either (A) a statement (an
"Owner's Statement") signed under penalties of perjury by the beneficial owner
of the Exchange Note in which the owner certifies that the owner is not a
United States person and which provides the owner's name and address, or (B) a
statement signed under penalties of perjury by the Financial Institution
holding the Exchange Note on behalf of the beneficial owner, together with a
copy of the Owner's Statement. The term "Financial Institution" means a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business and
that holds an Exchange Note on behalf of the owner of the Exchange Note. A
Foreign Person who does not qualify for the "portfolio interest" exception
would, under current law, generally be subject to United States withholding tax
at a flat rate of 30% (or a lower applicable treaty rate) on interest payments
and payments (including redemption proceeds) attributable to original issue
discount on the Exchange Notes.
In general, gain recognized by a Foreign Person upon the redemption,
sale or exchange of an Exchange Note (including any gain representing accrued
market discount) will not be subject to United States tax. However, a Foreign
Person may be subject to United States tax at a flat rate of 30% (unless exempt
by applicable treaty) on any such gain if the Foreign Person is an individual
present in the United States for 183 days or more during the taxable year in
which the Exchange Note is redeemed, sold or exchanged, and certain other
requirements are met.
BACKUP WITHHOLDING
A holder may be subject, under certain circumstances, to backup
withholding at a 31% rate with respect to payments received with respect to the
Exchange Notes. This withholding generally applies only if the holder (i) fails
to furnish his or her social security or other taxpayer identification number
("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he
or she has failed to report properly payments of interest and dividends and the
IRS has notified the Company that he or she is subject to backup withholding or
(iv) fails, under certain circumstances, to provide a certified statement,
signed under penalty of perjury, that the TIN provided is his or her correct
number and that he or she is not subject to backup withholding. Any amount
withheld from a payment to a holder under the backup withholding rules is
allowable as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS. Certain holders
(including, among others, corporations and foreign individuals who comply with
certain certification requirements described above under "Foreign Holders") are
not subject to backup withholding. Holders should consult their tax advisors as
to their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption.
CERTAIN LEGAL CONSIDERATIONS
CANCELLATION OF DEBT ISSUES
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 COD Exclusion.
TransAmerican has reduced its tax attributes (including its net operating loss
and credit carryforwards) as a consequence of the COD Exclusion. Although
TransTexas believes that there is substantial legal authority to support the
position that the COD Exclusion applies to the cancellation of TransAmerican's
indebtedness due to factual and legal uncertainties, there can be no assurance
that the IRS will not challenge this position, or that any such challenge would
not be upheld. Under the Tax Allocation Agreement, TransTexas has agreed to pay
an amount equal to any federal tax liability (which would be approximately
$25.4 million) attributable to the inapplicability of the COD Exclusion. Any
such tax would be offset in future years by alternative minimum tax credits and
retained loss and credit carryforwards to the extent recoverable from
TransAmerican. 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 July 31, 1995. Because the audit is in its initial stages,
it is not possible to predict the scope of the IRS' review and whether any tax
deficiencies will be proposed by the IRS as a result of its review.
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RECOGNITION OF GAIN AND DEDUCTION OF COSTS
If a transfer or other disposition occurs of an amount of TransTexas
common stock that results in the members of the TNGC Consolidated Group
(excluding TransTexas) in the aggregate owning less than 80% of the voting power
and 80% of the stock value of TransTexas, then a Deconsolidation of TransTexas
would occur. 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. If
TARC were no longer a member of the TNGC Consolidated Group, TransTexas would
also no longer be a member of the TNGC Consolidated Group based on the Company's
anticipated level of ownership of TransTexas stock. Further, if a spin-off of
TTXD occurs and is a taxable event, TransTexas would recognize a significant
deferred gain, which TransTexas would include in income upon a Deconsolidation
of TransTexas or upon a disposition outside the TNGC Consolidated Group of the
TTXD stock that initially was distributed to group members, and the tax
liability resulting from a Deconsolidation of TransTexas of TNGC Consolidated
Group members also would be increased. Moreover, a distribution of TransTexas
common stock by TARC would create gain to TARC that would not be taken into
income until either a Deconsolidation of TARC or upon a disposition of the
distributed common stock outside of the TNGC Consolidated Group.
Likewise, if TransAmerican, the Company or TARC sells or otherwise
disposes of stock of TransTexas outside of the TNGC Consolidated Group, the
selling corporation will recognize gain (which would not be deferred under the
consolidated return regulations) equal to the excess (if any) of the fair
market value of the TransTexas stock disposed of over the seller's basis (if
any) in such stock. It is possible that any shares of TransTexas stock sold by
the TNGC Consolidated Group will have no basis.
The Tax Allocation Agreement has been revised to require TNGC,
TransAmerican, the Company, TransTexas and TARC to file federal income tax
returns as members of the TNGC Consolidated Group. Corporations that are
members of a federal consolidated group are generally severally liable for the
federal tax of the entire group.
TransTexas and TARC intend to deduct currently the excess of the price
paid to redeem the TransTexas Senior Secured Notes and the TARC Discount Notes,
respectively, over the principal amount and the accreted amount (as applicable)
of such notes as redemption premium. If the IRS were to argue successfully
that, taking into account the issuance of the Outstanding Senior Secured
Discount Notes and the Outstanding Senior Secured Notes, the redemption of the
TransTexas Senior Secured Notes and the TARC Discount Notes should be treated
as a debt for debt exchange, it is possible that TransTexas and TARC would be
required to amortize and deduct the applicable redemption premiums ratably over
the terms of the Outstanding Notes. Moreover, deductibility of the redemption
premiums may be subject to other limitations. TEC believes, however, that the
redemption of the TransTexas Senior Secured Notes and the TARC Discount Notes
should be treated as a cash redemption rather than a debt for debt exchange and
that the redemption premiums constitute deductible interest, thereby entitling
TransTexas and TARC to deduct the redemption premium in the year the redemption
occurs.
STATE TAX
Under the Tax Allocation Agreement, TransTexas is required to pay 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 date of the Lobo Sale and will pay a substantial amount of
the remaining tax within the ensuing twelve-month period.
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DESCRIPTION OF EXISTING INDEBTEDNESS
TRANSTEXAS
TRANSTEXAS SUBORDINATED NOTES. TransTexas has outstanding approximately
$116 million in principal amount of TransTexas Subordinated Notes. TransTexas
has filed a registration statement to register the exchange of the TransTexas
Subordinated Notes for subordinated notes with terms substantially identical to
the TransTexas Subordinated Notes. The TransTexas Subordinated Notes bear cash
interest at the rate of 13 3/4% per annum, payable semi-annually in arrears on
June 30 and December 31 of each year, commencing December 31, 1997. Upon the
occurrence of a TTXD Spinoff (as defined in the Indenture) through a pro rata
distribution or dividend to TransTexas' common stockholders, the interest rate
on the TransTexas Subordinated Notes would increase to 14 1/8% and TransTexas
will issue to each holder of TransTexas Subordinated Notes in principal amount
equal to 1 1/2% of the aggregate principal amount of TransTexas Subordinated
Notes held by such holder. The Subordinated Notes Indenture contains
restrictive covenants including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates.
TRANSTEXAS RECEIVABLES FACILITY. 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, 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.
TARC
TARC NOTES. As of July 31, 1997, TARC has outstanding $15.7 million in
aggregate carrying value of the TARC Notes. Cash interest does not accrue on
the TARC Discount Notes prior to February 15, 1998. Commencing August 15, 1998,
cash interest on the TARC Discount Notes is payable semi-annually on February
15 and August 15 at a rate of 18 1/2% per annum, subject to adjustment. The
TARC Mortgage Notes bear interest at the rate of 16 1/2% per annum, subject to
adjustment, payable semi-annually on February 15 and August 15. Upon payment in
full in cash of the interest payment due on August 15, 1998, in respect of the
TARC Discount Notes, the TARC Discount Notes and the TARC Mortgage Notes will
thereafter bear interest at the respective rates per annum set forth above less
50 basis points. The TARC Notes will mature on February 15, 2002. The TARC
Notes Indenture contains restrictive covenants, including limitations on TARC's
ability to transfer or sell assets or consummate a merger, consolidation or
sale of all or substantially all of its assets.
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued as a separate series of notes pursuant
to an indenture, dated as of June 13, 1997 (the "Indenture" or "TEC Notes
Indenture"), by and between the Company and Firstar Bank of Minnesota, N.A., as
trustee (the "Trustee"). The Exchange Notes are substantially identical
(including principal amount, interest rate, maturity and redemption rights) to
the Outstanding Notes for which they may be exchanged pursuant to this offer,
except for certain transfer restrictions and registration rights relating the
Outstanding Notes and except for certain interest provisions relating to such
rights. Under the terms of the Indenture, the covenants and events of default
will apply equally to the Exchange Notes and the Outstanding Notes, and the
Exchange Notes and the Outstanding Notes will be treated as one class for all
actions to be taken by the holders thereof and for determining their respective
rights under the Indenture. References to the Notes include the Exchanges
Notes and the Outstanding Notes unless the context otherwise requires. The
terms of the Indenture are also governed by certain provisions contained in the
Trust Indenture Act of 1939, as amended. The following summaries of certain
provisions of the Indenture, the Disbursement Agreement (as defined) and the
Security Documents (as defined) are summaries only, do not purport to be
complete, and are
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qualified in their entirety by reference to all of the provisions of the
Indenture, the Disbursement Agreement or the Security Documents, as applicable.
A copy of the Indenture, Disbursement Agreement and Security Documents have
been filed as exhibits to the Registration Statement of which this Prospectus
is a part. Capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Indenture. References to the "Company" as
used in this "Description of the Notes" are to TransAmerican Energy
Corporation.
GENERAL
The Notes are senior secured obligations of the Company and will rank
pari passu in right of payment to any future senior indebtedness and are senior
in right of payment to any subordinated indebtedness of the Company. The Notes
will be issued only in fully registered form, without coupons, in denominations
of $1,000 and integral multiples thereof.
The Notes will mature on June 15, 2002. The Senior Secured Exchange
Notes will bear interest at the rate of 11 1/2% per annum from the date of
issuance of the Outstanding Senior Secured Notes or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually in cash in arrears on June 15 and December 15 of each year,
commencing December 15, 1997, to the persons in whose names such Senior Secured
Exchange Notes are registered at the close of business on the June 1 or
December 1 preceding such Interest Payment Date. The Outstanding Senior Secured
Discount Notes were issued at a substantial discount from their principal
amount. The Senior Secured Discount Notes will accrete from the date of their
original issuance (June 13, 1997 for the Outstanding Senior Secured Discount
Notes and the Exchange Date for the Senior Secured Discount Exchanges Notes)
until June 15, 1999. On their issue date, the Senior Secured Discount Exchange
Notes will have the same Accreted Value per $1,000 face amount as the
Outstanding Senior Secured Discount Notes on such date. After June 15, 1999
the Senior Secured Discount Notes will bear cash interest at the rate of 13%
per annum, payable semi-annually on June 15 and December 15 of each year,
commencing December 15, 1999, to the persons in whose names such Senior Secured
Discount Notes are registered at the close of business on the June 1 or
December 1 preceding such Interest Payment Date. Interest on the Notes will be
paid on the basis of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be
payable, and the Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose in
New York, New York, and such other office or agency of the Company as may be
maintained for such purpose. At the option of the Company, payment of interest
may be made by check mailed to the Holders of the Notes at the addresses set
forth upon the registry books of the Company. No service charge will be made
for any registration of transfer or exchange of the Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. Until otherwise designated by the
Company, the Company's office or agency will be the principal corporate trust
office of the Indenture Trustee presently located in New York, New York.
The Company's operations are, or are expected to be, conducted through
TransTexas, TARC and TTXD. Any right of the Company to receive assets of
TransTexas, TARC, TTXD or any of their Subsidiaries upon their liquidation or
recapitalization (and the consequent right of holders of the Notes to
participate in those assets) will be subordinate to the claims of creditors of
TransTexas, TARC, TTXD or any of their Subsidiaries, as applicable, except to
the extent that the Company is itself recognized as a creditor of such entity.
The ability of the Company to pay principal of and interest on the Notes is
dependent upon the earnings of TransTexas, TARC, TTXD and their Subsidiaries
and the distribution of those earnings to the Company, the payment of
obligations under the TransTexas Intercompany Loan and the TARC Intercompany
Loan or upon loans or advances made by TransTexas, TARC, TTXD or any of their
Subsidiaries to the Company or by sale of the stock of the Company's
Subsidiaries. See "Risk Factors -- General Risk Factors -- Holding Company
Structure."
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DISBURSEMENT OF FUNDS; DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement (the "Disbursement Agreement")
among TARC, the Company, Firstar Bank of Minnesota, N.A., as disbursement agent
(the "Disbursement Agent"), the Trustee and Baker & O'Brien, Inc., as
construction supervisor (the "Construction Supervisor"), approximately $284
million from the Transactions was or will be placed in an account (the "TARC
Disbursement Account"), to be held and invested by the Disbursement Agent until
satisfaction of the disbursement conditions set forth in the Disbursement
Agreement. In addition, TARC deposited the unused portion of funds allocated to
the repurchase of the TARC Notes (the "TARC Note Funds") in the TARC
Disbursement Account. Pursuant to the Disbursement Agreement, the Company also
will deposit approximately $226 million in an account (the "TEC Disbursement
Account" and together with the TARC Disbursement Account, the "Disbursement
Accounts"). The Disbursement Agent will invest the assets of the Disbursement
Accounts in cash or Cash Equivalents (as defined) as specifically directed in
writing by the Company. Interest income, if any, earned on the invested
proceeds will be added to the balance of the Disbursement Accounts. The
Disbursement Agent will disburse funds from the Disbursement Accounts only upon
satisfaction of the disbursement conditions set forth in the Disbursement
Agreement. All funds in the TARC Disbursement Account and the TEC Disbursement
Account will be pledged as security for the repayment of the TARC Intercompany
Loan and the Notes, respectively.
Baker & O'Brien is a professional consulting firm serving the energy,
chemical, and related industries. Although Baker & O'Brien has performed and is
currently performing consulting services for TARC and affiliates of TARC, it is
an independent consultant and has no affiliation with TARC. Baker & O'Brien was
retained by the Initial Purchaser to provide an independent review of the plans
of TARC to reactivate and upgrade its petroleum refinery.
The Disbursement Agent will make disbursements out of the Disbursement
Accounts in accordance with a budget prepared by TARC and approved by the
Construction Supervisor. The budget consists of an itemized schedule setting
forth the additional expenditures estimated to be incurred in connection with
the Capital Improvement Program. TARC may reallocate expenditures to line items
within Phase I or line items within Phase II or may reallocate from Phase II to
Phase I but may not reallocate expenditures budgeted for Phase I to Phase II
until Phase I is completed.
Under the Disbursement Agreement, the Construction Supervisor is
responsible for review and approval of TARC's plans and specifications and
budget for the Capital Improvement Program. In addition, the Construction
Supervisor is required to review each request by TARC for a disbursement from
the Disbursement Accounts. No disbursements may be made from either
Disbursement Account to fund the Capital Improvement Program unless the
Construction Supervisor determines (i) that the disbursement has been requested
to pay for expenses that are in accordance with the plans and specifications
approved by the Construction Supervisor, pursuant to the terms of the budget,
and (ii) that transactions for which a disbursement has been requested were
made on an arm's length basis or on a basis at least as favorable to TARC as
could have been obtained on an arm's length basis, as represented by TARC. No
disbursements may be made from either Disbursement Account for purposes other
than the Capital Improvement Program other than (i) up to $1.5 million per
month (except for December 1997, in which disbursements may be up to $4.5
million) to fund administrative costs and certain taxes and insurance payments,
not in excess of $25.5 million in the aggregate; provided, that if less than
$1.5 million is spent in any month (or less than $4.5 million is spent in
December 1997) the amounts which may be disbursed in one or more subsequent
months will be increased by the amount of such difference, (ii) up to $50
million for feedstock upon certification by the Construction Supervisor of the
Mechanical Completion of the Delayed Coking Unit and associated facilities,
(iii) the TARC Note Funds to redeem or otherwise retire the TARC Notes and (iv)
up to $7.0 million for outstanding accounts payable. In addition, interest
income from the Disbursement Accounts may be used for the Capital Improvement
Program or disbursed to fund administrative and other costs of TARC or the
Company including, without limitation, costs incurred pursuant to the Services
Agreement.
Pursuant to a disbursement agreement (the "TransTexas Disbursement
Agreement") among TransTexas, the Company and Firstar Bank of Minnesota, N.A.,
as disbursement agent (the "TransTexas Disbursement Agent"), approximately $399
million was placed in an account (the "TransTexas Disbursement Account"), to be
held and invested by the TransTexas Disbursement Agent for use by TransTexas
solely to make share repurchases pursuant to
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the TransTexas Share Repurchase Program. Any funds remaining in the TransTexas
Disbursement Account after the Phase II Completion Date may be used by
TransTexas for general corporate purposes. The TransTexas Disbursement Agent
will invest the assets of the TransTexas Disbursement Account in cash or Cash
Equivalents (as defined) as specifically directed in writing by TransTexas.
Interest income, if any, earned on the invested proceeds will be added to the
balance of the TransTexas Disbursement Account but may be disbursed to
TransTexas at any time and used by TransTexas for general corporate purposes.
The TransTexas Disbursement Agent will disburse funds from the TransTexas
Disbursement Account only upon satisfaction of the disbursement conditions set
forth in the TransTexas Disbursement Agreement. As of September 15, 1997,
approximately $262.4 million had been disbursed from the TransTexas
Disbursement Account. All funds in the TransTexas Disbursement Account are
pledged as security for the repayment of the TransTexas Intercompany Loan.
OPTIONAL REDEMPTION
The Company will not have the right to redeem the Notes prior to June
15, 2000, except that prior to June 15, 2000, the Company may redeem, at its
option, up to 35% of the aggregate principal amount of the Senior Secured Notes
and up to 35% of the Value of the Senior Secured Discount Notes, in each case
in cash at a redemption price equal to 111 1/2% of the principal amount of the
Senior Secured Notes or 111 1/2% of the Accreted Value of the Senior Secured
Discount Notes so redeemed, together with accrued and unpaid interest, if any,
to the date of redemption, with the net proceeds of any Equity Offering by the
Company. On or after June 15, 2000, the Company will have the right to redeem
all or any part of the Notes in cash at the redemption prices (expressed as a
percentage of the outstanding principal amount) set forth below for the year
2000 and thereafter, together with accrued and unpaid interest, if any, to the
redemption date:
<TABLE>
<CAPTION>
If redeemed during the 12-month Redemption
period beginning June 15, Price
-------------------------------- -----
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.750%
2001 and thereafter . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
In the case of a partial redemption, the Company may elect to redeem
from either the Senior Secured Notes or the Senior Secured Discount Notes or a
combination thereof, and the Indenture Trustee shall select the Notes to be
redeemed from within the Senior Secured Notes or the Senior Secured Discount
Notes pro rata or by lot or in such other manner as in its sole discretion it
deems appropriate and fair. The Notes may be redeemed in part in multiples of
$1,000 principal amount only.
Notice of any redemption will be sent, by first class mail at least 15
days and not more than 60 days prior to the date fixed for redemption, to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal
to the unredeemed portion thereof and must state that on and after the date
fixed for redemption, upon surrender of such Note, a new Note, or Notes in a
principal amount equal to the unredeemed portion thereof will be issued. The
date fixed for redemption contained in any notice of redemption and the
obligation of the Company to redeem any Notes upon such date may be subject to
the satisfaction or waiver of conditions determined by the Company in its sole
discretion. On and after the date fixed for redemption, unless the Company
defaults on its payment obligations or any conditions contained in the notice
of redemption are not satisfied or waived, interest will cease to accrue and/or
the original issue discount will cease to accrete on the Notes or portions
thereof called for redemption.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms contained in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
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"Accounts Receivable Subsidiary" means a subsidiary of the Company
designated as an Accounts Receivable Subsidiary for the purpose of financing
the accounts receivable of TARC.
"Accounts Receivable Subsidiary Notes" means the notes to be issued by
the Accounts Receivable Subsidiary for the purchase of accounts receivable.
"Accreted Value" of a Senior Secured Discount Note, with respect to each
$1,000 principal amount of Senior Secured Discount Notes, is defined as of any
Semi-Annual Accrual Date set forth below as the Accreted Value thereof set
forth below and as of any other date as the Accreted Value set forth below for
the immediately preceding Semi-Annual Accrual Date plus the Proportionate
Amount to such date:
<TABLE>
<CAPTION>
ACCRETED VALUE
(PER $1,000
PRINCIPAL
SEMI-ANNUAL ACCRUAL DATE AMOUNT)
------------------------ -------
<S> <C>
December 15, 1997 . . . . . . . . . . . . . . $827.849
June 15, 1998 . . . . . . . . . . . . . . . . 881.659
December 15, 1998 . . . . . . . . . . . . . . 938.967
June 15, 1999 and thereafter . . . . . . . . 1,000.00
</TABLE>
The Accreted Value prior to the first Semi-Annual Accrual Date will be
the sum of $776.779 and the Proportionate Amount. "Proportionate Amount," with
respect to a Senior Secured Discount Note as of any date, is defined as an
amount equal to the product of (i) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date (or, with respect to the period before the
first Semi-Annual Accrual Date, less $776.779) multiplied by (ii) a fraction,
the numerator of which is the actual number of days elapsed from the
immediately preceding Semi-Annual Accrual Date (or, with respect to the period
before the first Semi-Annual Accrual Date, the Issue Date) to the date for
which the Proportionate Amount is being determined and the denominator of which
is the actual number of days from the date of the immediately preceding Semi-
Annual Accrual Date to and including the immediately following Semi-Annual
Accrual Date or the actual number of days from the Issue Date to the first
Semi-Annual Accrual Date, as the case may be.
"Additional Interest Accumulated Amount" shall have the meaning given to
it in the covenant described herein under the heading "-- Additional Interest
Excess Cash Offer."
"Additional Interest Excess Cash" means the cash received by the Company
from (i) the TARC Interest Increase and (ii) the TransTexas Interest Increase.
"Additional Interest Excess Cash Acceptance Amount" shall have the
meaning given to it in the covenant described herein under the heading "--
Additional Interest Excess Cash Offer."
"Additional Interest Excess Cash Offer" shall have the meaning given to
it in the covenant described herein under the heading "-- Additional Interest
Excess Cash Offer."
"Additional Interest Excess Cash Offer Amount" shall have the meaning
given to it in the covenant described herein under the heading "-- Additional
Interest Excess Cash Offer."
"Additional Interest Excess Cash Offer Price" shall have the meaning
given to it in the covenant described herein under the heading "-- Additional
Interest Excess Cash Offer."
"Additional Interest Excess Cash Purchase Date" shall have the meaning
given to it in the covenant described herein under the heading "-- Additional
Interest Cash Offer."
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"Additional Interest Final Put Date" shall have the meaning given to it
in the covenant described herein under the heading "-- Additional Interest
Excess Cash Offer."
"Adjusted Consolidated Net Income" of any Person for any period means
the net income (loss) of such Person and its consolidated Subsidiaries for such
period, determined in accordance with GAAP, excluding (without duplication) (i)
all extraordinary gains, (ii) the net income, if positive, of any other Person,
other than a consolidated Subsidiary, in which such Person or any of its
consolidated Subsidiaries has an interest, except to the extent of the amount
of any dividends or distributions actually paid in cash to such Person or a
consolidated Subsidiary of such Person during such period, (iii) the net
income, if positive, of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition and (iv) the
net income, if positive, of any Subsidiary of such Person to the extent that
the declaration or payment of dividends or similar distributions is not at the
time permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule, or governmental regulation
applicable to such Subsidiary.
"Adjusted Consolidated Tangible Assets" means (without duplication), as
of the date of determination, (A) the sum of (i) discounted future net cash
flows from proved oil and gas reserves of the TransTexas Entities, calculated
in accordance with SEC guidelines (before any state or federal income tax), as
estimated in a Reserve Report as of a date no earlier than TransTexas' most
recent fiscal year end (or, if such reserve report is unavailable, or if the
date of determination is after the end of the first fiscal quarter of the most
recent fiscal year of TransTexas, as estimated by TransTexas engineers on the
same basis as of a date no earlier than the end of the most recent fiscal
quarter, which estimates shall be confirmed in writing by a report by
nationally recognized independent petroleum engineers in accordance with SEC
guidelines in the event of a Material Change), (ii) the Net Working Capital of
TransTexas on a date no earlier than the date of TransTexas' latest
consolidated annual or quarterly financial statements and (iii) with respect to
all other tangible assets (which are deemed to include mineral lease-hold
interests) of the TransTexas Entities, the greater of (a) the net book value of
such other tangible assets on a date no earlier than the date of TransTexas'
latest consolidated annual or quarterly financial statements, and (b) the
appraised value, as estimated by a qualified independent appraiser, of such
other tangible assets, as of a date no earlier than the date that is three
years prior to the date of determination (or such later date on which
TransTexas shall have a reasonable basis to believe that there has occurred a
material decrease in value since the determination of such appraised value),
minus (B) minority interests and, to the extent not otherwise taken into
account in determining Adjusted Consolidated Tangible Assets, any gas balancing
liabilities of the TransTexas Entities. In addition to, but without duplication
of the foregoing, for purposes of this definition, "Adjusted Consolidated
Tangible Assets" shall be calculated after giving effect, on a pro forma basis,
to (1) any Permitted Investment, to and including the date of the transaction
giving rise to the need to calculate Adjusted Consolidated Tangible Assets (the
"Assets Transaction Date"), in any other Person that, as a result of such
investment, becomes a Subsidiary of TransTexas, (2) the acquisition, to and
including the Assets Transaction Date (by merger, consolidation, or purchase of
stock or assets), of any business or assets, including, without limitation,
Permitted Investments, (3) any sales or other dispositions of assets (other
than sales of Hydrocarbons or other mineral products in the ordinary course of
business) occurring on or prior to the Assets Transaction Date and (4) the TTXD
Spin-off if the TTXD Spin-off has occurred. For purposes of calculating the
ratio of TransTexas' Adjusted Consolidated Tangible Assets to total
consolidated Debt of the TransTexas Entities, Debt of a Subsidiary that is not
a wholly owned Subsidiary of TransTexas (which Debt is non-recourse to
TransTexas or any of its other Subsidiaries or any of their assets) shall be
included only to the extent of TransTexas' pro rata ownership interest in such
Subsidiary.
"Adjusted Net Assets" of a Guarantor means the lesser of (a) the amount
by which the Guarantor's property, at a fair valuation, exceeds the sum of its
debts (including unliquidated or contingent debts), (b) the amount by which the
present fair salable value of the Guarantor's assets exceeds the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured, (c) the amount by which the Guarantor's assets
exceed the maximum amount that would constitute unreasonably small capital for
its business or (d) the amount by which the Guarantor's assets exceed the
amount that such Guarantor should reasonably retain to pay its debts (including
unliquidated or contingent debts) as they mature.
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<PAGE> 110
"Asset Sale" means any direct or indirect conveyance, sale, transfer or
other disposition (including through damage or destruction for which Insurance
Proceeds are paid or by condemnation), in one transaction or a series of
related transactions, of any of the properties, businesses or assets of the
Company or any Subsidiary of the Company, whether owned on the Issue Date or
thereafter acquired; provided, however, that "Asset Sale" shall not include (i)
any disposition of property that is not Collateral, (ii) any pledge or
disposition of assets (if such pledge or disposition would otherwise constitute
an Asset Sale) to the extent and only to the extent that it results in the
creation of a Permitted Lien (other than the creation of a Permitted Lien in
connection with a Dollar-Denominated Production Payment that TransTexas or any
of its Subsidiaries does not elect to treat as Debt or in connection with a
Volumetric Production Payment, which in either case shall be treated as an
Asset Sale hereunder; provided, however, that a contribution of a Dollar
Denominated Production Payment to a Hedging Subsidiary shall not constitute an
Asset Sale) or (iii) conveyances, sales, transfers or other dispositions in
connection with a Drilling Program.
"Attributable Debt" in respect of a Sale and Leaseback Transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP
or, in the event that such rate of interest is not reasonably determinable,
discounted at the rate of interest borne by the Senior Secured Notes) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such Sale and Leaseback Transaction (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended).
"Capital Expenditures" of a Person means expenditures (whether paid in
cash or accrued as a liability) by such Person or any of its Subsidiaries that,
in conformity with GAAP, are or would be included in "capital expenditures,"
"additions to property, plant, or equipment" or comparable items in the
consolidated financial statements of such Person consistent with prior
accounting practices.
"Capital Expenditures Testing Quarter" means any fiscal quarter
immediately following a Measurement Quarter in which Measurement Quarter the
SEC PV10 of TransTexas (based on TransTexas' then most recent Reserve Report)
is less than 90% of the Net Debt of TransTexas, measured as of the last day of
such Measurement Quarter.
"Capital Improvement Program" means the expansion and improvement
program at TARC as described in this Prospectus under the heading "Business of
TARC -- Capital Improvement Program" and including both Phase I and Phase II.
"Capital Stock" means, with respect to any Person, any capital stock of
such Person and shares, interests, participations, or other ownership interests
(however designated) of such Person and any rights (other than debt securities
convertible into corporate stock), warrants or options to purchase any of the
foregoing, including without limitation, each class of common stock and
preferred stock of such Person, if such Person is a corporation, and each
general or limited partnership interest or other equity interest of such
Person, if such Person is a partnership.
"Capitalized Lease Obligation" means obligations under a lease that are
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Debt represented by such obligations shall be the
capitalized amount of such obligations, as determined in accordance with GAAP.
"Cash Equivalents" means (a) United States dollars, (b) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (c) certificates of deposit
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year, and overnight bank
deposits, in each case, with any Eligible Institution, (d) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (b) and (c) entered into with any Eligible
Institution, (e) commercial paper rated "P-1," "A-1" or the equivalent thereof
by Moody's Investors Service, Inc. or Standard & Poor's Corporation, Inc.,
respectively, and in each case maturing within one year after the date of
acquisition, (f) shares of money market funds, including those of the Indenture
Trustee, that invest solely in United States dollars and securities of the
types described in clauses (a) through (e), (g) demand and time deposits and
certificates of deposit with any commercial bank organized
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in the United States not meeting the qualifications specified in clause (c)
above or an Eligible Institution, provided that such deposits and certificates
support bonds, letters of credit and other similar types of obligations
incurred in the ordinary course of business, (h) deposits, including deposits
denominated in foreign currency, with any Eligible Institution; provided that
all such deposits do not exceed $10 million in the aggregate at any one time,
and (i) demand or fully insured time deposits used in the ordinary course of
business with commercial banks insured by the Federal Deposit Insurance
Corporation.
"CATOFIN(R) Unit" means certain real property currently owned by TARC as
more specifically defined in the TARC Mortgage, together with all personal
property of TARC now or hereinafter located on such real property but only to
the extent that such property is part of a refining unit designed to produce
propane and butane mono-olefins using the CATOFIN(R) process.
"Change of Control" means (i) the liquidation or dissolution of, or the
adoption of a plan of liquidation by, the Company, (ii) any transaction, event
or circumstance pursuant to which any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable), other than John R. Stanley (or his heirs, his estate or any
trust in which he or his immediate family members have, directly or indirectly,
a beneficial interest in excess of 50%) and his Subsidiaries or the Indenture
Trustee, is or becomes the "beneficial owner" (as that term is used in Rules
13d-3 and 13d-5 under the Exchange Act, whether or not applicable), directly or
indirectly, of more than 50% of the total voting power of the Company's then
outstanding Voting Stock or (iii) any event which results in the Company or any
of its Subsidiaries having beneficial ownership of at least some of TARC or
TransTexas Capital Stock, respectively, but less than 50%, on a fully diluted
basis, of (x) the total voting power of TARC's or TransTexas' then outstanding
Voting Stock, respectively, or (y) the economic value of the outstanding
Capital Stock of TARC or TransTexas, respectively; unless, at the time of the
occurrence of an event specified in clause (ii) or (iii), the Notes have an
Investment Grade Rating; provided, however, that if at any time within 120 days
after such occurrence, the Notes cease having an Investment Grade Rating, such
event shall be a "Change of Control."
"Collateral" shall mean the TARC Collateral and the TransTexas
Collateral as well as all of the Company's ownership interest in the Capital
Stock of TARC and TransTexas and any future Subsidiaries of the Company and all
of the Company's rights under the TARC Intercompany Loan and the TransTexas
Intercompany Loan.
"Common Stock" means the Company's common stock, $0.01 par value.
"Consolidated EBITDA" of any Person for any period, unless otherwise
defined herein, means (a) the Consolidated Net Income of such Person for such
period, plus (b) the sum, without duplication (and only to the extent such
amounts are deducted from net revenues in determining such Consolidated Net
Income), of (i) the provision for income taxes for such period for such Person
and its consolidated Subsidiaries, (ii) depreciation, depletion, and
amortization of such Person and its consolidated Subsidiaries for such period
and (iii) Consolidated Fixed Charges of such Person for such period,
determined, in each case, on a consolidated basis for such Person and its
consolidated Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" on any date (the "Transaction
Date") means, with respect to any Person, the ratio, on a pro forma basis, of
(i) the aggregate amount of Consolidated EBITDA of such Person (attributable to
continuing operations and businesses and exclusive of the amounts attributable
to operations and businesses discontinued or disposed of, on a pro forma basis
as if such operations and businesses were discontinued or disposed of on the
first day of the Reference Period) for the Reference Period to (ii) the
aggregate Consolidated Fixed Charges of such Person (exclusive of amounts
attributable to discontinued operations and businesses on a pro forma basis as
if such operations and businesses were discontinued or disposed of on the first
day of the Reference Period, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; provided, that for purposes of
such computation, in calculating Consolidated EBITDA and Consolidated Fixed
Charges, (a) the transaction giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio shall be assumed to have occurred on
the first day of the Reference Period, (b) the incurrence of any Debt or
issuance of
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Disqualified Capital Stock or the retirement of any Debt or Capital Stock
during the Reference Period or subsequent thereto and on or prior to the
Transaction Date shall be assumed to have occurred on the first day of such
Reference Period, (c) Consolidated Interest Expense attributable to any Debt
(whether existing or being incurred) bearing a floating interest rate shall be
computed as if the rate in effect on the Transaction Date had been the
applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to a Swap Obligation (that remains in effect for the
12-month period after the Transaction Date) that has the effect of fixing the
interest rate on the date of computation, in which case such rate (whether
higher or lower) shall be used, and (d) Consolidated EBITDA and Consolidated
Fixed Charges of any Person shall be calculated by giving pro forma effect to
the TTXD Spin-off and each other transaction described elsewhere in this
Prospectus under the heading "Prospectus Summary -- Recent Events" as if such
transactions had occurred on the first day of the Reference Period, in each
case, other than the TTXD Spin-off, only if such transaction has occurred
during the Reference Period.
"Consolidated Fixed Charges" of any Person for any period means (without
duplication) the sum of (i) Consolidated Interest Expense of such Person for
such period, (ii) dividend requirements of such Person and its consolidated
Subsidiaries (whether in cash or otherwise (except dividends payable solely in
shares of Qualified Capital Stock)) with respect to Preferred Stock paid,
accrued, or scheduled to be paid or accrued during such period, in each case to
the extent attributable to such period and excluding items eliminated in
consolidation and (iii) fees paid, accrued, or scheduled to be paid or accrued
during such period by such Person and its Subsidiaries in respect of
performance bonds or other guarantees of payment. For purposes of clause (ii)
above, dividend requirements shall be increased to an amount representing the
pre-tax earnings that would be required to cover such dividend requirements;
accordingly, the increased amount shall be equal to a fraction, the numerator
of which is such dividend requirements and the denominator of which is 1 minus
the applicable actual combined effective Federal, state, local, and foreign
income tax rate of such Person and its subsidiaries (expressed as a decimal),
on a consolidated basis, for the fiscal year immediately preceding the date of
the transaction giving rise to the need to calculate Consolidated Fixed
Charges.
"Consolidated Interest Expense" of any Person means, for any period, the
aggregate interest (without duplication), whether expensed or capitalized,
paid, accrued, or scheduled to be paid or accrued during such period in respect
of all Debt of such Person and its consolidated Subsidiaries (including (i)
amortization of deferred financing costs and original issue discount and non-
cash interest payments or accruals, (ii) the interest portion of all deferred
payment obligations, calculated in accordance with the effective interest
method and (iii) all commissions, discounts, other fees, and charges owed with
respect to letters of credit and banker's acceptance financing and costs
associated with Swap Obligations, in each case to the extent attributable to
such period but excluding any interest accrued on intercompany payables for
taxes to the extent the liability for such taxes has been assumed by
TransAmerican pursuant to the Tax Allocation Agreement) determined on a
consolidated basis in accordance with GAAP. For purposes of this definition,
(x) interest on a Capitalized Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP (including Statement of
Financial Accounting Standards No. 13 of the Financial Accounting Standards
Board), and (y) Consolidated Interest Expense attributable to any Debt
represented by the guarantee by such Person or a Subsidiary of such Person
other than with respect to Debt of such Person or a Subsidiary of such Person
shall be deemed to be the interest expense attributable to the item guaranteed.
"Consolidated Net Income" of any Person for any period means the net
income (loss) of such Person and its consolidated Subsidiaries for such period,
determined in accordance with GAAP, excluding (without duplication) (i) all
extraordinary, unusual and nonrecurring gains, (ii) the net income, if
positive, of any other Person, other than a consolidated Subsidiary, in which
such Person or any of its consolidated Subsidiaries has an interest, except to
the extent of the amount of any dividends or distributions actually paid in
cash to such Person or a consolidated Subsidiary of such Person during such
period, but not in excess of such Person's pro rata share of such other
Person's aggregate net income earned during such period or earned during the
immediately preceding period and not distributed during such period, (iii) the
net income, if positive, of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition and (iv) the
net income, if positive, of any Subsidiary of such Person to the extent that
the declaration or payment of dividends or similar distributions is not at the
time permitted by operation of the terms of its
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charter or any agreement, instrument, judgment, decree, order, statute, rule,
or governmental regulation applicable to such Subsidiary.
"Construction Supervisor" means Baker & O'Brien, Inc., as construction
supervisor of the Capital Improvement Program or any successor construction
supervisor appointed pursuant to the Disbursement Agreement.
"Continuing Operations" means the operations of the TransTexas Entities
after giving effect to the sale by TransTexas of the stock of TransTexas
Transmission Corporation.
"Debt" means, with respect to any Person, without duplication (i) all
liabilities, contingent or otherwise, of such Person (a) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property acquired by
such Person or services received by such Person (other than long-term service
or supply contracts which require minimum periodic payments), (c) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks or Swap
Obligations, (d) for the payment of money relating to a Capitalized Lease
Obligation, (e) the Attributable Debt associated with any Sale and Leaseback
Transaction or (f) Dollar-Denominated Production Payments that TransTexas or
any of its Subsidiaries elect to treat as Debt (excluding all other Permitted
Production Payment Obligations); (ii) reimbursement obligations of such Person
with respect to letters of credit; (iii) all liabilities of others of the kind
described in the preceding clause (i) or (ii) that such Person has guaranteed
or that is otherwise its legal liability (to the extent of such guaranty or
other legal liability) other than for endorsements, with recourse, of
negotiable instruments in the ordinary course of business; (iv) all obligations
secured by a Lien (other than Permitted Liens, except to the extent the
obligations secured by such Permitted Liens are otherwise included in clause
(i), (ii) or (iii) of this definition and are obligations of such Person) to
which the property or assets (including, without limitation, leasehold
interests and any other tangible or intangible property rights) of such Person
are subject, regardless of whether the obligations secured thereby shall have
been assumed by or shall otherwise be such Person's legal liability (but, if
such obligations are not assumed by such Person or are not otherwise such
Person's legal liability, the amount of such Debt shall be deemed to be limited
to the fair market value of such property or assets determined as of the end of
the preceding fiscal quarter); and (v) any and all deferrals, renewals,
extensions, refinancings, and refundings (whether direct or indirect) of, or
amendments, modifications, or supplements to, any liability of the kind
described in any of the preceding clauses (i) through (iv) regardless of
whether between or among the same parties.
"Default" means an event or condition, the occurrence of which is, or
with the lapse of time or giving of notice or both would be, an Event of
Default.
"Delayed Coking Unit" means the delayed coking unit being constructed as
part of the Capital Improvement Program.
"Disbursement Agreement" means the Disbursement Agreement, among TARC,
the Company, the disbursement agent named therein and the Construction
Supervisor, as amended pursuant to the terms thereof.
"Disqualified Capital Stock" means, with respect to any Person, any
Capital Stock of such person or its subsidiaries that, by its terms or by the
terms of any security into which it is convertible or exchangeable, is, or upon
the happening of an event or the passage of time would be, required to be
redeemed or repurchased by such Person or its subsidiaries, including at the
option of the holder, in whole or in part, or has, or upon the happening of an
event or passage of time would have, a redemption or similar payment due, on or
prior to June 15, 2002.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Drilling Program" means any arrangement between TransTexas or any
Subsidiary of TransTexas and another Person pursuant to which (i) such Person
agrees (x) to drill, complete or perform operations to enhance recovery from,
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a well or wells on mineral interests owned by TransTexas or such Subsidiary or
(y) to pay to TransTexas or such Subsidiary all or a portion of the costs paid
or incurred in connection with drilling, completing or performing such other
operations (or to reimburse TransTexas or such Subsidiary for such costs within
6 months of the incurrence thereof) and (ii) TransTexas or such Subsidiary
agrees to convey or assign to such person an interest in such well or wells in
accordance with clause (l) of the definition of "Permitted TransTexas Liens."
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million and that is rated
"A" (or higher) according to Moody's Investors Service, Inc. or Standard &
Poor's Corporation, Inc. at the time as of which any investment or rollover
therein is made.
"Equipment" means and includes, as to (i) TransTexas or any of its
Subsidiaries, all of such Person's now owned or hereafter acquired Vehicles,
drilling rigs, workover rigs, fracture stimulation equipment, well site
compressors, rolling stock and related equipment and other assets accounted for
as equipment by such Person on its financial statements, all proceeds thereof,
and all documents of title, books, records, ledger cards, files,
correspondence, and computer files, tapes, disks and related data processing
software that at any time evidence or contain information relating to the
foregoing; provided, however, that "Equipment" shall not include any assets
constituting part of a natural gas pipeline or the compression or dehydration
equipment used in the operation of any such pipeline and (ii) TARC or any of
its Subsidiaries, all of such Person's now owned or hereafter acquired
Vehicles, rolling stock and related equipment and other assets accounted for as
equipment by such Person in its financial statements, all proceeds thereof, and
all documents of title, books, records, ledger cards, files, correspondence and
computer files, tapes, disks and related data processing software that at any
time evidence or contain information relating to the foregoing; provided
however that "Equipment" shall not include any assets constituting part of
TARC's refinery or fixed assets used in TARC's processing or storage
operations.
"Equity Offering" of any Person means any Public Equity Offering or any
private placement of any Capital Stock of such Person.
"Excess Cash" means the Net Cash Proceeds received by the Company from
Asset Sales by the Company and the aggregate amount of cash and Cash
Equivalents received by the Company from its Subsidiaries, including from
dividends or payments in respect of Intercompany Loan Redemptions less the sum
(without duplication) of (a) the provision for income and other taxes of the
Company or, in the case of subclause (iii) of this clause (a), TransAmerican,
for (i) the current fiscal year, (ii) the immediately preceding fiscal year or
(iii) relating to the sale by TransTexas of the Capital Stock of TransTexas
Transmission Corporation, (b) without duplication, amounts received pursuant to
the Services Agreement, (c) amounts used to pay consent fees in connection with
a solicitation of waivers or amendments to the Notes, (d) dividends received
from an Accounts Receivable Subsidiary; provided, that such funds are then
contributed to TARC, (e) payments of interest and principal on loans by the
Company to TARC or TransTexas which loans are permitted by the terms of the
Indenture and (f) scheduled payments of interest and principal pursuant to the
terms of the Intercompany Loans.
"Excess Cash Acceptance Amount" shall have the meaning given to it in
the covenant described herein under the heading "-- Covenants -- Excess Cash
Offer."
"Excess Cash Offer" shall have the meaning given to it under the heading
"-- Covenants -- Excess Cash Offer."
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"Exchange Assets" means assets acquired by TARC or TransTexas or any
Subsidiary of either of them in exchange for assets of TARC or TransTexas or
such Subsidiary, respectively, in connection with an Asset Sale, which acquired
assets in the case of exchanges of assets by TransTexas or any of its
Subsidiaries include proved reserves with a value that, together with the cash
or Cash Equivalents received therefor by TransTexas or any of its Subsidiaries,
is
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equal to or greater than the value of the proved reserves included in the
assets disposed of by TransTexas or such Subsidiary in connection with such
Asset Sale; provided, that during any fiscal year TransTexas or any of its
Subsidiaries can collectively acquire assets (other than proved reserves, cash
or Cash Equivalents) with a fair market value of up to $40 million in exchange
for assets of TransTexas or such Subsidiaries with proved reserves, and such
assets acquired by TransTexas or such Subsidiaries shall constitute "Exchange
Assets" hereunder.
"First Lien Debt" means any Debt or other obligation secured by a
Permitted TransTexas Lien described in clause (c), (d), (e), (f), (i), (k),
(l), (o), (q), (r) to the extent that the Incurrence of the Permitted Lien to
which such clause relates is one of the other clauses listed here, (s) or (t)
of the definition of "Permitted TransTexas Liens," a Permitted TARC Lien
described in clause (c), (d), (g), (j), (k), (m), (o), (p), (q), (r) to the
extent that the Incurrence of the Permitted Lien to which such clause relates
is one of the other clauses listed here, (s), (t) and (y) of the definition of
"Permitted TARC Liens," or a Permitted TEC Lien described under clause (g) of
Permitted TEC Liens including, in each case, any refinancings thereof.
"GAAP" means generally accepted accounting principles as in effect in
the United States on the Issue Date applied on a basis consistent with that
used in the preparation of the audited financial statements of the Company
included in this Prospectus.
"Gas Purchase Agreement" means the Interruptible Gas Sales Terms and
Conditions between TARC and TransTexas, as in effect on the Issue Date and as
amended from time to time, provided that any such amendment is not adverse to
the holders of the Notes in any material respect.
"Guarantee" means any guarantee of the obligations of TARC under the
TARC Intercompany Loan or of TransTexas under the TransTexas Intercompany Loan
by any Guarantor.
"Guarantor" means each of TARC's or TransTexas' Subsidiaries that
becomes a guarantor of either the TARC Intercompany Loan or the TransTexas
Intercompany Loan in compliance with the provisions of the Indenture.
"Hedging Subsidiary" means a Subsidiary of TransTexas engaged solely in
the business of facilitating Permitted Hedging Transactions with TransTexas or
any of its Subsidiaries.
"Hydrocarbons" means oil, natural gas, condensate, and natural gas
liquids.
"Independent Director" means an individual that is not and has not been
affiliated (other than as a director of TransAmerican or its past or present
subsidiaries) with, and is not and has not been a Related Person (other than
solely as a director of TransAmerican or one of its past or present
subsidiaries) with respect to John R. Stanley, TransAmerican or the Company or
its Subsidiaries.
"Insurance Proceeds" means the interest in and to all proceeds (net of
costs of collection, including attorney's fees) which now or hereafter may be
paid under any insurance policies now or hereafter obtained by or on behalf of
the Company, TARC, TransTexas, or any Guarantor in connection with any assets
thereof, together with interest payable thereon and the right to collect and
receive the same, including, without limitation, proceeds of casualty
insurance, title insurance, business interruption insurance and any other
insurance now or hereafter maintained with respect to such assets.
"Intercompany Loans" means the TransTexas Intercompany Loan and the TARC
Intercompany Loan.
"Intercompany Loan Redemptions" means the optional redemption by TARC or
TransTexas of all or a portion of the accreted value or principal amount, as
the case may be, then outstanding under the TARC Intercompany Loan or the
TransTexas Intercompany Loan, respectively, in cash at a redemption price equal
to (a) 105% of the accreted value of the TARC Intercompany Loan and the
principal amount of the TransTexas Intercompany Loan for redemptions made on or
prior to December 31, 1997, (b) 108% of the accreted value of the TARC
Intercompany Loan and the
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principal amount of the TransTexas Intercompany Loan for redemptions made
during the period from January 1, 1998 through June 14, 2000, (c) at a price
equal to 105.750% of the accreted value of the TARC Intercompany Loan and the
principal amount of the TransTexas Intercompany Loan for redemptions made
during the period from June 15, 2000 through June 14, 2001 and (d) 100.000% of
the accreted value of the TARC Intercompany Loan and the principal amount of
the TransTexas Intercompany Loan for redemptions made on or after June 15,
2001, in each case, plus accrued and unpaid interest, if any, to and including
the redemption date.
"Interest Rate or Currency Agreement" of any Person means any forward
contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars, puts and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates.
"Inventory" means and includes, (i) as to TransTexas, all of TransTexas'
now owned or hereafter acquired casing, drill pipe and other supplies accounted
for as inventory by TransTexas on its financial statements (excluding any
Hydrocarbons), all proceeds thereof, and all documents of title, books,
records, ledger cards, files, correspondence, and computer files, tapes, disks
and related data processing software that at any time evidence or contain
information relating to the foregoing and (ii) as to TARC, feedstocks, refined
products, chemicals and catalysts, other supplies and storeroom items and
similar items accounted for as inventory by TARC on its financial statements,
all proceeds thereof, and all documents of title, books, records, ledger cards,
files, correspondence, and computer files, tapes, disks and related data
processing software that at any time evidence or contain information relating
to the foregoing.
"Investment" by any Person in any other Person means (a) the acquisition
(whether for cash, property, services, securities or otherwise) of capital
stock, bonds, notes, debentures, partnership, or other ownership interests or
other securities of such other Person or any agreement to make any such
acquisition; (b) the making by such Person of any deposit with, or advance,
loan or other extension of credit to, such other Person (including the purchase
of property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) and
(without duplication) any amount committed to be advanced, loaned or extended
to such other Person; (c) the entering into of any guarantee of, or other
contingent obligation with respect to, Debt or other liability of such other
Person; (d) the entering into of any Swap Obligation with such other Person; or
(e) the making of any capital contribution by such Person to such other Person.
"Investment Grade Rating" means, with respect to any Person or issue of
debt securities or preferred stock, a rating in one of the four highest letter
rating categories (without regard to "+" or "-" or other modifiers) by any
rating agency or if any such rating agency has ceased using letter rating
categories or the four highest of such letter rating categories are not
considered to represent "investment grade" ratings, then the comparable
"investment grade" ratings (as designated by any such rating agency).
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means any mortgage, lien, pledge, charge, security interest, or
other encumbrance of any kind, regardless of whether filed, recorded, or
otherwise perfected under applicable law (including any conditional sale or
other title retention agreement and any lease deemed to constitute a security
interest and any option or other agreement to give any security interest).
"Material Change" means an increase or decrease of more than 10% since
the then most recent Reserve Report in the discounted future net cash flows
(excluding changes that result from changes in prices) from proved oil and gas
reserves of TransTexas and its consolidated Subsidiaries (before any state or
federal income tax); provided, however, that the following will be excluded
from the Material Change calculation: (i) any acquisitions since the then most
recent Reserve Report of oil and gas reserves that have been estimated by
independent petroleum engineers and on which a report or reports have been
prepared by such independent petroleum engineers within 12 months of the
acquisition, (ii) any reserves added since the then most recent Reserve Report
attributable to the drilling or recompletion of wells not included in previous
reserve estimates and (iii) any disposition of properties existing on the date
of then most recent Reserve Report that have been disposed of.
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"Measurement Quarter" means any fiscal quarter ending on or after April
30, 1998.
"Mechanical Completion" means with respect to the Capital Improvement
Program, Phase I, Phase II or any specified unit or component thereof,
sufficient completion of the construction of the Capital Improvement Program,
Phase I, Phase II or any specified unit or component, as the case may be, in
accordance with the Plans, so that the Capital Improvement Program, Phase I,
Phase II or such unit or component, as the case may be, can be operated for its
intended purpose.
"Net Proceeds" means (a) in the case of any sale by a Person of
Qualified Capital Stock, the aggregate net cash proceeds received by such
Person from the sale of Qualified Capital Stock (other than to a Subsidiary)
after payment of reasonable out-of-pocket expenses, commissions and discounts
incurred in connection therewith, and (b) in the case of any exchange,
exercise, conversion or surrender of any outstanding securities or Debt of such
Person for or into shares of Qualified Capital Stock of such Person, the net
book value of such outstanding securities as adjusted on the books of such
Person or Debt of such Person to the extent recorded in accordance with GAAP,
in each case, on the date of such exchange, exercise, conversion or surrender
(plus any additional amount required to be paid by the holder of such Debt or
securities to such Person upon such exchange, exercise, conversion or surrender
and less (i) any and all payments made to the holders of such Debt or
securities and (ii) all other expenses incurred by such Person in connection
therewith, in each case, in so far as such payments or expenses are incident to
such exchange, exercise, conversion, or surrender).
"Net Cash Proceeds" means an amount equal to the aggregate amount of
cash received by the Company and its Subsidiaries in respect of an Asset Sale
or a Non-Collateral Asset Sale, less the sum of (i) all reasonable out-of-
pocket fees, commissions, and other expenses incurred in connection with such
Asset Sale or Non-Collateral Asset Sale, as the case may be, including the
amount (estimated in good faith by the Company) of income, franchise, sales and
other applicable taxes to be paid, payable or accrued by the Company or any
Subsidiary of the Company (in each case as estimated in good faith by the
Company or such Subsidiary without giving effect to tax attributes unrelated to
such Asset Sale) in connection with such Asset Sale or Non-Collateral Asset
Sale, as the case may be, and (ii) the aggregate amount of cash so received
which is used to retire any then existing Debt of the Company or its
Subsidiaries (other than the Intercompany Loans or the Notes), as the case may
be, which is required by the terms of such Debt to be repaid in connection with
such Asset Sale or Non-Collateral Asset Sale, as the case may be.
"Net Debt" of a Person means such Person's outstanding Debt to the
extent recorded in accordance with GAAP, less cash and Cash Equivalents of such
Person, in each case as measured on a consolidated basis and as of the last day
of the measuring period.
"Net Working Capital" of any Person means (i) all current assets of such
Person and its consolidated Subsidiaries, minus (ii) all current liabilities of
such Person and its consolidated Subsidiaries other than the current portion of
long term debt, each item to be determined in conformity with GAAP.
"Net Worth" of any Person means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of such Person and its Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts included therein attributable to Disqualified
Capital Stock or any equity security convertible into or exchangeable for Debt,
the cost of treasury stock (not otherwise deducted from stockholder's equity),
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of such Person or any of its Subsidiaries, each item to be
determined in conformity with GAAP.
"NNM" means the Nasdaq National Market.
"Nominee" means any Person who has or holds any right, title or interest
in any oil and gas or mineral lease as a nominee for TransTexas or any of its
Subsidiaries.
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"Nominee Property" means any property, lease, interest or other asset
with respect to which any Person has or holds any right, title or interest as a
Nominee.
"Non-Collateral Asset Sale" means any direct or indirect conveyance,
sale, transfer or other disposition (including through damage or destruction
for which Insurance Proceeds are paid or by condemnation), in one or a series
of related transactions, of any of the properties, businesses or assets of the
Company or any Subsidiary of the Company (other than properties, businesses or
assets of any of the TTXD Entities after the TTXD Spin-off), whether owned on
the Issue Date or thereafter acquired, which properties, businesses or assets
do not constitute Collateral.
"Non-Recourse Debt" of any Accounts Receivable Subsidiary means Debt of
such Accounts Receivable Subsidiary that (a) is not guaranteed by the Company
or any of its Subsidiaries (other than a guaranty by the Company limited in
recourse to the stock of the Accounts Receivable Subsidiary), (b) is not
recourse to and does not obligate the Company or any of its Subsidiaries (other
than as described in clause (a) above), and (c) does not subject any assets of
the Company (other than Capital Stock of such Accounts Receivable Subsidiary)
or any of its Subsidiaries, to the payment thereof.
"Note Redemption" means a redemption of Notes by the Company pursuant to
the redemption provisions of the Indenture.
"Note Repurchase" means a purchase of Notes by the Company, other than
pursuant to a Note Redemption, a Change of Control Offer or an Excess Cash
Offer; provided that all Notes purchased are delivered to the Indenture Trustee
for cancellation promptly upon their receipt by the Company.
"NYSE" means the New York Stock Exchange.
"Office Leases" means the existing leases of office space at 1300 North
Sam Houston Parkway East, Houston, Texas 77032-2949.
"Permitted Hedging Transactions" means non-speculative transactions in
futures, forwards, swaps or option contracts (including both physical and
financial settlement transactions) engaged in by the TARC Entities or the
TransTexas Entities as part of their normal business operations as a risk-
management strategy or hedge against adverse changes in the prices of natural
gas, feedstock or refined products; provided, that such transactions do not in
the case of TransTexas or its Subsidiaries, on a monthly basis, relate to more
than 90% of the TransTexas Entities' average net natural gas production per
month from the Continuing Operations for the most recent 3-month period
measured at the time of such incurrence; provided, further, that, at the time
of such transaction (i) the counter party to any such transaction is an
Eligible Institution or a Person that has an Investment Grade Rating or has an
issue of debt securities or preferred stock outstanding with an Investment
Grade Rating or (ii) such counter party's obligation pursuant to such
transaction is unconditionally guaranteed in full by, or secured by a letter of
credit issued by, an Eligible Institution or a Person that has an Investment
Grade Rating or that has an issue of debt securities or preferred stock
outstanding with an Investment Grade Rating.
"Permitted Investment" means, when used with reference to the Company or
its Subsidiaries, (i) trade credit extended to persons in the ordinary course
of business; (ii) purchases of Cash Equivalents; (iii) Investments by
TransTexas or its wholly owned Subsidiaries in wholly owned Subsidiaries of
TransTexas (other than TTXD) that are engaged in Related TransTexas Businesses
and Investments by TARC or its wholly owned Subsidiaries in wholly owned
Subsidiaries of TARC that are engaged in Related TARC Businesses; (iv) Swap
Obligations; (v) the receipt of capital stock in lieu of cash in connection
with the settlement of litigation; (vi) advances to officers and employees in
connection with the performance of their duties in the ordinary course of
business in an amount not to exceed $3 million in the aggregate outstanding at
any time in the case of each of (i) the TARC Entities and (ii) the TransTexas
Entities; (vii) margin deposits in connection with Permitted Hedging
Transactions; (viii) an Investment in one or more Unrestricted Subsidiaries of
(a) TransTexas in an aggregate amount, net of return on such Investment, not in
excess of $25 million less the amount of any Unrestricted Non-Recourse Debt
outstanding of TransTexas or any of its Subsidiaries
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and (b) TARC of the assets comprising the CATOFIN(R) Unit owned by TARC as of
the date hereof; (ix) Investments and expenditures made in the ordinary course
of business by TransTexas or its Subsidiaries, and of a nature that is or shall
have become customary in, the oil and gas business as a means of actively
exploiting, exploring for, acquiring, developing, processing, gathering,
marketing or transporting oil or gas through agreements, transactions,
interests or arrangements which permit a person to share risks or costs, comply
with regulatory requirements regarding local ownership or satisfy other
objectives customarily achieved through the conduct of the oil and gas business
jointly with third parties, including, without limitation, (a) ownership
interests in oil and gas properties or gathering systems and (b) Investments
and expenditures in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling
arrangements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties (including Unrestricted Subsidiaries); provided, that in the case of
any joint venture engaged in processing, gathering, marketing or transporting
oil or gas (i) all Debt of such joint venture (other than a joint venture that
is an Unrestricted Subsidiary) that would not otherwise constitute Debt of one
of the TransTexas Entities shall be deemed Debt of TransTexas in proportion to
its direct or indirect ownership interest in such joint venture and (ii) such
joint venture shall be reasonably calculated to enhance the value of the
reserves of the TransTexas Entities or marketability of production from such
reserves; (x) a guaranty by any Subsidiary of the Company permitted under the
covenant described under "-- Covenants -- Limitation on Incurrences of
Additional Debt and Issuances of Disqualified Capital Stock"; (xi) deposits
permitted by the definition of Permitted Liens or any extension, renewal, or
replacement of any of them, (xii) the TTXD Equity Investment (in addition to
any contribution by TransTexas pursuant to clause (xiii) below), (xiii) capital
contributions by TransTexas to TTXD or to a joint venture, a partnership, a
limited liability company or a similar entity of TransTexas' drilling and
energy services business and pipeline services business and related assets,
(xiv) any acquisition by TARC of tank storage facilities (or the company that
owns such facilities) in the vicinity of the TARC refinery, (xv) guarantees by
TransTexas of Debt of TTXD to the extent that such Debt relates to assets
contributed to TTXD pursuant to clause (xiii) hereof, (xvi) Investments in
Accounts Receivables Notes by TARC in an Accounts Receivable Subsidiary in
amounts not to exceed the greater of $20 million or 20% of the TARC Borrowing
Base at any one time, (xvii) a loan from the Company to its Subsidiaries (other
than the TTXD Entities prior to the TTXD Spin-off) with (i) the excess of the
Excess Cash Offer Amount (after reserving the full Interest Reserve Amount)
over the Excess Cash Acceptance Amount, provided, that such loans are on terms
no less favorable to the Company than were disclosed to the Holders of the
Notes in the Excess Cash Offer or (ii) the excess of the Additional Interest
Excess Cash Offer Amount over the Additional Interest Excess Cash Acceptance
Amount, provided, that such loans are on terms no less favorable to the Company
than were disclosed to the Holders of the Notes in the Additional Interest
Excess Cash Offer, (xviii) an Investment in Capital Stock resulting from an
Asset Sale pursuant to clause (M) of the covenant described herein under the
heading "-- Limitation on Asset Sales," (xix) Investments by the Company in an
Accounts Receivable Subsidiary, or by the Company or TARC in a reincorporation
subsidiary in each case in connection with the initial capitalization thereof
and not to exceed $1,000, (xx) Investments by the Company or TARC or a wholly
owned Subsidiary of either of them solely for the purpose of facilitating a
repurchase of the TARC Warrants in connection with a merger, (xxi) other
Investments not in excess of $5 million at any time outstanding, (xxii) loans
made (X) to officers, directors and employees of the Company or any of its
Subsidiaries approved by the applicable Board of Directors (or by an authorized
officer), the proceeds of which are used solely to purchase stock or to
exercise stock options received pursuant to an employee stock option plan or
other incentive plan, in a principal amount not to exceed the purchase price of
such stock or the exercise price of such stock options, as applicable and (Y)
to refinance loans, together with accrued interest thereon made pursuant to
this clause, in each case not in excess of $3 million in the aggregate
outstanding at any one time, (xxiii) Investments by the Company in its
Subsidiaries in an aggregate amount not to exceed the proceeds of Subordinated
Debt permitted to be incurred pursuant to clause (5)(d) of the covenant
described herein under the heading "Limitation on Issuances of Additional
Indebtedness and Issuances of Disqualified Capital Stock," (xxiv) Investments
by the Company in TARC in an amount not to exceed the amounts received by the
Company from an Accounts Receivable Subsidiary, (xxv) a capital contribution by
TTXD of any or all of its assets to a joint venture, a partnership, a limited
liability company or a similar entity, (xxvi) a capital contribution by the
Company to TARC in an amount not to exceed $226 million (inclusive of any
equity contribution made as described under the heading "Prospectus Summary --
Recent Events -- TARC Equity Contribution"), (xxvii) any deposit or escrow of
funds in connection with adjustments to the Lobo Sale purchase price or
(xxviii) loans made by
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the Company to TransTexas or TARC which in the aggregate do not exceed $50
million principal amount outstanding at any one time.
"Permitted Liens" means Permitted TARC Liens, Permitted TEC Liens and
Permitted TransTexas Liens.
"Permitted Production Payment Obligations" means Volumetric Production
Payments and Dollar-Denominated Production Payments each as permitted to be
made hereunder, and similar burdens on the property of TransTexas or any
Subsidiary of TransTexas to the extent such burdens are limited in recourse to
(x) the properties subject to such interests or agreements, (y) the
Hydrocarbons produced from such properties, and (z) the proceeds of such
Hydrocarbons.
"Permitted TARC Liens" means (a) Liens imposed by governmental
authorities for taxes, assessments, or other charges not yet due or which are
being contested in good faith and by appropriate proceedings, if adequate
reserves with respect thereto are maintained on the books of any of the TARC
Entities in accordance with GAAP; (b) statutory Liens of landlords, carriers,
warehousemen, mechanics, materialmen, repairmen, mineral interest owners, or
other like Liens arising by operation of law in the ordinary course of business
provided that (i) the underlying obligations are not overdue for a period of
more than 60 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of any of the TARC Entities in accordance with GAAP;
(c) deposits of cash or Cash Equivalents to secure (i) the performance of bids,
trade contracts (other than borrowed money), leases, statutory obligations,
surety bonds, performance bonds, and other obligations of a like nature
incurred in the ordinary course of business (or to secure reimbursement
obligations or letters of credit issued to secure such performance or other
obligations) in an aggregate amount outstanding at any one time not in excess
of $5 million or (ii) appeal or supersedeas bonds (or to secure reimbursement
obligations or letters of credit in support of such bonds); (d) easements,
rights-of-way, zoning, similar restrictions and other similar encumbrances or
title defects incurred in the ordinary course of business which, in the
aggregate, are not material in amount and which do not, in any case, materially
detract from the value of the property subject thereto (as such property is
used by any of the TARC Entities) or materially interfere with the ordinary
conduct of the business of any of the TARC Entities; (e) Liens arising by
operation of law in connection with judgments, only to the extent, for an
amount and for a period not resulting in an Event of Default with respect
thereto; (f) Liens securing Debt or other obligations not in excess of $3
million; (g) pledges or deposits made in the ordinary course of business in
connection with worker's compensation, unemployment insurance, other types of
social security legislation, property insurance and liability insurance; (h)
Liens on Equipment, Receivables and Inventory; (i) Liens on the assets of any
entity existing at the time such assets are acquired by any of the TARC
Entities, whether by merger, consolidation, purchase of assets or otherwise so
long as such Liens (i) are not created, incurred or assumed in contemplation of
such assets being acquired by any of the TARC Entities and (ii) do not extend
to any other assets of any of the TARC Entities; (j) Liens (including
extensions and renewals thereof) on real or personal property, acquired after
the Issue Date ("New TARC Property"); provided, however, that (i) such Lien is
created solely for the purpose of securing Debt Incurred to finance the cost
(including the cost of improvement or construction) of the item of New TARC
Property subject thereto and such Lien is created at the time of or within six
months after the later of the acquisition, the completion of construction, or
the commencement of full operation of such New TARC Property, (ii) the
principal amount of the Debt secured by such Lien does not exceed 100% of such
cost plus reasonable financing fees and other associated reasonable out-of-
pocket expenses (iii) any such Lien shall not extend to or cover any property
or assets other than such item of New TARC Property and any improvements on
such New TARC Property and (iv) such Lien does not extend to assets or property
which are part of the fixed refinery assets which are part of the Capital
Improvement Program; (k) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of any of the TARC
Entities, taken as a whole; (l) Liens on the assets of one of the TARC Entities
in favor of another TARC Entity; (m) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents relating to such
letters of credit and the products and proceeds thereof; provided, that, such
reimbursement obligations are not matured for a period of over 60 days; (n)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(o) Liens encumbering customary initial deposits and margin deposits securing
Swap Obligations or Permitted Hedging Transactions; (p) Liens on cash deposits
to secure reimbursement obligations with respect to letters of credit after the
Delayed Coking Unit is completed; (q) Liens that secure Unrestricted Non-
Recourse Debt;
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provided, however, that at the time of incurrence the aggregate fair market
value of the assets securing such Lien (exclusive of the stock of the
applicable Unrestricted Subsidiary) shall not exceed the amount of allowed
Unrestricted Non-Recourse Debt of TARC; (r) Liens on the proceeds of any
property subject to a Permitted TARC Lien or on deposit accounts containing any
such proceeds; (s) Liens on the proceeds of any property that is not
Collateral; (t) Liens imposed in connection with the Port Commission Bond
Financing; provided, that such liens do not extend to property other than the
Port Facility Assets; (u) any extension, renewal or replacement of the Liens
created pursuant to any of clauses (a) through (g), (i) through (t) or (w)
provided that such Liens would have otherwise been permitted under such
clauses, and provided further that the Liens permitted by this clause (u) do
not secure any additional Debt or encumber any additional property; (v) Liens
of the trustee under the indenture and related collateral documents governing
the terms of the Senior TARC Mortgage Notes and the Senior TARC Discount Notes,
(w) Liens in favor of the Company or its assignee under the Security Documents
and (y) Liens on tank storage facilities in the vicinity of the TARC refinery
acquired after the date hereof.
"Permitted TEC Liens" means (a) Liens imposed by governmental
authorities for taxes, assessments, or other charges not yet due or which are
being contested in good faith and by appropriate proceedings, if adequate
reserves with respect thereto are maintained on the books of any of the Company
in accordance with GAAP; (b) Liens arising by operation of law in connection
with judgments, only to the extent, for an amount and for a period not
resulting in an Event of Default with respect thereto; (c) any extension,
renewal, or replacement of Liens created pursuant to either of clauses (a) or
(b) of this definition, provided that such Liens would have otherwise been
permitted under such clauses, and further provided that the Liens permitted by
this clause (c) shall not be spread to cover any additional Debt or property;
(d) Liens of the trustee under the indenture and related collateral documents
governing the terms of the Senior TARC Mortgage Notes and the Senior TARC
Discount Notes; (e) deposits of cash or Cash Equivalents to secure appeal or
supersedeas bonds (or to secure reimbursement obligations or letters of credit
in support of such bonds), (f) pledges or deposits made in the ordinary course
of business in connection with worker's compensation, unemployment insurance,
and other types of social security legislation, property insurance and
liability insurance or (g) a guaranty of the Debt of an Accounts Receivable
Subsidiary limited in recourse to the stock of such Accounts Receivable
Subsidiary.
"Permitted TransTexas Liens" means (a) Liens imposed by governmental
authorities for taxes, assessments, or other charges not yet due or which are
being contested in good faith and by appropriate proceedings, if adequate
reserves with respect thereto are maintained on the books of any of the
TransTexas Entities in accordance with GAAP; (b) statutory Liens of landlords,
carriers, warehousemen, mechanics, materialmen, repairmen, mineral interest
owners, or other like Liens arising by operation of law in the ordinary course
of business, provided that (i) the underlying obligations are not overdue for a
period of more than 60 days, or (ii) such Liens are being contested in good
faith and by appropriate proceedings and adequate reserves with respect thereto
are maintained on the books of any of the TransTexas Entities in accordance
with GAAP; (c) (i) pledges of assets or deposits of cash or Cash Equivalents to
secure the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business (or to
secure reimbursement obligations or letters of credit in support of such bonds)
in an aggregate amount not in excess of 5% of the SEC PV10 indicated on
TransTexas' most recent Reserve Report at the time such pledges or deposits are
made or (ii) pledges of assets, the fair market value of which is not in excess
of $40 million in the aggregate pledged at any one time, or deposits of cash or
Cash Equivalents, in each case, to secure appeal or supersedeas bonds (or to
secure reimbursement obligations or letters of credit in support of such
bonds); (d) Liens encumbering customary initial deposits and margin deposits
securing Swap Obligations or Permitted Hedging Transactions; (e) pledges of
assets including, without limitation, the mortgage of a production payment by a
Hedging Subsidiary, to secure margin obligations, settlement obligations,
reimbursement obligations or letters of credit in connection with Permitted
Hedging Transactions; provided that, at the time such pledge is made (or, if
such pledge secures future Permitted Hedging Transactions, at the time any such
Permitted Hedging Transaction is entered into), the maximum aggregate exposure
under such Permitted Hedging Transactions does not exceed the greater of (i)
$25 million or (ii) 10% of the SEC PV10 indicated on TransTexas' then most
recent Reserve Report; (f) easements, rights-of-way, zoning, similar
restrictions and other similar encumbrances or title defects incurred in the
ordinary course of business which, in the aggregate, are not material in
amount, and which do not in any case materially detract from the value of the
property subject thereto (as such property is used by any of the TransTexas
Entities) or materially interfere with the ordinary conduct of the
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business of any of the TransTexas Entities; (g) Liens arising by operation of
law in connection with judgments, only to the extent, for an amount and for a
period not resulting in an Event of Default with respect thereto; (h) Liens
securing Debt or other obligations not in excess of $3 million and Liens
existing on the date of the Indenture; (i) pledges or deposits made in the
ordinary course of business in connection with worker's compensation,
unemployment insurance, and other types of social security legislation,
property insurance and liability insurance; (j) Liens granted on Equipment,
Inventory or Receivables; (k) Liens granted in connection with the Presale of
Gas, provided that all of the proceeds from such Presale of Gas shall be
applied to an Intercompany Loan Redemption; (l) Liens created on acreage
drilled or to be drilled pursuant to Drilling Programs, on Hydrocarbons
produced therefrom and on the proceeds of such Hydrocarbons to secure
TransTexas' obligations thereunder, provided that (i) the number of wells
included in such program commenced in any fiscal year does not exceed 30 per
fiscal year (plus the number of wells included in programs commenced in prior
years but not yet completed), (ii) such obligations are limited to a percentage
of production from such wells, (iii) such Liens survive only until the Person
to whom such Lien was granted has received production with a value equal to the
reimbursable costs, expenses and fees related to property and services provided
or paid for by such Person plus an agreed-upon interest component, and (iv)
such Liens secure obligations that are nonrecourse to each of the Company or
its Subsidiaries; (m) Liens on the assets of any entity existing at the time
such assets are acquired by any of the TransTexas Entities, whether by merger,
consolidation, purchase of assets or otherwise so long as such Liens (i) are
not created, incurred or assumed in contemplation of such assets being acquired
by any of the TransTexas Entities and (ii) do not extend to any other assets of
any of the Company or its Subsidiaries; (n) any extension, renewal, or
replacement of Liens created pursuant to any of clauses (a) through (g), (i),
(k) through (m) or (q) through (t) of this definition, provided that such Liens
would have otherwise been permitted under such clauses, and further provided
that the Liens permitted by this clause (n) do not secure any additional Debt
or encumber any additional property; (o) Liens securing (i) Royalty Payment
Obligations and (ii) Permitted Production Payment Obligations; (p) Liens on the
assets of any of the TransTexas Entities in favor of another TransTexas Entity;
(q) Liens that secure Unrestricted Non-Recourse Debt; provided however, that at
the time of incurrence the aggregate fair market value of the assets securing
such Lien (exclusive of the stock of the applicable Unrestricted Subsidiary)
shall not exceed the amount of allowed Unrestricted Non-Recourse Debt of
TransTexas; (r) Liens on the proceeds of any property subject to a Permitted
TransTexas Lien or on deposit accounts containing any such proceeds; (s) Liens
on the proceeds of any property that is not Collateral; (t) Liens (including
extensions and renewals thereof) on real or personal property, acquired after
the Issue Date ("New TransTexas Property"); provided, however, that (i) such
Lien is created solely for the purpose of securing Debt Incurred to finance the
cost (including the cost of improvements or construction) of New TransTexas
Property subject thereto and such Lien is created at the time of or within six
months after the later of the acquisition, the completion of construction, or
the commencement of full operation of such New TransTexas Property, (ii) the
principal amount of the Debt secured by such Lien does not exceed 100% of such
cost including costs and fees related to the financing thereof, (iii) any such
Lien shall not extend to or cover any property or assets other than such item
of New TransTexas Property and any improvements on such New TransTexas
Property; (u) Liens of the trustee under the indenture and related collateral
documents governing the terms of the TransTexas Senior Notes and (v) Liens in
favor of the Company or its assignee under the Security Documents.
"Person" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state, or political subdivision thereof, trust, municipality,
or other entity.
"Phase I" has the meaning given to it in this Prospectus under the
heading "Business of TARC -- Capital Improvement Program."
"Phase I Completion Date" means the date on which the Construction
Supervisor issues a written notice (the "Phase I Completion Notice") to the
Company and the Disbursement Agent certifying that (a) the process units and
supporting facilities set forth under the heading "Business of TARC -- Capital
Improvement Program -- Phase I" have reached Mechanical Completion in
accordance with the Plans, and (b) for a period of at least 15 consecutive
days, TARC's refinery has sustained (i) the successful performance of the
Delayed Coking Unit, the Hydrodesulfurization Unit and the Sulfur Recovery
Unit, (ii) an average feedstock throughput level of at least 150,000 barrels
per day, and
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(iii) no net production of vacuum tower bottoms when using as input a combined
feedstock slate with an average API Gravity of 22 degrees or less.
"Phase II" has the meaning given to it in this Prospectus under the
heading "Business of TARC -- Capital Improvement Program."
"Phase II Completion Date" means the date on which the Construction
Supervisor issues a written notice (the "Phase II Completion Notice") to the
Company and the Disbursement Agent certifying that (a) the process units and
supporting facilities set forth under the heading "Business of TARC -- Capital
Improvement Program -- Phase II" have reached Mechanical Completion in
accordance with the Plans and (b) for a period of at least 72 uninterrupted
hours, TARC's refinery has sustained (i) the successful performance of all of
the Phase I facilities plus the Fluid Catalytic Cracking (FCC) Unit, the FCC
Flue Gas Scrubber and the Alkylation Unit, (ii) an average feedstock throughput
level of at least 180,000 barrels per day, and (iii) average production yields
(measured as the liquid volume percent of feedstock throughput) of refined
products with a specific gravity of gasoline or lighter of at least 40% and of
middle distillates or lighter of at least 70%, when using a combined Crude Unit
feedstock slate with an average API Gravity of 22 degrees or less.
"Plans" means (a) the plans and specifications prepared by or on behalf
of TARC as used in the Disbursement Agreement, which describe and show the
proposed expansion and modification of TARC's refinery and (b) a budget
prepared by or on behalf of TARC as used in the Disbursement Agreement.
"Port Commission Bond Financing" means a financing transaction involving
the following elements: (a) the transfer of TARC's interest in all or some of
the following assets which are under construction in or near TARC's refinery:
(i) the Prospect Road tank farm; (ii) certain dock improvements; (iii) the dock
vapor recovery system; (iv) the coke handling system; (v) the refinery waste
water treatment facility and (vi) tankage for liquefied petroleum gas (the
"Port Facility Assets") to the Port of South Louisiana Commission (the "Tax-
Exempt Issuer") or its affiliate and a leaseback of the Port Facility Assets to
TARC or one of its Subsidiaries; (b) the issuance of tax-exempt bonds by the
Tax-Exempt Issuer; and (c) the loan of proceeds from such bonds to TARC or one
of its Subsidiaries for the purpose of financing the completion of the Port
Facility Assets.
"Preferred Stock" means, with respect to any corporation, any class or
classes (however designated) of Capital Stock of such Person that is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation over
shares of Capital Stock of any other class of such corporation.
"Presale of Gas" means any advance payment agreement or other
arrangement pursuant to which TransTexas or any Guarantor of the TransTexas
Intercompany Loan, having received full payment of the purchase price for a
specified quantity of Hydrocarbons prior to the first scheduled date of
delivery, is required to deliver, in one or more installments subsequent to the
date of such agreement or arrangement, such quantity of Hydrocarbons to the
purchaser of such Hydrocarbons pursuant to and during the term of such
agreement or arrangement; provided, however, that the term "Presale of Gas"
shall not include (i) any such agreement or other arrangement covering
deliveries of Hydrocarbons for a period not exceeding three calendar months and
pursuant to which TransTexas or such Guarantor has received full payment of the
purchase price within 120 days of the last scheduled date of delivery, (ii) a
transaction to the extent and only to the extent that it results in the
creation of any Permitted TransTexas Lien under clauses (l) or (o) of the
definition of "Permitted TransTexas Liens," (iii) Permitted Hedging
Transactions or (iv) an Asset Sale involving Hydrocarbon reserves.
"principal amount" when used with respect to the Senior Secured Discount
Notes means the principal amount of such Debt as indicated on the face of such
Debt instrument.
"Project Costs" means, with respect to a proposed expansion or
modification of TARC's refinery, the aggregate costs required to complete such
expansion or modification of the refinery in accordance with the Plans therefor
and
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applicable legal requirements, including direct costs related thereto such as
construction, engineering and design costs and the cost of site work,
construction permits, certificates and bonds, fixtures, machinery, and
equipment.
"Public Equity Offering" means an underwritten public offering by a
nationally recognized member of the National Association of Securities Dealers
of Qualified Capital Stock of any Person pursuant to an effective registration
statement filed with the SEC pursuant to the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Receivables" means and includes, as to any Person, any and all of such
Person's now owned or hereafter acquired "accounts" as such term is defined in
Article 9 of the Uniform Commercial Code in the State of New York, all products
and proceeds thereof, and all books, records, ledger cards, files,
correspondence, and computer files, tapes, disks or software that at any time
evidence or contain information relating to the foregoing.
"Reference Period" with regard to any Person means the four full fiscal
quarters of such Person ended on or immediately preceding any date upon which
any determination is to be made pursuant to the terms of the Notes or the
Indenture.
"Registration Rights Agreements" means the Registration Rights
Agreements in connection with the registration under federal securities laws of
(i) the Notes and (ii) the capital stock of TARC, TransTexas and TTXD pledged
or to be pledged to the Indenture Trustee, in each case among the Company and
the Indenture Trustee, as in effect on the Issue Date and as amended from time
to time, provided that any such amendment is not materially adverse to the
holders of the Notes.
"Reimbursement and Credit Facility" means the Reimbursement and Credit
Agreement dated January 25, 1996, pursuant to which a third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas, as amended from time to time in a manner not adverse to
the Holders of the Notes.
"Related Person" means (i) any Person directly or indirectly controlling
or controlled by or under direct or indirect common control with the Company or
any Subsidiary of the Company or any officer, director, or employee of the
Company or any Subsidiary of the Company or of such Person, (ii) the spouse,
any immediate family member, or any other relative who has the same principal
residence of any Person described in clause (i) above, and any Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with, such spouse, family member, or other relative, and (iii) any
trust in which any Person described in clause (i) or (ii), above, is a
fiduciary or has a beneficial interest. For purposes of this definition the
term "control" means (a) the power to direct the management and policies of a
Person, directly or through one or more intermediaries, whether through the
ownership of voting securities, by contract, or otherwise, or (b) the
beneficial ownership of 10% or more of the voting common equity of such Person
(on a fully diluted basis) or of warrants or other rights to acquire such
equity (whether or not presently exercisable).
"Related Business" means any of the Related TARC Business, the Related
TransTexas Business and the Related TTXD Business.
"Related TARC Business" means the business of (i) processing, blending,
terminalling, storing, marketing (other than through operating retail gasoline
stations), refining, or distilling crude oil, condensate, natural gas liquids,
petroleum blendstocks or refined products thereof (ii) owning and operating an
Accounts Receivable Subsidiary and (iii) after the Phase II Completion Date,
the exploration for, acquisition of, development of, production, transportation
and gathering of crude oil, natural gas, condensate and natural gas liquids
from outside of the United States.
"Related TransTexas Business" means (i) the exploration for, acquisition
of, development of, production, transportation, gathering, and processing (in
connection with natural gas and natural gas liquids only) of, crude oil,
natural gas, condensate, and natural gas liquids; provided that the Related
TransTexas Business shall not include any
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refining or distilling of Hydrocarbons other than processing and fractionating
natural gas and natural gas liquids, (ii) the drilling and energy services
business and pipeline services business or (iii) owning and operating a Hedging
Subsidiary.
"Related TTXD Business" means the drilling and energy services business
and pipeline services business.
"Required Phase I Completion Date" means March 31, 1999.
"Reserve Report" means a report prepared by independent petroleum
engineers with respect to Hydrocarbon reserves in accordance with guidelines
published by the SEC.
"Restricted Investment" means any direct or indirect Investment by the
Company or any Subsidiary of the Company other than a Permitted Investment.
"Restricted Payment" means, with respect to any Person, (i) any
Restricted Investment, (ii) any dividend or other distribution on shares of
Capital Stock of such Person or any Subsidiary of such Person, (iii) any
payment on account of the purchase, redemption, or other acquisition or
retirement for value of any shares of Capital Stock of such Person, and (iv)
any defeasance, redemption, repurchase, or other acquisition or retirement for
value, or any payment in respect of any amendment in anticipation of or in
connection with any such retirement, acquisition, or defeasance, in whole or in
part, of any Subordinated Debt, directly or indirectly, of such Person or a
Subsidiary of such Person prior to the scheduled maturity or prior to any
scheduled repayment of principal in respect of such Subordinated Debt;
provided, however, that the term "Restricted Payment" does not include (i) any
dividend, distribution, or other payment on shares of Capital Stock of an
issuer solely in shares of Qualified Capital Stock of such issuer that is at
least as junior in ranking as the Capital Stock on which such dividend,
distribution, or other payment is to be made, (ii) any dividend, distribution,
or other payment to the Company from any of its Subsidiaries, (iii) any
defeasance, redemption, repurchase, or other acquisition or retirement for
value, in whole or in part, of any Subordinated Debt of such Person payable
solely in shares of Qualified Capital Stock of such Person, (iv) any payments
or distributions made pursuant to and in accordance with the Transfer
Agreement, the TransTexas Drilling Agreement, the Services Agreement, the
Office Leases or the Tax Allocation Agreement, or (v) any dividend,
distribution or other payment to TARC by any of its Subsidiaries or TransTexas
by any of its Subsidiaries, (vi) any Intercompany Loan Redemptions, (vii) any
redemption, repurchase or other retirement for value of the TARC Warrants by
the Company or TARC, including any premium paid thereon, (viii) any redemption,
repurchase or other retirement for value of the TEC Preferred Stock by the
Company, including any premium paid thereon, (ix) any redemption, defeasance,
repurchase or other retirement for value of the Senior TARC Mortgage Notes by
TARC, including any premium paid thereon, (x) any redemption, defeasance,
repurchase or other retirement for value of the Senior TARC Discount Notes by
TARC, including any premium paid thereon, (xi) any redemption, defeasance,
repurchase or other retirement for value of the Senior TransTexas Notes by
TransTexas, including any premium paid thereon, (xii) an Investment by
TransTexas in, or distribution by TransTexas on, its Capital Stock pursuant to
share repurchases or dividends on its Capital Stock in each case as described
under the caption "Transactions" in an aggregate amount not to exceed $400
million, (xiii) the redemption, purchase, retirement or other acquisition of
any Debt including any premium paid thereon, with the proceeds of any
refinancing Debt permitted to be incurred pursuant to clause (1)(g), (3)(j),
4(j) or 5(e) of the covenant described herein under the heading "Limitation on
the Incurrences of Additional Debt and Issuances of Disqualified Capital
Stock," (xiv) the distribution by TransTexas of shares of capital stock of TTXD
in connection with the TTXD Spin-off, (xv) after the repayment of the TARC
Intercompany Loan or the TransTexas Intercompany Loan, dividends or other
distributions on shares of common stock of TARC or TransTexas, respectively,
provided that each such dividend or distribution is paid to all holders of
common stock of such entity on a pro rata basis, (xvi) the purchase by TARC or
TransTexas of shares of Capital Stock of TARC, TransTexas or TTXD in connection
with each of their employee benefit plans, including without limitation any
employee stock ownership plans or any employee stock option plans, in an
aggregate amount not to exceed 7% of the aggregate market value of the voting
stock held by non-affiliates of the issuer measured from the date of the first
such purchase, (xvii) a dividend or other payment not to exceed $23 million
from the Company to TransAmerican, and (xviii) any repayment or retirement for
value by TARC or TransTexas of any loan from the Company incurred pursuant to
clause (1)(q), (1)(r), (2)(o), (2)(p), (3)(u), (3)(v), (4)(s), or (4)(t) of the
covenant
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described herein under the heading "-- Limitation on Incurrences of Additional
Indebtedness and Issuances of Disqualified Capital Stock."
"Revolving Credit Facility" means any revolving credit facility between
TransTexas, on the one hand, and any banks or other lenders, on the other hand.
"Royalty Payment Obligations" means (i) royalties, overriding royalties,
revenue interests, net revenue interests, net profit interests, and
reversionary interests, (ii) the interests of others in pooling or unitization
agreements, production sales contracts and operating agreements, (iii) Liens
arising under, in connection with or related to farm-out, farm-in, joint
operating, pooling, unitization or area of mutual interest agreements or other
similar or customary arrangements, agreements or interests, and (iv) similar
burdens on the property of TransTexas or any Subsidiary of TransTexas; each as
incurred in the ordinary course of business and to the extent such burdens are
limited in recourse to (x) the properties subject to such interests or
agreements, (y) the Hydrocarbons produced from such properties, and (z) the
proceeds of such Hydrocarbons.
"Sale and Leaseback Transaction" means an arrangement relating to
property owned on the Issue Date or thereafter acquired whereby the Company or
a Subsidiary of the Company transfers such property to a Person and leases it
back from such Person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Security Documents" means the TARC Security Documents and the
TransTexas Security Documents and a collateral assignment by the Company of
each of these to the Indenture Trustee and a pledge by the Company of
substantially all of its assets, including its interest in the TEC Disbursement
Account, the Capital Stock of TARC, TransTexas and any other future
Subsidiaries and the Intercompany Notes and each other agreement relating to
any Guarantee or the pledge of assets to secure the Notes or the TransTexas
Intercompany Loan or the TARC Intercompany Loan that may be entered into on or
after the Issue Date pursuant to the terms of the Indenture.
"Senior Debt" means, with respect to any Person, any Debt that is not
Subordinated Debt.
"Senior TARC Discount Notes" means the Guaranteed First Mortgage
Discount Notes due 2002 issued by TARC and guaranteed by the Company.
"Senior TARC Mortgage Notes" means the Guaranteed First Mortgage Notes
due 2002 issued by TARC and guaranteed by the Company.
"Senior TransTexas Notes" means the 11 1/2% Senior Secured Notes due
2002 of TransTexas.
"Services Agreement" means the Services Agreement among TNGC Holdings
and its Subsidiaries, as in effect on the Issue Date and as amended from time
to time, provided that any such amendment is not materially adverse to the
holders of the Notes.
"Subordinated Debt" means Debt of TARC or TransTexas that (i) requires
no payment of principal prior to or on the date on which all principal of and
interest on the respective Intercompany Loans is paid in full and (ii) is
subordinate and junior in right of payment to the respective Intercompany Loans
in the event of a liquidation.
"Subordinated Notes" means the $189 million principal amount of 13 1/4%
Series A Senior Subordinated Discount Notes due 2003 of TransTexas, in the form
in existence on the date of the Indenture, the 13 1/4% Series B Senior
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Subordinated Discount Notes due 2003 of TransTexas, the 13 3/4% Series C
Senior Subordinated Notes due 2001 of TransTexas and the 13 3/4% Series D
Senior Subordinated Notes due 2001 of TransTexas.
"Subsidiary" with respect to any Person, means (i) a corporation with
respect to which such Person or its Subsidiaries owns, directly or indirectly,
at least fifty percent of such corporation's Capital Stock with voting power,
under ordinary circumstances, to elect directors, or (ii) a partnership in
which such Person or a subsidiary of such Person is, at the time, a general
partner of such partnership and has more than 50% of the total voting power of
partnership interests entitled (without regard to the occurrence of any
contingency) to vote in the election of managers thereof, or (iii) any other
Person (other than a corporation or a partnership) in which such Person, one or
more Subsidiaries of such Person, or such Person and one or more Subsidiaries
of such Person, directly or indirectly, at the date of determination thereof
has (x) at least a fifty percent ownership interest or (y) the power to elect
or direct the election of the directors or other governing body of such other
Person; provided, however, that "Subsidiary" shall not include (i) for the
purposes of the covenant "Guarantee by Subsidiaries," a joint venture an
investment in which would constitute a Permitted Investment under clause (ix)
of the definition thereof, (ii) any Unrestricted Subsidiary of such Person,
except for purposes of the covenant "-- Limitation on Transactions with Related
Persons" or (iii) an Accounts Receivable Subsidiary.
"Swap Obligation" of any Person means any Interest Rate or Currency
Agreement entered into with one or more financial institutions or one or more
futures exchanges in the ordinary course of business and not for purposes of
speculation that is designed to protect such Person against fluctuations in (x)
interest rates with respect to Debt Incurred and which shall have a notional
amount no greater than 105% of the principal amount of the Debt being hedged
thereby, or (y) currency exchange rate fluctuations.
"TARC" means TransAmerican Refining Corporation, a Texas corporation.
"TARC Borrowing Base" means, as of any date, an amount equal to the sum
of (a) 90% of the book value of all accounts receivable owned by TARC and its
Subsidiaries (excluding any accounts receivable that are more than 90 days past
due, less (without duplication) the allowance for doubtful accounts
attributable to such current accounts receivable) calculated on a consolidated
basis and in accordance with GAAP and (b) 85% of the current market value of
all inventory owned by TARC and its Subsidiaries as of such date. To the extent
that information is not available as to the amount of accounts receivable as of
a specific date, TARC may utilize, to the extent reasonable, the most recent
available information for purposes of calculating the TARC Borrowing Base.
"TARC Collateral" means (x) the assets of TARC which are mortgaged or
pledged to the Company as security for the TARC Intercompany Loan in accordance
with the TARC Security Documents and (y) the Guarantees by the Subsidiaries of
TARC of the TARC Intercompany Loan.
"TARC Disbursement Account" means a segregated deposit account from
which funds will be disbursed pursuant to the terms of the Disbursement
Agreement.
"TARC Entities" means TARC and each of its Subsidiaries.
"TARC Guarantor Mortgage" means each mortgage, deed of trust,
assignment, security agreement and financing statement by each Guarantor of the
TARC Intercompany Loan to the trustee named therein for the benefit of the
Company.
"TARC Guarantor Security Agreement" means each Security Agreement,
Pledge and Financing Statement by each Guarantor of the TARC Intercompany Loan
in favor of the Company.
"TARC Intercompany Loan" means the senior secured promissory note from
TARC to the Company in the fully accreted principal amount of $920 million upon
substantially the terms described under "-- Collateral and Security."
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"TARC Interest Increase" means the .25% per annum increase in the rate
of interest borne by the TARC Intercompany Loan on or after June 15, 1999 which
occurs if the cost to complete Phase I is in excess of $245 million.
"TARC Mortgage" means the Mortgage, Assignment of Leases and Rents,
Security Agreement and Financing Statement from TARC in favor of the Company.
"TARC Pledge Agreement" means the Pledge Agreement between TARC and the
Company.
"TARC Security Agreement" means the Security Agreement between TARC and
the Company.
"TARC Security Documents" means the TARC Security Agreement, the TARC
Pledge Agreement, the Disbursement Agreement, the TARC Mortgage, a registration
rights agreement relating to the shares of TARC Common Stock pledged to the
Indenture Trustee and each other agreement relating to the pledge of assets to
secure the TARC Intercompany Loan and any guarantee of the obligations of TARC
under the TARC Intercompany Loan by any Guarantor that may be entered into
after the date of the TARC Intercompany Loan, pursuant to the terms of the TARC
Intercompany Loan.
"TARC Shared Collateral" means the Collateral securing the Senior TARC
Mortgage Notes, the Senior TARC Discount Notes, and the TARC Intercompany Loan.
"TARC Warrants" means the Common Stock Purchase Warrants of TARC issued
on February 23, 1995.
"Tax Allocation Agreement" means the Tax Allocation Agreement, dated as
of August 24, 1993, among TNGC Holdings Corporation, the Company and other
subsidiaries, as in effect on the Issue Date and as amended from time to time,
provided that any such amendment is not materially adverse to the holders of
the Notes.
"TEC Disbursement Account" means a segregated deposit account from which
funds will be disbursed pursuant to the Disbursement Agreement.
"TEC Preferred Stock" means the 1,000 shares of Preferred Stock issued
on February 23, 1995.
"Third Party Consent Agreement" means any mineral lease, right-of-way,
easement, or any farm-out, farm-in, joint operating, joint venture or area of
mutual interest agreement to which TransTexas or any of its Subsidiaries is a
party (i) that is included in the Collateral or relates to an asset included in
the Collateral, (ii) that requires the consent or approval of any Person (a)
for the creation, perfection, maintenance or protection of a valid security
interest in, or Lien against, any of the Collateral in favor of the Company or
the Indenture Trustee or (b) upon foreclosure of the Indenture Trustee's Lien,
for the Company or the Indenture Trustee to acquire or sell, assign, dispose of
or otherwise transfer such mineral lease, right-of-way, easement, or farm-out,
farm-in, joint operating, joint venture or area of mutual interest agreement or
any right or interest of TransTexas or any of its Subsidiaries thereunder, or
for the Company or the Indenture Trustee to exercise any or all of its rights
or remedies under any of the Security Documents and (iii) with respect to which
such consent or approval has not yet been obtained.
"Trading Day" means any day on which the securities in question are
quoted on the NYSE, or if such securities are not approved for listing on the
NYSE, on the principal national securities market or exchange on which such
securities are listed or admitted, or if not listed or admitted for trading on
any national securities market or exchange, on the NNM.
"Transfer Agreement" means the Transfer Agreement, dated as of August
24, 1993, among TransAmerican, TransTexas, TransTexas Transmission Corporation,
and Mr. Stanley, as in effect on the Issue Date and as amended from time to
time, provided that any such amendment is not materially adverse to the holders
of the Notes.
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"TransTexas" means TransTexas Gas Corporation, a Delaware corporation.
"TransTexas Borrowing Base" means, as of any date, an amount equal to
the sum of (a) 85% of the book value of all accounts receivable owned by
TransTexas and its Subsidiaries (excluding any accounts receivable that are
more than 90 days past due, less (without duplication) the allowance for
doubtful accounts attributable to such current accounts receivable) calculated
on a consolidated basis and in accordance with GAAP and (b) 70% of the current
market value of all inventory owned by TransTexas and its Subsidiaries as of
such date. To the extent that information is not available as to the amount of
accounts receivable as of a specific date, TransTexas may utilize, to the
extent reasonable, the most recent available information for purposes of
calculating the TransTexas Borrowing Base.
"TransTexas Disbursement Agreement" means the Disbursement Agreement
among TransTexas, the Company, the Trustee and the disbursement agent named
therein, as amended pursuant to the terms thereof.
"TransTexas Collateral" means (x) the assets of TransTexas which are
mortgaged or pledged to the Company pursuant to the terms of the TransTexas
Security Documents and (y) the guarantees by the Subsidiaries of TransTexas of
the TransTexas Intercompany Loan.
"TransTexas Drilling Agreement" means a drilling services agreement
between TransTexas and TTXD relating to the provision by TTXD to TransTexas of
drilling and related services at market rates, upon the terms approved by the
board of directors of each of TTXD and TransTexas.
"TransTexas Entities" means TransTexas and each of its Subsidiaries.
"TransTexas Guarantor Mortgage" means each mortgage, deed of trust,
assignment, security agreement and financing statement by each Guarantor of the
TransTexas Intercompany Loan to the trustee named therein for the benefit of
the Company.
"TransTexas Guarantor Security Agreement" means each security agreement,
pledge and financing statement by each Guarantor of the TransTexas Intercompany
Loan in favor of the Company.
"TransTexas Intercompany Loan" means the senior secured promissory note
from TransTexas to the Company in the principal amount of $450 million upon
substantially the terms described under the heading "-- Collateral and
Security."
"TransTexas Interest Increase" means an increase in the rate of interest
borne by the TransTexas Intercompany Loan from 10 7/8% to 12 7/8% during a
TransTexas Interest Increase Quarter.
"TransTexas Interest Increase Quarter" means any fiscal quarter
immediately following a Capital Expenditure Testing Quarter, in which Capital
Expenditure Testing Quarter the Capital Expenditures of TransTexas exceeded the
Consolidated EBITDA of TransTexas for the fiscal quarter immediately preceding
such Capital Expenditure Testing Quarter.
"TransTexas Mortgage" means the Mortgage, Deed of Trust, Assignment of
Production, Security Agreement and Financing Statement by TransTexas to the
trustee named therein for the benefit of the Company.
"TransTexas Security Agreement" means the Security Agreement, Pledge and
Financing Statement by TransTexas, in favor of the Company.
"TransTexas Security Documents" means the TransTexas Mortgage, the
TransTexas Security Agreement, the TransTexas Disbursement Agreement, the
TransTexas Intercreditor Agreement, a registration rights agreement relating
to the shares of TransTexas common stock pledged to the Indenture Trustee and
each other agreement relating to the pledge of assets to secure the TransTexas
Intercompany Loan and any guarantee of the obligations of TransTexas under
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the TransTexas Intercompany Loan by any Guarantor that may be entered into
after the date of the TransTexas Intercompany Loan, pursuant to the terms of
the TransTexas Intercompany Loan.
"TransTexas Shared Collateral" means the Collateral securing the Senior
TransTexas Notes and the TransTexas Intercompany Loan.
"TTXD" means TransTexas Drilling Services, Inc., a Delaware corporation
or a newly formed corporation which is initially a wholly-owned Subsidiary of
TransTexas formed for the purpose of receiving the Investments described herein
under clauses (xii) and (xiii) under the definition of "Permitted Investments"
contained herein.
"TTXD Entities" means TTXD and each of its Subsidiaries.
"TTXD Equity Investment" means an equity Investment by TransTexas in
TTXD in an aggregate amount not in excess of $75 million.
"TTXD Spin-off" means (i) the transfer of the drilling and integrated
services business and pipeline services business and related assets from
TransTexas to TTXD and (ii) the (x) dividend of shares of common stock of TTXD
to holders of TransTexas common stock or (y) any other transaction that would
result, in the case of (x) or (y), in TransTexas being the beneficial owner of
less than 50% of the common stock of TTXD.
"Unrestricted Non-Recourse Debt" of the Company or any of its
Subsidiaries means (i) Debt of such Person that is secured solely (other than
with respect to clause (ii) below) by a Lien upon the stock of an Unrestricted
Subsidiary of such Person and as to which there is no recourse (other than with
respect to clause (ii) below) against such Person or any of its assets other
than against such stock (and the dollar amount of any Debt of such Person as
described in this clause (i) shall be deemed to be zero for purposes of all
other provisions of the Indenture) and (ii) guarantees of the Debt of
Unrestricted Subsidiaries of such Person; provided, that the aggregate of all
Debt of such Person Incurred and outstanding pursuant to clause (ii) of this
definition, together with all Permitted Investments (net of any return on such
Investment) in Unrestricted Subsidiaries of such Person, does not exceed (x)
$25 million in the case of TransTexas or (y) 20% of TARC's Consolidated EBITDA
since the Phase II Completion Date in the case of TARC plus in the case of
clause (ii) of this definition of Unrestricted Non-Recourse Debt, Restricted
Payments permitted to be made pursuant to clauses (i) or (ii), as applicable,
of the covenant contained herein under the heading "Limitation on Restricted
Payments."
"Unrestricted Subsidiary" of any Person means any other Person ("Other
Person") that would, but for this definition of "Unrestricted Subsidiary" be a
Subsidiary of such Person organized or acquired after the Issue Date as to
which all of the following conditions apply: (i) neither such Person nor any of
its other Subsidiaries provides credit support of any Debt of such Other Person
(including any undertaking, agreement or instrument evidencing such Debt),
other than Unrestricted Non-Recourse Debt; (ii) such Other Person is not
liable, directly or indirectly, with respect to any Debt other than
Unrestricted Subsidiary Debt; (iii) neither such Person nor any of its
Subsidiaries has made an Investment in such Other Person unless such Investment
was permitted by the provisions described under " -- Covenants -- Limitation on
Restricted Payments;" and (iv) the Board of Directors of such Person, as
provided below, shall have designated such Other Person to be an Unrestricted
Subsidiary on or prior to the date of organization or acquisition of such Other
Person. Any such designation by the Board of Directors of such Person shall be
evidenced to the Indenture Trustee by delivering to the Indenture Trustee a
resolution thereof giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions. The Board of Directors of any Person may designate any Unrestricted
Subsidiary of such Person as a Subsidiary of such Person; provided, that, (a)
if the Unrestricted Subsidiary has any Debt outstanding or is otherwise liable
for any Debt or has a negative Net Worth, then immediately after giving pro
forma effect to such designation, such Person could incur at least $1.00 of
additional Debt pursuant to the provisions described under the heading " --
Covenants -- Limitation on Incurrences of Additional Debt and Issuances of
Disqualified Capital Stock" (assuming, for purposes of this calculation, that
each dollar of negative Net Worth is equal to one dollar of Debt), (b) all Debt
of such Unrestricted Subsidiary shall be deemed to be incurred by a Subsidiary
of the Person on the date such Unrestricted Subsidiary becomes a Subsidiary,
and (c) no
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Default or Event of Default would occur or be continuing after giving effect to
such designation. Any subsidiary of an Unrestricted Subsidiary shall be an
Unrestricted Subsidiary for purposes of the Indenture. Notwithstanding the
foregoing, TransTexas Exploration Corporation shall be deemed to be an
Unrestricted Subsidiary of TransTexas.
"Unrestricted Subsidiary Debt" means, as to any Unrestricted Subsidiary
of any Person, Debt of such Unrestricted Subsidiary (i) as to which neither
such Person nor any Subsidiary of such Person is directly or indirectly liable
(by virtue of such Person or any such Subsidiary being the primary obligor on,
guarantor of, or otherwise liable in any respect to, such Debt), unless such
liability constitutes Unrestricted Non-Recourse Debt and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder (other than the Company or any Subsidiary of the Company) of any Debt of
such Person or any Subsidiary of such Person to declare, a default on such Debt
of such Person or any Subsidiary of such Person or cause the payment thereof to
be accelerated or payable prior to its stated maturity, unless, in the case of
this clause (ii), such Debt constitutes Unrestricted Non-Recourse Debt.
"Value" means, as of any date, (a) when used with respect to Senior
Secured Discount Notes prior to June 15, 1999, the Accreted Value of such
Senior Secured Discount Notes, and (b) when used with respect to (i) Senior
Secured Discount Notes on or after June 15, 1999 or (ii) Senior Secured Notes,
the outstanding principal amount of such Notes, plus all accrued and unpaid
interest thereon.
"Vehicles" means all trucks, automobiles, trailers and other vehicles
covered by a certificate of title.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means Capital Stock of a Person having generally the
right to vote in the election of directors of such Person.
"Weighted Average Life" means, as of the date of determination, with
respect to any debt instrument, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such debt instrument
multiplied by the amount of such principal payment by (ii) the sum of all such
principal payments.
COVENANTS
The Indenture contains, among others, the following covenants:
Repurchase of Notes at the Option of the Holder Upon a Change of
Control. In the event that a Change of Control occurs, each Holder of Notes
will have the right, at such Holder's option, subject to the terms and
conditions of the Indenture, to require the Company to repurchase all or any
part of such Holder's Notes (provided that the principal amount of such Notes
must be $1,000 or an integral multiple thereof) on a date that is no later than
60 Business Days after the occurrence of such Change of Control (the date on
which the repurchase is effected being referred to herein as the "Change of
Control Payment Date"), at a cash purchase price equal to 101% of the Value
thereof (the "Change of Control Purchase Price"), on and including the Change
of Control Payment Date.
The Company shall notify the Indenture Trustee within five Business Days
after each date upon which the Company knows, or reasonably should know, of the
occurrence of a Change of Control. Within 20 Business Days after the Company
knows, or reasonably should know, of the occurrence of each Change of Control,
the Company will make an irrevocable, unconditional offer (a "Change of Control
Offer") to the Holders of Notes to purchase all of the Notes at the Change of
Control Purchase Price by sending written notice of a Change of Control Offer,
by first class mail, to each Holder at its registered address, with a copy to
the Indenture Trustee. The notice to Holders will contain all instructions and
materials required by applicable law and will contain or make available to
Holders other information material to such Holders' decision to tender Notes
pursuant to the Change of Control Offer.
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On or before the Change of Control Payment Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer prior to the close of the third Business Day prior to
the Change of Control Payment Date, (ii) deposit with the Paying Agent U.S.
Legal Tender sufficient to pay the Change of Control Purchase Price of all
Notes so tendered, and (iii) deliver or cause to be delivered to the Indenture
Trustee Notes so accepted together with an Officers' Certificate listing the
Notes or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to the Holders of Notes so accepted payment in an amount equal to
the Change of Control Purchase Price, and the Indenture Trustee will promptly
authenticate and mail or deliver to such Holders a new Note equal in Accreted
Value or principal amount, as applicable, to any unpurchased portion of the
Note surrendered. Any Notes not so accepted will be promptly mailed or
delivered by the Company to the Holder thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date.
To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and
any other tender offer rules under the Exchange Act and other securities laws,
rules, and regulations which may then be applicable to any offer by the Company
to purchase the Notes at the option of Holders upon a Change of Control and, if
such laws, rules, and regulations require or prohibit any action inconsistent
with the foregoing, compliance by the Company with such laws, rules, and
regulations will not constitute a breach of the Company's obligations with
respect to the foregoing.
Limitation on Incurrences of Additional Debt and Issuances of
Disqualified Capital Stock. The Indenture provides that the Company may not,
and may not permit any of its Subsidiaries (other than any of the TTXD Entities
after the TTXD Spin-off) to, directly or indirectly, create, incur, assume,
guarantee, or otherwise become liable for, contingently or otherwise (to
"Incur" or, as appropriate, an "Incurrence"), any Debt or issue any
Disqualified Capital Stock, except:
(1) in the case of TransTexas or its Subsidiaries prior to the
earlier to occur of (x) the Phase I Completion Date or (y) the Notes being
rated "B2" or better by Moody's Investors Services, Inc. or "BB-" or better by
Standard and Poors Corporation, Inc.:
(a) Debt evidenced by the TransTexas Intercompany Loan or the
Guarantees;
(b) Subordinated Debt of TransTexas solely to any wholly owned
Subsidiary of TransTexas, or Debt of any wholly owned Subsidiary of
TransTexas solely to TransTexas or to any wholly owned Subsidiary of
TransTexas;
(c) Debt outstanding under a Revolving Credit Facility in an
aggregate principal amount not to exceed at any one time the greater of
$30 million or the TransTexas Borrowing Base;
(d) Debt in an aggregate principal amount outstanding not to
exceed at any one time $35 million;
(e) Debt of TransTexas secured by a Permitted TransTexas Lien
that meets the requirements of clause (c), (d), (e), (i), (k), (l), (m),
(o) or (r) of the definition of "Permitted TransTexas Liens," to the
extent that such Liens would give rise to Debt under clauses (i), (ii),
or (iii) of the definition of "Debt;"
(f) any guaranty of Debt permitted by clauses (c), (d), (e) or
(g) hereof, which guaranty is subordinated in right of payment to the
TransTexas Intercompany Loan to the same extent that the Debt permitted
to be incurred pursuant to such clauses would be required to be
subordinated to the TransTexas Intercompany Loan and which guaranty
shall not be included in the determination of the amount of Debt which
may be Incurred pursuant to (c), (d), (e) or (g) hereof;
(g) TransTexas may Incur Debt as an extension, renewal,
replacement, or refunding of any of the Debt permitted to be Incurred by
clauses (m) or (o) hereof, or this clause (g) (such Debt is collectively
referred to
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as "Pre-Phase I TransTexas Refinancing Debt"), provided, that (1) the
maximum principal amount of Pre-Phase I TransTexas Refinancing Debt (or,
if such Pre-Phase I TransTexas Refinancing Debt is issued with original
issue discount the original issue price of such Pre-Phase I TransTexas
Refinancing Debt) permitted under this clause (g) may not exceed the
lesser of (x) the principal amount of the Debt being extended, renewed,
replaced, or refunded plus reasonable financing fees and other
associated reasonable out-of-pocket expenses including consent payments,
premium, if any, and related fees, in each case other than those paid to
a Related Person (collectively, "Refinancing Fees"), or (y) if such Debt
being extended, renewed, replaced, or refunded was issued at an original
issue discount, the original issue price, plus amortization of the
original issue discount as of the time of the Incurrence of the Pre-
Phase I TransTexas Refinancing Debt plus Refinancing Fees, (2) the Pre-
Phase I TransTexas Refinancing Debt has a Weighted Average Life and a
final maturity that is equal to or greater than the Debt being extended,
renewed, replaced, or refunded at the time of such extension, renewal,
replacement, or refunding and (3) the Pre-Phase I TransTexas Refinancing
Debt shall rank with respect to the Notes and the TransTexas
Intercompany Loan to an extent no less favorable in respect thereof to
the Holders than the Debt being refinanced;
(h) Debt represented by trade payables or accrued expenses, in
each case incurred on normal, customary terms in the ordinary course of
business, not overdue for a period of more than 90 days (or, if overdue
for a period of more than 90 days, being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto being
maintained on the books of TransTexas in accordance with GAAP) and not
constituting any amounts due to banks or other financial institutions;
(i) Swap Obligations of TransTexas;
(j) Unrestricted Non-Recourse Debt of TransTexas;
(k) Debt evidenced by the Senior TransTexas Notes;
(l) TransTexas may enter into an agreement for the Presale of Gas
for cash if the net proceeds from such sale are used to make an
Intercompany Loan Redemption;
(m) Debt relating to the Reimbursement and Credit Facility;
(n) letters of credit and reimbursement obligations relating
thereto to the extent collateralized by cash or Cash Equivalents;
(o) Debt evidenced by the Subordinated Notes;
(p) guarantees of Debt of TTXD to the extent that such Debt was
Debt of TransTexas on the Issue Date and relates to assets contributed
to TTXD pursuant to clause (xiii) of the definition of "Permitted
Investment;"
(q) Debt of TransTexas or any of its Subsidiaries owed to the
Company which is loaned pursuant to terms of the fourth paragraph of
either of the covenants contained herein under the headings "-- Excess
Cash" and "-- Additional Interest Excess Cash Offer;" and
(r) Debt of TransTexas owed to the Company which together with
any Debt incurred pursuant to clauses (2)(p), (3)(v) and (4)(t) hereof
does not in the aggregate exceed $50 million principal amount
outstanding at any one time; provided that such Debt must have a
maturity date which is not after the maturity date of the Notes; and
provided further, that such loan must bear cash interest which, together
with any cash interest payable (i) on Debt Incurred pursuant to clauses
(2)(p), (3)(v) and (4)(t) hereof, (ii) the TARC Intercompany Loan, (iii)
the TransTexas Intercompany Loan and (iv) any other intercompany loan
payable to the Company, is sufficient to satisfy all interest payments
on the Notes through their stated maturity.
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(2) in the case of TARC or its Subsidiaries prior to the earlier to
occur of (x) the Phase I Completion Date or (y) the Notes being rated "B2" or
better by Moody's Investors Services, Inc. or "BB-" or better by Standard and
Poors Corporation, Inc.:
(a) Debt evidenced by the TARC Intercompany Loan or the
Guarantees;
(b) Subordinated Debt of TARC solely to any wholly owned
Subsidiary of TARC, or Debt of any wholly owned Subsidiary of TARC
solely to TARC or to any wholly owned Subsidiary of TARC;
(c) Debt of TARC outstanding at any time in an aggregate
principal amount not to exceed the greater of (x) $100 million or (y)
the TARC Borrowing Base, less, in each case, the amount of any Debt of
an Accounts Receivable Subsidiary (other than Debt owed to TARC).
(d) Debt in an aggregate principal amount not to exceed at any
one time $10 million;
(e) Debt incurred in connection with the Port Commission Bond
Financing, and any Attributable Debt related thereto, in each case in an
aggregate amount not to exceed $65 million;
(f) Debt secured by a Permitted TARC Lien that meets the
requirements of clause (c), (g), (m), (o) and (r) of the definition of
"Permitted TARC Liens", to the extent that such Liens would give rise to
Debt under clauses (i), (ii), or (iii) of the definition of "Debt";
(g) Any guaranty of Debt permitted by clauses (c), (d) or (f)
hereof which guaranty is subordinated in right of payment to the Notes
and the TARC Intercompany Loan to the same extent that the Debt
permitted to be incurred pursuant to such clauses would be required to
be subordinated to the Notes and the TARC Intercompany Loan and which
guaranty shall not be included in the determination of the amount of
Debt which may be Incurred pursuant to (c), (d) or (f) hereof;
(h) Debt of TARC represented by trade payables or accrued
expenses, in each case, incurred on normal, customary terms in the
ordinary course of business, not overdue for a period of more than 90
days (or, if overdue for a period of more than 90 days, being contested
in good faith and by appropriate proceedings and adequate reserves with
respect thereto being maintained on the books of TARC in accordance with
GAAP) and not constituting any amounts due to banks or other financial
institutions;
(i) Swap Obligations of TARC;
(j) Unrestricted Non-Recourse Debt of TARC;
(k) Debt evidenced by the Senior TARC Mortgage Notes;
(l) Debt or Attributable Debt Incurred in connection with the
acquisition of tank storage facilities in the vicinity of the refinery
or a substantially contemporaneous Sale and Leaseback Transaction with
respect thereto;
(m) letters of credit and reimbursement obligations relating
thereto to the extent collateralized by cash or Cash Equivalents;
(n) Debt evidenced by the Senior TARC Discount Notes;
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(o) Debt of TARC or any of its Subsidiaries owed to the Company
which is loaned pursuant to terms of the fourth paragraph of either of
the covenants contained herein under the headings "-- Excess Cash" and
"-- Additional Interest Excess Cash Offer;"
(p) Debt of TARC owed to the Company which together with any Debt
incurred pursuant to clauses (1)(r), (3)(v) and (4)(t) hereof does not
in the aggregate exceed $50 million principal amount outstanding at any
one time; provided that such Debt must have a maturity date which is not
after the maturity date of the Notes; and provided further, that such
loan must bear cash interest which, together with any cash interest
payable (i) on Debt Incurred pursuant to clauses (1)(r), (3)(v) and
(4)(t) hereof, (ii) the TARC Intercompany Loan, (iii) the TransTexas
Intercompany Loan and (iv) any other intercompany loan payable to the
Company, is sufficient to satisfy all interest payments on the Notes
through their stated maturity; and
(q) TARC may Incur Debt as an extension, renewal, replacement, or
refunding of any of the Debt permitted to be Incurred by clause (e)
hereof, or this clause (q) (such Debt is collectively referred to as
"Pre-Phase I TARC Refinancing Debt"), provided, that (1) the maximum
principal amount of Pre-Phase I TARC Refinancing Debt (or, if such Pre-
Phase I TARC Refinancing Debt is issued with original issue discount,
the original issue price of such Pre-Phase I TARC Refinancing Debt)
permitted under this clause (q) may not exceed the lesser of (x) the
principal amount of the Debt being extended, renewed, replaced, or
refunded plus Refinancing Fees or (y) if such Debt being extended,
renewed, replaced, or refunded was issued at an original issue discount,
the original issue price, plus amortization of the original issue
discount as of the time of the Incurrence of the Pre-Phase I TARC
Refinancing Debt plus Refinancing Fees, (2) the Pre-Phase I TARC
Refinancing Debt has a Weighted Average Life and a final maturity that
is equal to or greater than the Debt being extended, renewed, replaced,
or refunded at the time of such extension, renewal, replacement, or
refunding and (3) the Pre-Phase I TARC Refinancing Debt shall rank with
respect to the Notes and the TARC Intercompany Loan to an extent no less
favorable in respect thereof to the Holders than the Debt being
refinanced.
(3) in the case of TransTexas or its Subsidiaries after the earlier
to occur of (x) the Phase I Completion Date or (y) the Notes being rated "B2"
or better by Moody's Investors Services, Inc. or "BB-" or better by Standard
and Poors Corporation, Inc.:
(a) Debt evidenced by the TransTexas Intercompany Loan or the
Guarantees;
(b) Subordinated Debt of TransTexas solely to any wholly owned
Subsidiary of TransTexas, or Debt of any wholly owned Subsidiary of
TransTexas solely to TransTexas or to any wholly owned Subsidiary of
TransTexas;
(c) (i) if the Phase I Completion Date has not occurred but the
Notes have been rated "B2" by Moody's Investors Services, Inc. or "BB-"
by Standard and Poors Corporation, Inc., TransTexas may Incur
Subordinated Debt with initial net proceeds to TransTexas not in excess
of $75 million in the aggregate, (ii) if the Phase I Completion Date has
not occurred but the Notes are rated at least "B1" or better by Moody's
Investors Services, Inc. or "BB" or better by Standard and Poors
Corporation, Inc., TransTexas may Incur Subordinated Debt with initial
net proceeds to TransTexas not in excess of $125 million in the
aggregate, less any Subordinated Debt Incurred pursuant to subclause (i)
above, and (iii) if the Phase I Completion Date has occurred, TransTexas
may Incur Subordinated Debt with initial net proceeds to TransTexas not
in excess of $125 million in the aggregate, less any Subordinated Debt
Incurred pursuant to subclauses (i) and (ii) above;
(d) Debt outstanding under a Revolving Credit Facility in an
aggregate principal amount not to exceed at any one time the greater of
$40 million or the TransTexas Borrowing Base, less any Debt outstanding
pursuant to clause (c) of clause (l) above;
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(e) Debt in an aggregate principal amount outstanding not to
exceed at any one time $35 million, less any Debt outstanding pursuant
to clause (d) of clause (l) above;
(f) Debt secured by Liens permitted pursuant to clauses (j) or
(t) of Permitted TransTexas Liens, in an aggregate principal amount not
to exceed $35 million;
(g) The Attributable Debt Incurred in connection with a Sale and
Leaseback Transaction of TransTexas' headquarters building located at
1300 North Sam Houston Parkway East, Houston, Texas, and the properties,
including various buildings and site improvements, located (i) on U.S.
Highway 359, known as "TransTexas Gas Corporation," in Webb County,
Texas and (ii) two (2) miles west of Zapata, Texas, on Farm-To-Market
Road 496, known as "TransTexas Gas Corporation," in Zapata County,
Texas;
(h) Debt of TransTexas secured by a Permitted TransTexas Lien
that meets the requirements of clause (c), (d), (e), (i), (k), (l), (m),
(o) or (r) of the definition of "Permitted TransTexas Liens," to the
extent that such Liens would give rise to Debt under clauses (i), (ii),
or (iii) of the definition of "Debt;"
(i) any guaranty of Debt permitted by clauses (c), (d), (e), (f),
(h) or (j) hereof, which guaranty is subordinated in right of payment to
the TransTexas Intercompany Loan to the same extent that the Debt
permitted to be incurred pursuant to such clauses would be required to
be subordinated to the TransTexas Intercompany Loan and which guaranty
shall not be included in the determination of the amount of Debt which
may be Incurred pursuant to (c), (d), (e), (f), (h) or (j) hereof;
(j) TransTexas may Incur Debt as an extension, renewal,
replacement, or refunding of any of the Debt permitted to be Incurred by
clauses (c), (j) (q) or (s) hereof, or the third paragraph of this
section or Debt permitted to be refinanced pursuant to clause (1)(g)
hereof (such Debt is collectively referred to as "TransTexas Refinancing
Debt"), provided, that (1) the maximum principal amount of TransTexas
Refinancing Debt (or, if such TransTexas Refinancing Debt is issued with
original issue discount, the original issue price of such TransTexas
Refinancing Debt) permitted under this subclause (j) may not exceed the
lesser of (x) the principal amount of the Debt being extended, renewed,
replaced, or refunded plus Refinancing Fees, or (y) if such Debt being
extended, renewed, replaced, or refunded was issued at an original issue
discount, the original issue price, plus amortization of the original
issue discount as of the time of the Incurrence of the TransTexas
Refinancing Debt plus Refinancing Fees, (2) the TransTexas Refinancing
Debt has a Weighted Average Life and a final maturity that is equal to
or greater than the Debt being extended, renewed, replaced, or refunded
at the time of such extension, renewal, replacement, or refunding and
(3) the TransTexas Refinancing Debt shall rank with respect to the Notes
and the TransTexas Intercompany Loan to an extent no less favorable in
respect thereof to the Holders than the Debt being refinanced;
(k) Debt represented by trade payables or accrued expenses, in
each case incurred on normal, customary terms in the ordinary course of
business, not overdue for a period of more than 90 days (or, if overdue
for a period of more than 90 days, being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto being
maintained on the books of TransTexas in accordance with GAAP) and not
constituting any amounts due to banks or other financial institutions;
(l) Swap Obligations of TransTexas;
(m) Unrestricted Non-Recourse Debt of TransTexas;
(n) Debt evidenced by the Senior TransTexas Notes;
(o) Dollar-Denominated Production Payment Obligations that
TransTexas elects to treat as Debt not to exceed $40 million in the
aggregate at any one time outstanding;
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(p) TransTexas may enter into an agreement for the Presale of Gas
for cash if the net proceeds from such sale are used to make an
Intercompany Loan Redemption;
(q) Debt relating to the Reimbursement and Credit Facility;
(r) letters of credit and reimbursement obligations relating
thereto to the extent collateralized by cash or Cash Equivalents;
(s) Debt evidenced by the Subordinated Notes;
(t) guarantees of Debt of TTXD to the extent that such Debt was
Debt of TransTexas on the Issue Date and relates to assets contributed
to TTXD pursuant to clause (xiii) of the definition of "Permitted
Investment;"
(u) Debt of TransTexas or any of its Subsidiaries owed to the
Company which is loaned pursuant to terms of the fourth paragraph of
either of the covenants contained herein under the headings "-- Excess
Cash" and "-- Additional Interest Excess Cash Offer;" and
(v) Debt of TransTexas owed to the Company which together with
any Debt incurred pursuant to clauses (1)(r), (2)(p) and (4)(t) hereof
does not in the aggregate exceed $50 million principal amount
outstanding at any one time; provided that such Debt must have a
maturity date which is not after the maturity date of the Notes; and
provided further, that such loan must bear cash interest which, together
with any cash interest payable (i) on Debt Incurred pursuant to clauses
(1)(r), (2)(p) and (4)(t) hereof, (ii) the TARC Intercompany Loan, (iii)
the TransTexas Intercompany Loan and (iv) any other intercompany loan
payable to the Company, is sufficient to satisfy all interest payments
on the Notes through their stated maturity.
(4) in the case of TARC or its Subsidiaries after the earlier to
occur of (x) the Phase I Completion Date or (y) the Notes being rated "B2" or
better by Moody's Investors Services, Inc. or "BB-" or better by Standard and
Poors Corporation, Inc.:
(a) Debt evidenced by the TARC Intercompany Loan or the
Guarantees;
(b) Subordinated Debt of TARC solely to any wholly owned
Subsidiary of TARC, or Debt of any wholly owned Subsidiary of TARC
solely to TARC or to any wholly owned Subsidiary of TARC;
(c) Subordinated Debt of TARC with initial net proceeds to TARC
not in excess of $150 million in the aggregate;
(d) Debt of TARC outstanding at any time in an aggregate
principal amount not to exceed the greater of (x) $100 million or (y)
the TARC Borrowing Base, less, in each case, the amount of any Debt of
an Accounts Receivable Subsidiary (other than Debt owed to TARC) and any
Debt outstanding pursuant to clause (c) of clause (2) above.
(e) Debt in an aggregate principal amount not to exceed at any
one time $10 million, less any Debt outstanding pursuant to clause (d)
of clause (2) above;
(f) Debt secured by Liens permitted pursuant to clauses (h) and
(j) of Permitted TARC Liens, in an aggregate principal amount not to
exceed $35 million;
(g) Debt incurred in connection with the Port Commission Bond
Financing, and any Attributable Debt related thereto, in each case in an
aggregate amount not to exceed $65 million, less any Debt incurred
pursuant to clause (e) of clause (2) above;
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(h) Debt secured by a Permitted TARC Lien that meets the
requirements of clause (c), (g), (m), (o) and (r) of the definition of
"Permitted TARC Liens", to the extent that such Liens would give rise to
Debt under clauses (i), (ii), or (iii) of the definition of "Debt";
(i) Any guaranty of Debt permitted by clauses (c), (d), (e), (f),
(h) or (j) hereof which guaranty is subordinated in right of payment to
the Notes and the TARC Intercompany Loan to the same extent that the
Debt permitted to be incurred pursuant to such clauses would be required
to be subordinated to the Notes and the TARC Intercompany Loan and which
guaranty shall not be included in the determination of the amount of
Debt which may be Incurred pursuant to (c), (d), (e), (f), (h) or (j)
hereof; and
(j) TARC may Incur Debt as an extension, renewal, replacement, or
refunding of any of the Debt permitted to be Incurred by clauses (c) or
(g) above, the fourth paragraph of this section, or this subclause (j)
or Debt permitted to be refinanced pursuant to clause (2)(q) hereof
(such Debt is collectively referred to as "TARC Refinancing Debt"),
provided, that (1) the maximum principal amount of TARC Refinancing Debt
(or, if such TARC Refinancing Debt is issued with original issue
discount, the original issue price of such TARC Refinancing Debt)
permitted under this clause (j) may not exceed the lesser of (x) the
principal amount of the Debt being extended, renewed, replaced, or
refunded plus Refinancing Fees, or (y) if such Debt being extended,
renewed, replaced, or refunded was issued at an original issue discount,
the original issue price, plus amortization of the original issue
discount at the time of the Incurrence of the TARC Refinancing Debt plus
Refinancing Fees, (2) the TARC Refinancing Debt has a Weighted Average
Life and a final maturity that is equal to or greater than the Debt
being extended, renewed, replaced, or refunded at the time of such
extension, renewal, replacement, or refunding and (3) the TARC
Refinancing Debt shall rank with respect to the Notes and the TARC
Intercompany Loan to an extent no less favorable in respect thereof to
the Holders than the Debt being refinanced;
(k) Debt of TARC represented by trade payables or accrued
expenses, in each case, incurred on normal, customary terms in the
ordinary course of business, not overdue for a period of more than 90
days (or, if overdue for a period of more than 90 days, being contested
in good faith and by appropriate proceedings and adequate reserves with
respect thereto being maintained on the books of TARC in accordance with
GAAP) and not constituting any amounts due to banks or other financial
institutions;
(l) Swap Obligations of TARC;
(m) Unrestricted Non-Recourse Debt of TARC;
(n) Debt evidenced by the Senior TARC Mortgage Notes;
(o) Debt or Attributable Debt Incurred in connection with the
acquisition of tank storage facilities in the vicinity of the refinery
or a substantially contemporaneous Sale and Leaseback Transaction with
respect thereto;
(p) letters of credit and reimbursement obligations relating
thereto to the extent collateralized by cash;
(q) Debt evidenced by the Senior TARC Discount Notes;
(r) Debt of TARC Incurred in connection with the acquisition,
construction or improvement of a CATOFIN(R) Unit not in excess of 20% of
TARC's Consolidated EBITDA accrued for the period (taken as one
accounting period) commencing with the first full fiscal quarter that
commenced after the Phase I Completion Date, to and including the fiscal
quarter ended immediately prior to the date of such calculation,
provided, that, no such Debt may be Incurred unless (i) the Phase II
Completion Date has occurred or (ii) the Construction Supervisor shall
have provided the Indenture Trustee with written certification that,
based upon its bi-monthly evaluation of the Capital Improvement Program,
the amounts remaining in the disbursement
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accounts to complete Phase II are sufficient to complete Phase II in
accordance with the Plans approved by the Construction Supervisor;
(s) Debt of TARC or any of its Subsidiaries owed to the Company
which is loaned pursuant to terms of the fourth paragraph of either of
the covenants contained herein under the headings "-- Excess Cash" and
"-- Additional Interest Excess Cash Offer;" and
(t) Debt of TARC owed to the Company which together with any Debt
incurred pursuant to clauses (1)(r), (2)(p) and (3)(v) hereof does not
in the aggregate exceed $50 million principal amount outstanding at any
one time; provided that such Debt must have a maturity date which is not
after the maturity date of the Notes; and provided further, that such
loan must bear cash interest which, together with any cash interest
payable (i) on Debt Incurred pursuant to clauses (1)(r), (2)(p) and
(3)(v) hereof, (ii) the TARC Intercompany Loan, (iii) the TransTexas
Intercompany Loan and (iv) any other intercompany loan payable to the
Company, is sufficient to satisfy all interest payments on the Notes
through their stated maturity.
(5) in the case of the Company or its Accounts Receivable Subsidiary;
(a) Debt evidenced by the Notes pursuant to the Indenture;
(b) guarantees of the Senior TARC Mortgage Notes and the Senior
TARC Discount Notes;
(c) Debt of an Accounts Receivable Subsidiary in an amount
permitted by the covenant contained herein under the heading "Accounts
Receivables Subsidiary";
(d) Subordinated Debt of the Company with initial net proceeds to
the Company not in excess of $150 million in the aggregate; and
(e) The Company may Incur Debt as an extension, renewal,
replacement, or refunding of any of the Debt permitted to be Incurred by
subclauses (d) hereof, or this subclause (e) (such Debt is collectively
referred to as "TEC Refinancing Debt"), provided, that (1) the maximum
principal amount of TEC Refinancing Debt (or, if such TEC Refinancing
Debt is issued with original issue discount, the original issue price of
such Refinancing Debt) permitted under this subclause (e) may not exceed
the lesser of (x) the principal amount of the Debt being extended,
renewed, replaced, or refunded plus Refinancing Fees, or (y) if such
Debt being extended, renewed, replaced, or refunded was issued at an
original issue discount, the original issue price, plus amortization of
the original issue discount as of the time of the Incurrence of the TEC
Refinancing Debt plus Refinancing Fees, (2) the TEC Refinancing Debt has
a Weighted Average Life and a final maturity that is equal to or greater
than the Debt being extended, renewed, replaced, or refunded at the time
of such extension, renewal, replacement, or refunding and (3) the TEC
Refinancing Debt shall rank with respect to the Notes to an extent no
less favorable in respect thereof to the Holders than the Debt being
refinanced.
For the purpose of determining the amount of outstanding Debt that has
been Incurred pursuant to clause (o) or (m) of clause (1) above, clause (e) of
clause (2) above, clause (c), (s) or (q) of clause (3) above, clause (c) or (g)
of clause (4) above or clause (d) of clause (5) above, there shall be included
in each such case the principal amount then outstanding of any Debt originally
Incurred pursuant to such clause and, after any refinancing or refunding of
such Debt, any outstanding Debt Incurred pursuant to clause (g) of clause (1)
above, clause (q) of clause (2) above, clause (j) of clause (3) above, clause
(j) of clause (4) above and clause (e) of clause (5) above so as to refinance
or refund such Debt Incurred pursuant to such subclauses and any subsequent
refinancings or refundings thereof.
Notwithstanding the foregoing provisions of this covenant, after the
Phase I Completion Date, TransTexas may (1) Incur Senior Debt and may issue
Disqualified Capital Stock if, at the time such Senior Debt is Incurred or such
Disqualified Capital Stock is Issued, (i) no Default or Event of Default shall
have occurred and be continuing at the time or immediately after giving effect
to such transaction on a pro forma basis, and (ii) immediately after giving
effect to
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the Consolidated Fixed Charges in respect of such Debt being incurred and the
application of the proceeds therefrom to the extent used to reduce Debt or
retire Disqualified Capital Stock, on a pro forma basis, the Consolidated Fixed
Charge Coverage Ratio of TransTexas for the Reference Period is greater than
2.5 to 1, and (iii) TransTexas' Adjusted Consolidated Tangible Assets are equal
to or greater than 150% of the total consolidated principal amount or accreted
value, as the case may be, of Debt of the TransTexas Entities (excluding, for
purposes of this calculation, the negative Net Worth of any Subsidiary which
was formerly designated as an Unrestricted Subsidiary); and (2) Incur
Subordinated Debt if, at the time such Subordinated Debt is incurred, (i) no
Default or Event of Default shall have occurred and be continuing at the time
or immediately after giving effect to such transaction on a pro forma basis,
(ii) immediately after giving effect to the Consolidated Fixed Charges in
respect of such Subordinated Debt being incurred and the application of the
proceeds therefrom to the extent used to reduce Debt, on a pro forma basis, the
Consolidated Fixed Charge Coverage Ratio of TransTexas for the Reference Period
is greater than 2.0 to 1, and (iii) TransTexas' Adjusted Consolidated Tangible
Assets are equal to or greater than 125% of the total consolidated principal
amount or accreted value, as the case may be, of Debt of the TransTexas
Entities (excluding, for purposes of this calculation, the negative Net Worth
of any Subsidiary which was formerly designated as an Unrestricted Subsidiary).
Notwithstanding the foregoing provisions of this covenant, (a) TARC may
Incur Senior Debt and TARC may issue Disqualified Capital Stock if, at the time
such Senior Debt is Incurred or such Disqualified Capital Stock is issued, (i)
no Default or Event of Default shall have occurred and be continuing at the
time or immediately after giving effect to such transaction on a pro forma
basis, and (ii) immediately after giving effect to the Consolidated Fixed
Charges in respect of such Debt being Incurred or such Disqualified Capital
Stock being issued and the application of the proceeds therefrom to the extent
used to reduce Debt or Disqualified Capital Stock, on a pro forma basis, the
Consolidated Fixed Charge Coverage Ratio of TARC for the Reference Period is
greater than 2.5 to 1, and (b) TARC may Incur Subordinated Debt if, at the time
such Subordinated Debt is incurred, (i) no Default or Event of Default shall
have occurred and be continuing at the time or immediately after giving effect
to such transaction on a pro forma basis, and (ii) immediately after giving
effect to the Consolidated Fixed Charges in respect of such Subordinated Debt
being incurred and the application of the proceeds therefrom to the extent used
to reduce Debt, on a pro forma basis, the Consolidated Fixed Charge Coverage
Ratio of TARC for the Reference Period is greater than 2.0 to 1.
Debt Incurred and Disqualified Capital Stock issued by any Person that
is not a Subsidiary of TransTexas or TARC, as the case may be, which Debt or
Disqualified Capital Stock is outstanding at the time such Person becomes a
Subsidiary of, or is merged into, or consolidated with TransTexas or TARC or
one of their Subsidiaries, as the case may be, shall be deemed to have been
Incurred or issued, as the case may be, at the time such Person becomes a
Subsidiary of, or is merged into, or consolidated with TransTexas or TARC,
respectively, or one of their respective Subsidiaries.
For the purpose of determining compliance with this covenant, (A) if an
item of Debt meets the criteria of more than one of the types of Debt described
in the above clauses, the Company or the Subsidiary in question shall have the
right to determine in its sole discretion the category to which such Debt
applies and shall not be required to include the amount and type of such Debt
in more than one of such categories and may elect to apportion such item of
Debt between or among any two or more of such categories otherwise applicable,
and (B) the amount of any Debt which does not pay interest in cash or which was
issued at a discount to face value shall be deemed to be equal to the amount of
the liability in respect thereof determined in accordance with GAAP.
Limitation on Restricted Payments. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries (other than any
of the TTXD Entities after the TTXD Spin-off) to, directly or indirectly, make
any dividend or other distribution on shares of Capital Stock of the Company or
any Subsidiary of the Company or make any payment on account of the purchase,
redemption, or other acquisition or retirement for value of any such shares of
Capital Stock (except (x) to TransTexas by any of its Subsidiaries or (y) to
TARC by any of its Subsidiaries) unless such dividends, distributions, or
payments are made in cash or Capital Stock or a combination thereof (other than
the TTXD Spin-off or a dividend of the common stock of TransTexas by TARC to
the Company). In addition, the Indenture provides that the Company will not,
and will not permit any of its Subsidiaries (other than any of the TTXD
Entities after the TTXD Spin-off) to, directly or indirectly, make any
Restricted Payment; provided, however, that TransTexas
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or TARC may make a Restricted Payment if, at the time or after giving effect
thereto on a pro forma basis no Default or Event of Default would occur or be
continuing, and:
(i) in the case of Restricted Payments by TransTexas:
(a) the Consolidated Fixed Charge Coverage Ratio of TransTexas
exceeds 2.25 to 1;
(b) TransTexas' Adjusted Consolidated Tangible Assets are equal
to or greater than 150% of the total consolidated principal amount or
accreted value, as the case may be, of Debt of TransTexas and its
Subsidiaries (excluding, for purposes of the calculation of Debt, any
Swap Obligations); and
(c) the aggregate amount of all Restricted Payments made by
TransTexas and its Subsidiaries, including such proposed Restricted
Payment and all payments that may be made pursuant to the proviso at the
end of this sentence (if not made in cash, then the fair market value of
any property used therefor) from and after the Issue Date and on or
prior to the date of such Restricted Payment, would not exceed the sum
of (x) 25% of Adjusted Consolidated Net Income of TransTexas accrued for
the period (taken as one accounting period), commencing with the first
full fiscal quarter that commenced after the Issue Date, to and
including the fiscal quarter ended immediately prior to the date of each
calculation (or, in the event Adjusted Consolidated Net Income for such
period is a deficit, then minus 100% of such deficit), minus (y) 100% of
the amount of any write-downs, write-offs, other negative revaluations,
and other negative extraordinary charges not otherwise reflected in
Adjusted Consolidated Net Income of TransTexas during such period, plus
(z) the aggregate Net Proceeds received by TransTexas from the issuance
or sale (other than to the Company or a Subsidiary of the Company) of
its Qualified Capital Stock from and after the Issue Date and on or
prior to the date of such Restricted Payment); or
(ii) in the case of Restricted Payments by TARC:
(a) TARC's Consolidated Fixed Charge Coverage Ratio exceeds 2.25
to 1; and
(b) the aggregate amount of all Restricted Payments made by all
of the TARC Entities, including such proposed Restricted Payment and all
payments that may be made pursuant to the proviso at the end of this
sentence (if not made in cash, then the fair market value of any
property used therefor), from and after the Issue Date and on or prior
to the date of such Restricted Payment, would not exceed an amount equal
to (x) 25% of Adjusted Consolidated Net Income of TARC accrued for the
period (taken as one accounting period) from the first full fiscal
quarter that commenced after the Issue Date to and including the fiscal
quarter ended immediately prior to the date of each calculation for
which financial statements are available (or, if TARC's Adjusted
Consolidated Net Income for such period is a deficit, then minus 100% of
such deficit), plus (y) the aggregate Net Proceeds received by TARC from
the issuance or sale (other than to the Company or a Subsidiary of the
Company) of its Qualified Capital Stock from and after the Issue Date
and on or prior to the date of such Restricted Payment, minus (z) 100%
of the amount of any write-downs, write-offs, other negative
revaluations, and other negative extraordinary charges not otherwise
reflected in TARC's Adjusted Consolidated Net Income during such period;
and
provided, that the foregoing clauses will not prohibit the payment of any
dividend within 60 days after the date of its declaration if such dividend
could have been made on the date of its declaration in compliance with the
foregoing provisions.
Accounts Receivable Subsidiary. The Indenture provides that:
(a) Notwithstanding the provisions of the covenant entitled
"Limitation on Restricted Payments," TARC may, and may permit any of its
Subsidiaries to, make Investments in an Accounts Receivable Subsidiary
(i) the proceeds of which are applied within five Business Days of the
making thereof solely to finance the
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purchase of accounts receivable of TARC and its Subsidiaries and (ii) in
the form of Accounts Receivable Subsidiary Notes to the extent permitted
by clause (b) below; provided that the aggregate amount of such
Investments shall not exceed the greater of $20 million or 20% of the
TARC Borrowing Base at any time;
(b) TARC may not, nor may it permit any of its Subsidiaries to,
sell accounts receivable to an Accounts Receivable Subsidiary except for
consideration in an amount not less than that which would be obtained in
an arm's length transaction and solely in the form of cash or Cash
Equivalents; provided that an Accounts Receivable Subsidiary may pay the
purchase price for any such accounts receivable in the form of Accounts
Receivable Subsidiary Notes so long as, after giving effect to the
issuance of any such Accounts Receivable Subsidiary Notes, the aggregate
principal amount of all Accounts Receivable Subsidiary Notes outstanding
shall not exceed the greater of $20 million or 20% of the aggregate
purchase price paid for all outstanding accounts receivable purchased by
an Accounts Receivable Subsidiary since the date of this Indenture (and
not written off or required to be written off in accordance with the
normal business practice of an Accounts Receivable Subsidiary);
(c) The Company shall not permit an Accounts Receivable
Subsidiary to sell any accounts receivable purchased from TARC and its
Subsidiaries or participation interests therein to any other Person
except on an arm's length basis and solely for consideration in the form
of cash or Cash Equivalents;
(d) The Company may not, nor may it permit any of its
Subsidiaries to, enter into any guarantee, subject any of their
respective properties or assets (other than the accounts receivable sold
by them to an Accounts Receivable Subsidiary or a guarantee limited in
recourse solely to the stock of an Accounts Receivable Subsidiary) to
the satisfaction of any liability or obligation or otherwise incur any
liability or obligation (contingent or otherwise), in each case, on
behalf of an Accounts Receivable Subsidiary or in connection with any
sale of accounts receivable or participation interests therein by or to
an Accounts Receivable Subsidiary, other than obligations relating to
breaches of representations, warranties, covenants, and other agreements
of TARC or any of its Subsidiaries with respect to the accounts
receivable sold by TARC or any of its Subsidiaries to an Accounts
Receivable Subsidiary or with respect to the servicing thereof; provided
that neither TARC nor any of its Subsidiaries shall at any time
guarantee or be otherwise liable for the collectability of accounts
receivable sold by them;
(e) The Company shall not permit an Accounts Receivable
Subsidiary to engage in any business or transaction other than the
purchase and sale of accounts receivable or participation interests
therein of TARC and its Subsidiaries and activities incidental thereto,
including incurring Debt pursuant to clause (f) below;
(f) The Company shall not permit an Accounts Receivable
Subsidiary to incur any Debt other than the Accounts Receivable
Subsidiary Notes, Debt owed to TARC, and Non-Recourse Debt; provided
that the aggregate principal amount of all such Debt of an Accounts
Receivable Subsidiary shall not exceed the book value of its total
assets as determined in accordance with GAAP;
(g) The Company shall cause any Accounts Receivable Subsidiary to
remit to the Company on a monthly basis as a distribution all available
cash and Cash Equivalents not held in a collection account pledged to
lenders, acquirors of accounts receivable or participation interests
therein, to the extent not applied to (i) pay interest or principal on
the Accounts Receivable Subsidiary Notes or any Debt of such Accounts
Receivable Subsidiary permitted by clause (f) above, (ii) pay or
maintain reserves for reasonable operating expenses of such Accounts
Receivable Subsidiary or to satisfy reasonable minimum operating capital
requirements, or (iii) to finance the purchase of additional accounts
receivable of TARC and its Subsidiaries; and
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(h) TARC may not, nor may it permit any of its Subsidiaries
to, sell accounts receivable to, or enter into any such transaction
with or for the benefit of, an Accounts Receivable Subsidiary (i) if
such Accounts Receivable Subsidiary pursuant to or within the meaning
of any Bankruptcy Law (A) commences a voluntary case, (B) consents to
the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property, (D) makes general assignment for
the benefit of its creditors, or (E) generally is not paying its debts
as they become due; or (ii) if a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that (A) is for
relief against such Accounts Receivable Subsidiary in an involuntary
case, (B) appoints a Custodian of such Accounts Receivable Subsidiary
or for all or substantially all of the property of such Accounts
Receivable Subsidiary, or (C) orders the liquidation of such Accounts
Receivable Subsidiary, and, with respect to clause (ii) hereof, the
order or decree remains unstayed and in effect for 60 consecutive
days.
Limitation on Restricting Subsidiary Dividends. The Indenture provides
that the Company may not, and may not permit any of its Subsidiaries (other
than TARC, TransTexas or any of the TTXD Entities) to, directly or indirectly,
create, assume, or suffer to exist any consensual encumbrance or restriction on
the ability of any Subsidiary of the Company (other than TARC, TransTexas or
any of the TTXD Entities) to pay dividends or make other distributions on the
Capital Stock of any Subsidiary of the Company, except encumbrances and
restrictions existing under this Indenture and any agreement of a Person
acquired by the Company or a Subsidiary of the Company, which restrictions
existed at the time of acquisition, were not put in place in anticipation of
such acquisition and are not applicable to any Person or property, other than
the Person or any property of the Person so acquired. Notwithstanding anything
contained herein to the contrary, neither TARC nor TransTexas may create an
encumbrance or restriction on their ability to pay premium, if any, principal
of, or interest on, the Intercompany Loans.
Guarantee by Subsidiaries. The Indenture provides that if TARC or
TransTexas or any of their respective Subsidiaries shall make Investments in an
aggregate amount, or otherwise transfer (including by capital contribution) or
cause to be transferred, in a manner otherwise permitted pursuant to the
Indenture, any assets (tangible or intangible), businesses, divisions, real
property, or equipment having a book value as shown in the Company's most
recent consolidated balance sheet or the notes thereto (or if greater, a fair
market value at the time of transfer) in excess of $1 million in or to any
Subsidiary that is not a Guarantor or an obligor on either the TransTexas
Intercompany Loan or the TARC Intercompany Loan, other than TTXD or any
Subsidiary of TTXD after the TTXD Spin-off, the Company shall (a) cause such
transferee Subsidiary to (x) guarantee payment of the TransTexas Intercompany
Loan, in the case of Subsidiaries of TransTexas, or the TARC Intercompany Loan
in the case of Subsidiaries of TARC, by executing a Guarantee and (y) execute
the appropriate security document, in substantially the form of the relevant
Security Document, necessary to grant a security interest in all of the assets
of such Subsidiary (other than Equipment, Inventory and Receivables) to secure
such Guarantee and (b) deliver to the Indenture Trustee an Opinion of Counsel,
in form reasonably satisfactory to the Indenture Trustee, that such Guarantee
is a valid, binding and enforceable obligation of such Subsidiary, subject to
customary exceptions for bankruptcy, fraudulent transfer and equitable
principles. If TARC or TransTexas or any of their Subsidiaries shall
subsequently sell or otherwise transfer all of the Capital Stock of such
Subsidiary held by TARC, TransTexas or any of their Subsidiaries, the Guarantee
required hereby shall be withdrawn or canceled. In addition, if the TTXD
Spin-off has occurred the Guarantee by TTXD or any of its Subsidiaries shall be
withdrawn or cancelled.
The liability of each Guarantor under its Guarantee will be limited to
the amount of its Adjusted Net Assets. The limitation is intended to protect
the Guarantees from avoidance as fraudulent transfers, although there can be no
assurance that the limitation will successfully do so. See "Risk Factors --
General Risk Factors -- Fraudulent Transfer Considerations." Each Guarantor
that makes a payment under its Guarantee of the TARC Intercompany Loan or the
TransTexas Intercompany Loan shall be entitled to assert a claim for
reimbursement from each other Guarantor of the respective Intercompany Loan, in
each case in an amount not to exceed the product of (x) the other Guarantor's
Adjusted Net Assets times (y) a fraction, the numerator of which is the other
Guarantor's Adjusted Net Assets and the denominator of which is the sum of the
Adjusted Net Assets of all Guarantors of the same Intercompany Loan.
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Limitation on Transactions with Related Persons. The Indenture
provides that the Company may not, and may not permit any of its Subsidiaries
(other than any of the TTXD Entities after the date of the TTXD Spin-off) to,
enter directly or indirectly into, or permit to exist, any transaction or
series of related transactions with any Related Person (excluding any Related
Person which is a Related Person solely because the party engaging in such
transaction has the ability to control the Related Person under the definition
of "Control" contained within the definition of "Related Person") (including
without limitation: (i) the sale, lease, transfer, or other disposition of
properties, assets, or securities to such Related Person; (ii) the purchase or
lease of any properties, assets, or securities from such Related Person; (iii)
an Investment in such Related Person (excluding Investments permitted to be
made pursuant to clauses (iii), (vi), (viii), (x), (xii), (xiii), (xv), (xvi),
(xvii), (xix), (xx), (xxii), (xxiii), (xxiv) or (xxvi) of the definition of
"Permitted Investment" contained herein); and (iv) entering into or amending
any contract or agreement with or for the benefit of a Related Person (each a
"Related Person Transaction")), except for (a) permitted Restricted Payments,
including for this purpose the transactions excluded from the definition of
Restricted Payments by the proviso contained in the definition of "Restricted
Payments", (b) transactions made in good faith, the terms of which are: (x)
fair and reasonable to the Company or such Subsidiary, as the case may be, and
(y) are at least as favorable as the terms which could be obtained by the
Company or such Subsidiary, as the case may be, in a comparable transaction
made on an arm's length basis with Persons who are not Related Persons, (c)
transactions (i) between the Company and any of its wholly owned Subsidiaries
or transactions between wholly owned Subsidiaries of the Company, (ii) among
the TTXD Entities, (iii) among the TARC Entities or (iv) among the TransTexas
Entities, (d) transactions pursuant to the Services Agreement, the Transfer
Agreement, the Tax Allocation Agreement, the Gas Purchase Agreement, the
Drilling Agreement, the Intercompany Notes, the Security Documents, and the
Registration Rights Agreements (e) the lease of office space to the Company or
an Affiliate of the Company by TransAmerican or an Affiliate of TransAmerican,
provided that payments thereunder do not exceed in the aggregate $2,000,000 per
year, (f) any sale and leaseback or other transfer of TransTexas' headquarters
building located at 1300 North Sam Houston Parkway East, Houston, Texas, (g)
any employee compensation arrangement in an amount which together with the
amount of all other cash compensation paid to such employee by the Company and
its Subsidiaries does not provide for cash compensation in excess of $2 million
in any fiscal year of the Company or any Subsidiary and which has been approved
by a majority of the Company's Independent Directors and found in good faith by
such directors to be in the best interests of the Company or such Subsidiary,
as the case may be; (h) loans to TARC and TransTexas which are permitted to be
Incurred pursuant to the terms of the covenant described herein under the
heading "-- Limitation on Incurrences of Additional Indebtedness and Issuances
of Disqualified Capital Stock"; (i) the amounts payable by the Company and its
Subsidiaries to Southeast Contractors for employee services provided to TARC
not exceeding the actual costs to Southeast Contractors of the employees, which
costs consist solely of payroll and employee benefits, plus related
administrative costs and an administrative fee, not exceeding $2 million per
year in the aggregate; and (j) the Company and its Subsidiaries may pay a
management fee to TransAmerican in an amount not to exceed $2.5 million per
year.
Notwithstanding the foregoing, the Company may not, nor may the
Company permit any of its Subsidiaries to, directly or indirectly (excluding
clauses (i) and (j) above), loan or advance any funds to John R. Stanley, and
the aggregate amount of total compensation to John R. Stanley shall not exceed
(i) $1.0 million per year in the aggregate from the Company and TransTexas and
(ii) following the Phase II Completion Date, $1.0 million from TARC.
Without limiting the foregoing, except for sales of accounts
receivable to an Accounts Receivable Subsidiary in accordance with the
provisions described under "-- Accounts Receivable Subsidiary," (a) with
respect to any Related Person Transaction or series of Related Person
Transactions (other than any Related Person Transaction described in clause (a)
(with respect to permitted Restricted Payments by virtue of clauses (i), (ii),
(iv)-(xii), (xiv), (xv), (xvi) and (xvii) of the proviso contained in the
definition of "Restricted Payments"), (c), (d), (e), (f) or (h) of the first
paragraph of this covenant) with an aggregate value in excess of $1 million,
such transaction must first be approved by a majority of the Board of Directors
of the Company or its Subsidiary which is the transacting party and a majority
of the directors of such entity who are disinterested in the transaction
pursuant to a Board Resolution, as (i) fair and reasonable to the Company or
such Subsidiary, as the case may be, and (ii) on terms which are at least as
favorable as the terms which could be obtained by the Company or such
Subsidiary, as the case may be, on an arm's length basis with Persons who are
not Related Persons, and (b) with respect to any Related Person Transaction or
series of related Person Transactions (other than any Related Person
Transaction described in clause (a) (with respect to permitted Restricted
Payments by
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virtue of clauses (i), (ii), (iv)-(xii), (xiv), (xv), (xvi) and (xvii) of the
proviso contained in the definition of "Restricted Payments"), (c), (d), (e),
(f), (g) or (h) of the first paragraph of this covenant) with an aggregate
value in excess of $5 million, the Company must first obtain a favorable
written opinion as to the fairness of such transaction to the Company or such
Subsidiary, as the case may be, from a financial point of view, from a "big 6
accounting firm" or a nationally recognized investment banking firm; provided
that such opinion shall not be necessary if approval of the Board of Directors
to such Related Person Transaction has been obtained after receipt of bona fide
bids of at least two other independent parties and such Related Person
Transaction is in the ordinary course of business.
Limitation on Asset Sales. The Indenture provides that the Company may
not, and may not permit any of its Subsidiaries to, consummate an Asset Sale
unless: (a) an amount equal to the Net Cash Proceeds therefrom is (i) in the
case of an Asset Sale by the Company, applied as described herein under the
heading "Excess Cash," (ii) in the case of an Asset Sale by one of the
TransTexas Entities, applied to an Intercompany Loan Redemption of the
TransTexas Intercompany Loan, (iii) in the case of an Asset Sale by one of the
TARC Entities, applied to an Intercompany Loan Redemption of the TARC
Intercompany Loan, (iv) used to make cash payments in the ordinary course of
business and consistent with past practices that are not otherwise prohibited
by the Indenture, provided that the aggregate amount so used pursuant to this
clause (iv) from and after the Issue Date does not exceed $25 million with
respect to TransTexas, or $15 million with respect to TARC (without duplication
of amounts used to acquire any Capital Assets in accordance with clauses (v),
(vi) and (vii) below); (v), with respect to an Asset Sale by TransTexas or any
of its Subsidiaries (x) to the extent such Asset Sale occurs prior to the
payment in full of the TransTexas Intercompany Loan (and any other loans from
the Company pursuant to clauses (xvii) or (xxviii) of the definition of
"Permitted Investment") and includes proved reserve assets, used for Capital
Expenditures in a Related TransTexas Business within 180 days after the date of
such Asset Sale, provided that TransTexas' most recent Reserve Report indicates
that TransTexas and its Subsidiaries, after giving effect to the Asset Sale and
to the addition of proved reserves associated with any assets acquired in
connection with such Asset Sale, have proved reserves as indicated on the most
recent Reserve Report at least equal to (1) if such sale occurs during the
fiscal year ending January 31, 1998, 450 Bcfe of natural gas, (2) if such sale
occurs during the fiscal year ending January 31, 1999, 500 Bcfe of natural gas
or with an SEC PV 10 of at least $600 million and (3) if such sale occurs
during the fiscal year ending January 31, 2000 or thereafter, 600 Bcfe of
natural gas or with an SEC PV 10 of at least $700 million, or (y) to the extent
such Asset Sale occurs substantially contemporaneously with or after the
payment in full of the TransTexas Intercompany Loan (and any other loan to
TransTexas from the Company pursuant to clauses (xvii) or (xxviii) of the
definition of "Permitted Investment") or involves assets that do not include
proved reserves, used for Capital Expenditures in a Related TransTexas Business
within 180 days after the date of such Asset Sale; (vi) with respect to an
Asset Sale by TARC or any of its Subsidiaries after the Phase II Completion
Date, used for Capital Expenditures in a Related TARC Business within 180 days
after the date of such Asset Sale; provided that, prior to the payment in full
of the TARC Intercompany Loan (and any other loan to TARC from the Company
pursuant to clauses (xvii) or (xxviii) of the definition of "Permitted
Investment"), the aggregate amount does not exceed $10 million or (vii) with
respect to Asset Sales by TransTexas or TARC or any of their Subsidiaries
resulting from (x) the damage to or destruction of assets for which Insurance
Proceeds are paid or (y) condemnation, eminent domain or similar type
proceedings, in each case, used for Capital Expenditures in a Related
TransTexas Business (in the case of Asset Sales by any of the TransTexas
Entities) or a Related TARC Business (in the case of Asset Sales by any of the
TARC Entities) within 360 days after the date of such Asset Sale; and (b) in
the case of any Asset Sale or series of related Asset Sales for total proceeds
in excess of $5 million, at least 85% of the value of the consideration for
such Asset Sales consists of cash, Cash Equivalents or Exchange Assets or any
combination thereof. Notwithstanding the foregoing limitations on Asset Sales
and restrictions on the use of Net Cash Proceeds therefrom:
(A) TransTexas or any Subsidiary of TransTexas may convey,
sell, lease, transfer, or otherwise dispose of any or all of its
assets (upon voluntary liquidation or otherwise) to TransTexas or a
wholly owned Subsidiary of TransTexas;
(B) TARC or any Subsidiary of TARC may convey, sell, lease,
transfer, or otherwise dispose of any or all of its assets (upon
voluntary liquidation or otherwise) to TARC or any wholly owned
Subsidiary of TARC;
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(C) the Company and its Subsidiaries may engage in Asset Sales
in the ordinary course of business;
(D) the Company and its Subsidiaries may engage in Asset Sales
not otherwise permitted in clauses (A) through (C) or (E) through (N)
of this sentence provided that the aggregate proceeds from all such
Asset Sales do not exceed $5 million in any twelve-month period;
(E) the Company and its Subsidiaries may engage in Asset Sales
pursuant to and in accordance with the provisions described under " --
Limitation on Mergers, Sales, or Consolidation;"
(F) the Company and its Subsidiaries may sell, assign, lease,
license, transfer, abandon or otherwise dispose of (a) damaged, worn
out, unserviceable or other obsolete property in the ordinary course
of business or (b) other property no longer necessary for the proper
conduct of their business;
(G) TARC and its Subsidiaries may sell accounts receivable to
an Accounts Receivable Subsidiary in accordance with the provisions
described under "-- Covenants -- Accounts Receivable Subsidiary;"
(H) TARC and its Subsidiaries may convey, sell, transfer or
otherwise dispose of crude oil and refined products in the ordinary
course of business;
(I) the Company and its Subsidiaries may engage in Asset Sales
(a) the Net Cash Proceeds of which are used for payment of cash
interest on the Notes or the Intercompany Loans, (b) in connection
with the settlement of litigation or the payment of judgments or (c)
the Net Cash Proceeds of which are used in connection with the
settlement of litigation or for the payment of judgments; provided,
that the aggregate value of assets transferred pursuant to clauses (b)
and (c) above from and after the Issue Date does not exceed
$25,000,000;
(J) TransTexas may sell, convey, contribute or otherwise
transfer the assets comprising the Related TTXD Business to TTXD;
(K) TARC may transfer the Port Facility Assets in connection
with the Port Commission Bond Financing;
(L) TransTexas and its Subsidiaries may convey, sell, transfer
or otherwise dispose of Hydrocarbons or other mineral products in the
ordinary course of business;
(M) Prior to the TTXD Spin-off, TransTexas may sell, transfer,
contribute or otherwise dispose of the capital stock of TTXD or the
assets comprising the drilling and energy services business and
pipeline services business of TransTexas provided that (x) in the case
of a transfer, contribution or other distribution to a company which
has a class of equity securities publicly traded on a national
securities exchange or on the NNM, (aa) at least 50% of the value of
the consideration for such Asset Sale consists of cash and up to 50%
of the value of the consideration for such Asset Sale may consist of
Capital Stock and (bb) the Net Cash Proceeds from such Asset Sale are
applied pursuant to clause (a)(ii) of the prior paragraph or (y) in
the case of a transfer, contribution or other distribution to a joint
venture, partnership, limited liability company or similar entity
newly formed for the purpose of this transfer, up to 100% of the value
of the consideration for such Asset Sale may consist of Capital Stock
or other equity interests in such entity; provided, that any Net Cash
Proceeds from such Asset Sale are applied pursuant to clause (a)(ii)
of the prior paragraph;
(N) The Company and TARC may sell shares of TransTexas common
stock in connection with a transaction contemplated by the TransTexas
Disbursement Agreement and clause (xii) of the definition of
"Restricted Payments;" and
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(O) Unless otherwise required by the foregoing clauses (A)
through (N), the proceeds of any Asset Sale permitted thereby shall be
used by the Company or its Subsidiaries for purposes not otherwise
prohibited by the Indenture.
The Indenture also provides that the Company may not, and may not
permit any of its Subsidiaries to, consummate a Non-Collateral Asset Sale
unless an amount equal to the Net Cash Proceeds therefrom is used for Capital
Expenditures in (i) a Related TARC Business in the case of Non-Collateral Asset
Sales by any of the TARC Entities or (ii) a Related TransTexas Business in the
case of Non-Collateral Asset Sales by any of the TransTexas Entities, in each
case within 180 days after the date of such Non-Collateral Asset Sale.
Limitation on Liens. The Indenture provides that the Company may not
and may not permit any Subsidiary to, directly or indirectly, Incur, or suffer
to exist any Lien upon any of its respective property or assets, whether now
owned or hereafter acquired which property or assets constitute Collateral,
other than (a) in the case of the Company, Permitted TEC Liens, (b) in the case
of TARC, Permitted TARC Liens, and (c) in the case of TransTexas, Permitted
TransTexas Liens. For the purpose of determining compliance with this covenant,
if a Lien meets the criteria of more than one of the types of permitted Liens,
the Company or the Subsidiary in question shall have the right to determine in
its sole discretion the category of permitted Lien to which such Lien applies,
shall not be required to include such Lien in more than one of such categories
and may elect to apportion such Lien between or among any two or more
categories otherwise applicable.
Limitation on Line of Business. The Indenture provides that none of
the TransTexas Entities or the TARC Entities shall directly or indirectly
engage to any substantial extent in any line or lines of business activity
other than a Related TransTexas Business or a Related TARC Business
respectively and, in each case, such other business activities as are
reasonably related or incidental thereto. The Indenture also provides that
neither the Company nor any Affiliate of John R. Stanley (other than Persons
who are Affiliates solely by being directors or Affiliates of directors of one
or more companies affiliated with John R. Stanley and other than TARC,
TransTexas, TTXD or any of their Subsidiaries) may engage to any substantial
extent in any line or lines of business activity that is a Related Business.
The Indenture further provides that the Company shall not have any direct
Subsidiaries other than TARC, TTXD, TransTexas, an Accounts Receivable
Subsidiary, and any wholly owned Subsidiary formed solely for the purpose of
facilitating the reincorporation of TARC in Delaware or the repurchase of the
TARC Warrants.
Limitation on Status as Investment Company or Public Utility Company.
The Indenture prohibits the Company and its Subsidiaries from becoming
"investment companies" (as that term is defined in the Investment Company Act
of 1940, as amended), or a "holding company," or "public utility company" (as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended), or from otherwise becoming subject to regulation under the Investment
Company Act or the Public Utility Holding Company Act.
Excess Cash. Not later than 20 Business Days after any date on which
the Accumulated Amount (as defined) exceeds $50 million, the Company will make
an irrevocable, unconditional offer (an "Excess Cash Offer") to the Holders to
purchase the maximum amount of Notes which could be acquired by application of
the Accumulated Amount as described herein (the "Excess Cash Offer Amount"), at
a purchase price (the "Excess Cash Offer Price") equal to 105% of the Accreted
Value of the Senior Secured Discount Notes and the principal amount of the
Senior Secured Notes for offers made on or prior to December 31, 1997, at a
price equal to 108% of the Accreted Value of the Senior Secured Discount Notes
and the principal amount of the Senior Secured Notes for offers made during the
period from January 1, 1998 through June 15, 2000 and thereafter at the
optional redemption prices set forth under "Optional Redemption," in each case,
plus accrued and unpaid interest, if any, to and including, the date the Notes
tendered are purchased and paid for in accordance with the Indenture, which
date shall be no later than 25 Business Days after the first date on which the
Excess Cash Offer is required to be made (the "Excess Cash Purchase Date"). The
Excess Cash Offer Amount required to be paid hereunder shall be reduced by the
amount needed to pay the cash interest on the Notes through maturity (less any
interest payable to the Company on the TARC Intercompany Loan, the TransTexas
Intercompany Loan and any other intercompany loan payable to the Company) after
giving effect to the Notes repurchased pursuant to the Excess Cash Offer (the
"Interest Reserve Amount"). Notice of an Excess Cash Offer will be sent at
least 20
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Business Days prior to the close of business on the third Business Day prior to
the Excess Cash Purchase Date (the "Final Put Date"), by first-class mail, by
the Company to each Holder at the address on the books of the Note Registrar,
with a copy to the Indenture Trustee. The notice to the Holders will contain
all information, instructions, and materials required by applicable law or
otherwise material to such Holders' decision to tender Notes pursuant to the
Excess Cash Offer. An amount equal to the aggregate of all Excess Cash received
by the Company is referred to as the "Accumulated Amount." Prior to making any
Excess Cash Offer, the Company shall invest the Accumulated Amount only in cash
and Cash Equivalents. The Company may, at its option, elect to make an Excess
Cash Offer in the manner specified herein prior to the time that the
Accumulated Amount exceeds $50 million.
To the extent applicable and if required by law, the Company shall
comply with Section 14 of the Exchange Act and the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act and other securities
laws, rules, and regulations which may then be applicable to any Excess Cash
Offer by the Company to purchase the Notes. The Company shall give the
Indenture Trustee prompt notice if the Accumulated Amount exceeds $50 million.
On or before an Excess Cash Purchase Date, the Company shall (a)
accept for payment Notes or portions thereof properly tendered pursuant to the
Excess Cash Offer prior to the close of business on the Final Put Date (on a
pro rata basis between the issues (the maximum extent possible) based on the
Value of the Notes actually tendered if Notes with a Value in excess of the
Value of Notes to be acquired are tendered and not withdrawn), (b) deposit with
the Paying Agent U.S. Legal Tender sufficient to pay the Excess Cash Offer
Price through the Excess Cash Purchase Date of all Notes or portions thereof so
accepted, and (c) deliver to the Indenture Trustee Notes so accepted together
with an Officers' Certificate stating the Notes or portions thereof being
purchased by the Company. The Paying Agent shall promptly mail or deliver to
Holders of Notes so accepted, payment in an amount equal to the Excess Cash
Offer Price through the Excess Cash Purchase Date for such Notes. The Indenture
Trustee shall promptly cancel all Notes accepted by the Company pursuant to the
Excess Cash Offer and authenticate and mail or deliver to the Holders of Notes
so accepted a new Note equal in Value to any unpurchased portion of the Note
surrendered. Any Notes not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Excess Cash Offer on or as soon as practicable after the Excess
Cash Payment Date.
If the amount required to acquire all Notes tendered by Holders
pursuant to the Excess Cash Offer (the "Excess Cash Acceptance Amount") shall
be less than the aggregate Excess Cash Offer Amount, the excess of the Excess
Cash Offer Amount over the Excess Cash Acceptance Amount may be (i) invested in
cash or Cash Equivalents, (ii) used by the Company to make a Note Repurchase or
(iii) used by the Company to make loans to its Subsidiaries, provided that such
loans (x) are on terms no less favorable to the Company than the economic terms
described to the Holders of Notes in the Excess Cash Offer, (y) are made to the
parties described in the Excess Cash Offer, and (z) have a maturity date which
is not after the maturity date of the Notes. Upon consummation of any Excess
Cash Offer made in accordance with the terms of the Indenture, the Accumulated
Amount will be reduced to zero.
Notwithstanding anything contained in the foregoing to the contrary,
the Company shall immediately deposit any cash received by it that the Company
has allocated to the Interest Reserve Amount or the provision for income taxes,
in each case in the manner contemplated by the definition of "Excess Cash"
contained herein, into a segregated cash collateral account in which the
Indenture Trustee has a perfected first priority security interest pending such
uses.
Notwithstanding anything contained in the foregoing to the contrary,
at any time after June 15, 2000, the Company may elect to make an optional
redemption at the prices and in the manner described herein under the heading
"Optional Redemption" in lieu of making an Excess Cash Offer. In the event that
the Company makes an Optional Redemption, the Accumulated Amount shall be
reduced by an amount equal to the redemption price actually paid in connection
with such Optional Redemption.
Additional Interest Excess Cash Offer. Upon the occurrence of a TARC
Interest Increase or a TransTexas Interest Increase the Company shall be
obligated to make an offer to purchase the Notes upon the terms and subject to
the conditions described below. Not later than 20 Business Days after any date
on which the Additional Interest Accumulated Amount (as defined below) exceeds
$10,000,000, the Company shall make an irrevocable, unconditional
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offer (an "Additional Interest Excess Cash Offer") to the Holders to purchase
the maximum amount of Notes which could be acquired by application of the
Additional Interest Accumulated Amount as defined below (the "Additional
Interest Excess Cash Offer Amount"), at a purchase price (the "Additional
Interest Excess Cash Offer Price") equal to 101% of the Accreted Value of the
Senior Secured Discount Notes and the principal amount of the Senior Secured
Notes, in each case, plus accrued and unpaid interest, if any, to and including
the date the Notes tendered are purchased and paid for in accordance with the
Indenture, which date shall be no later than 25 Business Days after the first
date on which the Additional Interest Excess Cash Offer is required to be made
(the "Additional Interest Excess Cash Purchase Date"). The Company shall send
notice of an Additional Interest Excess Cash Offer at least 20 Business Days
prior to the close of business on the third Business Day prior to the
Additional Interest Excess Cash Purchase Date (the "Additional Interest Final
Put Date"), by first-class mail, to each Holder at his address set forth upon
the registry of the Company, with a copy to the Trustee. The notice to the
Holders will contain all information, instructions, and materials required by
applicable law or otherwise material to such Holders' decision to tender Notes
pursuant to the Additional Interest Excess Cash Offer. An amount equal to the
aggregate of all Additional Interest Excess Cash received by the Company is
referred to as the "Additional Interest Accumulated Amount." Prior to making
any Additional Interest Excess Cash Offer, the Company shall invest the
Additional Interest Accumulated Amount only in cash and Cash Equivalents. The
Company may, at its option, elect to make an Additional Interest Excess Cash
Offer in the manner specified herein prior to the time that the Additional
Interest Accumulated Amount exceeds $10,000,000.
To the extent applicable and if required by law, the Company shall
comply with Section 14 of the Exchange Act and the provisions of Regulation 14E
and any other tender offer rules under the Exchange Act and other securities
laws, rules, and regulations which may then be applicable to any Additional
Interest Excess Cash Offer by the Company to purchase the Notes. The Company
shall give the Trustee prompt notice if the Additional Interest Accumulated
Amount exceeds $10,000,000.
On or before an Additional Interest Excess Cash Purchase Date, the
Company shall (a) accept for payment Notes or portions thereof properly
tendered pursuant to the Additional Interest Excess Cash Offer prior to the
close of business on the Additional Interest Final Put Date (on a pro rata
basis between the issues (to the maximum extent possible) based on the Value of
the Notes actually tendered if Notes with a Value in excess of the Value of
Notes to be acquired are tendered and not withdrawn), (b) deposit with the
Paying Agent U.S. Legal Tender sufficient to pay the Additional Interest Excess
Cash Offer Price through the Additional Interest Excess Cash Purchase Date of
all Notes or portions thereof so accepted, and (c) deliver to the Trustee Notes
so accepted together with an Officers' Certificate stating the Notes or
portions thereof being purchased by the Company. The Paying Agent shall
promptly mail or deliver to Holders of Notes so accepted, payment in an amount
equal to the Additional Interest Excess Cash Offer Price through the Additional
Interest Excess Cash Purchase Date for such Notes. The Trustee shall promptly
cancel all Notes accepted by the Company pursuant to the Additional Interest
Excess Cash Offer and authenticate and mail or deliver to the Holders of Notes
so accepted a new Note equal in Value to any unpurchased portion of the Note
surrendered. Any Notes not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce the
results of the Additional Interest Excess Cash Offer on or as soon as
practicable after the Additional Interest Excess Cash Payment Date.
If the amount required to acquire all Notes tendered by Holders
pursuant to the Additional Interest Excess Cash Offer (the "Additional Interest
Excess Cash Acceptance Amount") shall be less than the aggregate Additional
Interest Excess Cash Offer Amount, the excess of the Additional Interest Excess
Cash Acceptance Amount shall be (i) invested in cash or Cash Equivalents, (ii)
used by the Company to make a Note Repurchase or (iii) used by the Company to
make loans to its Subsidiaries, provided that such loans (x) are on terms no
less favorable to the Company than the economic terms described to the Holders
in the Additional Interest Excess Cash Offer, (y) are made to the parties
described in the Excess Cash Offer and (z) have a maturity date which is not
after the maturity date of the Notes. Upon consummation of any Additional
Interest Excess Cash Offer made in accordance with the terms of the Indenture,
the Additional Interest Accumulated Amount will be reduced to zero.
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Notwithstanding anything contained in the foregoing to the contrary,
the Company shall immediately deposit any cash received by it that the Company
has allocated to the Additional Interest Reserve Amount into a segregated cash
collateral account in which the Trustee has a perfected first priority security
interest pending such uses.
Third Party Consents. TransTexas shall use its best efforts to obtain,
as soon as reasonably practicable, all consents and approvals that may be
required under any Third Party Consent Agreement (i) for the creation,
perfection, maintenance or protection of a valid security interest in, or lien
against, any of the Collateral in favor of the Indenture Trustee or (ii) upon
foreclosure of the Indenture Trustee's lien, for the Indenture Trustee to
acquire or sell, assign, dispose of or otherwise transfer such Third Party
Consent Agreement, or any right or interest of the Company or any of its
Subsidiaries thereunder, or for the Indenture Trustee to exercise any or all of
its rights or remedies under any of the Security Documents. The use of its
"best efforts" shall not require TransTexas to pay consideration for such
consents or approvals or to take actions other than use its good faith efforts
to request such consents and approvals. TransTexas shall not, and shall not
permit any of its Subsidiaries to, permit to exist as of the end of any fiscal
quarter, any Third Party Consent Agreement if, after giving effect to such
Third Party Consent Agreement, the aggregate of all Third Party Consent
Agreements entered into after the date of the Indenture includes or relates to
properties constituting more than 25% of the net acreage owned or leased by
TransTexas or any of its Subsidiaries or Nominees after the date of the
Indenture.
Limitation on Assets Held by Nominees. Within 270 days of the
acquisition of any Nominee Property by any Nominee (to the extent the aggregate
expenditures for all then existing Nominee Property exceeds $10 million),
TransTexas and its Subsidiaries shall cause such Nominee to assign and transfer
to TransTexas, or such of its Subsidiaries, as the case may be, all of such
Nominee's right, title and interest in and to such Nominee Property.
Maintenance of Properties and Insurance. Each of the Company and its
Subsidiaries will cause the properties used or useful to the conduct of its
business and the business of itself and each of its Subsidiaries to be
maintained and kept in good condition, repair, and working order (reasonable
wear and tear excepted) and supplied with all necessary equipment and will
cause to be made all necessary repairs, renewals, replacements, betterments,
and improvements thereof, all as in its reasonable judgment may be necessary,
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times.
Each of the Company and its Subsidiaries will provide, or cause to be
provided, for itself and each of its Subsidiaries, insurance (including
appropriate self-insurance) against loss or damage of the kinds that, in its
reasonable, good faith opinion, are adequate and appropriate for the conduct of
its business and the business of such Subsidiaries in a prudent manner, with
reputable insurers or with the government of the United States of America or an
agency or instrumentality thereof, in such amounts, with such deductibles, and
by such methods as is customary, in its reasonable, good faith opinion, and
adequate and appropriate for the conduct of its business and the business of
its Subsidiaries in a prudent manner for companies engaged in a similar
business.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not, and will not permit
TARC or TransTexas to, consolidate with or merge with or into any other Person
or, directly or indirectly, sell, lease, assign, transfer, or convey all or
substantially all of its assets (computed on a consolidated basis), to another
Person or group of Persons acting in concert, whether in a single transaction
or through a series of related transactions, unless (i) either (a) the Company,
TARC or TransTexas as the case may be, is the continuing Person or (b) the
resulting, surviving, or transferee entity is a corporation or partnership
organized under the laws of the United States, any state thereof, or the
District of Columbia, and shall expressly assume all of the obligations of the
Company, TARC or TransTexas, as the case may be, under the Notes, the
Intercompany Loans, the Security Documents, the Registration Rights Agreements
and the Indenture by a supplemental indenture or other appropriate document
supplemental thereto, and execute and deliver to the Indenture Trustee on or
prior to the consummation of such transaction, in form satisfactory to the
Indenture Trustee, any supplements to any Security Documents as the Indenture
Trustee, in its sole discretion, may require; (ii) no Default or Event of
Default shall exist or shall occur immediately after giving effect to such
transaction; (iii) immediately after
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giving effect to such transaction on a pro forma basis, the Net Worth of the
surviving or transferee entity is at least equal to the Net Worth of such
predecessor or transferring entity immediately prior to such transaction; (iv)
except for a merger of TARC into a wholly owned Subsidiary of the Company or
its wholly owned Subsidiary incorporated in the State of Delaware solely for
the purpose of facilitating a reincorporation in Delaware or a repurchase of
the TARC Warrants, the surviving or transferee entity would immediately
thereafter be permitted to Incur at least $1.00 of additional Senior Debt
pursuant to the third or fourth paragraph of the covenant described herein
under the caption "Limitation on Incurrences of Additional Debt and Issuances
of Disqualified Capital Stock," as applicable (in all cases for this purpose
only, as if the Phase I Completion Date has occurred), and (v) except for a
merger of TARC into a wholly owned Subsidiary of the Company or its wholly
owned Subsidiary incorporated in the State of Delaware solely for the purpose
of facilitating a reincorporation in Delaware or a repurchase of the TARC
Warrants, at the time of or within 120 days after the occurrence of the event
specified above, the Notes have not been or are not downgraded by Standard &
Poor's Corporation, Inc., Moody's Investors Services, Inc., or any successor
rating agencies to either entity to a rating below that which existed
immediately prior to the time the event specified above is first publicly
announced. For purposes of this covenant, the Consolidated Fixed Charge
Coverage Ratio shall be determined on a pro forma consolidated basis (giving
effect to the transaction) for the four fiscal quarters immediately preceding
such transaction.
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company, TARC or TransTexas in
accordance with the foregoing, the successor Person formed by such
consolidation or into which the Company, is merged or to which such transfer is
made, shall succeed to, and be substituted for, and may exercise every right
and power of, the Company, TARC or TransTexas under the Indenture, any
applicable Intercompany Loan or the Security Documents with the same effect as
if such successor corporation had been named as the Company, TARC or TransTexas
therein.
Notwithstanding the foregoing, any Subsidiary of TARC or TransTexas
with a Net Worth greater than zero, may merge into TARC or TransTexas,
respectively (or a wholly owned Subsidiary of TARC or TransTexas, respectively)
at any time, provided, that TARC or TransTexas, as the case may be, shall have
delivered to the Indenture Trustee an Officers' Certificate stating that such
Subsidiary has a Net Worth greater than zero and such merger does not result in
a Default or an Event of Default hereunder. Notwithstanding anything contained
in the foregoing to the contrary, an Accounts Receivable Subsidiary may merge
into TARC, provided, that such merger does not result in a Default or Event of
Default hereunder.
Notwithstanding anything contained in this covenant to the contrary,
none of TARC or TransTexas may merge into the Company or any of its
Subsidiaries.
COLLATERAL AND SECURITY
The Notes are secured by (x) a pledge of all of the Capital Stock of
TransTexas and TARC owned by the Company and the Capital Stock of any
Subsidiaries of the Company acquired after the date hereof (the "Stock
Pledge"), which initially constituted approximately 70% of the outstanding
common stock of TransTexas and 100% of the outstanding common stock of TARC,
(y) an assignment by the Company to the Indenture Trustee, for the ratable
benefit of the holders of the Notes, of (a) the TARC Intercompany Loan, (b) the
TARC Mortgage (as defined), (c) the TransTexas Intercompany Loan and (d) the
TransTexas Mortgage (as defined) and (z) a pledge of the Company's interest in
the TEC Disbursement Account. The TARC Intercompany Loan will be secured by the
TARC Mortgage and will be guaranteed by each of the TARC Entities other than
TARC (the "TARC Entities Guarantees"). The TransTexas Intercompany Loan is
secured by the TransTexas Mortgage and will be guaranteed by each of the
TransTexas Entities other than TransTexas (the "TransTexas Entities Guarantees"
and, together with the TARC Entities Guarantees, the "Guarantees"). The TARC
Intercompany Loan, the TARC Mortgage, the TransTexas Intercompany Loan, the
TransTexas Mortgage, the Guarantees and the Stock Pledge and any ancillary
documents executed by the Company, TARC, TransTexas or their Subsidiaries or
the Indenture Trustee for purposes of providing security for the benefit of the
holders of the Notes are referred to herein as the "Security Documents"), which
encompasses a lien on (i) the Capital Stock of TARC and TransTexas owned by the
Company and any other Subsidiaries which may be acquired by the Company after
the date hereof (the "Pledged Stock"), (ii) the TARC Intercompany Loan and the
TransTexas
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Intercompany Loan, (iii) substantially all the assets of the TARC and
substantially all of the assets of TransTexas (other than Equipment, Inventory
and Receivables and the assets used in or comprising the TTXD Related
Business), in each case, whether now owned or hereafter acquired and (iv) the
Company's interest in the TEC Disbursement Account (collectively, the
"Collateral").
TARC has executed a recourse promissory note in the principal amount
of $920 million in favor of the Company. TransTexas has executed a recourse
promissory note in the principal amount of $450 million in favor of the
Company. Each of the TARC Intercompany Loan and the TransTexas Intercompany
Loan contains redemption and default terms which are substantially similar to
those of the Notes. Each Intercompany Loan will mature on June 1, 2002. The
TARC Intercompany Loan will accrete principal at 16% per annum semi-annually
until June 15, 1999. Thereafter cash interest will accrue at 16% per annum and
be payable semi-annually in arrears on June 15 and December 15 of each year
commencing on December 15, 1999. If the cost to complete Phase I is in excess
of $245 million, the interest rate borne by the TARC Intercompany Loan after
June 15, 1999 will increase from 16% to 16.25% per annum. The TransTexas
Intercompany Loan bears interest at 10 7/8% per annum payable semi-annually in
arrears on June 15 and December 15 of each year commencing on December 15,
1997. The interest rate borne on the TransTexas Intercompany Loan will increase
from 10 7/8% to 12 7/8% per annum during any TransTexas Interest Increase
Quarter. The funds received by the Company from any increase in the interest
rate payable on the TARC Intercompany Loan or the TransTexas Intercompany Loan
pursuant to the above provisions shall constitute Additional Interest Excess
Cash to be applied in accordance with the covenant described herein under the
heading " -- Additional Interest Excess Cash Offer." TARC has entered into a
mortgage (the "TARC Mortgage") which encumbers substantially all of the assets
and properties of TARC other than Equipment, Inventory and Receivables, and the
CATOFIN(R) Unit. TransTexas has also entered into a mortgage (the "TransTexas
Mortgage") which encumbers substantially all of the assets and properties of
TransTexas other than Equipment, Inventory and Receivables.
Shares of Pledged Stock may be released from the Stock Pledge for sale
by the Company if (i) the Net Cash Proceeds of such sale are immediately
deposited in a segregated cash collateral account in which the Indenture
Trustee has a perfected first priority security interest, and (ii) funds in
such account are released only to permit the Company to fund an Excess Cash
Offer in the manner described herein under the heading "-- Excess Cash Offer."
Notwithstanding the foregoing, no shares of Pledged Stock may be
released from the pledge pursuant to the foregoing if at the time of such
proposed release, a Default or Event of Default has occurred and is continuing
or would occur as a result of such release.
The Company shall give written notice to the holders of Notes within
10 days of any release of Pledged Stock pursuant to the foregoing. Such notice
shall set forth the date of such release, the number of shares released, and
the provision of the Indenture pursuant to which such shares were released.
Concurrently with any Asset Sale, the Collateral that is the subject
of such Asset Sale may be released from the security interest created by the
Security Documents.
Upon satisfaction and discharge of the TARC Intercompany Loan, the
Indenture Trustee's lien on the TARC Collateral will be released and upon
satisfaction and discharge of the TransTexas Intercompany Loan the Indenture
Trustee's lien on the TransTexas Collateral will be released.
Each of TARC and TransTexas will have the right, at its option, to
redeem all or a portion of the accreted value or principal amount, as the case
may be, then outstanding under the TARC Intercompany Loan or the TransTexas
Intercompany Loan, respectively, in cash at a redemption price equal to (a)
105% of the accreted value of the TARC Intercompany Loan and the principal
amount of the TransTexas Intercompany Loan for redemptions made on or prior to
December 31, 1997, (b) 108% of the accreted value of the TARC Intercompany Loan
and the principal amount of the TransTexas Intercompany Loan for redemptions
made during the period from January 1, 1998 through June 14, 2000, (c) at a
price equal to 105.750% of the accreted value of the TARC Intercompany Loan and
the principal amount of the TransTexas Intercompany Loan for redemptions made
during the period from June 15, 2000 through June 14,
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2001 and (d) 100.000% of the accreted value of the TARC Intercompany Loan and
the principal amount of the TransTexas Intercompany Loan, for redemptions made
on or after June 15, 2001, in each case, plus accrued and unpaid interest, if
any, to and including the redemption date.
TransTexas has secured certain supersedeas bonds and its
indemnification obligations, including pursuant to the Reimbursement and Credit
Facility, with letters of credit and escrowed cash totaling approximately $21.1
million at January 31, 1997. These parties will therefore have a claim on such
assets prior to that of the holders of the Notes. The Indenture and the
Security Documents provide that the security interest of the Indenture Trustee
(as assignee of the Company) in the Collateral may be subordinated to First
Lien Debt. In certain circumstances, the Indenture may require the Indenture
Trustee to release Collateral with respect to First Lien Debt. In addition, the
Indenture Trustee has entered into an intercreditor and collateral agency
agreement (the "Intercreditor Agreement") with the trustees under the indenture
for the Senior TARC Mortgage Notes and the Senior TARC Discount Notes (the
"Prior TARC Notes") and Firstar Bank of Minnesota, NA, as collateral agent (the
"Collateral Agent"), that provide (i) that the TARC Intercompany Loan is
subordinated in right of payment (except regularly scheduled payments, provided
no default under the indenture governing the Prior TARC Notes exists or would
result therefrom) and lien priority to the Prior TARC Notes, (ii) that (a) in
the event of any liquidation or reorganization of TARC any cash or other assets
paid or distributed on account of the TARC Intercompany Loan will be applied,
after payment of reasonable costs and expenses relating to obtaining such
proceeds, to the payment of the Prior TARC Notes and only after the Prior TARC
Notes have been paid in full, to the payment of the TARC Intercompany Loan and
(b) in any other event, any such proceeds will be applied so as not to impair
or affect the right of the holders of the Prior TARC Notes to receive payments
as and when due (but nothing contained in this intercreditor agreement shall be
construed to prohibit, limit or otherwise affect the rights of TARC to
transfer, dispose of or otherwise deal with its properties and assets included
within the TARC Shared Collateral securing both the Prior TARC Notes and the
TARC Intercompany Loan and the proceeds thereof, in any manner permitted under
the indenture for the Prior TARC Notes and the TARC Intercompany Loan or the
security documents relating thereto) and (iii) that determinations regarding
the exercise of remedies against the TARC Shared Collateral, as the case may
be, will be made by a majority of the outstanding principal amount of the Prior
TARC Notes and the TARC Intercompany Loan. The principal amount of the TARC
Intercompany Loan is such that determinations under the Intercreditor Agreement
regarding enforcement of remedies and dispositions of the TARC Shared
Collateral will be controlled by the Indenture Trustee, as the holder of the
TARC Intercompany Loan, and thus, indirectly, by the holders of the Notes,
except that, and the Intercreditor Agreement so provides, nothing contained in
the Intercreditor Agreements will impair or affect the right of the holders of
any prior TARC Notes, to institute suit for the enforcement of any payment
thereon as and when due.
If the Notes become due and payable prior to the stated maturity
thereof or are not paid in full at the stated maturity thereof, the Indenture
Trustee may take all actions it deems necessary or appropriate, including, but
not limited to, foreclosing upon the Pledged Stock in accordance with
applicable law. If such event occurs and either the TARC Intercompany Loan or
the TransTexas Intercompany Loan is due and payable prior to the stated
maturity thereof or is not paid in full at the stated maturity thereof, the
Indenture Trustee may foreclose upon the TARC Collateral or the TransTexas
Collateral, as applicable. If the Indenture Trustee takes possession of or
otherwise acquires TARC's refinery or TransTexas' natural gas reserves, the
Indenture Trustee may retain one or more experienced operators of refineries or
managers of natural gas reserves to manage the refinery or natural gas reserves
on behalf of the holders of the Notes. The proceeds received from the sale of
any Collateral that is the subject of a foreclosure shall be applied first to
pay the expenses of such foreclosure and amounts then payable to the Indenture
Trustee and thereafter to pay (subject to any prior liens on the Collateral)
the principal of and interest on the Notes. The Indenture Trustee has the power
to institute and maintain such suits and proceedings as it may deem expedient
to prevent impairment of, or to preserve or protect its and the Holders'
interest in, the Collateral.
Consents or approvals will be required from third parties in order to
permit the Indenture Trustee to exercise all of its rights and remedies under
the Security Documents with respect to a portion of the Collateral. Without
these consents and approvals, the Indenture Trustee may not be able to
foreclose or otherwise acquire, sell, assign or otherwise transfer, all rights
in and to this portion of the Collateral. The Indenture obligates the Company
to use its best efforts to obtain such consents and approvals and limits the
Company's ability to acquire additional Collateral subject to such
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consent or approval requirements. However, there can be no assurance that all
such consents and approvals will be obtained.
There can be no assurance that the Collateral Agent or the Indenture
Trustee will be able to sell the Collateral without substantial delays or that
the proceeds obtained will be sufficient to pay all amounts owing to Holders of
the Notes. See "Risk Factors -- General Risk Factors -- Adequacy of Collateral;
Risks of Foreclosure," "-- General Risk Factors -- Fraudulent Conveyance
Considerations," and "-- General Risk Factors -- Certain Bankruptcy
Considerations."
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the
Company to pay installments of interest on the Notes as and when the same
become due and payable and the continuance of any such failure for 30 days,
(ii) the failure by the Company to pay all or any part of the principal or
premium, if any, on the Notes when and as the same become due and payable at
maturity, redemption, by acceleration, or otherwise, including payment of the
Excess Cash Offer Price, Additional Interest Excess Cash Offer Price or Change
of Control Purchase Price, (iii) the failure by the Company or any of its
Subsidiaries to observe or perform any other covenant, agreement, or warranty
contained in the Security Documents, the Notes or the Indenture and, subject to
certain exceptions, the continuance of such failure for a period of 30 days
after written notice is given to the Company by the Indenture Trustee or the
Company and the Indenture Trustee by the Holders of at least 25% in aggregate
Value of the Notes outstanding, (iv) certain events of bankruptcy, insolvency,
or reorganization in respect of the Company or any of its Subsidiaries, (v) a
default which extends beyond any stated period of grace applicable thereto
(including any extension thereof) under any mortgage, indenture, or instrument
under which there is outstanding any Debt of the Company or any of its
Subsidiaries aggregating in excess of $25 million or a failure to pay such Debt
at its stated maturity, provided that a waiver by all of the lenders of such
debt of such default shall constitute a waiver hereunder for the same period,
(vi) final judgments not covered by insurance aggregating at least $25 million
at any one time rendered against the Company or any of its Subsidiaries and not
stayed or discharged within 60 days, (vii) any of the Security Documents not
being in full force and effect (except where no material adverse effect to the
holders of the Notes would result) or ceasing to give the Indenture Trustee a
perfected security interest in, and Lien on, the Collateral, (viii) Independent
Directors not constituting a majority of the board of directors of the Company
for a period of 90 days in any twelve-month period, (ix) if the Phase I
Completion Date has not occurred by the Required Phase I Completion Date, or
(x) if the Phase II Completion Date has not occurred by January 31, 2000. The
Indenture provides that if a default occurs and is continuing and if it is
known to the Indenture Trustee, the Indenture Trustee must, within 90 days
after the occurrence of such default, give to the Holders notice of such
default; provided, that, except in the case of default in payment of principal
of, premium, if any, or interest on the Notes, including a default in the
payment of the Excess Cash Offer Price, Additional Interest Excess Cash Offer
Price or Change of Control Purchase Price as required by the Indenture, the
Indenture Trustee will be protected in withholding such notice if it in good
faith determines that the withholding of such notice is in the interest of the
holders of the Notes.
If an Event of Default occurs and is continuing (other than an Event
of Default specified in clause (iv), above, relating to the Company or its
Subsidiaries), then in every such case, unless the principal of all of the
Notes shall have already become due and payable, either the Indenture Trustee
or the Holders of 25% in aggregate Value of Notes then outstanding, by notice
in writing to the Company (and to the Indenture Trustee if given by Holders)
(an "Acceleration Notice"), may declare all principal of the Notes, determined
as set forth below, and accrued interest thereon or, as appropriate, the Change
of Control Purchase Price, to be due and payable immediately. If an Event of
Default specified in clause (iv), above, relating to the Company or its
Subsidiaries occurs, all principal and accrued interest thereon will be
immediately due and payable on all outstanding Notes without any declaration or
other act on the part of the Indenture Trustee or the Holders. The Holders of
no less than a majority in aggregate Value of Notes generally are authorized to
rescind such acceleration if all existing Events of Default, other than the
non-payment of the principal of, premium, if any, and interest on the Notes
which have become due solely by such acceleration, have been cured or waived.
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Prior to the declaration of acceleration of the Notes, the Holders of
a majority in aggregate Value of the Notes at the time outstanding may waive on
behalf of all the Holders any default or potential default, except a default or
potential default in the payment of principal of, premium, if any, or interest
on any Note not yet cured, or a default or potential default with respect to
any covenant or provision which cannot be modified or amended without the
consent of the Holder of each outstanding Note affected. Subject to the
provisions of the Indenture relating to the duties of the Indenture Trustee,
the Indenture Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request, order, or direction of any of the
Holders, unless such Holders have offered to the Indenture Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and
applicable law, the Holders of a majority in aggregate Value of the Notes at
the time outstanding have the right to direct the time, method, and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
exercising any trust or power conferred on the Indenture Trustee.
COVENANT DEFEASANCE; SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture ceases to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer, substitution, and
exchange of Notes and the Company's right of optional redemption, (ii) rights
of Holders to receive payments of principal of, premium, if any, and interest
on the Notes (but not the Change of Control Purchase Price of the Notes, Excess
Cash Offer Price or Additional Interest Excess Cash Offer Price) and any other
rights of the Holders with respect to such amounts, (iii) the rights,
obligations, and immunities of the Indenture Trustee under the Indenture, and
(iv) certain other specified provisions in the Indenture (the foregoing
exceptions (i) through (iv) are collectively referred to as the "Reserved
Rights")) on the 91st day (or one day after such other greater period of time
in which any such deposit of trust funds may remain subject to set aside or
avoidance under bankruptcy or insolvency laws, e.g., one year after any such
deposit) after the irrevocable deposit by the Company with the Indenture
Trustee, in trust for the benefit of the Holders, of (i) money in an amount,
(ii) U.S. Government Obligations which through the payment of interest and
principal will provide, not later than one day before the due date of payment
in respect of the Notes, money in an amount, or (iii) a combination thereof,
sufficient to pay and discharge the principal of, premium, if any, and interest
on the Notes then outstanding on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Notes are being defeased to maturity or to a particular redemption date. Such a
trust may be established only if certain conditions are satisfied, including
delivery by the Company to the Indenture Trustee of an opinion of outside
counsel acceptable to the Indenture Trustee (who may be outside counsel to the
Company) to the effect that (i) the defeasance and discharge will not be
deemed, or result in, a taxable event for Federal income tax purposes, with
respect to the Holders, (ii) the Company's deposit will not result in the
Company, the trust, or the Indenture Trustee being subject to regulation under
the Investment Company Act of 1940 and (iii) after the passage of 90 days (or
any greater period of time in which any such deposit of trust funds may remain
subject to bankruptcy or insolvency laws insofar as those laws apply to the
Company) following the deposit of the trust funds, such funds will not be
subject to set aside or avoidance under any bankruptcy, insolvency, or other
similar laws affecting creditors' rights generally. The Indenture will not be
discharged if, among other things, an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company shall have
occurred and be continuing on the date of such deposit. The Company will be
deemed to have paid and discharged the entire indebtedness on all of the
outstanding Notes when (i) all outstanding Notes have been delivered to the
Indenture Trustee for cancellation, or (ii) the Company has paid or caused to
be paid the principal of and interest on the Notes.
REPORTS
The Company is required to furnish to the Indenture Trustee, within 60
days after the end of each fiscal quarter or 90 days after the end of a fiscal
quarter that is also the end of a fiscal year, an officers' certificate to the
effect that such officers have conducted or supervised a review of the
activities of the Company and its Subsidiaries and of performance under the
Indenture and that, to the best of such officers' knowledge, based on their
review, the Company has fulfilled all of its obligations under the Indenture
or, if there has been a default, specifying each default known to them, its
nature and its status. The Company is also required to notify the Indenture
Trustee of any changes in the composition of the Board of Directors of the
Company or any of its Subsidiaries or of any amendment to the charter or bylaws
of the Company or any of its Subsidiaries.
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The Company and each of its Subsidiaries, where applicable, shall
deliver to the Indenture Trustee and to each Holder, within 15 days after it
files them with the Commission, copies of all reports and information that the
Company is required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. The Company shall, or shall cause TARC to, include in all
reports required to be filed with the Commission pursuant to Section 13 or
15(d) of the Exchange Act a summary of the status of the TARC's Capital
Improvement Program, including a description of sources of funds available for
the completion of the Capital Improvement Program. The Company agrees to
continue to be subject to the filing and reporting requirements of the
Commission as long as any of the Notes are outstanding.
Concurrently with the reports delivered pursuant to the preceding
paragraph, the Company shall deliver to the Indenture Trustee and to each
Holder annual and quarterly financial statements with appropriate footnotes of
the Company and its Subsidiaries, all prepared and presented in a manner
substantially consistent with those of the Company required by the preceding
paragraph.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the
Indenture Trustee to enter into a supplemental indenture or amend the Security
Documents for certain limited purposes without the consent of the Holders. With
the consent of the Holders of not less than a majority in aggregate Value of
the Notes at the time outstanding, the Company and the Indenture Trustee are
permitted to amend or supplement the Indenture or any supplemental indenture or
modify the rights of the Holders; provided, that no such modification may,
without the consent of the Holders of not less than 66 2/3 in aggregate Value
of the Notes at the time outstanding, (i) prior to a Change of Control, reduce
the Change of Control Purchase Price or alter the provisions of the covenant
described herein under the heading "Repurchase of Notes at the Option of the
Holder Upon a Change of Control", (ii) prior to the date upon which an Excess
Cash Offer is required to be made, reduce the Excess Cash Offer Price or alter
the provisions of the covenant described herein under the heading "Excess
Cash," in a manner adverse to the Holders or (iii) prior to the date upon which
an Additional Interest Excess Cash Offer is required to be made, reduce the
Additional Interest Excess Cash Offer Price or alter the provisions of the
covenant described herein under the heading "Additional Interest Excess Cash
Offer," in a manner adverse to the Holders; provided further, that no such
modification may, without the consent of each Holder affected thereby; (i)
change the Stated Maturity of the principal of, or any installment of principal
of, or any installment of interest on, any Note, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity thereof (or, in the case of redemption, on or
after the Redemption Date), or, (x) after the date upon which a Change of
Control Offer is required to be made, reduce the Change of Control Purchase
Price or alter the provisions of the covenant described herein under the
heading "Repurchase of Notes at the Option of the Holder upon a Change of
Control", (y) after the date upon which an Excess Cash Offer is required to be
made, reduce the Excess Cash Offer Price or alter the provisions of the
covenant described herein under the heading "Excess Cash" in a manner adverse
to the Holders or (z) after the date upon which an Additional Interest Excess
Cash Offer is required to be made, reduce the Additional Interest Excess Cash
Offer Price or alter the provisions of the covenant described herein under the
heading "Additional Interest Excess Cash Offer," in a manner adverse to the
Holders, or (ii) reduce the percentage in Value of the Outstanding Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture, or waiver provided for in the Indenture, or (iii) modify certain of
the waiver provisions, except to increase any required percentage or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Note affected thereby.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS
No stockholder, officer, or director, as such, past, present, or
future of the Company or any of its Subsidiaries or any successor corporation
or any of them shall have any personal liability in respect of the obligations
of the Company or such Subsidiary under the Indenture or the Notes by reason of
his or its status as such stockholder, officer, or director.
149
<PAGE> 157
REGISTRATION RIGHTS
The Company and the Initial Purchaser entered into the Registration
Rights Agreement pursuant to which the Company agreed to file with the
Commission promptly (but in any event on or prior to 120 days) after the
Closing Date, a registration statement on the appropriate form (the "Exchange
Offer Registration Statement"), relating to a registered exchange offer for the
Notes under the Securities Act and to use its best efforts to have such
Exchange offer Registration Statement declared effective by the Commission
within 180 days after the Closing Date. Upon the effectiveness of the Exchange
Offer Registration Statement, the Company will offer to the holders of Notes
who are not prohibited by any law or policy of the Commission from
participating in the Exchange Offer the opportunity to exchange their
Outstanding Notes for the Exchange Notes. In the event that applicable law or
interpretations of the staff of the Commission do not permit the Company to
effect the Exchange Offer or, in the case of any holder of Notes that
participates in the Exchange Offer, such holder does not receive freely
tradeable Exchange Notes on the date of the exchange for tendered Outstanding
Notes, or if for some reason the Exchange Offer is not consummated within 270
days after the Closing Date, or under certain circumstances upon the request of
the Initial Purchaser, the Company will, at its cost, file with the Commission
a shelf registration statement (the "Shelf Registration Statement"), to cover
resales of Outstanding Notes by the holders thereof who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. The Company will use its best efforts to cause
the applicable registration statement to be declared effective by the
Commission as promptly as practicable after the date of filing.
Based on an interpretation of the staff of the Commission set forth in
several no-action letters to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by holders thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act.
However, any purchaser of Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing
the Exchange Notes (i) will not be able to rely on the interpretation of the
staff of the Commission set forth in the above referenced no-action letters,
(ii) will not be able to tender its Notes in the Exchange Offer and (iii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Notes unless such
sale or transfer is made pursuant to an exemption from such requirements.
The Registration Rights Agreement provides that unless the Exchange
Offer would not be permitted by a policy of the Commission, the Company will
commence the Exchange Offer and will use its best efforts to issue, on or prior
to 30 business days after the date on which the Exchange Offer Registration
Statement is declared effective by the Commission, Exchange Notes in exchange
for all Outstanding Notes tendered prior thereto in the Exchange Offer. Upon
the occurrence of certain Registration Defaults (as defined in the Registration
Rights Agreement), the Company will be obligated, jointly and severally, to pay
liquidated damages to each holder of Registrable Securities (as defined in the
Registration Rights Agreement), during the first 120-day period immediately
following the occurrence of such Registration Default in an amount equal to
$0.05 per week per $1,000 principal amount of Registrable Securities held by
such Holder. Thereafter, the weekly liquidated damages amount will be $0.15
per week per $1,000 principal amount of Registrable Securities held by such
Holder, until the Registration Default is cured. All accrued liquidated
damages will be paid in the same manner as interest payments on the Notes on
semi-annual damages payment dates that correspond to interest payment dates for
the Notes. Following the cure of a Registration Default, the accrual of
liquidated damages will cease.
Holders of Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement. A holder of Notes that sells such Notes
pursuant to the Shelf Registration Statement generally would be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder
150
<PAGE> 158
(including certain indemnification obligations). The Company will provide a
copy of the Registration Rights Agreement to prospective investors upon
request.
GLOBAL EXCHANGE NOTE; BOOK-ENTRY FORM
The Exchange Notes initially exchanged by Qualified Institutional
Buyers (as defined in Rule 144A under the Securities Act) are represented by a
Global Exchange Note. The Global Exchange Note will be deposited on the
Exchange Date with DTC and registered in the name of DTC or its nominee (the
"Global Exchange Note Registered Owner"). Except as set forth below, the
Global Exchange Note may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
DTC is a limited-purpose trust company created to hold securities for
its participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
Pursuant to procedures established by DTC, (i) upon deposit of the
Global Exchange Note, DTC will credit, on its internal system, the principal
amounts of the Exchange Notes of the individual beneficial interests
represented by such Global Exchange Note to the respective accounts of
exchanging Holders who have accounts with DTC and (ii) ownership of such
interests in the Global Exchange Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC
(with respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the
Global Exchange Note). The laws of some states require that certain persons
take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer Exchange Notes will be limited to that
extent.
Except as described below, owners of interests in the Global Exchange
Note will not have Exchange Notes registered in their names, will not receive
physical delivery of Exchange Notes in definitive form and will not be
considered the registered owners thereof under the Indenture for any purpose.
None of the Company, the Trustee, nor any agent of the Company or the
Trustee will have any responsibility or liability for (i) any aspect of DTC's
records or any Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global
Exchange Note, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Exchange Note or (ii) any other
matter relating to the actions and practices of DTC or any of its Participants
or Indirect Participants.
Payments in respect of the principal of, premium, if any, and interest
on any Exchange Notes registered in the name of the Global Exchange Note
Registered Owner on any relevant record date will be payable by the Trustee to
the Global Exchange Note Registered Owner in its capacity as the registered
holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the Exchange Notes, including
the Global Exchange Note, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustee, nor any agent of the Company or
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of the Exchange Notes or for any other matter
relating to actions or practices of DTC or any of its Participants or Indirect
Participants. The Company understands that DTC's current practice, upon
receipt of any payment in respect of
151
<PAGE> 159
securities such as the Exchange Notes (including principal and interest), is to
credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in
principal amount of beneficial interests in the relevant security as shown on
the records of DTC (unless DTC has reason to believe it will not receive
payment on such payment date). Payments by the Participants and the Indirect
Participants to the beneficial owners of Exchange Notes will be governed by
standing instructions and customary practices and will not be the
responsibility of DTC, the Trustee or the Company. Neither the Company nor the
Trustee will be liable for any delay by DTC or any of its Participants or
Indirect Participants in identifying the beneficial owners of the Exchange
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from the Global Exchange Note Registered
Owner for all purposes.
The Global Exchange Note is exchangeable for definitive certificated
Exchange Notes if (i) DTC notifies the Company that it is unwilling or unable
to continue as depositary for the Global Exchange Note or if the Company
determines that DTC is unable to continue as depositary and the Company
thereupon fails to appoint a successor depositary, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the Exchange Notes in definitive certificated form, (iii) there shall have
occurred and be continuing an Event of Default or an event which after notice
or lapse of time would be an Event of Default with respect to the Exchange
Notes, or (iv) as provided in the last paragraph hereunder. Such definitive
certificated Exchange Notes shall be registered in the names of the owners of
the beneficial interests in the Global Exchange Note as provided by the
Participants. Exchange Notes in definitive certificated form will be fully
registered, without coupons, in minimum denominations of $1,000 and integral
multiples of $1,000 above the amount. Upon issuance of Exchange Notes in
definitive certificated form, the Trustee is required to register the Exchange
Notes in the name of, and cause the Exchange Notes to be delivered to, the
person or persons (or the nominee thereof) identified as the beneficial owner
as DTC shall direct.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Exchange Note among Participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
Participants or Indirect Participants of their respective obligations under the
rules and procedures governing their operations.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Company believes to be reliable,
but the Company takes no responsibility for the accuracy thereof.
Subject to the restrictions on the transferability of the Outstanding
Notes, an Outstanding Note in definitive form will be issued upon the resale,
pledge or other transfer of any Outstanding Note or interest therein to any
person or entity that is not a Qualified Institutional Buyer or that does not
participate in DTC. Outstanding Notes sold to Accredited Investors within the
meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act will be issued in registered, certified form without interest coupons.
Such Outstanding Notes will be subject to certain restrictions on transfer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such Exchange Notes. The
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes where such Outstanding Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period not to exceed 180 days after consummation of the
Exchange Offer, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
152
<PAGE> 160
The Company will not receive any proceeds from any sales of the
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchase or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells the Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act, and
any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal for the
Exchange Offer states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay certain expenses
incident to the Exchange Offer, other than commissions or concession of any
brokers or dealers, and will indemnify the holders of the Securities (including
any broker-dealers) against certain liabilities, including liabilities under
the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
request the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended
or supplemental Prospectus to such broker-dealer. If the Company shall give
any such notice to suspend the use of the Prospectus, it shall extend the
90-day period referred to above by the number of days during the period from
and including the date of the giving of such notice to and including when
broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of the Exchange Notes.
LEGAL MATTERS
The validity of the issuance of the Notes offered hereby will be
passed upon for the Company by Gardere & Wynne, L.L.P., Dallas, Texas.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company, TransTexas and
TARC as of January 31, 1997 and 1996 and the related statements of operations,
stockholders' equity and cash flows for the year ended January 31, 1997, the
six months ended January 31, 1996 and each of the years in the periods ended
July 31, 1995 and 1994 included elsewhere in this Prospectus have been audited
by Coopers & Lybrand, L.L.P., independent accountants, and are included herein
in reliance on their report, given on the authority of that firm as experts in
accounting and auditing.
RESERVE ENGINEERS
Information relating to the estimated proved reserves of oil and
natural gas and the related estimates of future net revenues and present values
thereof for the periods included in this Prospectus and in the Notes to
Consolidated Financial Statements of the Company have been prepared by
Netherland, Sewell & Associates, Inc., independent petroleum engineers and
geologists.
153
<PAGE> 161
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information of
TEC as of the year ended January 31, 1997 and six months ended July 31, 1997,
illustrate the effect of the Offering and the Transactions. The unaudited pro
forma condensed statements of operations have been prepared assuming that the
Offering and the Transactions were consummated on February 1, 1996.
The unaudited pro forma adjustments and the resulting unaudited pro
forma condensed financial information are based on the assumptions noted in the
footnotes thereto. The unaudited pro forma condensed financial information
does not purport to represent what TEC's results of operations would have been
had the Offering and the Transactions actually occurred on the dates indicated
or the results of operations for any future date or period.
PF-1
<PAGE> 162
TRANSAMERICAN ENERGY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids......... $ 360,740 $ (173,761)(a) $ 186,979
Transportation.................................. 34,423 (34,423)(a) --
Product sales................................... 10,857 -- 10,857
Gains on the sale of assets..................... 7,856 -- 7,856
Other........................................... 297 -- 297 (g)
----------- ----------- ----------
Total revenues.............................. 414,173 (208,184) 205,989
----------- ----------- ----------
Costs and expenses:
Operating....................................... 154,313 (97,494)(a) 56,819
Depreciation, depletion and amortization........ 139,678 (78,932)(a) 60,746
General and administrative...................... 57,500 (2,000)(a) 58,000
2,500 (d)
Taxes other than income taxes................... 26,772 (12,818)(a) 13,954
Litigation settlements.......................... (96,000) -- (96,000)
----------- ----------- ----------
Total costs and expenses.................... 282,263 (188,744) 93,519 (g)
----------- ----------- ----------
Operating income............................ 131,910 (19,440) 112,470
----------- ----------- ----------
Other income (expense):
Interest income................................. 5,748 -- 5,748
Interest expense, net........................... (101,670) (35,123)(b) (136,793)
Other, net...................................... 42,980 -- 42,980
----------- ----------- ----------
Total other income (expense)................ (52,942) (35,123) (88,065)
----------- ----------- ----------
Income (loss) before income taxes........... 78,968 (54,563) 24,405
Income taxes......................................... 12,491 23,644 (c) 36,135
----------- ----------- ----------
Net income (loss) before preferred
stock dividend.............................. $ 66,477 $ ( 78,207) $ (11,730)
=========== =========== ==========
Series A preferred stock dividend.................... $ 19 $ (19)(f) $ --
=========== =========== ==========
Net income (loss) available for common stockholder... $ 66,458 $ (78,188) $ (11,730)
=========== =========== ==========
Net income (loss) per share.......................... $ 7,384 $ (1,303)
=========== ==========
Weighted average number of common
shares outstanding.............................. 9,000 9,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of the pro forma financial
statements.
PF-2
<PAGE> 163
TRANSAMERICAN ENERGY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids . . . . . . . . . . . $ 111,848 $ (38,684)(a) $ 73,164
Transportation . . . . . . . . . . . . . . . . . . . . . . . 12,055 (12,055)(a) --
Gains on the sale of assets . . . . . . . . . . . . . . . . . 532,929 (532,929)(a) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 -- 617 (g)
--------- --------- --------
Total revenues . . . . . . . . . . . . . . . . . . . 657,449 (583,668) 73,781
--------- --------- --------
Costs and expenses:
Operating . . . . . . . . . . . . . . . . . . . . . . . . . . 47,887 (27,700)(a) 20,187
Depreciation, depletion and amortization . . . . . . . . . . 57,397 (19,726)(a) 37,671
General and administrative . . . . . . . . . . . . . . . . . 29,767 (7,688)(a) 23,329
1,250 (d)
Taxes other than income taxes . . . . . . . . . . . . . . . . 9,535 (2,255)(a) 7,280
--------- --------- --------
Total costs and expenses . . . . . . . . . . . . . . 144,586 (56,119) 88,467 (g)
--------- --------- --------
Operating income (loss) . . . . . . . . . . . . . . . 512,863 (527,549) (14,686)
--------- --------- --------
Other income (expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . 9,114 -- 9,114
Interest expense . . . . . . . . . . . . . . . . . . . . . . (69,932) (2,222)(b) (72,154)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 735 -- 735
--------- --------- --------
Total other income (expense) . . . . . . . . . . . . (60,083) (2,222) (62,305)
--------- --------- --------
Income (loss) before income taxes . . . . . . . . . . 452,780 (529,771) (76,991)
Income tax expense (benefit) . . . . . . . . . . . . . . . . . 172,483 (199,430)(c) (26,947)
--------- --------- --------
Income (loss) before extraordinary item . . . . . . . $ 280,297 (330,341) (50,044)
Extraordinary item - early extinguishment of debt . . . . . . . (156,539) 156,539 (e) --
--------- --------- --------
Net income (loss) before preferred stock dividend . . $ 123,758 $(173,802) $(50,044)
========= ========= ========
Series A preferred stock dividend . . . . . . . . . . . . . . . $ 19 $ (19)(f) $ --
========= ========= ========
Net income available for common stockholder . . . . . . . . . . $ 123,739 $(173,783) $(50,044)
========= ========= ========
Net income (loss) per share . . . . . . . . . . . . . . . . . . $ 13,749 $ (5,560)
========= ========
Weighted average number of common shares outstanding . . . . . 9,000 9,000
========= ========
</TABLE>
The accompanying notes are an integral part of the pro forma financial
statements.
PF-3
<PAGE> 164
TRANSAMERICAN ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(a) To adjust revenues, including losses relating to risk management
activities, operating expenses, depreciation, depletion and
amortization, general and administrative and taxes other than income
taxes as a result of the Lobo Sale.
(b) To adjust interest expense as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
January 31, 1997 July 31, 1997
---------------- ----------------
<S> <C> <C>
Historical interest on TransTexas Senior Secured Notes . . . . . . . $ (92,000) $(33,808)
Historical interest on TransTexas other debt . . . . . . . . . . . . (2,500) (1,736)
Historical interest on TARC Notes repurchased . . . . . . . . . . . . (62,999) (26,915)
Historical interest on TransTexas Subordinated Notes . . . . . . . . (1,646) (4,831)
Historical interest on TARC intercompany debt . . . . . . . . . . . . (2,237) (3,025)
Historical interest on TARC notes payable . . . . . . . . . . . . . . -- (1,339)
Interest on TransTexas Subordinated Exchange Notes . . . . . . . . . 15,925 7,962
Interest expense on TEC Senior Secured Notes . . . . . . . . . . . . 54,625 20,029
Interest expense on TEC Senior Secured Discount Notes (1) . . . . . . 99,598 36,639
Interest expense on estimated federal income tax
liability payable to affiliate at an assumed rate of 9% . . . . . . 6,750 3,375
Amortization of historical debt issuance costs . . . . . . . . . . . (5,461) (3,245)
Amortization of estimated debt issuance costs . . . . . . . . . . . . 11,300 2,969
Reduction in capitalized interest . . . . . . . . . . . . . . . . . . 13,768 6,147
-------- --------
$ 35,123 $ 2,222
======== ========
</TABLE>
- --------------
(1) Based on actual debt outstanding at January 31, 1997 and July
31, 1997. Pro forma interest expense on the entire amount of
Senior Secured Discount Notes is approximately $118.6 million
and $ 57.8 million, respectively.
(c) To adjust income tax expense based on the combined pro forma income
tax expense of TransTexas and TARC in accordance with the Tax
Allocation Agreement.
(d) To record the fee for advisory services and other benefits to be paid
annually to TransAmerican pursuant to the Services Agreement.
(e) To eliminate the extraordinary item related to the early retirement
of the TransTexas Senior Secured Notes and the TARC Notes and the
exchange of the Old TransTexas Subordinated Notes.
(f) To eliminate the dividend on the TEC Preferred Stock which was
redeemed.
(g) Does not include revenues and related expenses attributable to the
Agreement for Services between TransTexas and Conoco Inc.
PF-4
<PAGE> 165
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Stockholder's Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 166
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransAmerican Energy Corporation:
We have audited the accompanying consolidated balance sheet of
TransAmerican Energy Corporation (and predecessor) as of January 31, 1996 and
1997 and the related consolidated statements of operations and cash flows for
each of the two years ended July 31, 1995, the six months ended January 31,
1996 and the year ended January 31, 1997 and the statement of stockholder's
deficit for the two years ended July 31, 1995, the six months ended January
31, 1996 and the year ended January 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of TransAmerican Energy Corporation (and predecessor) as of January 31, 1996
and 1997, and the results of their operations and cash flows for each of the
two years in the period ended July 31, 1995, the six months ended January 31,
1996, and the year ended January 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its wholly-owned subsidiary, TransAmerican
Refining Corporation ("TARC"), will continue as going concerns. In our prior
opinion dated May 1, 1997 we referenced uncertainty regarding TARC's ability to
amend or refinance the TARC Notes, obtain the necessary additional funds to
complete its refinery expansion and fund its ongoing working capital
requirements. As described in Note 2, in June 1997 TARC completed a tender offer
for the TARC Notes and obtained funds for its refinery expansion with proceeds
from an intercompany loan from the Company. There is no assurance that the
refinery expansion can be completed, that the funds obtained will be adequate or
that profitable operations will be ultimately achieved. As a result, there is
substantial doubt about TARC's ability to continue as a going concern.
Additionally, the Company has pledged its ownership interest in TransTexas Gas
Corporation ("TransTexas") as collateral on the Company's Senior Discount Notes,
the repayment of which is substantially dependent on TARC's ability to provide
cash flow from operations or otherwise provide funds for debt repayment. In the
event TARC does not provide adequate funds to the Company, the Company may not
be able to recover its investment in TARC and could lose its ownership interest
in TransTexas. Therefore, there is substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 1, 1997 (except
paragraph four
above and Note 2,
which are dated as
of October 10, 1997)
F-2
<PAGE> 167
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,114 $ 24,179 $ 113,659
Cash restricted for interest - TransTexas 46,000 46,000 --
Debt proceeds held in disbursement account - TARC 14,840 -- 14,148
Accounts receivable 36,372 78,660 31,628
Receivable from affiliates 3,000 -- --
Inventories 48,652 12,481 15,105
Other current assets 56,300 25,638 16,588
----------- ----------- -----------
Total current assets 219,278 186,958 191,128
----------- ----------- -----------
Property and equipment 2,438,926 2,836,696 1,851,647
Less accumulated depreciation, depletion and amortization 1,302,972 1,451,417 702,195
----------- ----------- -----------
Net property and equipment -- based on the full cost method of accounting
for gas and oil properties of which $136,360, $158,973 and $147,080 was
excluded from amortization at January 31, 1996,
January 31, 1997 and July 31, 1997, respectively 1,135,954 1,385,279 1,149,452
----------- ----------- -----------
Restricted cash:
Cash held for share repurchases - TransTexas -- -- 349,685
Debt proceeds held in disbursement accounts 9,565 -- 137,662
Due from affiliates 26,846 -- --
Other assets, net 64,779 41,498 138,222
----------- ----------- -----------
$ 1,456,422 $ 1,613,735 $ 1,966,149
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,335 $ 5,787 $ 9,542
Revolving credit agreement -- -- 6,249
Accounts payable 63,302 48,202 58,378
Payable to affiliate 2,260 1,604 2,397
Product financing arrangements 37,206 -- --
Accrued liabilities 89,316 98,861 49,416
Long-term debt -- 365,730 --
----------- ----------- -----------
Total current liabilities 193,419 520,184 125,982
----------- ----------- -----------
Due to affiliates 18,992 26,295 4,743
Notes payable to affiliate -- 46,589 --
Long-term debt, less current maturities 1,119,079 910,469 1,513,932
Revolving credit agreement 20,365 26,268 --
Production payments, less current portion 31,036 11,931 11,218
Deferred revenue 32,850 54,554 --
Deferred income taxes 40,256 31,367 53,909
Other liabilities 36,358 32,991 11,493
Redeemable preferred stock, $0.01 par value, 10,000 shares
authorized; Series A - 1,000 shares issued and outstanding at
January 31, 1996 and January 31, 1997 96 96 --
Commitments and contingencies (Note 18) -- -- --
Stockholder's equity (deficit):
Common stock, $0.01 par value, 100,000 shares authorized; 9,000
shares issued and outstanding -- -- --
Additional paid-in capital 175,019 158,535 269,647
Accumulated deficit (211,048) (148,508) (24,775)
----------- ----------- -----------
(36,029) 10,027 244,872
Advances to affiliates -- (57,036) --
----------- ----------- -----------
Total stockholder's equity (deficit) (36,029) (47,009) 244,872
----------- ----------- -----------
$ 1,456,422 $ 1,613,735 $ 1,966,149
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE> 168
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
YEAR ENDED JULY 31, JANUARY 31, JANUARY 31,
------------------------ ----------- -----------
1994 1995 1996 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas liquids $ 300,210 $ 273,092 $ 123,253 $ 360,740
Transportation 33,240 36,787 15,892 34,423
Product sales 174,143 140,027 107,237 10,857
Gain on the sale of assets -- -- 474 7,856
Tank rentals 3,035 552 -- --
Other 157 285 127 297
--------- --------- --------- ---------
Total revenues 510,785 450,743 246,983 414,173
--------- --------- --------- ---------
Costs and expenses:
Operating 268,862 244,123 154,697 154,313
Depreciation, depletion and amortization 116,447 135,819 64,053 139,678
General and administrative 44,807 45,592 21,213 57,500
Taxes other than income taxes 16,904 18,208 8,133 26,772
Litigation settlements (1,000) -- (18,300) (96,000)
--------- --------- --------- ---------
Total costs and expenses 446,020 443,742 229,796 282,263
--------- --------- --------- ---------
Operating income 64,765 7,001 17,187 131,910
--------- --------- --------- ---------
Other income (expense):
Interest income 1,553 6,798 5,197 5,748
Interest expense, net (51,684) (81,012) (49,348) (101,670)
Other, net (2,851) 2,451 (229) 42,980
--------- --------- --------- ---------
Total other income (expense) (52,982) (71,763) (44,380) (52,942)
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item 11,783 (64,762) (27,193) 78,968
Income tax expense (benefit) 5,380 (2,415) (416) 12,491
--------- --------- --------- ---------
Income (loss) before extraordinary item 6,403 (62,347) (26,777) 66,477
Extraordinary item - early extinguishment of debt -- (56,637) -- --
--------- --------- --------- ---------
Net income (loss) before preferred stock dividend $ 6,403 $(118,984) $ (26,777) $ 66,477
========= ========= ========= =========
Series A preferred stock dividend $ -- $ -- $ -- $ 19
========= ========= ========= =========
Net income (loss) available for common stockholders $ 6,403 $(118,984) $ (26,777) $ 66,458
========= ========= ========= =========
Net income (loss) per common share:
Income (loss) before extraordinary item $ (13,901) $ (2,975) $ 7,384
Extraordinary item (12,628) -- --
--------- --------- ---------
$ (26,529) $ (2,975) $ 7,384
========= ========= =========
Weighted average number of shares outstanding 4,485 9,000 9,000
========= ========= =========
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------------
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
Gas, condensate and natural gas liquids $ 156,245 $ 111,848
Transportation 16,870 12,055
Product sales 10,857 --
Gain on the sale of assets 7,762 532,929
Tank rentals -- --
Other 357 617
--------- ---------
Total revenues 192,091 657,449
--------- ---------
Costs and expenses:
Operating 73,390 47,887
Depreciation, depletion and amortization 65,165 57,397
General and administrative 25,663 29,767
Taxes other than income taxes 15,255 9,535
Litigation settlements (96,000) --
--------- ---------
Total costs and expenses 83,473 144,586
--------- ---------
Operating income 108,618 512,863
--------- ---------
Other income (expense):
Interest income 2,121 9,114
Interest expense, net (54,121) (69,932)
Other, net 56,490 735
--------- ---------
Total other income (expense) 4,490 (60,083)
--------- ---------
Income before income taxes and
extraordinary item 113,108 452,780
Income taxes 7,788 172,483
--------- ---------
Income before extraordinary item 105,320 280,297
Extraordinary item - early extinguishment of debt -- (156,539)
--------- ---------
Net income before preferred stock dividend $ 105,320 $ 123,758
========= =========
Series A preferred stock dividend $ 19 $ 19
========= =========
Net income available for common stockholders $ 105,301 $ 123,739
========= =========
Net income per common share:
Income before extraordinary item $ 11,700 $ 31,142
Extraordinary item -- (17,393)
--------- ---------
$ 11,700 $ 13,749
========= =========
Weighted average number of shares outstanding 9,000 9,000
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE> 169
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Paid-in Capital (Accumulated)
Shares Amount (Capital Deficit) Deficit)
--------- --------- ----------------- -------------
<S> <C> <C> <C> <C>
Balance at July 31, 1994 1,000 $ -- $ 1 $ --
Stock transfer, as adjusted -- -- 175,018 (65,287)
Issuance of common stock 8,000 -- -- --
Net loss -- -- -- (118,984)
--------- ---------- --------- ---------
Balance at July 31, 1995 9,000 -- 175,019 (184,271)
Net loss -- -- -- (26,777)
--------- ---------- --------- ---------
Balance at January 31, 1996 9,000 -- 175,019 (211,048)
Transfer of litigation escrow to affiliate -- -- (22,484) --
Contribution of Signal Capital Holdings
Corporation stock by affiliate -- -- 6,000 --
Advances to affiliates -- -- -- --
Preferred stock dividends -- -- -- (19)
Elimination of intercompany gain on
property purchased from affiliate -- -- -- (3,918)
Net income -- -- -- 66,477
--------- ---------- --------- ---------
Balance at January 31, 1997 9,000 -- 158,535 (148,508)
Payment to affiliate -- -- (13,304) --
Contribution of properties by affiliate -- -- 21,513 --
Assumption of income taxes by affiliate -- -- 125,907 --
Dividend to affiliate -- -- (23,000) --
Preferred stock dividends -- -- -- (19)
Redemption of preferred stock -- -- (4) (6)
Reclassification of advances to affiliates -- -- -- --
Net income -- -- -- 123,758
--------- ---------- --------- ---------
Balance at July 31, 1997 (unaudited) 9,000 $ -- $ 269,647 $ (24,775)
========= ========== ========= =========
<CAPTION>
Total
Advances Stockholder's
to Affiliates Equity (Deficit)
------------- ----------------
<S> <C> <C>
Balance at July 31, 1994 $ -- $ 1
Stock transfer, as adjusted -- 109,731
Issuance of common stock -- --
Net loss -- (118,984)
--------- ---------
Balance at July 31, 1995 -- (9,252)
Net loss -- (26,777)
--------- ---------
Balance at January 31, 1996 -- (36,029)
Transfer of litigation escrow to affiliate -- (22,484)
Contribution of Signal Capital Holdings
Corporation stock by affiliate -- 6,000
Advances to affiliates (57,036) (57,036)
Preferred stock dividends -- (19)
Elimination of intercompany gain on
property purchased from affiliate -- (3,918)
Net income -- 66,477
--------- ---------
Balance at January 31, 1997 (57,036) (47,009)
Payment to affiliate -- (13,304)
Contribution of properties by affiliate -- 21,513
Assumption of income taxes by affiliate -- 125,907
Dividend to affiliate -- (23,000)
Preferred stock dividends -- (19)
Redemption of preferred stock -- (10)
Reclassification of advances to affiliates 57,036 57,036
Net income -- 123,758
--------- ---------
Balance at July 31, 1997 (unaudited) $ -- $ 244,872
========= =========
</TABLE>
Prior year periods are not presented because the Company's predecessor was not
a separate entity with its own capital structure.
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE> 170
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JULY 31, JANUARY 31,
---------------------------- -----------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 6,403 $ (118,984) $ (26,777)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Extraordinary item -- 56,637 --
Depreciation, depletion and amortization 116,447 135,819 64,053
Amortization of discount on long-term debt -- 7,673 3,389
Amortization of discount on subordinated notes -- -- --
Amortization of debt issue costs 2,818 4,339 1,533
Gain on the sale of assets -- -- (474)
Deferred income taxes (5,961) 5,196 (416)
Gain on the sale of TransTexas stock -- -- --
Inventory writedown 79 1,265 4,406
Proceeds from volumetric production payments -- -- 32,850
Repayment of volumetric production payments -- -- --
Amortization of deferred revenue -- -- --
Changes in assets and liabilities:
Accounts receivable (45,616) 19,685 (9,189)
Inventories (3,600) (6,540) 4,057
Other current assets 351 (12,446) 1,564
Accounts payable 9,690 (17,499) 1,995
Accrued liabilities 26,473 (27,184) (6,975)
Transactions with affiliates, net (721) (12,320) (3,447)
Other assets (1,816) (3,690) 569
Other liabilities 20,516 11,934 (18,228)
----------- ----------- -----------
Net cash provided (used) by operating activities 125,063 43,885 48,910
----------- ----------- -----------
Investing activities:
Capital expenditures (290,494) (376,458) (275,451)
Proceeds from the sale of assets -- -- 20,500
Increase in cash restricted for interest -- (44,722) (46,000)
Withdrawals from cash restricted for interest -- -- 44,722
Increase in cash restricted for TransTexas share repurchases -- -- --
Withdrawals from cash restricted for TransTexas share repurchases -- -- --
Advances to affiliate (8,257) -- --
Payment of advances by affiliate 8,257 -- --
Proceeds from the sale of TransTexas stock -- -- --
Purchase of production payment from affiliate (5,000) -- --
Production payment by affiliate 609 4,391 --
Purchase of TARC warrants -- -- --
Purchase of treasury stock - TransTexas -- -- --
----------- ----------- -----------
Net cash provided (used) by investing activities (294,885) (416,789) (256,229)
----------- ----------- -----------
Financing activities:
Issuance of long-term debt 500,000 1,120,750 3,000
Retirement of long-term debt -- (542,500) --
Principal payments on long-term debt -- (20,000) (219)
Increase in debt proceeds held in disbursement accounts (62,093) (173,000) --
Withdrawals from disbursement accounts -- 32,143 116,452
Issuance of note payable -- -- --
Retirement of note payable -- -- --
Issuance of production payments -- 49,500 --
Principal payments on production payments -- (7,866) (8,833)
Net proceeds from the sale of TransTexas stock -- -- --
Issuance of redeemable preferred stock -- 96 --
Principal payments on capital lease obligations -- -- --
Revolving credit agreement, net -- -- 20,365
Issuance of common stock 66,143 -- --
Dividend payment on preferred stock -- -- --
Advances from TransAmerican and affiliates to TARC 68,523 87,560 12,270
Repayment of advances from TransAmerican by TARC -- (60,000) (8,750)
Transfer of litigation escrow to affiliate -- -- --
Dividend to TransAmerican -- -- --
Debt issue costs (19,638) (38,515) (1,258)
Redemption of Series A preferred stock -- -- --
Other -- -- (458)
----------- ----------- -----------
Net cash provided (used) by financing activities 552,935 448,168 132,569
----------- ----------- -----------
TransTexas transactions with TransAmerican, net (369,529) -- --
----------- ----------- -----------
Increase in cash and cash equivalents 13,584 75,264 (74,750)
Beginning cash and cash equivalents 16 13,600 88,864
----------- ----------- -----------
Ending cash and cash equivalents $ 13,600 $ 88,864 $ 14,114
=========== =========== ===========
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
----------- ----------------------------
1997 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 66,477 $ 105,320 $ 123,758
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Extraordinary item -- -- 156,539
Depreciation, depletion and amortization 139,678 65,165 57,397
Amortization of discount on long-term debt 8,470 40 17,863
Amortization of discount on subordinated notes -- -- 4,941
Amortization of debt issue costs 1,653 7,002 2,175
Gain on the sale of assets (7,762) (532,929)
Deferred income taxes (1,343) (11,244) 172,483
Gain on the sale of TransTexas stock (42,607) (56,162) --
Inventory writedown (8,889) 921 --
Proceeds from volumetric production payments 58,621 58,621 --
Repayment of volumetric production payments -- -- (45,134)
Amortization of deferred revenue (36,917) (16,087) (9,420)
Changes in assets and liabilities:
Accounts receivable (42,288) (3,508) 47,032
Inventories (1,035) (5,578) (2,621)
Other current assets 2,671 22,899 5,050
Accounts payable 13,914 (1,406) 11,885
Accrued liabilities 32,561 (3,125) (51,106)
Transactions with affiliates, net (2) (11,763) (955)
Other assets 21,491 (2,161) 259
Other liabilities (20,173) (16,452) 1,867
----------- ----------- -----------
Net cash provided (used) by operating activities 192,282 124,720 (40,916)
----------- ----------- -----------
Investing activities:
Capital expenditures (427,232) (191,354) (293,412)
Proceeds from the sale of assets 92,518 69,971 1,030,032
Increase in cash restricted for interest (92,000) (46,000) --
Withdrawals from cash restricted for interest 92,000 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 (24,750) (9,500) (13,304)
Payment of advances by affiliate -- -- 56,354
Proceeds from the sale of TransTexas stock 42,607 -- --
Purchase of production payment from affiliate -- -- --
Production payment by affiliate -- -- --
Purchase of TARC warrants -- -- (33,010)
Purchase of treasury stock - TransTexas -- -- (49,599)
----------- ----------- -----------
Net cash provided (used) by investing activities (316,857) (130,883) 393,376
----------- ----------- -----------
Financing activities:
Issuance of long-term debt 125,645 25,000 1,367,706
Retirement of long-term debt -- -- (1,329,214)
Principal payments on long-term debt (20,238) (17,044) (5,428)
Increase in debt proceeds held in disbursement accounts (26,549) (26,549) (217,813)
Withdrawals from disbursement accounts 50,949 50,550 66,003
Issuance of note payable -- -- 36,000
Retirement of note payable -- -- (36,000)
Issuance of production payments 28,598 -- 20,977
Principal payments on production payments (45,205) (32,800) (23,909)
Net proceeds from the sale of TransTexas stock -- 42,607 --
Issuance of redeemable preferred stock --
Principal payments on capital lease obligations -- (517) (438)
Revolving credit agreement, net 5,903 (12,417) (20,019)
Issuance of common stock -- -- --
Dividend payment on preferred stock (19) (19) (19)
Advances from TransAmerican and affiliates to TARC 49,152 11,656 15,026
Repayment of advances from TransAmerican by TARC (1,925) (1,925) (66,000)
Transfer of litigation escrow to affiliate (22,484) -- --
Dividend to TransAmerican -- -- (23,000)
Debt issue costs (9,187) (4,256) (46,746)
Redemption of Series A preferred stock -- -- (106)
Other -- -- --
----------- ----------- -----------
Net cash provided (used) by financing activities 134,640 34,286 (262,980)
----------- ----------- -----------
TransTexas transactions with TransAmerican, net -- -- --
----------- ----------- -----------
Increase in cash and cash equivalents 10,065 28,123 89,480
Beginning cash and cash equivalents 14,114 14,114 24,179
----------- ----------- -----------
Ending cash and cash equivalents $ 24,179 $ 42,237 $ 113,659
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE> 171
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The consolidated financial statements include the following subsidiaries
of TransAmerican Energy Corporation (the "Company" or "TEC"), a wholly owned
subsidiary of TransAmerican Natural Gas Corporation ("TransAmerican"):
TransTexas Gas Corporation and subsidiary and its combined predecessors
("TransTexas") and TransAmerican Refining Corporation ("TARC")
For the periods prior to the formation of the Company, the combined
operations of TransTexas and TARC are referred to herein as "the predecessor."
The Company was formed on July 12, 1994 to hold 55 million shares of common
stock (74.3% of the then outstanding shares) of TransTexas and all of the
outstanding capital stock of TARC. TransAmerican contributed 55 million shares
(74.3% of the total then outstanding) of TransTexas common stock to the Company
(the "Stock Transfer") 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 then outstanding) of TransTexas common stock
to TARC. In March 1996, TARC sold 4.55 million shares (6.2% of the total then
outstanding) of TransTexas common stock in public offerings. The consolidated
financial statements include the financial statements of TransTexas and TARC on
a wholly-owned basis. Prior to the Stock Transfer, the financial statements of
the predecessor were presented on a combined basis.
The 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. TransTexas
and TARC do not operate as an integrated entity. Thus, the financial
information presented herein should be read in conjunction with the separate
financial statements of TransTexas and TARC filed on their respective Annual
Reports on Form 10-K for the fiscal year ended January 31, 1997.
TransAmerican and certain subsidiaries emerged from a proceeding under
Chapter 11 of the Bankruptcy Code on October 19, 1987, pursuant to a confirmed
plan of reorganization. With the proceeds of the public offering of
TransTexas' 10 1/2% senior secured notes (the "Prior Notes"), TransTexas paid
all allowed claims under TransAmerican's plan of reorganization as well as
certain other debts of TransAmerican. During 1996, TransTexas reclassified
approximately $21.6 million of deferred tax liability to capital to properly
reflect liabilities of TransAmerican.
TransTexas Transmission Corporation was incorporated in June 1993 as a
wholly owned subsidiary of TransTexas. In December 1995, TransTexas
Exploration Corporation ("TTEX") was incorporated as a wholly owned subsidiary
of TransTexas and is an Unrestricted Subsidiary, as defined in the TEC Notes
Indenture (as defined in Note 2). TransTexas Drilling Services, Inc. was
incorporated in January 1997 as a wholly owned subsidiary of TransTexas.
All significant intercompany transactions between the consolidated
entities have been eliminated. All significant intercompany transactions and
balances with TransAmerican prior to the Stock Transfer are recorded in
TransAmerican's equity investment.
F-7
<PAGE> 172
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
The results of operations and cash flows for the years ended July 31,
1994, represent that of the predecessor. Included in the results of operations
and cash flows for the year ended July 31, 1995, are the activities of the
predecessor through February 23, 1995.
Change in Fiscal Year
On January 30, 1996, the Board of Directors approved a change in the
Company's fiscal year end for financial reporting purposes to January 31 from
July 31.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date(s) of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period(s). Actual results could differ from these estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
The Company's inventories, consisting primarily of tubular goods,
refinery feedstocks and refined products, are stated at the lower of average
cost or market. At July 31, 1995 and January 31, 1996, TARC wrote down the
value of its inventories by approximately $1.3 million and $4.4 million,
respectively, to reflect existing market prices.
Gas and Oil Properties
The Company uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, the cost for successful,
as well as unsuccessful, exploration and development activities are
capitalized. Such capitalized costs and estimated future development and
reclamation costs are amortized on a unit-of-production method. Net
capitalized costs of gas and oil properties are limited to the lower of
unamortized cost or the cost center ceiling, defined as the sum of the present
value (10% discount rate) of estimated unescalated future net revenues from
proved reserves; plus the cost of properties not being amortized, if any; plus
the lower of cost or estimated fair value of unproved properties included in
the costs being amortized, if any; less related income tax effects.
Proceeds from the sale of gas and oil properties are applied to reduce
the costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.
Unevaluated properties and associated costs not currently being
amortized and included in gas and oil properties were $136 million, $159
million and $147 million at January 31, 1996 and 1997 and July 31, 1997,
respectively. The properties represented by these costs were undergoing
exploration at such dates, or are properties on which the Company intends to
commence such activities in the future. The Company believes that the
unevaluated properties at July 31, 1997 will be substantially evaluated in 12
to 24 months and it will begin to amortize these costs at such time.
F-8
<PAGE> 173
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
Refining Properties
Property and equipment acquired subsequent to 1983, including assets
transferred from TransAmerican in 1994, are stated at TransAmerican's or TARC's
historical cost. During the period from 1987 through August 1993, property and
equipment acquired prior to 1983 were carried at estimated net realizable value
and no depreciation expense was charged. New or refurbished units are
depreciated as placed in service. Depreciation of refinery equipment and other
buildings and equipment is computed by the straight-line method at rates that
will amortize the unrecovered cost of depreciable property and equipment,
including assets acquired under capital leases, over their estimated useful
lives. Costs of improving leased property are amortized over the estimated
useful lives of the assets or the terms of the leases, whichever is shorter.
Other Property and Equipment
Other property and equipment are stated at cost. The cost of repairs
and minor replacements is charged to operating expense while the cost of
renewals and betterments is capitalized. At the time depreciable assets other
than gas and oil properties are retired, or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the accounts.
Gains or losses on dispositions in the ordinary course of business are included
in the consolidated statement of operations. Impairment of other property and
equipment is reviewed whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable.
Depreciation of pipeline and transmission facilities, oil field services
equipment and other buildings and equipment is computed by the straight-line
method at rates that will amortize the unrecovered cost of depreciable property
and equipment, including assets acquired under capital leases, over their
estimated useful lives.
Costs of improving leased property are amortized over the estimated
useful lives of the assets or the terms of the leases, whichever is shorter.
Turnarounds
A turnaround consists of a complete shutdown, inspection and maintenance
of a unit. The estimated costs of turnarounds are accrued over the period to
the next scheduled turnaround, which is generally greater than one year.
Environmental Remediation Costs
Environmental expenditures are expensed or capitalized as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that do not have future
economic benefits are expensed. Liabilities for these expenditures are
provided when the responsibility to remediate is probable and the amount of
associated cost is reasonably estimable.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other
Assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the interest method. In the event of
a redemption of long-term debt, the related debt issue costs are charged to
income in the period of redemption.
Costs in Excess of Net Assets of Subsidiaries
Costs in excess of net assets of subsidiaries relates to (i) the
Company's acquisition of TARC warrants of approximately $33 million and (ii)
TransTexas' purchase of its treasury stock from nonaffiliates of approximately
F-9
<PAGE> 174
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
$50 million. The Company amortizes these costs using the straight-line method
over a period of 40 years. The Company periodically reviews the costs in
excess of net assets of subsidiaries to determine whether any impairment of
these assets has occurred. In making such determination, the Company evaluates
the performance, on an undiscounted basis, of the underlying subsidiaries'
expected future operating cash flows in relation to the Company's net
investment in the subsidiaries. Based on its review as of July 31, 1997, the
Company does not believe that an impairment of its costs in excess of net
assets of subsidiaries has occurred.
Defined Contribution Plan
The Company, through its parent company, TransAmerican, maintains a
defined contribution plan, which incorporates a "401(k) feature" as allowed
under the Internal Revenue Code. All investments are made through
Massachusetts Mutual Life Insurance Company. Employees who are at least 21
years of age and have completed one year of credited service are eligible to
participate on the next semiannual entry date. The Company matches 10%, 20%,
or 50% of employee contributions up to a maximum of 3% of the participant's
compensation, based on years of plan participation. The Company and its
predecessor's contributions with respect to this plan totaled approximately
$0.2 million, $0.3 million, $0.2 million and $0.6 million for the years ended
July 31, 1994 and 1995, the six months ended January 31, 1996 and the year ended
January 31, 1997, respectively. All contributions are currently funded.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated
financial statements when the fair value of its financial instruments is
different from the book value. The Company believes the book value of those
financial instruments that are classified as current approximate fair value
because of the short maturity of these instruments. For noncurrent financial
instruments, the Company uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
Revenue Recognition
The Company recognizes revenues from the sales of refined products,
natural gas, condensate, oil and natural gas liquids in the period of delivery.
Revenues were recognized from transportation of natural gas in the period the
service was provided. The sales method is used for natural gas imbalances that
arise from jointly produced properties.
Price Management Activities
TARC's revenues and feedstock costs have been and will continue to be
affected by changes in the prices of petroleum and petroleum products. TARC's
ability to obtain additional capital is also substantially dependent on refined
product prices and refining margins, which are subject to significant seasonal,
cyclical and other fluctuations that are beyond TARC's control.
From time to time, TARC enters into commonly traded refinery feedstock
and finished goods related futures contracts, options on futures, swap
agreements and forward sale agreements with the intent to protect against a
portion of the price risk associated with price declines from holding
inventory, or fixed price purchase commitments. Commitments involving future
settlement give rise to market risk, which represents the potential loss that
can be caused by a change in the market value of a particular instrument, and
to credit risk, which represents the potential loss if a counterparty is unable
to perform. Under the guidelines of Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts" ("SFAS 80"), gains and
losses associated with such transactions that meet the hedge criteria in SFAS
80 will be deferred until realized. Those transactions that do not meet the
hedging criteria in SFAS 80 are recorded at market value resulting in a gain or
a loss that is recorded in other income in the period in which a change in
market value occurs.
F-10
<PAGE> 175
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
TransTexas' results of operations and the value of its gas and oil
properties are highly dependent upon the prices TransTexas receives for its
natural gas. Substantially all of TransTexas' sales of natural gas are made in
the spot market, or pursuant to contracts based on spot market prices, and not
pursuant to long-term, fixed-price contracts. Accordingly, the prices received
by TransTexas for its natural gas production are dependent upon numerous
factors beyond the control of TransTexas, including the level of consumer
product demand, the North American supply of natural gas, government
regulations and taxes, the price and availability of alternative fuels, the
level of foreign imports of oil and natural gas and the overall economic
environment. Demand for natural gas is seasonal, with demand typically higher
during the summer and winter, and lower during the spring and fall, with
concomitant changes in price.
From time to time, TransTexas has entered 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 price of the hedge agreement correlates with the price of the natural
gas production hedged. Accordingly, gains or losses are deferred and recorded
as assets or liabilities and subsequently recognized as an increase or decrease
in revenues in the respective month the physical volumes are sold.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to credit risk
consist principally of cash, trade receivables, commodity price swap agreements
and forward contracts. The Company selects depository banks based upon
management's review of the financial stability of the institution. Balances
periodically exceed the $100,000 level covered by federal deposit insurance.
To date, there have been no losses incurred due to excess deposits in any
financial institution. Trade accounts receivable are generally from companies
with significant natural gas marketing and petroleum activities, who would be
impacted by conditions or occurrences affecting those industries. All futures
contracts have been with major brokerage firms, and in the opinion of
management, did not expose the Company to any undue credit risks. In addition,
as of January 31, 1996, TARC had deposited cash totaling $5.1 million with two
third parties to permit the third parties to hedge their price risk in
connection with TARC's product financing arrangements.
Income Taxes
The Company, TARC and TransTexas file a consolidated tax return with
TransAmerican. Income taxes are due from or payable to TransAmerican in
accordance with a tax allocation agreement (the "Tax Allocation Agreement").
It is each company's policy to record income tax expense as though such company
had filed separately. Deferred income taxes are recognized, at enacted tax
rates, to reflect the future effects of tax carryforwards and temporary
differences arising between the tax bases of assets and liabilities and their
financial reporting amounts in accordance with Statement of Financial
Accounting Standards No. 109 and the Tax Allocation Agreement between the
Company, TransAmerican and TransAmerican's other subsidiaries. Income taxes
include federal and state income taxes. The Company could not file a
consolidated return as it owns less than 80% of TransTexas and, therefore,
income taxes are presented on a combined basis.
Recently Issued Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
establishes standards for reporting information about operating segments. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement will be adopted by the
Company effective February 1, 1998. The Company does not believe the effect of
adoption of this statement will have a material effect on its financial
position.
F-11
<PAGE> 176
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and its
components in financial statements. This statement will be adopted by the
Company effective February 1, 1998. The Company does not believe the effect of
adoption of this statement will have a material effect on its financial
statements.
In February 1997, the FASB 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.
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 indenture governing the TEC Notes (the "TEC Notes Indenture")
contains certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
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 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 TEC 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
F-12
<PAGE> 177
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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 currently secured 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 currently secured 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 18.
TARC WARRANTS TENDER OFFER. On June 13, 1997, TEC completed a tender
offer for 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.
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.
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<PAGE> 178
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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 a tender offer (the "TransTexas Senior Secured Notes
Tender Offer") for its 11 1/2% Senior Secured Notes due 2002 (the "TransTexas
Senior Secured Notes") for 111 1/2% of their principal amount (plus accrued and
unpaid interest). Approximately $785.4 million principal amount of TransTexas
Senior Secured Notes were tendered and accepted by TransTexas. The TransTexas
Senior Secured Notes remaining outstanding were called for redemption on June
30, 1997 pursuant to the terms of the indenture governing the TransTexas Senior
Secured Notes (the "TransTexas Senior Secured Notes Indenture").
TRANSTEXAS SUBORDINATED NOTES EXCHANGE OFFER. On June 19, 1997,
TransTexas completed an exchange offer (the "TransTexas Subordinated Notes
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 Notes") for all of its outstanding 13 1/4% Senior
Subordinated Notes due 2003 (the "Old TransTexas Subordinated Notes"). The
indenture governing the TransTexas Subordinated Notes (the "TransTexas
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 TransTexas Senior Secured Notes Tender
Offer and the TransTexas Subordinated Notes Exchange Offer, TransTexas has
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 share
repurchase program (the "Share Repurchase Program") pursuant to which it plans
to repurchase common stock from its public stockholders and from its
affiliates, including TEC and TARC, in an aggregate amount of approximately
$399 million in value of stock purchased. It is anticipated that TransTexas
will acquire four times the number of shares from its affiliated stockholders
that it acquires from its public stockholders. Shares may be purchased through
open market purchases,
F-14
<PAGE> 179
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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 (the "TARC Notes Tender Offer") for its (i) Guaranteed First Mortgage
Notes due 2002 (the "TARC Mortgage Notes") for 112% of their principal amount
(plus accrued and unpaid interest), and (ii) Guaranteed First Mortgage Discount
Notes due 2002 (the "TARC Discount Notes" and, together with the TARC Mortgage
Notes, the "TARC 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 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.
GENERAL. Following consummation of the TEC Notes Offering and the
transactions described above, TEC's only source of funds for its holding
company operations and debt service will be from payments on the Intercompany
Loans or other loans to its subsidiaries, dividends from its subsidiaries,
interest on funds in the Disbursement Account (as defined), 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. 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.
TARC has incurred losses and negative cash flow from operations as a
result of limited refinery operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements including debt
service and losses on refined product sales due to financing costs and low
margins. Based on recent refining margins and projected levels of operations,
such negative cash flows are likely to continue. If TARC does not complete the
Capital Improvement Program without significant cost overruns or does not
ultimately achieve profitable operations, TARC's investment in the refinery may
not be recovered. The financial statements do not include any adjustments as a
result of such uncertainties. Additionally, the Company has pledged its entire
ownership interest of the common stock of TransTexas as collateral on the
Company's Notes. The repayment of the notes and related interest is dependent
on TARC's ability to provide cash flow. In the event TARC does not continue as
a going concern, it is likely that the Company will lose its entire investment
in TransTexas. Therefore, if the Company is unable to recover its investment
in TARC, and loses its investment in TransTexas, there is substantial doubt in
the Company's ability to continue as a going concern.
F-15
<PAGE> 180
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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 MSCC(SM) technology and
the installation of additional equipment expected to further improve operating
margins by allowing for a significant increase in the refinery's capacity to
produce gasoline. TARC estimates that Phase II will be completed at a cost of
$204 million and will be tested and operational by July 31, 1999. The proceeds
received or to be received by TARC from the TARC Intercompany Loan, the
TransTexas 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.
F-16
<PAGE> 181
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
4. DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement (the "Disbursement Agreement")
among TARC, TEC, the Trustee under the TEC Notes Indenture (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 secured notes due
March 1998 to unaffiliated third parties. These notes were collateralized by a
pledge of 5 million shares of TransTexas common stock. Proceeds from the
issuance of these notes were deposited in a cash collateral account and used
for refinery construction and general corporate purposes. These notes were
repaid in June 1997.
5. ADDITIONAL FINANCING AND WORKING CAPITAL REQUIREMENTS
TARC has incurred losses and negative cash flow from operations as a
result of limited refinery operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements including debt
service and losses on refined product sales and processing arrangements. In
order to operate the refinery at expected levels after completion of expansion
and modification of the refinery, TARC will require additional working capital
and ultimately must achieve profitable operations.
F-17
<PAGE> 182
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
A primary source of funds to meet TransTexas' debt service and capital
requirements is net cash flow provided by operating activities, which is
extremely sensitive to the prices TransTexas receives for its natural gas.
TransTexas entered into Hedge Agreements to reduce its exposure to price risk
in the spot market for natural gas. Additionally, significant capital
expenditures are required for drilling and development, lease acquisitions,
pipeline and other equipment additions. Since July 1995, TransTexas has relied
on assets sales and various financings, in addition to cash flow from operating
activities to meet its working capital requirements, including maintenance of
Working Capital as defined in the TransTexas Indenture. TransTexas anticipates
that it will require additional financing or sales of assets to fund planned
levels of operations through at least January 1998.
6. PREFERRED STOCK
In February 1995, the Company's Board of Directors established one
series of preferred stock, designated "Series A Preferred Stock", consisting of
an aggregate of 1,000 shares. In connection with the offering of TARC Notes,
the Company sold 1,000 shares of Preferred Stock realizing net proceeds of
$95,600. On June 17, 1997, TEC redeemed all of its outstanding preferred stock
for an aggregate amount of $100,000, plus accrued and unpaid dividends.
7. INVENTORIES AND OTHER CURRENT ASSETS
The major components of inventories are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- JULY 31,
1996 1997 1997
------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Refinery feedstocks and blendstocks $ 4,395 $ -- $ --
Intermediate and refined products 32,836 -- --
Tubular goods and other 11,421 12,481 15,105
---------- ---------- ------------
$ 48,652 $ 12,481 $ 15,105
========== ========== ============
</TABLE>
The major components of other current assets are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
----------------------- JULY 31,
1996 1997 1997
------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Prepayments:
Trade and drilling $ 4,464 $ 9,580 $ 10,566
Insurance 2,457 2,913 3,865
Product charges 4,452 51 --
Properties held for sale 6,000 -- --
Deferred loss on commodity
price swap agreements 31,317 8,276 --
Other 7,610 4,818 2,157
---------- ---------- ------------
$ 56,300 $ 25,638 $ 16,588
========== ========== ============
</TABLE>
F-18
<PAGE> 183
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
8. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
ESTIMATED JANUARY 31,
USEFUL LIFE ------------------------- JULY 31,
(YEARS) 1996 1997 1997
--------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land $ 10,022 $ 10,746 $ 10,735
Gas and oil properties 1,775,597 2,004,967 1,068,421
Gas transportation 10 160,819 193,443 44,846
Refinery 20-30 411,650 532,428 609,288
Equipment and other 4-10 80,838 95,112 118,357
------------ ------------ ------------
$ 2,438,926 $ 2,836,696 $ 1,851,647
============ ============ ============
</TABLE>
On July 2, 1996, TransTexas consummated the sale, effective as of May 1,
1996, of producing properties in Zapata County, Texas for consideration of
approximately $62 million. On June 17 and August 13, 1996, TransTexas
consummated the sales, effective as of February 1, 1996, of certain other
producing properties in Webb County, Texas for consideration of approximately
$9.95 million and $21.5 million, respectively. The purchase price for each of
the properties discussed above was subject to adjustment for gas sales between
the effective date and the closing date. TransTexas retained the proceeds of
such gas sales.
In March 1996, TransTexas sold its 41.67% interest in the 76-mile,
24-inch MidCon pipeline that runs from TransTexas' previously owned
Thompsonville compressor station to Agua Dulce for $7.5 million.
Approximately $45 million of refinery assets were being depreciated at
January 31, 1996 and 1997, respectively. Approximately $60 million of refinery
assets were being depreciated at July 31, 1997. The remaining refinery and
other assets are considered construction process. Approximately $90.4 million
of property, plant and equipment represents assets transferred by TransAmerican
at net realizable value and $553.8 million represents additions recorded at
historical cost. As of January 31, 1997, the Company changed the estimated
useful lives of the refinery equipment currently under construction from 10
years to a range of 20 to 30 years. The change in estimate was not material to
1997 net income. TARC recognized $2.7 million, $5.9 million, $2.9 million,
$6.7 million and $3.2 million in depreciation expense for the years ended July
31, 1994 and 1995, the six months ended January 31, 1996, the year ended
January 31, 1997 and the six months ended July 31, 1997, respectively.
In September 1997, TARC purchased a tank storage facility adjacent to
the refinery for a purchase price of $40 million.
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). As of February 1, 1996,
TARC adopted the requirements of SFAS 121. TARC currently believes, based on
estimates of refining margins and current estimates for costs of the expansion
and modification program, 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, in constructing and
operating a large scale refinery and the uncertainty regarding TARC's ability
to complete the Capital Improvement Program, there can be no assurance that
TARC will ultimately recover
F-19
<PAGE> 184
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
the cost of the refinery. Management believes that the book value of the
refinery is in excess of its current estimated fair market value.
9. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
----------------------- JULY 31,
1996 1997 1997
------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Debt issue costs, net of accumulated amortization
of $4,607 at January 31, 1996, $9,320 at
January 31, 1997, and $790 at July 31, $ 34,631 $ 32,127 $ 47,627
1997, respectively
Litigation escrow 22,972 -- --
Costs in excess of net assets of subsidiaries -- -- 82,609
Contractual rights and licenses, net of
accumulated amortization of $1,464 at
January 31, 1996, $992 at January 31, 1997,
and $1,211 at July 31, 1997, respectively 6,516 5,979 5,760
Other 660 3,392 2,226
---------- ---------- ------------
$ 64,779 $ 41,498 $ 138,222
========== ========== ============
</TABLE>
10. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- JULY 31,
1996 1997 1997
------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Royalties $ 9,793 $ 27,607 $ 11,326
Taxes other than income taxes 3,054 13,501 7,623
Interest 19,365 20,978 12,382
Payroll 6,153 6,012 6,167
Litigation settlements and other 9,553 1,263 --
Settlement values of commodity price
swap agreements 31,317 13,276 --
Insurance 1,628 7,840 6,269
Maintenance turnarounds 1,145 1,909 2,291
Other 7,308 6,475 3,358
---------- ---------- ------------
$ 89,316 $ 98,861 $ 49,416
========== ========== ============
</TABLE>
Included in litigation settlements and other at January 31, 1997 are
certain non-recurring costs associated with the Lobo Sale.
F-20
<PAGE> 185
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
11. LONG-TERM DEBT
The major components of long-term debt are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
----------------------- JULY 31,
1996 1997 1997
-------- -------- ------
(UNAUDITED)
<S> <C> <C> <C>
11 1/2% Senior Secured Notes due 2002--TransTexas $ 800,000 $ 800,000 $ --
13 3/4% Senior Subordinated Notes due 2001--TransTexas -- 101,092 115,815
Guaranteed First Mortgage Discount Notes due 2002-TARC 221,155 269,606 6,255
Guaranteed First Mortgage Notes due 2002-TARC 95,383 96,124 9,427
11 1/2% Senior Secured Notes due 2002 - TEC -- -- 475,000
13% Senior Secured Discount Notes due 2002 - TEC -- -- 892,897
Notes payable, ranging from 9.25% to 12.9% due through 2001 3,876 14,562 24,080
------------ ----------- -----------
Total long-term debt 1,120,414 1,281,384 1,523,474
Less current maturities 1,335 371,517 9,542
------------ ----------- -----------
$ 1,119,079 $ 909,867 $ 1,513,932
============ =========== ===========
</TABLE>
On June 13, 1997, TEC completed the TEC Notes Offering of $475 million
aggregate principal amount of the TEC Senior Secured Notes and $1.13 billion
aggregate principal amount of the TEC Senior Secured Discount 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, asset sales, dividends and transactions with
affiliates.
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 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 TEC 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.
F-21
<PAGE> 186
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
On June 20, 1995, TransTexas issued $800 million aggregate principal
amount of the TransTexas Senior Secured Notes. TransTexas received net
proceeds of approximately $787 million from the sale of the TransTexas Senior
Secured Notes after deducting underwriting discounts, fees and expenses.
TransTexas used approximately $556 million of the net proceeds to retire or
defease the entire principal amount of the Prior Notes, including premium and
consent fees and accrued and unpaid interest, and approximately $46 million to
establish an interest reserve account. TransTexas recorded an extraordinary
loss on the extinguishment of the Prior Notes of approximately $56.6 million.
In connection with the TransTexas Senior Secured Notes Tender Offer, TransTexas
repurchased or redeemed all of the TransTexas Senior Secured Notes.
In December 1996, TransTexas issued $189 million in face amount of Old
TransTexas Subordinated Notes to unaffiliated third parties. The Old
TransTexas Subordinated Notes were sold with original issue discount at a price
equal to 52.6166% of the principal amount shown on the face thereof, for gross
proceeds of approximately $99.45 million. The Old TransTexas Subordinated
Notes accreted at a rate of 13 1/4% compounded semi-annually. Proceeds from
the issuance of the Old TransTexas Subordinated Notes were used for working
capital and general corporate purposes. As discussed in Note 2, in June 1997,
TransTexas exchanged approximately $115.8 million aggregate principal amount of
its TransTexas Subordinated Notes for all of its outstanding Old TransTexas
Subordinated Notes.
On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of TARC Discount Notes and 5,811,773 of TARC
Warrants and 100,000 B Units consisting of $100 million aggregate principal
amount of TARC Mortgage Notes and 1,683,540 TARC Warrants. TARC received
approximately $301 million from the sale of A Units and B Units. Net proceeds
received by TARC approximated $92 million after deducting approximately $16
million for underwriting discounts, commissions, fees and expenses,
approximately $20 million for the repayment of the balance of a loan from
TransAmerican ("TransAmerican Loan"), and $173 million which was deposited into
a cash collateral account to fund the expansion and upgrading of TARC's
refinery. As discussed in Note 2, in connection with the TARC Notes Tender
Offer, TARC Notes with an aggregate carrying value of $423 million were
tendered and accepted by TARC. In connection with the TARC Warrants Tender
Offer, TEC purchased 7,335,452 TARC Warrants.
In March 1997, TARC issued $36 million principal amount of 15% senior
secured notes due 1998 to unaffiliated third parties. These notes were secured
by a pledge of the 5 million shares of TransTexas common stock. Proceeds from
the issuance of these notes were deposited in a cash collateral account to be
used for refinery construction and general corporate purposes. This note was
repaid in June 1997.
TransTexas' notes payable bear interest at rates ranging from 9.25% to
12.9% per annum and mature at various dates through 2001. These notes
payable are collateralized by certain of TransTexas' operating
equipment. Aggregate principal payments on TransTexas' notes payable at
January 31, 1997 total $5.2 million, $5.6 million and $0.7 million for fiscal
years ending January 31, 1998, 1999 and 2000, respectively.
TARC's capitalized lease obligations were approximately $2.4 million and
$1.3 million at January 31, 1996 and 1997, respectively. Maturities of such
obligations are approximately $0.8 million, $0.3 million and $0.2 million in
the years ending January 31, 1998, 1999 and 2000, respectively.
The fair value of the TEC Notes, based on quoted market prices of
similar instruments, was approximately $1.4 billion as of July 31, 1997. The
fair value of the TransTexas Notes, based on quoted market prices, was
approximately $818 million and $880 million as January 31, 1996 and 1997,
respectively. The fair value of the TransTexas Subordinated Notes, based on
quoted market prices of similar instruments, was approximately $104 million as
January 31, 1997 and the fair value of the TransTexas Subordinated Exchange
Notes was approximately $131 million as of July 31, 1997. The fair value of
the TARC Notes, based on quoted market prices, was approximately $295 million
and $404 million as January 31, 1996 and 1997, respectively.
F-22
<PAGE> 187
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
12. 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, 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. Outstanding advances under the BNY Facility totaled
approximately $26.3 million and $6.2 million at January 31, 1997 and July 31,
1997, respectively. 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.
In May 1996, TransTexas entered into a Note Purchase Agreement pursuant
to which TransTexas issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes, which bore interest
at 13 1/3% per annum, were paid in full in July 1996. The notes were
guaranteed on a senior secured basis by TransAmerican.
13. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
----------------------
1996 1997 1997
------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Litigation settlements and accruals $ 12,171 $ 9,641 $ 10,008
Short-term obligations expected
to be refinanced:
Litigation settlements 14,747 2,500 --
Accrued capital expenditures 5,443 19,738 --
Current portion of dollar-denominated
production payment 1,765 -- --
Other 2,232 1,112 1,485
---------- ---------- ------------
$ 36,358 $ 32,991 $ 11,493
========== ========== ============
</TABLE>
In February 1996, TransTexas completed a financing in the amount of $10
million at an interest rate of 12 1/2% per annum and a 36-month term,
collateralized by certain operating equipment. In February 1996, TransTexas
also amended a purchase agreement with an unaffiliated third party related to a
volumetric production payment to include an additional 14 Bcf which were sold
to the third party for a purchase price of approximately $16 million. Proceeds
from these transactions net of current maturities were used to pay all of the
obligations listed above under the caption "Short-term obligations expected to
be refinanced" at January 31, 1996.
In April 1997, TransTexas sold to an unaffiliated third party a term
royalty in the form of a dollar-denominated production payment in certain of
TransTexas' properties for net proceeds of approximately $20 million.
TransTexas also completed a financing in the amount of $8.3 million at an
interest rate of 12.7% per annum and a 36-month term, collateralized by certain
operating equipment. Proceeds from these transactions, net of current
F-23
<PAGE> 188
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
maturities, were used to pay all of the obligations listed above under the
caption "Short-term obligations expected to be refinanced" at January 31, 1997.
14. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS YEAR
YEAR ENDED ENDED ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31, JANUARY 31, JULY 31,
-------------------- ------------ ------------ ----------------------
1994 1995 1996 1997 1996 1997
--------- -------- ---------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal:
Current $ 10,909 $ (7,611) $ -- $ 21,380 $ 19,032 $ 111,108
Deferred (5,961) 5,196 (416) (8,889) (11,244) 22,542
State:
Current 432 -- -- -- -- --
--------- -------- ---------- ----------- --------- ---------
Income tax expense (benefit)
before extraordinary item 5,380 (2,415) (416) 12,491 7,788 133,650
Tax benefit of extraordinary
item -- (1,491) -- -- -- --
--------- -------- ---------- ----------- --------- ---------
Total income tax expense
(benefit) $ 5,380 $ (3,906) $ (416) $ 12,491 $ 7,788 $ 133,650
========= ======== ========== =========== ========= =========
</TABLE>
In August 1993, the Omnibus Reconciliation Act of 1993, among other
things, increased the maximum corporate marginal federal income tax rate to 35%
from 34% effective January 1, 1993. Deferred income taxes as of July 31, 1994
include an adjustment of approximately $2.7 million related to this increase in
corporate tax rates. Included in "Payable to affiliates" at January 31, 1996
and 1997 are income taxes payable to TransAmerican totaling approximately $3.0
million and $14.4 million, respectively.
During the third quarter of 1994, TARC reached a level of operations,
which, for federal income tax purposes, changed the tax status of
TransAmerican's consolidated group to an integrated oil company from an
independent producer. As a result of this change in tax status, TransTexas was
able to utilize a greater portion of its available tight sands credits, thereby
reducing its effective tax rate for 1994. TransTexas was unable to utilize any
tight sands credits during the six months ended January 31, 1996 or during the
year ended July 31, 1995 due to it net loss position. Total income tax expense
differs from amounts computed by applying the statutory federal income tax rate
to income before income taxes. The items accounting for this difference are as
follows (in thousands of dollars):
F-24
<PAGE> 189
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
YEAR ENDED ENDED ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31, JANUARY 31, JULY 31,
------------------ ----------- ----------- -------------------
1994 1995 1996 1997 1996 1997
------ ------ ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
(benefit) at the statutory rate $ 4,124 $(43,011) $ (9,518) $ 27,639 $ 39,588 $ 90,093
Increase (decrease) in tax
resulting from:
Net operating losses (utilized)
not utilizable 6,073 31,263 9,102 (7,707) (24,363) 43,557
Tax rate change 2,745 -- -- -- -- --
State income taxes, net of
federal income tax benefit 281 -- -- -- -- --
Tight sands credit (7,843) 7,842 -- (7,441) (7,437) --
--------- -------- ---------- ----------- --------- ---------
$ 5,380 $ (3,906) $ (416) $ 12,491 $ 7,788 $ 133,650
========= ======== ========== =========== ========= =========
</TABLE>
Significant components of the Company's tax attributes are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
--------------------- --------
1996 1997 1997
-------- ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Investment in affiliates $ -- $ 275,450 $ --
Receivable from TransAmerican in lieu of federal net
operating loss carryforwards 86,716 72,430 132,666
Safe harbor leases 85,283 81,976 80,080
Contingent liabilities 3,700 3,403 3,228
Alternative minimum tax credit carryforward 31,044 48,643 --
Other 10,483 3,530 --
----------- --------- --------
217,226 485,432 215,974
Valuation allowance (167,141) (430,194) (181,032)
----------- --------- --------
Net deferred tax assets 50,085 55,238 34,942
----------- --------- --------
Deferred tax liabilities:
Depreciation, depletion and amortization 90,341 86,605 8,617
Tax contingencies -- -- 75,000
Other, net -- -- 5,234
----------- --------- --------
90,341 86,605 88,851
----------- --------- --------
Net deferred tax liabilities $ 40,256 $ 31,367 $ 53,909
=========== ========= ========
</TABLE>
On a separate return basis, TARC and TransTexas have a total of
approximately $379.0 million of regular tax net operating loss ("NOL")
carryforwards at July 31, 1997 which would expire from 2004 through 2013.
Under the tax allocation agreement with TransAmerican and TransAmerican's other
subsidiaries, as long as TARC and TransTexas remain in the consolidated group
for tax purposes, TARC and TransTexas will receive benefits in the future for
loss carryforwards in the form of reduced current tax payable to the extent (i)
their loss carryforwards are
F-25
<PAGE> 190
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
available for and utilized by TransAmerican and (ii) TransAmerican has the
ability to pay tax then due. The Company can only use alternative minimum tax
credit carryforwards to the extent it is a regular federal income tax payer.
At July 31, 1997, TARC and TransTexas had NOL carryforwards of approximately
$203.6 million which have not been used by TransAmerican and would expire in
2013.
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.
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS YEAR
YEAR ENDED ENDED ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31, JANUARY 31, JULY 31,
----------------- ----------- ----------- ------------------
1994 1995 1996 1997 1996 1997
------- ----- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Seller financed obligations incurred
for capital expenditures $ -- -- $ 1,095 $ 3,621 $ -- $ --
========== ======== ======== ======== ========= ========
Capitalized lease obligations
incurred for property and
equipment $ 1,336 $ 967 $ 1,643 $ -- $ -- $ --
========== ======== ======== ======== ========= ========
Accounts payable and long-term
liabilities for property and
equipment $ 10,429 $ 11,784 $ 36,080 $ 19,673 $ 53,803 $ 36,825
========== ======== ======== ======== ========= ========
Accretion on notes and discount
notes capitalized in property and
equipment $ -- $ 11,120 $ 18,186 $ 49,109 $ 11,687 $ 30,426
========== ======== ======== ======== ========= ========
Forgiveness of advances from
TransAmerican (including $25.0
million for property and equipment
transferred from TransAmerican at
net book value in 1994) $ 100,000 $ 71,170 $ -- $ -- $ -- $ --
========== ======== ======== ======== ========= ========
Product financing arrangements $ -- $ 27,671 $ 37,206 $(37,206) $ (11,022) $ --
========== ======== ======== ======== ========= ========
</TABLE>
F-26
<PAGE> 191
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS YEAR
YEAR ENDED ENDED ENDED SIX MONTHS ENDED
JULY 31, JANUARY 31, JANUARY 31, JULY 31,
------------------- ----------- ----------- ------------------
1994 1995 1996 1997 1996 1997
------- ------- ------ ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest $ 26,978 $ 77,145 $ 49,771 $ 87,680 $ 46,946 $ 58,512
========= ======== =========== ============ ========== ========
Income taxes (paid to TransAmerican) $ 1,858 $ -- $ -- $ 7,000 $ 7,000 $ --
========= ======== =========== ============ ========== ========
</TABLE>
TransTexas incurred approximately $69.4 million, $50.8 million, $112.9
million, $59.6 million and $56.4 million of interest charges of which
approximately $0.9 million, $7.4 million, $15.9 million, $7.5 million and $9.2
million was capitalized for the year ended July 31, 1995, the six months ended
January 31, 1996, the year ended January 31, 1997 and the six months ended July
31, 1996 and 1997, respectively, in connection with the acquisition of certain
of TransTexas' unevaluated gas and oil properties. During 1994, TransTexas
capitalized a total of approximately $0.7 million of interest in connection
with the expansion of TransTexas' pipeline system. TARC capitalized interest
$68.8 million for the year ended January 31, 1997 in connection with the
Capital Improvement Program. Total interest charges incurred by TARC were
$73.5 million for the year ended January 31, 1997.
16. TRANSACTIONS WITH AFFILIATES
On June 13, 1997, the Transfer Agreement was amended to eliminate
TransAmerican's indemnification obligations to TransTexas other than for tax
liabilities.
In July 1995, TransTexas acquired certain oil leases in the Lodgepole
Prospect in North Dakota from TransAmerican for approximately $6.3 million,
which amount represented TransAmerican's cost for such leases. TransTexas
continued to acquire additional leases in the area. In October 1995, TransTexas
sold an undivided interest in its Lodgepole leases to TransDakota Oil
Corporation ("TDOC"), a subsidiary of TransAmerican. The sales price was
approximately $16.1, which amount represented the cost to TransTexas of the
interest sold. In September 1996, TransTexas purchased these and other oil and
gas leasehold interests in the Lodgepole area from TDOC for approximately $20.0
million. TransTexas believes that the combination of these interests, together
with TransTexas' other interests in the Lodgepole area, will produce a more
marketable property package. The purchase price was $3.9 million greater than
TDOC's basis in the properties. The properties have been recorded in
TransTexas' financial statements at the carryover basis and the $3.9 million
has been classified as a reduction of retained earnings.
In June 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 to 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.
F-27
<PAGE> 192
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $14.8
million, $11.1 million, $11.7 million and $11.7 million for the six months
ended July 31, 1996, the year ended July 31, 1995, the six months ended January
31, 1996 and the year ended July 31, 1997, respectively. The receivable from
TransAmerican for natural gas sales was paid in full in June 1997.
TransTexas has provided accounting and legal services to TARC and TEC
and drilling and workover, administrative and procurement, accounting, legal,
lease operating, and gas marketing services to TransAmerican pursuant to a
services agreement. TransTexas has provided general commercial legal services
and certain accounting services (including payroll, tax, and treasury services)
to TARC and TEC for a fee of $26,000 per month. TARC expects its general and
administrative expenses to increase significantly when the refinery commences
more complex operations. At TransAmerican's request, TransTexas, at its
election, has provided drilling and workover services. In June 1997, the
receivable from TransAmerican under the services agreement was paid and the
services agreement was terminated.
In September 1995, TransTexas made advances to TransAmerican in the
aggregate amount of $4.7 million. In October 1995, TransAmerican repaid the
full amount of these advances with interest at an annualized rate of 13%.
In October 1995, Mr. Stanley guaranteed TransTexas' $40 million line of
credit with BNY Financial Corporation.
As of January 1996, TransTexas and TTEX entered into a drilling program
pursuant to which TTEX received a portion of revenues, in the form of a
production payment, from certain of TransTexas' wells. The production payment
was transferred in consideration of a note payable in the amount of $23.7
million issued by TTEX. In July 1996, TTEX transferred this production payment
to the Company in the form of a dividend, and TransTexas forgave the $13.2
million remaining balance of the note payable.
In July 1996, TTEX loaned $9.5 million to TransAmerican pursuant to the
terms of a $25 million promissory note due July 31, 1998 that bore interest,
payable quarterly, at 15% per annum. TTEX made further advances pursuant to
the note, subject to the same terms. This note was paid in full in June 1997.
During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital.
In order to facilitate the settlement of certain litigation in May 1996,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. Amounts outstanding under this note were paid
in June 1997.
In September 1996, TransTexas and TransAmerican entered into an
agreement pursuant to which TransTexas obtained an $11.5 million
dollar-denominated production payment, subsequently increased to $19 million,
bearing interest at 17% per annum, burdening certain oil and gas interests
owned by TransAmerican as a source of repayment for certain of the receivables
from TransAmerican discussed above. On January 31, 1997, TransAmerican
conveyed, at historical cost, certain oil and gas properties to TransTexas for
a purchase price of $31.6 million. A portion of the purchase price was used to
offset obligations under the September 1996 production payment. At January 31,
1997, $59 million of related- party receivables were reclassified as a
reduction of stockholder's equity due to uncertainties regarding the repayment
terms for such receivables.
TransTexas has made various advances to TransAmerican in an aggregate of
approximately $7 million for
F-28
<PAGE> 193
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
lease purchases and other corporate expenses. These advances were repaid in
June 1997.
In January 1997, an affiliate of the Company contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with
a book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TTC. Also in January 1997, TransTexas
contributed substantially all of its Lobo Trend properties to TTC.
Certain refinery assets held by TransAmerican or its subsidiaries,
including the real property on which TARC's refinery is located, were
transferred to TARC in fiscal 1994 at TransAmerican's net book value of
approximately $25 million.
In July 1994, JRS Ventures, Inc. ("JRS"), owned by John R. Stanley,
conveyed to TARC a portion of the real property on which TARC's refinery is
located. TARC paid JRS $25,000 in October 1997, which is the amount for which
JRS purchased the land in August 1993 from Lynn (as defined).
A former affiliate of TransAmerican owed $205,000 to Lynn Petroleum
Storage and Transport Co., Inc. ("Lynn"), a company owned by Mr. Stanley's
children. This liability was assumed by TARC in conjunction with the transfer
of refinery assets described above. In May 1995, TARC paid this obligation and
an obligation arising from the purchase of a cryogenic gas processing unit and
butane tanks from Lynn at Lynn's undepreciated book value of such assets of
$492,200. TARC believes that the purchase price for the cryogenic gas
processing unit is fair and reasonable to TARC and on terms no less favorable
than could be obtained from an unrelated third party.
Pursuant to the stock transfer agreement (the "Stock Transfer
Agreement") among TransAmerican, the Company and TARC, TransAmerican
contributed to the capital of the Company (the "Stock Transfer") (i) all of the
outstanding capital stock of TARC, and (ii) 55 million shares of common stock
of TransTexas; and the Company then contributed 15 million of these shares of
TransTexas common stock to TARC.
Prior to the sale of the TARC Notes, TARC participated in
TransAmerican's centralized cash management program. Funds required by TARC
for daily operations and capital expenditures were advanced by TransAmerican.
In October 1994, TransAmerican sold 5.25 million shares of TransTexas common
stock. TransAmerican advanced approximately $50 million of the proceeds from
these stock sales to TARC, of which approximately $20 million was used by TARC
to repay a portion of the intercompany debt owed to TransAmerican, and the
remaining $30 million of the net proceeds was used for working capital and
general corporate purposes. TARC used approximately $30 million of the net
proceeds of the sale of the TARC Notes to repay additional intercompany debt to
TransAmerican. TransAmerican contributed to the capital of TARC (through TEC)
all but $10 million of the remainder of TARC's intercompany debt owed to
TransAmerican. In April 1995, TARC repaid the remaining $10 million of
intercompany indebtedness owed to TransAmerican. In August 1995, TARC received
an advance of $3 million from TransTexas which TARC used to settle its
remaining portion of certain litigation. In September 1995, TARC received an
advance of $1.7 million from TransAmerican which TARC used to purchase
feedstock. In October 1995, TARC repaid these advances without interest.
Additionally in October 1995, TARC received an advance of approximately $4
million from TransAmerican for working capital which it repaid in June 1997.
Southeast Louisiana Contractors of Norco, Inc. ("Southeast
Contractors"), a subsidiary of TransAmerican, 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 $2.2 million per year. Total labor costs charged by Southeast
Contractors were approximately $15.5 million, $20.2 million, $14.1 million,
$4.4 million and $9.7 million for the year ended July 31, 1995, the six months
ended
F-29
<PAGE> 194
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
January 31, 1996, the year ended January 31, 1997 and the six months ended July
31, 1996 and 1997, respectively. Amounts payable to Southeast Contractors were
$2.4 million at July 31, 1997. No labor costs were charged by Southeast
Contractors in prior years.
TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$2.3 million and $2.5 million, respectively, for the years ended July 31,
1994 and 1995, $2.2 million for the six months ended January 31, 1996, $2.7
million for the year ended January 31, 1997 and $1.5 million and $0.3 million,
respectively, for the six months ended July 31, 1996 and 1997. The receivable
from TARC for natural gas sales totaled approximately $3.0 million at July 31,
1997.
In September 1995, TARC received an advance of $1 million from
TransTexas which TARC used to purchase feedstock. This advance was repaid by
TARC without interest. In December 1995, TARC advanced $1 million to
TransTexas. This advance was repaid to TARC with interest.
In July 1996, TARC executed a promissory note to TransAmerican for up to
$25 million. The note bore interest at a rate of 15% per annum, payable
quarterly beginning October 31, 1996, with a scheduled maturity on July 31,
1998. As of January 31, 1997, the entire $25 million was outstanding under the
note. On November 1, 1996, TARC executed an additional $25 million promissory
note to TransAmerican which bore interest at 15% per annum, payable quarterly
beginning December 31, 1996, with a scheduled maturity on September 30, 1998
(together with the promissory note, the "TransAmerican Notes"). At January 31,
1997, TARC had approximately $44.4 million outstanding under both of these
notes. In February 1997, the November 1996 promissory note was replaced with
a $50 million note which bore interest at an annual rate of 15% with a
scheduled maturity on July 31, 2002. In June 1997, TARC repaid the
TransAmerican Notes.
In July 1997, TEC advanced $5 million to TARC. In September 1997, TEC
advanced TARC approximately $41 million. All of the advances are governed by
the terms of a promissory note that is due June 14, 2002 bearing interest at a
rate that, when added to the interest paid by TransTexas on the TransTexas
Intercompany Loan, will equal the amount of interest payable on the TEC Notes.
TransAmerican, its existing subsidiaries, including TARC, the Company,
and TransTexas, entered into a Tax Allocation Agreement, the general terms of
which require TransAmerican and all of its subsidiaries to file federal income
tax returns as members of a consolidated group to the extent permitted by law.
Filing on a consolidated basis allows income and tax of one member to be offset
by losses and credits of another and allows deferral of certain intercompany
gains; however, each member is severally liable for the consolidated federal
income tax liability of the consolidated group.
The Tax Allocation Agreement requires each of TransAmerican's
subsidiaries to pay to TransAmerican each year its allocable share of the
federal income tax liabilities of the consolidated group ("Allocable Share").
The Tax Allocation Agreement provides for a reallocation of the group's
consolidated federal income tax liabilities among the members if the IRS or the
courts ultimately redetermine the group's regular tax or alternative minimum
tax liability. In the event of an IRS audit or examination, the Tax Allocation
Agreement generally gives TransAmerican the authority to compromise or settle
disputes and to control litigation, subject to the approval of TARC, the
Company or TransTexas, as the case may be, where such compromise or settlement
affects the determination of the separate tax liability of that company.
Under the Tax Allocation Agreement, each subsidiary's Allocable Share
for each tax year will generally equal the amount of federal income tax it
would have owed had it filed a separate federal income tax return for each year
except that each subsidiary will be able to utilize net operating losses and
credits of TransAmerican and the other members of the TransAmerican
consolidated group effectively to defer payment of tax liabilities that it
would have
F-30
<PAGE> 195
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
otherwise owed had it filed a separate federal income tax return. Each
subsidiary will essentially pay the deferred taxes at the time TransAmerican
(or the member whose losses or credits are utilized by such subsidiary) begins
generating taxable income or tax. This will have the effect of deferring a
portion of such subsidiary's tax liability to future years.
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
17 and certain other transfers of assets between the Company and TransAmerican
totaling $8.0 million, additional paid-in capital increased from $158.6 million
as of January 31, 1997 to $269.6 million as of July 31, 1997.
The TEC Notes Indenture, and previously the TARC Notes Indenture and
TransTexas Notes Indenture, requires that, with certain exceptions,
transactions between the Company and certain related parties be on terms no
less favorable to the Company than would be available from an unrelated party
and that are fair and reasonable to the Company. This standard will apply to
future transactions, if any, with entities in which Mr. Stanley or members of
his family may have an interest. Before the issuance of the TransTexas Notes,
TransAmerican regularly acquired products and services from suppliers owned in
whole or in part by adult children of Mr. Stanley.
17. BUSINESS SEGMENTS
As of July 31, 1997, the Company conducts its operations through two
industry segments: exploration and production ("E&P"), and refining operations
("Refining"). Prior to the Lobo Sale, the Company also conducted operations
through its gas transportation segment ("Transportation"). The E&P segment
explores for, develops, produces and markets natural gas, condensate, crude oil
and natural gas liquids. The Refining segment is engaged in refining and
storage operations. The Transportation segment was engaged in intrastate
natural gas transportation and marketing. The Company's significant gas and oil
operations are located in Texas and North Dakota. The Company's refinery is
located in Norco, Louisiana, approximately 20 miles from New Orleans,
Louisiana. Segment income excludes interest income, interest expense and
unallocated general corporate expenses. Identifiable assets are those assets
used in the operations of the segment. Other assets consist primarily of
deferred financing costs, escrowed funds, certain receivables and other
property and equipment. The Company's revenues are derived principally from
sales to interstate and intrastate gas pipelines, direct end users, industrial
companies, marketers, and refiners located in the United States. As a general
policy, collateral is not required for receivables, but customers'
financial condition and credit worthiness are regularly evaluated. The Company
is not aware of any significant credit risk relating to its customers and has
not experienced significant credit losses associated with such receivables.
In 1994, one customer provided approximately $51 million in E&P and
Transportation revenues. For the year ended July 31, 1995, two customers
provided approximately $73 million and $41 million, respectively, in E&P and
Transportation revenues. For the Transition Period ended January 31, 1996,
three customers provided approximately $25 million, $22 million and $14
million, respectively, in E&P and Transportation revenues. For the year ended
January 31, 1997, three customers provided approximately $70 million, $59
million and $48 million, respectively, in E&P and Transportation revenues.
For the year ended July 31, 1994, Refining had two customers that
accounted for 46% of total revenues. For the year ended July 31, 1995,
Refining had two customers that accounted for 56% of total revenues. For the
six months ended January 31, 1996, Refining had three customers that accounted
for 41% of total revenues. For the year ended January 31, 1997, Refining had
two customers that accounted for 96% of total revenues.
F-31
<PAGE> 196
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
Business segment information is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--- ----- ------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1994
Exploration and production $ 300,210 $ 96,828 $ 107,727 $ 180,426 $ 462,951
Gas transportation 33,240 (2,257) 5,913 35,763 66,019
Refining 177,178 (14,526) 2,589 84,295 176,327
Other 157 (15,280) 218 34,522 53,367
--------- -------- --------- --------- ----------
$ 510,785 $ 64,765 $ 116,447 $ 335,006 $ 758,664
========= ======== ========= ========= ==========
YEAR ENDED JULY 31, 1995
Exploration and production $ 273,092 $ 62,855 $ 121,625 $ 259,189 $ 712,322
Gas transportation 36,787 2,827 8,041 10,105 60,916
Refining 140,579 (44,446) 5,855 116,654 499,879
Other 285 (14,235) 298 12,786 52,539
--------- -------- --------- --------- ----------
$ 450,743 $ 7,001 $ 135,819 $ 398,734 $1,325,656
========= ======== ========= ========= ==========
TRANSITION PERIOD ENDED JANUARY 31, 1996
Exploration and production $ 123,253 $ 51,443 $ 56,543 $ 176,386 $ 738,648
Gas transportation 15,892 (4,393) 4,194 13,266 72,815
Refining 107,237 (21,971) 3,159 150,238 518,205
Other 601 (7,892) 157 16,904 126,754
--------- -------- --------- --------- ----------
$ 246,983 $ 17,187 $ 64,053 $ 356,794 $1,456,422
========= ======== ========= ========= ==========
YEAR ENDED JANUARY 31, 1997
Exploration and production $ 360,740 $230,560 $ 122,570 $ 314,013 $ 881,390
Gas transportation 42,200 (9,018) 8,466 33,636 98,903
Refining 10,857 (54,995) 7,225 127,123 563,826
Other 376 (34,637) 1,417 11,165 69,616
--------- -------- --------- --------- ----------
$ 414,173 $131,910 $ 139,678 $ 485,937 $1,613,735
========= ======== ========= ========= ==========
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
As part of the Transfer, TransTexas succeeded to the potential
liability, if any, of TransAmerican and certain subsidiaries in connection with
the lawsuits described below. TransTexas assumed liability for litigation up
to $15 million plus the difference, if any, between $10 million and the costs
(if less than $10 million) incurred to resolve the disputed claims. Pursuant
to an agreement among TransTexas, TransAmerican and certain of its
subsidiaries, as amended (the "Transfer Agreement"), TransAmerican agreed to
indemnify TransTexas against all losses incurred by TransTexas in excess of $25
million in connection with (a) disputed claims in TransAmerican's bankruptcy
and (b) other litigation assumed by TransTexas and other agreements related to
TransAmerican's plan of reorganization (other than settlements and judgments
paid from escrowed cash established in connection with TransAmerican's plan of
reorganization). On June 13, 1997, the Transfer Agreement was amended to
eliminate TransAmerican's indemnity obligations to TransTexas other than for
tax liabilities.
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<PAGE> 197
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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.
F-33
<PAGE> 198
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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. Section 2000e et seq. ("Title VII"). In the Commissioner's Charge,
the EEOC charged TARC and Southeast Louisiana Contractors of Norco, Inc.
("Southeast Contractors"), a subsidiary of TransAmerican, with engaging in
unlawful discriminatory 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 back pay
and/or front pay in an undetermined amount, and for compensatory damages and/or
punitive damages in an amount that should not exceed $300,000, (ii) injunctive
relief, (iii) attorney's fees, and/or (iv) interest. During the period covered
by the Commissioner's Charge, TARC and Southeast Contractors estimate that they
received a combined total of approximately 15,000 to 22,000 employment
applications and hired (or rehired) a combined total of approximately 1,500 to
2,200 workers. TARC and Southeast Contractors have responded to the
Commissioner's Charge and have denied engaging in any unlawful employment
practices. TARC and Southeast Contractors have been cooperating fully with the
EEOC in connection with its investigation. TARC and Southeast Contractors
intend to vigorously defend against the allegations contained in the
Commissioner's Charge in all proceedings before the EEOC and in any subsequent
litigation. If TARC and/or Southeast Contractors are found liable for
violations of Title VII based on the matters asserted in the Commissioner's
Charge, TARC can make no assurance that such liability would not have a
material adverse effect on the financial condition, 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.
F-34
<PAGE> 199
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
ENVIRONMENTAL MATTERS
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. It is not anticipated that TransTexas will be
required in the near future to expend amounts that are material to the
financial condition or operations of TransTexas by reason of environmental laws
and regulations, but because such laws and regulations are frequently changed
and, as a result, may impose increasingly strict requirements, TransTexas is
unable to predict the ultimate cost of complying with such laws and
regulations.
COMPLIANCE MATTERS. TARC is subject to federal, state, and local laws,
regulations, and ordinances ("Pollution Control Laws"), which regulate
activities such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes. TARC believes that it is in
substantial compliance with applicable Pollution Control Laws. However, newly
enacted Pollution Control Laws, as well as increasingly strict enforcement of
existing Pollution Control Laws, will require TARC to make capital
expenditures in order to comply with such laws and regulations. To
ensure continuing compliance, TARC has made environmental compliance and
permitting issues an integral part of its refinery's start-up plans and has
budgeted for such capital expenditures in the Capital Improvement Program.
TARC uses (and in the past has used) certain materials, and generates
(and in the past has generated) certain substances or wastes, that are or may
be deemed hazardous substances or wastes. In the past, the refinery has been
the subject of certain environmental enforcement actions, and has incurred
certain fines, as a result of certain of TARC's operations. TARC also was
previously subject to enforcement proceedings relating to its prior production
of leaded gasoline and air emissions. TARC believes that, with minor
exception, all of these past matters were resolved prior to or in connection
with the resolution of the bankruptcy proceedings of its predecessor in
interest, TransAmerican, or are no longer applicable to TARC's operations. As
a result, TARC believes that such matters will not have a material adverse
effect on TARC's future results of operations, cash flow or financial position.
REQUIREMENTS UNDER THE FEDERAL CLEAN AIR ACT. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. At
this time, TARC cannot estimate the costs of such compliance. TARC 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.
F-35
<PAGE> 200
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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.
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
F-36
<PAGE> 201
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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.
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
F-37
<PAGE> 202
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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 becomes 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.
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 September 1997, TARC acquired a tank storage facility adjacent to the
refinery for a purchase price of $40 million.
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
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<PAGE> 203
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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.
PRODUCTION PAYMENTS
On February 28, 1995, TransTexas sold to an unaffiliated third party a
term royalty in the form of a dollar- denominated production payment in certain
of TransTexas' properties for proceeds of $49.5 million, less closing costs of
approximately $2 million. This production payment was paid in full in May 1996
with a portion of the proceeds of the volumetric production payment described
below.
In January 1996, TransTexas sold to an unaffiliated third party a term
overriding royalty interest in the form of a volumetric production payment
carved out of its interests in certain of its producing properties. For net
proceeds of approximately $33 million, TransTexas conveyed to the third party a
term overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional net
proceeds of approximately $16 million, TransTexas supplemented the production
payment to subject a percentage of its interests in certain additional
producing properties to the production payment and to include additional
volumes of approximately 14 Bcf of natural gas within the base volume subject
to the production payment. At January 31, 1997, approximately 23 Bcf of
natural gas remained subject to this production payment. In May 1996,
TransTexas sold to two unaffiliated third parties a volumetric production
payment for net proceeds of approximately $43 million. TransTexas conveyed to
the third parties a term overriding royalty equivalent to a base volume of
approximately 37 Bcf of natural gas, subject to certain increases in the base
volume and in the percentage interest dedicated if certain minimum performance
and delivery requirements are not met. Concurrently with the closing of that
transaction, TransTexas and one of the unaffiliated third parties terminated,
prior to the expiration of its stated term, a dollar-denominated term
overriding royalty interest previously sold by TransTexas to that unaffiliated
third party for a payment by TransTexas of approximately $25 million. As a
result of such termination, the remaining base volume from the previously sold
overriding royalty interest was conveyed to TransTexas. In connection with the
Lobo Sale, volumes remaining to be delivered under these production payments
were settled for payments by TransTexas of approximately $68 million.
In September 1996, TransTexas sold to an unaffiliated third party a term
royalty in the form of a dollar- denominated production payment in certain of
TransTexas' properties for proceeds of $13.5 million. The production payment
called 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. In connection
with the Lobo Sale, this production payment was paid in full.
In September 1996, TransTexas entered into a drilling program agreement
with an unaffiliated third party for the reimbursement of certain drilling
costs with respect to wells drilled by TransTexas. Pursuant to the agreement,
upon the approval of the third party of a well for inclusion in the program,
the third party committed to the reimbursement of all or a portion of the cost
of such well, up to an aggregate maximum for all such wells of $16.5 million.
The program wells were subject to a dollar-denominated production payment equal
to the principal amount of such reimbursed costs, plus an amount equivalent to
a 17.5% annual interest rate on the unpaid portion of such principal amount.
In April 1997, this production was paid in full.
F-39
<PAGE> 204
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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.
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.
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
F-40
<PAGE> 205
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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, the Company or TARC 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 the Company or TARC
sells or otherwise transfers any stock of TARC, or issues any options, warrants
or other similar rights relating to such stock, outside of the 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 the Company, TransTexas or TARC, may be required to pay the tax.
TransTexas has significant contingent liabilities, including liabilities
with respect to litigation matters and other obligations assumed in the
Transfer. In addition, 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.
PRICE MANAGEMENT ACTIVITIES
TARC enters into futures contracts, options on futures, swap agreements,
and forward sale agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory of feedstocks
and refined products or fixed price purchase commitments. At January 31,
1997, TARC's position in open futures contracts, options on futures, and swap
agreements was not significant. A net trading gain of approximately $3.1
million and a trading loss of approximately $2.3 million were reflected in
other income (expense) for the years ended July 31, 1994 and 1995,
respectively. These transactions do not qualify for hedge accounting treatment
under the guidelines of SFAS 80; therefore, gains or losses associated with
these futures contracts are recognized currently in other income.
FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
TARC enters into financing arrangements in order to maintain an
available supply of feedstocks. Typically, TARC enters into an agreement with
a third party to acquire a cargo of feedstock which is scheduled for delivery
to
F-41
<PAGE> 206
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
TARC's refinery. TARC pays through the third party all transportation costs,
related taxes and duties and letter of credit fees for the cargo, plus a
negotiated commission. Prior to arrival at the refinery, another third party
purchases the cargo, and TARC commits to purchase, at a later date, the cargo
at an agreed price plus commission and costs. TARC also places margin deposits
with the third party to permit the third party to hedge its price risk. TARC
purchases these cargos in quantities sufficient to maintain expected operations
and is obligated to purchase all of the cargos delivered pursuant to these
arrangements. In the event the refinery is not operating, these cargos may be
sold on the spot market. During the year ended January 31, 1997, approximately
1.1 million barrels of feedstocks with a cost of $23 million were sold by a
third party on the spot market prior to delivery to TARC without a material
gain or loss to TARC.
In March 1996, TARC entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. Under the
terms of the agreement, the processing fee earned by TARC is based on the
margin earned by the third party, if any, after deducting all of its related
costs such as feedstock acquisition, hedging, transportation, processing and
inspections plus a commission for each barrel processed. For the year ended
January 31, 1997, TARC processed approximately 1.1 million barrels of feedstock
pursuant to this agreement. TARC incurred a loss of approximately $2.6 million
related to this processing agreement primarily as a result of low margins and
price management activities.
In April 1996, TARC entered into a similar processing agreement with
another third party to process feedstocks. As of July 31, 1997, TARC had
processed approximately 6.4 million barrels of feedstocks under this agreement.
TARC also entered into a processing agreement with this third party to process
approximately 0.6 million barrels of the third party's feedstocks for a fixed
price per barrel. Under the terms of this fixed price agreement, TARC met all
quantity and quality yields earning the full price per barrel. For the year
ended January 31, 1997, TARC recorded a net loss of approximately $4.5 million
related to these processing arrangements primarily as a result of low margins
and price management activities. As of January 31, 1997 and July 31, 1997, TARC
was storing approximately 1.0 million and 0.8 million barrels, respectively, of
feedstock and intermediate or refined products. For the six months ended July
31, 1996 and 1997, TARC recorded income (loss) from processing agreements of
$(3.3) million and $3.2 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.
HEDGING AGREEMENTS
Beginning in April 1995, TransTexas entered into Hedge Agreements to
reduce its exposure to price risk in the spot market for natural gas. Pursuant
to the Hedge Agreements, either TransTexas or the counterparty thereto was
required to make a payment to the other at the end of each month (the
"Settlement Date"). The payments equaled the product of a notional quantity
("Base Quantity") of natural gas and the difference between a specified fixed
price ("Fixed Price") and a market price ("Floating Price") for natural gas.
The Floating Price was determined by reference to natural gas futures contracts
traded on the New York Mercantile Exchange ("NYMEX"). The Hedge Agreements
provided for TransTexas to make payments to the counterparty to the extent that
the Floating Price exceeded the Fixed Price, up to a maximum ("Maximum Floating
Price") and for the counterparty to make payments to TransTexas to the extent
that the Floating Price was less than the Fixed Price. For the year ended
F-42
<PAGE> 207
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
January 31, 1997, TransTexas made net settlement payments totaling
approximately $37 million to the counterparty pursuant to the Hedge Agreements.
As of January 31, 1997, TransTexas had Hedge Agreements with Settlement Dates
ranging from February 1997 through April 1997 involving total Base Quantities
aggregating approximately 20.4 TBtu of natural gas. Fixed Prices for these
agreements ranged from $1.70 to $1.78 per MMBtu ($1.76 to $1.84 per Mcf) up to
Maximum Floating Prices ranging from $2.00 to $2.20 per MMBtu ($2.07 to $2.28
per Mcf). In addition, one agreement had a Fixed Price of $2.48 per MMBtu
($2.57 per Mcf) with no Maximum Floating Price. Under the terms of this
agreement, the counterparty advanced $5 million to TransTexas. For the six
months ended July 31, 1997, TransTexas incurred net settlement losses pursuant
to the Hedge Agreements of approximately $7.4 million. As of July 31, 1997,
TransTexas had no Hedge Agreements outstanding.
OPERATING LEASES
As of July 31, 1997, the Company has long-term leases covering land and
other property and equipment. Rental expense was approximately $7 million and
$9 million for the years ended July 31, 1994 and 1995, respectively, $5 million
for the six months ended January 31, 1996, $10 million for the year ended
January 31, 1997 and $5 million for the six months ended July 31, 1997. Future
minimum rental payments required under operating leases that have initial or
remaining noncancellable lease terms in excess of one year as of January 31,
1997, including the sale-leaseback transaction described below, are as follows
(in thousands of dollars):
<TABLE>
<S> <C>
1998 $ 6,132
1999 4,869
2000 1,974
2001 1,633
2002 1,109
Thereafter 522
---------
$ 16,239
=========
</TABLE>
In January 1996, TransTexas completed a sale-leaseback transaction in
the amount of $3 million, related to its operating equipment. In May 1997,
this sale-leaseback was paid in full.
18. 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
F-43
<PAGE> 208
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
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.
MCNAMARA. On June 28, 1996, TransTexas consummated a settlement of
litigation with Tennessee Gas Pipeline Company ("Tennessee") that was filed on
October 14, 1993 in the 244th Judicial District Court, Ector County, Texas
pursuant to which TransTexas and another plaintiff received approximately $125
million from Tennessee. TransTexas' share of the settlement proceeds was $96
million. On July 2, 1996, John McNamara, Jr. et al. ("The Hubberd Trusts")
filed a new suit against TransTexas in the 241st District Court, Webb County,
Texas asserting that TransTexas had breached its duties to The Hubberd Trusts
under certain oil and gas leases and that TransTexas owed The Hubberd Trusts
25% of the gross settlement proceeds, or approximately $31.25 million. This
litigation was settled in December 1996.
KATHRYN M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred to
the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in certain leases, are
entitled to receive a portion of the settlement proceeds received by
TransAmerican from El Paso. On April 16, 1996, additional nonparticipating
royalty interest owners intervened, making the same claims as the plaintiffs.
In June 1996, TransAmerican filed its motion for summary judgment.
Plaintiffs also filed a motion for partial summary judgment. On August 2,
1996, the court denied TransAmerican's motion and plaintiffs' motion. The
plaintiffs and intervenors agreed on November 15, 1996 to dismiss their claims
without prejudice.
TERRY/PENROD. TransAmerican and a group of TransAmerican's former bank
lenders (the "Bank Group") were parties to a consolidated suit filed December
6, 1991, in the United States District Court for the Southern District of
Texas, Houston Division, relating to the interpretation of two third-party
drilling agreements. Plaintiffs Ensco Offshore Company, f/k/a Penrod Drilling
Corporation, Terry Oil field Supply Co., Inc. and Terry Resources, Inc.
("Terry") sued TransAmerican for approximately $50 million in actual damages
and punitive damages of not less than five times actual damages. On April 5,
1996, the court entered a final judgment against TransAmerican, TransTexas and
several of their affiliates, in the amount of approximately $43 million, plus
interest. On April 18, 1996, the court entered a separate judgment against the
same parties for Terry's attorneys' fees of $2 million. In May 1996,
TransTexas paid Terry approximately $19 million and caused escrowed funds held
for the benefit of the Bank Group of approximately $22
million to be paid to Terry. Upon payment of the settlement amount, Terry
released the judgments, released all liens and reassigned to TransTexas a
production payment in certain properties. Terry dismissed an unrelated
administrative proceeding upon payment of the settlement amount described
above.
GINTHER/WARREN. Wilbur L. Ginther and Howard C. Warren conveyed a
portion of a lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas Supreme
Court upheld a judgment in favor of Messrs. Ginther and Warren against Taub's
interest in the lease. The lower court judgment had awarded a portion of the
lease to Messrs. Ginther and Warren because Taub's attorney had defrauded
Messrs. Ginther and Warren with respect to their interest in the lease. On
November 26, 1986, the estates of Messrs. Ginther and Warren filed an adversary
proceeding in the United States Bankruptcy Court for the Southern District of
Texas, Houston Division (the "Bankruptcy Court") against
F-44
<PAGE> 209
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
TransAmerican seeking damages and claiming that TransAmerican had constructive
notice of their disputes but continued to pay royalties and proceeds of
production to Taub. TransAmerican filed an interpleader action in the
Bankruptcy Court and deposited the disputed funds accruing from and after
November 1984 into the registry of the court. On September 30, 1993, the
Bankruptcy Court entered a judgment against TransAmerican in the amount of $6.3
million plus post judgment interest. On September 15, 1995, the U.S. District
Court for the Southern District of Texas entered an order reversing an award of
interest to Taub and affirming the final judgment in all other respects.
TransTexas appealed the judgment to the Fifth Circuit Court of Appeals. On
July 2, 1996, TransTexas and the estates of Messrs. Ginther and Warren entered
into a settlement pursuant to which such estates received $3.5 million and a
promissory note for $2.8 million. The promissory note is payable in 36 equal
monthly installments commencing August 1, 1996, and bears no interest unless an
installment payment is not made. In addition, TransTexas transferred to such
estates an additional overriding royalty interest in a portion of the lease and
agreed to drill additional wells on the lease. In conjunction with the
settlement, the estates of Messrs. Ginther and Warren agreed to farm out to
TransTexas an additional working interest in the lease. In May 1977, the
outstanding balance of the promissory note was paid in full.
GATX. On May 14, 1996, GATX Terminals Corporation ("GATX") filed suit
against TARC in the U.S. District Court, Eastern District of Louisiana alleging
breach of an operating agreement to pay GATX $122,500 per month during 1996.
TARC settled this litigation in November 1996.
NLRB PROCEEDING. On July 13, 1994, the Oil, Chemical and Atomic Workers
International Union ("OCAW") filed unfair labor practices charges against TARC
with the New Orleans Regional Office of the National Labor Relations Board
("NLRB"). These charges alleged that TARC refused to reinstate 22 former
employees because of their union membership. The NLRB refused to issue a
complaint and the OCAW appealed the decision to the NLRB General Counsel. The
decision of the NLRB was upheld in November 1996.
19. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning TransTexas' gas
and oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." Estimates of TransTexas' proved reserves and proved developed
reserves were prepared by Netherland, Sewell & Associates, Inc., an independent
firm of petroleum engineers, based on data supplied to them by TransTexas.
Such estimates are inherently imprecise and may be subject to substantial
revisions as additional information such as reservoir performance, additional
drilling, technological advancements and other factors become available.
Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1996 1997
------ -------
<S> <C> <C>
Proved properties $ 1,639,237 $1,845,994
Unproved properties 136,360 158,973
----------- ----------
Total 1,775,597 2,004,967
Less accumulated depletion 1,165,943 1,288,860
----------- ----------
$ 609,654 $ 716,107
=========== ==========
</TABLE>
F-45
<PAGE> 210
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JULY 31, JANUARY 31, JANUARY 31,
-------------------- ---------------- ------------
1994 1995 1996 1997
------ ------- --------- -------
<S> <C> <C> <C> <C>
Property acquisitions $ 18,593 $ 124,956 $ 11,485 $ 50,963
Exploration 114,266 84,201 27,039 100,737
Development 47,567 50,032 115,812 162,313
---------- ----------- ----------- ----------
$ 180,426 $ 259,189 $ 154,336 $ 314,013
========== =========== =========== ==========
</TABLE>
Results of operations for gas and oil producing activities are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JULY 31, JANUARY 31, JANUARY 31,
-------------------- ---------------- ------------
1994 1995 1996 1997
------ ------- --------- -------
<S> <C> <C> <C>
Revenues $ 302,522 $ 275,627 $ 124,663 $ 363,459
---------- ----------- ---------- -----------
Expenses:
Production costs 76,928 76,798 31,376 97,619
Depletion 107,727 121,625 56,543 122,570
General and administrative 21,039 14,349 3,601 8,710
Litigation settlement -- -- (18,300) (96,000)
---------- ----------- ---------- -----------
Total operating expenses 205,694 212,772 73,220 132,899
---------- ----------- ----------- -----------
Income before income taxes 96,828 62,855 51,443 230,560
Income taxes 26,047 21,999 18,005 80,696
---------- ----------- ----------- -----------
$ 70,781 $ 40,856 $ 33,438 $ 149,864
========== =========== =========== ===========
Depletion rate per net equivalent Mcf $ .80 $ .81 $ .82 $ .96
========== =========== =========== ===========
</TABLE>
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating conditions. Natural gas quantities
represent wet gas volumes, which include amounts that will be extracted as
natural gas liquids. TransTexas' estimated
F-46
<PAGE> 211
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
net proved reserves and proved developed reserves of natural gas (billions of
cubic feet) and condensate (millions of barrels) are shown in the table below.
<TABLE>
<CAPTION>
YEAR ENDED
YEARS ENDED JULY 31, SIX MONTHS ENDED JANUARY 31,
-------------------------------- ---------------- --------------
1994 1995 1996 1997
------------- ------------ ---------------- --------------
Gas Oil Gas Oil Gas Oil Gas Oil
----- --- ------ ----- ------ --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year 695.0 2.0 717 .4 1.9 1,122.6 3.0 1,139.1 2.9
Increase (decrease) during
the year attributable to:
Revisions of previous
estimates .5 .1 143 .5 .5 43.0 -- 6.5 .1
Extensions, discoveries and
other additions 152.8 .4 409 .6 1.2 73.8 .2 90.3 3.6
Litigation settlement -- -- -- -- 9.5 -- -- --
Sales of reserves -- -- -- -- (42.9) -- (204.9) (.4)
Purchase of reserves -- -- -- -- -- -- 11.3 .1
Production (130.9) (.6) (147.9) (.6) (66.9) (.3) (122.6) (.6)
------- ---- -------- ---- -------- ----- ------- -----
End of year 717.4 1.9 1,122 .6 3.0 1,139.1 2.9 919.7 5.7
======= ==== ======== ==== ======== ===== ======= =====
Proved developed reserves:
Beginning of year 384.2 1.1 442 .2 1.1 476.6 1.1 425.3 .9
End of year 442.2 1.1 476 .6 1.1 425.3 .9 381.5 2.4
</TABLE>
Standardized Measure Information
The calculation of estimated future net cash flows in the following
table assumed the continuation of existing economic conditions and applied
year-end prices (except for future price changes as allowed by contract) of gas
and condensate to the expected future production of such reserves, less
estimated future expenditures (based on current costs) to be incurred in
developing and producing those proved reserves.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value of
TransTexas' gas and oil reserves. These estimates reflect proved reserves only
and ignore, among other things, changes in prices and costs, revenues that
could result from probable reserves which could become proved reserves in
fiscal 1998 or later years, and the risks inherent in reserve estimates.
The standardized measure of discounted future net cash flows relating to proved
gas and oil reserves is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
YEAR ENDED JULY 31, JANUARY 31, JANUARY 31,
---------------------- ---------------- -----------
1994 1995 1996 1997
------ ------- --------- -------
<S> <C> <C> <C> <C>
Future cash inflows $1,194,656 $ 1,591,011 $2,269,585 $ 3,051,397
Future production costs (219,485) (316,055) (427,482) (506,882)
Future development costs (243,991) (461,471) (582,798) (459,326)
Future income taxes (199,065) (196,942) (310,445) (563,812)
---------- --------- ---------- -----------
Future net cash flows 532,115 616,543 948,860 1,521,377
Annual discount (10%) for estimated
timing of cash flows (136,541) (201,479) (340,002) (464,121)
---------- ----------- ---------- -----------
Standardized measure of discounted
future net cash flows $ 395,574 $ 415,064 $ 608,858 $ 1,057,256
========== =========== ========== ===========
</TABLE>
F-47
<PAGE> 212
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information With Respect to the Interim Periods
Ended July 31, 1996 and 1997 is Unaudited)
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JULY 31, JANUARY 31, JANUARY 31,
-------------------- ---------------- ------------
1994 1995 1996 1997
------ ------- --------- -------
<S> <C> <C> <C> <C>
Beginning of year $ 512,460 $ 395,574 $ 415,064 $ 608,858
Revisions:
Quantity estimates and production rates (31,403) 122,771 31,712 13,903
Prices, net of lifting costs (158,906) (155,257) 331,936 665,054
Estimated future development costs 26,667 (13,631) (128,584) (75,622)
Additions, extensions, discoveries and
improved recovery 141,008 172,365 47,026 209,932
Net sales of production (233,031) (198,829) (92,139) (262,066)
Development costs incurred 35,285 49,873 115,812 156,430
Accretion of discount 63,824 54,439 27,382 80,806
Net changes in income taxes 39,670 (16,722) (66,622) (192,608)
Sale of reserves -- -- (77,879) (165,949)
Litigation settlement -- 4,481 5,150 --
Purchase of reserves -- -- -- 18,518
--------- ---------- --------- -----------
End of year $ 395,574 $ 415,064 $ 608,858 $ 1,057,256
========= ========== ========= ===========
</TABLE>
Year-end wellhead prices received by the Company from sales of natural
gas including margins from natural gas liquids, were $1.62, $1.37, $1.95 and
$3.17 per Mcf for 1994, 1995, 1996 and 1997, respectively. Year-end
condensate prices were $17.62, $16.27, $18.34 and $23.99 per barrel for 1994,
1995, 1996 and 1997, respectively.
F-48
<PAGE> 213
ANNEX A TO PROSPECTUS
GLOSSARY
EXPLORATION AND PRODUCTION TERMS
Unless otherwise indicated in this Prospectus, natural gas volumes are
stated at the legal pressure base of the state or area in which the reserves
are located and at 60 degrees Fahrenheit. Natural gas equivalents and crude oil
equivalents are determined using the ratio of six Mcf of natural gas to one
barrel of crude oil, condensate or natural gas liquids.
"Net production" means production that is owned by TransTexas less
royalties and production due others.
"Bbl" means a barrel of 42 U.S. gallons.
"Bcf" means billion cubic feet of natural gas.
"Bcfd" means billion cubic feet of natural gas per day.
"Bcfe" means Bcf of natural gas equivalent.
"BOE" means barrel of oil equivalent.
"Bpd" means barrels per day.
"Condensate" means a hydrocarbon mixture that becomes liquid and
separates, similar to crude oil, from natural gas when the gas is produced.
"Finding cost," expressed in dollars per Mcfe, is calculated by
dividing the amount of total capital expenditures during a specified period of
time (including all amounts paid with respect to producing property
acquisitions and excluding the cost of properties which have not been
evaluated) by the amount of proved reserves added as a result of drilling
activities during the same period (including the amount of any proved reserves
added from properties previously acquired and including reserve revisions).
"Gross acres" means mineral interests acreage in which a working
interest is owned by TransTexas.
"Gross wells" means wells in which a working interest is owned by
TransTexas.
"Lifting cost," expressed in dollars per Mcfe for a specified period
of time, means the sum of all costs incurred in connection with producing gas
and oil properties and includes (i) lease operating expenses, (ii) severance
and production taxes, and (iii) ad valorem taxes, during such period divided by
the number of Mcfe produced and sold during such period net of other interests
burdening such production.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means Mcf of natural gas equivalent.
"MBbls" means thousands of barrels.
"MMBpd" means millions of barrels per day.
"MMBbls" means million barrels.
A-1
<PAGE> 214
"MMBtu" means million Btus.
"MMcf" means million cubic feet of natural gas.
"MMcfd" means million cubic feet of natural gas per day.
"MMcfe" means million cubic feet of natural gas equivalent.
"MMgals" means millions of gallons.
"mt/day" means metric tons per day.
"Natural gas equivalents" are determined using the ratio of six Mcf of
natural gas to one Bbl of condensate.
"Net acres" means the sum of fractional working interests owned by
TransTexas in an area of associated gross acres.
"Net wells" is the sum of fractional working interests owned by
TransTexas in gross wells.
"NGLs" means natural gas liquids, including ethane, propane, butane,
natural gasoline and other liquid hydrocarbons that are extracted from natural
gas.
"Operator" means the individual or company responsible for the
exploration, development, and production of an oil or gas well or lease.
"Present Value of Proved Reserves" means the present value (discounted
at 10%) of estimated future net cash flows (before income taxes) of proved oil
and natural gas reserves based on product prices in effect on the date of
determination.
"Proved developed reserves" are those reserves expected to be
recovered through existing wells with existing equipment and operating methods.
"Proved undeveloped reserves" are those reserves expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
"Proved reserves" are estimated quantities of natural gas and
condensate that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions.
"PV10" means the present value of estimated future net revenues before
income taxes discounted at 10%.
"SEC PV10" means the present value of estimated future net revenues
before income taxes discounted at 10%, prepared within the guidelines of the
Securities and Exchange Commission.
"Tcf" means trillion cubic feet of natural gas.
"Tcfe" means Tcf of natural gas equivalent.
"Working interest" means the economic interest that gives the owner
the right to drill, produce and conduct operating activities on the property
and a share of production.
A-2
<PAGE> 215
REFINING TERMS
"Alkylation" is a process of combining light hydrocarbon molecules to
form high-octane gasoline using a catalyst. Propane and butane by-products are
sold or used as refinery fuel depending on economics.
"API Gravity" is an indication of density of crude oil or other liquid
hydrocarbons as measured by a system recommended by the American Petroleum
Institute (API), measured in degrees. The lower the API Gravity, the heavier
the compound. For example, asphalt has an API Gravity of 8 degrees and gasoline
has an API Gravity of 50 degrees.
"Atmospheric residual oil" is the residual from the atmospheric
distillation of crude oil, which can also be used as a refinery feedstock.
"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"Catalytic reforming" is a process which produces high-octane blending
stock for the manufacture of gasoline.
"Coking" means the thermal destruction of vacuum tower bottoms to
provide lighter hydrocarbons, leaving behind a carbonaceous material called
"coke."
"Complexity" is a measure of a refinery's downstream processing and
upgrading capacity. A higher complexity rating indicates a greater ability to
upgrade crude oil into higher valued products.
"Crude oil" means the oil as produced from the well; unrefined
petroleum.
"Crude oil capacity" means the crude oil processing capacity of the
refinery.
"Crude slate" or "slate" is a listing of the various crudes that are
processed in a refinery.
"Distillate" or "middle distillate" means the mid-boiling range liquid
hydrocarbons distilled from crude oil or condensate, including kerosene, diesel
fuel, and No. 2 fuel oil.
"dwt" means deadweight-ton; a designation for the size or displacement
of a ship.
"Feedstocks" are hydrocarbons such as crude oil and natural gas
liquids, that are processed in a refinery or blended directly into refined
products.
"Fluid catalytic cracking" or "FCC" is a refinery process for
converting vacuum gas oils or other intermediate feedstocks at high temperature
in the presence of a catalyst to produce lighter products such as gasoline and
blend stocks for home heating oil and fuel oil. Catalytic cracking greatly
enhances the efficiency of a refinery by converting a greater percentage of
hydrocarbon compounds to gasoline and other light distillates.
"Gross refining margin" is the difference between the value of refined
products and the cost of feedstocks expressed in dollars per barrel of crude
oil processed.
"Hydrodesulfurization" ("HDS") or "Hydrotreating" is the process of
removing sulfur from a hydrocarbon stream in the presence of hydrogen and a
catalyst.
"KWH" means kilowatt-hour.
"LPG" means liquefied petroleum gas, primarily propane and butane.
A-3
<PAGE> 216
"LSWR" means low sulfur waxy residual oil.
"LT/D" means long tons per day.
"MTBE" means methyl tertiary butyl ether, an oxygenated, high-octane
blending component which is used in the production of environmentally sensitive
low polluting gasoline.
"Olefins" are a class of unsaturated hydrocarbons.
"Refinery conversion" refers to the ability of a refinery to convert
low value intermediate hydrocarbon streams to high-value refined products.
"Refined products" means the products such as gasoline, diesel fuel,
jet fuel, and residual fuel, that are produced by a refinery.
"Sour crude" means oil typically containing 2.0% weight of sulfur or
more.
"Vacuum gas oil" or "VGO" is produced in the vacuum distillation of
crude oil and is a feedstock to the catalytic cracking unit.
"Vacuum tower bottoms" means the residue produced from the vacuum
tower which serves as feedstock for the Delayed Coking Unit.
"Yield" means the percentage of refined products that are produced
from feedstocks.
A-4
<PAGE> 217
ANNEX B TO PROSPECTUS
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
April 25, 1997
TransTexas Gas Corporation
1300 East North Belt
Houston, Texas 77032-2949
Gentlemen:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of February 1, 1997, to the TransTexas Gas Corporation
(TransTexas) interest in certain oil and gas properties located in Mississippi,
North Dakota, and Texas. This letter summarizes the results of our report dated
March 26, 1997. This report has been prepared using constant prices and costs
and conforms to the guidelines of the Securities and Exchange Commission (SEC).
We estimate the net reserves and future net revenue to the TransTexas
interest, as of February 1, 1997, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE (M$)
---------------------------- -------------------------------
OIL GAS PRESENT WORTH
CATEGORY (MBBLS) (MMCF) TOTAL AT 10%
------------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing . . . . . . . . . . . 2,125.6 288,265.7 734,819.3 576,338.5
Non-Producing . . . . . . . . . 262.2 93,261.0 216,615.5 106,943.3
Proved Undeveloped . . . . . . . 3,350.5 538,190.8 1,133,753.8 765,785.9
-------- --------- ----------- ----------
Total Proved . . . . . . . . 5,738.3 919,717.5 2,085,188.6 1,449,067.7
</TABLE>
Gas volumes are expressed in thousands of standard cubic feet (Mcf) at
the contract temperature and pressure bases. The oil reserves shown include
crude oil and condensate. Oil volumes are expressed in barrels which are
equivalent to 42 United States gallons.
The estimated reserves and future revenue shown are for proved
developed producing, proved developed non- producing, and proved undeveloped
reserves. In accordance with SEC guidelines, our estimates do not include any
value for probable or possible reserves which may exist for these properties.
Our estimates do not include any value which could be attributed to interests
in undeveloped acreage beyond those tracts for which undeveloped reserves have
been estimated.
The proved undeveloped category includes 4 wells that were drilled and
logged after February 1, 1997, and 298 identified undrilled locations projected
to be successful wells for which proved reserves have been estimated. The
proved undeveloped locations are projected to be drilled by TransTexas over the
next 4.5 years. The undeveloped wells drilled by TransTexas are projected to
cost an average of approximately $1,421,000 per successful well. These
estimated well costs are held constant in accordance with SEC guidelines.
Future gross revenue to the TransTexas interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
B-1
<PAGE> 218
consideration of federal income taxes. Also included in the proved developed
producing reserve category is a gas revenue deduction for the payment of
$13,750 per day to Coastal Oil and Gas Corporation through June 1997. In
addition, we have deducted 2 production payments totaling approximately 47 BCF
carved out of the revenue interest for certain producing wells. These
production payments are projected to be satisfied in May 1999. In accordance
with SEC guidelines, the future net revenue has been discounted at an annual
rate of 10 percent to determine its "present worth." These present worth is
shown to indicate the effect of time on the value of money and should not be
construed as being the fair market value of the properties.
Gas and oil prices used in the report have been provided by TransTexas
and are based on actual prices received in January 1997. As requested, the gas
price is based on a January 31, 1997 price of $3.09 per MMBtu which includes
allocated natural gas liquids revenue. This price is decreased to reflect
hedged volumes of 100,000 MMBtu per day at $1.71 per MMBtu and 100,000 MMBtu
per day at $1.70 per MMBtu through May 1997. For the purposes of this report,
no value has been included for transportation revenues generated by TransTexas
pipelines. Oil prices used are $24.28 per barrel for North Dakota and $23.61
per barrel for all other areas. Gas and oil prices are held constant in
accordance with SEC guidelines.
Lease and well operating costs are based on data provided by
TransTexas. These costs include only those direct costs estimated to be
incurred at and below the district and field levels. As requested, these costs
do not include the per-well overhead charges allowed under joint operating
agreements nor do they include the headquarters general and administrative
overhead expenses of TransTexas. Lease and well operating costs are held
constant in accordance with SEC guidelines. Capital costs are included as
required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from over delivery or under delivery to the
TransTexas interest. Therefore, our estimates of reserves and future revenue do
not include adjustments for the settlement of any such imbalances; our
projections are based on TransTexas receiving its net revenue interest share of
estimated future gross gas production.
For the purposes of the report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the cost of abandoning the properties.
The reserves included in this letter are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more
or less than the estimated amounts. A substantial portion of these reserves are
for undeveloped locations. Reserves for these locations are based on estimates
of reservoir volumes and recovery efficiencies along with analogies to similar
production. As such reserve estimates are usually subject to greater revision
than those based on substantial production and pressure data, it may be
necessary to revise these estimates up or down in the future as additional
wells are drilled and performance data become available. The sales rates,
prices received for the reserves, and costs incurred in recovering such
reserves may vary from assumptions included in this report due to governmental
policies and uncertainties of supply and demand. Also, estimates of reserves
may increase or decrease as a result of future operations.
In evaluating the information at our disposal concerning the report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological
data; therefore, our conclusions necessarily represent only informed
professional judgments.
B-2
<PAGE> 219
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
TransTexas Gas Corporation and the nonconfidential files of Netherland, Sewell
& Associates, Inc. and were accepted as accurate. We are independent petroleum
engineers, geologists, and geophysicists; we do not own an interest in these
properties and are not employed on a contingent basis. Basic geologic and field
performance data together with our engineering work sheets are maintained on
file in our office.
Very truly yours,
/s/ Danny D. Simmons
B-3
<PAGE> 220
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
April 28, 1997
TransTexas Gas Corporation
1300 East North Belt
Houston, Texas 77032-2949
Gentlemen:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of February 1, 1997, to the TransTexas Gas Corporation
(TransTexas) interest in certain oil and gas properties located in Mississippi,
North Dakota, and Texas excluding properties in the Lobo Trend Area being
offered for sale. This letter summarizes the results of the net reserves and
future net revenue presented in our report dated March 26, 1997, excluding the
above sale properties. This report has been prepared using constant prices and
costs and conforms to the guidelines of the Securities and Exchange Commission
(SEC).
We estimate the net reserves and future net revenue to the TransTexas
interest, as of February 1, 1997, to be:
<TABLE>
<CAPTION>
NET RESERVES FUTURE NET REVENUE (M$)
------------------------ ------------------------
OIL GAS PRESENT WORTH
CATEGORY (MBBLS) (MMCF) TOTAL AT 10%
- ------------------ ------- ------ ----- ------
<S> <C> <C> <C> <C>
Proved Developed
Producing . . . . . . . . . . . . 1,727.4 104,310.6 306,721.7 266,656.2
Non-Producing . . . . . . . . . . 154.3 17,344.1 43,611.4 26,167.6
Proved Undeveloped . . . . . . . . 2,329.6 257,480.2 510,544.1 339,856.6
-------- ---------- ---------- ---------
Total Proved . . . . . . . . . 4,211.3 379,134.9 860,877.2 632,680.4
</TABLE>
Gas volumes are expressed in thousands of standard cubic feet (Mcf) at
the contract temperature and pressure bases. The oil reserves shown include
crude oil and condensate. Oil volumes are expressed in barrels which are
equivalent to 42 United States gallons.
The estimated reserves and future revenue shown are for proved
developed producing, proved developed non- producing, and proved undeveloped
reserves. In accordance with SEC guidelines, our estimates do not include any
value for probable or possible reserves which may exist for these properties.
Our estimates do not include any value which could be attributed to interests
in undeveloped acreage beyond those tracts for which undeveloped reserves have
been estimated.
The proved undeveloped category includes 4 wells that were drilled and
logged after February 1, 1997, and 111 identified undrilled locations projected
to be successful wells for which proved reserves have been estimated. The
proved undeveloped locations are projected to be drilled by TransTexas over the
next 4.2 years. The undeveloped wells drilled by TransTexas are projected to
cost an average of approximately $1,780,000 per successful well. These
estimated well costs are held constant in accordance with SEC guidelines.
B-4
<PAGE> 221
Future gross revenue to the TransTexas interest is prior to deducting
state production taxes and ad valorem taxes. Future net revenue is after
deducting these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. Also included in the proved developed
producing reserve category is a gas revenue deduction for the payment of
$13,750 per day to Coastal Oil and Gas Corporation through June 1997. In
accordance with SEC guidelines, the future net revenue has been discounted at
an annual rate of 10 percent to determine its "present worth." The present
worth is shown to indicate the effect of time on the value of money and should
not be construed as being the fair market value of the properties.
Gas and oil prices used in the report have been provided by TransTexas
and are based on actual prices received in January 1997. As requested, the gas
price is based on a January 31, 1997 price of $3.09 per MMBtu which includes
allocated natural gas liquids revenue. This price is decreased to reflect
hedged volumes for all properties including those offered for sale of 100,000
MMBtu per day at $1.71 per MMBtu and 100,000 MMBtu per day at $1.70 per MMBtu
through May 1997. For the purposes of this report, no value has been included
for transportation revenues generated by TransTexas pipelines. Oil prices used
are $24.28 per barrel for North Dakota and $23.61 per barrel for all other
areas. Gas and oil prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on data provided by
TransTexas. These costs include only those direct costs estimated to be
incurred at and below the district and field levels. As requested, these costs
do not include the per-well overhead charges allowed under joint operating
agreements nor do they include the headquarters general and administrative
overhead expenses of TransTexas. Lease and well operating costs are held
constant in accordance with SEC guidelines. Capital costs are included as
required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from over delivery or under delivery to the
TransTexas interest. Therefore, our estimates of reserves and future revenue do
not include adjustments for the settlement of any such imbalances; our
projections are based on TransTexas receiving its net revenue interest share of
estimated future gross gas production.
For the purposes of the report, a field inspection of the properties
has not been performed nor has the mechanical operation or condition of the
wells and their related facilities been examined. We have not investigated
possible environmental liability related to the properties; therefore, our
estimates do not include any costs which may be incurred due to such possible
liability. Also, our estimates do not include any salvage value for the lease
and well equipment nor the costs of abandoning the properties.
The reserves included in this letter are estimates only and should not
be construed as exact quantities. They may or may not be recovered; if
recovered, the revenues therefrom and the costs related thereto could be more
or less than the estimated amounts. A substantial portion of these reserves are
for undeveloped locations. Reserves for these locations are based on estimates
of reservoir volumes and recovery efficiencies along with analogies to similar
production. As such reserve estimates are usually subject to greater revision
than those based on substantial production and pressure data, it may be
necessary to revise these estimates up or down in the future as additional
wells are drilled and performance data become available. The sales rates,
prices received for the reserves, and costs incurred in recovering such
reserves may vary from assumptions included in this report due to governmental
policies and uncertainties of supply and demand. Also, estimates of reserves
may increase or decrease as a result of future operations.
In evaluating the information at our disposal concerning the report,
we have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological
data; therefore, our conclusions necessarily represent only informed
professional judgments.
B-5
<PAGE> 222
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained from
TransTexas Gas Corporation and the nonconfidential files of Netherland, Sewell
& Associates, Inc. and were accepted as accurate. We are independent petroleum
engineers, geologists, and geophysicists; we do not own an interest in these
properties and are not employed on a contingent basis. Basic geologic and field
performance data together with our engineering work sheets are maintained on
file in our office.
Very truly yours,
/s/ Danny D. Simmons
B-6
<PAGE> 223
================================================================================
All tendered Outstanding Notes, executed Letters of Transmittal and
other related documents should be directed to the Exchange Agent. Questions
and requests for assistance and requests for additional copies of the
Prospectus, the Letter of Transmittal and other related documents should be
addressed to the Exchange Agent as follows:
By Registered or Certified Mail:
Firstar Bank of Minnesota, N.A.
101 East Fifth Street
St. Paul, Minnesota 55101
Attention: Corporate Trust Department
By Overnight Mail or Hand Delivery:
Firstar Bank of Minnesota, N.A.
101 East Fifth Street
St. Paul, Minnesota 55101
Attention: Corporate Trust Department
By Facsimile:
Firstar Bank of Minnesota, N.A.
Attention: Corporate Trust Department
(612) 298-6050
Confirm by Telephone: (612) 229-6415
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight delivery, or registered or certified mail.)
No person has been authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Prospectus and the accompanying Letter of Transmittal, and, if given or made,
such information or representations must not be relied upon as having been
authorized. Neither the Prospectus nor the accompanying Letter of Transmittal
nor both together constitute an offer to sell or the solicitation of an offer
to buy any securities other than the securities to which the Prospectus relates
or an offer to sell or the solicitation of an offer to buy such securities in
any circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus or the Letter of Transmittal or both together nor
any exchange made hereunder shall, under any circumstances, create any
implication that the information contained or incorporated by reference herein
is correct as of any time subsequent to the date herein or that there has been
no change in the affairs of the Company since such date.
================================================================================
================================================================================
TRANSAMERICAN ENERGY
CORPORATION
OFFER TO EXCHANGE ALL OUTSTANDING
$475,000,000
11 1/2% SERIES A SENIOR SECURED NOTES
DUE 2002
FOR
$475,000,000
11 1/2% SERIES B SENIOR SECURED NOTES
DUE 2002
AND
ALL OUTSTANDING
$1,130,000,000
13% SERIES A SENIOR SECURED DISCOUNT
NOTES DUE 2002
FOR
$1,130,000,000
13% SERIES B SENIOR SECURED DISCOUNT
NOTES DUE 2002
PROSPECTUS
, 1997
================================================================================
<PAGE> 224
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Section 145 of the Delaware
General Corporation Law (the "DGCL") provides that any person may be
indemnified by a Delaware corporation against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any threatened, pending or completed action,
suit or proceeding in which such person is made a party by reason of his being
or having been a director, officer, employee or agent of the Company. The
statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Section nine of the Company's Certificate of Incorporation provides
that directors of the Company shall not, to the fullest extent permitted by the
DGCL, as amended from time to time, be liable to the Company or its
stockholders for monetary damages for breach of their fiduciary duty to the
Company or the Company's stockholders.
The Company has purchased customary directors' and officers' liability
insurance policies for its directors and officers. The Bylaws of the Company
and agreements with directors and officers also provide for indemnification for
amounts (i) in respect of the deductibles for such insurance policies and (ii)
that exceed the liability limits of such insurance policies. Such
indemnification may be made even though directors and officers would not
otherwise be entitled to indemnification under other provisions of the Bylaws
or such agreements.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C> <C>
3.1 -- Certificate of Incorporation, as amended (previously filed as an exhibit to the Company's and TARC's
Registration Statement on Form S-1 (33-85930), and incorporated herein by reference).
3.2 -- Certificate of Amendment dated June 5, 1997 to Certificate of Incorporation of the Company (previously filed
as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by
reference).
3.3 -- Certificate of Amendment dated July 2, 1997 to Certificate of Incorporation of the Company (previously filed
as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by
reference).
3.4 -- Certificate of Amendment dated February 18, 1997 to Certificate of Incorporation (previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended January 31, 1997, and incorporated
herein by reference).
3.5 -- Certificate of Designation of Series A Preferred Stock (previously filed as an exhibit to the Company's and
TARC's Registration Statement on Form S-1 (33-85930), and incorporated herein by reference).
3.6 -- By-laws of the Company (previously filed as an exhibit to the Company's and TARC's Registration Statement
on Form S-1 (33-85930), and incorporated herein by reference).
4.1 -- Indenture dated as of February 15, 1995, between TARC, First Fidelity Bank, National Association, as
Trustee and the Company, with respect to the Guaranteed First Mortgage Discount Notes and the
</TABLE>
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Guaranteed First Mortgage Notes (together, the "TARC Notes"), including the forms of TARC Notes as exhibits
(previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.2 -- Warrant Agreement dated as of February 23, 1995, among the Company, TARC and First Fidelity Bank, National
Association, as Warrant Trustee, with respect to the Common Stock Purchase Warrants including the form of
Warrant as an exhibit (previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K
dated March 14, 1995, and incorporated herein by reference).
4.3 -- Pledge Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association, as
Trustee (previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated March
14, 1995, and incorporated herein by reference).
4.4 -- Security Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association,
as Trustee (previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated
March 14, 1995, and incorporated herein by reference).
4.5 -- Cash Collateral and Disbursement Agreement dated as of February 23, 1995, among TARC, First Fidelity Bank,
National Association, as Trustee, First Fidelity Bank, N.A., as Disbursement Agent, and Baker & O'Brien,
Inc., as Construction Supervisor (previously filed as an exhibit to the Company's and TARC's current Report
on Form 8-K dated March 14, 1995, and incorporated herein by reference).
4.6 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from TARC in favor of
First Fidelity Bank, National Association, as Trustee (previously filed as an exhibit to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995, and incorporated herein by reference).
4.7 -- Registration Rights Agreement dated as of February 23, 1995, between TransTexas, the Company, and TARC
(previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated March 14,
1995, and incorporated herein by reference).
4.8 -- First Supplemental Indenture dated as of February 24, 1997 among TARC, TEC and First Union National Bank,
f/k/a First Fidelity Bank, N.A. (previously filed as an exhibit to TARC's Annual Report on Form 10-K for the year
ended January 31, 1997, and incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (previously filed as an exhibit to TransTexas' Registration Statement
on Form S-3 (33-91494), and incorporated herein by reference).
4.10 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas
Gas Corporation and RECO Industries, Inc. (previously filed as an exhibit to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein by reference).
4.11 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Frito-Lay, Inc. (previously filed as an exhibit to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by reference).
4.12 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and EM Sector Holdings, Inc. (previously filed as an exhibit to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein by reference).
</TABLE>
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<TABLE>
<S> <C> <C>
4.13 -- Second Supplemental Indenture dated June 13, 1997 among TARC, as issuer, the Company, as guarantor, and
First Union National Bank, as trustee (previously filed as an exhibit to the Company's current report
on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.14 -- Indenture dated June 13, 1997 among the Company, as issuer, and Firstar Bank of Minnesota, as trustee
(previously filed as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
4.15 -- Security and Pledge Agreement dated June 13, 1997 by the Company in favor of Firstar Bank of Minnesota, as
trustee (previously filed as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
4.16 -- Registration Rights Agreement dated June 5, 1997 (previously filed as an exhibit the Company's current report
on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.17 -- Loan Agreement dated June 13, 1997 between TransTexas and the Company (previously filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.18 -- Loan Agreement dated June 13, 1997 between TARC and the Company (previously filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.19 -- Security and Pledge Agreement dated June 13, 1997 by TransTexas in favor of the Company (previously filed as an
exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by
reference).
4.20 -- Security and Pledge Agreement dated June 13, 1997 by TARC in favor of the Company (previously filed as an exhibit
to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.21 -- 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 (previously filed as an
exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.22 -- Disbursement Agreement dated June 13, 1997 among TransTexas, the Company and Firstar Bank of Minnesota, as
disbursement agent and trustee (previously filed as an exhibit to the Company's current report on Form 8-K dated
June 13, 1997, and incorporated herein by reference).
4.23 -- Forms of Mortgage dated June 13, 1997 between TransTexas and TransAmerican Energy Corporation (previously filed as
an exhibit to TransTexas' registration statement on Form S-4 (333-33803), and incorporated herein by
reference).
4.24 -- Form of Mortgage dated June 13, 1997 between TARC and TransAmerican Energy Corporation (previously filed as an
exhibit to TARC's quarterly report for the quarter ended July 31, 1997, and incorporated herein by reference).
4.25 -- Intercreditor and Collateral Agency Agreement dated June 13, 1997 among Firstar Bank of Minnesota, TEC and
TransTexas (previously filed as an exhibit to TEC's quarterly report on Form 10-Q for the quarter ended July 31, 1997,
and incorporated herein by reference).
</TABLE>
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<TABLE>
<S> <C> <C>
4.26 -- Intercreditor and Collateral Agency Agreement dated June 13, 1997, among Firstar Bank of Minnesota, First
Union National Bank, TEC and TAR (previously filed as an exhibit to TEC's quarterly report on Form 10-Q
for the quarter ended July 31, 1997, and incorporated herein by reference).
5.1* -- Legal Opinion of Gardere & Wynne, L.L.P.
10.1 -- Services Agreement dated August 24, 1993, by and between TransTexas and TransAmerican (previously filed as
an exhibit to TransTexas' Current Report on Form 8-K filed with the SEC on October 4, 1993, and incorporated
herein by reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and among TransAmerican, TransTexas, and the other
direct and indirect subsidiaries of TransAmerican, as amended (previously filed as an exhibit to
TransTexas' Registration Statement on Form S-1 (33-75050), and incorporated herein by reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between TransTexas and TARC, as amended (previously filed as
an exhibit to TARC's Registration Statement on Form S-1 (33-82200), and incorporated herein by reference).
10.4 -- Bank Group Agreement dated August 24, 1993, by and among TransAmerican, TransTexas, and the Bank Group
(previously filed as an exhibit to TransTexas' Current Report on Form 8-K filed with the SEC on October 4,
1993, and incorporated herein by reference).
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and between TransAmerican and The Coastal Corporation, as
amended by the Amendment to Gas Purchase Agreement dated February 13, 1990, by and between TransAmerican
and Texcol Gas Services, Inc., as successor to The Coastal Corporation (previously filed as an exhibit to
TransTexas' Registration Statement on Form S-1 (33-62740), and incorporated herein by reference).
10.6 -- Form of Indemnification Agreement by and between TransTexas and each of its directors (previously filed as
an exhibit to TransTexas' Current Report on Form 8-K filed with the Securities and Exchange Commission on
October 4, 1993, and incorporated herein by reference).
10.7 -- Gas Purchase Agreement dated November 1, 1985, between TransAmerican and Washington Gas and Light Company,
Frederick Gas Company, Inc., and Shenandoah Gas Company (previously filed as an exhibit to TransTexas'
Registration Statement on Form S-1 (33-75050), and incorporated herein by reference).
10.8 -- Amendment Extending Gas Purchase Agreement between TransTexas and Washington Gas Light Company, Inc., and
Shenandoah Gas Company, as amended, dated November 1, 1993 (previously filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the three months ended January 31, 1994, and incorporated herein by
reference).
10.9 -- Transfer Agreement dated August 24, 1993, by and among TransAmerican, TransTexas, TTC, and John R.
Stanley (previously filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on
October 4, 1993, and incorporated herein by reference).
10.10 -- Employment Agreement between TransTexas and Richard Bianchi dated August 12, 1996 (previously filed as
an exhibit to TransTexas' Form 10-Q for the quarter ended October 31, 1996, and incorporated herein by
reference).
10.11 -- Amended and Restated Accounts Receivable Management and Security Agreement dated as of October 31, 1995,
between TransTexas and BNY Financial Corporation (previously filed as an exhibit
</TABLE>
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<TABLE>
<S> <C> <C>
to TransTexas' Quarterly Report on Form 10-Q for the quarter ended October 31, 1995, and incorporated
herein by reference).
10.12 -- Processing Agreement dated March 20, 1996 by and between TARC and J. Aron & Company (previously filed as
an exhibit to TARC's Transition Report on Form 10-K for the transition period ended January 31, 1996,
and incorporated herein by reference).
10.13 -- Stock Transfer Agreement dated as of February 23, 1995, between TARC, the Company and TransAmerican
(previously filed as an exhibit to TARC's and the Company's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
10.14 -- Employment Agreement dated June 12, 1995 by and between TARC and R. Glenn McGinnis (previously filed as
an exhibit to TARC's Transition Report on Form 10-K for the transition period ended January 31, 1996,
and incorporated herein by reference).
10.15 -- Indemnification Agreement by and between TARC and each of its directors (previously filed as an exhibit
to TARC's and TEC's Registration Statement on Form S-1 (33-82200), and incorporated herein by reference).
10.16 -- Intercompany Note dated as of August 12, 1994, executed by TARC for the benefit of TransAmerican
(previously filed as an exhibit to TARC's and TEC's Registration Statement on Form S-1 (33-82200), and
incorporated herein by reference).
10.17 -- Employment Agreement between TransTexas and Arnold Brackenridge dated August 12, 1996 (previously filed as
an exhibit to TransTexas' Form 10-Q for the quarter ended October 31, 1996, and incorporated herein by
reference).
10.18 -- Note Purchase Agreement, dated as of May 10, 1996, among TransTexas Gas Corporation, TCW Shared Opportunity
Fund II, L.P. and Jefferies & Company, Inc. (previously filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended April 30, 1996, and incorporated herein by reference).
10.19 -- Master Swap Agreement, dated June 6, 1996, between TransTexas Gas Corporation and AIG Trading Corporation
(previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.20 -- Purchase Agreement, dated January 30, 1996, between TransTexas Gas Corporation and Sunflower Energy Finance
Company (previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.21 -- Production Payment Conveyance, executed on January 30, 1996, from TransTexas Gas Corporation to Sunflower
Energy Finance Company (previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April
30, 1996, and incorporated herein by reference).
10.22 -- First Supplement to Purchase Agreement, dated as of February 12, 1996, among TransTexas Gas Corporation,
Sunflower Energy Finance Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. (previously
filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein
by reference).
10.23 -- First Supplement to Production Payment Conveyance, executed February 12, 1996, among TransTexas Gas
Corporation, Sunflower Energy Finance Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
</TABLE>
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<TABLE>
<S> <C>
10.24 -- Purchase Agreement, dated May 14, 1996, among TransTexas Gas Corporation, TCW Portfolio No. 1555 DR V Sub-
Custody Partnership, L.P. and Sunflower Energy Finance Company (previously filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by reference).
10.25 -- Production Payment Conveyance, executed May 14, 1996, from TransTexas Gas Corporation to TCW Portfolio No.
1555 Dr V Sub-Custody Partnership, L.P. and Sunflower Energy Finance Company (previously filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by
reference).
10.26 -- Stock Purchase Agreement dated May 29, 1997 by and between TransTexas and First Union Bank of Connecticut
(previously filed as an exhibit to TransTexas' Current Report on Form 8-K dated May 29, 1997, and incorporated
herein by reference).
10.27 -- Note Purchase Agreement dated June 5, 1997.
10.28 -- Services Agreement dated June 13, 1997 among TNGC Holdings Corporation, TransAmerican, TEC, TARC,
TransTexas and TTXD (previously filed as an exhibit to TransTexas' Quarterly Report on Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by reference).
10.29 -- Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997 (previously filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
10.30 -- Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (previously filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
12.1 -- Statement regarding computation of ratio of earnings to consolidated fixed charges
21.1 -- Schedule of Subsidiaries
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Gardere & Wynne, L.L.P. (set forth in Exhibit 5.1)
23.3 -- Consent of Netherland, Sewell & Associates, Inc.
24.1 -- Power of Attorney (set forth on page II-8 hereof)
25.1 -- Statement of Eligibility of Trustee re: 11 1/2% Senior Secured Notes due 2002 (Form T-1)
25.2 -- Statement of Eligibility of Trustee re: 13% Senior Secured Discount Notes due 2002 (Form T-1)
99.1 -- Letter of Transmittal and Notice of Guaranteed Delivery
99.2 -- Financial statements of TransTexas dated July 31, 1997 (previously filed as part of TransTexas' Quarterly
Report on Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
99.3 -- Financial statements of TARC dated July 31, 1997 (previously filed as part of TARC'S Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
</TABLE>
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- ------------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under
the Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) That, for the purpose of determining any liability
under the Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) That, insofar as indemnification for liabilities
arising under the Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(4) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11,
or 13 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration statement
when it became effective.
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<PAGE> 231
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on the 10th day of
October, 1997.
TRANSAMERICAN ENERGY CORPORATION
By: /s/ Ed Donahue
------------------------------------------
Ed Donahue, Vice President and
Chief Financial Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints John R. Stanley and Edwin B.
Donahue, and each of them, as attorney and agent for the undersigned, with full
power of substitution, for and in the name, place and stead of the undersigned,
to sign and file with the Securities and Exchange Commission under the
Securities Act any and all amendments (including post-effective amendments) and
exhibits to this Registration Statement and any and all applications,
instruments, and other documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered hereby,
with full power and authority to do and perform any and all acts and things
whatsoever requisite or desirable.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 10, 1997.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ John R. Stanley Director and Chief Executive Officer
- -------------------------------------- (Principal Executive Officer)
John R. Stanley
/s/ Ed Donahue Vice President and Chief Financial Officer
- -------------------------------------- (Principal Financial and Accounting Officer)
Ed Donahue
/s/ Thomas B. McDade Director
- --------------------------------------
Thomas B. McDade
/s/ Donald B. Henderson Director
- --------------------------------------
Donald B. Henderson
/s/ John R. Blinn Director
- --------------------------------------
John R. Blinn
/s/ James V. Langston Director
- --------------------------------------
James V. Langston
</TABLE>
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<PAGE> 232
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
3.1 -- Certificate of Incorporation, as amended (previously filed as an exhibit to the Company's and TARC's
Registration Statement on Form S-1 (33-85930), and incorporated herein by reference).
3.2 -- Certificate of Amendment dated June 5, 1997 to Certificate of Incorporation of the Company (previously filed
as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by
reference).
3.3 -- Certificate of Amendment dated July 2, 1997 to Certificate of Incorporation of the Company (previously filed
as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by
reference).
3.4 -- Certificate of Amendment dated February 18, 1997 to Certificate of Incorporation (previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended January 31, 1997, and incorporated
herein by reference).
3.5 -- Certificate of Designation of Series A Preferred Stock (previously filed as an exhibit to the
Company's and TARC's Registration Statement on Form S-1 (33-85930), and incorporated herein by reference).
3.6 -- By-laws of the Company (previously filed as an exhibit to the Company's and TARC's Registration Statement
on Form S-1 (33-85930), and incorporated herein by reference).
4.1 -- Indenture dated as of February 15, 1995, between TARC, First Fidelity Bank, National Association, as
Trustee and the Company, with respect to the Guaranteed First Mortgage Discount Notes and the
</TABLE>
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<TABLE>
<S> <C> <C>
Guaranteed First Mortgage Notes (together, the "TARC Notes"), including the forms of TARC Notes as exhibits
(previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
4.2 -- Warrant Agreement dated as of February 23, 1995, among the Company, TARC and First Fidelity Bank, National
Association, as Warrant Trustee, with respect to the Common Stock Purchase Warrants including the form of
Warrant as an exhibit (previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K
dated March 14, 1995, and incorporated herein by reference).
4.3 -- Pledge Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association, as
Trustee (previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated March
14, 1995, and incorporated herein by reference).
4.4 -- Security Agreement dated as of February 23, 1995, from TARC to First Fidelity Bank, National Association,
as Trustee (previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated
March 14, 1995, and incorporated herein by reference).
4.5 -- Cash Collateral and Disbursement Agreement dated as of February 23, 1995, among TARC, First Fidelity Bank,
National Association, as Trustee, First Fidelity Bank, N.A., as Disbursement Agent, and Baker & O'Brien,
Inc., as Construction Supervisor (previously filed as an exhibit to the Company's and TARC's current Report
on Form 8-K dated March 14, 1995, and incorporated herein by reference).
4.6 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from TARC in favor of
First Fidelity Bank, National Association, as Trustee (previously filed as an exhibit to the Company's and
TARC's Current Report on Form 8-K dated March 14, 1995, and incorporated herein by reference).
4.7 -- Registration Rights Agreement dated as of February 23, 1995, between TransTexas, the Company, and TARC
(previously filed as an exhibit to the Company's and TARC's Current Report on Form 8-K dated March 14,
1995, and incorporated herein by reference).
4.8 -- First Supplemental Indenture dated as of February 24, 1997 among TARC, TEC and First Union National Bank,
f/k/a First Fidelity Bank, N.A. (filed as an exhibit to TARC's Annual Report on Form 10-K for the year
ended January 31, 1997, and incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (previously filed as an exhibit to TransTexas' Registration Statement
on Form S-3 (33-91494), and incorporated herein by reference).
4.10 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas
Gas Corporation and RECO Industries, Inc. (previously filed as an exhibit to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein by reference).
4.11 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Frito-Lay, Inc. (previously filed as an exhibit to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by reference).
4.12 -- Pledge Agreement dated as of February 23, 1995, among TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and EM Sector Holdings, Inc. (previously filed as an exhibit to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein by reference).
</TABLE>
<PAGE> 234
<TABLE>
<S> <C> <C>
4.13 -- Second Supplemental Indenture dated June 13, 1997 among TARC, as issuer, the Company, as guarantor, and
First Union National Bank, as trustee (previously filed as an exhibit to the Company's current report on Form 8-K
dated June 13, 1997, and incorporated herein by reference).
4.14 -- Indenture dated June 13, 1997 among the Company, as issuer, and Firstar Bank of Minnesota, as trustee
(previously filed as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated
herein by reference).
4.15 -- Security and Pledge Agreement dated June 13, 1997 by the Company in favor of Firstar Bank of Minnesota, as
trustee (previously filed as an exhibit to the Company's current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
4.16 -- Registration Rights Agreement dated June 5, 1997 (previously filed as an exhibit the Company's current report on Form
8-K dated June 13, 1997, and incorporated herein by reference).
4.17 -- Loan Agreement dated June 13, 1997 between TransTexas and the Company (previously filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.18 -- Loan Agreement dated June 13, 1997 between TARC and the Company (previously filed as an exhibit to the Company's
current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.19 -- Security and Pledge Agreement dated June 13, 1997 by TransTexas in favor of the Company (previously filed as an
exhibit to the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by
reference).
4.20 -- Security and Pledge Agreement dated June 13, 1997 by TARC in favor of the Company (previously filed as an exhibit to
the Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.21 -- 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 (previously filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997, and incorporated herein by reference).
4.22 -- Disbursement Agreement dated June 13, 1997 among TransTexas, the Company and Firstar Bank of Minnesota, as
disbursement agent and trustee (previously filed as an exhibit to the Company's current report on Form 8-K dated June
13, 1997, and incorporated herein by reference).
4.23 -- Forms of Mortgage dated June 13, 1997 between TransTexas and TransAmerican Energy Corporation (previously filed as
an exhibit to TransTexas' registration statement on Form S-4 (333-33803), and incorporated herein by
reference).
4.24 -- Form of Mortgage dated June 13, 1997 between TARC and TransAmerican Energy Corporation (previously filed as an exhibit
to TARC's quarterly report for the quarter ended July 31, 1997, and incorporated herein by reference).
4.25 -- Intercreditor and Collateral Agency Agreement dated June 13, 1997 among Firstar Bank of Minnesota, TEC and
TransTexas (previously filed as an exhibit to TEC's quarterly report on Form 10-Q for the quarter ended July 31, 1997,
and incorporated herein by reference).
</TABLE>
<PAGE> 235
<TABLE>
<S> <C> <C>
4.26 -- Intercreditor and Collateral Agency Agreement dated June 13, 1997, among Firstar Bank of Minnesota, First
Union National Bank, TEC and TAR (previously filed as an exhibit to TEC's quarterly report on Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by reference).
5.1* -- Legal Opinion of Gardere & Wynne, L.L.P.
10.1 -- Services Agreement dated August 24, 1993, by and between TransTexas and TransAmerican (previously filed as
an exhibit to TransTexas' Current Report on Form 8-K filed with the SEC on October 4, 1993, and incorporated
herein by reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and among TransAmerican, TransTexas, and the other
direct and indirect subsidiaries of TransAmerican, as amended (previously filed as an exhibit to
TransTexas' Registration Statement on Form S-1 (33-75050), and incorporated herein by reference).
10.3 -- Interruptible Gas Sales Terms and Conditions, between TransTexas and TARC, as amended (previously filed as
exhibit to TARC's Registration Statement on Form S-1 (33-82200), and incorporated herein by reference).
10.4 -- Bank Group Agreement dated August 24, 1993, by and among TransAmerican, TransTexas, and the Bank Group
(previously filed as an exhibit to TransTexas' Current Report on Form 8-K filed with the SEC on October 4,
1993, and incorporated herein by reference).
10.5 -- Gas Purchase Agreement dated June 8, 1987, by and between TransAmerican and The Coastal Corporation, as
amended by the Amendment to Gas Purchase Agreement dated February 13, 1990, by and between TransAmerican
and Texcol Gas Services, Inc., as successor to The Coastal Corporation (previously filed as an exhibit to
TransTexas' Registration Statement on Form S-1 (33-62740), and incorporated herein by reference).
10.6 -- Form of Indemnification Agreement by and between TransTexas and each of its directors (previously filed as
an exhibit to TransTexas' Current Report on Form 8-K filed with the Securities and Exchange Commission on
October 4, 1993, and incorporated herein by reference).
10.7 -- Gas Purchase Agreement dated November 1, 1985, between TransAmerican and Washington Gas and Light Company,
Frederick Gas Company, Inc., and Shenandoah Gas Company (previously filed as an exhibit to TransTexas'
Registration Statement on Form S-1 (33-75050), and incorporated herein by reference).
10.8 -- Amendment Extending Gas Purchase Agreement between TransTexas and Washington Gas Light Company, Inc., and
Shenandoah Gas Company, as amended, dated November 1, 1993 (previously filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the three months ended January 31, 1994, and incorporated herein by
reference).
10.9 -- Transfer Agreement dated August 24, 1993, by and among TransAmerican, TransTexas, TTC, and John R. Stanley
(previously filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on October 4,
1993, and incorporated herein by reference).
10.10 -- Employment Agreement between TransTexas and Richard Bianchi dated August 12, 1996 (previously filed as
an exhibit to TransTexas' Form 10-Q for the quarter ended October 31, 1996, and incorporated herein by
reference).
10.11 -- Amended and Restated Accounts Receivable Management and Security Agreement dated as of October 31, 1995,
between TransTexas and BNY Financial Corporation (previously filed as an exhibit to TransTexas' Quarterly
Report on Form 10-Q for the quarter ended October 31, 1995, and incorporated herein by reference).
</TABLE>
<PAGE> 236
<TABLE>
<S> <C> <C>
10.12 -- Processing Agreement dated March 20, 1996 by and between TARC and J. Aron & Company (previously filed as
an exhibit to TARC's Transition Report on Form 10-K for the transition period ended January 31, 1996,
and incorporated herein by reference).
10.13 -- Stock Transfer Agreement dated as of February 23, 1995, between TARC, the Company and TransAmerican
(previously filed as an exhibit to TARC's and the Company's Current Report on Form 8-K dated March 14, 1995,
and incorporated herein by reference).
10.14 -- Employment Agreement dated June 12, 1995 by and between TARC and R. Glenn McGinnis (previously filed as
an exhibit to TARC's Transition Report on Form 10-K for the transition period ended January 31, 1996,
and incorporated herein by reference).
10.15 -- Indemnification Agreement by and between TARC and each of its directors (previously filed as an exhibit
to TARC's and TEC's Registration Statement on Form S-1 (33-82200), and incorporated herein by reference).
10.16 -- Intercompany Note dated as of August 12, 1994, executed by TARC for the benefit of TransAmerican
(previously filed as an exhibit to TARC's and TEC's Registration Statement on Form S-1 (33-82200), and
incorporated herein by reference).
10.17 -- Employment Agreement between TransTexas and Arnold Brackenridge dated August 12, 1996 (previously filed as
an exhibit to TransTexas' Form 10-Q for the quarter ended October 31, 1996, and incorporated herein by
reference).
10.18 -- Note Purchase Agreement, dated as of May 10, 1996, among TransTexas Gas Corporation, TCW Shared Opportunity
Fund II, L.P. and Jefferies & Company, Inc. (previously filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended April 30, 1996, and incorporated herein by reference).
10.19 -- Master Swap Agreement, dated June 6, 1996, between TransTexas Gas Corporation and AIG Trading Corporation
(previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.20 -- Purchase Agreement, dated January 30, 1996, between TransTexas Gas Corporation and Sunflower Energy Finance
Company (previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.21 -- Production Payment Conveyance, executed on January 30, 1996, from TransTexas Gas Corporation to Sunflower
Energy Finance Company (previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April
30, 1996, and incorporated herein by reference).
10.22 -- First Supplement to Purchase Agreement, dated as of February 12, 1996, among TransTexas Gas Corporation,
Sunflower Energy Finance Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P. (previously
filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein
by reference).
10.23 -- First Supplement to Production Payment Conveyance, executed February 12, 1996, among TransTexas Gas
Corporation, Sunflower Energy Finance Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
(previously filed as an exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
</TABLE>
<PAGE> 237
<TABLE>
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10.24 -- Purchase Agreement, dated May 14, 1996, among TransTexas Gas Corporation, TCW Portfolio No. 1555 DR V Sub-
Custody Partnership, L.P. and Sunflower Energy Finance Company (previously filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by reference).
10.25 -- Production Payment Conveyance, executed May 14, 1996, from TransTexas Gas Corporation to TCW Portfolio No.
1555 Dr V Sub-Custody Partnership, L.P. and Sunflower Energy Finance Company (previously filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by
reference).
10.26 -- Stock Purchase Agreement dated May 29, 1997 by and between TransTexas and First Union Bank of Connecticut
(previously filed as an exhibit to TransTexas' Current Report on Form 8-K dated May 29, 1997, and incorporated
herein by reference).
10.27 -- Note Purchase Agreement dated June 5, 1997.
10.28 -- Services Agreement dated June 13, 1997 among TNGC Holdings Corporation, TransAmerican, TEC, TARC,
TransTexas and TTXD (previously filed as an exhibit to TransTexas' Quarterly Report on Form 10-Q for the quarter
ended July 31, 1997, and incorporated herein by reference).
10.29 -- Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997 (previously filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
10.30 -- Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (previously filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
12.1 -- Statement regarding computation of ratio of earnings to consolidated fixed charges
21.1 -- Schedule of Subsidiaries
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Gardere & Wynne, L.L.P. (set forth in Exhibit 5.1)
23.3 -- Consent of Netherland, Sewell & Associates, Inc.
24.1 -- Power of Attorney (set forth on page II-8 hereof)
25.1 -- Statement of Eligibility of Trustee re: 11 1/2% Senior Secured Notes due 2002 (Form T-1)
25.2 -- Statement of Eligibility of Trustee re: 13% Senior Secured Discount Notes due 2002 (Form T-1)
99.1 -- Letter of Transmittal and Notice of Guaranteed Delivery
99.2 -- Financial statements of TransTexas dated July 31, 1997 (previously filed as part of TransTexas' Quarterly Report on
Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by reference).
99.3 -- Financial statements of TARC dated July 31, 1997 (previously filed as part of TARC's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1997, and incorporated herein by reference).
- -------
* To be filed by amendment.
</TABLE>
<PAGE> 1
EXHIBIT 10.27
TRANSAMERICAN ENERGY CORPORATION
$475,000,000 11 1/2% Senior Secured Notes due 2002
$1,130,000,000 13% Senior Secured Discount Notes due 2002
PURCHASE AGREEMENT
June 5, 1997
Jefferies & Company, Inc.
11100 Santa Monica Boulevard
10th Floor
Los Angeles, California 90025
Ladies and Gentlemen:
Pursuant to this Purchase Agreement (this "Agreement"), each of
TransAmerican Energy Corporation, a Delaware corporation (the "Issuer"), and
each other TransAmerican Entity (as defined below) hereby agrees with you as
follows:
1. Issuance of Securities. The Issuer proposes to issue and sell to
Jefferies & Company, Inc. (the "Purchaser") $475,000,000 aggregate principal
amount of 11 1/2% Senior Secured Notes due 2002, Series A (the "Series A Senior
Secured Notes") and $1,130,000,000 aggregate principal amount of 13% Senior
Secured Discount Notes due 2002, Series A (the "Series A Senior Secured
Discount Notes" and, together with the Series A Senior Secured Notes, the
"Series A Notes"). The Series A Notes will be issued pursuant to an indenture,
to be dated as of June 13, 1997 (the "Indenture"), among the Issuer and Firstar
Bank of Minnesota, N.A., as trustee (the "Trustee"). The obligations under the
Notes (as defined below in Section 3) will be secured by security interests in
or pledges of (the "Security Interests") certain assets (the "Collateral") of
the Issuer as set forth in the Offering Circular (defined below).
The Series A Notes will be offered and sold to the Purchaser
pursuant to an exemption from the registration requirements under the
Securities Act of 1933, as amended (the "Securities Act"). The Issuer has
prepared a preliminary offering circular dated May 14, 1997 (the "Preliminary
Offering Circular") and a final offering circular dated June 5, 1997 (the
"Offering Circular") relating to the offer and sale of the Series A Notes (the
"Offering").
Upon original issuance thereof, and until such time as the same
is no longer required under the applicable requirements of the Securities Act,
the Series A Notes shall bear the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS
SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE
TRANSFER
<PAGE> 2
SUCH SECURITY, PRIOR TO THE DATE THAT IS TWO YEARS (OR SUCH SHORTER
PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(K) UNDER THE
SECURITIES ACT AS PERMITTING RESALES BY NON-AFFILIATES OF RESTRICTED
SECURITIES WITHOUT RESTRICTION) AFTER THE LATER OF THE ORIGINAL ISSUE
DATE HEREOF AND THE LAST DATE ON WHICH TRANSAMERICAN ENERGY CORPORATION
(THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) ONLY (A) TO THE COMPANY,
(B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, OR
(E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE
TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM,
AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE
FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE TRUSTEE.
2. Agreements to Sell and Purchase. On the basis of the
representations, warranties and agreements contained herein, and subject to the
terms and conditions hereof, the Issuer shall issue and sell to the Purchaser,
and the Purchaser shall purchase from the Issuer, $475,000,000 aggregate
principal amount of Series A Senior Secured Notes and $1,130,000,000 aggregate
principal amount of Series A Senior Secured Discount Notes. The purchase price
for the Series A Senior Secured Notes shall be $463,125,000, and the purchase
price for the Series A Senior Secured Discount Notes shall be $853,125,000.
3. Terms of Offering. The Purchaser has advised the Issuer that the
Purchaser will make offers to sell (the "Exempt Resales") some or all of the
Series A Notes purchased by the Purchaser hereunder on the terms set forth in
the Offering Circular, as amended or supplemented, solely to persons whom the
Purchaser reasonably believes to be "qualified institutional buyers" as defined
in Rule 144A under the Securities Act ("QIBs" or "Eligible Purchasers").
Holders of the Series A Notes (including subsequent transferees)
will have the registration rights set forth in the registration rights
agreement (the "Registration Rights Agreement"), to be executed on and dated as
of the Closing Date (as defined below in Section 4). Pursuant to the
Registration Rights Agreement, the Issuer and the other TransAmerican Entities
(as defined below) will agree, among other things, to file with the Securities
and Exchange Commission (the "Commission") (i) a registration statement
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<PAGE> 3
under the Securities Act (the "Exchange Offer Registration Statement") relating
to, among other things, the 11 1/2% Senior Secured Notes due 2002, Series B, of
the Issuer (the "Series B Senior Secured Notes") and the 13% Senior Secured
Discount Notes due 2002, Series B, of the Issuer (the "Series B Senior Secured
Discount Notes" and, together with Series A Notes and the Series B Senior
Secured Notes the "Notes"), identical in all respects to the Series A Senior
Secured Notes and the Series A Senior Secured Discount Notes, respectively,
(except for references to series and restrictive legends) to be offered in
exchange for the Series A Notes (such offer to exchange being referenced herein
as the "Registered Exchange Offer") and/or (ii) under certain circumstances, a
shelf registration statement pursuant to Rule 415 under the Securities Act (the
"Shelf Registration Statement") relating to the resale by certain holders of
the Series A Notes.
On the Closing Date, the following transactions shall occur:
(a) The Issuer will enter into a security and pledge agreement
(the "Issuer Pledge Agreement") and a collateral assignment (the "Issuer
Collateral Assignment") relating to each of the TARC Mortgage, the
TransTexas Texas Mortgage, the TransTexas Louisiana Mortgage, the
TransTexas Mississippi Mortgage, the TransTexas Alabama Mortgage, the
TransTexas North Dakota Mortgage, the TARC Pledge and the TransTexas
Pledge, that will provide for the grant of the Security Interests in the
Collateral to the Trustee, as collateral agent (in such capacity, the
"Collateral Agent"), for the benefit of the holders of the Notes. The
Security Interests will secure the payment and performance when due of
all of the obligations of the Issuer under the Indenture, the Notes, and
the Issuer Pledge Agreement.
(b) The Issuer and TransAmerican Refining Corporation, a Texas
corporation ("TARC"), will enter into a loan agreement (the "TARC Loan
Agreement"), pursuant to which the Issuer shall lend to TARC a portion
of the proceeds from the offering and sale of the Series A Notes and
TARC will execute a promissory note in favor of the Issuer (the "TARC
Intercompany Note") all as described in the Offering Circular. The
obligations of TARC under the TARC Loan Agreement and the TARC
Intercompany Note will be secured by (i) an act of mortgage, assignment
of leases and rents, security agreement and financing statement (the
"TARC Mortgage") and (ii) a security and pledge agreement that will
provide for the grant of a security interest in certain collateral to
the Issuer (the "TARC Pledge").
(c) The Issuer and TransTexas Gas Corporation, a Delaware
corporation ("TransTexas"), will enter into a loan agreement (the
"TransTexas Loan Agreement"), pursuant to which the Issuer shall lend to
TransTexas a portion of the proceeds from the offering and sale of the
Series A Notes and TransTexas will execute a promissory note in such
amount in favor of the Issuer (the "TransTexas Intercompany Note") all
as described in the Offering Circular. The obligations of TransTexas
under the TransTexas Loan Agreement and the TransTexas Intercompany Note
will be secured by (i) a mortgage, deed of trust, security agreement and
financing statement, relating to certain properties located in the State
of Texas (the "TransTexas Texas Mortgage"), (ii) an act of mortgage,
assignment of leases and rents, security agreement and financing
statement, relating to certain properties located in the State of
Louisiana (the "TransTexas Louisiana Mortgage"), (iii) a mortgage, deed
of trust, assignment of leases and rents, security agreement and
financing statement, relating to certain properties located in the State
of Mississippi (the "TransTexas Mississippi Mortgage"), (iv) a mortgage,
deed of trust, assignment of leases and rents, security agreement and
financing statement, relating to certain properties
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<PAGE> 4
located in the State of Alabama (the "TransTexas Alabama Mortgage"), (v)
a mortgage, assignment of leases and rents, security agreement and
financing statement, relating to certain properties located in the State
of North Dakota (the "TransTexas North Dakota Mortgage") and (vi) a
security and pledge agreement that will provide for the grant of a
security interest in certain collateral to the Issuer (the "TransTexas
Pledge").
(d) The Issuer and TARC will also enter into a disbursement
agreement (the "TARC Disbursement Agreement") with Firstar Bank of
Minnesota, N.A., as disbursement agent, Firstar Bank of Minnesota, N.A.,
as trustee, and Baker & O'Brien, Inc., as construction supervisor,
pursuant to which funds will be deposited in an account which will
secure the obligations of TARC under the TARC Loan Agreement and the
TARC Intercompany Note.
(e) The Issuer and TransTexas will also enter into a
disbursement agreement (the "TransTexas Disbursement Agreement") with
Firstar Bank of Minnesota, N.A., as disbursement agent, pursuant to
which funds will be deposited in an account which will secure the
obligations of TransTexas under the TransTexas Loan Agreement and the
TransTexas Intercompany Note.
The Issuer has previously entered into the Dealer Manager
Agreement dated May 14, 1997 (the "Issuer Dealer Manager Agreement") with
Jefferies & Company, Inc., as dealer manager; TARC has previously entered into
the Dealer Manager Agreement dated May 14, 1997 (the "TARC Dealer Manager
Agreement") with Jefferies & Company, Inc., as dealer manager; and TransTexas
has previously entered into the Dealer Manager Agreement dated May 14, 1997
(the "TransTexas Dealer Manager Agreement" and together with the Issuer Dealer
Manager Agreement and the TARC Dealer Manager Agreement, the "Dealer Manager
Agreements") with Jefferies & Company, Inc., as dealer manager. The TARC Loan
Agreement, the TARC Intercompany Note, the TARC Mortgage, the TARC Pledge, the
TransTexas Loan Agreement, the TransTexas Intercompany Note, the TransTexas
Texas Mortgage, the TransTexas Louisiana Mortgage, the TransTexas Mississippi
Mortgage, the TransTexas Alabama Mortgage, the TransTexas North Dakota Mortgage
and the TransTexas Pledge are referenced herein as the "Intercompany Loan
Documents." This Agreement, the Dealer Manager Agreements, the Indenture, the
Notes, the Registration Rights Agreement, the Issuer Pledge Agreement, the
Issuer Collateral Assignment, the Intercompany Loan Documents, the TARC
Disbursement Agreement, the TransTexas Disbursement Agreement, any
intercreditor agreement contemplated by the Offering Circular and all other
documents and instruments executed by the Issuer or any of the Subsidiaries (as
defined below in Section 6(c)) in connection with the transactions contemplated
hereby and thereby are referenced herein as the "Documents." The Issuer, TARC
and TransTexas are referenced collectively herein as the "TransAmerican
Entities." The transactions contemplated by the Documents, including without
limitation, the Lobo Sale (as defined in the Offering Circular), the Offering
and the use of the proceeds therefrom as described in the Offering Circular,
are collectively referenced herein as the "Transactions."
4. Delivery and Payment. Delivery to the Purchaser of and payment
for the Series A Notes shall be made at a Closing (the "Closing") to be held at
9:00 a.m., New York City time, on June 13, 1997 (the "Closing Date") at the
offices of Gardere & Wynne L.L.P., 1601 Elm Street, Suite 3000, Dallas, Texas
75201, Texas. The Closing Date and the location of delivery of and the form of
payment for the Series A Notes may be varied by agreement between the Purchaser
and the Issuer.
The Issuer shall deliver to the Purchaser (i) one or more
certificates representing the Series A Senior Secured Notes and the Series A
Senior Secured Discount Notes (the "Global Securities"), each
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<PAGE> 5
in definitive form, registered in the name of Cede & Co., as nominee of The
Depository Trust Company ("DTC"), or such other names as the Purchaser may
request upon at least one business day's notice to the Issuer, in an amount
corresponding to the aggregate principal amount of the Series A Senior Secured
Notes and the Series A Senior Secured Discount Notes sold pursuant to Exempt
Resales to QIBs, and (ii) one or more certificates representing the Series A
Senior Secured Notes and the Series A Senior Secured Discount Notes (the
"Individual Securities") in definitive form, registered in such names and
denominations as the Purchaser may so request, in an aggregate amount
corresponding to the aggregate principal amount of Senior Secured Notes or the
Series A Senior Secured Discount Notes, as the case may be, sold pursuant to
Exempt Resales to non U.S. persons pursuant to offers and sales that occur
outside the United States of America in reliance on Regulation S under the
Securities Act in each case against payment by the Purchaser of the purchase
price therefor by immediately available Federal funds bank wire transfer to
such bank account as the Issuer shall designate at least two business days
prior to the Closing. In compensation of delivery of payment by the Purchaser
in same day funds, the Issuer hereby acknowledges that the Purchaser will
deduct from the purchase price an amount equal to the Purchaser's cost of funds
with respect thereto for the period between the date on which such funds are
wire transferred and the next business day.
The Global Securities and the Individual Securities in definitive
form shall be made available to the Purchaser for inspection at such place as
shall be acceptable to the Purchaser not later than 9:30 a.m. on the business
day immediately preceding the Closing Date.
5. Agreements of the Issuer. The Issuer hereby agrees:
(a) To prepare the Offering Circular in a form approved by the
Purchaser; to make no amendment or any supplement to the Offering
Circular which shall be disapproved by the Purchaser promptly after
reasonable notice thereof; and to furnish the Purchaser with copies
thereof.
(b) To (i) advise the Purchaser promptly after obtaining
knowledge (and, if requested by the Purchaser, confirm such advice in
writing) of (A) the issuance by any state securities commission of any
stop order suspending the qualification or exemption from qualification
of any of the Notes for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purpose by any state securities
commission or other regulatory authority, or (B) the happening of any
event that makes any statement of a material fact made in the Offering
Circular untrue or that requires the making of any additions to or
changes in the Offering Circular in order to make the statements
therein, in the light of the circumstances under which they are made,
not misleading, (ii) use its best efforts to prevent the issuance of any
stop order or order suspending the qualification or exemption from
qualification of any of the Notes under any state securities or Blue Sky
laws, and (iii) if at any time any state securities commission or other
regulatory authority shall issue an order suspending the qualification
or exemption from qualification of any of the Notes under any such laws,
use its best efforts to obtain the withdrawal or lifting of such order
at the earliest possible time.
(c) To (i) furnish the Purchaser, without charge, as many
copies of the Offering Circular, and any amendments or supplements
thereto, as the Purchaser may request and (ii) promptly prepare, upon
the Purchaser's request, any amendment or supplement to the Offering
Circular that the Purchaser deems may be reasonably necessary in
connection with Exempt Resales
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<PAGE> 6
(and the TransAmerican Entities hereby consent to the use by the
Purchaser of the Preliminary Offering Circular prior to the availability
of the Offering Circular, and after such availability, to the use by the
Purchaser of the Offering Circular and any amendments and supplements
thereto, in connection with Exempt Resales).
(d) Not to amend or supplement the Offering Circular prior to
the Closing Date unless the Purchaser shall previously have been advised
thereof and shall not have objected thereto within five business days
after being furnished a copy thereof.
(e) So long as the Purchaser shall hold any Notes, (i) if any
event shall occur as a result of which, in the reasonable judgment of
the Issuer or the Purchaser, it becomes necessary or advisable to amend
or supplement the Offering Circular in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it is necessary to amend or supplement the
Offering Circular to comply with Applicable Law (defined below),
forthwith to prepare an appropriate amendment or supplement to the
Offering Circular (in form and substance satisfactory to the Purchaser)
so that (A) as so amended or supplemented the Offering Circular will not
include an untrue statement of material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and (B)
the Offering Circular will comply with applicable law and (ii) if it
becomes necessary or advisable to amend or supplement the Offering
Circular so that the Offering Circular will contain all of the
information specified in, and meet the requirements of, Rule
144(A)(d)(4) of the Securities Act, forthwith to prepare an appropriate
amendment or supplement to the Offering Circular (in form and substance
satisfactory to the Purchaser) so that the Offering Circular, as so
amended or supplemented, will contain the information specified in, and
meet the requirements of, such Rule.
(f) Promptly from time to time to take such action as
Purchaser may reasonably request in connection with the qualification of
the Notes for offering and sale under the securities or Blue Sky laws of
such jurisdictions as the Purchaser may request and to comply with such
laws so as to permit the continuance of such qualification in effect so
long as reasonably required for Exempt Resales; provided, that no
TransAmerican Entity shall be required in connection therewith to file
any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction where it is not now so qualified.
(g) Regardless of whether any of the Transactions are
consummated or this Agreement is terminated, to pay or cause to be paid
(i) all costs, expenses, fees and taxes incident to and in connection
with: (A) the preparation, printing and distribution of the Preliminary
Offering Circular and the Offering Circular and all amendments and
supplements thereto (including, without limitation, financial statements
and exhibits), and all preliminary and final Blue Sky memoranda and all
other agreements, memoranda, correspondence and other documents prepared
and delivered in connection herewith, (B) the printing, processing and
distribution (including, without limitation, word processing and
duplication costs) and delivery of, and performance under, each of the
Documents, (C) the issuance and delivery of the Notes, (D) the
qualification of the Notes for offer and sale under the securities or
Blue Sky laws of the several states (including, without limitation, the
fees and disbursements of the Purchaser's counsel relating to such
registration or qualification), (E) furnishing such copies of the
Preliminary Offering Circular and the Offering Circular, and all
amendments and supplements thereto, as may reasonably be requested for
use by
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the Purchaser, and (F) the preparation of the Notes (including, without
limitation, printing and engraving thereof), (ii) all reasonable fees,
disbursements and expenses of the counsel and accountants of the
TransAmerican Entities, (iii) all expenses and listing fees in
connection with the application for quotation of the Notes in the
Private Offerings, Resales and Trading Through Automatic Linkages
("PORTAL") market of the National Association of Securities Dealers,
Inc. ("NASD"), (iv) all reasonable fees and expenses (including fees and
expenses of counsel) of the TransAmerican Entities in connection with
approval of the Notes by DTC for "book-entry" transfer, (v) all fees
charged by rating agencies in connection with the rating of the Notes,
(vi) all reasonable fees and expenses of the Trustee and any agent of
the Trustee and the fees and disbursements of counsel for the Trustee in
connection with the Indenture and the Notes and (vii) all reasonable
fees and expenses (including reasonable fees and expenses of counsel)
incurred by the Purchaser in connection with the preparation,
negotiation and execution of the Documents and the consummation of the
Transactions.
(h) To use the proceeds from the sale of the Series A Notes
substantially in the manner described in the Offering Circular under the
caption "Use of Proceeds."
(i) To the extent it may lawfully do so, not to insist upon,
plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension, usury or other law, wherever enacted,
now or at any time hereafter in force, that would prohibit or forgive
the payment of all or any portion of the principal of or interest on the
Notes, the TARC Intercompany Note or the TransTexas Intercompany Note,
or that may affect the covenants or the performance of the Indenture,
the TARC Loan Agreement, the TransTexas Loan Agreement or any of the
other Documents (and, to the extent it may lawfully do so, each
TransAmerican Entity hereby expressly waives all benefit or advantage of
any such law, and covenants that it shall not, by resort to any such
law, hinder, delay or impede the execution of any power granted to the
Trustee in the Indenture, to the Collateral Agent in the Issuer Pledge
Agreement, or to the Issuer in any of the Intercompany Loan Documents,
but shall suffer and permit the execution of every such power as though
no such law had been enacted).
(j) To do and perform all things required to be done and
performed by it under the Documents prior to and after the Closing Date.
(k) Not to, and to ensure that no affiliate (as defined in
Rule 501(b) of the Securities Act) of the Issuer will, sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any
"security" (as defined in the Securities Act) that would be integrated
with the sale of the Series A Senior Secured Notes or the Series A
Senior Secured Discount Notes in a manner that would require the
registration under the Securities Act of the sale to the Purchaser or to
the Eligible Purchasers of the Series A Senior Secured Notes or the
Series A Senior Secured Discount Notes.
(l) For so long as any of the Notes remain outstanding, during
any period in which the Issuer is not subject to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to
furnish at its own expense, upon request, to any owner of the Notes in
connection with any sale thereof and any prospective Eligible Purchaser
of such Notes from such owner, the information required by Rule
144A(d)(4) under the Securities Act.
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<PAGE> 8
(m) To comply with the representation letter of the Issuer to
DTC relating to the approval of the Notes by DTC for "book-entry"
transfer.
(n) To use its best efforts to effect the inclusion of the
Notes in PORTAL.
(o) To file with the Commission, not later than 15 days after
the Closing Date, five copies of a notice on Form D under the Securities
Act (one of which will be manually signed by a person duly authorized by
the Issuer); to otherwise comply with the requirements of Rule 503 under
the Securities Act; and to furnish promptly to you evidence of each such
required timely filing, including a copy thereof.
(p) For so long as the Notes are outstanding, and regardless
of whether required to do so by the rules and regulations of the
Commission, to furnish to the Trustee and deliver or cause to be
delivered to the holders of the Notes and the Purchaser as soon as
practicable (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on
Forms 10-Q and 10-K if the Issuer were required to file such Forms,
including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Issuer's independent certified
public accountants including a balance sheet and statements of income,
shareholder's equity and cash flows of the Issuer and the Subsidiaries
and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Issuer were required to file such reports.
(q) Except in connection with the Registered Exchange Offer or
the filing of the Shelf Registration Statement, not to, and not to
authorize or permit any person acting on its behalf to, (i) distribute
any offering material in connection with the offering and sale of the
Notes other than the Preliminary Offering Circular and the Offering
Circular and any amendments and supplements to the Offering Circular
prepared in compliance with Section 5(d) hereof or (ii) solicit any
offer to buy or offer to sell the Notes by means of any form of general
solicitation or general advertising (including, without limitation, as
such terms are used in Regulation D under the Securities Act) or in any
manner involving a public offering within the meaning of Section 4(2) of
the Securities Act.
(r) Not to, directly or indirectly, without the prior consent
of the Purchaser, offer, sell, grant any option to purchase, or
otherwise dispose (or announce any offer, sale, grant of any option to
purchase or other disposition) of any securities of any of them for a
period of 90 days after the date of the Offering Circular, except as
contemplated by the Registration Rights Agreement or the Offering
Circular.
(s) For so long as the Purchaser shall hold any Notes, to
notify the Purchaser promptly in writing if any TransAmerican Entity or
Affiliate of a TransAmerican Entity becomes a party in interest or a
disqualified person with respect to any employee benefit plan. The
terms "ERISA," "Affiliates," "party in interest," "disqualified person"
and "employee benefit plan" shall have the meanings as set forth in
Section 6(y) hereof.
(t) Not to be or become, at any time prior to the expiration
of three years after the Closing Date, an open-end investment company,
unit investment trust, closed-end investment company or face-amount
certificate company that is or is required to be registered under
Section 8 of the Investment Company Act of 1940, as amended.
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<PAGE> 9
6. Representations and Warranties of the Issuer. The Issuer
represents and warrants to the Purchaser that:
(a) Each of the Preliminary Offering Circular and the Offering
Circular, both including the Annual Reports on Form 10-K for the fiscal
year ended January 31, 1997 of each of the TransAmerican Entities, as of
its respective date does not, and the Offering Circular as of the
Closing Date will not, and each supplement or amendment thereto as of
its date will not, contain any untrue statement of a material fact or
omit to state any material fact (except, in the case of the Preliminary
Offering Circular, for pricing terms and other financial terms
intentionally left blank) required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. Any reference herein to the
Preliminary Offering Circular or the Offering Circular shall be deemed
to refer to and include the most recent Annual Reports on Form 10-K of
each of the TransAmerican Entities and all subsequent documents filed by
any of the TransAmerican Entities with the Commission pursuant to
Section 13(a), 13(c) or 15(d) of the Exchange Act on or prior to the
date of the Preliminary Offering Circular or the Offering Circular, as
the case may be, and any reference herein to the Preliminary Offering
Circular or the Offering Circular, as the case may be, as amended or
supplemented, as of any specified date, shall be deemed to include (i)
any documents filed by any of the TransAmerican Entities with the
Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act
after the date of the Preliminary Offering Circular or the Offering
Circular, as the case may be, and prior to such specified date; and all
documents filed under the Exchange Act (the "Exchange Act Reports") are
so deemed to be included in the Preliminary Offering Circular or the
Offering Circular, as the case may be, or any amendment or supplement
thereto. The Exchange Act Reports, when they were or are filed with the
Commission, conformed or will conform in all material respects to the
applicable requirements of the Exchange Act and the applicable rules and
regulations of the Commission thereunder. No injunction or order has
been issued that either (i) asserts that any of the Transactions is
subject to the registration requirements of the Securities Act or (ii)
would prevent or suspend the issuance or sale of the Notes or the use of
the Preliminary Offering Circular, the Offering Circular, or any
amendment or supplement thereto, in any jurisdiction. Each of the
Preliminary Offering Circular and the Offering Circular, as of their
respective dates contained, and the Offering Circular as amended or
supplemented as of the Closing Date will contain, all the information
specified in, and meet the requirements of, Rule 144A(d)(4) under the
Securities Act.
(b) Each of the Issuer and each Subsidiary (as defined below)
(i) has been duly incorporated, is validly existing and is in good
standing under the laws of its jurisdiction of organization, (ii) has
full corporate power and authority to conduct its business and to own,
lease and operate its properties and assets as described in the Offering
Circular and (iii) is duly registered and qualified to conduct its
business and is in good standing as a foreign corporation authorized to
do business in each jurisdiction or place in which the nature of such
businesses or the ownership or leasing of such properties requires such
registration or qualification, except where the failure to be so
registered or qualified would not have a Material Adverse Effect (as
defined below in Section 6(d)).
(c) Immediately following the Closing, the only direct or
indirect subsidiaries of the Issuer (collectively, the "Subsidiaries")
will be TARC, TransTexas and the other corporations identified on
Schedule 6(c). There are no outstanding (x) securities convertible into
or
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<PAGE> 10
exchangeable for any capital stock of the Issuer or any of the
Subsidiaries, (y) options, warrants or other rights to purchase or
subscribe to capital stock of the Issuer or any of the Subsidiaries or
securities convertible into or exchangeable for capital stock of the
Issuer or any of the Subsidiaries (other than the TARC Warrants (as
defined in below in Section 9(a)(vii))) or (z) contracts, commitments,
agreements, understandings, arrangements, calls or claims of any kind
relating to the issuance of any capital stock of the Issuer or any of
the Subsidiaries, any such convertible or exchangeable securities or any
such options, warrants or rights (other than the Reimbursement and
Credit Agreement dated as of January 25, 1996, as amended, between
TransTexas and SunAmerica, Inc.). Immediately following the Closing,
the Issuer will not directly or indirectly own any capital stock or
other equity interest in any person other than the Subsidiaries.
(d) Immediately following the Closing, the total authorized
capital stock of the Issuer shall consist of (i) 100,000 shares of
common stock, $0.01 par value, of which 9,000 shares shall be issued and
outstanding and (ii) 1,000 shares of preferred stock, $0.01 par value.
All of the outstanding shares of capital stock of the Issuer have been
duly authorized and validly issued, and all of the outstanding shares of
common stock of the Issuer are owned beneficially and of record by
TransAmerican Natural Gas Corporation, a Texas corporation. Immediately
following the Closing, the total authorized capital stock of TransTexas
shall consist of 100,000,000 shares of common stock, $0.01 par value, of
which 74,000,000 shares shall be issued and outstanding. All of the
outstanding shares of capital stock of TransTexas have been duly
authorized and validly issued, are fully paid and nonassessable, and
were not issued in violation of, and are not subject to, any preemptive
or similar rights. The Issuer owns 40,000,000 of such shares
beneficially, free and clear of Liens (except for Liens securing the
Notes and Liens securing the TARC Notes). Immediately following the
Closing, the total authorized capital stock of TARC shall consist of
100,000,000 shares of common stock, $0.01 par value, of which 30,000,000
shares shall be issued and outstanding. All of the outstanding shares
of capital stock of TARC have been duly authorized and validly issued,
are owned beneficially and of record by the Issuer, free and clear of
Liens (except Liens securing the Notes and Liens securing the TARC
Notes), are fully paid and nonassessable, and were not issued in
violation of, and are not subject to, any preemptive or similar rights.
The table under the caption "Capitalization of TEC" in the Offering
Circular (including the footnotes thereto) sets forth, as of its date,
(i) the capitalization of the Issuer and its Subsidiaries on a
consolidated basis and (ii) the pro forma capitalization of the Issuer
and its subsidiaries on a consolidated basis after giving effect to the
transactions described in the Offering Circular. The table under the
caption "Capitalization of TransTexas" in the Offering Circular
(including the footnotes thereto) sets forth, as of its date, (i) the
capitalization of TransTexas and its Subsidiaries on a consolidated
basis and (ii) the pro forma capitalization of TransTexas and its
Subsidiaries on a consolidated basis after giving effect to the
transactions described in the Offering Circular. The table under the
caption "Capitalization of TARC" in the Offering Circular (including the
footnotes thereto) sets forth, as of its date, (i) the capitalization of
TARC and its subsidiaries on a consolidated basis and (ii) the pro forma
capitalization of TARC and its Subsidiaries on a consolidated basis
after giving effect to the transactions described in the Offering
Circular. Except as set forth in such tables, immediately following the
Closing, neither the Issuer nor any of the Subsidiaries shall have any
liabilities, absolute, accrued, contingent or otherwise other than (x)
liabilities that are recorded or disclosed in the Financial Statements
(defined below), or (y) liabilities incurred subsequent to the date
thereof in the ordinary course of business, consistent with past
practice, that would not, singly or in the aggregate, reasonably be
expected to have a material adverse effect (a "Material Adverse Effect")
on (i) the properties, business, prospects, operations,
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<PAGE> 11
earnings, assets, liabilities or condition (financial or otherwise) of
any of the TransAmerican Entities and its Subsidiaries, taken as a
whole, (ii) the ability of any TransAmerican Entity to perform its
obligations under any of the Documents or (iii) the perfection or
priority of any Security Interest in any portion of the Collateral.
(e) Except for this Agreement, the Registration Rights
Agreement, the other Documents and agreements previously disclosed in
documents filed by any of the TransAmerican Entities with the
Commission, neither the Issuer nor any of the Subsidiaries has entered
into any pending agreement (i) to register its securities under the
Securities Act or (ii) other than as contemplated by the Offering
Circular, to purchase or offer to purchase any securities of the Issuer,
any of the Subsidiaries or any of their respective affiliates.
(f) Each TransAmerican Entity has all requisite power and
authority to enter into, deliver and perform its obligations under the
Documents to which it is a party and to consummate the Transactions.
Each of the Documents has been duly and validly authorized by each
TransAmerican Entity that is, or will be, a party thereto, and this
Agreement is, and when executed and delivered on the Closing Date
(assuming the due authorization, execution and delivery thereof by the
other parties thereto) each other Document will be, a legal, valid and
binding obligation of each TransAmerican Entity that is a party hereto
or thereto, enforceable against each such person in accordance with its
terms, subject to (i) any applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting
creditor's rights and remedies generally and (ii) general principles of
equity (regardless of whether enforcement is sought in a proceeding at
equity or at law). When executed and delivered, each Document will
conform in all material respects to the description thereof in the
Offering Circular. On the Closing Date, the Indenture will conform to
the requirements of the Trust Indenture Act of 1939, as amended (the
"TIA"), applicable to an indenture that is required to be qualified
under the TIA.
(g) The Series A Notes have been duly and validly authorized
by the Issuer for issuance and sale to the Purchaser pursuant to this
Agreement and, when executed and authenticated in accordance with the
terms of the Indenture and delivered to and paid for by the Purchaser in
accordance with the terms hereof, will be legal, valid and binding
obligations of the Issuer, enforceable against the Issuer in accordance
with their terms, subject to (i) any applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting
creditor's rights and remedies generally, and (ii) general principles of
equity (regardless of whether enforcement is sought in a proceeding at
equity or at law). The Series B Senior Secured Notes and the Series B
Senior Secured Discount Notes have been duly and validly authorized by
the Issuer and, when executed, authenticated and delivered in accordance
with the terms of the Indenture and the Registration Rights Agreement,
will be legal, valid and binding obligations of the Issuer, enforceable
against the Issuer in accordance with their terms, subject to (i) any
applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to or affecting creditors' rights and remedies
generally and (ii) general principles of equity (regardless of whether
enforcement is sought in a proceeding at equity or at law).
(h) Neither the Issuer nor any of the Subsidiaries is (i) in
violation of its respective charter or by-laws or similar organizational
documents, each as amended to the Closing Date (collectively, "Charter
Documents"), other than violations that would not, singly or in the
aggregate, result in a Material Adverse Effect, (ii) in violation of any
Federal, state, local or
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<PAGE> 12
foreign statute, law (including, without limitation, common law) or
ordinance, or any judgment, decree, rule, regulation or order
(collectively, "Applicable Law") of any government, governmental or
regulatory agency or body, court or arbitrator, domestic or foreign
(each, a "Governmental Authority"), other than violations that would
not, singly or in the aggregate, result in a Material Adverse Effect or
(iii) other than breaches or defaults that would not, singly or in the
aggregate, result in a Material Adverse Effect, in breach of or default
under (with the passage of time or otherwise) any bond, debenture, note
or other evidence of indebtedness, indenture, mortgage, deed of trust,
lease or any other agreement or instrument to which any such person is a
party or by which any of them or their respective property is bound
(collectively, "Applicable Agreements"). There exists no condition
that, with the passage of time or otherwise, would constitute a
violation of such Charter Documents or Applicable Laws or a breach of or
default under any Applicable Agreement or result in the imposition of
any penalty or the acceleration of any indebtedness, other than
breaches, violations, penalties, defaults or conditions that shall have
been waived prior to Closing or that would not, singly or in the
aggregate, result in a Material Adverse Effect.
(i) Neither the execution, delivery or performance of the
Documents nor the consummation of the Transactions will conflict with,
violate, constitute a breach of or a default (with the passage of time
or otherwise) under, require the consent of any person (other than
consents obtained prior to Closing) under, result in the imposition of a
Lien on any assets of the Issuer or any of the Subsidiaries (except
pursuant to the Documents), or result in an acceleration of indebtedness
pursuant to (i) the Charter Documents of the Issuer or any of the
Subsidiaries, (ii) any Applicable Agreement, other than such breaches,
violations or defaults that shall have been waived prior to Closing or
would not, singly or in the aggregate, result in a Material Adverse
Effect or (iii) any Applicable Law. After giving effect to the
Transactions, no Default or Event of Default (as defined in the
Indenture) will exist.
(j) No permit, authorization, approval, consent, certificate,
license or order of, or filing, registration or qualification with, any
Governmental Authority (collectively, "Permits") and no approval or
consent of any other person, is required in connection with, or as a
condition to, the execution, delivery or performance of any of the
Documents or the consummation of any of the Transactions, other than
such Permits (i) as have been made or obtained on or prior to the
Closing Date, (ii) as are not required to be made or obtained on or
prior to the Closing Date that will be made or obtained when required or
(iii) the failure of which to make or obtain would not, singly or in the
aggregate, result in a Material Adverse Effect.
(k) Except as adequately disclosed in the Offering Circular,
(A) there is no action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a
deposition), domestic or foreign (collectively, "Proceedings"), pending
or, to the knowledge of the Issuer or the Subsidiaries, threatened
against the Issuer or the Subsidiaries, that (i) would be required to be
described in the Offering Circular or Preliminary Offering Circular, if
Item 103 of Regulation S-K under the Securities Act were to apply to the
Offering Circular, (ii) seek to restrain, enjoin, prevent the
consummation of, or otherwise challenges any of the Documents or any of
the Transactions or (iii) could, singly or in the aggregate, reasonably
be expected to have a Material Adverse Effect and (B) neither the Issuer
nor any of the Subsidiaries is subject to any judgment, order, decree,
rule or regulation of any Governmental Authority that could, singly or
in the aggregate, have a Material Adverse Effect.
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<PAGE> 13
(l) Each of the Issuer and the Subsidiaries has such Permits
as are necessary to own, lease and operate the properties and to conduct
the businesses described in the Offering Circular other than those the
failure of which to have could not, singly or in the aggregate,
reasonably be expected to result in a Material Adverse Effect. All such
Permits are in full force and effect. None of the Issuer and the
Subsidiaries has received any notice or threat of Proceedings relating
to the revocation or modification of any such Permits. Each of the
Issuer and the Subsidiaries has fulfilled and performed in all material
respects all of its current obligations with respect to such Permits,
subject to such qualifications as may be set forth in the Offering
Circular. The property and business of the Issuer and the Subsidiaries
conform in all material respects to the descriptions thereof contained
in the Offering Circular and Preliminary Offering Circular. No event
has occurred that allows, or after notice or lapse of time would allow,
the revocation or termination by the issuer of any such Permits or which
results in any material impairment of the rights of the holder of any
such Permits. Neither the Issuer nor any of the Subsidiaries has any
reason to believe that any issuer is considering limiting, suspending or
revoking any such Permit.
(m) Except as would not have a Material Adverse Effect,
immediately following the Closing, the Issuer and the Subsidiaries (i)
will have good, valid and defensible title, free and clear of all Liens
(except for Permitted Liens (as defined below)), to substantially all
property and assets described in the Offering Circular as being owned by
them after the Lobo Sale (as defined in the Offering Circular),
including, without limitation, the assets described in the reserve
report of Netherland, Sewell & Associates, Inc., dated April 28, 1997
(the "Reserve Report"), which report is included as Annex C to the
Preliminary Offering Circular and (ii) will be entitled to enjoy
peaceful and undisturbed possession under all leases to which any of
them is a party as lessee. "Permitted Liens" means, collectively, (i)
Permitted Liens as defined in the Indenture, (ii) Liens on assets
securing Indebtedness outstanding under the Notes and (iii) Purchase
Money Liens as defined in the Indenture. All Applicable Agreements are
in full force and effect and are legal, valid and binding obligations of
the Issuer or the Subsidiaries party to such agreement, and no default
has occurred or is continuing thereunder, other than such defaults that
would not, singly or in the aggregate, have a Material Adverse Effect.
TransTexas and its subsidiaries own, in the aggregate, respective
undivided working interests and net revenue interests in the leases upon
which the Reserve Report is based of not materially less, in the
aggregate, than those set forth in the Reserve Report. Except as
described in the Offering Circular, with respect to the leases covering
all wells and lands to which value has been ascribed in the Reserve
Report, TransTexas and its subsidiaries have valid, subsisting and
enforceable leases, superior and paramount to all other leases
respecting the properties to which they pertain, and all rentals,
royalties and other amounts due and payable in accordance with the terms
of the leases have been duly paid or provided for, and such leases are
in full force and effect, except, in each case, for any inaccuracies in
the foregoing that would not, singly or in the aggregate, result in a
Material Adverse Effect. The Issuer and the Subsidiaries maintain
insurance covering their properties, operations, personnel and
businesses against such losses and risks as they reasonably deem
adequate in accordance with customary industry practice. Any such
insurance is outstanding and duly in force.
(n) Upon execution and delivery thereof, the Issuer Pledge
Agreement will create, in favor of the Collateral Agent, for the benefit
of the holders of the Notes, a valid grant of a security interest in the
Collateral and the proceeds thereof and, upon the filings or the
recording required by the Issuer Pledge Agreement, the Collateral Agent
will have, other than with respect to Permitted Liens, a first priority
perfected security interest in the Collateral, subject to the prior
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<PAGE> 14
liens securing the TARC Notes and the prior liens securing the
TransTexas Senior Notes (as defined below in Section 9(a)(vii)). Upon
execution and delivery thereof, each of the TARC Mortgage, the TARC
Pledge, the TransTexas Texas Mortgage, the TransTexas Louisiana
Mortgage, the TransTexas Mississippi Mortgage, the TransTexas Alabama
Mortgage, the TransTexas North Dakota Mortgage and the TransTexas Pledge
will create, in favor of the Issuer, a valid grant of a security
interest in the collateral described in such instrument and the proceeds
thereof and, upon the filings or the recording required by such
instrument, the Issuer will have, other than with respect to Permitted
Liens, a first priority perfected security interest in such collateral,
subject to the prior liens securing the TARC Notes and the prior liens
securing the TransTexas Senior Notes (as defined below in Section
9(a)(vii)).
(o) All tax returns required to be filed by the Issuer and the
Subsidiaries in any jurisdiction (including foreign jurisdictions) have
been filed (other than Forms 5500 or state tax returns, the failure of
which to timely file cannot result in any material penalty) and, when
filed, all such returns were accurate in all material respects, and all
taxes, assessments, fees and other charges (including, without
limitation, withholding taxes, penalties and interest) due or claimed to
be due from such entities have been paid, other than those being
contested in good faith by appropriate proceedings, or those that are
currently payable without penalty or interest and, in each case, for
which an adequate reserve or accrual has been established on the books
and records of the Issuer or the Subsidiary, as applicable, in
accordance with generally accepted accounting principles of the United
States of America, consistently applied ("GAAP"). There are no actual
or, to the knowledge any of the TransAmerican Entities, proposed
additional tax assessments for any fiscal period against the Issuer or
any of the Subsidiaries that could, singly or in the aggregate, have a
Material Adverse Effect. Other than as disclosed in the Offering
Circular, the charges, accruals and reserves on the books of each of the
Issuer and the Subsidiaries in respect of any income and tax liability
for any years not finally determined are adequate to meet any
assessments or re-assessments for additional income tax for any years
not finally determined.
(p) The Issuer and the Subsidiaries own, or are licensed
under, and have the right to use, all patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
(collectively, "Intellectual Property") currently used in, or necessary
for the conduct of, their businesses as set forth in the Offering
Circular, other than failures to own or be licensed under or have the
rights to use, patents, patent rights, licenses, inventions, copyrights,
know-how, trademarks, service marks and trade names, which failures
would not, singly or in the aggregate have a Material Adverse Effect.
No claims have been asserted by any person challenging the use of any
such Intellectual Property by the Issuer or any of the Subsidiaries or
questioning the validity or effectiveness of any license or agreement
related thereto, to the knowledge of the Issuer and the Subsidiaries,
there is no valid basis for any such claim (other than any claims that
would not, singly or in the aggregate, have a Material Adverse Effect),
and to the knowledge of the Issuer, the use of such Intellectual
Property by the Issuer and the Subsidiaries will not infringe on the
Intellectual Property rights of any other person.
(q) Each of the Issuer and the Subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) material transactions are executed in accordance with
management's general or specific authorization, (ii) material
transactions are
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<PAGE> 15
recorded as necessary to permit preparation of financial statements in
conformity with GAAP, and to maintain asset accountability and (iii) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any material differences.
(r) Each of the audited consolidated financial statements of
the Issuer and related notes contained or incorporated by reference in
the Offering Circular (the "Financial Statements") present fairly in all
material respects the consolidated financial position, results of
operations and cash flows of the Issuer and its Subsidiaries, as of the
respective dates and for the respective periods to which they apply, and
have been prepared in accordance with GAAP and the requirements of
Regulation S-X that would be applicable if the Offering Circular were a
prospectus included in a registration statement on Form S-1 filed under
the Securities Act. The summary historical financial data included in
the Offering Circular have been derived accurately from the Financial
Statements. The pro forma consolidated financial statements and related
notes for the year ended January 31, 1997 included in the Offering
Circular (i) comply with the rules and guidelines of the Commission with
respect to pro forma financial statements, (ii) have been prepared on a
basis consistent with the Financial Statements, except for the pro forma
adjustments specified therein, and (iii) are based on good faith,
reasonable estimates and assumptions of the Issuer. The summary pro
forma financial information included in the Offering Circular have been
derived from such pro forma financial statements. All other financial
and statistical data included in the Offering Circular are fairly and
accurately presented.
(s) Subsequent to the respective dates as of which information
is given in the Offering Circular, except as adequately disclosed in the
Offering Circular, (i) neither the Issuer nor any of the Subsidiaries
has issued any securities, or incurred any material liabilities or
obligations, direct or contingent, for borrowed money, or entered into
any transaction, not in the ordinary course of business, or entered into
any transaction with any Affiliate that would otherwise be required to
be disclosed in the Offering Circular, (ii) there has not been any
material change in the capital stock or other equity or any material
increase in long-term indebtedness or short-term indebtedness of any of
them, or any payment of or declaration to pay any dividends or any other
distribution with respect to any of them, and (iii) there has not been
any change or development, regardless of whether arising in the ordinary
course of business, involving or which may reasonably be expected to
involve a material adverse change in the properties, business,
prospects, operations, earnings, assets, liabilities or condition
(financial or otherwise) of any of the TransAmerican Entities and its
Subsidiaries taken as a whole (each of clauses (i), (ii) and (iii), a
"Material Adverse Change"). There is no event that is reasonably likely
to occur, which if it were to occur, could reasonably be expected to,
singly or in the aggregate, have a Material Adverse Effect, except such
events that have been adequately disclosed in the Offering Circular.
(t) Immediately following the Closing, and after giving pro
forma effect to the Transactions, (i) the present fair salable value of
the assets of each TransAmerican Entity will exceed the amount that will
be required to pay its probable liability on its existing debts
(including contingent and unliquidated debts) as they become absolute
and matured, (ii) the sum of the debts of each TransAmerican Entity
(including contingent and unliquidated debts) will be less than all of
its assets at a fair valuation, and (iii) no TransAmerican Entity will
be engaged in a business or intend to engage in a business for which its
remaining unencumbered assets constitute unreasonably
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<PAGE> 16
small capital. Neither the Issuer nor any of its Subsidiaries intends
to incur or believes that it will incur debts beyond its ability to pay
as they mature.
(u) Except as contemplated by this Agreement, neither the
Issuer nor any of its Affiliates has (i) taken, directly or indirectly,
any action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of any of them to facilitate
the sale or resale of any of the Notes or (ii) except as disclosed in
the Offering Circular, (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, any of the Notes or (B) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of any of them. Neither the Issuer nor
any of its Affiliates has distributed and, prior to the later to occur
of (A) the Closing Date or (B) completion of the distribution of the
Notes, will distribute without your prior written consent any offering
material in connection with the offering and sale of the Notes other
than the Offering Circular, the Preliminary Offering Circular or other
materials, if any, permitted by the Securities Act.
(v) To the knowledge of the Issuer and its Subsidiaries,
neither the Issuer or any Subsidiary nor any of their respective
subsidiaries, predecessors, employees or agents has made any payment of
funds of the Issuer or any Subsidiary or any of their respective
subsidiaries or predecessors, or has received any funds, in violation of
any law or rule or regulation, which payment, receipt or retention of
funds is of a character required to be disclosed in the Offering
Circular.
(w) No registration under the Securities Act, and no
qualification of the Indenture under the TIA is required for the sale of
the Series A Notes to the Purchaser as contemplated hereby or for the
Exempt Resales, assuming (i) that the Eligible Purchasers who buy the
Series A Notes in the Exempt Resales are QIBs and (ii) the accuracy of
the Purchaser's representations contained herein regarding the absence
of general solicitation in connection with the sale of the Series A
Notes to the Purchaser and the Exempt Resales. No form of general
solicitation or general advertising was used by the Issuer or any of its
Affiliates or any of their representatives (other than the Purchaser,
with respect to which the TransAmerican Entities make no representation)
in connection with the offer and sale of any of the Series A Notes or in
connection with Exempt Resales. No securities of the same class as any
of the Notes have been offered, issued or sold by the Issuer or any of
its Affiliates within the six-month period immediately prior to the date
hereof.
(x) When the Notes are issued and delivered pursuant to this
Agreement, the Notes will not be of the same class (within the meaning
of Rule 144A under the Securities Act) as securities that are listed on
a national securities exchange registered under Section 6 of the
Exchange Act or quoted in a U.S. automated inter-dealer quotation
system.
(y) Neither the Issuer nor any of its "Affiliates" is a "party
in interest" or a "disqualified person" with respect to any employee
benefit plans except for those described in the Offering Circular. No
condition exists or event or transaction has occurred in connection with
any employee benefit plan that could result in the Issuer or any such
"Affiliate" incurring any liability, fine or penalty that could, singly
or in the aggregate, have a Material Adverse Effect. With respect to
any employee pension benefit plan that is subject to Title IV of ERISA,
(i) the fair market value
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<PAGE> 17
of the assets of such employee pension benefit plan equals or exceeds
the present value of the liabilities of such pension plan (as determined
in accordance with the actuarial methods and assumptions set forth in
the latest actuarial report for such employee pension benefit plan),
except where the failure to so equal or exceed would not, singly or in
the aggregate, have a Material Adverse Effect and (ii) there exists no
accumulated funding deficiency which could, singly or in the aggregate,
have a Material Adverse Effect. The terms "employee benefit plan,"
"employee pension benefit plan," and "party in interest" shall have the
meanings assigned to such terms in Section 3 of the Employee Retirement
Income Act of 1974, as amended, or the rules and regulations promulgated
thereunder ("ERISA"), the term "Affiliate" shall have the meaning
assigned to such term in Section 407(d)(7) of ERISA, and the term
"disqualified person" shall have the meaning assigned to such term in
section 4975 of the Internal Revenue Code of 1986, as amended, or the
rules, regulations and published interpretations promulgated thereunder
the ("Code").
(z) None of the Transactions will violate or result in a
violation of Section 7 of the Exchange Act (including, without
limitation, Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R.
Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors
of the Federal Reserve System).
(aa) Neither the Issuer nor any of the Subsidiaries has dealt
with any broker, finder, commission agent or other person (other than
the Purchaser) in connection with the Transactions (other than the Lobo
Sale) and neither the Issuer nor any of the Subsidiaries is under any
obligation to pay any broker's fee or commission in connection with such
transactions (other than with respect to the Lobo Sale and commissions
and fees to the Purchaser as set forth in the Offering Circular).
(bb) Neither the Issuer nor any Subsidiary is engaged in any
unfair labor practice. Except as adequately disclosed in the Offering
Circular, there is (i) no unfair labor practice complaint or other
proceeding pending or, to the knowledge of the Issuer, threatened
against the Issuer or any of the Subsidiaries before the National Labor
Relations Board or any state, local or foreign labor relations board or
any industrial tribunal, and to the knowledge of the Issuer, no
grievance or arbitration proceeding arising out of or under any
collective bargaining agreement is so pending or threatened, (ii) no
strike, labor dispute, slowdown or stoppage pending or, to the knowledge
of the Issuer after due inquiry, threatened against the Issuer or any of
the Subsidiaries, and (iii) no union representation question existing
with respect to the employees of the Issuer or any of the Subsidiaries,
and to the knowledge of the Issuer, no union organizing activities are
taking place that, singly or in the aggregate, could reasonably be
expected to have a Material Adverse Effect.
(cc) Except as adequately disclosed in the Offering Circular,
neither the Issuer nor any Subsidiary is involved in any labor dispute
nor, to the knowledge of the Issuer or any Subsidiary, is any such
dispute threatened.
(dd) Except as set forth in the Offering Circular, or as could
not reasonably be expected to have a Material Adverse Effect:
(i) each of the Issuer and its Subsidiaries and, to the
best knowledge of the Issuer and its Subsidiaries, any Person for
whom any of the foregoing are or may be
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<PAGE> 18
responsible by law or contract, is in compliance with all
federal, state, local and foreign laws and regulations relating
to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water,
ground water, land surface or subsurface strata), including,
without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of Materials of
Environmental Concern (as defined below), or otherwise relating
to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of
Environmental Concern (collectively, "Environmental Laws"), which
compliance includes, but is not limited to, (1) compliance with
all standards, schedules and timetables therein, and (2) the
possession of all permits, licenses, approvals and other
authorizations required under the Environmental Laws with respect
to the operation of the business, property and assets of the
Issuer or any of its Subsidiaries or any such Person, and
compliance with the terms and conditions thereof and (3) any
federal, state, local or foreign approvals required pursuant to
any Environmental Laws that pertain or relate to the transactions
contemplated by this Agreement;
(ii) each of the Issuer and its Subsidiaries has not
received any notice or claim (written or oral), whether from a
governmental authority, citizens group, employee or otherwise,
that alleges that it is in violation of any Environmental Law;
each of the Issuer and its Subsidiaries has no liability under
any Environmental Law; and, to the best knowledge of each of the
Issuer and its Subsidiaries, there are no past or present
actions, activities, circumstances, conditions, events or
incidents that may be expected to prevent or interfere with full
compliance by each of the Issuer and its Subsidiaries (or any
Person for whom the Issuer or any of its Subsidiaries is or may
be responsible by law or contract) with applicable Environmental
Laws in the future;
(iii) there is no claim, action, cause of action,
investigation or notice (written or oral) by any Person alleging
potential or actual liability (including, without limitation,
potential or actual liability for investigating costs, clean up
costs, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) arising out of,
based upon, resulting from or relating to or under any
Environmental Law, including, without limitation, any such
liability relating to the presence, or release into the
environment of any Material of Environmental Concern (as defined
below), or circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law (collectively,
"Environmental Liability") pending or, to the best knowledge of
the Issuer, threatened against the Issuer or any of its
Subsidiaries;
(iv) there are no past or present actions, activities,
circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or
disposal of any pollutants, contaminants, chemicals, industrial,
toxic or hazardous wastes, substances or constituents, petroleum
and petroleum products (or any by-product or constituent
thereof), asbestos or asbestos-containing materials, or
polychlorinated biphenyls (collectively, "Materials of
Environmental Concern"), that could reasonably be expected to
form the basis of any Environmental Liability against the Issuer
or any of its Subsidiaries;
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<PAGE> 19
(v) no real property or facility owned, used, operated,
leased, managed or controlled by the Issuer or any of its
Subsidiaries, or, to the best knowledge of each of the Issuer and
its Subsidiaries, any predecessor in interest for which the
Issuer or any of its Subsidiaries could be responsible, is listed
or proposed for listing on the National Priorities List or the
Comprehensive Environmental Response, Compensation, and Liability
Information System pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act, as amended, or on any
comparable state or local lists established pursuant to any
Environmental Law;
(vi) there have been no releases (including, without
limitation, any past or present releasing, spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, disposing or dumping, on-site or off-site) of
Materials of Environmental Concern by the Issuer or any of its
Subsidiaries or, to the best knowledge of each of the Issuer and
its Subsidiaries, any predecessor in interest, for which the
Issuer or any of its Subsidiaries could reasonably be expected to
incur liability under or pursuant to any Environmental Law, at,
on, under, from or into any facility or real property owned,
operated, leased, managed or controlled by the Issuer or any of
its Subsidiaries, and each of the Issuer and its Subsidiaries has
not incurred or reasonably could be expected to incur any
Environmental Liability for contamination at, on, under, from or
into any on-site or off-site locations where the Issuer or any of
its Subsidiaries has stored, disposed or arranged for the
disposal of Materials of Environmental Concern;
(vii) the condition of all underground storage tanks or
other underground storage receptacles, or related piping, that
are located on a facility or property owned, operated, leased,
managed or controlled by the Issuer or any of its Subsidiaries is
such that each of the Issuer and its Subsidiaries is not, and
cannot reasonably be expected to become, subject to any
Environmental Liability relating thereto or resulting therefrom;
and
(viii) there is no asbestos contained in or forming part
of any building, building component, structure or office space,
and no polychlorinated biphenyls ("PCBs") or PCB-containing items
are used or stored at any property, owned, operated, leased or
managed for which removal, abatement or cleanup is or may be
required or for which such matters the Issuer or any of its
Subsidiaries could be liable.
(ee) Coopers & Lybrand L.L.P. are independent accountants with
respect to the Issuer and its Subsidiaries as required by the Securities
Act, who have certified or shall certify the financial statements filed
or to be filed with the Commission which are included as part of the
Offering Circular and the Preliminary Offering Circular.
(ff) Baker & O'Brien, Inc. are independent energy consultants
with respect to the TransAmerican Entities and their Subsidiaries.
(gg) Netherland, Sewell & Associates, Inc. (the "Engineers")
are independent petroleum engineers with respect to TransTexas and its
Subsidiaries, and information based upon the Engineers' reports on the
oil and gas reserves of TransTexas is included or incorporated by
reference in the Offering Circular.
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<PAGE> 20
(hh) The Issuer is subject to Section 13 or 15(d) of the
Exchange Act.
(ii) None of the Issuer or any Subsidiary is (i) an "investment
company" within the Investment Company Act of 1940, as amended, and is
not subject to registration under such act or (ii) a "public utility
holding company" under the Public Utility Holding Company Act of 1935,
as amended, and is not subject to regulation as a public utility holding
company under such act or (ii) subject to regulation under the Federal
Power Act or the Interstate Commerce Act or (iv) subject to regulation
under any other federal or state statute, rule or regulation restricting
its ability to incur indebtedness for borrowed money.
(jj) Any certificate signed by any officer of the Issuer or any
Subsidiary and delivered to the Purchaser or to counsel for the
Purchaser pursuant to the terms of this Agreement shall be deemed a
representation and warranty by the Issuer or any such Subsidiary, as the
case may be, to the Purchaser as to the matters covered thereby.
7. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants with respect to itself that:
(a) It is a QIB.
(b) It (i) is not acquiring the Series A Notes with a view to
any distribution thereof that would violate the Securities Act or the
securities laws of any state of the United States of America or any
other applicable jurisdiction and (ii) will be soliciting offers for the
Series A Notes only from, and will be reoffering and reselling the
Series A Notes only to (A) persons in the United States of America whom
it reasonably believes to be QIBs in reliance on the exemption from the
registration requirements of the Securities Act provided by Rule 144A
and (B) non U.S. persons outside the United States of America in
transactions meeting the requirements of Regulation S under the
Securities Act.
(c) No form of general solicitation or general advertising in
violation of the Securities Act has been or will be used by such
Purchaser or any of its representatives in connection with the offer and
sale of any of the Series A Notes.
(d) In connection with the Exempt Resales, it will solicit
offers to buy the Series A Notes only from, and will offer and sell the
Series A Notes only to, Eligible Purchasers who, in purchasing such
Series A Notes, will be deemed to have represented and agreed (i) if
such Eligible Purchasers are QIBs, that they are purchasing the Series A
Notes for their own accounts or accounts with respect to which they
exercise sole investment discretion and that they or such accounts are
QIBs, (ii) that such Series A Notes will not have been registered under
the Securities Act and may be resold, pledged or otherwise transferred
only (A) inside the United States of America to a person who the seller
reasonably believes is a QIB in a transaction meeting the requirements
of Rule 144A, in a transaction meeting the requirements of Rule 144 or
in accordance with another exemption from the registration requirements
of the Securities Act, (B) to the Issuer, (C) pursuant to an effective
registration statement, and (D) outside the United States of America to
a foreign person in a transaction meeting the requirements of Regulation
S under the Securities Act and, in each case, in accordance with any
applicable securities laws of any state of the United States of America
or any other applicable jurisdiction, and (iii) that the holder will,
and each
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<PAGE> 21
subsequent holder is required to, notify any purchaser from it of the
security evidenced thereby of the resale restrictions set forth in (ii)
above.
(e) It has all requisite power and authority to enter into,
deliver and perform its obligations under this Agreement and the
Registration Rights Agreement and each of this Agreement and the
Registration Rights Agreement has been duly and validly authorized by
it.
8. Indemnification.
(a) Each TransAmerican Entity shall, jointly and severally,
without limitation as to time, indemnify and hold harmless the Purchaser
and each person, if any, who controls (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) the Purchaser
(any of such persons being hereinafter referenced as a "controlling
person"), and the respective officers, directors, partners, employees,
representatives and agents of the Purchaser and any such controlling
person (collectively, the "Indemnified Parties"), to the fullest extent
lawful, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation
and reasonable attorneys' fees) and expenses (including, without
limitation, costs and expenses incurred in connection with
investigating, preparing, pursuing or defending against any of the
foregoing) (collectively, "Losses"), as incurred, directly or indirectly
caused by, related to, based upon, arising out of or in connection with
any untrue statement or alleged untrue statement of a material fact
contained in the Preliminary Offering Circular or the Offering Circular
(or any amendment or supplement thereto), or any omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except insofar
as any such Loss arises out of or is based upon any untrue statement or
omission or alleged untrue statement or omission that has been made
therein or omitted therefrom in reliance upon and in conformity with the
information provided in writing to the Issuer by or on behalf of the
Purchaser, expressly for use in the Registration Statement or the
Offering Circular, and the TransAmerican Entities agree that the only
such information provided in writing by or on behalf of the Purchaser,
expressly for use in the Preliminary Offering Circular or the Offering
Circular is that information contained in the section of the Preliminary
Offering Circular or the Offering Circular entitled "Plan of
Distribution" and the last paragraph of text on the cover page of the
Preliminary Offering Circular and the Offering Circular; provided, that
the indemnity agreement contained in this Section 8(a) with respect to
any Preliminary Offering Circular or amended Preliminary Offering
Circular shall not inure to the benefit of the Indemnified Party from
whom the person asserting any such loss, expense, liability or claim
purchased the Securities which is the subject thereof, if the Offering
Circular corrected any such alleged untrue statement or omission and if
the Purchaser failed to deliver or have delivered on its behalf a copy
of the Offering Circular, excluding any documents incorporated by
reference, to such person at or prior to the written confirmation of the
sale of Securities to such person, provided that the Issuer has
delivered the Offering Circular to the Purchaser in sufficient quantity
not less than one full business day prior to the written confirmation of
the sale to the person asserting such claim. Notwithstanding any
provision hereof to the contrary, the liability of each of TARC and
TransTexas pursuant to this Section 8(a) shall be limited to the amount
of proceeds of the Offering received directly or indirectly by such
corporation, including without limitation pursuant to the transactions
contemplated hereby or by the Offering Circular.
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<PAGE> 22
If any action is brought against the Purchaser or any of its
affiliates or any of their respective officers, shareholders, counsel,
agents, employees, directors or any person who controls the Purchaser
(as described above) in respect of which indemnity may be sought against
any of the TransAmerican Entities pursuant to the foregoing paragraph,
the Purchaser shall promptly notify the TransAmerican Entities in
writing of the institution of such action (provided, that the failure to
give such notice shall not relieve any of the TransAmerican Entities of
any liability which it may have pursuant to this Agreement, unless it
shall have been determined by a court of competent jurisdiction by final
judgment that such failure has resulted in the forfeiture of substantive
rights or defenses by the indemnifying party) and the TransAmerican
Entities shall assume the defense of such action, including the
employment of counsel and payment of reasonable expenses. The Purchaser
or such affiliate, officer, shareholder, counsel, agent, employee,
director or person who controls the Purchaser (as described) shall have
the right to employ its or their own counsel in any such case and to
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Purchaser or such other person
unless: (i) the TransAmerican Entities shall have failed to assume the
defense of such action or the TransAmerican Entities shall have failed
to employ counsel reasonably satisfactory to the Purchaser or such other
person in any such action; or (ii) such indemnified party shall have
been advised by counsel that there may be one or more defenses available
to it that are different from or additional to those available to the
TransAmerican Entities (in which case, if such indemnified party
notifies the TransAmerican Entities in writing that it elects to employ
separate counsel at the expense of the TransAmerican Entities, the
TransAmerican Entities shall not have the right to assume the defense of
such action on behalf of such indemnified party), in any of which events
such fees and expenses shall be borne by the TransAmerican Entities and
paid as incurred; provided, that the TransAmerican Entities shall be
responsible for the fees and expenses of only one counsel (in addition
to any reasonably required local counsel) for all indemnified parties
hereunder. Anything in this paragraph to the contrary notwithstanding,
the TransAmerican Entities shall not be liable for any settlement of any
such claim or action effected without its written consent, which consent
shall not be unreasonably withheld.
(b) The Purchaser agrees to indemnify, defend and hold
harmless each of the TransAmerican Entities, their respective affiliates
and their respective directors, officers, shareholders, counsel, agents
and employees and any person who controls any of the TransAmerican
Entities or any of its affiliates within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any Losses
incurred insofar as such Loss is caused by, related to, based upon,
arises out of or is in connection with any untrue statement or omission
or alleged untrue statement or omission which has been made in or
omitted from the Preliminary Offering Circular or the Offering Circular
in reliance upon and in conformity with the information relating to the
Purchaser furnished in writing by or on behalf of the Purchaser to the
Issuer expressly for use in the Preliminary Offering Circular or the
Offering Circular. The TransAmerican Entities agree that the only
information provided in writing by or on behalf of the Purchaser to the
Issuer, expressly for use in the Preliminary Offering Circular or the
Offering Circular, is that information contained in the section of the
Preliminary Offering Circular or the Offering Circular entitled "Plan of
Distribution" and the last paragraph of text on the cover page of the
Preliminary Offering Circular or the Offering Circular.
If any action is brought against any of the TransAmerican
Entities or any of its affiliates or any other such person in respect of
which indemnity may be sought against the Purchaser
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<PAGE> 23
pursuant to the foregoing paragraph, the TransAmerican Entities, such
affiliate or such other person shall promptly notify the Purchaser in
writing of the institution of such action (provided, that the failure to
give such notice shall not relieve the Purchaser of any liability which
it may have pursuant to this Agreement, unless it shall have been
determined by a court of competent jurisdiction by final judgment that
such failure has resulted in the forfeiture of substantive rights or
defenses by the indemnifying party) and the Purchaser shall assume the
defense of such action, including the employment of counsel and payment
of reasonable expenses. The TransAmerican Entities, such affiliate or
such other person shall have the right to employ its or their own
counsel in any such case and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the
TransAmerican Entities, such affiliate or such other person unless: (i)
the Purchaser shall have failed to assume the defense of the action or
shall have failed to employ counsel reasonably satisfactory to the
TransAmerican Entities or such other person in any such action; or (ii)
such indemnified party shall have been advised by counsel that there may
be one or more defenses available to it that are different from or
additional to those available to the Purchaser (in which case, if such
indemnified party notifies the Purchaser in writing that it elects to
employ separate counsel at the expense of the Purchaser, the Purchaser
shall not have the right to assume the defense of such action on behalf
of the indemnified party), in any of which events such fees and expenses
shall be borne by the Purchaser and paid as incurred; provided, that the
Purchaser shall be responsible for the fees and expenses of only one
counsel (in addition to any reasonably required local counsel) for all
indemnified parties. Anything in this paragraph to the contrary
notwithstanding, the Purchaser shall not be liable for any settlement of
any such claim or action effected without the written consent of the
Purchaser, which consent shall not be unreasonably withheld.
The Issuer shall notify the Purchaser promptly of the
institution, threat or assertion of any Proceeding of which the Issuer
or any Subsidiary is aware in connection with the matters addressed by
this Agreement which involves the Issuer, any of the Subsidiaries or any
of the indemnified parties.
(c) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party or is insufficient to hold such
indemnified party harmless for any Losses in respect of which this
Section 8 would otherwise apply by its terms (other than by reason of
exceptions provided in this Section 8), then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such
Losses (i) in such proportion as is appropriate to reflect the relative
benefits received by the TransAmerican Entities, on the one hand, and
the Purchaser, on the other hand, from the offering of the Series A
Notes or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referenced in clause (i) above
but also the relative fault of the TransAmerican Entities, on the one
hand, and the Purchaser, on the other hand, in connection with the
actions, statements or omissions that resulted in such Losses, as well
as any other relevant equitable considerations. The relative benefits
received by the TransAmerican Entities, on the one hand, and the
Purchaser, on the other
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<PAGE> 24
hand, shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the
TransAmerican Entities, and the total discounts and commissions received
by the Purchaser, bear to the total price of the Series A Notes in
Exempt Resales in each case as set forth in the table on the cover page
of the Offering Circular. The relative fault of the TransAmerican
Entities, on the one hand, and the Purchaser, on the other hand, shall
be determined by reference to, among other things, whether any untrue or
alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
TransAmerican Entities, on the one hand, or the Purchaser, on the other
hand, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
amount paid or payable by an indemnified party as a result of any Losses
shall be deemed to include any legal or other fees or expenses incurred
by such party in connection with any Proceeding, to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section 8 was available to such
party.
Each party hereto agrees that it would not be just and
equitable if contribution pursuant to this Section 8(c) were determined
by pro rata allocation or by any other method of allocation which does
not take account of the equitable considerations referenced in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section 8(c), the Purchaser shall not be required to contribute, in the
aggregate, any amount in excess of the amount by which the total
discounts and commissions received by it with respect to the Series A
Notes exceeds the amount of any damages that the Purchaser has otherwise
been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(d) The indemnity and contribution agreements contained in
this Section 8 are in addition to any liability that the TransAmerican
Entities or the Purchaser may otherwise have to the indemnified parties.
9. Conditions.
(a) The obligation of the Purchaser to purchase the Series A
Notes under this Agreement is subject to the satisfaction or waiver of
each of the following conditions:
(i) All the representations and warranties of each
TransAmerican Entity in each of the Documents to which it is a
party shall be true and correct in all material respects (other
than representations and warranties with a materiality qualifier,
which shall be true and correct as written) at and as of the
Closing Date after giving effect to the Transactions with the
same force and effect as if made on and as of such date. On or
prior to the Closing Date, each of the TransAmerican Entities
and, to the knowledge of each of the TransAmerican Entities after
due inquiry, each other party to the Documents (other than the
Purchaser) shall have performed or complied in all material
respects with all of the agreements and satisfied in all material
respects all conditions on their respective parts to be
performed, complied with or satisfied pursuant to the Documents.
(ii) The Offering Circular shall have been printed and
copies made available to the Purchaser not later than 12:00 noon,
New York City time, on the second business day following the date
of this Agreement or at such later date and time as the Purchaser
may approve.
24
<PAGE> 25
(iii) No injunction, restraining order or order of any
nature by a Governmental Authority shall have been issued as of
the Closing Date that would prevent or interfere with the
consummation of any of the Transactions; and no stop order
suspending the qualification or exemption from qualification of
any of the Series A Notes in any jurisdiction shall have been
issued and no Proceeding for that purpose shall have been
commenced or be pending or contemplated.
(iv) No action shall have been taken and no Applicable
Law shall have been enacted, adopted or issued that would, as of
the Closing Date, prevent the consummation of any of the
Transactions. No Proceeding shall be pending or threatened other
than Proceedings that (A) if adversely determined could not,
singly or in the aggregate, adversely affect the issuance or
marketability of the Series A Notes and (B) could not reasonably
be expected to have a Material Adverse Effect.
(v) Since the date as of which information is given in
the Offering Circular, there shall not have been any Material
Adverse Change.
(vi) The Notes shall have (A) been designated PORTAL
securities in accordance with the rules and regulations adopted
by the NASD relating to trading in the PORTAL market, and (B)
received a rating of B+ and B3 from Standard & Poor's Corporation
and Moody's Investors Services, Inc., respectively.
(vii) The Purchaser shall have received on the Closing
Date (A) certificates dated the Closing Date, signed by (1) the
Chief Executive Officer and (2) the principal financial or
accounting officer of each of the TransAmerican Entities, on
behalf of such TransAmerican Entity, (x) confirming the matters
set forth in paragraphs (i), (v) and (vi) and to the knowledge of
such officer, paragraphs (iii) and (iv) of this Section 9(a) and
(y) certifying as to such other matters as the Purchaser may
reasonably request and (B) a certificate, dated the Closing Date,
signed by the Secretary of each TransAmerican Entity, certifying
such matters as the Purchaser may reasonably request.
(viii) The Purchaser shall have received:
(A) an opinion of Gardere & Wynne, L.L.P.,
counsel to the Issuer, dated the Closing Date, in the form
of Exhibit A hereto;
(B) an opinion of Campbell, McCranie, Sistrunk,
Anzelmo & Hardy, special counsel to the Issuer, dated the
Closing Date, in the form of Exhibit B hereto;
(C) an opinion of Fleck, Mather & Strutz, Ltd.,
special counsel to the Issuer, dated the Closing Date, in
the form of Exhibit C hereto;
(D) an opinion, dated the Closing Date, of
Skadden, Arps, Slate, Meagher & Flom LLP, in form and
substance reasonably satisfactory to the Purchaser
covering such matters as are customarily covered in such
opinions.
25
<PAGE> 26
(ix) The Purchaser shall have received from Coopers &
Lybrand L.L.P. (A) a customary comfort letter, dated the date of
the Offering Circular, in form and substance reasonably
satisfactory to the Purchaser, with respect to the financial
statements and certain financial information contained in the
Offering Circular, and (B) a customary comfort letter, dated the
Closing Date, in form and substance reasonably satisfactory to
the Purchaser, to the effect that they reaffirm the statements
made in the letter furnished pursuant to clause (A), except that
the specified date referenced shall be a date not more than five
days prior to the Closing Date.
(x) Each of the Documents shall have been executed and
delivered by all parties thereto and the Purchaser shall have
received a fully executed original of each Document.
(xi) The Purchaser shall have received copies of all
opinions, certificates, letters and other documents delivered
under or in connection with the Transactions, and letters to the
effect that the Purchaser may rely on such opinions, as if
addressed to the Purchaser.
(xii) The Purchaser shall have received evidence
satisfactory to it, of (A) amendments satisfactory to the
Purchaser to the terms of TransTexas' 13 1/4% Series A Senior
Subordinated Notes due 2003; (B) the satisfaction and discharge
of all obligations of TransTexas under all of its outstanding 11
1/2% Senior Secured Notes due 2002 (the "TransTexas Senior
Notes") or the mailing of a notice of redemption of all the
TransTexas Senior Notes in accordance with the provisions of the
indenture governing such notes; (C) the receipt of the Requisite
Consents (as defined in TARC's Offer to Purchase and Consent
Solicitation dated May 15, 1997 (the "TARC Offer to Purchase")
relating to its 18 1/2% Guaranteed First Mortgage Discount Notes
due 2002 (the "TARC Discount First Mortgage Notes") and its 16
1/2% Guaranteed First Mortgage Notes due 2002 (the "TARC First
Mortgage Notes" and together with the TARC Discount First
Mortgage Notes, the "TARC Notes")); (D) there having been validly
tendered and not withdrawn at least 66 2/3% of the aggregate
outstanding principal amount of the TARC Notes pursuant to the
TARC Offer to Purchase and the acceptance of such tenders by
TARC; (E) there having been validly tendered and not withdrawn at
least 50% of all the outstanding TARC Warrants (as defined below)
pursuant to the Issuer's Offer to Purchase dated May 14, 1997
relating to its offer to purchase all of the Common Stock
Purchase Warrants of TARC issued pursuant to the Warrant
Agreement dated as of February 23, 1995 (the "TARC Warrants");
(F) the redemption of all the issued and outstanding shares of
preferred stock of the Issuer; (G) the receipt of the Requisite
Consents (as defined in TransTexas' Consent Solicitation
Statement dated May 14, 1997 relating to its 13 1/4% Senior
Subordinated Notes due 2003), (H) the amendment of the Amended
and Restated Accounts Receivable Management and Security
Agreement dated as of October 31, 1996 among TransTexas,
TransTexas Transmission Corporation and BNY Financial Corporation
(the "TransTexas Credit Agreement") and (I) the amendment of the
certificate of incorporation of TEC to permit the consummation of
the Offering.
(xiii) The Purchaser and the Collateral Agent shall have
received (A) executed copies of each UCC-1 financing statement
filed in such jurisdictions as the Purchaser may
26
<PAGE> 27
reasonably require, relating to the perfection of security
interests securing indebtedness under the Notes and the
Intercompany Loan Documents; (B) the original stock certificates
pledged to the Collateral Agent pursuant to the Issuer Pledge
Agreement, together with undated stock powers or endorsements
duly executed in blank in connection therewith; and (C) bailee
letters, in form and substance reasonably satisfactory to the
Purchaser, executed by the Issuer for delivery to each of the
Persons identified in the Issuer Pledge Agreement as holding
Collateral.
(xiv) Counsel to the Purchaser shall have been furnished
with such documents as they may reasonably require for the
purpose of enabling them to review or pass upon the matters
referenced in this Section 9 and in order to evidence the
accuracy, completeness or satisfaction in all material respects
of any of the representations, warranties or conditions herein
contained.
(b) The obligation of the Issuer to sell the Series A Notes
under this Agreement is subject to the satisfaction or waiver of each of
the following conditions:
(i) The Purchaser shall have delivered payment to the
Issuer for the Series A Notes pursuant to Sections 2 and 4 of
this Agreement.
(ii) All of the representations and warranties of the
Purchaser in this Agreement shall be true and correct in all
material respects at and as of the Closing Date, with the same
force and effect as if made on and as of such date.
(iii) No injunction, restraining order or order of any
nature by a Governmental Authority shall have been issued as of
the Closing Date that would prevent or interfere with the
issuance and sale of the Series A Notes; and no stop order
suspending the qualification or exemption from qualification of
any of the Series A Notes in any jurisdiction shall have been
issued and no Proceeding for that purpose shall have been
commenced or be pending or contemplated as of the Closing Date.
(iv) No Applicable Law shall have been enacted, adopted
or issued that would, as of the Closing Date, prevent the
consummation of any of the Transactions.
10. Termination. The Purchaser may terminate this Agreement at any
time prior to the Closing Date by written notice to the Issuer if any of the
following has occurred:
(a) since the date as of which information is given in the
Offering Circular, any Material Adverse Effect or development involving
a prospective Material Adverse Effect on the properties, business,
prospects, operations, earnings, assets, liabilities or condition
(financial or otherwise), of the Issuer or any Subsidiary, regardless of
whether arising in the ordinary course of business, that could, in the
Purchaser's judgment, (i) make it impracticable or inadvisable to
proceed with the offering or delivery of the Series A Notes on the terms
and in the manner contemplated in the Offering Circular or (ii)
materially impair the investment quality of any of the Notes;
27
<PAGE> 28
(b) the failure of the Issuer to satisfy the conditions
contained in Section 9(a) hereof on or prior to the sixth business day
following the date of this Agreement;
(c) any outbreak or escalation of hostilities or other
national or international calamity or crisis or material adverse change
in economic conditions in or the financial markets of the United States
of America or elsewhere, if the effect of such outbreak, escalation,
calamity, crisis or material adverse change in the economic conditions
in or in the financial markets of the United States of America or
elsewhere make it, in the Purchaser's judgment, impracticable or
inadvisable to market or proceed with the offering or delivery of the
Series A Notes on the terms and in the manner contemplated in the
Offering Circular or to enforce contracts for the sale of any of the
Series A Notes;
(d) the suspension or limitation of trading generally in
securities on the New York Stock Exchange, the American Stock Exchange
or the NASDAQ National Market or any setting of limitations on prices
for securities on any such exchange or NASDAQ National Market;
(e) the enactment, publication, decree or other promulgation
after the date hereof of any Applicable Law that in the Purchaser's
opinion materially and adversely affects, or could materially and
adversely affect, the properties, business, prospects, operations,
earnings, assets, liabilities or condition (financial or otherwise) of
the Issuer or any Subsidiary;
(f) any securities of any TransAmerican Entity shall have been
downgraded or placed on any "watch list" for possible downgrading by any
"nationally recognized statistical rating organization," as such term is
defined for purposes of Rule 431(g)(2) under the Securities Act; or
(g) the declaration of a banking moratorium by any
Governmental Authority or the taking of any Governmental Authority after
the date hereof in respect of its monetary or fiscal affairs that in the
Purchaser's opinion could have a material adverse effect on the
financial markets in the United States of America or elsewhere.
The indemnities and contribution and expense reimbursement
provisions and other agreements, representations and warranties of the
TransAmerican Entities and the Purchaser set forth in or made pursuant to this
Agreement shall remain operative and in full force and effect, and will
survive, regardless of (i) any investigation, or statement as to the results
thereof, made by or on behalf of the Purchaser, (ii) acceptance of the Notes,
and payment for them hereunder, and (iii) any termination of this Agreement.
Without limiting the foregoing, notwithstanding any termination of this
Agreement, each of the TransAmerican Entities shall be liable (i) for all
expenses that it has agreed to pay pursuant to Section 5(g) hereof, and (ii)
pursuant to Section 8 hereof.
11. Default by Purchaser. If the Purchaser shall fail or refuse to
purchase the Series A Notes that it has agreed to purchase hereunder on the
Closing Date and arrangements satisfactory to the Issuer for the purchase of
such Series A Notes are not made within 36 hours after such default, this
Agreement shall terminate without liability on the part of the Issuer, except
as otherwise provided in Section 10 hereof. Nothing herein shall relieve the
Purchaser from liability for its default.
28
<PAGE> 29
12. Miscellaneous.
(a) All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Purchaser shall be directed to Jefferies & Company, Inc., 111000 Santa
Monica Boulevard, Los Angeles, California 90025, attention of Jerry M.
Gluck, Esq., with a copy to Skadden, Arps, Slate, Meagher & Flom LLP,
300 South Grand Avenue, 34th Floor, Los Angeles, California 90071,
attention of Rodrigo A. Guerra, Jr., Esq.; and notices to the Issuer
shall be directed to 1300 North Sam Houston Parkway East, Suite 310,
Houston, Texas 77032-2949, to the attention of Ed Donahue, with a copy
to Gardere & Wynne, L.L.P., 1601 Elm Street, Suite 3000, Dallas, Texas
75201, attention of C. Robert Butterfield, Esq.
(b) This Agreement has been and is made solely for the benefit
of and shall be binding upon the Issuer, the Purchaser and, to the
extent provided in Section 8 hereof, the controlling persons officers,
directors, partners, employees, representatives and agents referenced in
Section 8 and their respective heirs, executors, administrators,
successors and assigns, all as and to the extent provided in this
Agreement, and no other person shall acquire or have any right under or
by virtue of this Agreement. The term "successors and assigns" shall not
include a purchaser of any of the Series A Notes from the Purchaser
merely because of such purchase. Notwithstanding the foregoing, it is
expressly understood and agreed that each purchaser who purchases Series
A Notes from the Purchaser is intended to be a beneficiary of the
Issuer's covenants contained in the Registration Rights Agreement to the
same extent as if the Notes were sold and those covenants were made
directly to such purchaser by the Issuer, and each such purchaser shall
have the right to take action against the Issuer to enforce, and obtain
damages for any breach of, those covenants.
(c) THIS AGREEMENT SHALL BE CONSTRUED, INTERPRETED AND THE
RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW
EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. EACH
TRANSAMERICAN ENTITY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY
OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS
FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. EACH
TRANSAMERICAN ENTITY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION
THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. EACH TRANSAMERICAN ENTITY IRREVOCABLY
CONSENTS, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER
APPLICABLE LAW, TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF
BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ANY TRANSAMERICAN
ENTITY AT THE
29
<PAGE> 30
ADDRESS SET FORTH HEREIN, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE PURCHASER TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY TRANSAMERICAN ENTITY IN ANY
OTHER JURISDICTION.
(d) This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
(e) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning
hereof.
(f) If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force
and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction.
It is hereby stipulated and declared to be the intention of the parties
that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such that may be hereafter
declared invalid, illegal, void or unenforceable.
(g) This Agreement may be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may be
given, provided that the same are in writing and signed by each of the
signatories hereto.
(h) The indemnities and contribution and expense reimbursement
provisions set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery and
payment for the Series A Notes, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any party
hereto, (ii) acceptance of the Series A Notes, and payment for them
hereunder, and (iii) any termination of this Agreement.
30
<PAGE> 31
Please confirm that the foregoing correctly sets forth the
agreement between the Issuer and the Purchaser.
Very truly yours,
TRANSAMERICAN ENERGY CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
TRANSAMERICAN REFINING CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
TRANSTEXAS GAS CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Accepted and Agreed to:
JEFFERIES & COMPANY, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 1
EXHIBIT 12.1
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
RATIO OF EARNINGS TO FIXED CHARGES
(in thousands of dollars)
<TABLE>
<CAPTION>
Year Ended July 31, Six Months Ended
----------------------------------------------- January 31,
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $41,778 $ 90,990 $ 11,783 $(64,762) $(27,193)
Add:
Interest expense, net of amounts capitalized 3,173 2,999 51,684 81,012 49,348
Portion of rental expense representative 403 460 736 1,321 783
of an interest factor ------- -------- -------- -------- --------
A. Earnings before fixed charges $45,354 $ 94,449 $ 64,203 $ 17,571 $ 22,938
======= ======== ======== ======== ========
Fixed Charges:
Total interest $ 3,173 $ 2,999 $ 52,394 $100,745 $ 82,931
Portion of rental expense representative of
an interest factor 403 460 736 1,321 783
------- -------- -------- -------- --------
B. Fixed charges $ 3,576 $ 3,459 $ 53,130 $102,066 $ 83,714
======= ======== ======== ======== ========
Ratio of earnings to fixed charges
(A divided by B) 12.7 27.3 1.2 -- --
======= ======== ======== ======== ========
Earnings inadequate to cover fixed charges $ -- $ -- $ -- $ 84,495 $ 60,776
======= ======== ======== ======== ========
<CAPTION>
Six Months Ended
Year Ended July 31,
January 31, ----------------------
1997 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes $ 78,968 $113,108 $452,780
Add:
Interest expense, net of amounts capitalized 101,670 54,121 69,932
Portion of rental expense representative
of an interest factor 1,520 668 716
--------- -------- --------
A. Earnings before fixed charges $ 182,158 $167,897 $523,428
========= ======== ========
Fixed Charges:
Total interest $ 186,398 $ 94,988 $106,455
Portion of rental expense representative of
an interest factor 1,520 668 716
--------- -------- --------
B. Fixed charges $ 187,918 $ 95,656 $107,171
========= ======== ========
Ratio of earnings to fixed charges
(A divided by B) -- 1.8 4.9
========= ======== ========
Earnings inadequate to cover fixed charges $ 5,760 $ -- $ --
========= ======== ========
</TABLE>
<PAGE> 1
Exhibit 21.1
SCHEDULE OF SUBSIDIARIES
OF
TRANSAMERICAN ENERGY CORPORATION
<TABLE>
<CAPTION>
Name State of Incorporation Assumed Names
- ---- ---------------------- -------------
<S> <C> <C>
TransAmerican Refining Corporation Texas N/A
TransTexas Gas Corporation Delaware Southwest Texas Services
Diamond Services
TransTexas Drilling Services
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in the Registration Statement of TransAmerican
Energy Corporation on Form S-4 as filed with the Securities and Exchange
Commission on October 10, 1997 of our report dated May 1, 1997 relating to our
audit of the consolidated balance sheet of TransAmerican Energy Corporation as
of January 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year ended January 31,
1997, the six months ended January 31, 1996 and each of the two years in the
period ended July 31, 1995. We also consent to the reference to our firm under
the caption "Independent Accountants."
COOPERS & LYBRAND L.L.P.
Houston, Texas
October 10, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We consent to the inclusion in the Registration Statement of
TransAmerican Energy Corporation on Form S-4 as filed with the Securities and
Exchange Commission on October 10, 1997 of our reserve report as of February 1,
1997, and to the references to our name under the caption "Reserve Engineers"
and elsewhere in the form and context in which it appears in such Registration
Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ DANNY D. SIMMONS
-------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
October 10, 1997
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
-----------------------------
FIRSTAR BANK OF MINNESOTA, N.A.
(Exact name of Trustee as specified in its charter)
<TABLE>
<S> <C>
A National Banking Association 41-0122055
(State of incorporation if not a national bank) (IRS Employer Identification No.)
</TABLE>
101 East Fifth Street
Corporate Trust Department
St Paul, Minnesota 55101
(Address of principal executive offices) (Zip Code)
FIRSTAR BANK OF MINNESOTA, N.A.
101 East Fifth Street
St. Paul, Minnesota 55101
(612) 229-2600
(Exact name, address and telephone number of agent for service)
-----------------------------
TransAmerican Energy Corporation
(Exact name of obligor as specified in its charter)
Delaware 76-0441642
(State of incorporation or other jurisdiction) (IRS Employer Identification No.)
1300 North Sam Houston Parkway East
Suite 200
Houston, Texas 77032-2949
(Address of principal executive offices) (Zip Code)
-----------------------------
11.5% Senior Secured Notes due 2002
(Title of Indenture securities)
<PAGE> 2
Item 1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Treasury Department
Washington, DC
Federal Deposit Insurance Corporation
Washington, DC
The Board of Governors of the Federal Reserve System
Washington, DC
(b) The Trustee is authorized to exercise corporate trust powers.
GENERAL
Item 2. Affiliations with Obligor and Underwriters. If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe
each such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's knowledge
the obligor is not in default under any Indenture for which the Trustee acts as
Trustee.
Item 16. List of Exhibits. Listed below are all the exhibits filed as a part of
this statement of eligibility and qualification. Exhibits 1-5 are
incorporated by reference from filing 333-07261.
Exhibit 1. Copy of Articles of Association of the trustee now in
effect.
Exhibit 2. a. A copy of the certificate of the Comptroller of
Currency dated June 1, 1965, authorizing Firstar
Bank of Minnesota, N. A. to act as fiduciary.
b. A copy of the certificate of authority of the
trustee to commence business issued June 9,
1903, by the Comptroller of the Currency to
Firstar Bank of Minnesota, N.A.
<PAGE> 3
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued by the Federal Reserve
Board.
Exhibit 4. Copy of the By-Laws of the trustee as now in effect.
Exhibit 5. Copy of each Indenture referred to in Item 4.
Exhibit 6. The consent of the trustee required by Section 321(b) of
the Act.
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligor, or affiliates, are based
upon information furnished to the Trustee by the obligor. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, a national banking association organized and existing under the laws
of the United States, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City
of Saint Paul and State of Minnesota on the 25th day of September, 1997.
FIRSTAR BANK OF MINNESOTA, N.A.
[SEAL]
/s/ FRANK P. LESLIE III
-------------------------------------------
Frank P. Leslie III
Vice President
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, Firstar Bank of Minnesota, N.A., hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: September 25, 1997
FIRSTAR BANK OF MINNESOTA, N.A.
/s/ FRANK P. LESLIE III
-------------------------------------------
Frank P. Leslie III
Vice President
<PAGE> 5
- --------------------------------------------------------------------------------
FIRSTAR BANK MINNESOTA
ANNUAL FINANCIAL DISCLOSURE STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
This statement has not been reviewed, or confirmed for accuracy or relevance,
by the Office of the Comptroller of the Currency.
I, Michael J. Stello, as VP of Firstar Corporation, do hereby attest that the
information contained in this disclosure statement is correct.
- --------------------------------------
February 24, 1997
<PAGE> 6
FIRSTAR BANK OF MINNESOTA, N.A.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances 132,057 87,322 60,020 80,393 63,001
Interest-bearing balances 736 201 144 0 0
Securities 446,668 454,809 395,074 371,004 379,371
Federal funds sold and securities purchased under agreements to resell:
Federal funds sold 0 0 0 0 0
Securities purchased under agreements to resell 0 0 0 0 0
Loans and lease financing receivables:
Loans and leases, net of unearned income 2,276,562 1,797,918 723,375 615,578 540,293
LESS: Allowance for loan and lease losses 34,218 23,978 15,665 16,317 15,049
LESS: Allocated transfer risk reserve 0 0 0 0 0
--------- --------- --------- --------- ---------
Loans and leases, net of unearned income, allowance, and reserve 2,242,344 1,773,940 707,710 599,261 525,244
Assets held in trading accounts 300 0 0 0 0
Premises and fixed assets (including capitalized leases) 31,539 25,944 17,465 17,661 20,809
Other real estate owned 326 599 272 1,380 3,402
Investments in unconsolidated subsidiaries and associated companies 0 0 0 0 0
Customers' liability to this bank on acceptances outstanding 0 0 0 0 0
Intangible assets 118,287 25,260 26,456 29,644 32,832
Other assets 53,778 32,009 22,492 21,079 23,090
--------- --------- --------- --------- ---------
Total assets 3,026,035 2,400,084 1,229,633 1,120,422 1,047,749
========= ========= ========= ========= =========
LIABILITIES
Deposits:
In domestic offices:
Noninterest-bearing 375,851 227,405 213,066 195,136 181,238
Interest-bearing 1,783,187 1,375,794 724,995 719,091 724,573
--------- --------- --------- --------- ---------
Total domestic deposits 2,159,038 1,603,199 938,061 914,227 905,811
In foreign offices: 0 0 0 0 0
Federal funds purchased and securities sold under agreements to repurchase:
Federal funds purchased 104,476 167,903 151,614 69,211 410
Securities sold under agreements to repurchase 0 0 0 0 0
Demand notes issued to the U.S. Treasury 0 0 0 0 0
Other borrowed money 331,207 391,500 0 154 0
Mortgage indebtedness and obligations under capitalized leases 1,142 367 0 0 0
Bank's liability on acceptances executed and outstanding 0 0 0 0 0
Notes and debentures subordinated to deposits 0 0 0 0 0
Other liabilities 46,822 28,205 13,955 13,397 18,769
--------- --------- --------- --------- ---------
Total liabilities 2,642,685 2,191,174 1,103,630 996,989 924,990
Limited-life preferred stock 0 0 0 0 0
EQUITY CAPITAL
Perpetual preferred stock 0 0 0 0 0
Common stock 35,730 35,730 35,730 35,730 35,730
Surplus 220,084 101,435 64,948 64,886 64,834
Undivided profits and capital reserves 126,450 69,527 25,325 22,817 22,195
LESS: Net unrealized loss on marketable equity securities 1,086 2,218 0 0 0
--------- --------- --------- --------- ---------
Total equity capital 383,350 208,910 126,003 123,433 122,759
--------- --------- --------- --------- ---------
Total liabilities, limited-life preferred stock, and equity capital 3,026,035 2,400,084 1,229,633 1,120,422 1,047,749
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1991 1990
----- -----
$(000) $(000)
<S> <C> <C> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances 65,548 59,561 (17,217),
Interest-bearing balances 2,400 3,600
Securities 360,790 348,473
Federal funds sold and securities purchased under agreements to resell:
Federal funds sold 7,275 26,050 (29,450)A
Securities purchased under agreements to resell 0 0
Loans and lease financing receivables:
Loans and leases, net of unearned income 551,347 525,883
LESS: Allowance for loan and lease losses 10,763 13,739
LESS: Allocated transfer risk reserve 0 0
--------- -------
Loans and leases, net of unearned income, allowance, and reserve 540,584 512,144
Assets held in trading accounts 0 0
Premises and fixed assets (including capitalized leases) 23,464 23,090
Other real estate owned 4,398 2,844
Investments in unconsolidated subsidiaries and associated companies 0 0
Customers' liability to this bank on acceptances outstanding 0 0
Intangible assets 36,020 114
Other assets 20,424 19,275
--------- -------
Total assets 1,060,903 995,151
========= =======
LIABILITIES
Deposits:
In domestic offices:
Noninterest-bearing 166,447 179,811 (17,217),
Interest-bearing 764,840 724,382
--------- -------
Total domestic deposits 931,287 904,193
In foreign offices: 0 0
Federal funds purchased and securities sold under agreements to repurchase:
Federal funds purchased 0 750 (29,450)A
Securities sold under agreements to repurchase 0 4,772
Demand notes issued to the U.S. Treasury 0 1,067
Other borrowed money 37 37
Mortgage indebtedness and obligations under capitalized leases 3,290 2,334
Bank's liability on acceptances executed and outstanding 0 0
Notes and debentures subordinated to deposits 0 0
Other liabilities 10,447 9,128
--------- -------
Total liabilities 945,061 922,281
Limited-life preferred stock 0 0
EQUITY CAPITAL
Perpetual preferred stock 0 0
Common stock 35,730 6,336
Surplus 64,834 39,666
Undivided profits and capital reserves 15,278 26,868
LESS: Net unrealized loss on marketable equity securities 0 0
--------- -------
Total equity capital 115,842 72,870
--------- -------
Total liabilities, limited-life preferred stock, and equity capital 1,060,903 995,151
========= =======
</TABLE>
<PAGE> 7
FIRSTAR BANK OF MINNESOTA, N.A.
INCOME STATEMENT
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income Interest and fee income on loans:
Loans secured by real estate 115,978 106,902 20,644 18,049 19,637 21,473 23,398
Loans to finance agricultural production and other loans to farmers 0 20 10 12 17 39
Commercial and industrial loans 28,852 18,155 13,667 10,758 12,703 16,082
Loans to individuals for household, family, and other personal
expenditures:
Credit cards and related plans 2,618 2,040 1,324 725 1,084 1,250 1,093
Other 20,090 15,979 15,082 14,969 16,229 14,938 12,068
Loans to foreign governments and official institutions 0 0 0 0 0 0 0
Obligations (other than securities and leases) of states and
political subdivisions in the U.S.:
Taxable obligations 0 0 0 0 0 0 0
Tax-exempt obligations 621 497 428 418 374 712
All other loans 3,200 1,195 814 248 80 147 21,536
Income from lease financing receivables:
Taxable leases 1,318 99 10 4 23 117 217
Tax-exempt leases 25 0 6 17 61 149 312
Interest income on balances due from depository institutions 48 529 5 0 140 262 493
Interest and dividend income on securities:
U.S. Treasury securities and U.S. Government agency and
corporation obligations 17,220 18,752 15,540 17,511 17,791 19,660 17,767
Securities issued by states and political subdivisions in the U.S.:
Taxable securities 0 1 41 51 75 120 205
Tax-exempt securities 7,114 6,871 6,443 6,473 7,094 8,246 8,008
Other domestic debt securities 161 796 466 856 1,337 1,775 1,968
Foreign debt securities 67 24 19 19 16 22 23
Equity securities (including investments in mutual funds) 2,560 2,112 305 174 156 21 22
Interest income from assets held in trading accounts 0 0 0 0 0 0 0
Interest income on federal funds sold and securities purchased
under agreements to resell 37 0 0 0 377 433 2,329
------- ------- ------ ------ ------ ------ ------
Total interest income 199,909 173,972 74,804 70,284 77,194 85,446 89,439
Interest expense
Interest on deposits:
Transaction accounts (NOW accounts, ATS accounts, and telephone and
preauthorized transfer accounts) 2,290 1,635 1,420 1,676 2,786 5,350 6,930
Nontransaction accounts:
Money market deposit accounts (MMDAs) 12,518 8,288 4,947 5,322 7,108 10,877 11,417
Other savings deposits 2,283 2,439 1,317 1,767 2,120 3,782 2,876
Time certificates of deposit of $100,000 or more 6,401 4,614 1,318 1,154 1,796 3,571 5,818
All other time deposits 43,188 43,023 10,458 10,024 12,757 18,595 20,771
Expense of federal funds purchased and securities sold under
agreements to repurchase 9,817 11,834 4,539 1,489 135 598 643
Interest on demand notes issued to the U.S. Treasury and on other
borrowed money 19,168 23,582 0 0 0 21 62
Interest on mortgage indebtedness and obligations under
capitalized leases 56 43 0 0 199 220 184
Interest on notes and debentures subordinated to deposits 0 0 0 0 0 0 0
------- ------- ------ ------ ------ ------ ------
Total interest expense 95,721 95,458 23,999 21,432 26,901 43,014 48,701
------- ------- ------ ------ ------ ------ ------
Net interest income 104,188 78,514 50,805 48,852 50,293 42,432 40,738
Provisions:
Provision for loan and lease losses 774 5,738 0 2,980 7,000 3,020 7,196
Provision for allocated transfer risk 0 0 0 0 0 0 0
</TABLE>
<PAGE> 8
FIRSTAR BANK OF MINNESOTA, N.A.
INCOME STATEMENT (continued)
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C>
Noninterest income
Income from fiduciary activities 3,220 0 0 0 0
Service charges on deposit accounts 10,508 9,536 9,721 10,482 9,066
Trading gains (losses) and fees from foreign exchange transactions 461 58 16 (4) 14
Other foreign transaction gains (losses) 0 0 0 0 0
Gains (losses) and fees from assets held in trading accounts 0 0 0 0 0
Other noninterest income:
Other fee income 8,439 12,770 3,919 3,783 3,375
All other noninterest income 1,110 1,358 816 379 440
------- ------- ------- ------- -------
Total noninterest income 23,738 23,722 14,472 14,640 12,895
Gains (losses) on securities not held in trading accounts 36 (537) 22 28 341
Noninterest expense
Salaries and employee benefits 31,590 28,091 17,566 16,855 16,365
Expenses of premises and fixed assets (net of rental income) (excluding
salaries and employee benefits and mortgage interest) 13,167 7,837 5,279 8,464 7,844
Other noninterest expense 37,650 27,411 20,432 21,431 21,754
------- ------- ------- ------- -------
Total noninterest expense 82,407 63,339 43,277 46,750 45,963
------- ------- ------- ------- -------
Income (loss) before taxes and extraordinary items and other adjustments 44,781 32,622 22,022 13,790 10,566
Applicable income taxes 17,099 12,724 8,513 4,838 3,649
------- ------- ------- ------- -------
Income (loss) before extraordinary items and other adjustments 27,682 19,898 13,509 8,952 6,917
Extraordinary items and other adjustments:
Extraordinary items and other adjustments, gross of income taxes 0 0 0 2,370 0
Applicable income taxes 0 0 0 0 0
------- ------- ------- ------- -------
Extraordinary items and other adjustments, net of income taxes 0 0 0 2,370 0
------- ------- ------- ------- -------
Net income (loss) 27,682 19,898 13,509 11,322 6,917
======= ======= ======= ======= =======
CHANGES IN EQUITY CAPITAL
Total equity capital originally reported at end of previous calendar years 208,910 126,003 123,433 122,759 115,842
Equity capital adjustments from amended Reports of Income, net 0 0 0 0 0
------- ------- ------- ------- -------
Amended balance at end of previous calendar year 208,910 126,003 123,433 122,759 115,842
Net income (loss) 27,682 19,898 13,509 11,322 6,917
Sale, conversion, acquisition, or retirement of capital stock, net 711 269 61 52 0
Changes incident to business combination, net 159,313 70,922 0 0 0
LESS: Cash dividends declared on preferred stock 0 0 0 0 0
LESS: Cash dividends declared on common stock 24,000 10,400 11,000 10,700 0
Cumulative effect of changes in accounting principles from prior years 0 0 0 0 0
Corrections of material accounting errors from prior years 0 0 0 0 0
Change in net unrealized loss on marketable equity securities (1,132) 2,218 0 0 0
Other transactions with parent holding company 11,866 0 0 0 0
------- ------- ------- ------- -------
Total equity capital at end of period 383,350 208,910 126,003 123,433 122,759
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1991 1990
----- -----
$(000) $(000)
<S> <C> <C> <C>
Noninterest income
Income from fiduciary activities 0 0
Service charges on deposit accounts 7,974 7,488 (78)B
Trading gains (losses) and fees from foreign exchange transactions 32 1
Other foreign transaction gains (losses) 0 1
Gains (losses) and fees from assets held in trading accounts 0 0
Other noninterest income:
Other fee income 2,820 2,896
All other noninterest income 470 0
------- ------
Total noninterest income 11,296 10,386
Gains (losses) on securities not held in trading accounts 134 20
Noninterest expense
Salaries and employee benefits 11,993 15,939
Expenses of premises and fixed assets (net of rental income) (excluding
salaries and employee benefits and mortgage interest) 9,804 6,379
Other noninterest expense 23,964 16,232 (78)B
------- ------
Total noninterest expense 45,761 38,550
------- ------
Income (loss) before taxes and extraordinary items and other adjustment 5,081 5,398
Applicable income taxes 984 (452)
------- ------
Income (loss) before extraordinary items and other adjustments 4,097 5,850
Extraordinary items and other adjustments:
Extraordinary items and other adjustments, gross of income taxes 0 0
Applicable income taxes 0 0
------- ------
Extraordinary items and other adjustments, net of income taxes 0 0
------- ------
Net income (loss) 4,097 5,850
======= ======
CHANGES IN EQUITY CAPITAL
Total equity capital originally reported at end of previous calendar years 72,870 70,570
Equity capital adjustments from amended Reports of Income, net 0 0
------- ------
Amended balance at end of previous calendar year 72,870 70,570
Net income (loss) 4,097 5,850
Sale, conversion, acquisition, or retirement of capital stock, net 0 0
Changes incident to business combination, net 38,875 0
LESS: Cash dividends declared on preferred stock 0 0
LESS: Cash dividends declared on common stock 0 4,050
Cumulative effect of changes in accounting principles from prior years 0 0
Corrections of material accounting errors from prior years 0 0
Change in net unrealized loss on marketable equity securities 0 0
Other transactions with parent holding company 0 500
------- ------
Total equity capital at end of period 115,842 72,870
======= ======
</TABLE>
<PAGE> 9
FIRSTAR BANK OF MINNESOTA, N.A.
CHANGES IN ALLOWANCE FOR LOAN AND LEASE LOSSES
AND IN ALLOCATED TRANSFER RISK RESERVE
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan and lease losses:
Balance originally reported at end of previous year 23,978 15,665 16,317 15,049 10,763 13,739 10,932
Recoveries 2,780 2,321 2,829 1,890 2,213 1,417 1,704
LESS: Charge-offs 2,735 3,368 3,481 3,602 4,927 7,413 6,093 (33)C
Provision for loan and lease losses 774 5,738 0 2,980 7,000 3,020 7,196
Adjustments 9,421 3,622 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Balance at end of period 34,218 23,978 15,665 16,317 15,049 10,763 13,739
====== ====== ====== ====== ====== ====== ======
Allocated transfer risk reserve:
Balance originally reported at end of previous year 0 0 0 0 0 0 0
Recoveries 0 0 0 0 0 0 0
LESS: Charge-offs 0 0 0 0 0 0 0
Provision for allocated transfer risk 0 0 0 0 0 0 0
Adjustments 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Balance at end of period 0 0 0 0 0 0 0
====== ====== ====== ====== ====== ====== ======
PAST DUE AND NONACCRUAL LOANS, LEASES AND OTHER ASSETS
Loans, leases, and other assets past due 90 days or
more and still accruing:
Real estate loans 8,112 792 112 684 540 1,713 147
Installment loans 435 85 75 106 139 724 299
Credit cards and related plans 271 125 81 77 129 20 0
Commercial (time and demand) and all other loans 3,925 620 306 1,936 583 780 900
Lease financing receivables 28 0 0 0 0 0 357
------ ------ ------ ------ ------ ------ ------
Total past due and still accruing 12,771 1,622 574 2,803 1,391 3,237 1,703
====== ====== ====== ====== ====== ====== ======
Nonaccrual:
Real estate loans 9,358 8,960 2,863 3,854 3,288 3,055 7,872
Installment loans 46 82 56 389 1,577 932 273
Credit cards and related plans 22 0 14 18 2 5 0
Commercial (time and demand) and all other loans 523 516 447 640 1,008 2,484 6,944
Lease financing receivables 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Total nonaccrual 9,949 9,558 3,380 4,901 5,875 6,476 15,089
====== ====== ====== ====== ====== ====== ======
OFF BALANCE SHEET ITEMS
Standby letters of credit 36,939 20,364 16,725 17,371 15,620
Amount of standby letters of credit conveyed to others 0 5,947 3,507 3,691 3,756
====== ====== ====== ====== ======
</TABLE>
To eliminate Shelard cash balances
A To eliminate Shelard intercompany fed funds
B To eliminate Shelard service charges
C To adjust 1992 Charge-offs due to Eagan error corrected in 1992
- -----------------------------------------------
FIRSTAR BANK MINNESOTA
ANNUAL FINANCIAL DISCLOSURE STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -----------------------------------------------
This statement has not been reviewed, or confirmed for accuracy or relevance,
by the Office of the Comptroller of the Currency.
I, Michael J. Stello, as VP of Firstar Corporation, do hereby attest that the
information contained in this disclosure statement is correct.
- --------------------------------------
February 24, 1997
<PAGE> 1
EXHIBIT 25.2
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
-----------------------------
FIRSTAR BANK OF MINNESOTA, N.A.
(Exact name of Trustee as specified in its charter)
<TABLE>
<S> <C>
A National Banking Association 41-0122055
(State of incorporation if not a national bank) (IRS Employer Identification No.)
</TABLE>
101 East Fifth Street
Corporate Trust Department
St Paul, Minnesota 55101
(Address of principal executive offices) (Zip Code)
FIRSTAR BANK OF MINNESOTA, N.A.
101 East Fifth Street
St. Paul, Minnesota 55101
(612) 229-2600
(Exact name, address and telephone number of agent for service)
-----------------------------
TransAmerican Energy Corporation
(Exact name of obligor as specified in its charter)
Delaware 76-0441642
(State of incorporation or other jurisdiction) (IRS Employer Identification No.)
1300 North Sam Houston Parkway East
Suite 200
Houston, Texas 77032-2949
(Address of principal executive offices) (Zip Code)
-----------------------------
13% Senior Secured Discount Notes due 2002
(Title of Indenture securities)
<PAGE> 2
Item 1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Treasury Department
Washington, DC
Federal Deposit Insurance Corporation
Washington, DC
The Board of Governors of the Federal Reserve System
Washington, DC
(b) The Trustee is authorized to exercise corporate trust powers.
GENERAL
Item 2. Affiliations with Obligor and Underwriters. If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe
each such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's knowledge
the obligor is not in default under any Indenture for which the Trustee acts as
Trustee.
Item 16. List of Exhibits. Listed below are all the exhibits filed as a part of
this statement of eligibility and qualification. Exhibits 1-5 are
incorporated by reference from filing 333-07261.
Exhibit 1. Copy of Articles of Association of the trustee now in
effect.
Exhibit 2. a. A copy of the certificate of the Comptroller of
Currency dated June 1, 1965, authorizing Firstar
Bank of Minnesota, N. A. to act as fiduciary.
b. A copy of the certificate of authority of the
trustee to commence business issued June 9,
1903, by the Comptroller of the Currency to
Firstar Bank of Minnesota, N.A.
<PAGE> 3
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued by the Federal Reserve
Board.
Exhibit 4. Copy of the By-Laws of the trustee as now in effect.
Exhibit 5. Copy of each Indenture referred to in Item 4.
Exhibit 6. The consent of the trustee required by Section 321(b) of
the Act.
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligor, or affiliates, are based
upon information furnished to the Trustee by the obligor. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, a national banking association organized and existing under the laws
of the United States, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City
of Saint Paul and State of Minnesota on the 25th day of September, 1997.
FIRSTAR BANK OF MINNESOTA, N.A.
[SEAL]
/s/ FRANK P. LESLIE III
-------------------------------------------
Frank P. Leslie III
Vice President
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, Firstar Bank of Minnesota, N.A., hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: September 25, 1997
FIRSTAR BANK OF MINNESOTA, N.A.
/s/ FRANK P. LESLIE III
-------------------------------------------
Frank P. Leslie III
Vice President
<PAGE> 5
- --------------------------------------------------------------------------------
FIRSTAR BANK MINNESOTA
ANNUAL FINANCIAL DISCLOSURE STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
This statement has not been reviewed, or confirmed for accuracy or relevance,
by the Office of the Comptroller of the Currency.
I, Michael J. Stello, as VP of Firstar Corporation, do hereby attest that the
information contained in this disclosure statement is correct.
- --------------------------------------
February 24, 1997
<PAGE> 6
FIRSTAR BANK OF MINNESOTA, N.A.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances 132,057 87,322 60,020 80,393 63,001
Interest-bearing balances 736 201 144 0 0
Securities 446,668 454,809 395,074 371,004 379,371
Federal funds sold and securities purchased under agreements to resell:
Federal funds sold 0 0 0 0 0
Securities purchased under agreements to resell 0 0 0 0 0
Loans and lease financing receivables:
Loans and leases, net of unearned income 2,276,562 1,797,918 723,375 615,578 540,293
LESS: Allowance for loan and lease losses 34,218 23,978 15,665 16,317 15,049
LESS: Allocated transfer risk reserve 0 0 0 0 0
--------- --------- --------- --------- ---------
Loans and leases, net of unearned income, allowance, and reserve 2,242,344 1,773,940 707,710 599,261 525,244
Assets held in trading accounts 300 0 0 0 0
Premises and fixed assets (including capitalized leases) 31,539 25,944 17,465 17,661 20,809
Other real estate owned 326 599 272 1,380 3,402
Investments in unconsolidated subsidiaries and associated companies 0 0 0 0 0
Customers' liability to this bank on acceptances outstanding 0 0 0 0 0
Intangible assets 118,287 25,260 26,456 29,644 32,832
Other assets 53,778 32,009 22,492 21,079 23,090
--------- --------- --------- --------- ---------
Total assets 3,026,035 2,400,084 1,229,633 1,120,422 1,047,749
========= ========= ========= ========= =========
LIABILITIES
Deposits:
In domestic offices:
Noninterest-bearing 375,851 227,405 213,066 195,136 181,238
Interest-bearing 1,783,187 1,375,794 724,995 719,091 724,573
--------- --------- --------- --------- ---------
Total domestic deposits 2,159,038 1,603,199 938,061 914,227 905,811
In foreign offices: 0 0 0 0 0
Federal funds purchased and securities sold under agreements to repurchase:
Federal funds purchased 104,476 167,903 151,614 69,211 410
Securities sold under agreements to repurchase 0 0 0 0 0
Demand notes issued to the U.S. Treasury 0 0 0 0 0
Other borrowed money 331,207 391,500 0 154 0
Mortgage indebtedness and obligations under capitalized leases 1,142 367 0 0 0
Bank's liability on acceptances executed and outstanding 0 0 0 0 0
Notes and debentures subordinated to deposits 0 0 0 0 0
Other liabilities 46,822 28,205 13,955 13,397 18,769
--------- --------- --------- --------- ---------
Total liabilities 2,642,685 2,191,174 1,103,630 996,989 924,990
Limited-life preferred stock 0 0 0 0 0
EQUITY CAPITAL
Perpetual preferred stock 0 0 0 0 0
Common stock 35,730 35,730 35,730 35,730 35,730
Surplus 220,084 101,435 64,948 64,886 64,834
Undivided profits and capital reserves 126,450 69,527 25,325 22,817 22,195
LESS: Net unrealized loss on marketable equity securities 1,086 2,218 0 0 0
--------- --------- --------- --------- ---------
Total equity capital 383,350 208,910 126,003 123,433 122,759
--------- --------- --------- --------- ---------
Total liabilities, limited-life preferred stock, and equity capital 3,026,035 2,400,084 1,229,633 1,120,422 1,047,749
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1991 1990
----- -----
$(000) $(000)
<S> <C> <C> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances 65,548 59,561 (17,217),
Interest-bearing balances 2,400 3,600
Securities 360,790 348,473
Federal funds sold and securities purchased under agreements to resell:
Federal funds sold 7,275 26,050 (29,450)A
Securities purchased under agreements to resell 0 0
Loans and lease financing receivables:
Loans and leases, net of unearned income 551,347 525,883
LESS: Allowance for loan and lease losses 10,763 13,739
LESS: Allocated transfer risk reserve 0 0
--------- -------
Loans and leases, net of unearned income, allowance, and reserve 540,584 512,144
Assets held in trading accounts 0 0
Premises and fixed assets (including capitalized leases) 23,464 23,090
Other real estate owned 4,398 2,844
Investments in unconsolidated subsidiaries and associated companies 0 0
Customers' liability to this bank on acceptances outstanding 0 0
Intangible assets 36,020 114
Other assets 20,424 19,275
--------- -------
Total assets 1,060,903 995,151
========= =======
LIABILITIES
Deposits:
In domestic offices:
Noninterest-bearing 166,447 179,811 (17,217),
Interest-bearing 764,840 724,382
--------- -------
Total domestic deposits 931,287 904,193
In foreign offices: 0 0
Federal funds purchased and securities sold under agreements to repurchase:
Federal funds purchased 0 750 (29,450)A
Securities sold under agreements to repurchase 0 4,772
Demand notes issued to the U.S. Treasury 0 1,067
Other borrowed money 37 37
Mortgage indebtedness and obligations under capitalized leases 3,290 2,334
Bank's liability on acceptances executed and outstanding 0 0
Notes and debentures subordinated to deposits 0 0
Other liabilities 10,447 9,128
--------- -------
Total liabilities 945,061 922,281
Limited-life preferred stock 0 0
EQUITY CAPITAL
Perpetual preferred stock 0 0
Common stock 35,730 6,336
Surplus 64,834 39,666
Undivided profits and capital reserves 15,278 26,868
LESS: Net unrealized loss on marketable equity securities 0 0
--------- -------
Total equity capital 115,842 72,870
--------- -------
Total liabilities, limited-life preferred stock, and equity capital 1,060,903 995,151
========= =======
</TABLE>
<PAGE> 7
FIRSTAR BANK OF MINNESOTA, N.A.
INCOME STATEMENT
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income Interest and fee income on loans:
Loans secured by real estate 115,978 106,902 20,644 18,049 19,637 21,473 23,398
Loans to finance agricultural production and other loans to farmers 0 20 10 12 17 39
Commercial and industrial loans 28,852 18,155 13,667 10,758 12,703 16,082
Loans to individuals for household, family, and other personal
expenditures:
Credit cards and related plans 2,618 2,040 1,324 725 1,084 1,250 1,093
Other 20,090 15,979 15,082 14,969 16,229 14,938 12,068
Loans to foreign governments and official institutions 0 0 0 0 0 0 0
Obligations (other than securities and leases) of states and
political subdivisions in the U.S.:
Taxable obligations 0 0 0 0 0 0 0
Tax-exempt obligations 621 497 428 418 374 712
All other loans 3,200 1,195 814 248 80 147 21,536
Income from lease financing receivables:
Taxable leases 1,318 99 10 4 23 117 217
Tax-exempt leases 25 0 6 17 61 149 312
Interest income on balances due from depository institutions 48 529 5 0 140 262 493
Interest and dividend income on securities:
U.S. Treasury securities and U.S. Government agency and
corporation obligations 17,220 18,752 15,540 17,511 17,791 19,660 17,767
Securities issued by states and political subdivisions in the U.S.:
Taxable securities 0 1 41 51 75 120 205
Tax-exempt securities 7,114 6,871 6,443 6,473 7,094 8,246 8,008
Other domestic debt securities 161 796 466 856 1,337 1,775 1,968
Foreign debt securities 67 24 19 19 16 22 23
Equity securities (including investments in mutual funds) 2,560 2,112 305 174 156 21 22
Interest income from assets held in trading accounts 0 0 0 0 0 0 0
Interest income on federal funds sold and securities purchased
under agreements to resell 37 0 0 0 377 433 2,329
------- ------- ------ ------ ------ ------ ------
Total interest income 199,909 173,972 74,804 70,284 77,194 85,446 89,439
Interest expense
Interest on deposits:
Transaction accounts (NOW accounts, ATS accounts, and telephone and
preauthorized transfer accounts) 2,290 1,635 1,420 1,676 2,786 5,350 6,930
Nontransaction accounts:
Money market deposit accounts (MMDAs) 12,518 8,288 4,947 5,322 7,108 10,877 11,417
Other savings deposits 2,283 2,439 1,317 1,767 2,120 3,782 2,876
Time certificates of deposit of $100,000 or more 6,401 4,614 1,318 1,154 1,796 3,571 5,818
All other time deposits 43,188 43,023 10,458 10,024 12,757 18,595 20,771
Expense of federal funds purchased and securities sold under
agreements to repurchase 9,817 11,834 4,539 1,489 135 598 643
Interest on demand notes issued to the U.S. Treasury and on other
borrowed money 19,168 23,582 0 0 0 21 62
Interest on mortgage indebtedness and obligations under
capitalized leases 56 43 0 0 199 220 184
Interest on notes and debentures subordinated to deposits 0 0 0 0 0 0 0
------- ------- ------ ------ ------ ------ ------
Total interest expense 95,721 95,458 23,999 21,432 26,901 43,014 48,701
------- ------- ------ ------ ------ ------ ------
Net interest income 104,188 78,514 50,805 48,852 50,293 42,432 40,738
Provisions:
Provision for loan and lease losses 774 5,738 0 2,980 7,000 3,020 7,196
Provision for allocated transfer risk 0 0 0 0 0 0 0
</TABLE>
<PAGE> 8
FIRSTAR BANK OF MINNESOTA, N.A.
INCOME STATEMENT (continued)
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C>
Noninterest income
Income from fiduciary activities 3,220 0 0 0 0
Service charges on deposit accounts 10,508 9,536 9,721 10,482 9,066
Trading gains (losses) and fees from foreign exchange transactions 461 58 16 (4) 14
Other foreign transaction gains (losses) 0 0 0 0 0
Gains (losses) and fees from assets held in trading accounts 0 0 0 0 0
Other noninterest income:
Other fee income 8,439 12,770 3,919 3,783 3,375
All other noninterest income 1,110 1,358 816 379 440
------- ------- ------- ------- -------
Total noninterest income 23,738 23,722 14,472 14,640 12,895
Gains (losses) on securities not held in trading accounts 36 (537) 22 28 341
Noninterest expense
Salaries and employee benefits 31,590 28,091 17,566 16,855 16,365
Expenses of premises and fixed assets (net of rental income) (excluding
salaries and employee benefits and mortgage interest) 13,167 7,837 5,279 8,464 7,844
Other noninterest expense 37,650 27,411 20,432 21,431 21,754
------- ------- ------- ------- -------
Total noninterest expense 82,407 63,339 43,277 46,750 45,963
------- ------- ------- ------- -------
Income (loss) before taxes and extraordinary items and other adjustments 44,781 32,622 22,022 13,790 10,566
Applicable income taxes 17,099 12,724 8,513 4,838 3,649
------- ------- ------- ------- -------
Income (loss) before extraordinary items and other adjustments 27,682 19,898 13,509 8,952 6,917
Extraordinary items and other adjustments:
Extraordinary items and other adjustments, gross of income taxes 0 0 0 2,370 0
Applicable income taxes 0 0 0 0 0
------- ------- ------- ------- -------
Extraordinary items and other adjustments, net of income taxes 0 0 0 2,370 0
------- ------- ------- ------- -------
Net income (loss) 27,682 19,898 13,509 11,322 6,917
======= ======= ======= ======= =======
CHANGES IN EQUITY CAPITAL
Total equity capital originally reported at end of previous calendar years 208,910 126,003 123,433 122,759 115,842
Equity capital adjustments from amended Reports of Income, net 0 0 0 0 0
------- ------- ------- ------- -------
Amended balance at end of previous calendar year 208,910 126,003 123,433 122,759 115,842
Net income (loss) 27,682 19,898 13,509 11,322 6,917
Sale, conversion, acquisition, or retirement of capital stock, net 711 269 61 52 0
Changes incident to business combination, net 159,313 70,922 0 0 0
LESS: Cash dividends declared on preferred stock 0 0 0 0 0
LESS: Cash dividends declared on common stock 24,000 10,400 11,000 10,700 0
Cumulative effect of changes in accounting principles from prior years 0 0 0 0 0
Corrections of material accounting errors from prior years 0 0 0 0 0
Change in net unrealized loss on marketable equity securities (1,132) 2,218 0 0 0
Other transactions with parent holding company 11,866 0 0 0 0
------- ------- ------- ------- -------
Total equity capital at end of period 383,350 208,910 126,003 123,433 122,759
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1991 1990
----- -----
$(000) $(000)
<S> <C> <C> <C>
Noninterest income
Income from fiduciary activities 0 0
Service charges on deposit accounts 7,974 7,488 (78)B
Trading gains (losses) and fees from foreign exchange transactions 32 1
Other foreign transaction gains (losses) 0 1
Gains (losses) and fees from assets held in trading accounts 0 0
Other noninterest income:
Other fee income 2,820 2,896
All other noninterest income 470 0
------- ------
Total noninterest income 11,296 10,386
Gains (losses) on securities not held in trading accounts 134 20
Noninterest expense
Salaries and employee benefits 11,993 15,939
Expenses of premises and fixed assets (net of rental income) (excluding
salaries and employee benefits and mortgage interest) 9,804 6,379
Other noninterest expense 23,964 16,232 (78)B
------- ------
Total noninterest expense 45,761 38,550
------- ------
Income (loss) before taxes and extraordinary items and other adjustment 5,081 5,398
Applicable income taxes 984 (452)
------- ------
Income (loss) before extraordinary items and other adjustments 4,097 5,850
Extraordinary items and other adjustments:
Extraordinary items and other adjustments, gross of income taxes 0 0
Applicable income taxes 0 0
------- ------
Extraordinary items and other adjustments, net of income taxes 0 0
------- ------
Net income (loss) 4,097 5,850
======= ======
CHANGES IN EQUITY CAPITAL
Total equity capital originally reported at end of previous calendar years 72,870 70,570
Equity capital adjustments from amended Reports of Income, net 0 0
------- ------
Amended balance at end of previous calendar year 72,870 70,570
Net income (loss) 4,097 5,850
Sale, conversion, acquisition, or retirement of capital stock, net 0 0
Changes incident to business combination, net 38,875 0
LESS: Cash dividends declared on preferred stock 0 0
LESS: Cash dividends declared on common stock 0 4,050
Cumulative effect of changes in accounting principles from prior years 0 0
Corrections of material accounting errors from prior years 0 0
Change in net unrealized loss on marketable equity securities 0 0
Other transactions with parent holding company 0 500
------- ------
Total equity capital at end of period 115,842 72,870
======= ======
</TABLE>
<PAGE> 9
FIRSTAR BANK OF MINNESOTA, N.A.
CHANGES IN ALLOWANCE FOR LOAN AND LEASE LOSSES
AND IN ALLOCATED TRANSFER RISK RESERVE
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- -----
$(000) $(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan and lease losses:
Balance originally reported at end of previous year 23,978 15,665 16,317 15,049 10,763 13,739 10,932
Recoveries 2,780 2,321 2,829 1,890 2,213 1,417 1,704
LESS: Charge-offs 2,735 3,368 3,481 3,602 4,927 7,413 6,093 (33)C
Provision for loan and lease losses 774 5,738 0 2,980 7,000 3,020 7,196
Adjustments 9,421 3,622 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Balance at end of period 34,218 23,978 15,665 16,317 15,049 10,763 13,739
====== ====== ====== ====== ====== ====== ======
Allocated transfer risk reserve:
Balance originally reported at end of previous year 0 0 0 0 0 0 0
Recoveries 0 0 0 0 0 0 0
LESS: Charge-offs 0 0 0 0 0 0 0
Provision for allocated transfer risk 0 0 0 0 0 0 0
Adjustments 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Balance at end of period 0 0 0 0 0 0 0
====== ====== ====== ====== ====== ====== ======
PAST DUE AND NONACCRUAL LOANS, LEASES AND OTHER ASSETS
Loans, leases, and other assets past due 90 days or
more and still accruing:
Real estate loans 8,112 792 112 684 540 1,713 147
Installment loans 435 85 75 106 139 724 299
Credit cards and related plans 271 125 81 77 129 20 0
Commercial (time and demand) and all other loans 3,925 620 306 1,936 583 780 900
Lease financing receivables 28 0 0 0 0 0 357
------ ------ ------ ------ ------ ------ ------
Total past due and still accruing 12,771 1,622 574 2,803 1,391 3,237 1,703
====== ====== ====== ====== ====== ====== ======
Nonaccrual:
Real estate loans 9,358 8,960 2,863 3,854 3,288 3,055 7,872
Installment loans 46 82 56 389 1,577 932 273
Credit cards and related plans 22 0 14 18 2 5 0
Commercial (time and demand) and all other loans 523 516 447 640 1,008 2,484 6,944
Lease financing receivables 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Total nonaccrual 9,949 9,558 3,380 4,901 5,875 6,476 15,089
====== ====== ====== ====== ====== ====== ======
OFF BALANCE SHEET ITEMS
Standby letters of credit 36,939 20,364 16,725 17,371 15,620
Amount of standby letters of credit conveyed to others 0 5,947 3,507 3,691 3,756
====== ====== ====== ====== ======
</TABLE>
To eliminate Shelard cash balances
A To eliminate Shelard intercompany fed funds
B To eliminate Shelard service charges
C To adjust 1992 Charge-offs due to Eagan error corrected in 1992
- -----------------------------------------------
FIRSTAR BANK MINNESOTA
ANNUAL FINANCIAL DISCLOSURE STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -----------------------------------------------
This statement has not been reviewed, or confirmed for accuracy or relevance,
by the Office of the Comptroller of the Currency.
I, Michael J. Stello, as VP of Firstar Corporation, do hereby attest that the
information contained in this disclosure statement is correct.
- --------------------------------------
February 24, 1997
<PAGE> 1
EXHIBIT 99.1
TRANSAMERICAN ENERGY CORPORATION
LETTER OF TRANSMITTAL
FOR
TENDER OF ALL OUTSTANDING
11 1/2% SENIOR SECURED NOTES DUE 2002
IN EXCHANGE FOR
11 1/2% SERIES B SENIOR SECURED NOTES DUE 2002
AND
13% SENIOR SECURED DISCOUNT NOTES DUE 2002
IN EXCHANGE FOR
13% SERIES B SENIOR SECURED DISCOUNT NOTES DUE 2002
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE")
OUTSTANDING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE
DELIVER TO THE EXCHANGE AGENT:
FIRSTAR BANK OF MINNESOTA, N.A.
<TABLE>
<S> <C> <C>
By Mail: By Facsimile: By Hand or Overnight Courier:
FIRSTAR BANK OF MINNESOTA, N.A. (612) 229-6415 FIRSTAR BANK OF MINNESOTA, N.A.
Corporate Trust Department Corporate Trust Department
101 East Fifth Street Confirm by Telephone 101 East Fifth Street
12th Floor (612) 229-2600 12th Floor
St. Paul, Minnesota 55101-1860 St. Paul, Minnesota 55101-1860
Attention: Frank Leslie Attention: Frank Leslie
</TABLE>
---------------------
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated , 1997 (the "Prospectus") of TransAmerican Energy
Corporation, a Delaware corporation (the "Company") and this Letter of
Transmittal (the "Letter of Transmittal"), which together describe the Company's
offer (the "Exchange Offer") to exchange its 11 1/2% Series B Senior Secured
Notes due 2002 and 13% Series B Senior Secured Discount Notes due 2002 (the
"Exchange Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a Registration Statement of which
the Prospectus is a part, for a like principal amount of its issued and
outstanding 11 1/2% Senior Secured Notes due 2002 and 13% Senior Secured
Discount Notes due 2002 (the "Outstanding Notes"), respectively. Capitalized
terms used but not defined herein have the respective meaning given to them in
the Prospectus.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended. The Company
shall notify the holders of the Outstanding Notes of any extension by
announcement thereof, prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
This Letter of Transmittal is to be used by a holder of Outstanding Notes
if original Outstanding Notes, if available, are to be forwarded herewith or an
Agent's Message is to be used if delivery of Outstanding Notes is to be made by
book-entry transfer to the account maintained by the Exchange Agent at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in the Prospectus under the caption "The Exchange Offer --
Procedures for Tendering." Holders of Outstanding Notes whose Outstanding Notes
are not immediately available, or who are unable to deliver their Outstanding
Notes and all other documents required by this Letter of Transmittal to the
Exchange Agent on or prior to the Expiration Date, or who are unable to complete
the procedure for book-entry transfer on a timely basis, must tender their
Outstanding Notes according to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." See Instructions 1 and 2. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Exchange Agent.
<PAGE> 2
The term "holder" with respect to the Exchange Offer means any person in
whose name Outstanding Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Outstanding
Notes must complete this Letter of Transmittal in its entirety.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space below is inadequate, list the registered numbers and
principal amounts on a separate signed schedule and affix the list to this
Letter of Transmittal.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OUTSTANDING NOTES TENDERED
- -------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED
HOLDER(S) EXACTLY AS NAME(S)
APPEAR(S) ON OUTSTANDING NOTES
(PLEASE FILL IN, IF BLANK) OUTSTANDING NOTE(S) TENDERED
- -------------------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL PRINCIPAL
REGISTERED AMOUNT REPRESENTED BY AMOUNT
NUMBER(S)* NOTE(S) TENDERED**
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
=========================================================================================================================
* Need not be completed by book-entry holders.
** Unless otherwise indicated, any tendering holder of Outstanding Notes will be deemed to have tendered the entire
aggregate principal amount represented by such Outstanding Notes. All tenders must be in integral multiples of
$1,000.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name(s) of Tendering Institution:
Account Number:
Transaction Code Number:
[ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING:
Name(s) of Registered holder(s) of Outstanding Notes:
Date of Execution of Notice of Guaranteed Delivery:
Window Ticket Number (if available):
- --------------------------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
----------------------------------------------------------------
Account Number (if delivered by book-entry transfer):
----------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO:
Name:
--------------------------------------------------------------------------
Address:
--------------------------------------------------------------------------
<PAGE> 4
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company for exchange the principal amount of Outstanding
Notes indicated above. Subject to and effective upon the acceptance for exchange
of the principal amount of Outstanding Notes tendered in accordance with this
Letter of Transmittal, the undersigned hereby exchanges, assigns and transfers
to the Company all right, title and interest in and to the Outstanding Notes
tendered for exchange hereby. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent, the agent and attorney-in-fact of the undersigned
(with full knowledge that the Exchange Agent also acts as the agent of the
Company in connection with the Exchange Offer) with respect to the tendered
Outstanding Notes with full power of substitution to (i) deliver such
Outstanding Notes, or transfer ownership of such Outstanding Notes on the
account books maintained by the Book-Entry Transfer Facility, to the Company and
deliver all accompanying evidences of transfer and authenticity, and (ii)
present such Outstanding Notes for transfer on the books of the Company and
receive all benefits and otherwise exercise all rights of beneficial ownership
of such Outstanding Notes, all in accordance with the terms of the Exchange
Offer. The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the
Outstanding Notes tendered hereby and to acquire the Exchange Notes issuable
upon the exchange of such tendered Outstanding Notes, and that the Company will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim,
when the same are accepted for exchange by the Company.
The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the "SEC"),
including Exxon Capital Holdings Corporation, SEC No-Action Letter (available
April 13, 1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June
5, 1991) (the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC
No-Action Letter (available June 5, 1991), that the Exchange Notes issued in
exchange for the Outstanding Notes pursuant to the Exchange Offer may be offered
for resale, resold and otherwise transferred by holders thereof (other than (i)
a broker-dealer who purchased Outstanding Notes exchanged for such Exchange
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act and (ii) an affiliate of the
Company), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders are not
participating in, and have no arrangement with any person to participate in, the
distribution of such Exchange Notes. The undersigned specifically represent(s)
to the Company that (i) any Exchange Notes acquired in exchange for Outstanding
Notes tendered hereby are being acquired in the ordinary course of business of
the person receiving such Exchange Notes, whether or not the undersigned, (ii)
the undersigned is not participating in, and has no arrangement with any person
to participate in, the distribution of Exchange Notes, and (iii) neither the
undersigned nor any such other person is an "affiliate" (as defined in Rule 405
under the Securities Act) of the Company or a broker-dealer tendering
Outstanding Notes acquired directly from the Company for its own account.
If the undersigned or the person receiving the Exchange Notes is a
broker-dealer that is receiving Exchange Notes for its own account pursuant to
the Exchange Offer, the undersigned acknowledges that it or such other person
will deliver a prospectus in connection with any resale of such Exchange Notes.
The undersigned acknowledges that if the undersigned is participating in the
Exchange Offer for the purpose of distributing the Exchange Notes (i) the
undersigned cannot rely on the position of the staff of the SEC in the Morgan
Stanley Letter and similar SEC no-action letters, and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes, in which case the registration statement must
contain the selling security holder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the SEC, and (ii) a broker-dealer that
delivers such a prospectus to purchasers in connection with such resales will be
subject to certain of the civil liability provisions under the Securities Act
and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations).
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Outstanding
Notes tendered hereby, including the transfer of such Outstanding Notes on the
account books maintained by the Book-Entry Transfer Facility.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Outstanding Notes when, as and if the
Company gives oral or written notice thereof to the Exchange Agent. Any tendered
Outstanding Notes that are not accepted for exchange pursuant to the Exchange
Offer for any reason will be returned, without expense, to the undersigned at
the address shown below or at a different address as may be indicated herein
under "Special Delivery Instructions" as promptly as practicable after the
Expiration Date.
<PAGE> 5
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Outstanding Notes pursuant to the procedures described under the
caption "The Exchange Offer -- Procedures for Tendering" in the Prospectus and
in the instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Exchange Offer. The undersigned further acknowledges its obligations under the
Registration Rights Agreement as applicable to the Exchange Offer and the
Registration Statement of which the Prospectus is a part.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the Exchange Notes issued in exchange for the Outstanding Notes accepted
for exchange and return any Outstanding Notes not tendered or not exchanged, in
the name(s) of the undersigned. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please mail or deliver the Exchange Notes
issued in exchange for the Outstanding Notes accepted for exchange and any
Outstanding Notes not tendered or not exchanged (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both the "Special Issuance Instructions" and
"Special Delivery Instructions" are completed, please issue the Exchange Notes
issued in exchange for the Outstanding Notes accepted for exchange in the
name(s) of, and return any Outstanding Notes not tendered or not exchanged to,
the person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Outstanding Notes from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the
Outstanding Notes so tendered for exchange.
<PAGE> 6
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY (i) if Outstanding Notes in a principal amount not
tendered, or Exchange Notes issued in exchange for Outstanding Notes accepted
for exchange, are to be issued in the name of someone other than the undersigned
or (ii) if Outstanding Notes tendered by book-entry transfer which are not
exchanged are to be reissued by credit to an account maintained at the
Book-Entry Transfer Facility.
ISSUE EXCHANGE NOTES AND/OR OUTSTANDING NOTES TO:
NAME:
----------------------------------------
(Please Type or Print)
- ----------------------------------------------
ADDRESS:
-------------------------------------
- ----------------------------------------------
(Include Zip Code)
- ----------------------------------------------
(Tax Identification or Social Security Number)
(Complete Substitute Form W-9)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY if Outstanding Notes in a principal amount not tendered, or
Exchange Notes issued in exchange for Outstanding Notes accepted for exchange,
are to be mailed or delivered to someone other than the undersigned, or to the
undersigned at an address other than that shown below the undersigned's
signature.
MAIL OR DELIVER EXCHANGE NOTES AND/OR OUTSTANDING NOTES TO:
NAME:
---------------------------------------
(Please Type or Print)
- ---------------------------------------------
ADDRESS:
------------------------------------
- ---------------------------------------------
(Include Zip Code)
- ---------------------------------------------
(Tax Identification or Social Security Number)
[ ] Credit unexchanged Outstanding Notes delivered by book-entry transfer to the
Book-Entry Transfer Facility account set forth below:
Book-Entry Transfer Facility Account Number: -------------------------------
<PAGE> 7
IMPORTANT
PLEASE SIGN HERE WHETHER OR NOT
OUTSTANDING NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(Complete Accompanying Substitute Form W-9 on Reverse Side)
X
------------------------------------------------------------------------------
X
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(Signature(s) of Registered Holders of Outstanding Notes)
Dated: , 1997
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(The above lines must be signed by the registered holder(s) of Outstanding Notes
as name(s) appear(s) on the Outstanding Notes or on a security position listing,
or by person(s) authorized to become registered holder(s) by a properly
completed bond power from the registered holder(s), a copy of which must be
transmitted with this Letter of Transmittal. If Outstanding Notes to which this
Letter of Transmittal relate are held of record by two or more joint holders,
then all such holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
then such person must (i) set forth his or her full title below and (ii) unless
waived by the Company, submit evidence satisfactory to the Company of such
person's authority so to act. See Instruction 5 regarding the completion of this
Letter of Transmittal, printed below.)
Name(s):
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(Please Type or Print)
Capacity: ----------------------------------------------------------------------
Address: -----------------------------------------------------------------------
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(Include Zip Code)
Area Code and Telephone Number:
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MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an Eligible Institution:
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(Authorized Signature)
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(Title)
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(Name of Firm)
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(Address, Include Zip Code)
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(Area Code and Telephone Number)
Dated: , 1997
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<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Outstanding Notes or
Book-Entry Confirmation. All physically delivered Outstanding Notes or any
confirmation of a book-entry transfer to the Exchange Agent's account at the
Book-Entry Transfer Facility of Outstanding Notes tendered by book-entry
transfer (a "Book-Entry Confirmation"), as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile hereof or Agent's
Message, and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. The method of delivery of the
tendered Outstanding Notes, this Letter of Transmittal and all other required
documents to the Exchange Agent is at the election and risk of the holder and,
except as otherwise provided below, the delivery will be deemed made only when
actually received or confirmed by the Exchange Agent. Instead of delivery by
mail, it is recommended that the holder use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to assure delivery to
the Exchange Agent before the Expiration Date. No Letter of Transmittal or
Outstanding Notes should be sent to the Company.
2. Guaranteed Delivery Procedures. Holders who wish to tender their
Outstanding Notes and whose Outstanding Notes are not immediately available or
who cannot deliver their Outstanding Notes, this Letter of Transmittal or any
other documents required hereby to the Exchange Agent prior to the Expiration
Date or who cannot complete the procedure for book-entry transfer on a timely
basis and deliver an Agent's Message, must tender their Outstanding Notes
according to the guaranteed delivery procedures set forth in the Prospectus.
Pursuant to such procedures: (i) such tender must be made by or through a firm
which is a member of a registered national securities exchange or of the
National Association of Securities Dealers Inc., a commercial bank or a trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution"); (ii) prior to the Expiration Date, the Exchange
Agent must have received from the Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or
hand delivery) setting forth the name and address of the holder of the
Outstanding Notes, the registration number(s) of such Outstanding Notes and the
total principal amount of Outstanding Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the Expiration Date, this Letter of Transmittal (or facsimile
hereof) together with the Outstanding Notes in proper form for transfer (or a
Book-Entry Confirmation) and any other documents required hereby, must be
deposited by the Eligible Institution with the Exchange Agent within three New
York Stock Exchange trading days after the Expiration Date; and (iii) the
certificates for all physically tendered shares of Outstanding Notes, in proper
form for transfer (or a Book-Entry Confirmation, as the case may be) and all
other documents required hereby are received by the Exchange Agent within three
New York Stock Exchange trading days after the Expiration Date.
Any holder of Outstanding Notes who wishes to tender Outstanding Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00
p.m., New York City time, on the Expiration Date. Upon request of the Exchange
Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to
tender their Outstanding Notes according to the guaranteed delivery procedures
set forth above.
See "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus.
3. Tender of Holder. Only a holder of Outstanding Notes may tender such
Outstanding Notes in the Exchange Offer. Any beneficial holder of Outstanding
Notes who is not the registered holder and who wishes to tender should arrange
with the registered holder to execute and deliver this Letter of Transmittal on
his behalf or must, prior to completing and executing this Letter of Transmittal
and delivering his Outstanding Notes, either make appropriate arrangements to
register ownership of the Outstanding Notes in such holder's name or obtain a
properly completed bond power from the registered holder.
4. Partial Tenders. Tenders of Outstanding Notes will be accepted only in
integral multiples of $1,000. If less than the entire principal amount of any
Outstanding Notes is tendered, the tendering holder should fill in the principal
amount tendered in the third column of the box entitled "Description of
Outstanding Notes Tendered" above. The entire principal amount of Outstanding
Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated. If the entire principal amount of all Outstanding
Notes is not tendered, then Outstanding Notes for the principal amount of
Outstanding Notes not tendered and Exchange Notes issued in exchange for any
Outstanding Notes accepted will be sent to the holder at his or her registered
address, unless a different address is provided in the appropriate box on this
Letter of Transmittal, promptly after the Outstanding Notes are accepted for
exchange.
5. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Medallion Guarantee of Signatures. If this Letter of Transmittal (or facsimile
hereof) is signed by the record holder(s) of the Outstanding Notes tendered
hereby, the signature must correspond with the name(s) as written on the face of
the Outstanding Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by a participant
in the Book-Entry Transfer Facility, the signature must correspond with the name
as it appears on the security position listing as the holder of the Outstanding
Notes.
<PAGE> 9
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Outstanding Notes listed and tendered hereby and
the Exchange Notes issued in exchange therefor are to be issued (or any
untendered principal amount of Outstanding Notes is to be reissued) to the
registered holder, the holder need not and should not endorse any tendered
Outstanding Notes, nor provide a separate bond power. In any other case, such
holder must either properly endorse the Outstanding Notes tendered or transmit a
properly completed separate bond power with this Letter of Transmittal, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Outstanding Notes listed,
such Outstanding Notes must be endorsed or accompanied by appropriate bond
powers, in each case signed as the name of the registered holder or holders
appears on the Outstanding Notes.
If this Letter of Transmittal (or facsimile hereof) or any Outstanding
Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, evidence satisfactory to the Company
of their authority to act must be submitted with this Letter of Transmittal.
Endorsements on Outstanding Notes or signatures on bond powers required by
this Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal (or
facsimile hereof) is signed by the registered holder(s) of the Outstanding Notes
tendered herein (or by a participant in the Book-Entry Transfer Facility whose
name appears on a security position listing as the owner of the tendered
Outstanding Notes) and the Exchange Notes are to be issued directly to such
registered holder(s) (or, if signed by a participant in the Book-Entry Transfer
Facility, deposited to such participant's account at such Book-Entry Transfer
Facility) and neither the box entitled "Special Delivery Instructions" nor the
box entitled "Special Registration Instructions" has been completed, or (ii)
such Outstanding Notes are tendered for the account of an Eligible Institution.
In all other cases, all signatures on this Letter of Transmittal (or facsimile
hereof) must be guaranteed by an Eligible Institution.
6. Special Registration and Delivery Instructions. Tendering holders should
indicate, in the applicable box or boxes, the name and address (or account at
the Book-Entry Transfer Facility) to which Exchange Notes or substitute
Outstanding Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
7. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer.
If, however, Exchange Notes or Outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Outstanding Notes tendered hereby, or if tendered Outstanding Notes are
registered in the name of any person other than the person signing this Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Outstanding Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OUTSTANDING NOTES LISTED IN THIS LETTER
OF TRANSMITTAL.
8. Tax Identification Number. Federal income tax law requires that a holder
of any Outstanding Notes which are accepted for exchange must provide the
Company (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual is his or her social
security number. If the Company is not provided with the correct TIN, the holder
may be subject to a $50 penalty imposed by Internal Revenue Service. (If
withholding results in an over-payment of taxes, a refund may be obtained).
Certain holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Outstanding Notes are registered in more than one name or are not in the
name of the actual owner, see the enclosed "Guidelines for Certification of
Taxpayer Identification Number of Substitute Form W-9" for information on which
TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligations regarding backup
withholding.
<PAGE> 10
9. Validity of Tenders. All questions as to the validity, form,
eligibility (including time of receipt), acceptance and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Company's acceptance of which would, in the opinion of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any conditions of the Exchange Offer or defects or irregularities
in tenders as to particular Outstanding Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including this Letter of
Transmittal and the instructions hereto) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Outstanding Notes must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent nor any person shall be under
any duty to give notification of defects or irregularities with regard to
tenders of Outstanding Notes nor shall any of them incur any liability for
failure to give such notification.
10. Waiver of Conditions. The Company reserves the absolute right to waive,
in whole or part, any of the conditions to the Exchange Offer set forth in the
Prospectus.
11. No Conditional Tender. No alternative, conditional, irregular, or
contingent tender of Outstanding Notes on transmittal of this Letter of
Transmittal will be accepted.
12. Mutilated, Lost, Stolen or Destroyed Outstanding Notes. Any holder
whose Outstanding Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated above for further
instructions.
13. Requests for Assistance or Additional Copies. Requests for assistance
or for additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
14. Withdrawal. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE OUTSTANDING NOTES DELIVERED BY BOOK-ENTRY TRANSFER OR IN
ORIGINAL HARD COPY FORM) MUST BE RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE
OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE
EXPIRATION DATE.
<PAGE> 11
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<TABLE>
<S> <S> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT Social Security Number
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW OR Employer Identification Number
FORM W-9
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DEPARTMENT OF THE TREASURY PART 2 -- Certification -- Under penalties of perjury, I PART 3 --
INTERNAL REVENUE SERVICE certify that:
(1) The number shown on this form is my correct Taxpayer Awaiting TIN [ ]
Identification Number (or I am waiting for a number to
be issued to me) and
(2) I am not subject to backup withholding either because Please complete the
PAYER'S REQUEST FOR TAXPAYER I have not been notified by the Internal Revenue Certificate of Awaiting
IDENTIFICATION NUMBER (TIN) Service ("IRS") that I am subject to backup Taxpayer Identification Number
withholding as a result of failure to report all below.
interest or dividends, or the IRS has notified me that
I am no longer subject to backup withholding.
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Certificate Instructions -- You must cross out item (2) in Part 2 above if you have been
notified by the IRS that you are subject to backup withholding because of underreporting
interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS
stating that you are no longer subject to backup withholding, do not cross out item (2).
SIGNATURE DATE , 1997
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</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number to the payor within 60
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide a number.
<TABLE>
<C> <C>
SIGNATURE DATE , 1997
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</TABLE>
CERTIFICATE FOR FOREIGN RECORD HOLDERS
Under penalties of perjury, I certify that I am not a United States citizen
or resident (or I am signing for a foreign corporation, partnership, estate or
trust).
<TABLE>
<C> <C>
SIGNATURE DATE , 1997
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</TABLE>
<PAGE> 12
NOTICE OF GUARANTEED DELIVERY
FOR THE EXCHANGE OFFER
BY
TRANSAMERICAN ENERGY CORPORATION
ALL OUTSTANDING 11 1/2% SENIOR SECURED NOTES DUE 2002
FOR
11 1/2% SERIES B SENIOR SECURED NOTES DUE 2002
AND
ALL OUTSTANDING 13% SENIOR SECURED DISCOUNT NOTES DUE 2002
FOR
13% SERIES B SENIOR SECURED DISCOUNT NOTES DUE 2002
PURSUANT TO THE PROSPECTUS DATED , 1997
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERED OUTSTANDING NOTES MAY BE
WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
As set forth in the Prospectus dated , 1997 (the "Prospectus")
under the caption "The Exchange Offer -- Guaranteed Delivery Procedures" and the
accompanying Letter of Transmittal (the "Letter of Transmittal") and Instruction
2 thereto, this form, or one substantially equivalent hereto, must be used to
accept the Exchange Offer if certificates representing the 11 1/2% Senior
Secured Notes due 2002 or 13% Senior Secured Discount Notes due 2002 (the
"Outstanding Notes") of TransAmerican Energy Corporation, a Delaware corporation
(the "Company"), are not immediately available or if the procedure for
book-entry transfer cannot be completed in a timely basis or time will not
permit a holder's certificates or other required documents to reach the Exchange
Agent prior to the Expiration Date. Such form may be delivered by hand or
transmitted by facsimile transmission or mail to the Exchange Agent and must
include a guarantee by an Eligible Institution unless such form is submitted on
behalf of an Eligible Institution. Capitalized terms used and not defined herein
have the meanings given to them in the Prospectus.
The Exchange Agent for the Exchange Offer is:
FIRSTAR BANK OF MINNESOTA, N.A.
<TABLE>
<S> <C> <C>
By Mail: By Facsimile: By Hand or Overnight Courier:
FIRSTAR BANK OF MINNESOTA, N.A. (612) 229-6415 FIRSTAR BANK OF MINNESOTA, N.A.
Corporate Trust Department Corporate Trust Department
101 East Fifth Street Confirm by Telephone: 101 East Fifth Street
12th Floor (612) 229-2600 12th Floor
St. Paul, Minnesota 55101-1860 St. Paul, Minnesota 55101-1860
Attention: Frank Leslie Attention: Frank Leslie
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION VIA A FACSIMILE
NUMBER OTHER THAN THE ONES LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE> 13
Ladies and Gentlemen:
Upon the terms and subject to the conditions set forth in the Prospectus
and accompanying Letter of Transmittal, receipt of which is hereby acknowledged,
the undersigned hereby tenders to TransAmerican Energy Corporation, a Delaware
corporation (the "Company"), the principal amount of Outstanding Notes listed
below pursuant to the guaranteed delivery procedures set forth in the Prospectus
and accompanying Letter of Transmittal.
<TABLE>
<S> <C>
CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT TENDERED
(IF AVAILABLE) (MUST BE IN INTEGRAL MULTIPLES OF $1,000)
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</TABLE>
If Outstanding Notes will be tendered by book entry transfer:
Name of Tendering Institution:
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Account Number:
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SIGN HERE
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Signature(s)
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Name(s) (Please Type or Print)
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Address
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Zip Code
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Area Code and Telephone No.
Dated: , 1997
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<PAGE> 14
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEES)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., or a commercial bank
or trust company having an office in the United States, hereby (a) represents
that the above-named person(s) has a net long position in the Outstanding Notes
tendered hereby within the meaning of Rule 14e-4 under the Securities Exchange
Act of 1934, as amended, (b) represents that such tender of Outstanding Notes
complies with Rule 14e-4 and (c) guarantees delivery to the Exchange Agent of
certificates representing the Outstanding Notes tendered hereby, in proper form
for transfer, or confirmation of book-entry transfer of such Outstanding Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility (as
defined in the Letter of Transmittal), in each case, together with a properly
completed and duly executed Letter of Transmittal with any required signature
guarantees and any other documents required by the Letter of Transmittal, within
three New York Stock Exchange trading days after the date hereof.
<TABLE>
<S> <C>
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Name of Firm Title
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Authorized Signature Name (Please Type or Print)
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Address Dated: , 1997
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Area Code and Telephone No.
</TABLE>
NOTE: DO NOT SEND CERTIFICATES REPRESENTING OUTSTANDING NOTES WITH THIS FORM.
CERTIFICATES FOR OUTSTANDING NOTES MUST BE SENT WITH YOUR LETTER OF
TRANSMITTAL.
