<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1997
REGISTRATION NO. 333-37723
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
TRANSAMERICAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 1311; 2911 76-0441642
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
ED DONAHUE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
1300 NORTH SAM HOUSTON PARKWAY EAST 1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 200 SUITE 200
HOUSTON, TEXAS 77032-2949 HOUSTON, TEXAS 77032-2949
(281) 987-8600 (281) 987-8600
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including telephone
area code, of registrant's principal executive number, including area code, of agent for
offices) service)
</TABLE>
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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. [ ]
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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
PROSPECTUS
OFFER TO EXCHANGE
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ALL OUTSTANDING AND ALL OUTSTANDING
11 1/2% SENIOR SECURED NOTES DUE 2002 13% SENIOR SECURED DISCOUNT NOTES DUE
2002
($475,000,000 PRINCIPAL AMOUNT ($1,130,000,000 PRINCIPAL AMOUNT
OUTSTANDING) OUTSTANDING
FOR AS SHOWN ON THE FACE THEREOF)
11 1/2% SERIES B SENIOR SECURED NOTES DUE FOR
2002
($475,000,000 PRINCIPAL AMOUNT) 13% SERIES B SENIOR SECURED DISCOUNT
NOTES
DUE 2002
($1,130,000,000 PRINCIPAL AMOUNT AS SHOWN
ON
THE FACE THEREOF)
</TABLE>
OF
TRANSAMERICAN ENERGY CORPORATION
---------------------
The Exchange Offer will expire at 5:00 p.m., New York City time on January 9,
1998, 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.
---------------------
SEE "RISK FACTORS" ON PAGE 16 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 December 10, 1997.
<PAGE> 3
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 January 9, 1998, 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
ii
<PAGE> 4
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."
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> 5
TABLE OF CONTENTS
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PAGE
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Available Information....................................... v
Special Note Regarding Forward-Looking Statements........... v
Prospectus Summary.......................................... 1
Risk Factors................................................ 16
The Exchange Offer.......................................... 31
Use of Proceeds............................................. 37
The Company................................................. 38
Selected Financial and Operating Data....................... 40
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 43
Business of TransTexas...................................... 61
Business of TARC............................................ 71
Management of the Company................................... 84
Security Ownership of Certain Beneficial Owners and
Management................................................ 87
Certain Relationships and Related Transactions.............. 87
Certain Federal Income Tax Considerations................... 91
Certain Legal Considerations................................ 94
Description of Existing Indebtedness........................ 95
Description of the Exchange Notes........................... 96
Plan of Distribution........................................ 150
Legal Matters............................................... 151
Independent Accountants..................................... 151
Reserve Engineers........................................... 151
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> 6
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 New York Stock Exchange under the symbol TTG, and
such reports, proxy statements and other information may be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, NY 10005.
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> 7
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.
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
1
<PAGE> 8
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 (the "1995 Program") designed to reactivate the refinery
and increase its complexity. From February 1995 through April 1997, TARC spent
approximately $245 million on the 1995 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 for its completion.
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> 9
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, other than 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
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<PAGE> 10
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 in an offer to purchase pursuant to a Change
of Control.
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 7,320,552 TARC Warrants for an aggregate purchase price of
approximately $33 million. TransAmerican subsequently purchased 163,679 TARC
Warrants for an aggregate purchase price of approximately $0.7 million. TEC,
TransAmerican or TARC may repurchase additional TARC Warrants, and TARC may
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 Original 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").
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% Series C Senior Subordinated
Notes due 2001 (the "TransTexas Series C Subordinated Notes") for all of its
13 1/4% Senior Subordinated Notes due 2003 (the "Old TransTexas Subordinated
Notes"). On October 10, 1997, TransTexas completed a registered exchange offer
whereby it issued $115.8 million aggregate principal amount of its 13 3/4%
Series D Senior Subordinated Notes due 2001 (the "TransTexas Subordinated
Notes") in exchange for all of the outstanding TransTexas Series C 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. In June 1997, TransTexas 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 weighted average price paid to purchase shares from the public
stockholders. As of October 31, 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 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. As of October 31, 1997, approximately
4
<PAGE> 11
$262.4 million had been disbursed to TransTexas for 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
October 31, 1997, TARC Mortgage Notes and TARC Discount Notes with an aggregate
carrying value of approximately $16.0 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, proceeds to TEC and TARC of
approximately $201 million from the Share Repurchase Program have been deposited
in the TARC Disbursement Account. All funds in the TARC Disbursement Account are
pledged as security for the repayment of the Notes.
The Disbursement Agent makes disbursements for the Capital Improvement
Program out of the TARC Disbursement Account in accordance with requests made by
TARC and approved by the Construction Supervisor. The Construction Supervisor is
required to review each such disbursement request by TARC. 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.
BNY Facility. On October 14, 1997, TransTexas and BNY Financial
Corporation entered into a Second Amended and Restated Accounts Receivable
Management and Security Agreement ("BNY Facility") for a $40 million line of
credit. The line of credit is collateralized by accounts receivable and
inventory of TransTexas and is guaranteed by John R. Stanley. The amounts that
may be advanced to TransTexas under this line of credit are based on a
percentage of TransTexas' natural gas receivables from unaffiliated third
parties. 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%. As of October 31, 1997, outstanding advances under the BNY
Facility totaled approximately $11.3 million.
GATX Terminal Acquisition. In September 1997, TARC purchased a tank
storage facility located adjacent to the refinery for a purchase price of $40
million. Environmental investigations conducted by the previous owner of the
facilities have indicated soil and groundwater contamination in several areas on
the
5
<PAGE> 12
property. As a result, the former owner submitted to the Louisiana Department of
Environmental Quality (the "LDEQ") plans for the remediation of any significant
indicated contamination in such areas. TARC has analyzed these investigations
and has carried out further Phase II Environmental Assessments to verify their
results. TARC intends to incorporate any required remediation into its ongoing
work at the refinery. In connection with the purchase of the facilities, TARC
agreed to indemnify the seller from all cleanup costs and certain other damages
resulting from contamination on the property, and created a $5 million escrow
account to fund required remediation costs and indemnification claims by the
seller. As a result of TARC's Phase II Environmental Assessments, TARC believes
that the amount in escrow should be sufficient to fund the remediation costs
associated with identified contamination; however, because the LDEQ has not yet
approved certain of the remediation plans, there can be no assurance that the
funds set aside in the escrow account will be sufficient to pay all required
remediation costs.
THE EXCHANGE OFFER
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 January 16, 1998 (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
6
<PAGE> 13
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."
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 January 9, 1998.
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
appropri-
7
<PAGE> 14
ate 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."
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
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<PAGE> 15
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.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
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 Exchange
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 Exchange 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
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<PAGE> 16
discount in ordinary income in advance of the
receipt of cash attributable thereto 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. 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."
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
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<PAGE> 17
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.
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 of Notes to
Condensed Consolidated Financial Statements. Of
these funds, $427 million will be available only
for the Capital Improvement Program, approximately
$25.5 million will be available for general and
administrative expenses, $7 million will be
available for outstanding accounts payable, $50
million will be available for working capital upon
completion of the Delayed Coking Unit and certain
supporting units and $19 million will be available
for the payment of interest on, or the redemption,
purchase, defeasance or other retirement of, the
outstanding TARC Notes. 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 October 31, 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.
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<PAGE> 18
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."
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."
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<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.
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<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
YEAR ENDED JULY 31, JANUARY 31, JANUARY 31,
------------------------------------------- ----------------------- -----------------------
1992 1993 1994 1995 1995 1996 1996 1997
-------- -------- -------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <C> <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 $ 254,275 $ 360,740
Refining revenues............ -- -- 174,143 140,027 71,035 107,237 176,229 10,857
Transportation revenues...... 30,749 30,816 33,240 36,787 19,161 15,892 33,518 34,423
Gain on sale of assets....... -- -- -- -- -- 474 474 7,856
Other revenues............... 3,402 5,425 3,192 837 603 127 361 297
-------- -------- -------- --------- ---------- ---------- ---------- ----------
261,359 330,994 510,785 450,743 232,869 246,983 464,857 414,173
Operating costs and
expenses.................... 87,109 113,220 285,766 262,331 133,336 162,830 291,825 181,085
Depreciation, depletion, and
amortization................ 96,523 95,016 116,447 135,819 73,051 64,053 126,821 139,678
General and administrative
expenses.................... 34,912 34,954 44,807 45,592 21,037 21,213 45,768 57,500
Net interest expense......... 1,724 2,457 50,131 74,214 29,086 44,151 89,615 95,922
Income taxes and other....... 3,587 11,103 7,231 (4,866) (247) (18,487) (23,106) (126,489)
Extraordinary loss, net of
taxes....................... -- -- -- 56,637 -- -- 56,637 --
-------- -------- -------- --------- ---------- ---------- ---------- ----------
Net income (loss)(9)......... $ 37,504 $ 74,244 $ 6,403 $(118,984) $ (23,394) $ (26,777) $ (122,703) $ 66,477
======== ======== ======== ========= ========== ========== ========== ==========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item.......... $ (13,901) $ (2,975) $ (7,341) $ 7,384
Extraordinary item........... (12,628) -- (6,293) --
--------- ---------- ---------- ----------
$ (26,529) $ (2,975) $ (13,634) $ 7,384
========= ========== ========== ==========
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 66.9 137.9 153.6(4)
Average gas prices (dry) (per
Mcf)........................ $ 1.36 $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65 $ 1.51 $ 2.14(5)
Average lifting costs (per
Mcfe)....................... $ .19 $ .22 $ .24 $ .21 $ .21 $ .23 $ .23 $ .29
Number of gross wells
drilled..................... 71 103 140 97 60 65 102 151
Percentage of wells drilled
completed................... 82% 85% 83% 77% 78% 74% 75% 68%
Net proved reserves(6):
Gas (Bcf)................... 686.2 695.0 717.4 1,122.6 943.4 1,139.1 1,139.1 919.7
Condensate (MBbls).......... 2,171 1,968 1,935 3,049 2,637 2,903 2,903 5,738
SEC PV10.................... $623,173 $701,434 $544,387 $ 547,646 $ 533,281 $ 808,062 $ 808,062 $1,449,068(7)
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate, and NGL
revenue..................... $ 156,245 $ 111,848
Refining revenues............ 10,857 --
Transportation revenues...... 16,870 12,055
Gain on sale of assets....... 7,762 532,929
Other revenues............... 357 617
---------- ----------
192,091 657,449
Operating costs and
expenses.................... 88,645 57,422
Depreciation, depletion, and
amortization................ 65,165 57,397
General and administrative
expenses.................... 25,663 29,767
Net interest expense......... 52,000 60,818
Income taxes and other....... (144,702) 171,748
Extraordinary loss, net of
taxes....................... -- 156,539
---------- ----------
Net income (loss)(9)......... $ 105,320 $ 123,758
========== ==========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item.......... $ 11,700 $ 31,142
Extraordinary item........... -- (17,393)
---------- ----------
$ 11,700 $ 13,749
========== ==========
Ratio of earnings to fixed
charges(2).................. 1.8x 4.9x
OPERATING DATA OF TRANSTEXAS:
Gas sales volumes (Bcf)...... 74.3 53.2
Average gas prices (dry) (per
Mcf)........................ $ 1.99(5) $ 1.80
Average lifting costs (per
Mcfe)....................... $ .30 $ .35
Number of gross wells
drilled..................... 58 55
Percentage of wells drilled
completed................... 74% 58%
Net proved reserves(6):
Gas (Bcf)................... N/A N/A
Condensate (MBbls).......... N/A N/A
SEC PV10.................... N/A N/A
</TABLE>
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
-------------------------------------------- ------------------------------------
1992 1993 1994 1995 1995 1996 1997
-------- -------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <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 $ 32,504
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 1,307,652
Stockholder's equity (deficit)......... 198,957 230,418 15,262 (9,156) (8,133) (35,933) (47,009)
<CAPTION>
JULY 31,
------------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <C>
BALANCE SHEET DATA:
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>
14
<PAGE> 21
- ---------------
(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 preferred stock dividends of $19,000 for the
year ended January 31, 1997 and the six months ended July 31, 1996 and 1997.
15
<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
16
<PAGE> 23
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").
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
17
<PAGE> 24
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," 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
18
<PAGE> 25
(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.
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
19
<PAGE> 26
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 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 October 31, 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
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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.
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 the BNY Facility and
certain equipment
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<PAGE> 28
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 in ordinary income for federal income tax
purposes in advance of the receipt of the cash attributable thereto 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. 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 Exchange Notes.
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.
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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.
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.
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<PAGE> 30
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."
Absence of Public Market for the Notes. The Outstanding Notes have not
been registered under the Securities Act, 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
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<PAGE> 31
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 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
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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.
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."
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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.
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 1995 Program 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.
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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.
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,
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TARC believes that such matters will not have a material adverse effect on
TARC's future results of operations, cash flow or financial position.
In September 1997, TARC purchased a tank storage facility located adjacent
to the refinery for a purchase price of $40 million. Environmental
investigations conducted by the previous owner of the facilities have indicated
soil and groundwater contamination in several areas on the property. As a
result, the former owner submitted to the LDEQ plans for the remediation of any
significant indicated contamination in such areas. TARC has analyzed these
investigations and has carried out further Phase II Environmental Assessments to
verify their results. TARC intends to incorporate any required remediation into
its ongoing work at the refinery. In connection with the purchase of the
facilities, TARC agreed to indemnify the seller from all cleanup costs and
certain other damages resulting from contamination on the property, and created
a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessments, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination; however, because the LDEQ has not yet approved certain of the
remediation plans, there can be no assurance that the funds set aside in the
escrow account will be sufficient to pay all required remediation costs.
Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a material
adverse effect on TARC's financial position, results of operations or cash flow.
Until the refinery is in full operation, however, there can be no assurance that
the regulations will not have such an effect.
In addition, the 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 LDEQ has incorporated MACT standards into TARC's air
permits under federal and state air pollution prevention laws. TARC believes
that compliance with the Hazardous Organics NESHAPS will not have a material
adverse effect on TARC's financial position, results of operations or cash flow.
Until the refinery is in full operation, however, there can be no assurance that
the regulations will not have such an effect.
The EPA recently promulgated federal regulations pursuant to the Clean Air
Act to control fuels and fuel additives (the "Gasoline Standards") that could
have a material adverse effect on TARC. Under 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") the
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.
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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 flow 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.
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.
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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.
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.
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The Company has fixed the close of business on December 8, 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.
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.
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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.
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 Depository Trust Company ("DTC" or 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
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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.
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
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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.
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>
<S> <C> <C>
By Registered or Certified By Overnight Mail or Hand: By Facsimile:
Mail:
Firstar Bank of Minnesota, Firstar Bank of Minnesota, Firstar Bank of Minnesota,
N.A. N.A. N.A.
101 East Fifth Street 101 East Fifth Street Attn: Corporate Trust
St. Paul, MN 55101-1860 St. Paul, MN 55101-1860 Department
Attn: Corporate Trust Attn: Corporate Trust Facsimile No. (612) 229-6415
Department 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.
35
<PAGE> 42
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 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
36
<PAGE> 43
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 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.
37
<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 77032-2949, 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.
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
38
<PAGE> 45
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 (the "1995 Program") designed to reactivate the refinery
and increase its complexity. From February 1995 through April 1997, TARC spent
approximately $245 million on the 1995 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 for its completion.
The Transactions, when completed, will result in proceeds to TARC in excess
of the $427 million estimated budget for the Capital Improvement Program. 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.
39
<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.
40
<PAGE> 47
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
YEAR ENDED JULY 31, JANUARY 31, JANUARY 31,
------------------------------------------- ----------------------- -----------------------
1992 1993 1994 1995 1995 1996 1996 1997
-------- -------- -------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <C> <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 $ 254,275 $ 360,740
Refining revenues............ -- -- 174,143 140,027 71,035 107,237 176,229 10,857
Transportation revenues...... 30,749 30,816 33,240 36,787 19,161 15,892 33,518 34,423
Gain on sale of assets....... -- -- -- -- -- 474 474 7,856
Other revenues............... 3,402 5,425 3,192 837 603 127 361 297
-------- -------- -------- --------- ---------- ---------- ---------- ----------
261,359 330,994 510,785 450,743 232,869 246,983 464,857 414,173
Operating costs and
expenses.................... 87,109 113,220 285,766 262,331 133,336 162,830 291,825 181,085
Depreciation, depletion, and
amortization................ 96,523 95,016 116,447 135,819 73,051 64,053 126,821 139,678
General and administrative
expenses.................... 34,912 34,954 44,807 45,592 21,037 21,213 45,768 57,500
Net interest expense......... 1,724 2,457 50,131 74,214 29,086 44,151 89,615 95,922
Income taxes and other....... 3,587 11,103 7,231 (4,866) (247) (18,487) (23,106) (126,489)
Extraordinary loss, net of
taxes....................... -- -- -- 56,637 -- -- 56,637 --
-------- -------- -------- --------- ---------- ---------- ---------- ----------
Net income (loss)(9)......... $ 37,504 $ 74,244 $ 6,403 $(118,984) $ (23,394) $ (26,777) $ (122,703) $ 66,477
======== ======== ======== ========= ========== ========== ========== ==========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item.......... $ (13,901) $ (2,975) $ (7,341) $ 7,384
Extraordinary item........... (12,628) -- (6,293) --
--------- ---------- ---------- ----------
$ (26,529) $ (2,975) $ (13,634) $ 7,384
========= ========== ========== ==========
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 66.9 137.9 153.6(4)
Average gas prices (dry) (per
Mcf)........................ $ 1.36 $ 1.98 $ 1.96 $ 1.40 $ 1.41 $ 1.65 $ 1.51 $ 2.14(5)
Average lifting costs (per
Mcfe)....................... $ .19 $ .22 $ .24 $ .21 $ .21 $ .23 $ .23 $ .29
Number of gross wells
drilled..................... 71 103 140 97 60 65 102 151
Percentage of wells drilled
completed................... 82% 85% 83% 77% 78% 74% 75% 68%
Net proved reserves(6):
Gas (Bcf)................... 686.2 695.0 717.4 1,122.6 943.4 1,139.1 1,139.1 919.7
Condensate (MBbls).......... 2,171 1,968 1,935 3,049 2,637 2,903 2,903 5,738
SEC PV10.................... $623,173 $701,434 $544,387 $ 547,646 $ 533,281 $ 808,062 $ 808,062 $1,449,068(7)
<CAPTION>
SIX MONTHS ENDED
JULY 31,
------------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AND PER UNIT AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate, and NGL
revenue..................... $ 156,245 $ 111,848
Refining revenues............ 10,857 --
Transportation revenues...... 16,870 12,055
Gain on sale of assets....... 7,762 532,929
Other revenues............... 357 617
---------- ----------
192,091 657,449
Operating costs and
expenses.................... 88,645 57,422
Depreciation, depletion, and
amortization................ 65,165 57,397
General and administrative
expenses.................... 25,663 29,767
Net interest expense......... 52,000 60,818
Income taxes and other....... (144,702) 171,748
Extraordinary loss, net of
taxes....................... -- 156,539
---------- ----------
Net income (loss)(9)......... $ 105,320 $ 123,758
========== ==========
Net income (loss) per common
share:(1)
Income (loss) before
extraordinary item.......... $ 11,700 $ 31,142
Extraordinary item........... -- (17,393)
---------- ----------
$ 11,700 $ 13,749
========== ==========
Ratio of earnings to fixed
charges(2).................. 1.8x 4.9x
OPERATING DATA OF TRANSTEXAS:
Gas sales volumes (Bcf)...... 74.3 53.2
Average gas prices (dry) (per
Mcf)........................ $ 1.99(5) $ 1.80
Average lifting costs (per
Mcfe)....................... $ .30 $ .35
Number of gross wells
drilled..................... 58 55
Percentage of wells drilled
completed................... 74% 58%
Net proved reserves(6):
Gas (Bcf)................... N/A N/A
Condensate (MBbls).......... N/A N/A
SEC PV10.................... N/A N/A
</TABLE>
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
-------------------------------------------- ------------------------------------
1992 1993 1994 1995 1995 1996 1997
-------- -------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
<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 $ 32,504
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 1,307,652
Stockholder's equity (deficit)......... 198,957 230,418 15,262 (9,156) (8,133) (35,933) (47,009)
<CAPTION>
JULY 31,
------------------------
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AND PER UNIT AMOUNTS)
<S> <C> <C>
BALANCE SHEET DATA:
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>
41
<PAGE> 48
- ---------------
(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 preferred stock dividends of $19,000 for the
year ended January 31, 1997 and the six months ended July 31, 1996 and 1997.
42
<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:
<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
======== ======== ======== ======== ==========
</TABLE>
43
<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 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 $ 30,560 $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 $ 31,910 $139,678 $485,937 $1,613,735
======== ======== ======== ======== ==========
Six Months Ended July 31, 1996
Exploration and production.... $156,245 $ 43,593 $ 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 $ 50,901 $ 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>
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.
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<PAGE> 51
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> <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.
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> <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
45
<PAGE> 52
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.
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 Old 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
46
<PAGE> 53
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 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.
47
<PAGE> 54
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 Old 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 $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
48
<PAGE> 55
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.
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.
49
<PAGE> 56
TARC
RESULTS OF OPERATIONS
TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals and
its expenses consisted of maintenance and repairs, tank rentals, general and
administrative expenses and property taxes. TARC commenced partial operations at
the refinery in March 1994 and has operated the No. 2 Vacuum Unit intermittently
since that time. TARC may operate the No. 2 Crude Unit and the No. 2 Vacuum Unit
if market conditions are favorable. TARC's decision to commence or suspend
operations is based on the availability of working capital, current operating
margins and the need to tie-in units as they are completed. TARC does not
consider its historical results to be indicative of future results.
TARC's results of operations are dependent on the operating status of
certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the unit
costs of purchased feedstocks and the unit prices of refined products, which can
vary significantly. The Capital Improvement Program is designed to significantly
change TARC's throughput capacity, the feedstocks processed, and refined product
yields.
TARC currently believes, based on estimates of refining margins and current
estimates for costs of the expansion and modification of the refinery, that
future undiscounted cash flows will be sufficient to recover the cost of the
refinery over its estimated useful life as well as the costs of related
identifiable intangible assets. Management believes there have been no events or
changes in circumstances that would require the recognition of an impairment
loss. However, due to the inherent uncertainties in estimating future refining
margins, and in constructing and operating a large scale refinery, there can be
no assurance that TARC will ultimately recover the cost of the refinery.
Management believes that the book value of the refinery is in excess of its
current estimated fair market value.
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
50
<PAGE> 57
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 Series C 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.
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.
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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.
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
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$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.
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 that adoption
of this statement will have a material impact on its financial position.
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 that adoption of this statement
will have a material impact on its financial statements.
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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 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 adoption 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 that adoption of SOP 96-1 in 1998 will have a material impact on
TARC's financial position, results of operations or cash flow.
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.
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 in an offer to purchase pursuant to a Change of Control. 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 7,320,552 TARC Warrants for
an aggregate purchase price of approximately $33 million. TransAmerican
subsequently purchased 163,679 TARC Warrants for an aggregate purchase price of
approximately $0.7 million. TEC, TransAmerican or TARC may repurchase additional
TARC Warrants, and TARC may 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
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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.
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% Series C Senior Subordinated Notes due 2001 (the "TransTexas Series C
Subordinated Notes") for all of the Old TransTexas Subordinated Notes. On
October 10, 1997, TransTexas completed a registered exchange offer whereby it
issued $115.8 million aggregate principal amount of its 13 3/4% Series D Senior
Subordinated Notes due 2001 (the "TransTexas Subordinated Notes") in exchange
for all of the outstanding TransTexas Series C 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.
In June 1997, TransTexas implemented 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 a combination of the above. It is anticipated that the price paid to
affiliated stockholders will equal
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the weighted average price paid to purchase shares from the public stockholders.
As of October 31, 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.
On October 14, 1997, TransTexas and BNY Financial Corporation entered into
a Second Amended and Restated Accounts Receivable Management and Security
Agreement for a $40 million line of credit (the "BNY Facility"). As of October
31, 1997, outstanding advances under the BNY Facility totaled approximately
$11.3 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.
During the months of April and May 1997, TransTexas obtained additional
financing in the aggregate amount of approximately $45.8 million, of which
approximately $21.0 million remains outstanding. Proceeds from these
transactions, net of current maturities, were used to pay certain short-term
obligations outstanding at January 31, 1997.
TransTexas makes substantial capital expenditures for the exploration 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
October 31, 1997, TARC Mortgage Notes and TARC Discount Notes with a carrying
value of approximately $16.0 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
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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 of Notes to Consolidated Financial Statements. Of these funds, $427 million
will be available only for the Capital Improvement Program, approximately $25.5
million will be available for general and administrative expenses, $7 million
will be available for outstanding accounts payable, $50 million will be
available for working capital upon completion of the Delayed Coking Unit and
certain supporting units and $19 million will be available for the payment of
interest on, or the redemption, purchase, defeasance or other retirement of, the
outstanding TARC Notes. TARC's estimated capital expenditures for the Capital
Improvement Program are $201 million, $210 million, and $16 million,
respectively, during the remainder of fiscal 1998, and the fiscal years ending
January 31, 1999 and 2000. If engineering problems, cost overruns or delays
occur and other financing sources are not available, TARC may not be able to
complete both phases of the Capital Improvement Program. As of July 31, 1997,
$24.9 million had been disbursed to TARC out of the TARC Disbursement Account
for use in the Capital Improvement Program and $7.0 million for general
corporate purposes.
In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned by the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. As of July 31, 1997, TARC has processed 6.4 million barrels of
feedstocks under this agreement. As of July 31, 1997 and January 31, 1997, TARC
was storing approximately 0.8 million and 1.0 million barrels, respectively, of
feedstock and intermediate or refined products. For the six months ended July
31, 1997 and 1996, TARC recorded income (loss) from processing agreements of
$3.2 million and $(3.3) million, respectively. Included in the 0.8 million
barrels of product stored at the refinery as of July 31, 1997, is approximately
0.6 million barrels of feedstock related to a purchase commitment entered into
in April 1997. The 0.6 million barrels have been sold to the third party
involved in the processing arrangement. For the six months ended July 31, 1997,
TARC incurred a loss of approximately $4.8 million related to this purchase
commitment.
TARC also entered into processing agreements with this third party to
process approximately 1.1 million barrels of the third party's feedstocks for a
fixed price per barrel. As of July 31, 1997, TARC recorded a net margin of
approximately $0.2 million related to these processing arrangements, primarily
as a result of income on the fixed fee processing agreement.
In September 1997, TARC purchased a tank storage facility adjacent to the
refinery for a purchase price of $40 million. See "Prospectus Summary -- Recent
Events."
In July and September 1997, TEC advanced an aggregate of $46 million to
TARC (the "TARC Working Capital Loan"). See "Certain Relationships and Related
Transactions."
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 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
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effect on TransTexas' cash flow or operations for that period. Although the
outcome of these contingencies or the probability of the occurrence of these
contingencies cannot be predicted with certainty, TransTexas does not expect
these matters to have a material adverse effect on its financial position.
TransTexas has caused delivery of a letter of credit to secure potential
liabilities totaling approximately $20 million in connection with certain
litigation described above.
In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
TransTexas. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days. TransTexas has agreed to
issue up to 8.6 million shares of common stock of TransTexas to the third party
if this contingent obligation to such third party becomes fixed and remains
unpaid for 60 days. TransTexas does not believe that this contingency will
occur. If the obligation becomes fixed, and alternative sources of capital are
not available, TransTexas could elect to sell shares of TransTexas' common stock
prior to the maturity of the obligation and use the proceeds of such sale to
repay the third party. Based on TransTexas' current capitalization, the issuance
of shares of TransTexas' common stock to satisfy this obligation would result in
deconsolidation of TransTexas for federal income tax purposes.
Pursuant to the Lobo Sale Agreement, TransTexas is required to indemnify
the buyer for certain liabilities related to the assets owned by TTC. Although
TransTexas does not anticipate that it will incur any material indemnity
liability, no assurance can be given that TransTexas will have sufficient funds
to satisfy any such indemnity obligation or that any payment thereof will not
have a material adverse effect on its ability to fund its debt service, capital
expenditure and working capital requirements.
Potential Tax Liability
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will not
challenge this position, or that such challenge would not be upheld. Under an
agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such tax
would be offset in future years by alternative minimum tax credits and retained
loss and credit carryforwards to the extent recoverable from TransAmerican. As a
member of the TNGC Consolidated Group (defined below), each of TransTexas, TEC
and TARC will be severally liable for any tax liability resulting from the
above-described transactions. The IRS has commenced an audit of the consolidated
federal income tax returns of the TNGC Consolidated Group for its taxable years
ended July 31, 1994 and 1995. Because the audit is in its initial stages, it is
not possible to predict the scope of the IRS' review or whether any tax
deficiencies will be proposed by the IRS as a result of its review.
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
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<PAGE> 65
resulting taxes, in the estimated amount of up to $250 million (assuming the use
of existing tax attributes of the TNGC Consolidated Group), possible penalties
equal to 20% of the amount of the tax, and interest at the statutory rate
(currently 9%) on the tax and penalties (if any). The Tax Allocation Agreement
has been amended so that TransAmerican will become obligated to fund the entire
tax deficiency (if any) resulting from the Lobo Sale. There can be no assurance
that TransAmerican would be able to fund any such payment at the time due and
the other members of the TNGC Consolidated Group, thus, may be required to pay
the tax. TransTexas has reserved approximately $75 million with respect to the
potential tax liability for financial reporting purposes to reflect a portion of
the federal tax liability that TransAmerican might not be able to pay. If
TransTexas were required to pay this tax deficiency, it is likely that it would
be required to sell significant assets or raise additional debt or equity
capital to fund the payment.
Under certain circumstances, TransAmerican or TEC may sell or otherwise
dispose of shares of common stock of the Company. If, as a result of any sale or
other disposition of the Company's common stock, the aggregate ownership of
TransTexas by members of the TNGC Consolidated Group (excluding TransTexas) is
less than 80% (measured by voting power and value), TransTexas will no longer be
a member of the TNGC Consolidated Group for federal tax purposes
("Deconsolidation") and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement. Further, if TEC or TARC sells or otherwise transfers any
stock of TARC, or issues any options, warrants or other similar rights relating
to such stock, outside of the TNGC Consolidated Group, which represents more
than 20% of the voting power or equity value of TARC, then a Deconsolidation of
TARC would occur. A Deconsolidation of TARC would result in a Deconsolidation of
TransTexas if the TNGC Consolidated Group, excluding TARC, does not then own at
least 80% of the voting power and equity value of TransTexas. Upon a
Deconsolidation of TransTexas, members of the TNGC Consolidated Group that own
TransTexas' common stock could incur a substantial amount of federal income tax
liability. If such Deconsolidation occurred during the fiscal year ending
January 31, 1998, the aggregate amount of this tax liability is estimated to be
between $50 million and $100 million, assuming no reduction for tax attributes
of the TNGC Consolidated Group. However, such tax liability generally would be
substantially reduced or eliminated in the event that the IRS successfully
challenged TransTexas' position on the Lobo Sale. Each member of a consolidated
group filing a consolidated federal income tax return is severally liable to the
IRS for the consolidated federal income tax liability of the consolidated group.
There can be no assurance that each TNGC Consolidated Group member will have the
ability to satisfy any tax obligation attributable to the Transactions at the
time due and, therefore, other members of the group, including TEC, TransTexas,
or TARC, may be required to pay the tax.
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
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<PAGE> 66
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 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 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> 67
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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<PAGE> 68
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 in Galveston Bay, the State Tract
88A#1, 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
has completed this well and expects to commence production as soon as additional
pipeline capacity is available. An earlier well, the Dorris #1, was lost due to
mechanical problems that resulted from a tubular failure. TransTexas has
completed two additional wells in Goliad County, the Strong #2 and Dorris #3,
and expects to commence production as soon as additional pipeline capacity is
available. 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.
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
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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. As of July 31, 1997, TransTexas owned a 69% working interest in 13,180
gross acres (9,840 net acres) in South Louisiana.
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.
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
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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
SIX MONTHS YEAR ENDED SIX MONTHS ENDED
YEAR ENDED JULY 31, ENDED YEAR ENDED JANUARY 31, ENDED JULY 31,
------------------------- JANUARY 31, JANUARY 31, 1997 JULY 31, 1997
1994 1995 1996 1997 (PRO FORMA)(2) 1997 (PRO FORMA)(2)
----------- ----------- ----------- ----------- -------------- ----------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- --- ------ ---- ----- --- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory Wells:
Productive(1)....... 4 4 13 13 12 11 36 33 36 33 11 7 11 7
Non-Productive...... 1 1 7 6 13 12 45 41 45 41 7 4 7 4
% Productive........ 80% 80% 65% 68% 48% 48% 44% 45% 44% 45% 61% 64% 61% 64%
Development Wells:
Productive(1)....... 112 112 63 63 36 36 67 66 23 23 21 19 14 13
Non-Productive...... 23 23 15 15 4 4 3 3 -- -- 16 14 16 14
% Productive........ 83% 83% 81% 81% 90% 90% 96% 96% 100% 100% 57% 58% 47% 48%
</TABLE>
- ---------------
(1) Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connection. Wells that are completed
in more than one producing zone are counted as one well.
(2) Gives effect to the Lobo Sale as of February 1, 1996.
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>
SIX
YEAR ENDED MONTHS YEAR YEAR ENDED SIX MONTHS SIX MONTHS
JULY 31, ENDED 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(1)
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(2) $ 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 .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
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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.
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.
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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.
<TABLE>
<CAPTION>
AT AUGUST 1, AT FEBRUARY 1, AT FEBRUARY 1,
---------------------- ------------------------ 1997
1994 1995 1996 1997 (PRO 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.
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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 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
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<PAGE> 74
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.
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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<PAGE> 75
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's motion for rehearing was denied, 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
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<PAGE> 76
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' motion for new
trial was denied in October 1997 and the court amended its final judgment.
TransTexas intends to refile a motion for a 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' motion for summary judgment is pending before the court.
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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<PAGE> 77
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 (the "1995 Program") designed to reactivate the refinery and
increase its complexity. From February 1, 1995 through April 1997, TARC spent
approximately $245 million on the 1995 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 for its completion.
The Capital Improvement Program is designed to complete the refinery under
an estimated budget of $427 million in expenditures from June 1997 to
completion. 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
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<PAGE> 78
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.
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.
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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<PAGE> 79
CAPITAL IMPROVEMENT PROGRAM
The Capital Improvement Program is designed to increase the capacity and
complexity of the refinery. The most significant projects include: (i)
converting the visbreaker unit into a delayed coking unit to process vacuum
tower bottoms into lighter petroleum products, (ii) modernizing and upgrading a
fluid catalytic cracking unit to increase gasoline production capacity and allow
the direct processing of low cost atmospheric residual feedstocks and (iii)
upgrading and expanding hydrotreating, alkylation and sulfur recovery 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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<PAGE> 80
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.
Offsite Facilities/Tankage. 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 one of its docks. 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. TARC has purchased an
adjacent storage terminal to provide additional storage. TARC intends to
construct pressurized tanks with a storage capacity of 127,500 barrels for LPG
and butane.
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.
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
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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.
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
---- ------
</TABLE>
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<TABLE>
<CAPTION>
BUDGET EXPENDITURES DAILY PRINCIPAL OUTSIDE
TO COMPLETE(1) TO DATE(2) CAPACITY CONTRACTOR
-------------- ------------ -------- -----------------
<S> <C> <C> <C> <C>
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.
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
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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.
CRUDE OIL AND FEEDSTOCK SUPPLY
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. Although TARC currently has no long-term supply contracts, it has
entered into negotiations with a major supplier of heavy, sour crude oil and is
in discussions with two other suppliers. TARC expects to be able to purchase
feedstocks on the spot market as needed and believes that it will have access to
adequate supplies of crude oil it intends to process; however there can be no
assurance that such supplies will be available on favorable terms.
The refinery has a variety of supply channels. The Mississippi River
permits delivery of feedstocks from both barge and ocean-going vessels. 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 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 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.
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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.
TANK STORAGE ACQUISITION
On September 9, 1997, the Company acquired tank storage facilities and
property located adjacent to the Company's refinery for $40 million. The
acquired assets included approximately 5.5 million barrels of tank storage
capacity for crude oil, feedstocks and finished products, and three docks on the
Mississippi River, as well as almost 500 acres of undeveloped wetlands. The
Company is integrating the tank storage and terminal facilities with its
refinery offsites systems and is leasing to other persons storage that is not
needed for its own operations. See "-- Environmental Matters."
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.
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.
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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 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.
In September 1997, TARC purchased a tank storage facility located adjacent
to the refinery for a purchase price of $40 million. Environmental
investigations conducted by the previous owner of the facilities have indicated
soil and groundwater contamination in several areas on the property. As a
result, the former owner submitted to the LDEQ plans for the remediation of any
significant indicated contamination in such areas. TARC has analyzed these
investigations and has carried out further Phase II Environmental Assessments to
verify their results. TARC intends to incorporate any required remediation into
its ongoing work at the refinery. In connection with the purchase of the
facilities, TARC agreed to indemnify the seller from all cleanup costs and
certain other damages resulting from contamination on the property, and created
a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessment, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination; however, because the LDEQ has not yet approved certain of the
remediation plans, there can be no assurance that the funds set aside in the
escrow account will be sufficient to pay all required remediation costs.
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Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to reduce benzene emissions to a level that will provide
an ample margin of safety to protect public health. TARC will be required to
comply with the Benzene Waste NESHAPS as its refinery operations start up. TARC
believes that compliance with the Benzene Waste NESHAPS will not have a material
adverse effect on TARC's financial position, results of operations or cash flow.
Until the refinery is in full operation, however, there can be no assurance that
the regulations will not have such an effect.
In addition, the EPA promulgated National Emission Standards for Hazardous
Air Pollutants for Hazardous Organics (the "Hazardous Organic NESHAPS")
regulations for petroleum refineries under the Clean Air Act in 1995, and
subsequently has amended such regulations. These regulations set Maximum
Achievable Control Technology ("MACT") standards for petroleum refineries. The
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 has promulgated federal regulations pursuant to the Clean Air Act
to control fuels and fuel additives (the "Gasoline Standards") that could have a
material adverse effect on TARC. Under these regulations, only reformulated
gasoline can be sold in certain domestic geographic areas in which the EPA has
mandated or approved its use. Reformulated gasoline must contain a minimum
amount of oxygen, have a lower vapor pressure, and have reduced sulfur, olefins,
benzene and aromatics compared to the average 1990 gasoline. The EPA recently
promulgated final National Ambient Air Quality Standards ("NAAQS") that revise
the standards for particulate matter and ozone. The number and extent of the
areas subject to reformulated gasoline standards may increase in the future
after the NAAQS are implemented. Conventional gasoline may be used in all other
domestic markets; however, a refiner's post-1994 average conventional gasoline
must not be more polluting than it was in 1990. With limited exceptions, to
determine its compliance as of January 1, 1995, a refiner must compare its
post-1994 and 1990 average values of controlled fuel parameters and emissions.
The Gasoline Standards recognize that many gasoline refiners may not be able to
develop an individual 1990 baseline for a number of reasons, including, for
example, lack of adequate data or the absence or limited scope of operations in
1990. Under such circumstances, the refiner must use a statutory baseline
reflecting the 1990 industry average. The EPA has authority, upon a showing of
extenuating circumstances by a refiner, to grant an individual adjusted baseline
or other appropriate regulatory relief to that refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The EPA
has denied TARC's request for an individual baseline adjustment and other
regulatory relief. TARC will continue to pursue regulatory relief with the EPA.
However, 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 flow
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
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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.
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
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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
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.
LEGAL PROCEEDINGS
EEOC. On September 30, 1997, the U.S. Equal Employment Opportunity
Commission ("EEOC") issued a Determination (the "Determination) as a result of
the Commissioner's Charge that had been filed in August 1995 against TARC and
Southeast Louisiana Contractors of Norco, Inc. ("Southeast Contractors")
pursuant to Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
sec. 2000e et seq. ("Title VII"). In the Determination, the EEOC stated that it
found reasonable cause to believe that each of TARC and Southeast Contractors
had discriminated based on race and gender in its hiring and promotion
practices. Each violation of Title VII (for each individual allegedly
aggrieved), if proven, potentially could subject TARC and/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 not to exceed $300,000 per plaintiff, (ii) injunctive relief, (iii)
attorney's fees, and/or (iv) interest. During the period covered by the
Commissioner's Charge and the Determination, TARC and Southeast Contractors
estimate
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that they received a combined total of approximately 23,000 to 30,000 employment
applications and hired (or rehired) a combined total of approximately 3,400 to
4,100 workers, although the total number of individuals who ultimately are
covered in any conciliation proposal or any subsequent lawsuit may be higher.
TARC and Southeast Contractors deny engaging in any unlawful employment
practices. TARC and Southeast Contractors intend vigorously to defend against
the allegations contained in the Commissioner's Charge and the findings set
forth in the Determination in any proceedings in state or federal court,
regardless of whether any such lawsuit is brought by the EEOC or any individual
or groups of individuals. If TARC and/or Southeast Contractors are found liable
for violations of Title VII based on the matters asserted in the Determination,
TARC can make no assurance that such liability would not have a material adverse
effect on its financial condition.
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 47
Arnold H. Brackenridge.......... President and Chief Operating Officer of TransTexas 64
R. Glenn McGinnis............... Vice President of Manufacturing of TARC 48
Richard P. Bianchi.............. 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 General Counsel of TransTexas since June
1995 and served as Vice President from June 1995 to December 1997. 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 has been a director of the Company since 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.
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
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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"):
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 $ -- $ --
General Counsel 1996* 100,000 -- --
of TransTexas 1997 214,154 -- 777
Glenn McGinnis(f) 1995 $ 8,654 $ -- $ --
Vice President of Manufacturing of TARC 1996* 116,937 -- --
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,
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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.
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.
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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."
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
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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' 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,
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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 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 $2.0 million
per year. Total labor costs charged by Southeast Contractors for the six months
ended July 31, 1997 and 1996 were $9.7 million and $4.4 million, respectively,
of which $2.4 million and $1.8 million 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.
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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 and September 1997, TEC advanced an aggregate of $46 million to
TARC (the "TARC Working Capital Loan"). The TARC Working Capital Loan, which is
due June 14, 2002, bears 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.
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 and to the ownership and
disposition of the Exchange Notes. 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, taxexempt 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 instead 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, and the Senior
Secured Discount Exchange Notes will have, OID for federal income tax purposes.
No OID exists with respect to the Outstanding Senior Secured Notes and, thus,
the Senior Secured Exchange Notes will not have OID. The amount of OID
attributable to each Senior Secured Discount Exchange Note equals the excess of
the "stated redemption price at maturity" over its "issue price," less the
amount of OID that will have accrued on the Outstanding Senior Secured Discount
Note exchanged therefor to the Exchange Date. The issue price of the Senior
Secured Discount Exchange Notes is the first price at which a substantial amount
of the Outstanding Senior Secured Discount Notes were initially sold. The stated
redemption price at maturity of a Senior Secured Discount Exchange Note is the
sum of all payments to be made on an Outstanding Senior Secured Discount Note
determined when the Outstanding Senior Secured Discount Note was issued,
including the amount of all stated interest payments. Although the Senior
Secured Discount Exchange Notes do not provide for the payment of interest in
cash until 1999, a holder of a Senior Secured Discount Exchange Note will be
required to include OID in gross income in advance of the receipt of cash
attributable to such income during the period ending June 15, 1999
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that the holder owns the Senior Secured Discount Exchange Note. The amount and
timing of such OID during this period should correspond to the increase in the
Accreted Value of the Senior Secured Discount Exchange Note, which is based on
the semi-annual interest rate of 13% per annum. Subsequent to June 15, 1999, the
amount of OID required to be included by the holder of a Senior Secured Discount
Exchange Note should be equal to the amount of scheduled interest payments
received. Senior Secured Discount Exchange Notes issued in certificated form
contain a legend that sets forth various information concerning OID.
More specifically, a holder of a Senior Secured Discount Exchange 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 Senior Secured Discount Exchange Note
for each day during the taxable year or portion of a taxable year on which such
holder holds the Senior Secured Discount Exchange 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 Senior Secured Discount Exchange Note at the
beginning of the accrual period multiplied by the yield to maturity of the
Senior Secured Discount Exchange Note, taking into consideration the Accrued OID
attributable to the Outstanding Senior Secured Discount Note exchanged therefor.
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 Senior Secured Discount Exchange Notes and the date six months prior to such
maturity date. The adjusted issue price of a Senior Secured Discount Exchange
Note at the beginning of any accrual period is the issue price of the
Outstanding Senior Secured Discount Note exchanged therefor, increased by the
Accrued OID for all prior accrual periods including the period the corresponding
Outstanding Senior Secured Discount Note was outstanding (less all payments of
stated principal and interest made on the Senior Secured Discount Exchange
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 (including Accrued OID on the Outstanding Senior Secured
Discount Note exchanged therefor) 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 have acquired (i) Outstanding Notes
other than from the Initial Purchaser or (ii) Exchange Notes other than in the
exchange pursuant to the Exchange Offer, 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.
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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 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.
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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.
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
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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.
DESCRIPTION OF EXISTING INDEBTEDNESS
TRANSTEXAS
TransTexas Subordinated Notes. TransTexas has outstanding approximately
$115.8 million in principal amount of 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
TransTexas 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 a Second Amended and Restated Accounts Receivable Management and
Security Agreement (the "BNY Facility"), dated as of October 14, 1997. As of
October 31, 1997, outstanding advances under the BNY Facility totaled
approximately $11.3 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.
Equipment Financing. As of October 31, 1997, TransTexas had approximately
$21.7 million in notes payable collateralized by certain of TransTexas'
operating equipment. These notes payable bear interest at rates ranging from
approximately 9.25% to 12.9% per annum and mature at various dates through 2000.
TARC
TARC Notes. As of October 31, 1997, TARC had outstanding approximately
$16.0 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.
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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 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.
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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."
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
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$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 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 October 31, 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
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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.
"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."
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"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."
"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.
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<PAGE> 107
"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.
"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
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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 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
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<PAGE> 109
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 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
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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 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
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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, 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."
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"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 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
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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, 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
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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.
"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 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
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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
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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 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
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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; 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
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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 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.
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"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
(iii) no net production of vacuum tower bottoms when using as input a combined
feedstock slate with an average API Gravity of 2 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
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"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
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,
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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 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
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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 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%
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Series B Senior 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.
"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
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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 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
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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 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
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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.
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
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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 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
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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.
(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;
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(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;
(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
Refinanc-
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ing 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;
(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
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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;
(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.
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(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;
(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;
(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
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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 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
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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 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
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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 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
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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 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
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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
(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,
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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.
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.
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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 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
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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;
(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, Sale 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
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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
(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.
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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 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
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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 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,
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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.
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
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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 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.
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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
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.
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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, 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.
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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 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
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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.
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
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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.
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
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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.
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
147
<PAGE> 154
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 (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
148
<PAGE> 155
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 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.
149
<PAGE> 156
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.
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.
150
<PAGE> 157
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,
stockholder's deficit 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, which includes an explanatory paragraph concerning the
Company's ability to continue as a going concern, 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.
151
<PAGE> 158
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 Original Notes Offering and the Transactions. The
unaudited pro forma condensed statements of operations have been prepared
assuming that the Original Notes 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 Original Notes Offering and the Transactions actually occurred on the dates
indicated or the results of operations for any future date or period.
PF-1
<PAGE> 159
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...................................... (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> 160
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 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> 161
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 to be redeemed.
(g) Does not include revenues and related expenses attributable to the
Agreement for Services between TransTexas and Conoco Inc.
PF-4
<PAGE> 162
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 Equity
(Deficit).............................................. F-5
Consolidated Statement of Cash Flows...................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 163
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, stockholder's
deficit 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. 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 (the "Capital Improvement Program") 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 received proceeds from an
intercompany loan from the Company in order to complete the Capital Improvement
Program as budgeted. There is no assurance that the proceeds from the
intercompany loan will be adequate to complete the Capital Improvement Program
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> 164
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
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
---------- ---------- ----------
Total current liabilities........................... 193,419 154,454 125,982
---------- ---------- ----------
Due to affiliates........................................... 18,992 26,295 4,743
Notes payable to affiliate.................................. -- 46,589 --
Long-term debt, less current maturities..................... 1,119,079 1,275,597 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 33,593 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> 165
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
YEAR ENDED JULY 31, ENDED YEAR ENDED JULY 31,
-------------------- JANUARY 31, JANUARY 31, --------------------
1994 1995 1996 1997 1996 1997
-------- --------- ----------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural
gas liquids............................... $300,210 $ 273,092 $123,253 $ 360,740 $156,245 $ 111,848
Transportation.............................. 33,240 36,787 15,892 34,423 16,870 12,055
Product sales............................... 174,143 140,027 107,237 10,857 10,857 --
Gain on the sale of assets.................. -- -- 474 7,856 7,762 532,929
Tank rentals................................ 3,035 552 -- -- -- --
Other....................................... 157 285 127 297 357 617
-------- --------- -------- --------- -------- ---------
Total revenues........................ 510,785 450,743 246,983 414,173 192,091 657,449
-------- --------- -------- --------- -------- ---------
Costs and expenses:
Operating................................... 268,862 244,123 154,697 154,313 73,390 47,887
Depreciation, depletion and amortization.... 116,447 135,819 64,053 139,678 65,165 57,397
General and administrative.................. 44,807 45,592 21,213 57,500 25,663 29,767
Taxes other than income taxes............... 16,904 18,208 8,133 26,772 15,255 9,535
Litigation settlements...................... (1,000) -- (18,300) (96,000) (96,000) --
-------- --------- -------- --------- -------- ---------
Total costs and expenses.............. 446,020 443,742 229,796 282,263 83,473 144,586
-------- --------- -------- --------- -------- ---------
Operating income.............................. 64,765 7,001 17,187 131,910 108,618 512,863
-------- --------- -------- --------- -------- ---------
Other income (expense):
Interest income............................. 1,553 6,798 5,197 5,748 2,121 9,114
Interest expense, net....................... (51,684) (81,012) (49,348) (101,670) (54,121) (69,932)
Other, net.................................. (2,851) 2,451 (229) 42,980 56,490 735
-------- --------- -------- --------- -------- ---------
Total other income (expense).......... (52,982) (71,763) (44,380) (52,942) 4,490 (60,083)
-------- --------- -------- --------- -------- ---------
Income (loss) before income taxes and
extraordinary item.......................... 11,783 (64,762) (27,193) 78,968 113,108 452,780
Income tax expense (benefit).................. 5,380 (2,415) (416) 12,491 7,788 172,483
-------- --------- -------- --------- -------- ---------
Income (loss) before extraordinary item....... 6,403 (62,347) (26,777) 66,477 105,320 280,297
Extraordinary item -- early extinguishment of
debt........................................ -- (56,637) -- -- -- (156,539)
-------- --------- -------- --------- -------- ---------
Net income (loss) before preferred
stock dividend...................... $ 6,403 $(118,984) $(26,777) $ 66,477 $105,320 $ 123,758
======== ========= ======== ========= ======== =========
Series A preferred stock dividend............. $ -- $ -- $ -- $ 19 $ 19 $ 19
======== ========= ======== ========= ======== =========
Net income (loss) available for common
stockholder................................. $ 6,403 $(118,984) $(26,777) $ 66,458 $105,301 $ 123,739
======== ========= ======== ========= ======== =========
Net income (loss) per common share:
Income (loss) before extraordinary item..... $ (13,901) $ (2,975) $ 7,384 $ 11,700 $ 31,142
Extraordinary item.......................... (12,628) -- -- -- (17,393)
--------- -------- --------- -------- ---------
$ (26,529) $ (2,975) $ 7,384 $ 11,700 $ 13,749
========= ======== ========= ======== =========
Weighted average number of shares
outstanding................................. 4,485 9,000 9,000 9,000 9,000
========= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 166
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
PAID-IN CAPITAL (ACCUMULATED ADVANCES STOCKHOLDER'S
SHARES AMOUNT (CAPITAL DEFICIT) DEFICIT) TO AFFILIATES EQUITY (DEFICIT)
------ ------ ----------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994......... 1,000 $ -- $ 1 $ -- $ -- $ 1
Stock transfer, as adjusted.... -- -- 175,018 (65,287) -- 109,731
Issuance of common stock....... 8,000 -- -- -- -- --
Net loss....................... -- -- -- (118,984) -- (118,984)
----- ------ -------- --------- -------- ---------
Balance at July 31, 1995......... 9,000 -- 175,019 (184,271) -- (9,252)
Net loss....................... -- -- -- (26,777) -- (26,777)
----- ------ -------- --------- -------- ---------
Balance at January 31, 1996...... 9,000 -- 175,019 (211,048) -- (36,029)
Transfer of litigation escrow
to affiliate................. -- -- (22,484) -- -- (22,484)
Contribution of Signal Capital
Holdings Corporation stock by
affiliate.................... -- -- 6,000 -- -- 6,000
Advances to affiliates......... -- -- -- -- (57,036) (57,036)
Preferred stock dividends...... -- -- -- (19) -- (19)
Elimination of intercompany
gain on property purchased
from affiliate............... -- -- -- (3,918) -- (3,918)
Net income..................... -- -- -- 66,477 -- 66,477
----- ------ -------- --------- -------- ---------
Balance at January 31, 1997...... 9,000 -- 158,535 (148,508) (57,036) (47,009)
Payment to affiliate........... -- -- (13,304) -- -- (13,304)
Contribution of properties by
affiliate.................... -- -- 21,513 -- -- 21,513
Assumption of income taxes by
affiliate.................... -- -- 125,907 -- -- 125,907
Dividend to affiliate.......... -- -- (23,000) -- -- (23,000)
Preferred stock dividends...... -- -- -- (19) -- (19)
Redemption of preferred
stock........................ -- -- (4) (6) -- (10)
Reclassification of advances to
affiliates................... -- -- -- -- 57,036 57,036
Net income..................... -- -- -- 123,758 -- 123,758
----- ------ -------- --------- -------- ---------
Balance at July 31, 1997
(unaudited).................... 9,000 $ -- $269,647 $ (24,775) $ -- $ 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> 167
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
YEAR ENDED JULY 31, ENDED YEAR ENDED JULY 31,
---------------------- JANUARY 31, JANUARY 31, -----------------------
1994 1995 1996 1997 1996 1997
--------- ---------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $ 6,403 $ (118,984) $ (26,777) $ 66,477 $ 105,320 $ 123,758
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Extraordinary item............................. -- 56,637 -- -- -- 156,539
Depreciation, depletion and amortization....... 116,447 135,819 64,053 139,678 65,165 57,397
Amortization of discount on long-term debt..... -- 7,673 3,389 8,470 40 17,863
Amortization of discount on subordinated
notes........................................ -- -- -- -- -- 4,941
Amortization of debt issue costs............... 2,818 4,339 1,533 1,653 7,002 2,175
Gain on the sale of assets..................... -- -- (474) (7,762) (532,929)
Deferred income taxes.......................... (5,961) 5,196 (416) (1,343) (11,244) 172,483
Gain on the sale of TransTexas stock........... -- -- -- (42,607) (56,162)
Inventory writedown............................ 79 1,265 4,406 (8,889) 921 --
Proceeds from volumetric production payments... -- -- 32,850 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.......................... (45,616) 19,685 (9,189) (42,288) (3,508) 47,032
Inventories.................................. (3,600) (6,540) 4,057 (1,035) (5,578) (2,621)
Other current assets......................... 351 (12,446) 1,564 2,671 22,899 5,050
Accounts payable............................. 9,690 (17,499) 1,995 13,914 (1,406) 11,885
Accrued liabilities.......................... 26,473 (27,184) (6,975) 32,561 (3,125) (51,106)
Transactions with affiliates, net............ (721) (12,320) (3,447) (2) (11,763) (955)
Other assets................................. (1,816) (3,690) 569 21,491 (2,161) 259
Other liabilities............................ 20,516 11,934 (18,228) (20,173) (16,452) 1,867
--------- ---------- --------- --------- --------- -----------
Net cash provided (used) by operating
activities............................... 125,063 43,885 48,910 192,282 124,720 (40,916)
--------- ---------- --------- --------- --------- -----------
Investing activities:
Capital expenditures............................. (290,494) (376,458) (275,451) (427,232) (191,354) (293,412)
Proceeds from the sale of assets................. -- -- 20,500 92,518 69,971 1,030,032
Increase in cash restricted for interest......... -- (44,722) (46,000) (92,000) (46,000) --
Withdrawals from cash restricted for interest.... -- -- 44,722 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............................ (8,257) -- -- (24,750) (9,500) (13,304)
Payment of advances by affiliate................. 8,257 -- -- -- -- 56,354
Proceeds from the sale of TransTexas stock....... -- -- -- 42,607 -- --
Purchase of production payment from affiliate.... (5,000) -- -- -- -- --
Production payment by affiliate.................. 609 4,391 -- -- -- --
Purchase of TARC warrants........................ -- -- -- -- -- (33,010)
Purchase of treasury stock -- TransTexas......... -- -- -- -- -- (49,599)
--------- ---------- --------- --------- --------- -----------
Net cash provided (used) by investing
activities............................... (294,885) (416,789) (256,229) (316,857) (130,883) 393,376
--------- ---------- --------- --------- --------- -----------
Financing activities:
Issuance of long-term debt....................... 500,000 1,120,750 3,000 125,645 25,000 1,367,706
Retirement of long-term debt..................... -- (542,500) -- -- -- (1,329,214)
Principal payments on long-term debt............. -- (20,000) (219) (20,238) (17,044) (5,428)
Increase in debt proceeds held in disbursement
accounts....................................... (62,093) (173,000) -- (26,549) (26,549) (217,813)
Withdrawals from disbursement accounts........... -- 32,143 116,452 50,949 50,550 66,003
Issuance of note payable......................... -- -- -- -- -- 36,000
Retirement of note payable....................... -- -- -- -- -- (36,000)
Issuance of production payments.................. -- 49,500 -- 28,598 -- 20,977
Principal payments on production payments........ -- (7,866) (8,833) (45,205) (32,800) (23,909)
Net proceeds from the sale of TransTexas stock... -- -- -- -- 42,607 --
Issuance of redeemable preferred stock........... -- 96 -- -- -- --
Principal payments on capital lease
obligations.................................... -- -- -- -- (517) (438)
Revolving credit agreement, net.................. -- -- 20,365 5,903 (12,417) (20,019)
Issuance of common stock......................... 66,143 -- -- -- -- --
Dividend payment on preferred stock.............. -- -- -- (19) (19) (19)
Advances from TransAmerican and affiliates to
TARC........................................... 68,523 87,560 12,270 49,152 11,656 15,026
Repayment of advances from TransAmerican by
TARC........................................... -- (60,000) (8,750) (1,925) (1,925) (66,000)
Transfer of litigation escrow to affiliate....... -- -- -- (22,484) -- --
Dividend to TransAmerican........................ -- -- -- -- -- (23,000)
Debt issue costs................................. (19,638) (38,515) (1,258) (9,187) (4,256) (46,746)
Redemption of Series A preferred stock........... -- -- -- -- -- (106)
Other............................................ -- -- (458) -- -- --
--------- ---------- --------- --------- --------- -----------
Net cash provided (used) by financing
activities............................... 552,935 448,168 132,569 134,640 34,286 (262,980)
--------- ---------- --------- --------- --------- -----------
TransTexas transactions with TransAmerican, net.... (369,529) -- -- -- -- --
--------- ---------- --------- --------- --------- -----------
Increase (decrease) in cash and cash
equivalents.............................. 13,584 75,264 (74,750) 10,065 28,123 89,480
Beginning cash and cash equivalents................ 16 13,600 88,864 14,114 14,114 24,179
--------- ---------- --------- --------- --------- -----------
Ending cash and cash equivalents................... $ 13,600 $ 88,864 $ 14,114 $ 24,179 $ 42,237 $ 113,659
========= ========== ========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 168
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.
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.
F-7
<PAGE> 169
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-8
<PAGE> 170
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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,
F-9
<PAGE> 171
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-10
<PAGE> 172
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 that adoption
of this statement will have a material impact on its financial position.
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 that adoption of this statement
will have a material impact on its financial statements.
F-11
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
that 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 adoption of SOP 96-1
did not 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 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-12
<PAGE> 174
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 7,320,552 TARC Warrants for an aggregate purchase price of
approximately $33 million. TransAmerican subsequently purchased 163,679 TARC
Warrants for an aggregate purchase price of approximately $0.7 million. TEC,
TransAmerican or TARC may repurchase additional TARC Warrants, and TARC may
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.
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.
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
F-13
<PAGE> 175
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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
F-14
<PAGE> 176
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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<PAGE> 177
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loses its investment in TransTexas, there is substantial doubt in the Company's
ability to continue as a going concern.
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> 178
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
As a result of the transactions described in Note 2, the long-term debt
previously classified as current as of January 31, 1997 has been reclassified to
long term. 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
F-17
<PAGE> 179
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
modification of the refinery, TARC will require additional working capital and
ultimately must achieve profitable operations.
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> 180
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the cost of
the refinery. Management believes that the book value of the refinery is in
excess of its current estimated fair market value.
F-19
<PAGE> 181
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, respectively................ $34,631 $32,127 $ 47,627
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> 182
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 5,787 9,542
---------- ---------- ----------
$1,119,079 $1,275,597 $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> 183
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 7,320,552 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> 184
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 entered into an
amended and restated BNY Facility in October 1997.
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 1,714 1,485
------- ------- -------
$36,358 $33,593 $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 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.
F-23
<PAGE> 185
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS YEAR SIX MONTHS ENDED
JULY 31, ENDED ENDED JULY 31,
----------------- JANUARY 31, JANUARY 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):
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS YEAR SIX MONTHS ENDED
JULY 31, ENDED ENDED JULY 31,
------------------ JANUARY 31, JANUARY 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>
F-24
<PAGE> 186
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-25
<PAGE> 187
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS YEAR SIX MONTHS ENDED
JULY 31, ENDED ENDED JULY 31,
------------------ JANUARY 31, JANUARY 31, ------------------
1994 1995 1996 1997 1996 1997
-------- ------- ----------- ----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <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>
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS YEAR SIX MONTHS ENDED
JULY 31, ENDED ENDED JULY 31,
----------------- JANUARY 31, JANUARY 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.
F-26
<PAGE> 188
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-27
<PAGE> 189
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-28
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $2.0
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 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
F-29
<PAGE> 191
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-30
<PAGE> 192
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-31
<PAGE> 193
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-32
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
April 3, 1996. TransTexas and TransAmerican filed a motion for rehearing. On
August 14, 1996, the Fourth Court of Appeals reversed the trial court judgment
and rendered judgment in favor of TransAmerican and TransTexas. On August 29,
1996, Finkelstein filed a motion for stay and a motion for rehearing with the
court. On October 9, 1996, the court denied Finkelstein's rehearing request. In
November 1996, Finkelstein filed an application for writ of error with the
Supreme Court of Texas.
On April 22, 1991, Finkelstein filed a separate suit against TransAmerican
and various affiliates in the 49th Judicial District Court, Zapata County,
Texas, alleging an improper calculation of overriding royalties allegedly owed
to the plaintiff and seeking damages and attorneys' fees in excess of $33.7
million. On November 18, 1993, the plaintiff added TransTexas as an additional
defendant. The parties arbitrated this matter in January 1997. A partial
decision from the arbitration panel has been rendered in favor of Finkelstein.
Although the amount of damages has yet to be determined under the panel's
decision, such amount will be substantially less than that sought by plaintiff.
Arabian Offshore Partners. On June 27, 1997, Arabian Offshore Partners
filed a lawsuit against TransTexas in the 14th Judicial District Court, Dallas
County, Texas, seeking $20 million in damages in connection with TransTexas'
refusal to proceed with the acquisition of two jack-up drilling rigs. TransTexas
has filed its answer and is preparing a motion for summary judgment.
EEOC. On August 31, 1995, the U.S. Equal Employment Opportunity Commission
("EEOC") issued a Commissioner's Charge against TARC and Southeast Louisiana
Contractors of Norco, Inc. (the "Commissioners Charge") pursuant to Sections 706
and 707 of Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. sec.
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
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<PAGE> 195
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
action to bring TARC back into the case. Shell has demanded $400,000 from TARC.
TARC has refused to pay such amount and is defending the case vigorously.
General. TransTexas and TARC are also named defendants in other ordinary
course, routine litigation incidental to their businesses. While the outcome of
these other lawsuits cannot be predicted with certainty, the Company does not
expect these matters to have a material adverse effect on its financial
position. At July 31, 1997, the possible range of estimated losses related to
all of the aforementioned claims in addition to the estimates accrued by
TransTexas and TARC is $0 to $36 million. The resolution in any reporting period
of one or more of these matters in a manner adverse to TARC or TransTexas could
have a material adverse impact on the Company's results of operations or cash
flows for that period.
Environmental Matters
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
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
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Benzene Waste NESHAPS will not have a material adverse effect on its financial
position, results of operations or cash flow. Until the refinery is in full
operation, however, there can be no assurance that the regulations will not have
such an effect.
In addition, the Environmental Protection Agency ("EPA") promulgated
National Emission Standards for Hazardous Air Pollutants for Hazardous Organics
(the "Hazardous Organics NESHAPS") regulations for petroleum refineries under
the Clean Air Act in 1995, and subsequently has amended such regulations. These
regulations set "Maximum Achievable Control Technology ("MACT") standards for
petroleum refineries. The Louisiana Department of Environmental Quality (the
"LDEQ") has incorporated MACT standards into TARC's air permits under federal
and state air pollution prevention laws. TARC believes that compliance with the
Hazardous Organics NESHAPS will not have a material adverse effect on TARC's
financial position, results of operations or cash flow. Until the refinery is in
full operation, however, there can be no assurance that the regulations will not
have such an effect.
The EPA recently promulgated federal regulations pursuant to the Clean Air
Act to control fuels and fuel additives (the "Gasoline Standards") that could
have a material adverse effect on TARC. Under the new regulations, only
reformulated gasoline can be sold in certain domestic geographic areas in which
the EPA has mandated or approved its use. Reformulated gasoline must contain a
minimum amount of oxygen, have a lower vapor pressure, and have reduced sulfur,
olefins, benzene and aromatics compared to the average 1990 gasoline. The number
and extent of the areas subject to reformulated gasoline standards may increase
in the future if the EPA's National Ambient Air Quality Standards ("NAAQS")
proposals for particulate matter and ozone are implemented. Conventional
gasoline may be used in all other domestic markets; however, a refiner's
post-1994 average conventional gasoline must not be more polluting than it was
in 1990. With limited exceptions, to determine its compliance as of January 1,
1995, a refiner must compare its post-1994 and 1990 average values of controlled
fuel parameters and emissions. The Gasoline Standards recognize that many
gasoline refiners may not be able to develop an individual 1990 baseline for a
number of reasons, including, for example, lack of adequate data or the absence
or limited scope of operations in 1990. Under such circumstances, the refiner
must use a statutory baseline reflecting the 1990 industry average. The EPA has
authority, upon a showing of extenuating circumstances by a refiner, to grant an
individual adjusted baseline or other appropriate regulatory relief to that
refiner.
TARC filed a petition with the EPA requesting an individual baseline
adjustment or other appropriate regulatory relief based on extenuating
circumstances. The extenuating circumstances upon which TARC relied in its
petition include the fact that the refinery was not in operation in 1990 (and
thus there is no 1990 average for purposes of the necessary comparison) and the
fact that the start-up of the refinery is to occur on a phased-in basis. The EPA
has denied TARC's request for an individual baseline adjustment and other
appropriate regulatory relief. TARC will continue to pursue regulatory relief
with the EPA. There can be no assurance that any action taken by the EPA will
not have a material adverse effect on TARC's future results of operations, cash
flows or financial position.
Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The deadline for a refinery to submit an Operating
Permit Application under the Louisiana program was October 12, 1996. TARC timely
submitted its Title V Operating Permit application and the LDEQ has designated
the application as being administratively complete. As yet, the LDEQ has not
responded further regarding the status of TARC's Title V Operating Permit. TARC
believes that its application will be approved. However, there can be no
assurance that additional expenditures required pursuant to Title V Operating
Permit obligations will not have a material adverse effect on TARC's financial
position, results of operations or cash flow.
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,
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or other releases of hazardous substances ("Hazardous Substance Cleanup Laws").
Over the past several years, TARC has been, and to a limited extent continues to
be, engaged in environmental cleanup or remedial work relating to or arising out
of operations or activities at the refinery. In addition, TARC has been engaged
in upgrading its solid waste facilities, including the closure of several waste
management units. Similar to numerous other industrial sites in the state, the
refinery has been listed by the LDEQ on the Federal Comprehensive Environmental
Response, Compensation and Liability Information System, as a result of TARC's
prior waste management activities (as discussed below).
In 1991, the EPA performed a facility assessment at TARC's refinery
pursuant to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. In July 1996, the EPA and LDEQ agreed that the LDEQ would
serve as the lead agency with respect to the investigation and remediation of
areas of concern identified in the investigation. TARC, under a voluntary
initiative approved by the LDEQ, has submitted a work plan to the LDEQ to
determine which areas may require further investigation and remediation. The
LDEQ has not yet responded to TARC's submission or issued any further requests
relating to this matter. As a result, TARC is unable at this time to estimate
what the costs, if any, will be if the LDEQ does require further investigation
or remediation of the areas identified.
TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA to
include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRPs liable for the release to take such actions. PRPs
are broadly defined under CERCLA to include past and present owners and
operators of a site, as well as generators and transporters of wastes to a site
from which hazardous substances are released.
The EPA may seek reimbursement of expenditures of federal funds from PRPs
under Superfund. Courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for the entire amount of necessary
cleanup costs. As a practical matter, at sites where there are multiple PRPs for
a cleanup, the costs of cleanup typically are allocated according to a
volumetric or other standard among the parties. CERCLA also provides that
responsible parties generally may recover a portion of the costs of cleaning up
a site from other responsible parties. Thus, if one party is required to clean
up an entire site, that party can seek contribution or recovery of such costs
from other responsible parties. A number of states have laws similar to
Superfund, pursuant to which cleanup obligations, or the costs thereof, also may
be imposed.
At one Superfund site, TARC has submitted information to the EPA indicating
that it should have no liability for this matter, and negotiations are
continuing. With respect to the remaining two sites, TARC's liability for each
such matter has not been determined, and TARC anticipates that it may incur
costs related to the cleanup (and possibly including additional costs arising in
connection with any recovery action brought pursuant to such matters) at each
such site. After a review of the data available to TARC regarding the basis of
TARC's alleged liability at each site, and based on various factors, which
depend on the circumstances of the particular Superfund site (including, for
example, the relationship of TARC to each such site, the volume of wastes TARC
is alleged to have contributed to each such site in comparison to other PRPs
without giving effect to the ability of any other PRPs to contribute to or pay
for any liabilities incurred, and the range of likely cleanup costs at each such
site), TARC does not believe its ultimate environmental liabilities will be
significant; however, it is not possible to determine the ultimate environmental
liabilities, if any, that may arise from the matters discussed above.
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Potential Effects of a Change of Control
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the TransTexas Subordinated Exchange Notes
will have the right to require TransTexas to repurchase such holder's notes at
101% of the principal amount thereof plus accrued and unpaid interest. Pursuant
to the terms of the TransTexas Intercompany Loan, upon the occurrence of a
Change of Control, TEC would have the right to require TransTexas and TARC to
repay the principal of the TransTexas Intercompany Loan in an amount equal to a
pro rata share of the amount TEC is required to pay under the TEC Notes
Indenture. Such pro rata share would be calculated using the ratio of the
outstanding principal amount of the TransTexas Intercompany Loan (or, for TARC,
the accreted value of the outstanding principal amount of the TARC Intercompany
Loan) to the sum of (i) the outstanding principal amount of the TransTexas
Intercompany Loan plus (ii) the accreted value of the outstanding principal
amount of the TARC Intercompany Loan. A Change of Control would be deemed to
occur under the Subordinated Notes Indenture in the case of certain changes or
other events in respect of the ownership of TransTexas, including any
circumstances pursuant to which any person or group other than John R. Stanley
and his subsidiaries or the TEC Indenture Trustee is or 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
TECNotes 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
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $65 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.
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
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TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-41
<PAGE> 203
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("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 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
F-42
<PAGE> 204
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Court of Texas declined to hear the appeal. The judgment was paid on May 27,
1997. Coastal executed a Release of Judgment and Judgment Lien which has been
recorded in Webb and Zapata Counties.
Frost. On November 10, 1994, Frost National Bank filed suit against
TransTexas in the 111th Judicial District Court, Webb County, Texas, seeking a
declaratory judgment determination that TransTexas failed to properly and
accurately calculate royalties under a lease. The plaintiff had demanded $10
million plus interest. This case was settled in May 1997.
Farias. On February 15, 1996, Celita Suzana Farias filed a wrongful death
action in the 93rd District Court, Hidalgo County, Texas, against TransTexas and
one of its contractors for fatal injuries suffered by the plaintiff's husband at
the Yzaguirre Heirs #3 Well on February 13, 1996. The plaintiff alleges the
defendants operated a crane in such a manner that they were negligent and
grossly negligent. The plaintiff seeks unspecified damages. On March 7, 1996,
the mother of the deceased TransTexas employee filed a petition in intervention
also alleging negligence, gross negligence and malice and seeking unspecified
damages. This litigation was settled in August 1997.
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
F-43
<PAGE> 205
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
because Taub's attorney had defrauded Messrs. Ginther and Warren with respect to
their interest in the lease. On November 26, 1986, the estates of Messrs.
Ginther and Warren filed an adversary proceeding in the United States Bankruptcy
Court for the Southern District of Texas, Houston Division (the "Bankruptcy
Court") against TransAmerican seeking damages and claiming that TransAmerican
had constructive notice of their disputes but continued to pay royalties and
proceeds of production to Taub. TransAmerican filed an interpleader action in
the Bankruptcy Court and deposited the disputed funds accruing from and after
November 1984 into the registry of the court. On September 30, 1993, the
Bankruptcy Court entered a judgment against TransAmerican in the amount of $6.3
million plus post judgment interest. 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-44
<PAGE> 206
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, SIX MONTHS ENDED YEAR ENDED
-------------------- 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
JULY 31, SIX MONTHS ENDED YEAR ENDED
-------------------- JANUARY 31, JANUARY 31,
1994 1995 1996 1997
-------- -------- ---------------- -----------
<S> <C> <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
F-45
<PAGE> 207
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
natural gas liquids. TransTexas' estimated 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>
SIX MONTHS
YEAR ENDED JULY 31, ENDED YEAR ENDED
---------------------------- JANUARY 31, 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
YEAR ENDED JULY 31, ENDED YEAR ENDED
----------------------- 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-46
<PAGE> 208
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JULY 31, ENDED YEAR ENDED
--------------------- 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-47
<PAGE> 209
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.
"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.
A-1
<PAGE> 210
"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.
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."
A-2
<PAGE> 211
"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.
"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-3
<PAGE> 212
ANNEX B TO PROSPECTUS
NETHERLAND, SEWELL & ASSOCIATES, INC.
---------------------------------------------
INTERNATIONAL PETROLEUM CONSULTANTS
ENGINEERING, GEOLOGY, GEOPHYSICS
CHAIRMAN -- CLARENCE M. NETHERLAND
PRESIDENT -- FREDERIC D. SEWELL
SENIOR VICE PRESIDENTS
DANNY D. SIMMONS -- HOUSTON
THOMAS J. TELLA II -- DALLAS
DAN PAUL SMITH -- DALLAS
WILLIAM D. ANDERSON -- DALLAS
G. LANCE BINDER -- DALLAS
PHILIP A. LONGACRE -- DALLAS
P. SCOTT FROST -- DALLAS
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
B-1
<PAGE> 213
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
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> 214
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> 215
NETHERLAND, SEWELL & ASSOCIATES, INC.
---------------------------------------------
INTERNATIONAL PETROLEUM CONSULTANTS
ENGINEERING, GEOLOGY, GEOPHYSICS
CHAIRMAN -- CLARENCE M. NETHERLAND
PRESIDENT -- FREDERIC D. SEWELL
SENIOR VICE PRESIDENTS
DANNY D. SIMMONS -- HOUSTON
THOMAS J. TELLA II -- DALLAS
DAN PAUL SMITH -- DALLAS
WILLIAM D. ANDERSON -- DALLAS
G. LANCE BINDER -- DALLAS
PHILIP A. LONGACRE -- DALLAS
P. SCOTT FROST -- DALLAS
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 11 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.
B-4
<PAGE> 216
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.
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.
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
B-5
<PAGE> 217
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> 218
======================================================
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
December 10, 1997
======================================================
<PAGE> 219
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>
<C> <S>
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 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).
</TABLE>
II-1
<PAGE> 220
<TABLE>
<S> <C>
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).
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).
</TABLE>
II-2
<PAGE> 221
<TABLE>
<S> <C>
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).
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).
</TABLE>
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<PAGE> 222
<TABLE>
<S> <C>
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, Transmission, 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).
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).
</TABLE>
II-4
<PAGE> 223
<TABLE>
<S> <C>
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 the
Company'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 the Company'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).
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).
</TABLE>
II-5
<PAGE> 224
<TABLE>
<S> <C>
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 of the
Registration Statement filed on October 10, 1997)
*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>
- ---------------
* Previously filed.
(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
II-6
<PAGE> 225
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.
II-7
<PAGE> 226
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 5th day of December,
1997.
TRANSAMERICAN ENERGY CORPORATION
By: /s/ ED DONAHUE
------------------------------------
Ed Donahue,
Vice President and Chief Financial
Officer
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 December 5, 1997.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
* 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
* Director
- -----------------------------------------------------
Thomas B. McDade
* Director
- -----------------------------------------------------
Donald B. Henderson
* Director
- -----------------------------------------------------
John R. Blinn
* Director
- -----------------------------------------------------
James V. Langston
*By: /s/ ED DONAHUE
------------------------------------------------
Ed Donahue,
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 227
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransAmerican Energy Corporation:
Our report, which includes an explanatory paragraph concerning the
Company's ability to continue as a going concern, on the consolidated financial
statements of TransAmerican Energy Corporation and TAEC, predecessor to
TransAmerican Energy Corporation, is included on page F-2 of this registration
statement on Form S-4. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
on page S-2 of this registration statement on Form S-4.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 1, 1997
S-1
<PAGE> 228
SCHEDULE II
TRANSAMERICAN ENERGY CORPORATION (AND PREDECESSOR)
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER END OF
DESCRIPTION OF PERIOD AT COSTS RETIREMENTS CHANGES PERIOD
----------- ---------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1993:
Valuation allowance --
long-term receivables............. $ -- $ -- $ -- $ -- $ --
====== ==== ====== ====== ======
Year Ended July 31, 1994:
Valuation allowance --
long-term receivables............. $ -- $531 $ -- $ -- $ 531
====== ==== ====== ====== ======
Year ended July 31, 1995:
Valuation allowance --
long-term receivables............. $ 531 $421 $ -- $ -- $ 952
====== ==== ====== ====== ======
Transition Period ended
January 31, 1996:
Valuation allowance --
long-term receivables............. $ 952 $278 $ -- $ -- $1,230
====== ==== ====== ====== ======
Year Ended January 31, 1997:
Valuation allowance --
long-term receivables............. $1,230 $516 $1,746 $ -- $ --
====== ==== ====== ====== ======
</TABLE>
S-2
<PAGE> 229
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 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).
</TABLE>
<PAGE> 230
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
<PAGE> 231
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
<PAGE> 232
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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, Transmission, 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).
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 the
Company'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 the Company'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).
</TABLE>
<PAGE> 233
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
<PAGE> 234
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 of the
Registration Statement filed on October 10, 1997)
*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>
- ---------------
* Previously filed.
<PAGE> 1
[GARDERE & WYNNE, L.L.P. LETTERHEAD]
(214) 999-3000
December 4, 1997
TransAmerican Energy Corporation
1300 North Sam Houston Parkway East
Suite 200
Houston, Texas 77032-2949
Gentlemen:
We have served as counsel for TransAmerican Energy Corporation, a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of (i) $475,000,000
principal amount of the Company's 11 1/2% Senior Secured Notes due 2002, Series
B (the "Senior Secured Notes"), to be offered in exchange for the Company's
outstanding 11 1/2% Senior Secured Notes due 2002, Series A, and (ii)
$1,130,000,000 principal amount of the Company's 13% Senior Secured Discount
Notes due 2002, Series B (the "Senior Secured Discount Notes" and together with
the Senior Secured Notes, the "Notes"), to be offered in exchange for the
Company's outstanding 13% Senior Secured Discount Notes due 2002, Series A.
We have examined the Registration Statement, the Indenture between the
Company and Firstar Bank of Minnesota, N.A., as Trustee, pursuant to which the
Notes are to be issued (the "Indenture"), the form of the Notes to be issued
and such other documents and such questions of law as we have deemed necessary
to render the opinion expressed below.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as copies, and the authenticity of the originals of
such copied documents. We have also assumed that, with respect to all persons
and entities other than the Company, such persons or entities had the power
(corporate or otherwise) to enter into and perform all of their obligations
under the Indenture, the due authorization by all requisite action (corporate
or otherwise) on the part of such persons or entities, the due execution and
delivery by such persons or entities of such document, and the validity and
binding effect thereof. As to any facts material to the opinion expressed
herein that we did not independently establish or verify, we have relied upon
oral or written statements, certificates and representations of officers and
other representatives of the Company and others.
<PAGE> 2
TransAmerican Energy Corporation
December 4, 1997
Page 2
Based upon the foregoing, and subject to the qualifications set forth
below, we are of the opinion that when the Notes are executed and authenticated
in accordance with the terms of the Indenture and delivered in the manner and
for the consideration described in the Registration Statement, the Notes will
be binding and enforceable obligations of the Company.
The opinion expressed above is subject to the following
qualifications:
A. The binding nature and enforceability of the Notes may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or transfer, and other similar laws affecting the enforcement of
creditors' rights generally and (ii) equitable principles of general
application and judicial discretion that may limit or affect the availability
or grant of certain equitable remedies in certain instances. In addition, the
binding nature and enforceability of certain of the remedial, waiver and other
provisions of the Notes, or of the Indenture for the Notes, may be restricted
by applicable state law, but such restrictions will not, in our opinion, render
the Notes invalid as a whole or substantially interfere with the realization of
the principal legal benefits purported to be provided by the Notes or by the
Indenture for the Notes (except to the extent of any procedural delay which may
result therefrom). Further, the binding nature and enforceability of the
indemnification provisions of the Indenture for the Notes or the holders
thereof may be limited by public policies embodied in or reflected by various
state and federal securities laws.
B. The opinion expressed herein is limited to the laws of the
United States of America, the laws of the State of Texas, and the corporate
laws of the State of Delaware, and we assume no responsibility as to the
applicability or the effect of any other laws. We have assumed that the laws
of the State of New York, which purport to govern the Notes and the Indenture,
are the same as the laws of the State of Texas with respect to the binding
nature and enforceability of the Notes and (to the extent incorporated in the
Notes) the Indenture for the Notes.
We consent to the use of this opinion letter as an exhibit to the
Registration Statement and to the use of our name in the Registration Statement
under the heading "Legal Matters." Our consent, however, is not an admission
that we come within the category of persons whose consent is required under
Section 7 of the 1933 Act or the rules and regulations of the Securities and
Exchange Commission.
Very truly yours,
GARDERE & WYNNE, L.L.P.
By: /s/ C. ROBERT BUTTERFIELD
----------------------------------------
C. Robert Butterfield, Partner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in Amendment No. 1 to the Registration Statement of
TransAmerican Energy Corporation on Form S-4 as filed with the Securities and
Exchange Commission on December 8, 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
December 5, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We consent to the inclusion in Amendment No. 1 to the Registration
Statement of TransAmerican Energy Corporation on Form S-4 as filed with the
Securities and Exchange Commission on December 8, 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
December 5, 1997
