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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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REGISTRATION NUMBER 33-85930
TRANSAMERICAN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 76-0441642
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 200
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 986-8822
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of common stock of the registrant outstanding on May
1, 1998 was 9,000. None of the registrant's common stock is owned by
non-affiliates.
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TABLE OF CONTENTS
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PART 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related 18
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures About Market 38
Risk......................................................
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements With Accountants on Accounting 82
and Financial Disclosure..................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 82
Item 11. Executive Compensation...................................... 83
Item 12. Security Ownership of Certain Beneficial Owners and 85
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 85
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 89
8-K.......................................................
Signatures.................................................. 97
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PART I
ITEM 1. BUSINESS
GENERAL
TransAmerican Energy Corporation (the "Company" or "TEC") is a holding
company formed in 1994 to hold certain shares of common stock of TransTexas Gas
Corporation (together with its subsidiaries, "TransTexas") and all of the
outstanding capital stock of TransAmerican Refining Corporation ("TARC"). The
Company, TransTexas and TARC are all direct or indirect subsidiaries of
TransAmerican Natural Gas Corporation ("TransAmerican"). The Company is engaged
in the exploration and production of natural gas through operations conducted by
TransTexas and is engaged in the refining and storage of crude oil and petroleum
products through operations conducted by TARC.
See Note 15 of Notes to the Consolidated Financial Statements included
elsewhere herein for business segment information regarding the Company.
The address of the Company's principal executive office is 1300 North Sam
Houston Parkway East, Suite 200, Houston, Texas 77032, and its telephone number
at that address is (281) 986-8822.
BUSINESS OF TRANSTEXAS
General
TransTexas is engaged in the exploration for and development and production
of natural gas, primarily in south and coastal Texas. Since 1973, TransTexas has
drilled over 1,700 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 was organized in May 1993 to facilitate the refinancing of
TransAmerican. TransTexas' operations currently consist of the natural gas
exploration and production and businesses of TransAmerican, which were
transferred to TransTexas in August 1993 (the "Transfer") pursuant to an
agreement among TransAmerican, TransTexas and John R. Stanley (the "Transfer
Agreement").
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' development of certain of these areas has resulted
in substantial new 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 an adjusted sales price of approximately $1.1 billion. With proceeds
from the Lobo Sale, TransTexas repaid certain indebtedness and other
obligations, including production payments. 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, 1998, TransTexas' net proved reserves in properties
remaining after the Lobo Sale, as estimated by Netherland, Sewell & Associates,
Inc., were 444 Bcfe. As of January 31, 1998, TransTexas owned approximately
649,000 gross (447,000 net) acres of mineral interests. TransTexas' average net
daily natural gas production for the year ended January 31, 1998 from properties
remaining after the Lobo Sale, was approximately 132 MMcfd, for a total net
production of 48.3 Bcf of natural gas.
In November 1997, TransTexas engaged an investment banking firm to examine
the feasibility of the sale of certain of TransTexas' producing properties in
Webb, Zapata, Jim Hogg and Starr Counties, Texas. The conclusion of any such
sale will be dependent upon, among other things, the ongoing success of
TransTexas'
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Galveston Bay development drilling program and the terms of such transaction.
TransTexas has also engaged an investment banking firm to assist it in the sale
of certain assets comprising its drilling services division.
OPERATING AREAS
TransTexas' primary areas of operations as of January 31, 1998 are
discussed below:
Eagle Bay. In November 1996, TransTexas reached agreement with an
unaffiliated third party to jointly conduct exploration of geological prospects
in the Galveston Bay area. The parties have drilled three out of seven prospects
identified in the area.
On January 8, 1998, TransTexas announced that it had successfully drilled,
completed and flow-tested its first well, the State Tract 331#1, located
approximately one mile off the coast of San Leon, Texas, in a water depth of
less than 10 feet. This discovery well flow-tested at a gross rate of 76.4 MMcfd
of natural gas and 11,002 Bpd of condensate and oil.
TransTexas has successfully drilled, completed and flow-tested a second
well, the State Tract 331#3, located approximately one-half mile northeast of
the discovery well. This confirmation well flow-tested at a gross rate of 41
MMcfd of natural gas and 10,700 Bpd of condensate and oil. A third well, the
State Tract 352#1, located approximately one-half mile southwest of the
discovery well is currently being drilled.
As of April 15, 1998, the Eagle Bay field was producing at a rate of 8.3
MMcfd of natural gas and 1,560 Bpd of condensate and oil. Current production
rates are constrained by temporary production facilities. TransTexas expects the
rate to increase substantially in the second half of fiscal 1999 after
additional production facilities are installed. As of January 31, 1998,
TransTexas owned a 75% working interest covering approximately 5,002 gross
(4,803 net) acres in the Eagle Bay area.
TransTexas has also drilled two exploratory wells on two other prospects in
Galveston Bay. These wells, the Doornbos #1 and State Tract 88A#1, were
unsuccessful although the acquisition of additional seismic data covering these
prospects is under consideration. TransTexas intends to drill four additional
prospects in Galveston Bay. As of January 31, 1998, TransTexas owned a 75%
working interest covering approximately 16,524 gross (13,628 net) acres in the
Galveston Bay area prospects including Eagle Bay.
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 January 31,
1998, TransTexas had drilled 53 wells and completed 51 wells in the area. As of
January 31, 1998, TransTexas' mineral interests in Bob West North consisted of a
98% working interest in 17,300 gross (14,200 net) acres and a 90% net profits
interest in 660 gross acres. In April 1998, TransTexas sold the net profits
interest. On January 31, 1998, TransTexas was in the process of completing one
well in Bob West North. For the fiscal year ended January 31, 1998, TransTexas
produced 46.8 Bcf (33.9 Bcf net) from the Bob West North area at an average net
daily rate of 93 MMcfd. Recently obtained 3-D seismic data indicates the
potential for additional drilling locations to further develop productive
reservoirs in the area.
Fandango South. TransTexas is developing a natural gas discovery located in
reservoirs in Jim Hogg County, Texas known as the Fandango South area. As of
January 31, 1998, TransTexas had drilled nine wells, had completed eight wells
and was drilling two additional wells to develop the lower Wilcox sandstone. For
the fiscal year ended January 31, 1998, TransTexas produced 4.2 Bcf (2.9 Bcf
net) of natural gas from this field, at an average net daily rate of 8 MMcfd. As
of January 31, 1998, TransTexas held a 97% working interest in approximately
5,500 gross (5,500 net) acres in Fandango South.
Goliad and Victoria Counties. As of January 31, 1998, TransTexas had
drilled eight wells in prospects in Goliad and Victoria Counties, Texas, six of
which had been completed. For the fiscal year ended January 31, 1998, TransTexas
produced 1.5 Bcf (1.1 Bcf net) of natural gas from the development area, at an
average net daily rate of 3 MMcfd. As of January 31, 1998, TransTexas owned a
100% working interest in approximately 8,412 gross (7,329 net) acres in Goliad
and Victoria Counties.
Wharton County. In 1995, TransTexas entered into an agreement with an
unaffiliated third party, that acts as operator, to jointly develop the mineral
rights in the shallow Frio and Miocene sands in Wharton
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County, Texas. As of January 31, 1998, 60 wells had been drilled in shallow
formations in the area, 26 of which had been completed.
TransTexas also acquired mineral rights covering deeper Wilcox formations
in Wharton County. TransTexas has drilled and completed four deeper wells in the
area. The first such well, the Joel Hudgins #1, commenced production from the
area on August 25, 1997 at a rate of 4 MMcfd.
For the fiscal year ended January 31, 1998, TransTexas' Wharton County
properties produced 3.7 Bcf (2.6 Bcf net) of natural gas, at an average net
daily rate of 7 MMcfd. As of January 31, 1998, TransTexas held a 75% working
interest in the shallow mineral rights in approximately 43,956 gross (22,049
net) acres in Wharton County and a 100% working interest in the deep mineral
rights in approximately 3,123 gross (2,747 net) acres.
Lodgepole, North Dakota. In late 1996, TransTexas announced the discovery
of a Lodgepole formation oil field in Dickinson, North Dakota. As of January 31,
1998, TransTexas had drilled a total of 11 wells in the Lodgepole, three of
which had been completed. For the fiscal year ended January 31, 1998,
TransTexas' Lodgepole properties produced 684,007 barrels of crude oil (437,764
barrels net) at an average net daily rate of 1,199 Bpd. In January 1998,
TransTexas sold its Lodgepole producing properties for a sales price of $19.1
million. As of January 31, 1998, TransTexas held an 80% average working interest
in approximately 210,540 gross (96,111 net) acres in the Lodgepole trend.
Other Areas. TransTexas has also made discoveries of natural gas and oil in
other prospects in Texas, Louisiana and Mississippi that, as of January 31,
1998, are in the preliminary stages of development drilling but which management
believes have the potential to 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 Vermilion Parish that is currently being
completed for production. TransTexas expects eventually to participate in more
than 350 square miles of 3-D seismic data. As of January 31, 1998, TransTexas
had identified eight individual exploration prospects in South Louisiana that it
intends to drill and, as of January 31, 1998, owned a 50% working interest in
14,202 gross (10,094 net) acres.
TransTexas owns an 82% working interest in 1,509 gross (1,407 net) acres in
Brazoria County, Texas. As of January 31, 1998, TransTexas had drilled and was
completing the initial test well and drilling a second well in an area adjacent
to existing production areas.
TransTexas owns a 100% working interest in 5,189 gross (2,691 net) acres in
Chambers County, Texas. As of January 31, 1998, TransTexas had drilled five
wells and completed three wells in Chambers County. TransTexas has conducted a
3-D seismic survey covering approximately 32 square miles that indicates
multiple prospective drilling locations.
TransTexas holds a 92% working interest in approximately 19,652 gross
(19,409 net) acres in the Cuba Libre area of Webb County, Texas. For the fiscal
year ended January 31, 1998, TransTexas produced 3.5 Bcf (2.5 Bcf net) at an
average net daily rate of 7 MMcfd from a total of 20 wells drilled in Cuba
Libre, of which 11 wells had been completed.
TransTexas holds a 95% working interest in approximately 81,512 gross
(58,216 net) acres in the La Grulla area of Starr County, Texas. As of January
31, 1998, TransTexas had drilled a total of 38 wells in La Grulla, of which 17
wells had been completed. For the fiscal year ended January 31, 1998,
TransTexas' La Grulla properties produced 2.2 Bcf (1.6 Bcf net) at an average
net daily rate of 4 MMcfd.
EXPLORATION AND PRODUCTION OPERATIONS
The exploration and production activities of TransTexas consist of
geological evaluation of current and prospective properties, the acquisition of
mineral 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 on adding proved reserves of at least 50 Bcfe per development
area. TransTexas' technical staff consists of geologists, geophysicists and
engineers whose assessment of drilling locations may be enhanced with the use of
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3-D seismic workstations, which TransTexas owns and operates at its Houston
headquarters. TransTexas' technical staff selects drilling locations based on
the interpretation of available well data and 3-D and 2-D seismic data.
TransTexas operates substantially all of its producing properties. TransTexas
believes that this experience is especially important in south and coastal
Texas, which are geologically complex.
During the five years ended January 31, 1998, TransTexas completed
approximately 72% of 613 wells drilled at an average finding cost of
approximately $0.76 per Mcfe. As of January 31, 1998, TransTexas was drilling
nine gross (nine net) wells. As of January 31, 1998, TransTexas had a total of
157 productive wells. TransTexas had a working interest in the following numbers
of wells that were drilled during the periods indicated:
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SIX MONTHS
YEAR ENDED JANUARY 31, ENDED YEAR ENDED
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1998* 1997 1996 1995
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GROSS NET GROSS NET GROSS NET GROSS NET
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Exploratory Wells(1):
Productive(2).............. 13 11 36 33 12 11 13 13
Non-Productive............. 16 14 45 41 13 12 7 6
% Productive............... 45% 44% 44% 45% 48% 48% 65% 68%
Development Wells(1):
Productive(2).............. 47 43 67 66 36 36 63 63
Non-Productive............. 31 27 3 3 4 4 15 15
% Productive............... 60% 61% 96% 96% 90% 90% 81% 81%
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* Results for 1998 include the effect of the Lobo Sale.
(1) The number of net wells is the sum of the fractional working interests owned
in gross wells.
(2) 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.
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:
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SIX MONTHS
ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
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1998* 1997 1996 1996 1995 1995
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Production:
Gas (Bcf) (1)........................ 72.4 153.6 137.9 66.8 76.9 147.9
NGLs (MMgals)........................ 62.4 174.2 169.2 65.3 121.3 225.3
Condensate and oil (MBbls)........... 619 604 543 258 354 638
Average sales prices:
Gas (dry) (per Mcf)(2)............... $2.09 $2.14 $1.51 $1.65 $1.41 $1.40
NGLs (per gallon).................... .29 .36 .27 .30 .27 .26
Condensate and oil (per Bbl)......... 19.20 21.54 17.76 17.39 16.50 17.22
Average lifting cost per Mcfe(3)....... .34 .29 .23 .23 .21 .21
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* Results for 1998 include the effect of the Lobo Sale.
(1) Net gas production volumes for the years ended January 31, 1998 and 1997,
include 7.3 Bcf and 32.0 Bcf delivered under volumetric production payments.
(2) Average prices for the years ended January 31, 1998 and 1997, include
amounts delivered under volumetric production payments. The average gas
price for TransTexas' undedicated production for these periods was $2.10 per
Mcf and $2.39 per Mcf, respectively. Gas prices do not include the effect of
hedging.
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(3) Condensate and oil are converted to a common unit of measure on the basis of
six Mcf of natural gas to one barrel of condensate or oil. The components of
production costs may vary substantially among wells depending on the methods
of recovery employed and other factors. The calculation of average lifting
cost per Mcfe for the year ended January 31, 1998, includes volumes
delivered to third parties under volumetric production payments.
DRILLING SERVICES DIVISION
For the past 12 years, TransTexas has performed substantially all of its
own drilling and oil field services through its drilling services division
located in Laredo, Texas. Drilling services include drilling, workover and
completion, as well as a variety of other support services required for the
exploration and production of natural gas.
Subsequent to the Lobo Sale, TransTexas' exploration and production
activities are no longer concentrated in the Laredo area nor are they comparable
to those historically conducted. Therefore, the utilization of a
centrally-located drilling services operation in Laredo is no longer as
efficient or cost-effective. Accordingly, TransTexas has engaged an investment
banking firm to assist in the sale of the drilling services assets. TransTexas
anticipates selling its oilfield stimulation, cementing and coiled tubing
equipment and related facilities on or about April 30, 1998. TransTexas has also
entered into a letter of intent to sell its drilling rigs. Discussions regarding
the sale of TransTexas' remaining drilling services assets are being conducted.
As of January 31, 1998, the assets of this division included 25 land
drilling rigs, nine workover rigs and two fracture stimulation fleets.
Complementary drilling, completion and workover 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. During the year ended
January 31, 1998, TransTexas drilled 107 wells, substantially all of which were
drilled by this division.
NATURAL GAS TRANSPORTATION AND PROCESSING
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
Gas Plant for gas processing. The agreements are for a term of approximately 10
years and allow for the transportation of up to a combined total of 400 MMcfd.
TransTexas has retained ownership of its pipeline systems within the Bob West
North and Fandango South fields.
TransTexas intends to enter into agreements for the gathering,
transportation, processing and sale of natural gas produced from its Galveston
Bay prospects. TransTexas has constructed approximately 3.2 miles of 20-inch
pipeline from a platform located at State Tract 331 to interconnect with an
existing 18-inch pipeline owned by Tejas Gas Pipeline, L.L.C. ("Tejas") in Texas
State Tract Block 327. TransTexas and Tejas are currently negotiating gathering,
transportation and purchase agreements.
In 1996, TransTexas built a 24-inch pipeline for MidCon Texas Pipeline
Corp. ("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 37.5% interest in a 28-mile segment of the
pipeline after five years.
TransTexas believes that there is currently adequate pipeline
transportation capacity for its 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.
On June 23, 1997, TransTexas and Shell Midstream Enterprises, Inc.
("Shell") entered into a five-year gas processing agreement for the treatment of
natural gas at Shell's Fandango Gas Plant which is expected to be operational by
May 1, 1998. Pursuant to this agreement, TransTexas has committed to deliver 75
MMcfd
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for processing. The agreement also allows TransTexas to assign one-third of its
commitment to a third party. A treating fee of $0.12 per Mcf will be paid by
TransTexas subject to adjustment in certain circumstances.
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. For the year ended
January 31, 1998, three purchasers accounted for a total of 65% of the
consolidated natural gas, condensate, NGLs and transportation revenues of
TransTexas. TransTexas believes that the loss of any single purchaser would not
have a material adverse effect on TransTexas due to the availability of other
purchasers for TransTexas' production at comparable prices.
In January 1997, TransTexas and Koch Energy Trading Inc. entered into a gas
purchase contract pursuant to which TransTexas is required to deliver 25,000
MMBtu per day to a specified delivery point. The purchase price is determined by
an industry index less $0.08 per MMBtu. Deliveries commenced on June 1, 1997 and
are to continue through August 31, 1999.
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, 1998,
TransTexas made net settlement payments totaling approximately $7.4 million to
the counterparty pursuant to the Hedge Agreements. As of January 31, 1998,
TransTexas had no outstanding Hedge Agreements or other derivative instruments.
The Hedge Agreements were accounted for as hedges and, accordingly, any gains
and losses were deferred and recognized in the respective month as physical
volumes were sold.
COMPETITION
TransTexas encounters significant 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 available capital and the costs involved in
finding and developing gas and oil resources combined with commodity sales
prices and market access.
EMPLOYEES
As of January 31, 1998, TransTexas had approximately 2,500 employees,
including approximately 2,300 field employees related to its natural gas
exploration, production and drilling services businesses. TransTexas 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.
The State of Texas (through the Texas Railroad Commission) and many other
states require permits for drilling operations, drilling bonds and reports
concerning operations, and impose other requirements related to the exploration
and production of natural gas. Such states also have statutes or regulations
addressing conservation matters, including provisions for the unitization or
pooling of gas properties, the establishment of
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maximum rates of production from 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 natural gas can be produced from
TransTexas' properties. Management believes that 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
See Note 16 of Notes to Consolidated Financial Statements for a discussion
of environmental matters affecting TransTexas.
BUSINESS OF TARC
General
TARC was formed in 1987 to hold and operate the refinery assets of
TransAmerican and owns facilities for the refining and storage of crude oil and
petroleum products. TARC's refinery is located in the Gulf Coast region along
the Mississippi River, approximately 20 miles from New Orleans, Louisiana.
TARC's business strategy is to modify, expand and reactivate its refinery and to
maximize its 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 May 1997, TARC spent approximately $251 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.
In order to capitalize on the progress on the refinery made through its
expenditures on the 1995 Program, in June 1997 TARC commenced a modified
two-phase construction and expansion program (the "Capital Improvement
Program"). TARC spent approximately $215 million on the Capital Improvement
Program during the period between June 1997 and January 31, 1998. The design and
estimated timing and cost of the Capital Improvement Program are based on
substantial input from several engineering and construction firms which have
been engaged 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. 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. 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. TARC currently
believes that the costs of construction of the refinery will exceed the budget
established in June 1997, but that sufficient cash will be available to fund
such costs. See "-- Capital Improvement Program -- Capital Budget Status" and
"-- Completion Status." The foregoing estimates, as well as other estimates and
projections herein, are subject to substantial revision upon the
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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 increased. As a result, capacity utilization has increased to
approximately 95.0% in 1997 from approximately 83.1% in 1987. 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. These factors, if sustained, would likely result in an
increased demand for product imports into the United States. Management believes
that these factors, together with relatively low prices expected by it for
heavy, sour crude oil, should have a positive effect on TARC's refining margins.
DOMESTIC REFINING CAPACITY
UTILIZATION RATES, AND DEMAND FOR REFINED PRODUCTS
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capacity (MMBpd)........................... 15.6 15.9 15.6 15.6 15.7 15.7 15.1 15.0 15.4 15.3 15.5
Utilization................................ 83.1% 84.7% 86.6% 87.1% 86.0% 87.9% 91.5% 92.6% 91.9% 93.5% 95.0%
Demand for refined products (MMBpd)........ 16.7 17.3 17.3 17.0 16.7 17.0 17.2 17.7 17.7 18.2 18.6
</TABLE>
- ---------------
Source: Energy Information Administration.
CURRENT OPERATIONS
The No. 2 Vacuum Unit was operated intermittently between March 1994 and
January 1997. 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 low 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 previously has 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.
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
8
<PAGE> 11
units, tankage and offsite facilities as part of the Capital Improvement
Program. The Capital Improvement Program includes expenditures necessary to
ensure that the refinery is in compliance with certain existing air and water
discharge regulations and that gasoline produced will comply with federal
standards. TARC is acting and 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, the Sulfur Recovery System 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 other 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
completed and all major equipment has been purchased and installed. Fluor
Daniel, Inc. is managing the construction, which consists primarily of the
installation of piping and instrumentation systems. 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. Petroleum
coke will be produced as a by-product of the coking process.
Naphtha Pretreater. TARC has purchased a used naphtha pretreater, which it
has disassembled and moved to the refinery site. Recent inspection of the used
piping in the naphtha pretreater indicates that a majority of it will need to be
replaced. 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. 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.
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 delivered, 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
9
<PAGE> 12
combined base capacity of 370 LT/D of sulfur, which can be increased to 510 LT/D
of sulfur with standard 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. Pressurized tanks with
a storage capacity of 127,500 barrels will be constructed for LPG and butane.
Other. Additional equipment will be installed to enhance waste water
treatment and reduce the generation of solid waste. TARC has commenced Hazardous
Operation ("HAZOP") analyses 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 will produce 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 and is managing construction of the FCC Unit. All major
equipment has been procured, delivered and erected.
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 is being
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.
and a new refrigeration system. Remaining work includes inspection and testing
of the equipment in the existing unit and installation of a new electronic
instrumentation system. Fluor Daniel is providing engineering and construction
management services for this work.
10
<PAGE> 13
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 as of June 13, 1997 and
expenditures as of January 31, 1998.
<TABLE>
<CAPTION>
BUDGET EXPENDITURES TO DAILY
TO COMPLETE(1) JANUARY 31, 1998(2) CAPACITY
-------------- ------------------- --------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS) (BPD)
<S> <C> <C> <C>
PHASE I:
Crude Unit................................ $ 3 $ 3.7 200,000
Delayed Coking Unit....................... 27 45.2 75,000
Naphtha Pretreater........................ 12 7.1 30,000
No. 2 Reformer............................ 9 0.7 12,000
HDS Unit.................................. 24 11.8 60,000
Sulfur Recovery System.................... 53 23.8 370(4)
Offsite Facilities/Tankage................ 46 33.3 N/A
Other..................................... 3 0.4 N/A
Engineering and Administrative............ 7 8.0 N/A
Contingencies(3).......................... 39 -- N/A
---- ------
Total Phase I..................... 223 134.0
---- ------
PHASE II:
FCC Unit.................................. 115 67.9 100,000
FCC Flue Gas Scrubber..................... 14 5.5 N/A
Alkylation Unit........................... 24 6.6 26,000
Offsite Facilities/Tankage................ 26 1.0 N/A
Other..................................... 2 -- N/A
Engineering and Administrative............ 3 -- N/A
Contingencies(3).......................... 20 -- N/A
---- ------
Total Phase II.................... 204 81.0
---- ------
Total Phase I and Phase II........ $427 $215.0
==== ======
</TABLE>
- ---------------
(1) Budget as of June 13, 1997 for estimated expenditures from June 13, 1997 to
completion. See "-- Capital Budget Status."
(2) From June 13, 1997 through January 31, 1998.
(3) To the extent expenditures have exceeded or are expected to exceed the
approved capital budget for a unit or units, the contingencies portion of
the budget is allocated to specific units. As of January 31, 1998, the
entire contingencies portion of the budget has been allocated to specific
units.
(4) Units are LT/D. Capacity can be increased to 510 LT/D with oxygen
enrichment.
CAPITAL BUDGET STATUS
As of April 30, 1998, TARC was in the process of preparing information for
the Construction Supervisor in connection with the Construction Supervisor's
bimonthly report, to be finalized by the Construction Supervisor in May. TARC
believes that the report will indicate the necessity for expenditures in excess
of the
11
<PAGE> 14
budget of up to approximately $45 million, of which approximately $30 million
will be allocated to Phase I. These estimates are preliminary, and may change in
the May report. Cash available in the TARC Disbursement Account is sufficient to
fund the projected remaining costs of Phase I. Although there can be no
assurance, TARC believes that cash available in the TARC Disbursement Account,
other cash on hand (exclusive of any proceeds of the issuance of Port Commission
Bonds, discussed below), and anticipated cash flow from operation of certain
Phase I units will be sufficient to fund the projected remaining costs of Phase
II.
COMPLETION STATUS
TARC anticipates Mechanical Completion of the Delayed Coking Unit, the HDS
Unit and the related portion of the Sulfur Recovery System in May 1998. Upon
Mechanical Completion of these units, TARC will be able to purchase feedstocks
using funds in the TARC Disbursement Account reserved for such purpose. TARC
believes that the remainder of Phase I (other than the No. 2 Reformer) will
reach Mechanical Completion during the second quarter of fiscal 1999. TARC
intends to defer additional expenditures on the No. 2 Reformer until the fourth
quarter of fiscal 1999, ending January 31, 1999. TARC expects to complete both
Phase I and Phase II in advance of the Phase I completion date required by the
TEC Notes Indenture.
PORT COMMISSION BONDS
TARC and the South Louisiana Port Commission ("Port Commission") have
entered into a preliminary agreement for the issuance of revenue bonds which, if
issued, are expected to provide net proceeds to TARC of approximately $50
million. Of such proceeds, TARC anticipates that approximately $35 million would
be available to fund construction of facilities included in the Capital
Improvement Program budget. The Port Commission would own a coke handling system
and certain tank storage and dock facilities. TARC would operate such 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.
FEEDSTOCK FINANCING ARRANGEMENTS AND PROCESSING AGREEMENTS
During periods of limited operations, TARC has entered into financing
arrangements in order to maintain an available supply of feedstocks. Typically,
TARC entered into an agreement with a third party to acquire a cargo of
feedstock scheduled for delivery to TARC's refinery. TARC paid 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 purchased the cargo, and TARC committed to
purchase, at a later date, the cargo at an agreed price plus commission and
costs. TARC also placed margin deposits with the third party to permit the third
party to hedge its price risk. TARC purchased these cargos in quantities
sufficient to maintain expected operations and was obligated to purchase all of
the cargos delivered pursuant to these arrangements. In the event the refinery
was not operating, these cargos could 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 January 31, 1998, TARC has processed
6.4 million barrels of feedstocks under this agreement. 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. For the
years ended January 31, 1998 and 1997, TARC recorded income (loss) from
processing agreements of $1.4 million and $(7.1) million, respectively. As of
January 31, 1998 and 1997, TARC was storing approximately 0.7 million and 1.0
million barrels, respectively, of feedstock and intermediate or refined products
pursuant to these processing agreements. Included in the 0.7 million barrels of
product stored at the refinery as of January 31, 1998, is approximately 0.6
million barrels of feedstock owned by a third party related to a purchase
commitment entered into in April 1997. For the year ended January 31, 1998, TARC
incurred a loss of approximately $7.8 million related to this purchase
commitment.
12
<PAGE> 15
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 TARC's debt instruments. 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. TARC 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.
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.
The refinery has a variety of available options for the receipt of
feedstocks. The Mississippi River permits delivery of feedstocks from both barge
and ocean-going vessels. TARC has four ship docks and a barge dock on the
Mississippi River. 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.
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. 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, TARC acquired tank storage facilities and property
located adjacent to TARC'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. TARC 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.
13
<PAGE> 16
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. TARC primarily
competes with refiners in the Gulf Coast region, many of which are owned by
large, integrated oil companies which, because of their more diverse operations,
stronger capitalizations or crude oil supply arrangements, are better able than
TARC to withstand volatile industry conditions, including shortages or excesses
of crude oil or refined products or intense price competition. The principal
competitive factors affecting TARC's refining operations are the quality,
quantity and delivered costs of crude oil and other refinery feedstocks,
refinery processing efficiency, mix of refined products, refined product prices
and the cost of delivering refined products to markets. Competition also exists
between the petroleum refining industry and other industries supplying energy
and fuel to industrial, commercial and individual consumers.
EMPLOYEES
As of January 31, 1998, TARC had approximately 450 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.
Since July 1994, Southeast Louisiana Contractors of Norco, Inc. ("Southeast
Contractors"), a subsidiary of TransAmerican, has provided construction
personnel to TARC in connection with construction at the refinery. Southeast
Contractors will continue to 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. As of January 31, 1998, Southeast Contractors was providing
approximately 2,500 construction workers to TARC. The Equal Employment
Opportunity
14
<PAGE> 17
Commission (the "EEOC") has initiated an investigation into the employment
practices of TARC and Southeast Contractors alleging discriminatory hiring and
promotion practices. See "-- Legal Proceedings."
ENVIRONMENTAL MATTERS
See Note 16 of Notes to Consolidated Financial Statements for a discussion
of environmental matters affecting TARC.
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 the Occupational Safety and Health Administration ("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.
ITEM 2. PROPERTIES
ACREAGE
The following table sets forth TransTexas' total developed and undeveloped
acreage and productive wells as of January 31, 1998:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)
--------- ----------- ----------
<S> <C> <C> <C>
Gross.................................................. 18,700 630,384 157
Net(2)................................................. 15,932 430,618 134
</TABLE>
- ---------------
(1) Of the total productive wells, 149 gross (132 net) were gas wells and 8
gross (2 net) were oil wells. As of January 31, 1998, TransTexas had
interests in 6 productive wells which had multiple completions.
(2) The number of net acres and net wells is the sum of the fractional working
interests owned in gross acres and gross wells, respectively.
TARC owns the approximately 457-acre site on which the refinery and tank
storage facility are located. TARC also owns approximately 500 acres of wetlands
adjacent to the refinery site. TARC leases office space in Houston, Texas from
TransTexas.
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 & Associates, Inc. ("Netherland, Sewell"), TransTexas' independent
petroleum engineers, as of the dates indicated. See Note 18 of Notes to
Consolidated Financial Statements for additional information regarding
TransTexas' proved reserves at February 1, 1998.
<TABLE>
<CAPTION>
FEBRUARY 1,
----------------------------------
1998* 1997 1996
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Proved Developed Reserves:
Gas (MMcf)(1)..................................... 134,258 381,527 425,317
Condensate and oil (MBbls)........................ 4,230 2,388 880
Estimated future net revenues(2).................. $228,932 $ 951,435 $ 572,882
Present value of estimated future net revenues
discounted at 10%(2)........................... $173,832 $ 683,282 $ 416,205
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
FEBRUARY 1,
----------------------------------
1998* 1997 1996
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Proved Undeveloped Reserves:
Gas (MMcf)........................................ 214,430 538,191 713,810
Condensate and oil (MBbls)........................ 11,680 3,350 2,023
Estimated future net revenues(2).................. $316,420 $1,133,754 $ 686,423
Present value of estimated future net revenues
discounted at 10%(2)........................... $221,841 $ 765,786 $ 391,857
Total Proved Reserves:
Gas (MMcf)(1)..................................... 348,688 919,718 1,139,127
Condensate and oil (MBbls)........................ 15,910 5,738 2,903
Estimated future net revenues(2).................. $545,352 $2,085,187 $1,259,305
Present value of estimated future net revenues
discounted at 10%(2)........................... $395,673 $1,449,068 $ 808,062
</TABLE>
- ---------------
* Results for 1998 include the effect of the Lobo Sale.
(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.
In accordance with applicable guidelines of the Securities and Exchange
Commission, the estimates of TransTexas' proved reserves and future net revenues
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 are
affected by changes in gas, condensate and oil prices, which have fluctuated
widely in recent years. From time to time, TransTexas enters into hedging
transactions to mitigate a portion of such natural gas price volatility. As of
February 1, 1998, 1997 and 1996, the period end sales prices used for purposes
of estimating TransTexas' proved reserves and the future net revenues from those
reserves were $1.96, $3.17 and $1.95 per Mcf of gas, respectively, and $13.54,
$23.99 and $18.34 per Bbl of condensate and crude oil, respectively.
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.
In computing this 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. Such costs exclude 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
16
<PAGE> 19
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 amounts 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.
TITLE INSURANCE
TARC has obtained a lender's title insurance policy in the amount of $859
million for the benefit of the Trustee under the TEC Notes Indenture (the
"Trustee") to insure against certain claims made against title to the refinery
parcel site. The title insurance policy is 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 does 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.
ITEM 3. LEGAL PROCEEDINGS
See Notes 16 and 17 of Notes to Consolidated Financial Statements for
information concerning legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of securityholders during the
three months ended January 31, 1998.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for TEC's common stock. On
April 30, 1998, there was one holder of TEC's common stock.
TEC has not paid any cash dividends on its capital stock since inception.
TEC's ability to pay dividends is restricted by TEC's debt instruments and will
depend in part upon TEC's debt levels. In determining whether to declare and pay
a dividend, the Board of Directors will consider various other factors,
including TEC's capital requirements and financial condition.
ITEM 6. SELECTED FINANCIAL DATA
On January 30, 1996, the Company changed its fiscal year end for financial
reporting purposes to January 31, from July 31. The following table sets forth
selected financial data of the Company as of and for each of the three years
ended January 31, 1998, the six months ended January 31, 1996 and 1995 and each
of the three years ended July 31, 1995. Data for the years ended July 31, 1994
and 1993 represents the combined financial data of TransTexas and TARC. This
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto. The financial data for the fiscal year ended July 31, 1993
represent the results of operations and financial position of the Company prior
to the reactivation of TARC's refinery. During these periods, TARC had only
maintenance expenses and lease income for storage facilities. The data for
subsequent periods reflects limited operations of the refinery. The Company does
not consider its subsidiaries' historical results to be indicative of future
results.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------------------- ------------------- -------------------------------
1998 1997 1996 1996 1995 1995 1994 1993
--------- --------- --------- -------- -------- --------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gas, condensate and NGL
revenues................... $ 164,172 $ 360,740 $ 254,275 $123,253 $142,070 $ 273,092 $300,210 $294,753
Refining revenues............ -- 10,857 176,229 107,237 71,035 140,027 174,143 --
Transportation revenues...... 12,055 34,423 33,518 15,892 19,161 36,787 33,240 30,816
Gain on sale of assets....... 543,365 7,856 474 474 -- -- -- --
Other revenues............... 6,141 297 361 127 603 837 3,192 5,425
--------- --------- --------- -------- -------- --------- -------- --------
Total revenues......... 725,733 414,173 464,857 246,983 232,869 450,743 510,785 330,994
Operating costs and
expenses................... 83,605 181,085 291,825 162,830 133,336 262,331 285,766 113,220
Depreciation, depletion, and
amortization............... 91,075 139,678 126,821 64,053 73,051 135,819 116,447 95,016
General and administrative
expenses................... 68,210 57,500 45,768 21,213 21,037 45,592 44,807 34,954
Litigation settlements....... -- (96,000) (18,300) (18,300) -- -- (1,000) (5,600)
Operating income............. 482,843 131,910 18,743 17,187 5,445 7,001 64,765 93,404
Net interest expense......... 91,281 95,922 89,615 44,151 29,086 74,214 50,131 2,457
Income taxes and other....... 196,826(7) (30,489) (4,806) (187) (247) (4,866) 8,231 16,703
Extraordinary loss, net of
taxes...................... 156,796 -- 56,637 -- -- 56,637 -- --
--------- --------- --------- -------- -------- --------- -------- --------
Net income (loss)(6)......... $ 37,940 $ 66,477 $(122,703) $(26,777) $(23,394) $(118,984) $ 6,403 $ 74,244
========= ========= ========= ======== ======== ========= ======== ========
Net income (loss) per
share:(1)
Income (loss) before
extraordinary item....... $ 21,635 $ 7,384 $ (7,341) $ (2,975) $ (13,901)
Extraordinary item......... (17,422) -- (6,293) -- (12,628)
--------- --------- --------- -------- ---------
Net income (loss).......... $ 4,213 $ 7,384 $ (13,634) $ (2,975) $ (26,529)
========= ========= ========= ======== =========
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------------------- ------------------- -------------------------------
1998 1997 1996 1996 1995 1995 1994 1993
--------- --------- --------- -------- -------- --------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA OF TRANSTEXAS:
Sales volumes:
Gas (average daily)
(MMcfd).................. 198.9 419.6 376.8 363.4 417.7 405.2 358.8 326.8
Gas (Bcf).................. 72.4(2) 153.6(2) 137.9 66.9 76.9 147.9 130.9 119.3
NGLs (MMgal)............... 62.4 174.2 169.2 65.3 121.3 225.3 164.0 183.8
Condensate (MBbls)......... 619 604 543 259 354 638 650 617
Total production (Bcfe).... 76.1 157.2 141.1 68.4 79.0 151.7 134.8 123.0
Average prices:
Gas (dry) (per Mcf)........ $ 2.09(3) 2.14(3) $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96 $ 1.98
NGLs (per gallon).......... .29 0.36 0.27 0.30 0.27 0.26 0.27 0.30
Condensate (per Bbl)....... 19.20 21.54 17.76 17.39 16.50 17.22 15.13 18.65
Average lifting costs (per
Mcfe)...................... 0.34 0.29 0.23 0.23 0.21 0.21 0.24 0.22
Proved reserves (net) (end of
period)(4):
Gas (Bcf).................. 348.7 919.7 1,139.1 1,139.1 943.4 1,122.6 717.4 695.0
Condensate (Mbbls)......... 15,910 5,738 2,903 2,903 2,637 3,049 1,935 1,968
Number of gross wells
drilled.................... 107 151 102 65 60 97 140 103
Percentage of wells drilled
completed.................. 56% 68% 75% 74% 78% 77% 83% 85%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
----------------------------------------------- --------------------------------
1998 1997 1996 1995 1995 1994 1993
---------- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(5)............ $ 173,608 $ 32,504 $ 25,859 $(92,258) $ 112,998 $(25,102) $(58,443)
Total assets............................ 2,131,439 1,613,735 1,456,422 823,726 1,325,656 758,664 431,141
Total long-term debt.................... 1,769,929 1,307,652 1,140,779 510,000 1,094,963 500,000 8,270
Stockholder's equity (deficit).......... 90,402 (47,009) (35,933) (8,133) (9,156) 15,262 230,418
</TABLE>
- ---------------
(1) Per share data for the six month period ended July 31, 1995 and for the
years prior to July 31, 1995 is omitted because TEC's predecessor was not a
separate entity with its own capital structure.
(2) Sales volumes for the years ended January 31, 1998 and 1997 include amounts
delivered pursuant to volumetric production payments.
(3) Average price calculations for the years ended January 31, 1998 and 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 $2.10 per Mcf and $2.39 per Mcf,
respectively. The gas price does not include the effect of hedging.
(4) These reserve data are estimates of TransTexas' proved reserves as of
February 1, 1998, 1997 and 1996 and August 1, 1995, 1994 and 1993, as
evaluated by Netherland, Sewell & Associates, Inc.
(5) 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 January 31, 1998, 1997
and 1996 and July 31, 1995, includes $32.8 million, $46.0 million, $46.0
million and $44.7 million, respectively, in cash restricted for the payment
of interest.
(6) Net income (loss) is prior to preferred stock dividends of $19,000 for the
years ended January 31, 1998 and 1997.
(7) Includes minority interest in TransTexas of $35.2 million.
19
<PAGE> 22
ITEM 7. 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 substantial
operations in the natural gas transportation segment. TEC's sources of liquidity
and cash flow will include payments on the Intercompany Loans and other loans to
its 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 included under Item 8 of this Report. The financial data for
the year ended January 31, 1996 and the six months ended January 31, 1995, are
derived from the unaudited financial statements of TEC. All of TEC's operations
are conducted through TransTexas and TARC.
The TEC Notes Indenture (as defined), as well as the debt instruments of
TransTexas and TARC, contain substantial restrictions which essentially prevent
the Company from using the assets of one entity to satisfy the liabilities of
the other and substantially limit transactions between affiliates. Accordingly,
the consolidated financial statements should be read in conjunction with the
separate financial statements of TransTexas and TARC filed as a part of their
respective Annual Reports on Form 10-K for the fiscal year ended January 31,
1998.
Business segment information for TEC for the years ended January 31, 1998,
1997 and 1996, the six months ended January 31, 1996 and 1995, and the year
ended July 31, 1995, 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 January 31, 1998
Exploration and production........ $164,172 $ 48,325 $ 62,933 $378,762 $ 718,146
Gas transportation................ 12,055 (16,601) 19,726 12,407 --
Refining.......................... 2,828 (46,032) 8,416 373,397 1,184,881
Other............................. 546,678 497,151 -- 37,564 228,412
-------- -------- -------- -------- ----------
$725,733 $482,843 $ 91,075 $802,130 $2,131,439
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
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>
20
<PAGE> 23
<TABLE>
<CAPTION>
DEPRECIATION,
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
</TABLE>
RESULTS OF OPERATIONS
TRANSTEXAS
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 its ability to minimize finding and
lifting costs and maintain 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 an adjusted sales price of approximately $1.1
billion. Accordingly, TransTexas' reported results for the fiscal year ended
January 31, 1998 include the effect of reduced volumes attributable to the
divestiture of the Lobo Trend producing properties. TransTexas recorded a gain
of $543.4 million on the Lobo Sale.
TransTexas' operating data for the years ended January 31, 1998, 1997 and
1996, the six months ended January 31, 1996 and 1995 and the year ended July 31,
1995 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------ ----------------- JULY 31,
1998 1997 1996 1996 1995 1995
------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf)(1)......................... 72.4 153.6 137.9 66.9 76.9 147.9
NGLs (MMgals)........................ 62.4 174.2 169.2 65.3 121.3 225.3
Condensate and oil (MBbls)........... 619 604 543 259 354 638
Average prices:
Gas (dry) (per Mcf)(2)............... $ 2.09 $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40
NGLs (per gallon).................... .29 .36 .27 .30 .27 .26
Condensate and oil (per Bbl)......... 19.20 21.54 17.76 17.39 16.50 17.22
Number of gross wells drilled.......... 107 151 102 65 60 98
Percentage of wells completed.......... 56% 68% 75% 74% 78% 78%
</TABLE>
- ---------------
(1) Sales volumes for the years ended January 31, 1998 and 1997 include 7.3 Bcf
and 32.0 Bcf, respectively, delivered pursuant to volumetric production
payments.
(2) Average prices for the years ended January 31, 1998 and 1997 include amounts
delivered under volumetric production payments. The average gas prices for
TransTexas' undedicated production for these periods were $2.10 per Mcf and
$2.39 per Mcf, respectively. Gas prices do not include the effect of
hedging.
21
<PAGE> 24
TransTexas uses the full-cost method of accounting for exploration and
development costs. Under the full-cost method, the cost for successful, as well
as unsuccessful, exploration and development activities is capitalized and
amortized on a unit-of-production basis over the life of the remaining proved
reserves. As of January 31, 1998, the TransTexas' net capitalized costs of gas
and oil properties exceeded the cost center ceiling. TransTexas did not adjust
its net capitalized costs because, subsequent to year-end, prices for gas and
oil increased such that TransTexas' net capitalized costs did not exceed the
recalculated cost center ceiling. A summary of TransTexas' operating expenses is
set forth below (in millions of dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
-------------------------- ----------------- JULY 31,
1998 1997 1996 1996 1995 1995
----- ------ ----- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Lease.............................. $15.2 $ 27.5 $18.7 $ 9.4 $10.3 $19.6
Pipeline and gathering............. 18.1 37.2 24.4 13.0 9.8 21.2
Natural gas liquids................ 14.5 49.3 35.5 15.6 24.5 44.4
Drilling services.................. 3.1 .4 .2 .1 -- .1
----- ------ ----- ----- ----- -----
50.9 114.4 78.8 38.1 44.6 85.3
Taxes other than income taxes(1)... 11.4 22.6 15.2 7.5 6.3 14.0
----- ------ ----- ----- ----- -----
$62.3 $137.0 $94.0 $45.6 $50.9 $99.3
===== ====== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Taxes other than income taxes include severance, property and other taxes.
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
----------------------- -------------- JULY 31,
1998 1997 1996 1996 1995 1995
----- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Depletion rates (per Mcfe)........... $1.11 $.96 $.79 $.82 $.84 $.81
===== ==== ==== ==== ==== ====
</TABLE>
Year Ended January 31, 1998, Compared with the Year Ended January 31, 1997
Gas, condensate and NGL revenues for the year ended January 31, 1998
decreased by $198.9 million from the prior year, primarily due to decreases in
gas, condensate and NGLs sales prices and gas sales volumes, offset in part by
increases in condensate sales volumes. The average prices received per Mcf of
gas, excluding amounts dedicated to volumetric production payments, ranged from
$1.49 to $3.01 in the year ended January 31, 1998, compared to a range of $1.71
to $3.74 in 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 divestiture of producing properties 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 $22.4 million for the year
ended January 31, 1998, due primarily to the divestiture of the pipeline system
as a result of the Lobo Sale. Drilling service revenues increased by $2.7
million for the year ended January 31, 1998, due primarily to an increase in
services provided to third parties.
Lease operating expenses for the year ended January 31, 1998 decreased by
$12.3 million from the prior year due primarily to the Lobo Sale and the
resulting decrease in the number of producing wells. Pipeline and gathering
expenses decreased by $19.1 million due primarily to the divestiture of the
pipeline system, offset partially by an increase of $2.3 million attributable to
contractual transportation charges. NGLs cost decreased by $34.8 million from
the prior year primarily due to the Lobo Sale and the resulting decrease in
volumes of natural gas processed. Drilling service expenses for the year ended
January 31, 1998 increased $2.7 million as compared to the prior year primarily
due to increased costs related to providing services to the new operator of the
Lobo Trend properties. Depreciation, depletion and amortization expense for the
year ended January 31, 1998 decreased by $49.8 million due to the Lobo Sale and
the resulting decrease in TransTexas' undedicated natural gas production,
partially offset by a $0.15 increase in the depletion rate. The depletion rate
increased
22
<PAGE> 25
primarily as a result of the inclusion of approximately $48 million of
properties previously not subject to depletion and a reduction in TransTexas'
proved reserves as a result of the Lobo Sale. General and administrative
expenses increased by $2.6 million due primarily to an increase in professional
services related to amendments to debt agreements offset partially by a decrease
in litigation expense. Taxes other than income taxes decreased by $11.2 million
over the prior year due primarily to decreases in ad valorem, severance and
excise taxes associated with the Lobo Sale and the resulting decrease in the
number of producing wells.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests which are classified as unevaluated properties. As a result
of exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $17 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the cost center, which could result in continued increases in
the depletion rate or a writedown of TransTexas' net capitalized costs of gas
and oil properties. The majority of unevaluated properties will be evaluated
over the next two years.
Interest income for the year ended January 31, 1998 increased by $6.8
million as compared to the prior year due to higher cash balances available for
investment. TransTexas does not expect to earn significant interest income
during fiscal 1999. Interest expense decreased by $16.4 million primarily as a
result of the retirement of the Senior Secured Notes offset in part by accretion
of interest on the Old Subordinated Notes (as defined) retired by TransTexas on
June 19, 1997.
Cash flow from operating activities for the year ended January 31, 1998
decreased by approximately $199.1 million from the prior year due primarily to
lower net income from gas and oil production activities and cash settlement of
volumetric production payments in connection with the Lobo Sale and reduction of
current liabilities partially offset by collections of receivables and advances
to affiliates. During fiscal 1997, TransTexas collected $58.6 million from the
sale of volumetric production payments.
Cash provided by investing activities increased by $968.9 million due to
proceeds primarily from the Lobo Sale, offset in part by an increase in capital
expenditures.
Cash flow used by financing activities increased by $767.2 million due
primarily to the retirement of the Senior Secured Notes and purchases by
TransTexas of its common stock pursuant to the share repurchase program, offset
in part by proceeds from the TransTexas Intercompany Loan.
Year Ended January 31, 1997, Compared with the Year Ended January 31, 1996
Gas, condensate and NGL revenues for the year ended January 31, 1997,
increased by $106.5 million from the year ended January 31, 1996, primarily due
to higher prices for and increased volumes of natural gas, condensate, oil and
NGLs, primarily in the fourth quarter. The average monthly prices received for
natural gas, excluding amounts delivered to third parties under volumetric
production payments, ranged from $1.71 to $3.74 per Mcf during the year ended
January 31, 1997, compared to prices ranging from $1.29 to $1.95 per Mcf in the
year ended January 31, 1996. The increase in natural gas sales volumes resulted
primarily from increased production from TransTexas' Bob West North development
area, offset in part by the normal decline in natural gas production from
TransTexas' Lobo Trend wells and the sale of approximately 207 Bcfe of
TransTexas' reserves in the Lobo Trend. NGLs sales volumes increased as a result
of increases in the volumes of natural gas processed. Transportation revenues
increased by $0.9 million for the year ended January 31, 1997, primarily due to
increased volumes of natural gas transported.
Lease operating expenses for the year ended January 31, 1997 increased by
$8.8 million from the year ended January 31, 1996 primarily due to increases in
repairs and maintenance and workover expenses attributable to an increase in the
number of producing wells prior to the sale of certain of TransTexas' Lobo Trend
properties and the initiation in the first quarter of fiscal 1997 of a program
to increase flow rates on certain wells. This program included the installation
of leased wellhead compressors and additional workover
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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 $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 $148.9 million from the prior year primarily due to increased net
income, the settlement of take-or-pay litigation in the second quarter of fiscal
1997 and proceeds from the sale of volumetric production payments, partially
offset by increases in working capital.
Cash used in investing activities decreased by $67.9 million due to the
sale of approximately 207 Bcfe of TransTexas' reserves, offset in part by
advances to an affiliate and increased capital spending. Capital expenditures
for fiscal 1997 included $47.7 million for purchases of oil and gas properties
from TransAmerican.
Cash flow from financing activities decreased by $214.9 million from the
year ended January 1, 1996 due primarily to the issuance of the TransTexas
Senior Secured Notes in June 1995, offset in part by the issuance of the Old
Subordinated Notes (as defined) 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.
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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 $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 $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 $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 $5.2 million due primarily
to repayments of TransTexas' dollardenominated production payment, offset in
part by increases in long-term borrowings.
TARC
TARC's refinery was inoperative from January 1983 through February 1994.
During this period, TARC's revenues were derived primarily from tank rentals and
its expenses consisted of maintenance and repairs, tank rentals, general and
administrative expenses and property taxes. The No. 2 Vacuum Unit was operated
intermittently between March 1994 and January 1997. TARC 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 will depend 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 believes, based on current estimates of refining margins and costs of
the expansion and modification of the refinery, that future undiscounted cash
flows will be sufficient to recover the cost of the refinery over its estimated
useful life. Management believes there have been no events or changes in
circumstances that would require the recognition of an impairment loss. However,
due to the inherent uncertainties in estimating future refining margins, and in
constructing and operating a large-scale refinery, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Management believes
that the book value of the refinery is in excess of its current estimated fair
market value.
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Year Ended January 31, 1998, Compared with the Year Ended January 31, 1997
There were no product sales for the year ended January 31, 1998 as compared
to $10.9 million for the year ended January 31, 1997, due primarily to TARC not
operating the No. 2 Vacuum Unit since January 1997 and TARC's use during fiscal
1998 of processing arrangements pursuant to which TARC processed feedstocks
owned by third parties (as opposed to TARC's purchase of feedstock and sale of
refined product).
Other revenues of $2.8 million for the year ended January 31, 1998 resulted
primarily from rental income from TARC's tank storage facility acquired in
September 1997,
There were no costs of products sold for the year ended January 31, 1998 as
compared to $11.5 million for the year ended January 31, 1997, due primarily to
TARC not operating the No. 2 Vacuum Unit since January 1997 and TARC's use
during fiscal 1998 of processing arrangements pursuant to which TARC processed
feedstocks owned by third parties (as opposed to TARC's purchase of feedstock
and sale of refined product).
During 1997 and 1998, TARC entered into other processing arrangements
whereby TARC did not take title to feedstocks or refined products but received a
fee based on margins, if any, realized by the counterparty to the arrangement.
TARC retained all market and production risks related to barrels processed.
These arrangements, which are recorded net in the statement of operations,
resulted in income of $1.4 million and a loss of $7.1 million for the years
ended January 31, 1998 and 1997, respectively. Income and losses were primarily
due to unfavorable prices for refined products and unfavorable results of price
management activities.
Operations and maintenance expense for the year ended January 31, 1998
decreased $12.1 million to $11.8 million from $23.9 million for the year ended
January 31, 1997, primarily due to TARC not operating the No. 2 Vacuum Unit
since January 1997, a $1.9 million decrease in labor costs, and a decrease of
$1.9 million in tank rentals due to the acquisition of a tank storage facility
adjacent to the refinery and the settlement of a tank rental dispute during
1996.
Depreciation and amortization expense for the year ended January 31, 1998
increased $1.2 million to $8.4 million from $7.2 million for the year ended
January 31, 1997, primarily due to depreciation related to the tank storage
facility acquired in September 1997.
General and administrative expenses increased $7.4 million to $19.2 million
for the year ended January 31, 1998 from $11.8 million for the year ended
January 31, 1997, primarily due to a charge to operations of approximately $2.2
million of certain intangible costs, increased fees of approximately $3.7
million related to a new services agreement entered into among TransAmerican,
TEC, TARC and TransTexas and increased professional fees related to the
modification and issuance of debt.
Taxes other than income taxes for the year ended January 31, 1998 decreased
$0.8 million to $3.4 million from $4.2 million for the year ended January 31,
1997, primarily due to decreased property tax expense.
Loss on purchase commitments for the year ended January 31, 1998 consists
of a $7.8 million loss related to a commitment to purchase 0.6 million barrels
of feedstock. These barrels have been sold to a third party and the Company
intends to subject them to a processing agreement with the third party. TARC
remains subject to market risk related to these barrels.
Interest income for the year ended January 31, 1998 increased $5.0 million
as compared to the year ended January 31, 1997, primarily due to the investment
of proceeds from the TARC Intercompany Loan and Senior Subordinated Notes.
Interest expense for the year ended January 31, 1998 increased $39.9 million,
primarily due to interest on the TARC Intercompany Loan and Senior Subordinated
Notes. During the year ended January 31, 1998, TARC capitalized approximately
$93.0 million of interest related to property and equipment additions at TARC's
refinery compared to $68.8 million for the year ended January 31, 1997. The
increase was primarily due to higher capital spending.
Equity in income of TransTexas before extraordinary item for the year ended
January 31, 1998 increased to $44.6 million as compared to $12.3 million for the
year ended January 31, 1997, due primarily to a $543 million gain on the sale by
TransTexas of a subsidiary. In September 1997, TARC sold approximately
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8.5 million shares of TransTexas common stock pursuant to the TransTexas share
repurchase program. TARC received $136.2 million in connection with the
repurchase, of which $124.5 million (representing the excess of the cash
received over TARC's carrying value of the stock) was recorded as a capital
contribution. TARC recognized equity in an extraordinary item of TransTexas of
$(10.2) million for the year ended January 31, 1998. The extraordinary loss of
TransTexas is attributable to a loss on the early extinguishment of debt as a
result of the repurchase by TransTexas of its Senior Secured Notes and an
exchange offer by TransTexas for its Subordinated Notes. The gain on the sale of
TransTexas stock of $56.2 million for the year ended January 31, 1997 was a
result of TARC's sale of 4.55 million shares of TransTexas common stock to third
parties in March 1996. In April 1998, TARC distributed its remaining shares of
TransTexas common stock to TEC.
The additional loss on the early extinguishment of debt of $84.8 million
for the year ended January 31, 1998 is a result of the completion of the TARC
Notes Tender Offer as described in Note 9 of Notes to Consolidated Financial
Statements.
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 decrease in the purchase and processing of feedstocks for third
parties compared to the prior year. During fiscal 1997, the refinery's principal
activity was the processing of feedstocks pursuant to third party processing
arrangements.
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 decrease in the purchase and processing of feedstocks for third
parties compared to the prior year.
Losses from processing arrangements were $7.1 million for the year ended
January 31, 1997, primarily due to price management activities. See "Liquidity
and Capital Resources."
Operations and maintenance expense 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 and not intended for use in the 1995 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 expense 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 a disbursement account. Interest expense,
net, for the year ended January 31, 1997 decreased $13.8 million, primarily due
to a larger portion of interest capitalized as well as a reduction of product
financing costs in 1997 versus 1996. 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 stock in March 1996 (which reduced
TARC's interest in TransTexas to 14.1%). The increase of $14.9 million in the
equity in income of TransTexas is primarily the result of higher gas prices and
a favorable litigation settlement.
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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 stock in March 1996. Other income for the year ended
January 31, 1996 was $2.1 million, primarily resulting from trading gains on
futures contracts.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Total revenues for the six months ended January 31, 1996 increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of $0.19
per barrel in 1996 over 1995.
Cost of products sold for the six months ended January 31, 1996 increased
$36.2 million to $110.1 million from $73.9 million for the same period in 1995,
primarily due to an increase in the volume of products sold, partially offset by
a decrease in the average price of feedstocks purchased.
Operations and maintenance expense 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 vacuum
unit was operating.
Depreciation and amortization expense 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 expense 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 decreased property tax expense.
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 a disbursement account. 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 construction activities associated with the 1995 Program.
LIQUIDITY AND CAPITAL RESOURCES
On May 29, 1997, TransTexas consummated the Lobo Sale for an adjusted sales
price of approximately $1.1 billion. 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 used for the redemption or repurchase of the
Senior Secured Notes and for general corporate purposes.
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.
With proceeds of the TEC Notes Offering, TEC made intercompany loans to
TransTexas in the principal amount of $450 million (the "TransTexas Intercompany
Loan") and to TARC in the original amount of $676 million (the "TARC
Intercompany Loan" and, together with the TransTexas Intercompany Loan, the
"Intercompany Loans"). The promissory note evidencing the TransTexas
Intercompany Loan (i) bears interest at a rate of 10 7/8% per annum, payable
semi-annually in cash in arrears and (ii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than inventory,
receivables and
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equipment. The promissory note evidencing the TARC Intercompany Loan (i)
accretes principal at the rate of 16% per annum, compounded semi-annually, until
June 15, 1999 to a final accreted value of $920 million, and thereafter pays
interest semi-annually in cash in arrears on the accreted value thereof, at a
rate of 16% per annum and (ii) is secured initially by a security interest in
substantially all of TARC's assets other than inventory, receivables and
equipment. The Intercompany Loans will mature on June 1, 2002. The 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. Upon
the occurrence of a Change of Control (as defined), TEC will be required to make
an offer to purchase all of the outstanding TEC Notes at a price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, or, in the case of any such offer to purchase the TEC Senior Secured
Discount Notes prior to June 15, 1999, at a price equal to 101% of the accreted
value thereof, in each case, to and including the date of purchase. Pursuant to
the terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay
a pro rata share of the purchase price paid by TEC in an offer to purchase
pursuant to a Change of Control. See "Potential Effects of a Change of Control."
On June 13, 1997, TransTexas completed a tender offer for its Senior
Secured Notes for 111 1/2% of their principal amount (plus accrued and unpaid
interest). Approximately $785.4 million principal amount of Senior Secured Notes
were tendered and accepted by TransTexas. The Senior Secured Notes remaining
outstanding were called for redemption on June 30, 1997 pursuant to the terms of
the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer, pursuant to which
it exchanged approximately $115.8 million aggregate principal amount of its
13 3/4% Series C Senior Subordinated Notes due 2001 (the "TransTexas Series C
Subordinated Notes") for all of its outstanding 13 1/4% Senior Subordinated
Notes due 2003 (the "Old TransTexas Subordinated Notes"). On October 10, 1997,
TransTexas completed a registered exchange offer resulting in the issuance of
$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 "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 a share repurchase program pursuant to
which it repurchased common stock from its public stockholders and from TEC and
TARC. The share repurchase program was originally funded with $399 million from
the TransTexas Intercompany Loan. As of January 31, 1998, 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. TARC received $136.2 million of the purchase price,
of which $124.5 million (representing the excess of the cash received over
TARC's carrying value of the stock) was recorded as a capital contribution. The
amounts received by TEC and TARC were deposited in the TARC Disbursement
Account. The share repurchase program was terminated in December 1997.
In December 1997, TEC obtained consents from the holders of the TEC Series
A Notes to certain amendments to the indenture governing the TEC Notes (the "TEC
Notes Indenture") and related documents. These amendments, among other things,
allowed for the release to TransTexas of approximately $136.6 million in funds
remaining in the TransTexas Disbursement Account after termination of the share
repurchase program. TransTexas paid a fee of $14 million to holders of the TEC
Notes in connection with the consent solicitation which was capitalized as debt
issue costs.
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
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TARC of approximately $437 million (including accrued interest, premiums and
other costs). As a result of the TARC Notes Tender Offer, $22.8 million in debt
issuance costs were written off and TARC recorded a total extraordinary charge
of $84.8 million during the year ended January 31, 1998. As of January 31, 1998,
TARC Mortgage Notes and TARC Discount Notes with a carrying value of
approximately $14.4 million remained outstanding.
On January 14, 1998, TARC called for redemption on February 17, 1998
approximately $7 million in aggregate principal amount of TARC Notes pursuant to
the terms of the indenture governing the TARC Notes. On January 16, 1998, TARC
deposited pursuant to an irrevocable trust agreement approximately $9.8 million
for defeasance of the remaining TARC Notes outstanding after the redemption. The
deposited funds are sufficient to pay the principal of the remaining TARC Notes
and interest thereon from the date of deposit to and including the final
redemption date, as well as a call premium of 6%. The final redemption date is
February 15, 1999.
On June 13, 1997, TEC completed a tender offer for the then outstanding
common stock purchase warrants of TARC ("1995 Warrants") at a price of $4.50 per
warrant. Pursuant to the tender offer, TEC purchased 7,320,552 1995 Warrants for
an aggregate purchase price of approximately $33 million. TransAmerican
subsequently purchased 163,679 1995 Warrants for an aggregate purchase price of
approximately $0.7 million. In December 1997, TransAmerican sold 11,100 1995
Warrants to an unaffiliated third party. The remaining 1995 Warrants owned by
TransAmerican, as well as the 1995 Warrants purchased by TEC in the tender
offer, were contributed to TARC and cancelled. As of January 31, 1998, there
were 22,119 1995 Warrants outstanding.
In June 1997, 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.
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 January 31, 1998, outstanding
advances under the BNY Facility totaled approximately $7.9 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.
The TEC Notes Indenture permits TARC to obtain a revolving credit facility
but places certain limitations on TARC's ability to incur other indebtedness. In
order to operate the refinery at expected levels after the completion of Phase I
of the Capital Improvement Program, TARC will require additional working
capital. Although TARC and a lender have engaged in discussions concerning the
terms of a revolving credit facility, there can be no assurance TARC will be
able to obtain such a facility.
During the months of April and May 1997, TransTexas obtained additional
financing in the aggregate amount of approximately $45.8 million, of which
approximately $10.6 million remained outstanding as of January 31, 1998.
In March 1998, TransTexas executed an amended and restated note in the
principal amount of approximately $14.9 million evidencing debt previously
incurred. Concurrently, TransTexas incurred an additional $14 million in debt,
evidenced by a promissory note. Both notes are secured by a lien on equipment.
The notes bear interest at a rate of 13.87%, with monthly installments and a
final installment payable on April 1, 2001.
TEC's only source of funds for its holding company operations and debt
service will be from approximately $50 million in working capital currently held
by TEC, payments on the Intercompany Loans, dividends from its subsidiaries,
interest on funds in the Disbursement Account, payments made by TARC on behalf
of TEC pursuant to the Services Agreement and, in limited circumstances as
permitted by the TEC Notes Indenture, sales of stock TEC holds in its
subsidiaries.
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 are used to
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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.
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.
TransTexas' cash flow from operations is sensitive to the prices it
receives for its natural gas. TransTexas from time to time enters into commodity
price swap agreements to reduce its exposure to price risk in the spot market
for natural gas. Proceeds from natural gas sales are received at approximately
the same time that production-related burdens, such as royalties, production
taxes and drilling program obligations are payable.
TransTexas makes substantial capital expenditures for the exploration,
development and production of natural gas. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements from
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, its accounts
receivable revolving credit facilities and other financings. TransTexas' debt
covenants may limit its ability to obtain additional financings or to sell
properties, and there is no assurance that cash flow from operations will be
sufficient to fund capital and debt service requirements.
For the year ended January 31, 1998, total capital expenditures were $424
million, including $56 million for lease acquisitions, $296 million for drilling
and development and $72 million for TransTexas' gas gathering and pipeline
system and other equipment and seismic acquisitions. During fiscal 1998,
TransTexas accelerated its exploration program 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 significantly exceeded its original anticipated amount of $220 million.
Subject to cash availability, capital expenditures for fiscal 1999 are estimated
to be approximately $180 million which amount is in excess of projected cash
flow from operations for fiscal 1999. A reduction in planned capital spending
could result in less than anticipated cash flow from operations in fiscal 1999
and future years which could have a material adverse effect on TransTexas. To
finance these capital expenditure requirements and reduce its working capital
deficit, TransTexas will be required to supplement its anticipated cash flow
from operations with a combination of asset sales, including assets of the
drilling services division, and financings which may include borrowings or
production payments. There is no assurance that adequate funds can be obtained
on a timely basis from such sources.
As discussed above in Item 1, TransTexas has engaged an investment banking
firm to assist in the sale of its drilling services assets. TransTexas expects
that its future general and administrative expenses and operating expenses will
be reduced as a result of the sale of its drilling services assets.
Although TARC may operate the No. 2 Crude Unit and the No. 2 Vacuum Unit if
it obtains a favorable processing arrangement, TARC anticipates that, until
completion of the Delayed Coking Unit, its liquidity and capital needs will be
limited to expenditures for the Capital Improvement Program, general and
administrative expenses and refinery maintenance costs.
TARC estimates that capital expenditures for the Capital Improvement
Program will be $256 million and $0, respectively, during the fiscal years
ending January 31, 1999 and 2000. TARC currently estimates that Capital
Improvement Program costs may increase by as much as $45 million over the $427
million originally estimated. Although there can be no assurance, TARC believes
that it will have cash sufficient to fund the remaining construction. See
"Business -- Business of TARC -- Capital Budget Status" and "-- Completion
Status." If engineering problems, cost overruns or delays occur and other
financing sources are not available,
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TARC may not be able to complete both phases of the Capital Improvement Program.
TARC has historically incurred losses and negative cash flow from operating
activities as a result of limited refinery operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
(including debt service) and losses on refined product sales and processing
arrangements. There is no assurance that TARC can complete the Capital
Improvement Program, fund its future working capital requirements, or achieve
positive cash flow from operations. As a result, there is substantial doubt
about TARC's ability to continue as a going concern. The Consolidated Financial
Statements do not include any adjustments that might result from the outcome of
these uncertainties.
As of January 31, 1998, TARC and TEC had deposited an aggregate of
approximately $529 million into accounts (collectively, the "TARC Disbursement
Account") from which disbursements are made pursuant to a disbursement
agreement, as amended (the "Disbursement Agreement") among TARC, TEC, the TEC
Indenture Trustee, Firstar Bank of Minnesota, N. A., as Disbursement Agent, and
Baker & O'Brien, Inc., as Construction Supervisor. See Note 3 of Notes to
Consolidated Financial Statements. Of these funds, $427 million was designated
for the Capital Improvement Program, approximately $25.5 million was designated
for general and administrative expenses, $7 million was designated for
outstanding accounts payable, $50 million was designated for working capital
upon completion of the Delayed Coking Unit and certain supporting units and $19
million was designated for the payment of interest on, or the redemption,
purchase, defeasance or other retirement of, the outstanding TARC Notes. There
is no assurance that the funds deposited in the TARC Disbursement Account will
be adequate for their designated purposes. As of January 31, 1998, $225 million
had been disbursed to TARC out of the TARC Disbursement Account for use in the
Capital Improvement Program, $18 million for accounts payable and general and
administrative expenses and $19 million for the payment of interest on, and the
redemption, repurchase and defeasance of the TARC Notes.
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 January 31, 1998, TARC has processed
6.4 million barrels of feedstocks under this agreement. 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. For the
years ended January 31, 1998 and 1997, TARC recorded income (loss) from
processing agreements of $1.4 million and $(7.1) million, respectively. As of
January 31, 1998 and 1997, TARC was storing approximately 0.7 million and 1.0
million barrels, respectively, of feedstock and intermediate or refined products
pursuant to these processing agreements. Included in the 0.7 million barrels of
product stored at the refinery as of January 31, 1998, is approximately 0.6
million barrels of feedstock owned by a third party related to a purchase
commitment entered into in April 1997. For the year ended January 31, 1998, TARC
incurred a loss of approximately $7.8 million related to this purchase
commitment and remains subject to market risk for these barrels.
In July and September 1997, TARC received advances from TEC in the
aggregate amount of $46 million. In November and December 1997, TARC repaid
approximately $31 million in principal, and in December 1997 paid approximately
$2.9 million in interest to TEC. In September 1997, TEC advanced $3 million to
TransTexas pursuant to a non-interest-bearing note which matures on June 14,
2002. In November and December 1997 and January 1998, TEC advanced an aggregate
of approximately $34 million to TransTexas pursuant to promissory notes which
mature on June 14, 2002. The notes bear interest in an amount equal to a fixed
semi-annual interest payment of $2.8 million, prorated based on the average
outstanding balance of all notes (other than the note evidencing the
Intercompany Loan) between TransTexas and TEC and the average outstanding
balance of all notes (other than the note evidencing the Intercompany Loan)
between TARC and TEC.
In February 1998, TransTexas entered into a drilling program with unrelated
third parties, pursuant to which such parties have reimbursed or will reimburse
to TransTexas certain drilling costs with respect to recently drilled wells in
exchange for the assignment of a dollar denominated production payment in such
wells. The production payment is limited to repayment of the reimbursement plus
an amount equal to the
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interest that would accrue at 15% per year on the unpaid balance of
reimbursement amounts. Pursuant to the terms of the TransTexas Intercompany
Loan, the number of wells included in the program cannot exceed 30 per fiscal
year. Pursuant to the terms of the drilling program, the maximum aggregate
reimbursement payments to TransTexas cannot exceed $75 million. As of April 30,
1998, 13 wells were included in the drilling program and aggregate reimbursement
payments to TransTexas totaled $33 million. The program includes wells in
Galveston, Chambers, Jim Hogg, Webb and Wharton Counties, Texas.
In September 1997, TARC purchased a tank storage facility adjacent to the
refinery for a cash purchase price of $40 million (which does not include a $3.1
million liability recorded for environmental remediation as discussed below).
Environmental investigations conducted by the previous owner of the facilities
have indicated soil and groundwater contamination in several areas on the
property. As a result, the former owner submitted to the LDEQ plans for the
remediation of any significant indicated contamination in such areas. TARC has
analyzed these investigations and has carried out further Phase II Environmental
Assessments to verify their results. TARC intends to incorporate any required
remediation into its ongoing work at the refinery. In connection with the
purchase of the facilities, TARC agreed to indemnify the seller for all cleanup
costs and certain other damages resulting from contamination of the property,
and created a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental 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. As of
January 31, 1998, TARC has recognized a liability of $3.1 million for this
contingency.
On December 10, 1997, TARC issued to an unaffiliated third party a 13%
Senior Secured Note due 2002 (the "Acquisition Note") in the principal amount of
$36 million to finance a portion of the purchase price of the tank storage
facility purchased in September 1997. The Acquisition Note is secured by a
mortgage on the tank storage facility, and is governed by a Note Purchase
Agreement containing restrictive covenants substantially similar to those
contained in the TARC Intercompany Loan and TEC Notes Indenture. The Acquisition
Note bears interest at 13%, payable semiannually on June 15 and December 15, and
matures on December 15, 2002. TARC deposited approximately $7 million in an
interest reserve account for interest payments on the Acquisition Note through
June 15, 1999.
On December 30, 1997, TARC issued in a private offering 175,000 Units
consisting of $175 million in aggregate principal amount of 16% Series A Senior
Subordinated Notes due 2003 (the "Series A Subordinated Notes") and 175,000
warrants (the "December 1997 Warrants") to purchase 2,335,245 shares of TARC
common stock. Net proceeds to TARC, after deducting fees and expenses of
approximately $8 million, were approximately $167 million. Net proceeds of $8.2
million from the sale of the Units were allocated to the December 1997 Warrants.
TARC deposited $119 million of the net proceeds into the TARC Disbursement
Account for use in the Capital Improvement Program and deposited $42 million
into an interest reserve account for interest payments on the Series A Senior
Subordinated Notes through June 30, 1999. The remaining $6 million of net
proceeds was used for general corporate purposes including the redemption and
defeasance of the TARC Notes.
On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of 16% Series C Senior
Subordinated Notes due 2003 (the "Series C Senior Subordinated Notes" and,
together with the Series A Senior Subordinated Notes, the "Senior Subordinated
Notes") and 25,000 warrants (the "March 1998 Warrants" and, together with the
December 1997 Warrants, the "Warrants") to purchase 333,606 shares of TARC
common stock. Net proceeds to TARC, after deducting fees and expenses of
approximately $1.2 million, were approximately $26.2 million. Net proceeds of
approximately $2.8 million from the sale of the Units were allocated to the
March 1998 Warrants. TARC deposited $6.0 million into an interest reserve
account for interest payments on the Series C Senior Subordinated Notes from
December 30, 1997 through June 30, 1999. The remaining $20.2 million of net
proceeds has been or will be used for general corporate purposes.
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
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any additional significant expenses for environmental compliance during fiscal
1999 other than those budgeted for the Capital Improvement Program. There is no
assurance, however, that costs incurred to comply with environmental laws will
not have a material adverse effect on TARC's future financial condition, results
of operations or cash flows.
Contingent Liabilities
TransTexas and TARC have significant contingent liabilities, including
liabilities with respect to litigation matters described in Note 16 of Notes to
Consolidated Financial Statements. These matters, individually and in the
aggregate, amount to significant potential liability which, if adjudicated in a
manner adverse to TransTexas or TARC in one reporting period, could have a
material adverse effect on TransTexas' or TARC's 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,
neither TransTexas nor TARC expect these matters to have a material adverse
effect on its financial position.
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. 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.
TransTexas does not believe that this contingency will occur.
Pursuant to the Lobo Sale, TransTexas is required to indemnify the buyer
for certain liabilities related to the assets previously 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, 1995 and 1994. At this time, it is not possible to predict the
scope of the IRS' review or whether any tax deficiencies will be proposed by the
IRS as a result of its review.
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Based upon independent legal advice, TransTexas has determined that it will
not report any significant federal income tax liability as a result of the Lobo
Sale. There are, however, significant uncertainties regarding TransTexas' tax
position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been or
will be obtained from the IRS regarding the Lobo Sale by any member of the TNGC
Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $250 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that TransAmerican
would be able to fund any such payment at the time due and the other members of
the TNGC Consolidated Group, thus, may be required to pay the tax. TransTexas
has reserved approximately $75 million with respect to the potential tax
liability for financial reporting purposes to reflect a portion of the federal
tax liability that TransAmerican might not be able to pay. If TransTexas were
required to pay this tax deficiency, it is likely that it would be required to
sell significant assets or raise additional debt or equity capital to fund the
payment.
Under certain circumstances, TransAmerican or TEC may sell or otherwise
dispose of shares of common stock of the Company. If, as a result of any sale or
other disposition of the Company's common stock, the aggregate ownership of
TransTexas by members of the TNGC Consolidated Group (excluding TransTexas) is
less than 80% (measured by voting power and value), TransTexas will no longer be
a member of the TNGC Consolidated Group for federal tax purposes
("Deconsolidation") and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement. 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 approximately $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. As of January 31, 1998, TransTexas had
paid approximately $5.4 million of such tax and estimates that approximately $6
million will be paid in fiscal 1999.
Potential Effects of Change of Control
The 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
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holder's notes at 101% of the principal amount thereof plus accrued and unpaid
interest. Pursuant to the terms of the TransTexas Intercompany Loan, upon the
occurrence of a Change of Control, TEC would have the right to require
TransTexas to repay the principal of the TransTexas Intercompany Loan in an
amount equal to a pro rata share of the amount TEC is required to pay under the
TEC Notes Indenture. Such pro rata share would be calculated using the ratio of
the outstanding principal amount of the TransTexas Intercompany Loan to the sum
of (i) the outstanding principal amount of the TransTexas Intercompany Loan plus
(ii) the accreted value of the outstanding principal amount of the TARC
Intercompany Loan.
A Change of Control would be deemed to occur under the Subordinated Notes
Indenture in the case of certain changes or other events in respect of the
ownership of TransTexas, including any circumstances pursuant to which any
person or group other than John R. Stanley (or his heirs, his estate, or any
Trust in which he or his immediate family members have, directly or indirectly,
a beneficial interest in excess of 50%) and his subsidiaries or the TEC
Indenture Trustee is or becomes the beneficial owner of more than 50% of the
total voting power of TransTexas' then outstanding voting stock, and during the
90 days thereafter, the rating of the Subordinated 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 TEC Indenture Trustee is or becomes the beneficial owner of
more than 50% of the total voting power of TEC's then outstanding voting stock,
or (ii) TEC or any of its subsidiaries own some of TransTexas' or TARC's capital
stock, respectively, but less than 50% of the total voting stock or economic
value of TransTexas or TARC, respectively, unless the TEC Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also includes a "group," which is defined as two or more
persons acting as a partnership, limited partnership or other group.
In addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the TEC
Notes Indenture may result in a "change of control" of TransTexas under the
terms of the BNY Facility and certain equipment financing. Such an occurrence
could create an obligation for TransTexas to repay such other indebtedness. At
January 31, 1998, TransTexas had approximately $24.2 million of indebtedness
(excluding the TransTexas Subordinated Notes) subject to such right of repayment
or repurchase. In the event of a Change of Control under the Subordinated Notes
Indenture or the TEC Notes Indenture or a "change of control" under the terms of
other outstanding indebtedness, there can be no assurance that TransTexas will
have sufficient funds to satisfy any such payment obligations.
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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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 long-term contracts at market prices. 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,
1998.
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 approximately 175 MMcfd,
TransTexas estimates that a $0.10 per MMBtu change in average gas prices
received would change annual operating income by approximately $6 million.
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
TEC Notes Indenture.
RECENTLY ISSUED PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start Up Activities,"
("SOP 98-5") which provides guidance on the financial reporting of start-up
costs and organization costs. This statement of position will be adopted by TARC
effective February 1, 1998. Implementation of the statement requires start-up
activities, such as those related to the Capital Improvement Program, to be
expensed as incurred.
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.
IMPACT OF YEAR 2000
The year 2000 issue relates to computer programs or computer equipment
designed to use two digits rather than four digits to define the applicable
year. As a result, computer systems with time-sensitive software may not
accurately calculate, store or use a date subsequent to December 31, 1999. This
could result in system failures or miscalculations and disruptions of
operations, including among other things, a temporary inability to process
transactions or engage in other normal business activities.
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In June 1997, management began a Company-wide program to prepare its
computer systems for year 2000 compliance. In January 1998, the Company began
implementation of new client/server based systems which are anticipated to be
completed by January 1999. The Company estimates the cost of upgrading its
computer systems to be approximately $4 million. There can be no assurance that
the Company will timely complete the implementation of the new systems. The year
2000 issue should not impact the Company's ability to continue exploration,
production, refining, storage or sales activities.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this Annual Report on Form 10-K regarding TEC's
financial position, business strategy, plans and objectives of management for
future operations, including but not limited to words such as "anticipates,"
"expects," "believes," "estimates," "intends," "projects" and "likely" indicate
forward-looking statements. TEC's management believes that its current views and
expectations are based on reasonable assumptions; however, there are significant
risks and uncertainties that could significantly affect expected results.
Factors that could cause actual results to differ materially from those in the
forward-looking statements include, without limitation, fluctuations in the
commodity prices for natural gas, crude oil, condensate and natural gas liquids,
the extent of TransTexas' success in discovering, developing and producing
reserves, engineering problems, work stoppages, cost overruns, personnel or
materials shortages, fluctuations in commodity prices for petroleum and refined
products, casualty losses, conditions in the equity and capital markets, the
ultimate resolution of litigation and competition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
38
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 40
Financial Statements:
Consolidated Balance Sheet................................ 41
Consolidated Statement of Operations...................... 42
Consolidated Statement of Stockholder's Equity
(Deficit).............................................. 43
Consolidated Statement of Cash Flows...................... 44
Notes to Consolidated Financial Statements................ 45
</TABLE>
39
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors
TransAmerican Energy Corporation:
We have audited the accompanying consolidated balance sheet of
TransAmerican Energy Corporation as of January 31, 1998 and 1997 and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows for the years ended January 31, 1998 and 1997, the six months ended
January 31, 1996 and the year ended July 31, 1995. 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 as of January 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended January 31,
1998 and 1997, the six months ended January 31, 1996 and the year ended July 31,
1995, 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. TARC has
historically incurred losses and negative cash flow from operating activities as
a result of limited refinery operations that did not cover the fixed costs of
maintaining the refinery, increased working capital requirements, including debt
service, and losses on refinery product sales and processing arrangements. There
is no assurance that TARC can complete its refinery construction and expansion
program, fund its future working capital requirements or achieve positive cash
flow from operations. As a result, there is substantial doubt about TARC's
ability to continue as a going concern. TARC's plans are described in Note 2.
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 these
uncertainties.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 30, 1998
40
<PAGE> 43
TRANSAMERICAN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 86,513 $ 24,179
Restricted cash held in disbursement accounts............. 158,563 --
Cash restricted for interest.............................. 32,823 46,000
Investments held in trust................................. 9,114 --
Accounts receivable....................................... 17,926 78,660
Inventories............................................... 16,437 12,481
Other current assets...................................... 12,065 25,638
---------- ----------
Total current assets.............................. 333,441 186,958
---------- ----------
Property and equipment...................................... 2,350,060 2,836,696
Less accumulated depreciation, depletion and amortization... 741,952 1,451,417
---------- ----------
Net property and equipment -- based on the full cost
method of accounting for gas and oil properties of
which $104,389 and $158,973 was excluded from
amortization at January 31, 1998 and 1997,
respectively........................................... 1,608,108 1,385,279
---------- ----------
Restricted cash held in disbursement accounts............... 60,166 --
Cash restricted for interest................................ 16,348 --
Investments held in trust................................... 8,592 --
Receivable from affiliates.................................. 1,463 --
Other assets, net........................................... 103,321 41,498
---------- ----------
$2,131,439 $1,613,735
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 84,181 $ 48,202
Payable to affiliate...................................... 6,758 1,604
Accrued liabilities....................................... 52,326 98,861
Current maturities of long-term debt...................... 16,891 5,787
---------- ----------
Total current liabilities......................... 160,156 154,454
---------- ----------
Due to affiliates........................................... 6,827 26,295
Notes payable to affiliate.................................. -- 46,589
Long-term debt, less current maturities..................... 1,761,689 1,275,597
Revolving credit agreement.................................. 7,917 26,268
Production payments, less current portion................... 4,121 11,931
Deferred revenue............................................ -- 54,554
Deferred income taxes....................................... 39,497 31,367
Other liabilities........................................... 25,668 33,593
Minority interest in net income of TransTexas............... 35,162 --
Redeemable preferred stock, $0.01 par value, 10,000 shares
authorized; Series A -- 1,000 shares issued and
outstanding at January 31, 1997........................... -- 96
Commitments and contingencies (Note 16)..................... -- --
Stockholder's equity (deficit):
Common stock, $0.01 par value, 100,000 shares authorized;
9,000 shares issued and outstanding.................... -- --
Additional paid-in capital................................ 200,996 158,535
Accumulated deficit....................................... (110,594) (148,508)
---------- ----------
90,402 10,027
Advances to affiliates.................................... -- (57,036)
---------- ----------
Total stockholder's equity (deficit).............. 90,402 (47,009)
---------- ----------
$2,131,439 $1,613,735
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 44
TRANSAMERICAN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------------------ ----------------------- JULY 31,
1998 1997 1996 1996 1995 1995
--------- --------- ----------- -------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gas, condensate and natural gas
liquids........................... $ 164,172 $ 360,740 $ 254,275 $123,253 $142,070 $ 273,092
Transportation...................... 12,055 34,423 33,518 15,892 19,161 36,787
Product sales....................... -- 10,857 176,229 107,237 71,035 140,027
Gain on the sale of assets.......... 543,365 7,856 474 474 -- --
Other............................... 6,141 297 361 127 603 837
--------- --------- --------- -------- -------- ---------
Total revenues................ 725,733 414,173 464,857 246,983 232,869 450,743
--------- --------- --------- -------- -------- ---------
Costs and expenses:
Operating........................... 68,836 154,313 273,860 154,697 124,960 244,123
Depreciation, depletion and
amortization...................... 91,075 139,678 126,821 64,053 73,051 135,819
General and administrative.......... 68,210 57,500 45,768 21,213 21,037 45,592
Taxes other than income taxes....... 14,769 26,772 17,965 8,133 8,376 18,208
Litigation settlement............... -- (96,000) (18,300) (18,300) -- --
--------- --------- --------- -------- -------- ---------
Total costs and expenses...... 242,890 282,263 446,114 229,796 227,424 443,742
--------- --------- --------- -------- -------- ---------
Operating income.............. 482,843 131,910 18,743 17,187 5,445 7,001
--------- --------- --------- -------- -------- ---------
Other income (expense):
Interest income..................... 21,952 5,748 11,079 5,197 916 6,798
Interest expense, net............... (113,233) (101,670) (100,358) (49,348) (30,002) (81,012)
Gain on the sale of TransTexas
stock............................. -- 42,607 -- -- -- --
Other, net.......................... 5 373 2,106 (229) 116 2,451
--------- --------- --------- -------- -------- ---------
Total other income
(expense)................... (91,276) (52,942) (87,173) (44,380) (28,970) (71,763)
--------- --------- --------- -------- -------- ---------
Income (loss) before income taxes,
minority interest and extraordinary
item................................ 391,567 78,968 (68,430) (27,193) (23,525) (64,762)
Income taxes (benefit)................ 161,669 12,491 (2,700) (416) (131) (2,415)
--------- --------- --------- -------- -------- ---------
Income (loss) before minority
interest and extraordinary item... 229,898 66,477 (65,730) (26,777) (23,394) (62,347)
Minority interest in net income of
TransTexas.......................... (35,162) -- -- -- -- --
Extraordinary item -- early
extinguishment of debt, net of
income taxes........................ (156,796) -- (56,637) -- -- (56,637)
--------- --------- --------- -------- -------- ---------
Net income (loss) before
preferred stock dividend.... $ 37,940 $ 66,477 $(122,367) $(26,777) $(23,394) $(118,984)
========= ========= ========= ======== ======== =========
Series A preferred stock dividend..... $ 19 $ 19 $ -- $ -- $ -- $ --
========= ========= ========= ======== ======== =========
Net income (loss) available for common
stockholders........................ $ 37,921 $ 66,458 $(122,367) $(26,777) $(23,394) $(118,984)
========= ========= ========= ======== ======== =========
Basic and diluted net income (loss)
per common share:
Income (loss) before extraordinary
item.............................. $ 21,635 $ 7,384 $ (7,303) $ (2,975) $ (13,901)
Extraordinary item.................. (17,422) -- (6,293) -- (12,628)
--------- --------- --------- -------- ---------
$ 4,213 $ 7,384 $ (13,596) $ (2,975) $ (26,529)
========= ========= ========= ======== =========
Weighted average number of shares
outstanding......................... 9,000 9,000 9,000 9,000 4,485
========= ========= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 45
TRANSAMERICAN ENERGY CORPORATION
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)
Elimination of intercompany
gain on property purchased
from affiliate.............. -- -- -- (3,918) -- (3,918)
Preferred stock dividends..... -- -- -- (19) -- (19)
Net income.................... -- -- -- 66,477 -- 66,477
----- ------- -------- --------- -------- ---------
Balance at January 31, 1997..... 9,000 -- 158,535 (148,508) (57,036) (47,009)
Collection of advances from
affiliates.................. -- -- -- -- 57,036 57,036
Advance to affiliate.......... -- -- (13,304) -- -- (13,304)
Contribution from affiliate... -- -- 21,513 -- -- 21,513
Assumption of tax liability by
affiliate................... -- -- 129,549 -- -- 129,549
Issuance of warrants by
TARC........................ -- -- 11,676 -- -- 11,676
Dividend to affiliate......... -- -- (23,000) -- -- (23,000)
Preferred stock dividend...... -- -- -- (19) -- (19)
Redemption of Series A
preferred stock............. -- -- (3) (7) -- (10)
Contribution of TARC warrants
from affiliate.............. -- -- 686 -- -- 686
TransTexas purchase of
treasury stock.............. -- -- (61,424) -- -- (61,424)
Purchase of TARC warrants..... -- -- (23,232) -- -- (23,232)
Net income.................... -- -- -- 37,940 -- 37,940
----- ------- -------- --------- -------- ---------
Balance at January 31, 1998..... 9,000 $ -- $200,996 $(110,594) $ -- $ 90,402
===== ======= ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 46
TRANSAMERICAN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
YEAR ENDED JANUARY 31, JANUARY 31, ENDED
------------------------------------- ----------------------- JULY 31,
1998 1997 1996 1996 1995 1995
----------- --------- ----------- --------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $ 37,940 $ 66,477 $ (122,367) $ (26,777) $ (23,394) $ (118,984)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Extraordinary item............................. 156,796 -- 56,637 -- -- 56,637
Litigation, net................................ -- -- (9,300) (16,300) 4,500 11,500
Depreciation, depletion and amortization....... 91,075 139,678 126,821 64,053 73,051 135,819
Amortization of discount on long-term debt..... 42,064 8,470 11,062 3,389 -- 7,673
Amortization of debt issue costs............... 3,397 1,653 4,348 1,533 1,524 4,339
Gain on the sale of assets..................... (543,365) (1,343) (474) (474) -- --
Deferred income taxes.......................... 161,670 (8,889) 6,263 (416) (1,483) 5,196
Issuance of warrants for professional fees..... 3,503 -- -- -- -- --
Gain on the sale of TransTexas stock........... -- (42,607) -- -- -- --
Inventory write-down........................... -- -- 5,671 4,406 -- 1,265
Proceeds from volumetric production payments... -- 58,621 32,850 32,850 -- --
Repayment of volumetric production payments.... (45,134) -- -- -- -- --
Amortization of deferred revenue............... (9,420) (36,917) -- -- -- --
Minority interest in net income of consolidated
subsidiary................................... 35,162 -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable.......................... 60,734 (42,288) (4,264) (9,189) 14,760 19,685
Inventories.................................. (3,953) (1,035) (7,299) 4,057 4,816 (6,540)
Other current assets......................... 9,573 2,671 (8,468) 1,564 (2,414) (12,446)
Accounts payable............................. 21,147 13,914 (18,405) 1,995 2,901 (17,499)
Accrued liabilities.......................... (56,316) 32,561 (22,306) (6,975) (11,853) (27,184)
Transactions with affiliates, net............ 38,854 (2) (16,032) (3,447) 265 (12,320)
Other assets................................. (3,468) 21,491 (2,798) 569 (323) (3,690)
Other liabilities............................ (5,005) (20,173) (1,994) (1,928) 500 434
----------- --------- ---------- --------- --------- ----------
Net cash provided (used) by operating
activities................................... (4,746) 192,282 29,945 48,910 62,850 43,885
----------- --------- ---------- --------- --------- ----------
Investing activities:
Capital expenditures............................. (713,354) (427,232) (493,433) (275,451) (158,476) (376,458)
Prepaid capital expenditures..................... (24,216) -- -- -- -- --
Proceeds from the sale of assets................. 1,062,490 92,518 20,500 20,500 -- --
Increase in cash restricted for interest......... (49,171) (92,000) (90,722) (46,000) -- (44,722)
Withdrawals from cash restricted for interest.... 46,000 92,000 44,722 44,722 -- --
Increase in investments held in trust............ (17,706) -- -- -- -- --
Contribution to affiliate........................ (13,304) -- -- -- -- --
Advances to affiliate............................ -- (24,750) -- -- -- --
Payment of advances by affiliate................. 24,750 -- -- -- -- --
Purchase of TARC warrants........................ (32,943) -- -- -- -- --
TransTexas purchase of treasury stock............ (61,424) -- -- -- -- --
Production payment by affiliate.................. -- -- 3,547 -- 844 4,391
----------- --------- ---------- --------- --------- ----------
Net cash provided (used) by investing
activities................................... 221,122 (359,464) (515,386) (256,229) (157,632) (416,789)
----------- --------- ---------- --------- --------- ----------
Financing activities:
Issuance of long-term debt....................... 1,614,706 125,645 1,113,750 3,000 10,000 1,120,750
Principal payments on long-term debt............. (1,372,711) (20,238) (562,719) (219) -- (562,500)
Increase in restricted cash held in disbursement
accounts....................................... (512,404) (26,549) (173,000) -- -- (173,000)
Withdrawals from disbursement accounts........... 293,675 50,949 148,595 116,452 -- 32,143
Issuance of production payments.................. 20,977 28,598 49,500 -- -- 49,500
Principal payments on production payments........ (29,504) (45,205) (16,699) (8,833) -- (7,866)
Revolving credit agreement, net.................. (18,351) 5,903 11,664 20,365 8,701 --
Advances from affiliates......................... 15,026 49,152 12,905 12,270 86,925 87,560
Repayment of advances and notes payable to
affiliates..................................... (66,000) (1,925) (48,750) (8,750) (20,000) (60,000)
Dividend to TransAmerican........................ (23,000) -- -- -- -- --
Proceeds from the sale of TransTexas stock....... -- 42,607 -- -- -- --
Debt issue costs................................. (75,039) (9,187) (36,195) (1,258) (3,578) (38,515)
Increase in cash restricted for TransTexas share
repurchases.................................... (399,284) -- -- -- -- --
Withdrawals from cash restricted for TransTexas
share repurchases.............................. 399,284 -- -- -- -- --
Transfer of litigation escrow to affiliate....... -- (22,484) -- -- -- --
Issuance of Series A preferred stock............. -- -- 96 -- -- 96
Dividend payment on Series A preferred stock..... (19) (19) -- -- -- --
Redemption of Series A preferred stock........... (106) -- -- -- -- --
Other............................................ (1,292) -- (458) (458) -- --
----------- --------- ---------- --------- --------- ----------
Net cash provided (used) by financing
activities............................... (154,042) 177,247 498,689 132,569 82,048 448,168
----------- --------- ---------- --------- --------- ----------
Increase in cash and cash equivalents...... 62,334 10,065 13,248 (74,750) (12,734) 75,264
Beginning cash and cash equivalents................ 24,179 14,114 866 88,864 13,600 13,600
----------- --------- ---------- --------- --------- ----------
Ending cash and cash equivalents................... $ 86,513 $ 24,179 $ 14,114 $ 14,114 $ 866 $ 88,864
=========== ========= ========== ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 47
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE YEAR ENDED JANUARY 31, 1996
AND THE INTERIM PERIOD ENDED JANUARY 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The consolidated financial statements include the following subsidiaries of
TransAmerican Energy Corporation ("TEC" or the "Company"), a wholly owned
subsidiary of TransAmerican Natural Gas Corporation ("TransAmerican"):
TransTexas Gas Corporation and subsidiaries ("TransTexas")
TransAmerican Refining Corporation ("TARC")
The Company was formed on July 12, 1994 to hold certain shares of common
stock of TransTexas and all of the outstanding capital stock of TARC. The
consolidated financial statements include the financial statements of TransTexas
and TARC on a wholly-owned basis.
The TEC Notes Indenture (as defined), as well as the debt instruments of
TransTexas and TARC, contain substantial restrictions which essentially prevent
the Company from using the assets of one entity to satisfy the liabilities of
the other and substantially limit transactions between affiliates. Accordingly,
the consolidated financial statements should be read in conjunction with the
separate financial statements of TransTexas and TARC filed as a part of their
respective Annual Reports on Form 10-K for the fiscal year ended January 31,
1998.
Change in Fiscal Year
On January 30, 1996, the Board of Directors determined to change the
Company's fiscal year end for financial reporting purposes to January 31 from
July 31. The consolidated financial statements include presentation of the year
ended January 31, 1997 and the six months ended January 31, 1996 (the
"Transition Period") and the comparable prior year and six month periods which
are unaudited.
Use of Estimates and Reclassifications
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). The Company's most significant financial estimates are
based on litigation, income taxes and remaining proved gas and oil reserves.
Actual results could differ from these estimates. Certain previously reported
financial information has been reclassified to conform to the current
presentation. The reclassifications did not affect net income (loss) or
stockholder's equity.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents in restricted accounts are excluded from cash and are classified in
accordance with the terms of the restrictions.
Inventories
The Company's inventories, consisting primarily of tubular goods,
feedstocks and refined products, are stated at the lower of average cost or
market. At January 31, 1996 and July 31, 1995, TARC wrote down the
45
<PAGE> 48
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of its inventories by approximately $4.4 million and $1.3 million,
respectively, to reflect existing market prices.
Investments
Investments in fixed income securities are classified as held to maturity
and are carried at amortized cost. Short-term investments are carried at cost,
which approximates market value. The realized gain or loss on investment
transactions is determined on the basis of specific identification and is
included in earnings on the trade date.
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. As of January 31, 1998, TransTexas' net capitalized
costs of gas and oil properties exceeded the cost center ceiling. TransTexas did
not adjust its net capitalized costs because, subsequent to year-end, prices for
gas and oil increased such that TransTexas' net capitalized costs did not exceed
the recalculated cost center ceiling.
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 oil and gas properties were $104 million and $159 million at
January 31, 1998 and 1997, respectively. The properties represented by these
costs were at such dates undergoing exploration activities or are properties on
which the Company intends to commence such activities in the future. The Company
believes that the unevaluated properties at January 31, 1998 will be
substantially evaluated in 12 to 24 months and it will begin to amortize these
costs at such time.
Refining Properties
Refining 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,
refining property and equipment acquired prior to 1983 were carried at estimated
net realizable value and no depreciation expense was charged. New or refurbished
units are depreciated as placed in service. Depreciation of refinery equipment
and other buildings and equipment, including assets acquired under capital
leases, is computed using the straight-line method over the estimated useful
lives of the assets. Costs of improving leased property are amortized over the
estimated useful lives of the assets or the terms of the leases, whichever is
shorter.
The cost of repairs and minor replacements is charged to operating expense.
The cost of renewals and improvements are capitalized. At the time depreciable
assets 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 statement of
operations. Impairment of property and equipment is reviewed whenever events or
changes in circumstances indicate that the carrying
46
<PAGE> 49
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of assets may not be recoverable. Events or circumstances that may
indicate impairment may include, among others, a prolonged shutdown of the
refinery or a prolonged period of negative or low refining margins.
Other Property and Equipment
Other property and equipment are recorded 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 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, oilfield services
equipment and other buildings and equipment is computed by the straight-line
method at rates which 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.
Maintenance Turnaround Costs
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 deferred and 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 will be
charged to income in the period of presentation.
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's contributions with respect to this
plan totaled approximately $0.6 million, $0.6 million, $0.2 million, and $0.3
million for the years ended January 31, 1998 and 1997, the six months ended
January 31, 1996, and the year ended July 31, 1995, respectively. All
contributions are currently funded.
47
<PAGE> 50
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury Stock
TransTexas uses the cost method to account for treasury stock. In June
1997, TransTexas implemented a share repurchase program pursuant to which it
repurchased approximately 3.9 million shares from public stockholders for an
aggregate purchase price of approximately $61.4 million, and approximately 12.6
million shares from TARC and TEC for an aggregate purchase price of
approximately $201 million. The share repurchase program was terminated in
December 1997.
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 assumes 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.
When the book value approximates fair value, no additional disclosure is made.
Revenue Recognition
The Company recognizes revenues from the sales of refined products, natural
gas, condensate and natural gas liquids in the period of delivery. Revenues from
transportation of natural gas and other are recognized in the period the service
is provided. The sales method is used for natural gas imbalances that arise from
jointly produced properties. Volumetric production is monitored to minimize
these natural gas imbalances. A natural gas imbalance liability is recorded in
other liabilities if TransTexas' excess sales of natural gas exceed its
estimated remaining recoverable reserves for such properties.
Recently Issued Pronouncements
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start Up Activities,"
("SOP 98-5"), which provides guidance on the financial reporting of start-up
costs and organization costs. This statement of position will be adopted by the
Company effective February 1, 1998. Implementation of the statement requires
start-up activities, such as those related to the Capital Improvement Program,
to be expensed as incurred.
In June 1997, the 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 believes that
adoption of this statement will not have a material impact on its financial
statements.
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 believes that adoption of this statement will not
have a material impact on its financial statements.
48
<PAGE> 51
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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 and
recognized when the related products are sold. Those transactions which do not
meet the hedging criteria in SFAS 80 are recorded at market value and marked to
market each period resulting in a gain or a loss which is recorded in other
income in the period in which a change in market value occurs.
Concentration of Credit Risk
Financial instruments which 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 on
management's review of the 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 were with major brokerage firms and, in the opinion of management,
exposed the Company to no undue credit risks. The Company performs ongoing
credit evaluations and generally requires no collateral from its customers.
Hedging Agreements
From time to time, TransTexas enters into commodity price swap agreements
(the "Hedge Agreements") to reduce its exposure to price risk in the spot market
for natural gas. The Hedge Agreements are accounted for as hedges if the pricing
of the hedge agreement correlates with the pricing of the natural gas production
hedged. Accordingly, gains or losses are deferred and recognized as an increase
or decrease in revenues in the respective month the physical volumes are sold.
For the years ended January 31, 1998 and 1997, TransTexas incurred net
settlement losses pursuant to the Hedge Agreements of approximately $7.4 million
and $37 million, respectively. TransTexas had no Hedge Agreements outstanding at
January 31, 1998. As of January 31, 1997, TransTexas had Hedge Agreements with
settlement dates ranging from February 1997 through April 1997 involving total
base quantities for all monthly periods aggregating approximately 20.4 TBtu of
natural gas. Fixed prices for these agreements range 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.
Income Taxes
The Company, TARC and TransTexas file a consolidated tax return with
TransAmerican. Income taxes for each company 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
it had
49
<PAGE> 52
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, TNGC Holdings
Corporation ("TNGC"), TransAmerican, TARC, TransTexas and TransAmerican's other
direct and indirect subsidiaries. Income taxes include federal and state income
taxes.
Net Income (Loss) Per Share
As of January 31, 1998, the Company had implemented Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Net income (loss) per share
has been restated for all periods presented to the extent applicable. Basic net
income per share is calculated by dividing net income available to common
shareholders by the weighted average number of shares of common stock. Diluted
net income per share is calculated by dividing net income available to common
shareholders by the weighted average number of shares of common stock and
potential shares of common stock.
2. CAPITAL IMPROVEMENT PROGRAM
TARC's refinery is located in the Gulf Coast region along the Mississippi
River, approximately 20 miles from New Orleans, Louisiana. TARC's business
strategy is to modify, expand and reactivate its refinery and to maximize
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 May 1997, TARC spent approximately $251 million on
the 1995 Program, procured a majority of the equipment required and completed
substantially all of the process design engineering and a substantial portion of
the remaining engineering necessary for its completion.
In June 1997, in connection with the TEC Notes Offering, the TARC
Intercompany Loan and the TARC Notes Tender Offer, TARC adopted the Capital
Improvement Program. The most significant projects include: (i) converting the
visbreaker unit into a delayed coking unit to process vacuum tower bottoms into
lighter petroleum products, (ii) modernizing and upgrading a fluid catalytic
cracking unit to increase gasoline production capacity and allow the direct
processing of low-cost atmospheric residual feedstocks, and (iii) upgrading and
expanding hydrotreating, alkylation and sulfur recovery 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. In June
1997, TARC estimated that Phase I would be completed at a cost of $223 million,
would be tested and operational by September 30, 1998 and would result in the
refinery having the capacity to process up to 200,000 Bpd of sour crude oil.
Phase II of the Capital Improvement Program includes the completion and start-up
of the Fluid Catalytic Cracking Unit utilizing state-of-the-art MSCC(SM)
technology and the installation of additional equipment expected to further
improve operating margins by allowing for a significant increase in the
refinery's capacity to produce gasoline. In June 1997, TARC estimated that Phase
II would be completed at a cost of $204 million and would be
50
<PAGE> 53
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tested and operational by July 31, 1999. TARC currently believes that actual
expenditures may exceed the budget by as much as $45 million (of which $30
million is allocated to Phase I). Although there can be no assurance, TARC
believes that it will have cash sufficient to fund the remaining construction,
and that both Phase I and Phase II will be completed in advance of the Phase I
completion date required by the TEC Indenture. TARC anticipates Mechanical
Completion of the Delayed Coking Unit, the HDS Unit and the related portion of
the Sulfur Recovery System in May 1998. Upon Mechanical Completion of these
units, TARC will be able to purchase feedstocks using funds in the TARC
Disbursement Account reserved for such purpose. TARC believes that the remainder
of Phase I (other than the No. 2 Reformer) will reach Mechanical Completion
during the second quarter of fiscal 1999. TARC intends to defer additional
expenditures on the No. 2 Reformer until the fourth quarter of fiscal 1999,
ending January 31, 1999. TARC expects to complete both Phase I and Phase II in
advance of the Phase I completion date required by the TEC Notes Indenture. TARC
spent approximately $215 million on the Capital Improvement Program during the
period between June 1997 and January 31, 1998. As of January 31, 1998, TARC had
commitments to spend another $83.3 million. The foregoing estimates, as well as
other estimates and projections herein, are subject to substantial revision upon
the occurrence of future events, such as unavailability of financing,
engineering problems, work stoppages and cost overruns, over which TARC may not
have any control, and there can be no assurance that any such projections or
estimates will prove accurate.
TARC believes, based on current estimates of refining margins and costs of
the expansion and modification of the refinery, that future undiscounted cash
flows will be sufficient to recover the cost of the refinery over its estimated
useful life. Management believes there have been no events or changes in
circumstances that would require the recognition of an impairment loss. However,
due to the inherent uncertainties in estimating future refining margins, and in
constructing and operating a large scale refinery, there can be no assurance
that TARC will ultimately recover the cost of the refinery. Management believes
that the book value of the refinery is in excess of its current estimated fair
market value.
3. DISBURSEMENT ACCOUNTS
Pursuant to a disbursement agreement dated June 13, 1997, as amended
December 30, 1997 (the "Disbursement Agreement") among TARC, TEC, Firstar Bank
of Minnesota, N.A., as trustee (the "TEC Indenture Trustee"), Firstar Bank of
Minnesota, N.A., as disbursement agent (the "Disbursement Agent"), and Baker &
O'Brien, Inc., as construction supervisor (the "Construction Supervisor"), $208
million of the net proceeds from the sale of the TEC Notes was placed into
accounts (collectively, the "TARC Disbursement Account") to be held and invested
by the Disbursement Agent until disbursed. TEC disbursements for TARC
expenditures will be treated as capital contributions. In addition, proceeds to
TEC and TARC of approximately $201 million from the TransTexas share repurchase
program have been deposited in the TARC Disbursement Account. On December 30,
1997, TARC deposited $119 million of the net proceeds from the issuance of its
Series A Senior Subordinated Notes into the TARC Disbursement Account for use in
the Capital Improvement Program. All funds in the TARC Disbursement Account are
pledged as security for the repayment of the TEC Notes.
The Disbursement Agent will make disbursements for the Capital Improvement
Program out of the TARC Disbursement Account in accordance with requests made by
TARC and approved by the Construction Supervisor. The Construction Supervisor is
required to review each such disbursement request by TARC. No disbursements may
be made from the TARC Disbursement Account for purposes other than the Capital
Improvement Program other than (i) up to $1.5 million per month (except for
December 1997, in which disbursements may be up to $4.5 million) to fund
administrative costs and certain taxes and insurance payments, not in excess of
$25.5 million in the aggregate; provided, that if less than $1.5 million is
spent in any month (or less than $4.5 million is spent in December 1997) the
amounts that may be disbursed in one or more subsequent months will be increased
by the amount of such difference, (ii) up to $50 million for feedstock upon
certification by the Construction Supervisor of the Mechanical Completion (as
defined in the
51
<PAGE> 54
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEC Notes Indenture) 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 million for
outstanding accounts payable. In addition, interest income from the TARC
Disbursement Account may be used for the Capital Improvement Program or
disbursed to fund administrative and other costs of TARC and TEC. As of January
31, 1998, $225 million had been disbursed to TARC out of the TARC Disbursement
Account for use in the Capital Improvement Program, $18 million for accounts
payable and general and administrative expenses and $19 million for payments of
interest on, and the redemption, repurchase and defeasance of the TARC Notes.
4. LIQUIDITY
TransTexas' cash flow from operations is sensitive to the level of capital
expenditures and the prices it receives for its natural gas. TransTexas' debt
covenants may limit its ability to obtain additional financing or to sell
properties, and there is no assurance that cash flow from operations will be
sufficient to fund capital and debt service requirements.
TransTexas makes substantial capital expenditures for the exploration and
development of natural gas reserves. 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, an accounts receivable revolving
credit facility and other financings.
During the fiscal year ended January 31, 1998, total capital expenditures
were $424 million, including $56 million for lease acquisitions, $296 million
for drilling and development and $72 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. During fiscal
1998, TransTexas accelerated its exploration program 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 significantly exceeded its original anticipated amount of $220
million. Subject to cash availability, capital expenditures for fiscal 1999 are
estimated to be approximately $180 million, which amount is in excess of
projected cash flow from operations for fiscal 1999. A reduction in planned
capital spending could result in less than anticipated cash flow from operations
in fiscal 1999 and later years, which could have a material adverse effect on
TransTexas. To finance these capital expenditure requirements and reduce its
working capital deficit, TransTexas will be required to supplement its
anticipated cash flow from operations with a combination of asset sales,
including assets of the drilling services division, and financings which may
include borrowings or production payments. There is no assurance that adequate
funds can be obtained on a timely basis from such sources.
TARC has historically incurred losses and negative cash flow from operating
activities as a result of limited refinery operations that did not cover the
fixed costs of maintaining the refinery, increased working capital requirements
(including debt service) and losses on refined product sales and processing
arrangements. There is no assurance that TARC can complete the Capital
Improvement Program, fund its future working capital requirements or achieve
positive cash flow from operations. As a result, there is substantial doubt
about TARC's ability to continue as a going concern. Additionally, the Company
has pledged its ownership interest in 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 these uncertainties.
52
<PAGE> 55
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Prepayments:
Trade..................................................... $ 7,120 $ 9,580
Insurance................................................. 4,120 2,913
Deferred loss on commodity price swap agreements............ -- 8,276
Other....................................................... 825 4,869
------- -------
$12,065 $25,638
======= =======
</TABLE>
6. 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 ------------------------
(YEARS) 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Land............................................ $ 19,808 $ 10,746
Gas and oil properties.......................... 1,249,138 2,004,967
Gas gathering and transportation................ 10 51,714 193,443
Refinery........................................ 20 to 30 888,268 532,428
Equipment and other............................. 4 to 10 141,132 95,112
---------- ----------
$2,350,060 $2,836,696
========== ==========
</TABLE>
In May 1997, TransTexas consummated a stock purchase agreement with an
unaffiliated buyer (the "Lobo Sale Agreement"), 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 an adjusted sales price
of approximately $1.1 billion. With proceeds from the Lobo Sale, TransTexas
repaid certain indebtedness and other obligations, including production
payments, in an aggregate amount of approximately $84 million. TransTexas
recorded a gain of $543.4 million on the Lobo Sale. Historical cost of the
properties sold was estimated based on relative fair market value.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests classified as unevaluated properties. As a result of
exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $17 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the cost center, which could result in continued increases in
the depletion rate or a writedown of TransTexas' net capitalized costs of gas
and oil properties. The majority of unevaluated properties will be evaluated
over the next two years.
In January 1998, TransTexas sold a portion of its Lodgepole producing
properties for a sales price of $19.1 million. The proceeds from this sale were
credited to the full cost pool.
TransTexas anticipates selling its oilfield stimulation, cementing and
coiled tubing equipment and related facilities on or about April 30, 1998. In
addition, in April 1998 TransTexas entered into a letter of intent to sell its
drilling rigs.
53
<PAGE> 56
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately $97 million and $45 million of refinery assets were being
depreciated at January 31, 1998 and 1997, respectively. The remaining refinery
and other assets are considered construction in process. Approximately $90.4
million of property, plant and equipment represents assets transferred by
TransAmerican at net realizable value and $465.4 million represents additions
recorded at historical cost. As of January 31, 1997, TARC 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 $7.8 million, $6.7 million, $2.9 million and
$5.9 million in depreciation expense for the years ended January 31, 1998 and
1997, the six months ended January 31, 1996 and the year ended July 31, 1995,
respectively.
TARC believes, based on current estimates of refining margins and projected
costs of the Capital Improvement 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.
7. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Debt issue costs, net of accumulated amortization of $5,061
and $9,320 at January 31, 1998 and, 1997, respectively.... $ 68,363 $32,127
Prepaid capital expenditures................................ 24,217 --
Environmental escrow........................................ 5,062 --
Contractual rights and licenses, net of accumulated
amortization of $0 and $992 at January 31, 1998 and 1997,
respectively.............................................. 3,500 5,979
Other....................................................... 2,179 3,392
-------- -------
$103,321 $41,498
======== =======
</TABLE>
TARC uses the straight-line method to amortize intangibles over the periods
estimated to be benefited. During fiscal 1998, TARC charged to income $22.8
million in debt issue costs and $2.2 million of intangible costs in connection
with the acquisition of a tank storage facility. TransTexas expensed $9.0
million of debt issue costs in connection with the retirement of its Senior
Secured Notes.
54
<PAGE> 57
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Royalties................................................... $ 7,171 $27,607
Taxes other than income taxes............................... 3,146 13,501
Interest.................................................... 13,189 20,978
Payroll..................................................... 6,528 6,012
Litigation settlements...................................... 1,387 1,263
Settlement values of commodity price swap agreements........ -- 13,276
Insurance................................................... 9,682 7,840
Maintenance turnarounds..................................... 2,673 1,909
Other....................................................... 8,550 6,475
------- -------
$52,326 $98,861
======= =======
</TABLE>
9. LONG-TERM DEBT
The major components of long-term debt are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
11 1/2% Senior Secured Notes due 2002 -- TEC................ $ 475,000 $ --
13% Senior Secured Discount Notes due 2002 -- TEC........... 951,009 --
11 1/2% Senior Secured Notes due 2002 -- TransTexas......... -- 800,000
13 1/4% Senior Subordinated Notes due 2003 -- TransTexas.... -- 101,092
13 3/4% Senior Subordinated Notes due 2001 -- TransTexas.... 115,815 --
Guaranteed First Mortgage Discount Notes due 2002 -- TARC... 6,890 269,606
Guaranteed First Mortgage Notes due 2002 -- TARC............ 7,531 96,124
Acquisition Note -- TARC.................................... 36,000 --
16% Senior Subordinated Notes due 2003 -- TARC.............. 166,955 --
Notes payable, ranging from 9.43% to 13%, due through
2001...................................................... 19,380 14,562
---------- ----------
Total long-term debt.............................. 1,778,580 1,281,384
Less current maturities..................................... 16,891 5,787
---------- ----------
$1,761,689 $1,275,597
========== ==========
</TABLE>
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
55
<PAGE> 58
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. As of January 31, 1998, the fair value, based on quoted market
prices, of the TEC Senior Secured Notes and the TEC Senior Secured Discount
Notes was approximately $485 million and $941 million, respectively.
With the proceeds of the TEC Notes Offering, TEC made an intercompany loan
to TransTexas (the "TransTexas Intercompany Loan") and also made an intercompany
loan to 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 secured
initially 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 secured initially by a security interest in substantially all of
TARC's assets other than inventory, receivables and equipment. The Intercompany
Loans will mature on June 1, 2002. The Intercompany Loan Agreements contain
certain restrictive covenants, including, among others, limitations on incurring
additional debt, asset sales, dividends and transactions with affiliates. In
connection with the TEC Notes Offering, TEC allocated $24.9 million of debt
issuance costs to TARC and $12.6 million to TransTexas which are reflected as a
contribution of capital. Such costs are being amortized over the term of the
Intercompany Loans using the interest method. Upon the occurrence of a Change of
Control (as defined), TEC will be required to make an offer to purchase all of
the outstanding TEC Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, or, in the case of
any such offer to purchase the TEC Senior Secured Discount Notes prior to June
15, 1999, at a price equal to 101% of the accreted value thereof, in each case,
to and including the date of purchase. Pursuant to the terms of the Intercompany
Loans, TEC may require TransTexas and TARC to pay a pro rata share of the
purchase price paid by TEC in an offer to purchase pursuant to a Change of
Control. See "Potential Effects of a Change of Control" in Note 16.
On June 20, 1995, TransTexas issued $800 million aggregate principal amount
of 11 1/2% Senior Secured Notes due 2002 (the "Senior Secured Notes").
TransTexas received net proceeds of approximately $787 million from the sale of
the Senior Secured Notes after deducting underwriting discounts, fees and
expenses. TransTexas used approximately $556 million of the net proceeds to
retire the entire principal amount of TransTexas' $500 million 10 1/2% Senior
Secured Notes due 2000 (the "Prior Notes"), including premium and consent fees
and accrued and unpaid interest, and approximately $46 million to establish an
interest reserve account. The remainder was used for lease acquisitions,
drilling and development and general
57
<PAGE> 59
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and corporate purposes. TransTexas recorded an extraordinary loss on the
extinguishment of the Prior Notes of approximately $56.6 million, net of an
income tax benefit.
In December 1996, TransTexas issued $189 million in face amount of 13 1/4%
Series A Senior Subordinated Notes due 2003 (the "Old Subordinated Notes") to
unaffiliated third parties. The Old 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. Proceeds from
the issuance of the Old Subordinated Notes were used for working capital and
general corporate purposes.
On June 13, 1997, TransTexas completed a tender offer (the "Tender Offer")
for its Senior Secured Notes for 111 1/2% of their principal amount (plus
accrued and unpaid interest). Approximately $785.4 million principal amount of
Senior Secured Notes were tendered and accepted by TransTexas. The Senior
Secured Notes remaining outstanding were called for redemption on June 30, 1997
pursuant to the terms of the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer (the "Subordinated
Notes 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 "Series C Subordinated Notes") for all of the Old
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 "Subordinated
Notes") in exchange for all of the outstanding Series C Subordinated Notes. The
indenture governing the Subordinated Notes includes certain restrictive
covenants, including, among others, limitations on incurring additional debt,
asset sales, dividends and transactions with affiliates. The fair value of the
Subordinated Notes, based on quoted market prices as of January 31, 1998, was
$129.7 million.
As a result of the Tender Offer and the Subordinated Notes Exchange Offer,
TransTexas recorded a $72 million after tax extraordinary charge during the year
ended January 31, 1998.
On February 23, 1995, TARC issued 340,000 A Units consisting of $340
million aggregate principal amount of 18 1/2% Guaranteed First Mortgage Discount
Notes due 2002 ("Discount Mortgage Notes") and 5,811,773 Common Stock Purchase
Warrants ("1995 Warrants"), and 100,000 B Units consisting of $100 million
aggregate principal amount of 16 1/2% Guaranteed First Mortgage Notes due 2002
("Mortgage Notes" and, together with the Discount Mortgage Notes, the "TARC
Notes") and 1,683,540 1995 Warrants. Interest is payable semi-annually with the
first interest payment on the Discount Mortgage Notes due August 15, 1998.
Interest payments on the Mortgage Notes began August 15, 1995. The TARC Notes
are senior obligations of TARC, collateralized as of January 31, 1998 by a first
priority lien on substantially all of TARC's property and assets and pledges of
1.9 million shares of common stock of TransTexas and all of TARC's outstanding
common stock. The 1995 Warrants are exercisable at a price of $0.01 per share
and expire on February 15, 2002. TARC allocated $23.3 million of the proceeds
from the issuance of the TARC Notes to the 1995 Warrants based on their
estimated fair value.
TARC received approximately $301 million from the sale of A Units and B
Units. Net proceeds to TARC were approximately $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 1995 Program.
On June 13, 1997, TEC completed a tender offer for all of the then
outstanding 1995 Warrants at a price of $4.50 per warrant. Pursuant to the
tender offer, TEC purchased 7,320,552 1995 Warrants for an aggregate purchase
price of approximately $33 million. The excess of the purchase price over TEC's
basis in the 1995 Warrants of approximately $9.8 million was treated as an
acquisition of a minority interest. TransAmerican subsequently purchased 163,679
1995 Warrants for an aggregate purchase price of approximately $0.7 million. In
December 1997, TransAmerican sold 11,100 1995 Warrants to an unaffiliated third
party. The remaining
58
<PAGE> 60
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 Warrants owned by TransAmerican, as well as the 1995 Warrants purchased by
TEC in the tender offer, were contributed to TARC and cancelled. As of January
31, 1998, there were 22,119 1995 Warrants outstanding.
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. 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 a result of the TARC Notes Tender Offer, $22.8 million of
debt issuance costs were written off and TARC recorded a total extraordinary
charge of $84.8 million during the year ended January 31, 1998. On January 14,
1998, TARC called for redemption on February 17, 1998 approximately $7 million
in aggregate principal amount of TARC Notes. On January 16, 1998, TARC
deposited, pursuant to an irrevocable trust agreement, approximately $9.8
million in order to defease the remaining TARC Notes. The amount deposited was
invested in U.S. Treasury strip securities which will yield on maturity amounts
sufficient to pay the principal of the remaining TARC Notes and interest thereon
from the date of deposit to and including the final redemption date, as well as
a call premium of 6%. The maturity dates of the strip securities coincide with
the final redemption date of February 15, 1999 and all scheduled interest
payment dates occurring during the period ending on such final redemption date.
As of January 31, 1998, the amortized cost of these investments approximated
fair value. As of January 31, 1998, TARC Mortgage Notes and TARC Discount Notes
with an aggregate carrying value of approximately $14.4 million remained
outstanding. On April 17, 1998, the TARC Notes were defeased and the collateral
securing the TARC Notes was released.
On December 10, 1997, TARC issued to an unaffiliated third party a 13%
Senior Secured Note due 2002 (the "Acquisition Note") in the principal amount of
$36 million to finance a portion of the purchase price of a tank storage
facility purchased in September 1997. The Acquisition Note is secured by a
mortgage on the tank storage facility, and is governed by a Note Purchase
Agreement containing restrictive covenants substantially similar to those
contained in the TARC Intercompany Loan and the TEC Notes Indenture. The
Acquisition Note bears interest at 13%, payable semiannually on June 15 and
December 15, and matures on December 15, 2002.
On December 30, 1997, TARC issued in a private offering 175,000 Units
consisting of $175 million in aggregate principal amount of 16% Series A Senior
Subordinated Notes due 2003 (the "Series A Senior Subordinated Notes") and
175,000 common stock purchase warrants (the "December 1997 Warrants"). The
Series A Senior Subordinated Notes bear interest at 16%, payable semi-annually
on June 30 and December 30 and mature on June 30, 2003. The December 1997
Warrants will be exercisable on or after December 30, 1998 at a price of $0.01
per share and expire on June 20, 2003. Net proceeds to TARC, after deducting
fees and expenses of approximately $8 million, were approximately $167 million.
Net proceeds of $8.2 million from the sale of the Units was allocated to the
December 1997 Warrants. TARC deposited $119 million of the net proceeds into the
TARC Disbursement Account for use in the Capital Improvement Program and
deposited $42 million into an interest reserve account for interest payments on
the Series A Senior Subordinated Notes through June 30, 1999. The remaining $6
million of net proceeds was used for general corporate purposes including the
redemption and defeasance of the TARC Notes. The indenture governing the Series
A Senior Subordinated Notes contains certain restrictive covenants, including,
among others, limitations on incurring additional debt, asset sales, dividends
and transactions with affiliates.
On March 16, 1998, TARC issued in a private offering 25,000 Units
consisting of $25 million in aggregate principal amount of 16% Series C Senior
Subordinated Notes due 2003 (the "Series C Senior
59
<PAGE> 61
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subordinated Notes" and, together with the Series A Senior Subordinated Notes,
the "Senior Subordinated Notes") and 25,000 warrants (the "March 1998 Warrants"
and, together with the December 1997 Warrants, the "Warrants") to purchase
333,606 shares of TARC common stock. The Series C Subordinated Notes bear
interest at 16%, payable semiannually on June 30 and December 30, and mature on
June 30, 2003. The March 1998 Warrants will be exercisable on or after December
30, 1998 at a price of $0.01 per share and expire on June 20, 2003. Net proceeds
to TARC, after deducting fees and expenses of approximately $1.2 million, were
approximately $26.2 million. Net proceeds of approximately $2.8 million from the
sale of the Units was allocated to the March 1998 Warrants. TARC deposited $6
million into an interest reserve account for interest payments on the Series C
Senior Subordinated Notes from December 30, 1997 through June 30, 1999. The
remaining $20.2 million of net proceeds has been or will be used for general
corporate purposes. The indenture governing the Series C Senior Subordinated
Notes contains certain restrictive covenants, including, among others,
limitations on incurring additional debt, asset sales, dividends and
transactions with affiliates.
Pursuant to a disbursement agreement (the "Disbursement Agreement") among
TransTexas, TEC, the TEC Indenture Trustee, and 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 "Disbursement
Account") to be held and invested by the disbursement agent until disbursed for
use in the share repurchase program. As of January 31, 1998, approximately
$262.4 million had been disbursed for use in TransTexas' share repurchase
program.
In December 1997, TEC obtained consents from the holders of the TEC Series
A Notes to certain amendments to the TEC Notes Indenture and related documents.
These amendments, among other things, allowed for the release to TransTexas of
approximately $136.6 million in funds remaining in the TransTexas Disbursement
Account after termination of the share repurchase program in December 1997.
TransTexas paid a fee of $14 million to holders of the TEC Notes in connection
with the consent solicitation which was capitalized as debt issue costs and paid
other fees and expenses of $5 million.
In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. 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. As of January 31, 1998, the amount payable
pursuant to the advances was approximately $15 million.
The fair value of the TARC Notes was approximately $16 million and $404
million as of January 31, 1998 and 1997, respectively. The fair value of the
Series A Subordinated Notes was approximately $182 million as of January 31,
1998. Fair value is based on quoted market prices.
In September, November and December 1997 and January 1998, TEC advanced an
aggregate of approximately $37 million to TransTexas pursuant to promissory
notes which mature on June 14, 2002. The notes bear interest in an amount equal
to a fixed semi-annual interest payment of $2.8 million, prorated based upon the
average outstanding balance of all notes (other than the notes evidencing the
Intercompany Loans) between TransTexas and TEC and the average outstanding
balance of all notes (other than the notes evidencing the Intercompany Loans)
between TARC and TEC. On January 31, 1998, the outstanding notes from TransTexas
totaled $37 million. As of January 31, 1998, TEC had prorated approximately $0.5
million of interest to TransTexas with respect to these notes.
As of January 31, 1998, TransTexas had notes payable bearing interest at
rates ranging from 9.43% to 14.41% per annum and mature at various dates through
November 2001. These notes payable are collateralized by certain of TransTexas'
operating equipment.
Aggregate principal payments on the Company's long-term debt at January 31,
1998 are expected to total $17.2 million, $14.4 million, $118.2 million, $0.4
million and $1,641.0 million for the years ending January 31, 1999, 2000, 2001,
2002 and 2003, respectively.
60
<PAGE> 62
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, TransTexas executed an amended and restated note in the
principal amount of approximately $14.9 million evidencing a portion of the
notes payable described above. Concurrently, TransTexas incurred an additional
$14 million in debt, evidenced by a promissory note. Both notes are secured by a
lien on equipment. The notes bear interest at a rate of 13.87%, with monthly
installments and a final installment payable on April 1, 2001.
10. CREDIT AGREEMENT
TransTexas and BNY Financial Corporation ("BNY") 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 January 31, 1998,
outstanding advances under the BNY Facility totaled approximately $7.9 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. The BNY Facility contains certain
financial covenants including a limitation on net losses. As of January 31,
1998, TransTexas was not in compliance with these covenants. BNY has agreed to
waive the noncompliance, and the BNY Facility has been amended with respect to
these covenants.
11. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Litigation settlements and accrual.......................... $15,008 $ 9,641
Environmental accrual....................................... 3,100
Insurance................................................... 740
Short-term obligations expected to be refinanced:
Litigation settlement..................................... -- 2,500
Accrued capital expenditures.............................. -- 19,738
Other....................................................... 6,820 1,714
------- -------
$25,668 $33,593
======= =======
</TABLE>
During the months of April and May 1997, TransTexas obtained financings,
the proceeds of which were used to pay the obligations listed above under the
caption "Short-term obligations expected to be refinanced" at January 31, 1997
and for general corporate purposes.
61
<PAGE> 63
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
----------------------------- ----------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- ------- -------- ------ -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal:
Current................. $(21,380) $21,380 $ (8,963) $ -- $ 1,352 $(7,611)
Deferred................ 144,256 (8,889) 6,263 (416) (1,483) 5,196
State:
Current................. -- -- -- -- -- --
-------- ------- -------- ----- ------- -------
Income tax expense
(benefit) before
extraordinary item...... 122,876 12,491 (2,700) (416) (131) (2,415)
Tax benefit of
extraordinary item...... -- -- (1,491) -- -- (1,491)
-------- ------- -------- ----- ------- -------
Total income tax expense
(benefit)............... $122,876 $12,491 $ (4,191) $(416) $ (131) $(3,906)
======== ======= ======== ===== ======= =======
</TABLE>
Included in "Payable to affiliates" at January 31, 1998 and 1997 are income
taxes payable to TransAmerican totaling approximately $3.0 million and $14.4
million, respectively.
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 MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
----------------------------- ----------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- ------- -------- ------- ------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense (benefit) at
the statutory rate.... $ 56,286 $27,639 $(44,295) $(9,518) $(8,234) $(43,011)
Increase (decrease) in
tax resulting from:
Net operating losses
not utilizable..... 66,590 (7,707) 32,262 9,102 8,103 31,263
Tax rate change....... -- -- -- -- -- --
State income taxes,
net of federal
income tax
benefit............ -- -- -- -- -- --
Tight sands credit.... -- (7,441) 7,842 -- -- 7,842
-------- ------- -------- ------- ------- --------
$122,876 $12,491 $ (4,191) $ (416) $ (131) $ (3,906)
======== ======= ======== ======= ======= ========
</TABLE>
62
<PAGE> 64
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's tax attributes are as follows (in
thousand of dollars):
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Investment in affiliates.................................. $ -- $ 275,450
Receivable from TransAmerican in lieu of federal net
operating loss carryforwards........................... 192,015 72,430
Safe harbor leases........................................ 78,026 81,976
Contingent liabilities.................................... 6,553 3,403
Alternative minimum tax credit carryforward............... -- 48,643
Other..................................................... 7,669 3,530
--------- ---------
284,263 485,432
Valuation allowance....................................... (208,492) (430,194)
--------- ---------
Net deferred tax assets........................... 75,771 55,238
--------- ---------
Deferred tax liabilities:
Depreciation, depletion and amortization.................. 40,268 86,605
Tax assumption............................................ 75,000 --
--------- ---------
115,268 86,605
--------- ---------
Net deferred tax liabilities...................... $ 39,497 $ 31,367
========= =========
</TABLE>
On a separate return basis, TARC and TransTexas have a total of
approximately $539.3 million of regular tax net operating loss ("NOL")
carryforwards at January 31, 1998 which would expire from 2004 through 2014.
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 January 31, 1998, TARC and TransTexas had generated
NOL carryforwards of approximately $365.3 million which have not been used by
TransAmerican and would expire in 2014.
At January 31, 1997, TransTexas recorded a deferred tax asset and related
100% valuation allowance for the tax basis of certain assets of a subsidiary.
Those assets were sold in connection with the Lobo Sale and, for financial
reporting purposes, the tax asset and related valuation allowance were both
reversed resulting in no tax effect in the statement of operations.
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 its position will be sustained if
challenged by the Internal Revenue Service ("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 will be able to fund any such payment at
63
<PAGE> 65
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
TransTexas agreed to contribute to TransAmerican $48.6 million of
alternative minimum tax credit carryforwards in connection with the assumption
by TransAmerican of the aforementioned contingency. The assumption of the tax
contingency net of the alternative minimum tax credits and the $75 million
liability recorded by TransTexas was a credit to additional paid-in capital of
approximately $129.5 million.
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and 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 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, 1995 and 1994. At this time, 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.
TNGC Holdings Corporation ("TNGC"), TransAmerican and its existing
subsidiaries, including TARC, TEC and TransTexas, entered into a tax allocation
agreement, as amended (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
64
<PAGE> 66
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Under certain circumstances, TransAmerican or TEC may sell or otherwise
dispose of shares of TransTexas common stock. 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. 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, 1999, the aggregate amount of this tax
liability is estimated to be approximately $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 these
transactions at the time due and, therefore, other members of the group,
including TEC, TransTexas or TARC, may be required to pay the tax.
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. As of January 31, 1998, TransTexas had
paid $5.4 million of these franchise taxes and estimates that it will pay
approximately $6.0 million during fiscal 1999.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following information reflects the Company's noncash investing and
financing activities (in thousands of dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
--------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- -------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Seller financed obligations incurred
for capital expenditures.......... $ -- $ 3,621 $ -- $ 1,095 $ -- $ --
======== ======== ======= ======= ====== =======
Capitalized lease obligations
incurred for property and
equipment......................... $ 1,775 $ -- $ 2,544 $ 1,643 $ 66 $ 967
======== ======== ======= ======= ====== =======
Accounts payable and long-term
liabilities for property and
equipment......................... $ 56,880 $ 42,048 $39,571 $36,080 $8,293 $11,784
======== ======== ======= ======= ====== =======
Interest accretion on notes and
discount notes capitalized in
property and equipment............ $ 74,716 $ 49,109 $29,306 $18,186 $ -- $11,120
======== ======== ======= ======= ====== =======
</TABLE>
65
<PAGE> 67
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
--------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- -------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Forgiveness of advances from
TransAmerican (including $25.0
million for property, plant and
equipment transferred from
TransAmerican at net book value in
1994)............................. $ -- $ -- $71,170 $ -- $ -- $71,170
======== ======== ======= ======= ====== =======
Product financing arrangements...... $ -- $(37,206) $64,877 $37,206 $ -- $27,671
======== ======== ======= ======= ====== =======
Assumption of tax liability by
TransAmerican..................... $129,549 $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ====== =======
Contribution from affiliate......... $ 21,513 $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ====== =======
Exchange of Subordinated Notes...... $115,815 $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ====== =======
Issuance of Warrants for
professional fees................. $ 3,503 -- -- -- -- --
======== ======== ======= ======= ====== =======
</TABLE>
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
------- ------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest, net of amounts
capitalized........................ $89,801 $87,680 $96,945 $49,771 $29,971 $77,145
======= ======= ======= ======= ======= =======
Income taxes (paid to
TransAmerican)..................... $ -- $ 7,000 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= =======
</TABLE>
The Company incurred approximately $214.0 million, $186.4 million, $150.2
million, $83.0 million and $100.8 million of interest charges of which
approximately $57.7 million $84.7 million, $49.8 million, $33.6 million and
$19.8 million was capitalized for the years ended January 31, 1998, 1997 and
1996, the six months ended January 31, 1996 and the year ended July 31, 1995,
respectively.
14. TRANSACTIONS WITH AFFILIATES
From August 1993 to June 1997, TransTexas 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. The fee to TARC and TEC for
general commercial legal services and certain accounting services (including
payroll, tax, and treasury services) was $26,000 per month. At TransAmerican's
request, TransTexas, at its election, 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
66
<PAGE> 68
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for services rendered and for allocated expenses paid by TransTexas on behalf of
TARC. TransAmerican will pay to TransTexas approximately $20,000 per month for
such services. TEC and its subsidiaries will pay $2.5 million in the aggregate
per year to TransAmerican for advisory services and benefits provided by
TransAmerican. Pursuant to these agreements, the Company has incurred $1.6
million in service agreement expenses and has recognized approximately $0.2
million in service agreement revenues during the year ended January 31, 1998. As
of January 31, 1998, $1.2 million and $1.6 million was payable to TransTexas and
TransAmerican, respectively, pursuant to the services agreement. As of January
31, 1998, TransTexas' receivable from TARC and TransAmerican for such services
was $1.4 million.
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $11.7
million, $21.4 million, $11.1 million, $4.4 million and $14.8 million for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
1995 and the year ended July 31, 1995, respectively. TransAmerican did not
purchase any gas from TransTexas during the year ended January 31, 1998. 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. The purchase price was $3.9 million greater than TDOC's basis in the
properties. The properties were recorded in TransTexas' financial statements at
carryover basis and the $3.9 million was classified as a reduction of retained
earnings.
In October 1997, Mr. Stanley guaranteed TransTexas' $40 million line of
credit with BNY Financial Corporation.
In July 1996, TransAmerican executed a note payable to TransTexas
Exploration Corporation ("TTEX") in the original principal amount of $25 million
maturing on July 31, 1998. Advances by TTEX to TransAmerican under the note bore
interest at a rate of 15% per annum, payable quarterly. This note was repaid on
June 13, 1997.
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.
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 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 was recorded as a contra equity account due to uncertainties
regarding the repayment terms for such receivables. TransTexas agreed to defer
any interest payments due from TransAmerican until 1998. As of 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.
In January 1997, an affiliate of TransTexas contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with a
book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TTC.
67
<PAGE> 69
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TransTexas sells natural gas to TARC under an interruptible long-term sales
contract. Revenues from TARC under this contract totaled approximately $1.1
million , $2.7 million and $2.4 million, respectively, for the years ended
January 31, 1998, 1997 and 1996, $2.2 million and $2.3 million, respectively,
for the six months ended January 31, 1996 and 1995, and $2.5 million for the
year ended July 31, 1995. The amount payable to TransTexas for natural gas
purchases at January 31, 1998 was $2.7 million.
Pursuant to the stock transfer agreement dated February 23, 1995 (the
"Stock Transfer Agreement") among TransAmerican, TEC and TARC, TransAmerican
contributed to the capital of TEC (the "Stock Transfer") (i) all of the
outstanding capital stock of TARC, and (ii) 55 million shares of common stock of
TransTexas. TEC subsequently contributed 15 million of its shares of TransTexas
common stock to TARC.
Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily operations
and capital expenditures were advanced by TransAmerican. In October 1994,
TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican
advanced approximately $50 million of the proceeds from these stock sales to
TARC, of which approximately $20 million was used by TARC to repay a portion of
the intercompany debt owed to TransAmerican, and the remaining $30 million of
the net proceeds was used for working capital and general corporate purposes.
TARC used approximately $30 million of the net proceeds of the sale of the TARC
Notes to repay additional intercompany debt to TransAmerican. TransAmerican
contributed to the capital of TARC (through TEC) all but $10 million of the
remainder of TARC's intercompany debt owed to TransAmerican. In April 1995, TARC
repaid the remaining $10 million of intercompany indebtedness owed to
TransAmerican. In August 1995, TARC received an advance of $3 million from
TransTexas, which TARC used to settle its remaining portion of certain
litigation. In September 1995, TARC received an advance of $1.7 million from
TransAmerican, which TARC used to purchase feedstock. In October 1995, TARC
repaid these advances without interest. Additionally in October 1995, TARC
received an advance of approximately $4 million from TransAmerican for working
capital which it repaid in June 1997.
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.
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. TransTexas charges TARC approximately $61,000 in rent
annually, of which approximately $117,000 was payable to TransTexas at January
31, 1998.
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"). As of January 31, 1997, TARC
had approximately $44.4 million outstanding under 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% and which matures on July 31,
2002. All amounts outstanding under the TransAmerican Notes were repaid on June
13, 1997.
Southeast Contractors, a subsidiary of TransAmerican, provides construction
personnel to TARC in connection with the Capital Improvement Program. These
construction workers are temporary employees, and the number and composition of
the workforce will vary throughout the Capital Improvement Program. Southeast
Contractors charges TARC for the direct costs it incurs (which consist solely of
employee payroll and benefits) plus administrative costs and fees of up to $2.0
million per year. Total labor costs charged by Southeast Contractors for the
years ended January 31, 1998 and 1997, the six months ended January 31, 1996 and
the year ended July 31, 1995 were $50.7 million, $14.1 million, $20.2 million
and $15.5 million, respectively, of which $5.3 million and $1.8 million was
payable at January 31, 1998 and 1997, respectively.
68
<PAGE> 70
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. 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 through December 15, 1997. Thereafter, the
amount of fixed interest payable to TEC of $5.7 million per year will be
proportioned semi-annually between TARC and TransTexas based on the average
outstanding balance of TARC's note to TEC and the average outstanding balance of
all notes between TransTexas and TEC. As of January 31, 1998, the principal
amount payable by TARC to TEC pursuant to the advances was $15 million. During
the year ended January 31, 1998, TARC recognized $3.1 million in interest
expense pursuant to the advances of which approximately $0.2 million was payable
to TEC at January 31, 1998. Included in the $3.1 million of interest expense is
approximately $0.3 million paid to TEC for advances made to TransTexas during
fiscal 1998.
During the year ended January 31, 1998, TEC contributed $13.5 million to
TARC for general corporate purposes pursuant to the TARC Disbursement Agreement.
On December 30, 1997, TEC and TARC entered into an expense reimbursement
agreement pursuant to which TARC will reimburse TEC for certain administrative,
legal and accounting expenses and directors fees and will also reimburse TEC for
other expenses in an amount not to exceed $200,000 per year. Since December 30,
1997, no such expenses were reimbursed to TEC.
Blackburn & Henderson, a law firm of which Mr. Henderson, a director of
TARC and TEC, is a partner, provides legal and other services to TransAmerican
and its affiliates for an annual fee of $96,000 plus expenses.
15. BUSINESS SEGMENTS
The Company currently conducts its operations through two industry
segments: exploration and production ("E&P") and refining operations
("Refining"). Prior to the Lobo Sale, the Company also operated a gas
transportation segment ("Transportation"). The E&P segment explores for,
develops, produces and markets natural gas, condensate and natural gas liquids.
The refining segment is engaged in refining and storage operations. Prior to the
Lobo Sale, all of the Company's significant gas and oil operations were located
in Webb, Zapata and Starr counties, Texas. The Company's refinery is located in
Norco, Louisiana, approximately 20 miles from New Orleans, Louisiana. Segment
income excludes interest income, interest expense and unallocated general
corporate expenses. Identifiable assets are those assets used in the operations
of the segment. Other assets consist primarily of deferred financing costs,
escrowed funds, certain receivables and other property and equipment. The
Company's revenues are derived principally from sales to interstate and
intrastate gas pipelines, direct end users, industrial companies, marketers, and
refiners located in the United States. As a general policy, collateral is not
required for receivables, but customers' financial condition and credit
worthiness are regularly evaluated. The Company is not aware of any significant
credit risk relating to its customers and has not experienced significant credit
losses associated with such receivables.
For the year ended January 31, 1998, three customers provided approximately
$114 million in E&P and Transportation revenues. For the year ended January 31,
1997, three customers provided approximately $177 million in E&P and
Transportation revenues. For the Transition Period, three customers provided
approximately $61 million in E&P and Transportation revenues. For the year ended
July 31, 1995, two customers provided approximately $114 million in E&P and
Transportation.
For the year ended January 31, 1998, TARC had processed feedstocks from one
customer which accounted for 100% of the net processing arrangement income, and
three customers accounted for 76% of storage revenues. For the year ended
January 31, 1997, TARC had two customers which accounted for 96% of total
revenues. For the six months ended January 31, 1996, TARC had three customers
which accounted for
69
<PAGE> 71
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
41% of total revenues. For the year ended July 31, 1995, TARC had two customers
which accounted for 56% of total revenues and another customer which accounted
for 19% of total revenues.
<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, 1998
Exploration and production........ $164,172 $ 48,325 $ 62,933 $378,762 $ 718,146
Gas transportation................ 12,055 (16,601) 19,726 12,407 --
Refining.......................... 2,828 (46,032) 8,416 373,397 1,184,881
Other............................. 546,678 497,151 -- 37,564 228,412
-------- -------- -------- -------- ----------
$725,733 $482,843 $ 91,075 $802,130 $2,131,439
======== ======== ======== ======== ==========
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 (34,627) 1,417 11,165 69,616
-------- -------- -------- -------- ----------
$414,173 $131,910 $139,678 $485,937 $1,613,735
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
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
======== ======== ======== ======== ==========
</TABLE>
70
<PAGE> 72
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Alameda. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican in the 234th Judicial District Court, Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a 1990 settlement of litigation with El Paso
Natural Gas Company ("El Paso"), and that TransAmerican has been unjustly
enriched by its failure to share such proceeds with Alameda. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda appealed to
the Fourteenth Court of Appeals, which affirmed the trial court judgment in
favor of TransAmerican. Alameda's motion for rehearing was denied and Alameda
appealed to the Texas Supreme Court. The Texas Supreme Court has refused to hear
Alameda's appeal. Alameda has filed a motion for rehearing.
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 was granted on January 13, 1998. The
plaintiffs have appealed.
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. The Texas Supreme Court denied
Finkelstein's application; however, Finkelstein has filed a motion for
rehearing.
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 received, but a final judgment
amount has not yet been ascertained. TransTexas expects the final amount to be
substantially less than the amount originally claimed.
Hein Minerals. On April 3, 1998, Henry and Luz A. Hein Minerals, L.C.
("Hein") filed suit in the 49th Judical District Court, Zapata County, Texas,
against TransAmerican, TransTexas, TTC and Conoco, Inc. Plaintiff alleges that a
1990 mineral lease from plaintiffs to TransAmerican, comprising approximately
2,000 acres, was breached by failure to release certain acreage from the lease.
Plaintiff alleges trespass, tortious interference, conversion, fraud, breach of
fiduciary duty, breach of contract, conversion and slander of title, and claim
damages including $10 per day per acre that was not released. TransTexas intends
to vigorously defend against these claims.
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
71
<PAGE> 73
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Southeast Contractors had discriminated based on race and gender in its hiring
and promotion practices. Each violation of Title VII (for each individual
allegedly aggrieved), if proven, potentially could subject TARC and Southeast
Contractors to liability for (i) monetary damages for backpay and front pay in
an undetermined amount, and for compensatory damages and punitive damages in an
amount not to exceed $300,000 per plaintiff, (ii) injunctive relief, (iii)
attorney's fees and (iv) interest. During the period covered by the
Commissioner's Charge and the Determination, TARC and Southeast Contractors
estimate that they received a combined total of approximately 23,000 to 30,000
employment applications and hired (or rehired) a combined total of approximately
3,400 to 4,100 workers, although the total number of individuals who ultimately
are covered in any conciliation proposal or any subsequent lawsuit may be
higher. TARC and Southeast Contractors deny 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 or Southeast Contractors is found liable for
violations of Title VII based on the matters asserted in the Determination, TARC
can make no assurance that such liability would not have a material adverse
effect on its financial position, results of operations or cash flow.
Rineheart. On October 8, 1996, Carlton Gene Rineheart, et al., and as
representative of a class of persons similarly situated, filed suit against 84
individuals and corporations, including TARC, in the U.S. District Court, Middle
District of Louisiana alleging negligent and improper storage, handling,
treatment, and disposal of hazardous materials from 1976 to the present at two
sites in Iberville Parish, Louisiana. The suit claims damages for physical,
mental, and property damage in the communities of Bayou Sorrel, Bayou Pigeon and
Indian Village. TARC intends to vigorously defend this claim.
Shell Oil. On September 27, 1996, Shell Oil filed a third party suit
against TARC in the U.S. District Court, Eastern District of Louisiana for
contribution and/or indemnity relating to alleged environmental contamination of
Bayou Trapagnier and surrounding lands near Norco, Louisiana. In March 1997,
TARC obtained a voluntary dismissal from Shell. Shell proceeded to trial on the
main case and settled with the plaintiffs during trial by purchasing their land
for $5 million. On June 27, 1997, Shell amended its third party action to bring
TARC back into the case. However, TARC has not yet been served in the case. If
TARC is served, it will defend the case vigorously.
The resolution in any reporting period of one or more of the foregoing
matters in a manner adverse to TransTexas or TARC could have a material adverse
effect on TransTexas' or TARC's results of operations and cash flows for that
period. TransTexas and TARC are also named defendants in other ordinary course,
routine litigation incidental to their business. Although the outcome of these
other lawsuits cannot be predicted with certainty, neither TransTexas nor TARC
expect these matters to have a material adverse effect on their financial
position. At January 31, 1998, the possible range of estimated losses related to
all of the aforementioned claims, in addition to the estimates accrued by
TransTexas is $0 to $20 million. Litigation expense, including legal fees,
totaled approximately $15 million, $19 million, $11 million, $3 million, $2
million and $11 million for the fiscal years ended January 31, 1998, 1997 and
1996, the six months ended January 31, 1996 and 1995 and the fiscal year ended
July 31, 1995.
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. Governmen-
72
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tal 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.
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 financial
position, results of operations or cash flow.
In September 1997, TARC purchased a tank storage facility located adjacent
to the refinery for a cash purchase price of $40 million (which does not include
a $3.1 million liability recorded for environmental remediation, as discussed
below). Environmental investigations conducted by the previous owner of the
facilities have indicated soil and groundwater contamination in several areas on
the property. As a result, the former owner submitted to the Louisiana
Department of Environmental Quality (the "LDEQ") plans for the remediation of
any significant indicated contamination in such areas. TARC has analyzed these
investigations and has carried out further Phase II Environmental Assessments to
verify their results. TARC intends to incorporate any required remediation into
its ongoing work at the refinery. In connection with the purchase of the
facilities, TARC agreed to indemnify the seller for all cleanup costs and
certain other damages resulting from contamination of the property, and created
a $5 million escrow account to fund required remediation costs and
indemnification claims by the seller. As a result of TARC's Phase II
Environmental Assessment, TARC believes that the amount in escrow should be
sufficient to fund the remediation costs associated with identified
contamination; however, because the LDEQ has not yet approved certain of the
remediation plans, there can be no assurance that the funds set aside in the
escrow account will be sufficient to pay all required remediation costs. As of
January 31, 1998, TARC has recognized a liability of $3.1 million for this
contingency.
Requirements Under the Federal Clean Air Act. The National Emission
Standards for Hazardous Air Pollutants for Benzene Waste Operations (the
"Benzene Waste NESHAPS"), promulgated in January 1993 pursuant to the Clean Air
Act, regulate benzene emissions from numerous industries, including petroleum
refineries. The Benzene Waste NESHAPS require all existing, new, modified, or
reconstructed sources to
73
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, there can be no assurance that regulatory relief will be granted. There
can be no assurance that any action taken by the EPA will not have a material
adverse effect on TARC's future financial position, results of operations or
cash flow.
Title V of the Clean Air Act requires states to implement an Operating
Permit Program that codifies all federally enforceable limitations that are
applicable to a particular source. The EPA has approved Louisiana's Title V
Operating Permit Program. The Title V Operating Permit is necessary for TARC to
produce at projected levels upon completion of the Capital Improvement Program.
TARC has submitted its Title V Operating Permit Application and the LDEQ has
designated the application as being administratively complete. However, 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
74
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligations will not have a material adverse effect on TARC's financial
position, results of operations or cash flow.
Cleanup Matters. TARC also is subject to federal, state and local laws,
regulations and ordinances that impose liability for the costs of clean up
related to, and certain damages resulting from, past spills, disposals or other
releases of hazardous substances ("Hazardous Substance Cleanup Laws"). Over the
past several years, TARC has been, and to a limited extent continues to be,
engaged in environmental cleanup or remedial work relating to or arising out of
operations or activities at the refinery. In addition, TARC has been engaged in
upgrading its solid waste facilities, including the closure of several waste
management units. Similar to numerous other industrial sites in the state, the
refinery has been listed by the LDEQ on the Federal Comprehensive Environmental
Response, Compensation and Liability Information System, as a result of TARC's
prior waste management activities (as discussed below).
In 1991, the EPA performed a facility assessment at the refinery pursuant
to the Federal Resource Conservation and Recovery Act ("RCRA"). The EPA
performed a follow up assessment in March 1996, but has not yet issued a report
of its investigations. In July 1996, the EPA and the LDEQ agreed that the LDEQ
would serve as the lead agency with respect to the investigation and remediation
of areas of concern identified in the investigations. TARC, under a voluntary
initiative approved by the LDEQ, submitted a work plan to the LDEQ to determine
which areas may require further investigation and remediation. TARC submitted
further information in January 1998 which was requested by the LDEQ. Based on
the workplan submitted and additional requests by the LDEQ, TARC believes that
any further action will not have a material adverse effect on its financial
position, results of operations or cash flow.
TARC has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), for the cleanup of contamination
from hazardous substances at three Superfund sites (i.e. sites on the National
Priorities List ("NPL")) to which it has been alleged that TARC, or its
predecessors, sent hazardous substances in the past. CERCLA requires cleanup of
sites from which there has been a "release" or threatened release of "hazardous
substances" (as such terms are defined under CERCLA). CERCLA requires the EPA to
include sites needing long-term study and cleanup on the NPL based on their
potential effect on public health or the environment. CERCLA authorizes the EPA
to take any necessary response actions at NPL sites and, in certain
circumstances, to order PRPs liable for the release to take such 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
75
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such site in comparison to other PRPs without giving effect to the ability of
any other PRPs to contribute to or pay for any liabilities incurred, and the
range of likely cleanup costs at each such site), TARC believes that its
ultimate environmental liabilities will not be significant; however, it is not
possible to determine the ultimate environmental liabilities, if any, that may
arise from the matters discussed above.
Potential Effects of a Change of Control
The Subordinated Notes Indenture provides that, upon the occurrence of a
Change of Control, each holder of the Subordinated Notes will have the right to
require TransTexas to repurchase such holder's Subordinated Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the terms
of the TransTexas Intercompany Loan, upon the occurrence of a Change of Control,
TEC would have the right to require TransTexas to repay the principal of the
TransTexas Intercompany Loan in an amount equal to a pro rata share of the
amount TEC is required to pay under the TEC Notes Indenture. Such pro rata share
would be calculated using the ratio of the outstanding principal amount of the
TransTexas Intercompany Loan to the sum of (i) the outstanding principal amount
of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan.
A Change of Control would be deemed to occur under the Subordinated Notes
Indenture in the case of certain changes or other events in respect of the
ownership of TransTexas, including any circumstances pursuant to which any
person or group other than John R. Stanley (or his heirs, his estate, or any
trust in which he or his immediate family members have, directly or indirectly,
a beneficial interest in excess of 50%) and his subsidiaries or the TEC
Indenture Trustee is or becomes the beneficial owner of more than 50% of the
total voting power of TransTexas' then outstanding voting stock, and during the
90 days thereafter, the rating of the Subordinated 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 TEC Indenture Trustee is or becomes the beneficial owner of
more than 50% of the total voting power of TEC's then outstanding voting stock,
or (ii) TEC or any of its subsidiaries own some of TransTexas' or TARC's capital
stock, respectively, but less than 50% of the total voting stock or economic
value of TransTexas or TARC, respectively, unless the TEC Notes have an
investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also includes a "group," which is defined as two or more
persons acting as a partnership, limited partnership or other group.
In addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the
Subordinated Notes Indenture or the TEC Notes 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 January 31, 1998, TransTexas had
approximately $24.2 million of indebtedness (excluding the Subordinated Notes)
subject to such right of repayment or repurchase. In the event of a Change of
Control under the Subordinated Notes Indenture or the TEC Notes Indenture or a
"change of control" under the terms of other outstanding indebtedness, there can
be no assurance that TransTexas will have sufficient funds to satisfy any such
payment obligations.
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 Note 12. 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
76
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 January 31, 1998, TARC had commitments for refinery construction
and maintenance of approximately $83.3 million. TARC is acting as general
contractor and can generally cancel or postpone capital projects.
Gas Sales and Delivery Commitments
In January 1997, TransTexas and Koch Energy Trading Inc. entered into a gas
purchase contract pursuant to which TransTexas is required to deliver 25,000
MMBtu per day to a specified delivery point. The purchase price is determined by
an industry index less $0.08 per MMBtu. Deliveries commenced on June 1, 1997 and
are to continue through August 31, 1999.
TransTexas has entered into various contracts whereby TransTexas is
required to deliver approximately 425 MMcf per day to specified delivery points.
TransTexas will incur certain charges if it does not deliver specified
quantities under the contracts. Such charges totaled $3.1 million in 1998.
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 TransTexas common stock to the third party if
this contingent obligation to such third party becomes fixed and remains unpaid
for 60 days. 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 the current capitalization of TransTexas, the
issuance of shares to satisfy this obligation would result in Deconsolidation
for tax purposes. TransTexas does not believe that this contingency will occur.
Production Payments
In April 1997, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $20 million. The
production payment calls for the repayment of the primary sum plus an amount
equivalent to a 16% annual interest rate on the unpaid portion of such primary
sum. As of January 31, 1998, the remaining balance was $4.8 million.
Lobo Sale
Pursuant to the Lobo Sale, TransTexas is required to indemnify the buyer
for certain liabilities related to the assets previously 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.
77
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Price Management Activities
TARC enters into futures contracts, options on future, swap agreements and
forward sales agreements with the intent to protect against a portion of the
price risk associated with price declines from holding inventory of feedstocks
and refined products or fixed price purchase commitments. At January 31, 1998
and 1997, TARC had no significant positions in open futures contracts, options
on futures, swap agreements or forward sales agreements. A net trading gain of
approximately $2.3 million was reflected in other income (expense) for the year
ended July 31, 1995. These transactions did not qualify for hedge accounting
treatment under the guidelines of SFAS 80; therefore, gains or losses associated
with these futures contracts have not been deferred.
Processing Agreements
In April 1996, TARC entered into a processing agreement with a third party
to process feedstocks. Under the terms of the agreement, the processing fee
earned from the third party is based on the margin earned by the third party, if
any, after deducting all of its related costs such as feedstock acquisition,
hedging, transportation, processing and inspections plus a commission for each
barrel processed. As of January 31, 1998, TARC has processed 6.4 million barrels
of feedstocks under this agreement. 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. For the years ended January 31,
1998 and 1997, TARC recorded income (loss) from processing agreements of $1.4
million and $(7.1) million, respectively. As of January 31, 1998, TARC was
storing approximately 0.7 million barrels of feedstock and intermediate or
refined products pursuant to these processing agreements. Included in the 0.7
million barrels of product stored at the refinery as of January 31, 1998, is
approximately 0.6 million barrels of feedstock owned by a third party related to
a purchase commitment entered into in April 1997. For the year ended January 31,
1998, TARC incurred a loss of approximately $7.8 million related to this
purchase commitment and remains subject to market risk for these barrels.
Operating Leases
As of January 31, 1998, the Company had long-term leases covering land and
other property and equipment. Rental expense was approximately $4 million, $10
million, $5 million and $9 million for the years ended January 31, 1998 and
1997, the six months ended January 31, 1996 and the year ended July 31, 1995.
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,
1998, are as follows (in thousands of dollars):
<TABLE>
<S> <C>
1999........................................................ $1,830
2000........................................................ 1,732
2001........................................................ 1,371
2002........................................................ 898
2003........................................................ 200
Later years................................................. 1,163
------
$7,194
======
</TABLE>
17. LITIGATION SETTLEMENTS
Aspen. TransAmerican brought suit on September 29, 1993 in the 215th
Judicial District Court, Harris County, Texas against Aspen Services, Inc.
("Aspen"), seeking an audit and accounting of drilling costs that Aspen had
charged while providing drilling services to TransAmerican. The parties'
drilling agreement provided, among other things, that Aspen would receive
payment for its drilling-related costs from the production and sale of gas from
the wells that were drilled, and that the revenues that TransAmerican would
78
<PAGE> 80
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In April 1997, the trial court ruled against
Aspen on all of their counterclaims.
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 proceeds from a 1990 settlement with El
Paso Natural Gas Company, 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.
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 found 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' motions for new
trial were denied. TransTexas executed a settlement agreement with Briones in
February 1998.
Coastal. On October 28, 1991, The Coastal Corporation ("Coastal") filed an
action against TransAmerican that was consolidated in the 49th Judicial District
Court, Webb County, Texas, alleging breach of contract and tortious interference
related to two gas sales contracts and a transportation agreement, seeking
unspecified actual and punitive damages and injunctive relief. On April 22,
1994, the court entered a judgment adverse to TransAmerican and TransTexas
requiring them to pay $1.3 million plus $0.7 million in attorneys' fees to
Coastal. On May 29, 1996, the Court of Appeals affirmed the judgment. In
December 1996, the Supreme Court of Texas declined to hear TransTexas' appeal.
The judgment was paid on May 27, 1997. Coastal executed a Release of Judgment
and Judgment Lien which was recorded in Webb and Zapata Counties.
Farias. On February 15, 1996, Celita Suzana Farias filed a wrongful death
action in the 93rd Judicial 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 sought unspecified damages and alleged that the defendants operated a
crane in such a manner that they were negligent and grossly negligent. 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.
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.
18. 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
79
<PAGE> 81
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Proved properties........................................... $1,142,195 $1,845,994
Unproved properties......................................... 104,389 158,973
---------- ----------
Total............................................. 1,246,584 2,004,967
Less accumulated depletion.................................. 652,090 1,288,860
---------- ----------
$ 594,494 $ 716,107
========== ==========
</TABLE>
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Property acquisitions................ $ 56,205 $ 50,963 $ 11,485 $124,956
Exploration.......................... 196,728 100,737 27,039 84,201
Development.......................... 123,273 162,313 115,812 50,032
-------- -------- -------- --------
$376,206 $314,013 $154,336 $259,189
======== ======== ======== ========
</TABLE>
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Revenues............................. $164,538 $363,459 $124,663 $275,627
Expenses:
Production costs................... 51,346 97,619 31,376 76,798
Depletion.......................... 62,933 122,570 56,543 121,625
General and administrative......... 1,568 8,710 3,601 14,349
Litigation settlement.............. -- (96,000) (18,300) --
-------- -------- -------- --------
Total operating expenses........... 115,847 132,899 73,220 212,772
-------- -------- -------- --------
Income before income taxes......... 48,691 230,560 51,443 62,855
Income taxes......................... 17,042 80,696 18,005 21,999
-------- -------- -------- --------
$ 31,649 $149,864 $ 33,438 $ 40,856
======== ======== ======== ========
Depletion rate per net equivalent
Mcf................................ $ 1.11 $ 0.96 $ 0.82 $ 0.81
======== ======== ======== ========
</TABLE>
Reserve Quantity Information
Proved reserves are estimated quantities of natural gas, condensate and
natural gas liquids which 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 methods. Natural gas quantities
represent gas volumes which include amounts that will be extracted
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TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as 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 JANUARY 31, ENDED YEAR ENDED
--------------------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
--------------- ------------- ------------- -------------
GAS OIL GAS OIL GAS OIL GAS OIL
------ ---- ------ ---- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year........ 919.7 5.7 1,139.1 2.9 1,122.6 3.0 717.4 1.9
Increase (decrease)
during the year
attributable to:
Revisions of previous
estimates............. (103.8)(1) (1.0)(1) 6.5 .1 43.0 -- 143.5 .5
Extensions, discoveries
and other additions... 123.7 15.1 90.3 3.6 73.8 .2 409.6 1.2
Litigation settlement
...................... -- -- -- -- 9.5 -- -- --
Sales of reserves........ (525.8) (3.3) (204.9) (.4) (42.9) -- -- --
Purchase of reserves..... -- -- 11.3 .1 -- -- -- --
Production............... (65.1) (.6) (122.6) (.6) (66.9) (.3) (147.9) (.6)
------ ---- ------ ---- ------- --- ------- ---
End of year.............. 348.7 15.9 919.7 5.7 1,139.1 2.9 1,122.6 3.0
====== ==== ====== ==== ======= === ======= ===
Proved developed reserves:
Beginning of year........ 381.5 2.4 425.3 .9 476.6 1.1 442.2 1.1
End of year.............. 134.3 4.2 381.5 2.4 425.3 .9 476.6 1.1
</TABLE>
- ---------------
(1) Revisions to estimates of proved reserves for the year ended January 31,
1998 are primarily attributable to a reduction in proved undeveloped
reserves in the Cuba Libre, La Grulla and Bob West North fields.
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 1998 or
later years and the risks inherent in reserve
81
<PAGE> 83
TRANSAMERICAN ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
---------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
--------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Future cash inflows.............. $ 898,257 $3,051,397 $2,269,585 $1,591,011
Future production costs.......... (154,725) (506,882) (427,482) (316,055)
Future development costs......... (198,180) (459,326) (582,798) (461,471)
Future income taxes.............. -- (563,812) (310,445) (196,942)
--------- ---------- ---------- ----------
Future net cash flows............ 545,352 1,521,377 948,860 616,543
Annual discount (10%) for
estimated timing of cash
flows.......................... (149,679) (464,121) (340,002) (201,479)
--------- ---------- ---------- ----------
Standardized measure of
discounted future net cash
flows.......................... $ 395,673 $1,057,256 $ 608,858 $ 415,064
========= ========== ========== ==========
</TABLE>
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Beginning of year................ $1,057,256 $ 608,858 $ 415,064 $ 395,574
Revisions:
Quantity estimates and
production rates............ (215,564) 13,903 31,712 122,771
Prices, net of lifting costs... (348,781) 665,054 331,936 (155,257)
Estimated future development
costs....................... (33,033) (75,622) (128,584) (13,631)
Additions, extensions,
discoveries and improved
recovery....................... 238,403 209,932 47,026 172,365
Net sales of production.......... (124,498) (262,066) (92,139) (198,829)
Development costs incurred....... 119,944 156,430 115,812 49,873
Accretion of discount............ 144,908 80,806 27,382 54,439
Net changes in income taxes...... 391,812 (192,608) (66,622) (16,722)
Sale of a volumetric production
payment........................ -- (165,949) (77,879) --
Litigation settlement............ -- -- 5,150 4,481
Purchases (sales) of reserves.... (834,775) 18,518 -- --
---------- ---------- --------- ---------
End of year...................... $ 395,673 $1,057,256 $ 608,858 $ 415,064
========== ========== ========= =========
</TABLE>
Year-end wellhead prices received by TransTexas from sales of natural gas
including margins from natural gas liquids, were $1.96, $3.17, $1.95 and $1.37
per Mcf for 1998, 1997, 1996 and 1995, respectively. Year-end condensate prices
were $13.54, $23.99, $18.34 and $16.27 per barrel for 1998, 1997, 1996 and 1995,
respectively.
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<PAGE> 84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
John R. Stanley............... Chairman of the Board and Chief Executive Officer 59
Edwin B. Donahue.............. Vice President, Chief Financial Officer and Secretary 47
Arnold H. Brackenridge........ President and Chief Operating Officer of TransTexas 65
R. Glenn McGinnis............. Vice President of Manufacturing of TARC 49
John R. Blinn................. Director 54
Donald B. Henderson........... Director 48
James V. Langston............. Director 74
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 21 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.
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. From 1972 to 1978, Mr. Henderson was a member of the
Texas House of Representatives. Mr. Henderson was a member of the Texas Senate
from 1982. Mr. Henderson served as a director of TransAmerican from 1985 until
his resignation in February 1995. In April 1998, Mr. Henderson was charged with
intoxication assault in connection with a traffic accident. Mr. Henderson has
pleaded innocent and intends to vigorously defend these charges.
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<PAGE> 85
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 served as a director of TransAmerican from 1986 until his
resignation in February 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. He also serves on the board of Group Maintenance America Corp. 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. From 1985 to 1995, Mr. McDade served as a director and
trustee of eleven registered investment companies 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.
DIRECTOR COMPENSATION
Each director other than John R. Stanley receives an annual director's fee
of $75,000 plus $750 for each board meeting attended.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid for the periods
indicated to the Company's Chief Executive Officer and all other executive
officers of the Company whose annual salary exceeded $100,000 for the fiscal
year ended January 31, 1998.
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)............................. 1998 $400,483 $ -- $4,346
Chief Executive Officer of the Company, 1997 397,117 -- 5,170
TransTexas and TARC 1996* 175,001 -- 807
1995 369,521 -- 4,500
Arnold H. Brackenridge(b)...................... 1998 $326,538 $336,089(c) $8,479
President and Chief Operating Officer 1997 209,411 85,327(d) 2,742
of TransTexas 1996* 137,500 -- 288
1995 221,154 -- 1,027
Edwin B. Donahue(b)............................ 1998 $200,000 $213,885(c) $4,519
Vice President, Chief Financial Officer and 1997 129,987 85,397(d) 4,731
Secretary of the Company and TransTexas; 1996* 90,385 1,110
Vice President and Secretary of TARC 1995 149,423 4,553
Glenn McGinnis(e).............................. 1998 $235,038 $ -- $ 950
Vice President of Manufacturing of TARC 1997 233,654 -- 727
1996* 116,937 -- --
1995 9,904 -- --
</TABLE>
84
<PAGE> 86
- ---------------
* Six months ended January 31, 1996 ("Transition Period")
(a) Reflects amounts contributed under the Company's Savings Plan. Certain of
the executive officers receive personal benefits in addition to salary and
cash bonuses. The aggregate amount of such personal benefits, however, does
not exceed the lesser of $50,000 or 10% of the total of the annual salary
and bonus reported for the named executive officer and accordingly, such
amounts have been excluded from the table.
(b) Compensated by TransTexas.
(c) These bonuses were paid in fiscal 1998 for services rendered in fiscal
1997.
(d) These bonuses were paid in fiscal 1997 for services rendered during the
Transition Period.
(e) Compensated by TARC. Mr. McGinnis joined TARC in July 1995.
EMPLOYMENT AGREEMENTS
In August 1996, the Company and Mr. Brackenridge entered into a one-year
employment agreement which provided for an annual salary of $295,000. In
December 1997, the Company and Mr. Brackenridge entered into a new employment
agreement which provides for an annual salary of $500,000 and guaranteed annual
bonus of $250,000. The agreement has an initial term of one year and is
renewable on an annual basis for subsequent one-year terms. If the Company
terminates Mr. Brackenridge's employment other than for cause, or Mr.
Brackenridge terminates his employment for cause, prior to the end of the
initial term of the agreement, the Company shall pay Mr. Brackenridge his salary
for the remaining term of the agreement plus an additional six months' salary.
If the Company terminates Mr. Brackenridge's employment other than for cause, or
Mr. Brackenridge terminates his employment for cause, prior to the end of any
subsequent term, the Company shall pay Mr. Brackenridge his salary to the date
of termination plus an additional six months' salary.
SAVINGS PLAN
TransAmerican maintains a long-term savings plan (the "Savings Plan") in
which eligible employees of TransTexas and TARC 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 1998, this limit is $10,000. 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
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<PAGE> 87
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 TransAmerican. As
of January 31, 1998, approximately 1,550 employees of TransTexas and TARC were
eligible to participate in the Savings Plan, including Messrs. Stanley,
Brackenridge, Donahue, Bianchi and McGinnis.
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. Blackburn & Henderson, a law firm of which Mr. Henderson is a
partner, provides legal and other services to TransAmerican and its affiliates
for an annual fee of $96,000 plus expenses. The TEC Notes Indenture prohibits
TEC and its subsidiaries from paying compensation to Mr. Stanley in excess of
$1.0 million per year, in the aggregate, from TEC and TransTexas and, following
completion of Phase II, $1.0 million per year from TARC. See "Certain
Relationships and Related Transactions."
ITEM 12. 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 January
31, 1998, there were 9,000 shares of common stock outstanding and no shares of
preferred stock outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From August 1993 to June 1997, TransTexas 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. The fee to TARC and TEC for
general commercial legal services and certain accounting services (including
payroll, tax, and treasury services) was $26,000 per month. At TransAmerican's
request, TransTexas, at its election, 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 and for allocated
expenses paid by TransTexas on behalf of TARC. TransAmerican will pay to
TransTexas approximately $20,000 per month for such services. TEC and its
subsidiaries will pay $2.5 million in the aggregate per year to TransAmerican
for advisory services and benefits provided by TransAmerican. Pursuant to these
agreements, the Company has incurred $1.6 million in service agreement expenses
and has recognized approximately $0.2 million in service agreement revenues
during the year ended January 31, 1998. As of January 31, 1998, $1.2 million and
$1.6 million was payable to TransTexas and TransAmerican, respectively, pursuant
to the services agreement. As of January 31, 1998, TransTexas' receivable from
TARC and TransAmerican for such services was $1.4 million.
In December 1994, TransTexas entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $11.7
million, $21.4 million, $11.1 million, $4.4 million and $14.8 million for the
years ended January 31, 1997 and 1996, the six months ended January 31, 1996 and
1995 and the year ended July 31, 1995, respectively. TransAmerican did not
purchase any gas from TransTexas during the year ended January 31, 1998. 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
86
<PAGE> 88
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. The purchase price was $3.9 million greater than
TDOC's basis in the properties. The properties were recorded in TransTexas'
financial statements at carryover basis and the $3.9 million was classified as a
reduction of retained earnings.
In October 1997, Mr. Stanley guaranteed TransTexas' $40 million line of
credit with BNY Financial Corporation.
In July 1996, TransAmerican executed a note payable to TransTexas
Exploration Corporation ("TTEX") in the original principal amount of $25 million
maturing on July 31, 1998. Advances by TTEX to TransAmerican under the note bore
interest at a rate of 15% per annum, payable quarterly. This note was repaid on
June 13, 1997.
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.
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 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 was recorded as a contra equity account due to uncertainties
regarding the repayment terms for such receivables. TransTexas agreed to defer
any interest payments due from TransAmerican until 1998. As of 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.
In January 1997, an affiliate of TransTexas contributed all of the
outstanding common stock of Signal Capital Holdings Corporation ("SCHC"), with a
book value of $6 million, to TransTexas. In the same month, TransTexas
contributed the stock of SCHC to TTC.
TransTexas sells natural gas to TARC under an interruptible long-term sales
contract. Revenues from TARC under this contract totaled approximately $1.1
million , $2.7 million and $2.4 million, respectively, for the years ended
January 31, 1998, 1997 and 1996, $2.2 million and $2.3 million, respectively,
for the six months ended January 31, 1996 and 1995, and $2.5 million for the
year ended July 31, 1995. The amount payable to TransTexas for natural gas
purchases at January 31, 1997 was $2.7 million.
Pursuant to the stock transfer agreement dated February 23, 1995 (the
"Stock Transfer Agreement") among TransAmerican, TEC and TARC, TransAmerican
contributed to the capital of TEC (the "Stock Transfer") (i) all of the
outstanding capital stock of TARC, and (ii) 55 million shares of common stock of
TransTexas. TEC subsequently contributed 15 million of its shares of TransTexas
common stock to TARC.
Prior to the sale of the TARC Notes, TARC participated in TransAmerican's
centralized cash management program. Funds required by TARC for daily operations
and capital expenditures were advanced by TransAmerican. In October 1994,
TransAmerican sold 5.25 million shares of TransTexas common stock. TransAmerican
advanced approximately $50 million of the proceeds from these stock sales to
TARC, of which approximately $20 million was used by TARC to repay a portion of
the intercompany debt owed to TransAmerican, and the remaining $30 million of
the net proceeds was used for working capital and general corporate purposes.
TARC used approximately $30 million of the net proceeds of the sale of the TARC
Notes to repay additional intercompany debt to TransAmerican. TransAmerican
contributed to the capital of TARC (through TEC) all but $10 million of the
remainder of TARC's intercompany debt owed to TransAmerican.
87
<PAGE> 89
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.
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.
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. TransTexas charges TARC approximately $61,000 in rent
annually, of which approximately $117,000 was payable to TransTexas at January
31, 1998.
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"). As of January 31, 1997, TARC
had approximately $44.4 million outstanding under 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% and which matures on July 31,
2002. All amounts outstanding under the TransAmerican Notes were repaid on June
13, 1997.
Southeast Contractors, a subsidiary of TransAmerican, provides construction
personnel to TARC in connection with the Capital Improvement Program. These
construction workers are temporary employees, and the number and composition of
the workforce will vary throughout the Capital Improvement Program. Southeast
Contractors charges TARC for the direct costs it incurs (which consist solely of
employee payroll and benefits) plus administrative costs and fees of up to $2.0
million per year. Total labor costs charged by Southeast Contractors for the
years ended January 31, 1998 and 1997, the six months ended January 31, 1996 and
the year ended July 31, 1995 were $50.7 million, $14.1 million, $20.2 million
and $15.5 million, respectively, of which $5.3 million and $1.8 million was
payable at January 31, 1998 and 1997, respectively.
In July and September 1997, TEC advanced an aggregate of $46 million to
TARC. 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 through December 15, 1997. Thereafter, the
amount of fixed interest payable to TEC of $5.7 million per year will be
proportioned semi-annually between TARC and TransTexas based on the average
outstanding balance of TARC's note to TEC and the average outstanding balance of
all notes between TransTexas and TEC. As of January 31, 1998, the principal
amount payable by TARC to TEC pursuant to the advances was $15 million. During
the year ended January 31, 1998, TARC recognized $3.1 million in interest
expense pursuant to the advances of which approximately $0.2 million was payable
to TEC at January 31, 1998. Included in the $3.1 million of interest expense is
approximately $0.3 million paid to TEC for advances made to TransTexas during
fiscal 1998.
During the year ended January 31, 1998, TEC contributed $13.5 million to
TARC for general corporate purposes pursuant to the TARC Disbursement Agreement.
On December 30, 1997, TEC and TARC entered into an expense reimbursement
agreement pursuant to which TARC will reimburse TEC for certain administrative,
legal and accounting expenses and directors fees and will also reimburse TEC for
other expenses in an amount not to exceed $200,000 per year. Since December 30,
1997, no such expenses were reimbursed to TEC.
Blackburn & Henderson, a law firm of which Mr. Henderson, a director of
TARC and TEC, is a partner, provides legal and other services to TransAmerican
and its affiliates for an annual fee of $96,000 plus expenses.
88
<PAGE> 90
TNGC Holdings Corporation, TransAmerican, and 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 consummated in June 1997 to allocate to TransAmerican, as among the
parties, any tax liability associated with the Lobo Sale.
89
<PAGE> 91
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
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PAGE
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(a) Financial Statements, Schedules and Exhibits
(1) Report of Independent Accountants........................... 40
Consolidated Balance Sheet.................................. 41
Consolidated Statement of Operations........................ 42
Consolidated Statement of Stockholder's Equity (Deficit).... 43
Consolidated Statement of Cash Flows........................ 44
Notes to Consolidated Financial Statements.................. 45
(2) Report of Independent Accountants........................... 98
Schedule II -- Valuation and Qualifying Accounts............ 99
(3) Exhibits
3.1 -- Certificate of Incorporation, as amended (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 (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 (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 (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
(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 (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 (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 (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
(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>
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<PAGE> 92
<TABLE>
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4.4 -- Security Agreement dated as of February 23, 1995, from
TARC to First Fidelity Bank, National Association, as
Trustee (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 (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
(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 (filed as
an exhibit to the Company's and TARC's Current Report on
Form 8-K dated March 14, 1995, and incorporated herein by
reference).
4.8 -- First Supplemental Indenture dated as of February 24,
1997 among TARC, TEC and First Union National Bank, f/k/a
First Fidelity Bank, N.A. (filed as an exhibit to TARC's
Annual Report on Form 10-K for the year ended January 31,
1997, and incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (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. (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. (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. (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 (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 (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
(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 (filed
as an exhibit the Company's current report on Form 8-K
dated June 13, 1997, and incorporated herein by
reference).
</TABLE>
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<PAGE> 93
<TABLE>
<C> <S>
4.17 -- Loan Agreement dated June 13, 1997 between TransTexas and
the Company (filed as an exhibit to the Company's current
report on Form 8-K dated June 13, 1997, and incorporated
herein by reference).
4.18 -- Loan Agreement dated June 13, 1997 between TARC and the
Company (filed as an exhibit to the Company's current
report on Form 8-K dated June 13, 1997, and incorporated
herein by reference).
4.19 -- Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of the Company (filed as an exhibit
to the Company's current report on Form 8-K dated June
13, 1997, and incorporated herein by reference).
4.20 -- Security and Pledge Agreement dated June 13, 1997 by TARC
in favor of the Company (filed as an exhibit to the
Company's current report on Form 8-K dated June 13, 1997,
and incorporated herein by reference).
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 (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 (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 (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 (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 (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 (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).
*4.27 -- First Supplemental Indenture dated December 30, 1997
between TEC and Firstar Bank of Minnesota.
*4.28 -- First Amendment to Registration Rights Agreement dated
December 30, 1997.
4.29 -- First Amendment to Loan Agreement dated December 30, 1997
between TransTexas and TEC (filed as an exhibit to
TransTexas' annual report on Form 10-K for the year ended
January 31, 1998, and incorporated herein by reference).
4.30 -- First Amendment to Disbursement Agreement dated December
30, 1997 between TransTexas, TEC and First Bank of
Minnesota, as disbursement agent and Trustee (filed as an
exhibit to TransTexas' annual report on Form 10-K for the
year ended January 31, 1998, and incorporated herein by
reference).
4.31 -- First Amendment dated December 30, 1997 to Loan Agreement
between TARC and TEC (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
</TABLE>
92
<PAGE> 94
<TABLE>
<C> <S>
4.32 -- First Amendment dated December 30, 1997 to Disbursement
Agreement among TARC, TEC, Firstar Bank of Minnesota,
N.A. and Baker & O'Brien (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.33 -- Indenture dated December 30, 1997 between TARC and First
Union National Bank, as trustee, with respect to the $200
million Series A Senior Subordinated Notes, including the
form of Note as an exhibit (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.34 -- Warrant Agreement dated December 30, 1997 between TARC
and First Union National Bank, as Warrant Agent, with
respect to 175,000 common stock purchase warrants (the
"December 1997 Warrants"), including the form of warrant
as an exhibit (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.35 -- Registration Rights Agreement dated December 30, 1997
between TARC and the holders of the Series A Senior
Subordinated Notes (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.36 -- Securityholders' and Registration Rights Agreement dated
December 30, 1997 between TARC, Jefferies & Company,
Inc., as the Purchaser, and the holders of the December
1997 Warrants (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.37 -- Third Supplemental Indenture dated January 16, 1998
between TARC, TEC and First Union National Bank (filed as
an exhibit to TARC's annual report on Form 10-K for the
year ended January 31, 1998, and incorporated herein by
reference).
4.38 -- Irrevocable Trust and Security Agreement dated January
16, 1998 between TARC and First Union National Bank
(filed as an exhibit to TARC's annual report on Form 10-K
for the year ended January 31, 1998, and incorporated
herein by reference).
4.39 -- Indenture dated March 16, 1998 between TARC and First
Union National Bank, as trustee, with respect to the $25
million Series C Senior Subordinated Notes, including the
form of Note as an exhibit (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.40 -- Warrant Agreement dated March 16, 1998 between TARC and
First Union National Bank, as Warrant Agent, with respect
to 25,000 common stock purchase warrants (the "March 1998
Warrants"), including the form of warrant as an exhibit
(filed as an exhibit to TARC's annual report on Form 10-K
for the year ended January 31, 1998, and incorporated
herein by reference).
4.41 -- Registration Rights Agreement dated March 16, 1998
between TARC and the holders of the Series C Senior
Subordinated Notes (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.42 -- Securityholders' and Registration Rights Agreement dated
March 16, 1998 between TARC, Jefferies & Company, Inc.,
as the Purchaser, and the holders of the March 1998
Warrants (filed as an exhibit to TARC's annual report on
Form 10-K for the year ended January 31, 1998, and
incorporated herein by reference).
</TABLE>
93
<PAGE> 95
<TABLE>
<C> <S>
4.43 -- Note Purchase Agreement dated December 10, 1997 between
TARC and Merrill Lynch Corporate Bond Fund, Inc. -- High
Income Portfolio (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
10.1 -- Services Agreement dated August 24, 1993, by and between
TransTexas and TransAmerican (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 (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 (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 (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
(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 (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
(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 (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 (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 (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 (filed as an
exhibit to TransTexas' Quarterly Report on Form 10-Q for
the quarter ended October 31, 1995, and incorporated
herein by reference).
</TABLE>
94
<PAGE> 96
<TABLE>
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10.12 -- Processing Agreement dated March 20, 1996 by and between
TARC and J. Aron & Company (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 (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 (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 (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 (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. (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
(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 (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 (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. (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.
(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
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended April 30, 1996, and incorporated herein by
reference).
</TABLE>
95
<PAGE> 97
<TABLE>
<C> <S>
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 (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
(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 (filed as an
exhibit to the Company's registration statement on Form
S-4 (333-37723), and incorporated herein by reference).
10.28 -- Services Agreement dated June 13, 1997 among TNGC
Holdings Corporation, TransAmerican, TEC, TARC,
TransTexas and TTXD (filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the quarter ended July
31, 1997, and incorporated herein by reference).
10.29 -- Amendment No. 3 to Tax Allocation Agreement dated May 29,
1997 (filed as an exhibit to TransTexas' Quarterly Report
on Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.30 -- Amendment No. 4 to Tax Allocation Agreement dated June
13, 1997 (filed as an exhibit to TransTexas' Quarterly
Report on Form 10-Q for the quarter ended July 31, 1997,
and incorporated herein by reference).
10.31 -- Asset Purchase Agreement dated September 19, 1997 between
GATX Terminals Corporation and TARC (filed as an exhibit
to TARC's 10-Q for the quarter ended October 31, 1997,
and incorporated herein by reference).
10.32 -- Second Amended and Restated Accounts Receivable
Management Agreement dated October 14, 1997 between
TransTexas and BNY Financial Corp. (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended October
31, 1997, and incorporated herein by reference).
10.33 -- Employment Agreement dated December 1, 1997 between
TransTexas and Arnold Brackenridge (filed as an exhibit
to TransTexas' annual report on Form 10-K for the year
ended January 31, 1998, and incorporated herein by
reference).
10.34 -- Employment Agreement Settlement dated April 28, 1998
between TransTexas and Richard Bianchi (filed as an
exhibit to TransTexas' annual report on Form 10-K for the
year ended January 31, 1998, and incorporated herein by
reference).
10.35 -- Severance Agreement dated November 21, 1997 between
TransTexas and Lee Muncy (filed as an exhibit to
TransTexas' annual report on Form 10-K for the year ended
January 31, 1998, and incorporated herein by reference).
10.36 -- Purchase Agreement dated February 23, 1998 between
TransTexas and TCW (filed as an exhibit to TransTexas'
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
10.37 -- Production Payment Conveyance dated February 23, 1998
between TransTexas and TCW (filed as an exhibit to
TransTexas' annual report on Form 10-K for the year ended
January 31, 1998, and incorporated herein by reference).
21.1 -- Schedule of Subsidiaries (filed as an exhibit to TARC's
and TEC's Registration Statement on Form S-1 (No.
33-82200), and incorporated herein by reference).
*23.1 -- Consent of Netherland, Sewell & Associates, Inc.
*27.1 -- Financial Data Schedule.
</TABLE>
96
<PAGE> 98
<TABLE>
<C> <S>
99.1 -- Financial statements of TransTexas dated January 31, 1998
(filed as part of TransTexas' Annual Report on Form 10-K
for the year ended January 31, 1998, and incorporated
herein by reference).
99.2 -- Financial statements of TARC dated January 31, 1998
(filed as part of TARC's Annual Report on Form 10-K for
the quarter ended January 31, 1998, and incorporated
herein by reference).
</TABLE>
- ---------------
*filed herewith
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the three
months ended January 31, 1998.
97
<PAGE> 99
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on May 4, 1998.
TRANSAMERICAN ENERGY CORPORATION
By: /s/ JOHN R. STANLEY
------------------------------------
John R. Stanley, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on May 4, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ JOHN R. STANLEY Director, Chairman of the Board and Chief Executive
- --------------------------------------------- Officer
John R. Stanley
(Principal Executive Officer)
/s/ THOMAS B. MCDADE Director
- ---------------------------------------------
Thomas B. McDade
/s/ JAMES V. LANGSTON Director
- ---------------------------------------------
James V. Langston
Director
- ---------------------------------------------
John R. Blinn
/s/ DONALD B. HENDERSON Director
- ---------------------------------------------
Donald B. Henderson
/s/ EDWIN B. DONAHUE Vice President, Chief Financial Officer and
- --------------------------------------------- Secretary (Principal Financial and Accounting
Edwin B. Donahue Officer)
</TABLE>
98
<PAGE> 100
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Board of Directors
TransAmerican Energy Corporation:
Our report on the consolidated financial statements of TransAmerican Energy
Corporation is included on page 40 of this Annual Report on Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 89 of this
Annual Report on Form 10-K.
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
April 30, 1998
99
<PAGE> 101
SCHEDULE II
TRANSAMERICAN ENERGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE
AT BALANCE AT
BEGINNING ADDITIONS OTHER END
DESCRIPTION OF PERIOD AT COSTS RETIREMENTS CHANGES OF PERIOD
----------- --------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended January 31, 1998:
Valuation allowance --
long-term receivables.................... $ -- $ -- $ -- $ -- $ --
====== ==== ====== ==== ======
Year Ended January 31, 1997:
Valuation allowance --
long-term receivables.................... $1,230 $516 $1,746 $ -- $ --
====== ==== ====== ==== ======
Transition Period ended January 31, 1996:
Valuation allowance --
long-term receivables.................... $ 952 $278 $ -- $ -- $1,230
====== ==== ====== ==== ======
Year ended July 31, 1995:
Valuation allowance --
long-term receivables.................... $ 531 $421 $ -- $ -- $ 952
====== ==== ====== ==== ======
</TABLE>
100
<PAGE> 102
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1 -- Certificate of Incorporation, as amended (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 (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 (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 (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
(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 (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 (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 (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
(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 (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 (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
(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> 103
<TABLE>
<C> <S>
4.7 -- Registration Rights Agreement dated as of February 23,
1995, between TransTexas, the Company, and TARC (filed as
an exhibit to the Company's and TARC's Current Report on
Form 8-K dated March 14, 1995, and incorporated herein by
reference).
4.8 -- First Supplemental Indenture dated as of February 24,
1997 among TARC, TEC and First Union National Bank, f/k/a
First Fidelity Bank, N.A. (filed as an exhibit to TARC's
Annual Report on Form 10-K for the year ended January 31,
1997, and incorporated herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican Natural Gas Corporation, TransTexas Gas
Corporation and Halliburton Company (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. (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. (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. (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 (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 (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
(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 (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 (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 (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 (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 (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> 104
<TABLE>
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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 (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 (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 (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 (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 (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 (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).
*4.27 -- First Supplemental Indenture dated December 30, 1997
between TEC and Firstar Bank of Minnesota.
*4.28 -- First Amendment to Registration Rights Agreement dated
December 30, 1997.
4.29 -- First Amendment to Loan Agreement dated December 30, 1997
between TransTexas and TEC (filed as an exhibit to
TransTexas' annual report on Form 10-K for the year ended
January 31, 1998, and incorporated herein by reference).
4.30 -- First Amendment to Disbursement Agreement dated December
30, 1997 between TransTexas, TEC and First Bank of
Minnesota, as disbursement agent and Trustee (filed as an
exhibit to TransTexas' annual report on Form 10-K for the
year ended January 31, 1998, and incorporated herein by
reference).
4.31 -- First Amendment dated December 30, 1997 to Loan Agreement
between TARC and TEC (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.32 -- First Amendment dated December 30, 1997 to Disbursement
Agreement among TARC, TEC, Firstar Bank of Minnesota,
N.A. and Baker & O'Brien (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.33 -- Indenture dated December 30, 1997 between TARC and First
Union National Bank, as trustee, with respect to the $200
million Series A Senior Subordinated Notes, including the
form of Note as an exhibit (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.34 -- Warrant Agreement dated December 30, 1997 between TARC
and First Union National Bank, as Warrant Agent, with
respect to 175,000 common stock purchase warrants (the
"December 1997 Warrants"), including the form of warrant
as an exhibit (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
</TABLE>
<PAGE> 105
<TABLE>
<C> <S>
4.35 -- Registration Rights Agreement dated December 30, 1997
between TARC and the holders of the Series A Senior
Subordinated Notes (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.36 -- Securityholders' and Registration Rights Agreement dated
December 30, 1997 between TARC, Jefferies & Company,
Inc., as the Purchaser, and the holders of the December
1997 Warrants (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.37 -- Third Supplemental Indenture dated January 16, 1998
between TARC, TEC and First Union National Bank (filed as
an exhibit to TARC's annual report on Form 10-K for the
year ended January 31, 1998, and incorporated herein by
reference).
4.38 -- Irrevocable Trust and Security Agreement dated January
16, 1998 between TARC and First Union National Bank
(filed as an exhibit to TARC's annual report on Form 10-K
for the year ended January 31, 1998, and incorporated
herein by reference).
4.39 -- Indenture dated March 16, 1998 between TARC and First
Union National Bank, as trustee, with respect to the $25
million Series C Senior Subordinated Notes, including the
form of Note as an exhibit (filed as an exhibit to TARC's
annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
4.40 -- Warrant Agreement dated March 16, 1998 between TARC and
First Union National Bank, as Warrant Agent, with respect
to 25,000 common stock purchase warrants (the "March 1998
Warrants"), including the form of warrant as an exhibit
(filed as an exhibit to TARC's annual report on Form 10-K
for the year ended January 31, 1998, and incorporated
herein by reference).
4.41 -- Registration Rights Agreement dated March 16, 1998
between TARC and the holders of the Series C Senior
Subordinated Notes (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
4.42 -- Securityholders' and Registration Rights Agreement dated
March 16, 1998 between TARC, Jefferies & Company, Inc.,
as the Purchaser, and the holders of the March 1998
Warrants (filed as an exhibit to TARC's annual report on
Form 10-K for the year ended January 31, 1998, and
incorporated herein by reference).
4.43 -- Note Purchase Agreement dated December 10, 1997 between
TARC and Merrill Lynch Corporate Bond Fund, Inc. -- High
Income Portfolio (filed as an exhibit to TARC's annual
report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
10.1 -- Services Agreement dated August 24, 1993, by and between
TransTexas and TransAmerican (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 (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 (filed as an exhibit to
TARC's Registration Statement on Form S-1 (33-82200), and
incorporated herein by reference).
</TABLE>
<PAGE> 106
<TABLE>
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10.4 -- Bank Group Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, and the Bank Group (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
(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 (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
(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 (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 (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 (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 (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 (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 (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 (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 (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 (filed as an
exhibit to the Company's and TEC's Registration Statement
on Form S-1 (33-82200), and incorporated herein by
reference).
</TABLE>
<PAGE> 107
<TABLE>
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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. (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
(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 (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 (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. (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.
(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
(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 (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
(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 (filed as an
exhibit to the Company's registration statement on Form
S-4 (333-37723), and incorporated herein by reference).
10.28 -- Services Agreement dated June 13, 1997 among TNGC
Holdings Corporation, TransAmerican, TEC, TARC,
TransTexas and TTXD (filed as an exhibit to TransTexas'
Quarterly Report on Form 10-Q for the quarter ended July
31, 1997, and incorporated herein by reference).
10.29 -- Amendment No. 3 to Tax Allocation Agreement dated May 29,
1997 (filed as an exhibit to TransTexas' Quarterly Report
on Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
</TABLE>
<PAGE> 108
<TABLE>
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10.30 -- Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (filed as an exhibit to
TransTexas' Quarterly Report on Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.31 -- Asset Purchase Agreement dated September 19, 1997 between GATX Terminals Corporation
and TARC (filed as an exhibit to TARC's 10-Q for the quarter ended October 31, 1997,
and incorporated herein by reference).
10.32 -- Second Amended and Restated Accounts Receivable Management Agreement dated October 14,
1997 between TransTexas and BNY Financial Corp. (filed as an exhibit to TransTexas'
Form 10-Q for the quarter ended October 31, 1997, and incorporated herein by
reference).
10.33 -- Employment Agreement dated December 1, 1997 between TransTexas and Arnold Brackenridge
(filed as an exhibit to TransTexas' annual report on Form 10-K for the year ended
January 31, 1998, and incorporated herein by reference).
10.34 -- Employment Agreement Settlement dated April 28, 1998 between TransTexas and Richard
Bianchi (filed as an exhibit to TransTexas' annual report on Form 10-K for the year
ended January 31, 1998, and incorporated herein by reference).
10.35 -- Severance Agreement dated November 21, 1997 between TransTexas and Lee Muncy (filed as
an exhibit to TransTexas' annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
10.36 -- Purchase Agreement dated February 23, 1998 between TransTexas and TCW (filed as an
exhibit to TransTexas' annual report on Form 10-K for the year ended January 31, 1998,
and incorporated herein by reference).
10.37 -- Production Payment Conveyance dated February 23, 1998 between TransTexas and TCW (filed
as an exhibit to TransTexas' annual report on Form 10-K for the year ended January 31,
1998, and incorporated herein by reference).
21.1 -- Schedule of Subsidiaries (filed as an exhibit to TARC's and TEC's Registration
Statement on Form S-1 (No. 33-82200), and incorporated herein by reference).
*23.1 -- Consent of Netherland, Sewell & Associates, Inc.
*27.1 -- Financial Data Schedule.
99.1 -- Financial statements of TransTexas dated January 31, 1998 (filed as part of TransTexas'
Annual Report on Form 10-K for the year ended January 31, 1998, and incorporated herein
by reference).
99.2 -- Financial statements of TARC dated January 31, 1998 (filed as part of TARC's Annual
Report on Form 10-K for the quarter ended January 31, 1998, and incorporated herein by
reference).
</TABLE>
- ---------------
*filed herewith
<PAGE> 1
EXHIBIT 4.27
- --------------------------------------------------------------------------------
TRANSAMERICAN ENERGY CORPORATION,
as Issuer,
and
FIRSTAR BANK OF MINNESOTA, N.A.,
as Trustee
------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of December 30, 1997
--------------------------
$475,000,000 11 1/2% Senior Secured Notes due 2002
and
$1,130,000,000 13% Senior Secured Discount Notes due 2002
- --------------------------------------------------------------------------------
<PAGE> 2
THIS FIRST SUPPLEMENTAL INDENTURE, effective as of December 30, 1997
(the "Supplemental Indenture"), is made and entered into by and among
TRANSAMERICAN ENERGY CORPORATION, a Delaware corporation (the "Company"), and
FIRSTAR BANK OF MINNESOTA, N.A. (the "Trustee"), under an Indenture dated as of
June 13, 1997, by and between the Company and the Trustee (the "Original
Indenture"). All capitalized terms used in this Supplemental Indenture that are
defined in the Original Indenture, either directly or by reference therein, have
the respective meanings assigned to them therein, except to the extent such
terms are otherwise defined in this Supplemental Indenture or the context
clearly requires otherwise.
WHEREAS, Section 9.2 of the Original Indenture provides, among other
things, that, with the consent of the Holders of not less than a majority in
aggregate Value of then outstanding Notes or, with respect to certain matters,
not less than 66-2/3% in aggregate Value of the Notes at the time outstanding,
the Company, when authorized by Board Resolutions, and the Trustee may amend or
supplement the Original Indenture or the Security Documents or enter into an
indenture supplemental thereto for the purposes of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Original
Indenture or the Security Documents or of modifying in any manner the rights of
the Holders under the Original Indenture or the Notes; and
WHEREAS, the Company has solicited consents from the Holders of the
Notes (the "Consent Solicitation") to amendments (the "Proposed Amendments") to
(i) the Original Indenture; (ii) the Disbursement Agreement; (iii) the
TransTexas Disbursement Agreement; (iv) the Loan Agreement dated June 13, 1997,
by and between the Company and TARC; (v) the Loan Agreement dated June 13, 1997,
by and between the Company and TransTexas; and (vi) the Registration Rights
Agreement dated June 5, 1997 by and among the Company, TransTexas, TARC and
Jefferies & Company, Inc.; and
WHEREAS, the Holders of at least 66-2/3% in aggregate Value of Notes at
the time outstanding have consented to the Proposed Amendments pursuant to the
Consent Solicitation; and
WHEREAS, the Board of Directors of the Company has adopted resolutions
authorizing and approving the Proposed Amendments and the Company and the
Trustee are executing and delivering this Supplemental Indenture in order to
provide for such amendments;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Supplemental
Indenture hereby agree as follows:
<PAGE> 3
ARTICLE I
AMENDMENTS TO ORIGINAL INDENTURE
Section 1.01. Amended Definitions. The following definitions in
Section 1.1 the Original Indenture are hereby amended as follows:
(a) Clause (ix) in the definition of "Permitted Investment" is
hereby amended to read in its entirety as follows:
(ix) Investments and expenditures made in the ordinary
course of business by TransTexas or its Subsidiaries, and of a
nature that is or shall have become customary in, the oil and
gas business as a means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or
transporting oil or gas or providing services with respect to
such activities 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 primarily 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;
(b) Clause (d) in the definition of "Permitted TARC Liens" is
hereby amended to read in its entirety as follows:
(d) easements, servitudes, 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
-2-
<PAGE> 4
TARC Entities including, without limitation, any easement or
servitude granted in connection with the Port Commission Bond
Financing;
(c) Clause (s) in the definition of "Permitted TARC Liens" is
hereby amended to read in its entirety as follows:
(s) Liens on the proceeds of any property that is not
Collateral, on the proceeds of any Debt Incurred in accordance
with the provisions hereof, or on deposit accounts containing
any such proceeds;
(d) The definition of "Permitted TARC Liens" is hereby amended by
deleting the word "and" immediately preceding "(y)" and inserting in
lieu thereof a ";", and by adding the following after clause (y):
; and (z) Liens on any property of TARC and any agreement to
grant such Liens; provided that such Liens may not be granted,
and any agreement to grant such Liens shall not obligate TARC
to grant such liens, until the TARC Intercompany Loan has been
paid in full and has not been refinanced, refunded or replaced
with the proceeds of other Debt ("Other Debt"), which Other
Debt has a lower cost of capital to TARC than the TARC
Intercompany Loan and the principal amount of such Other Debt
(or, if such Other Debt is issued with original issued
discount, the original issue price of such Other Debt) is
equal to or less than the original price of, plus amortization
of the original issue discount on, the TARC Intercompany Loan
at the time of the Incurrence of such Other Debt.
(e) Clause (s) in the definition of "Permitted TransTexas Liens"
is hereby amended to read in its entirety as follows:
(s) Liens on the proceeds of any property that is not
Collateral, on the proceeds of any Debt Incurred in accordance
with the provisions hereof, or on deposit accounts containing
any such proceeds;
(f) The definition of "Port Commission Bond Financing" is hereby
amended to read in its entirety as follows:
"Port Commission Bond Financing" means a financing
transaction involving the following elements: (a) the transfer
(including, without limitation, transfer by sale, lease, lien
or mortgage) of TARC's interest in all or some of the
following assets (together with the granting, at TARC's
discretion, of any easements or servitudes reasonably
necessary to the ownership and operation of such assets by the
transferee) which are under construction in or near TARC's
refinery: (i) the Prospect Road tank farm and other tanks;
(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
-3-
<PAGE> 5
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.
Section 1.02. Section 4.7 of the Original Indenture. Section 4.7(a) of
the Original Indenture is hereby amended to read in its entirety as follows:
(a) The Company shall deliver to the Trustee within 60 days
after the end of each of its fiscal quarters, or 105 days after the end
of a fiscal quarter that is also the end of a fiscal year, an Officers'
Certificate complying with Section 314(a)(4) of the TIA and stating
that a review of its activities and the activities of its Subsidiaries
during the preceding fiscal quarter has been made under the supervision
of the signing Officers with a view to determining whether the Company
and its Subsidiaries have kept, observed, performed and fulfilled its
obligations (excluding those obligations addressed by Section 12.3)
under this Indenture and further stating, as to each such Officer
signing such certificate, regardless of whether the signer knows of any
failure by the Company or any Subsidiary of the Company to comply with
any conditions or covenants in this Indenture, or of the occurrence of
any Default, and, if such signer does know of such a failure to comply
or Default, the certificate shall describe such failure or Default with
particularity.
Section 1.03. Section 4.11 of the Original Indenture. Section 4.11 of
the Original Indenture is hereby amended as follows:
(a) Section 4.11(1)(r) of the Original Indenture is hereby amended to
read in its entirety as follows:
(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 $50,000,000 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 (A) working capital available to the Company and (B) any
cash interest payable on (i) 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.
(b) Section 4.11(2)(g) of the Original Indenture is hereby amended
to read in its entirety as follows:
(g) Any guaranty of Debt permitted by clauses (c), (d), (f)
or (r) 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), (f) or (r) hereof;
-4-
<PAGE> 6
(c) Section 4.11(2)(l) of the Original Indenture is hereby amended
to read in its entirety as follows:
(l) Debt or Attributable Debt Incurred in connection with
the acquisition of tank storage and related facilities in the vicinity
of the refinery or a Sale and Leaseback Transaction with respect
thereto;
(d) Section 4.11(2)(p) of the Original Indenture is hereby amended
to read in its entirety as follows:
(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 $50,000,000 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 (A) working capital available at the Company and (B) any
cash interest payable on (i) 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;
(e) Section 4.11(2)(q) of the Original Indenture is hereby amended
to read in its entirety as follows:
(q) TARC may Incur Debt as an extension, renewal,
replacement, or refunding of any of the Debt permitted to be Incurred
by clauses (e), (1) or (r) hereof, or this clause (q) (such Debt is
collectively referred to as "Pre-Phase I TARC Refinancing Debt"),
provided, that (1) the maximum principal amount of Pre-Phase I TARC
Refinancing Debt (or, if such Pre- Phase I TARC Refinancing Debt is
issued with original issue discount, the original issue price of such
Pre-Phase I TARC Refinancing Debt) permitted under this clause (q)
may not exceed the lesser of (x) the principal amount of the Debt being
extended, renewed, replaced, or refunded plus Refinancing Fees or (y)
if such Debt being extended, renewed, replaced, or refunded was issued
at an original issue discount, the original issue price, plus
amortization of the original issue discount as of the time of the
Incurrence of the Pre-Phase I TARC Refinancing Debt plus Refinancing
Fees, (2) the Pre-Phase I TARC Refinancing Debt has a Weighted Average
Life and a final maturity that is equal to or greater than the Debt
being extended, renewed, replaced, or refunded at the time of such
extension, renewal, replacement, or refunding and (3) the Pre-Phase I
TARC Refinancing Debt shall rank with respect to the Notes and the TARC
Intercompany Loan to an extent no less favorable in respect thereof to
the Holders than the Debt being refinanced; and
(f) Section 4.11(2) of the Original Indenture is hereby amended by
adding the following after clause (q):
(r) Subordinated Debt of TARC with initial proceeds to TARC
not in excess of $200,000,000.
-5-
<PAGE> 7
(g) Section 4.11(3)(v) of the Original Indenture is hereby amended
to read in its entirety as follows:
(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 $50,000,000 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 (A) working capital available to the Company and (B) any
cash interest payable on (i) 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.
(h) Section 4.11(4)(c) of the Original Indenture is hereby amended
to read in its entirety as follows:
(c) Subordinated Debt of TARC with initial proceeds to TARC
not in excess of $200,000,000 in the aggregate, less the aggregate
proceeds received by TARC from the issuance of Subordinated Debt
pursuant to Section 4.11(2)(r) above;
(i) Section 4.11(4)(j) of the Original Indenture is hereby amended
to read in its entirety as follows:
(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, this
clause (j), clause (r) below or Debt permitted to be refinanced
pursuant to clause (2)(q) hereof (such Debt is collectively referred to
as "TARC Refinancing Debt"), 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;
(j) Section 4.11(4)(t) of the Original Indenture is hereby amended
to read in its entirety as follows:
(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 $50,000,000 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,
-6-
<PAGE> 8
that such loan must bear cash interest which, together with (A) working
capital available to the Company and (B) any cash interest payable on
(i) 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.
(k) Section 4.11(5)(d) of the Original Indenture is hereby amended
to read in its entirety as follows:
(d) Subordinated Debt of the Company with initial net
proceeds to the Company not in excess of $50,000,000 in the aggregate.
ARTICLE II
GENERAL PROVISIONS
Section 2.01. Effectiveness of Amendments. This Supplemental Indenture
is effective as of the date first above written.
Section 2.02. Ratification of Indenture. The Original Indenture is in
all respects acknowledged, ratified and confirmed, and shall continue in full
force and effect in accordance with the terms thereof and as supplemented by
this Supplemental Indenture. The Original Indenture and this Supplemental
Indenture, shall be read, taken and construed as one and the same instrument.
Section 2.03. Certificate and Opinion as to Conditions Precedent.
Simultaneously with and as a to the execution of this Supplemental Indenture,
the Company is delivering to the Trustee:
(a) an Officers' Certificate in the form attached hereto
as Exhibit A; and
(b) an Opinion of Counsel covering the matters described in
Exhibit B attached hereto.
Section 2.04. Effect of Headings. The Article and Section headings in
this Supplemental Indenture are for convenience only and shall not affect the
construction of this Supplemental Indenture.
Section 2.05. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK,
AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
Section 2.06. Counterparts. This Supplemental Indenture may be executed
in any number if counterparts, each of which so executed shall be deemed to be
an original, but all such counterparts shall together constitute the same
instrument.
-7-
<PAGE> 9
IN WITNESS WHEREOF, the parties to this Supplemental Indenture have
caused the Supplemental Indenture to be duly executed, and their respective
corporate seals to be hereunto affixed and attached, on and effective as of day
and year first above written.
TRANSAMERICAN ENERGY CORPORATION
Attest: By:
--------------------- ---------------------------------
Tim Moore, Ed Donahue,
Assistant Secretary Vice President, Chief Financial Officer
and Secretary
FIRSTAR BANK OF MINNESOTA, N.A.,
Trustee
By:
---------------------------------
Frank P. Leslie, III,
Vice President
-8-
<PAGE> 1
EXHIBIT 4.28
- --------------------------------------------------------------------------------
TRANSAMERICAN ENERGY CORPORATION
$475,000,000 11 1/2% Senior Secured Notes due 2002
and
$1,130,000,000 13% Senior Secured Discount Notes due 2002
-------------------------------------
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
Dated as of December 30, 1997
-------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
This First Amendment to Registration Rights Agreement (this "First
Amendment") is made as of December 30, 1997, by and among TransAmerican Energy
Corporation, a Delaware corporation ("TEC"), TransTexas Gas Corporation, a
Delaware corporation ("TransTexas"), TransAmerican Refining Corporation, a
Texas corporation ("TARC"), and Jefferies & Company, Inc. (the "Purchaser").
Capitalized terms used but not defined herein shall have the meaning attributed
to them in that certain Registration Rights Agreement, dated as of June 5,
1997, among TEC, TransTexas, TARC, and the Purchaser (the "Registration Rights
Agreement").
WHEREAS, TEC and Firstar Bank of Minnesota, N.A., as Trustee, have
entered into an Indenture dated as of June 13, 1997 (the "Indenture"), pursuant
to which TEC issued (i) $475,000,000 aggregate principal amount of its 11 1/2%
Senior Secured Notes due 2002, Series A, and (ii) $1,130,000,000 aggregate
principal amount of its 13% Senior Secured Discount Notes due 2002, Series A
(collectively, the "Notes"); and
WHEREAS, as an inducement to the Purchaser to enter into the Purchase
Agreement (as defined in the Registration Rights Agreement), TEC, TransTexas
and TARC entered into the Registration Rights Agreement with the Purchaser for
the benefit of the Holders of the Securities; and
WHEREAS, the parties to the Registration Rights Agreement have agreed to
certain amendments to the Registration Rights Agreement as hereinafter set
forth (the "Proposed Amendments"); and
WHEREAS, in accordance with the provisions of Section 11(c) of the
Registration Rights Agreement, the written consent of the of Holders of at
least a majority of the then outstanding aggregate principal amount of
Registrable Securities to the adoption of the Proposed Amendments have been
obtained;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this First
Amendment hereby agree as follows:
ARTICLE I
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
Section 1.01. Section 4 of the Registration Rights Agreement. Section
4(a)(iii) of the Registration Rights Agreement is hereby amended to read in its
entirety as follows:
(iii) if the Company has not accepted for exchange all Notes
validly tendered in accordance with the terms of the Exchange Offer
within 30 business days after the date on which an Exchange Offer
Registration Statement is declared effective by the SEC; or
ARTICLE II
MISCELLANEOUS
Section 2.01. Ratification and Confirmation. As amended and modified
by this First Amendment, the terms and provisions of the Registration Rights
Agreement are hereby ratified and confirmed and shall continue in full force
and effect.
<PAGE> 3
Section 2.02. Reference to Registration Rights Agreement. The
Registration Rights Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms of
the Registration Rights Agreement, are hereby amended so that any reference
therein to the Registration Rights Agreement shall mean a reference to the
Registration Rights Agreement as amended hereby.
Section 2.03. Counterparts. This First Amendment may be executed in
one or more counterparts, each of which when executed shall be deemed to be an
original, but all of which when taken together shall constitute one and the
same instrument.
Section 2.04. Headings. The headings, captions and arrangements used
in this First Amendment are for convenience only and shall not affect the
interpretation of this First Amendment.
Section 2.05. Governing Law. THIS FIRST AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date of first written above.
TRANSAMERICAN ENERGY CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
TRANSTEXAS GAS CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
TRANSAMERICAN REFINING CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
2
<PAGE> 4
Accepted and Agreed to:
JEFFERIES & COMPANY, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
3
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We consent to the references to our Reserve Report prepared for
TransTexas Gas Corporation, and to the use of our name in TransAmerican Energy
Corporation's Annual Report on Form 10-K for the fiscal year ended January 31,
1998 in the form and context in which they appear.
Netherland, Sewell & Associates, Inc.
By: /s/ Danny D. Simmons
-------------------------------------
Houston, Texas
May 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TRANSAMERICAN ENERGY CORPORATION AS OF AND
FOR THE YEAR ENDED JANUARY 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 277,899
<SECURITIES> 9,114
<RECEIVABLES> 17,926
<ALLOWANCES> 0
<INVENTORY> 16,437
<CURRENT-ASSETS> 333,441
<PP&E> 2,350,060
<DEPRECIATION> 741,952
<TOTAL-ASSETS> 2,131,439
<CURRENT-LIABILITIES> 160,156
<BONDS> 1,769,606
0
0
<COMMON> 0
<OTHER-SE> 90,402
<TOTAL-LIABILITY-AND-EQUITY> 2,131,439
<SALES> 164,172
<TOTAL-REVENUES> 725,733
<CGS> 0
<TOTAL-COSTS> 242,890
<OTHER-EXPENSES> (21,957)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,233
<INCOME-PRETAX> 391,567
<INCOME-TAX> 161,669
<INCOME-CONTINUING> 194,736
<DISCONTINUED> 0
<EXTRAORDINARY> 156,796
<CHANGES> 0
<NET-INCOME> 37,940
<EPS-PRIMARY> 4,213
<EPS-DILUTED> 4,213
</TABLE>
