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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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COMMISSION FILE NUMBER 1-12204
TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 987-8600
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
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 [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant on April 30, 1998, was $126,711,530.
The number of shares of common stock of the registrant outstanding on April
30, 1998, was 57,515,566.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) are
incorporated by reference from the registrant's definitive proxy statement to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this Form 10-K in connection with the registrant's 1998 annual
meeting of stockholders.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 23
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 55
Item 13. Certain Relationships and Related Transactions.............. 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 55
Signatures............................................................. 62
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PART I
ITEM 1. BUSINESS
GENERAL
TransTexas Gas Corporation (the "Company" or "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 Natural Gas Corporation ("TransAmerican"). TransTexas is a
subsidiary of TransAmerican Energy Corporation ("TEC"), which is wholly owned by
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' 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.
TransTexas' principal executive office is located at 1300 North Sam Houston
Parkway East, Suite 310, Houston, Texas 77032, and its telephone number at that
address is (281) 987-8600.
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.
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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 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
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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
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.
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TransTexas had a working interest in the following numbers of wells that were
drilled during the periods indicated:
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED YEAR ENDED
------------------------- JANUARY 31, JULY 31,
1998* 1997 1996 1995
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GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
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:
SIX MONTHS
ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------ --------------- JULY 31,
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.
(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
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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 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.
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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 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
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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 13 of Notes to Consolidated Financial Statements for a discussion
of environmental matters affecting TransTexas.
ITEM 2. PROPERTIES
ACREAGE
The following table sets forth TransTexas' total developed and undeveloped
acreage and productive wells as of January 31, 1998:
DEVELOPED UNDEVELOPED PRODUCTIVE
ACREAGE ACREAGE WELLS(1)
--------- ----------- ----------
Gross............................................ 18,700 630,384 157
Net(2)........................................... 15,932 430,618 134
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(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.
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RESERVES
The following table sets forth certain information with respect to
TransTexas' proved reserves and the present value (discounted at 10%) of
estimated future net revenues before income taxes, as estimated by Netherland,
Sewell & Associates, Inc. ("Netherland, Sewell"), TransTexas' independent
petroleum engineers, as of the dates indicated. See Note 17 of Notes to
Consolidated Financial Statements for additional information regarding
TransTexas' proved reserves at February 1, 1998.
FEBRUARY 1,
------------------------------------
1998* 1997 1996
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
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
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
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* 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.
8
11
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 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.
ITEM 3. LEGAL PROCEEDINGS
See Notes 13 and 15 of Notes to Consolidated Financial Statements for
information about TransTexas' legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three months ended January 31, 1998.
9
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TransTexas' common stock has traded on the New York Stock Exchange ("NYSE")
under the symbol "TTG" since October 30, 1997. Prior thereto, TransTexas' common
stock traded on the Nasdaq National Market tier of The Nasdaq Stock Market
("NNM") under the symbol "TTXG." The following table sets forth, on a per-share
basis for the periods indicated, the high and low sales prices for TransTexas'
common stock as reported by the NYSE and NNM.
HIGH LOW
------- -------
Fiscal year ended January 31, 1998:
Fourth Quarter............................................ $20.375 $13.500
Third Quarter............................................. 19.375 13.250
Second Quarter............................................ 17.250 13.250
First Quarter............................................. 17.500 12.000
Fiscal year ended January 31, 1997:
Fourth Quarter............................................ $17.250 $13.000
Third Quarter............................................. 14.250 8.500
Second Quarter............................................ 10.250 7.250
First Quarter............................................. 13.000 10.000
As of April 14, 1998, there were approximately 71 record holders of
TransTexas' common stock.
TransTexas has not paid any cash dividends on its capital stock since
inception, except a dividend of approximately $33 million to TransAmerican from
the proceeds of its initial public offering in March 1994. TransTexas' ability
to pay dividends in the future is restricted by TransTexas' existing debt
instruments and will depend on TransTexas' debt levels, earnings levels and book
value and discounted value of certain tangible assets. In determining whether to
declare and pay a dividend, the Board of Directors will consider various other
factors, including TransTexas' capital requirements and financial condition.
10
13
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED JULY 31,
----------------------------------- ----------------------- ---------------------------------
1998 1997 1996 1996 1995 1995 1994 1993
--------- --------- ----------- --------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Gas, condensate and natural
gas liquids revenue....... $ 164,538 $ 363,459 $ 256,986 $ 124,663 $ 143,304 $ 275,627 $ 302,522 $ 294,753
Transportation revenues..... 12,055 34,423 33,518 15,892 19,161 36,787 33,240 30,816
Gain on the sale of
assets.................... 543,365 7,865 474 474 -- -- -- --
Other revenues.............. 3,313 600 360 127 52 285 157 247
--------- --------- --------- --------- --------- --------- --------- ---------
723,271 406,347 291,338 141,156 162,517 312,699 335,919 325,816
Operating costs and
expenses.................. 62,356 137,019 94,046 45,629 50,893 99,310 103,459 99,982
Depreciation, depletion, and
amortization.............. 82,659 132,453 120,513 60,894 70,345 129,964 113,858 95,016
General and administrative
expenses.................. 48,156 45,596 33,025 13,685 12,595 31,935 40,311 23,613
Litigation settlements...... -- (96,000) (18,300) (18,300) -- -- (1,000) --
Operating income............ 530,100 187,279 62,054 39,248 28,684 51,490 79,291 107,205
Net interest expense........ 68,187 91,463 77,174 40,436 29,059 65,797 50,155 2,442
Income taxes and other...... 161,669 12,491 (2,700) (416) (131) (2,415) 5,380 11,146
Extraordinary loss, net of
taxes..................... 72,043 -- 56,637 -- -- 56,637 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)..... $ 228,201 $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529) $ 23,756 $ 93,617
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) per
share:(1)
Income (loss) before
extraordinary item...... $ 4.49 $ 1.13 $ (0.17) $ (0.01) $ -- $ (0.16) $ 0.33
Extraordinary item........ (1.08) -- (0.77) -- -- (0.77) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)..... $ 3.41 $ 1.13 $ (0.94) $ (0.01) $ -- $ (0.93) $ 0.33
========= ========= ========= ========= ========= ========= =========
Dividends declared per
common share(2)........... -- -- -- -- -- -- --
OTHER FINANCIAL DATA:
Cash provided by operating
activities................ $ 21,953 $ 221,061 $ 72,152 $ 52,172 $ 74,332 $ 94,312 $ 136,243 $ 184,466
Cash provided (used) by
investing activities...... 696,021 (272,883) (340,753) (136,664) (105,326) (309,415) (237,781) (142,848)
Cash provided (used) by
financing activities...... (703,033) 64,135 279,030 13,055 18,249 284,224 484,631 507
Ratio of earnings to fixed
charges(3)................ 5.6x 1.7x -- -- -- -- 1.5x 34.9x
EBITDA(4)................... 626,209 325,962 187,884 103,413 100,224 184,695 195,044 208,635
Consolidated fixed
charges................... 97,409 113,581 90,755 51,088 30,254 69,921 52,760 3,256
Capital expenditures........ 426,179 358,814 373,136 205,488 110,842 278,490 241,268 147,202
OPERATING DATA:
Sales volumes:
Gas (average daily)
(MMcfd)................. 198.9 419.6 376.8 363.4 417.7 405.2 358.8 326.8
Gas (Bcf)(6).............. 72.4 153.6 137.9 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 68.5 79.0 151.7 134.8 123.0
Average prices:
Gas (dry) (per Mcf)(6).... $ 2.09 $ 2.14 $ 1.51 $ 1.65 $ 1.41 $ 1.40 $ 1.96 $ 1.98
NGLs (per gallon)......... .29 .36 .27 .30 .27 .26 .27 .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)..................... .34 .29 .23 .23 .21 .21 .24 .22
Proved reserves (net) (end
of period):
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%
11
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JANUARY 31, JULY 31,
-------------------------------------------- --------------------------------
1998 1997 1996 1995 1995 1994 1993
-------- ---------- --------- -------- --------- -------- ---------
BALANCE SHEET DATA:
Working capital (deficit)(5).................. $(22,122) $ 71,586 $ 43,602 $(56,749) $ 106,836 $ (8,865) $ (56,949)
Net property and equipment.................... 701,598 846,393 715,340 498,165 601,460 462,340 341,976
Total assets.................................. 816,635 1,053,152 938,829 594,738 826,570 583,591 360,241
Total debt.................................... 630,103 941,922 824,241 518,701 800,000 500,000 8,270
Stockholders' equity (deficit)................ 24,637 (150,795) (154,440) (85,383) (153,668) (85,139) (204,575)
- ---------------
(1) Net income per share for the year ended July 31, 1994 gives effect to
69,000,000 shares of common stock outstanding after a 69,000-for-1 stock
split which was effective in February 1994. Per share data for 1993 is
omitted because TransTexas' predecessor was not a separate entity with its
own capital structure.
(2) TransTexas' existing debt instruments contain certain restrictions with
respect to the payment of dividends on TransTexas' common stock.
(3) For the purposes of determining the ratio of earnings to consolidated fixed
charges, earnings are defined as pre-tax income plus consolidated fixed
charges. Consolidated fixed charges consist of interest expense on all
indebtedness and the portion of operating lease rental expense that
represents the interest component. Earnings for the year ended January 31,
1996, six months ended January 31, 1996 and 1995 and year ended July 31,
1995 were inadequate to cover fixed charges by $15.1 million, $1.2 million,
$0.4 million and $14.3 million, respectively.
(4) Earnings before consolidated fixed charges, income taxes, depreciation,
depletion and amortization. Consolidated fixed charges consist of interest
expense (including capitalized interest) on all indebtedness and a portion
of operating lease rental expense that represents the interest component.
EBITDA for the year ended January 31, 1998 includes a $543.4 million gain on
the sale of assets. EBITDA for the year ended January 31, 1997 includes a
gain on a litigation settlement of $96.0 million and a gain on the sale of
assets of $7.9 million. EBITDA for the year ended January 31, 1996 and the
Transition Period includes a gain on a litigation settlement of $18.3
million. EBITDA includes litigation accruals of $15.0 million, $15.5 million
and $7.0 million for the years ended January 31, 1998, 1997 and 1996,
respectively. EBITDA includes litigation accruals of $7.0 million, $13.0
million and $10.0 million for the years ended July 31, 1995, 1994 and 1993,
respectively. EBITDA is not presented in accordance with GAAP and should not
be used in lieu of GAAP presentations of results of operations and cash
flows.
(5) Working capital for 1993 excludes all cash and accounts receivable because
those assets were not transferred to TransTexas in the Transfer. Working
capital as of January 31, 1997 and 1996 and July 31, 1995 includes $46.0
million, $46.0 million and $44.7 million, respectively, of cash restricted
for the payment of interest.
(6) Sales volumes include amounts delivered pursuant to volumetric production
payments.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with TransTexas'
Consolidated Financial Statements and Notes thereto included under Item 8 of
this report.
RESULTS OF OPERATIONS
TransTexas' results of operations are dependent upon natural gas production
volumes and unit prices from sales of natural gas, condensate and NGLs. The
profitability of TransTexas also depends on 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
12
15
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:
SIX MONTHS
ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------ --------------- JULY 31,
1998 1997 1996 1996 1995 1995
------ ------ ------ ------ ------ ----------
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%
- ---------------
(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.
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):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
---------------------------- ------------------- JULY 31,
1998 1997 1996 1996 1995 1995
----- ------ ----------- ----- ----------- ----------
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
===== ====== ===== ===== ===== =====
- ---------------
(1) Taxes other than income taxes include severance, property and other taxes.
13
16
TransTexas' average depletion rates have been as follows:
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
-------------------------- ------------------ JULY 31,
1998 1997 1996 1996 1995 1995
----- ---- ----------- ---- ----------- ----------
Depletion rates (per Mcfe)......... $1.11 $.96 $.79 $.82 $.84 $.81
===== ==== ==== ==== ==== ====
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 as a
result of the Lobo Sale, partially offset by a $0.15 increase in the depletion
rate. The depletion rate increased 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 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.
14
17
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 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.
15
18
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.
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.
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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' dollar-denominated production payment, offset in
part by increases in long-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is sensitive to the prices TransTexas receives
for its natural gas. TransTexas from time to time enters into commodity price
swap agreements to reduce its exposure to price risk in the spot market for
natural gas. Proceeds from natural gas sales are received at approximately the
same time that production-related burdens, such as royalties, production taxes
and drilling program obligations, are payable.
TransTexas 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, an accounts receivable
revolving credit facility 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.
In March 1988, 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.
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 were 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
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Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.
With the proceeds of the TEC Notes Offering, TEC made intercompany loans to
TransTexas in the principal amount of $450 million (the "TransTexas Intercompany
Loan") and to TARC in the original amount of $676 million (the "TARC
Intercompany Loan" and, together with the TransTexas Intercompany Loan, the
"Intercompany Loans"). The promissory note evidencing the TransTexas
Intercompany Loan (i) bears interest at a rate of 10 7/8% per annum, payable
semi-annually in cash in arrears and (ii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than inventory,
receivables and equipment. The promissory note evidencing the TARC Intercompany
Loan (i) accretes principal at the rate of 16% per annum, compounded
semi-annually, until June 15, 1999 to a final accreted value of $920 million,
and thereafter pays interest semi-annually in cash in arrears on the accreted
value thereof, at a rate of 16% per annum and (ii) is secured initially by a
security interest in substantially all of TARC's assets other than inventory,
receivables and equipment. The Intercompany Loans will mature on June 1, 2002.
The Intercompany Loan Agreements contain certain restrictive covenants
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates. Upon the occurrence of a Change of
Control (as defined), TEC will be required to make an offer to purchase all of
the outstanding TEC Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, or, in the case of
any such offer to purchase the TEC Senior Secured Discount Notes prior to June
15, 1999, at a price equal to 101% of the accreted value thereof, in each case,
to and including the date of purchase. Pursuant to the terms of the Intercompany
Loans, TEC may require TransTexas and TARC to pay a pro rata share of the
purchase price paid by TEC 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 (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 its 13 1/4% Series
A Senior Subordinated Notes due 2003 (the "Old 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 "Subordinated Notes") in exchange for
all of its outstanding Series C Subordinated Notes. The 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 Subordinated Notes
includes certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
As a result of the Tender Offer and Subordinated Notes Exchange Offer,
TransTexas recorded a $72 million after tax extraordinary charge.
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 by $399 million of
proceeds 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 TEC and TARC for an
aggregate purchase price of approximately $201 million. In December 1997, the
share repurchase program was terminated.
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
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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.
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.
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 Loans) between
TransTexas and TEC and the average outstanding balance of all notes (other than
the note evidencing the Intercompany Loans) 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 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.
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.
Contingent Liabilities
TransTexas has significant contingent liabilities, including liabilities
with respect to litigation matters as described in Note 13 of Notes to
Consolidated Financial Statements. These matters, individually and in the
aggregate, amount to potential liability which, if adjudicated in a manner
adverse to TransTexas in one reporting period, could have a material adverse
effect on TransTexas' cash flows or results of 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.
In January 1996, TransTexas entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20 million
letter of credit to be issued to collateralize a supersedeas bond on behalf of
TransTexas. If there is a draw under the letter of credit, TransTexas is
required to reimburse the third party within 60 days. TransTexas has agreed to
issue up to 8.6 million shares of its common stock to the third party if this
contingent obligation to such third party becomes fixed and remains unpaid for
60 days. If the obligation becomes fixed, and alternative sources of capital are
not available, TransTexas could elect to sell shares of its 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 its 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 Agreement, 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
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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.
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 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 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 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'
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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.
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 or TEC transfers shares of common
stock of TransTexas (or transfers options or other rights to acquire such
shares) and, as a result of such transfer, Deconsolidation of TransTexas occurs,
TransTexas would not thereafter receive any benefit pursuant to the Tax
Allocation Agreement for net operating losses of TransTexas used by other
members of the TNGC Consolidated Group prior to the Deconsolidation of
TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to transactions in prior years. As of January 31, 1998, TransTexas
had paid approximately $5.4 million of such tax and estimates that approximately
$6.0 million will be paid in fiscal 1999.
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
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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. As
of 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. 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 flows or results of
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.
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.
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.
In June 1997, management began a Company-wide program to prepare its
computer systems for year 2000 compliance. In January 1998, TransTexas began
implementation of new client/server based systems which are anticipated to be
completed by January 1999. TransTexas estimates the cost of upgrading its
computer systems to be approximately $2 million. There can be no assurance that
TransTexas will timely complete the implementation of the new systems. The year
2000 issue should not impact TransTexas' ability to continue exploration,
production or sales activities.
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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 report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes 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 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,
conditions in the equity and capital markets, competition and the ultimate
resolution of litigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Accountants........................... 25
Financial Statements:
Consolidated Balance Sheet................................ 26
Consolidated Statement of Operations...................... 27
Consolidated Statement of Stockholders' Equity
(Deficit).............................................. 28
Consolidated Statement of Cash Flows...................... 29
Notes to Consolidated Financial Statements................ 30
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransTexas Gas Corporation:
We have audited the accompanying consolidated balance sheet of TransTexas
Gas Corporation as of January 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' 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 TransTexas' 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
TransTexas Gas Corporation as of January 31, 1998 and 1997, and the results of
its operations and its 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.
COOPERS & LYBRAND L.L.P.
Houston, Texas
April 30, 1998
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TRANSTEXAS GAS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JANUARY 31,
------------------------
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 38,502 $ 23,561
Cash restricted for interest (Note 5)..................... -- 46,000
Accounts receivable....................................... 17,056 78,660
Receivable from affiliates................................ -- 3,248
Inventories............................................... 16,437 12,481
Other current assets...................................... 10,719 24,984
---------- ----------
Total current assets............................... 82,714 188,934
---------- ----------
Property and equipment...................................... 1,418,293 2,280,880
Less accumulated depreciation, depletion and amortization... 716,695 1,434,487
---------- ----------
Net property and equipment -- based on the full cost
method of accounting for gas and oil properties of which
$104,389 and $158,973 are excluded from amortization at
January 31, 1998 and 1997, respectively................. 701,598 846,393
---------- ----------
Due from affiliates......................................... 1,488 --
Other assets, net........................................... 30,835 17,825
---------- ----------
$ 816,635 $1,053,152
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt...................... $ 10,181 $ 5,787
Accounts payable.......................................... 52,075 28,150
Accrued interest payable to affiliate..................... 6,762 --
Accrued liabilities....................................... 35,818 83,411
---------- ----------
Total current liabilities.......................... 104,836 117,348
---------- ----------
Long-term debt, less current maturities..................... 9,199 8,775
Production payments, less current portion................... 4,121 11,931
Notes payable to affiliate.................................. 486,991 --
Senior secured notes........................................ -- 800,000
Subordinated notes.......................................... 115,815 101,092
Revolving credit agreement.................................. 7,917 26,268
Deferred revenue............................................ -- 54,554
Deferred income taxes....................................... 39,497 31,367
Payable to affiliates....................................... 3,002 19,621
Other liabilities........................................... 20,620 32,991
Commitments and contingencies (Note 13)..................... -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value, 100,000,000 shares
authorized, 57,515,566 shares and 74,000,000 shares
issued and outstanding at January 31, 1998 and 1997,
respectively............................................ 740 740
Additional paid-in capital (capital deficit).............. 26,834 (123,524)
Retained earnings......................................... 259,468 31,267
---------- ----------
287,042 (91,517)
Treasury stock, at cost, 16,484,434 shares................ (262,405) --
Advances to affiliates.................................... -- (59,278)
---------- ----------
Total stockholders' equity (deficit)............... 24,637 (150,795)
---------- ----------
$ 816,635 $1,053,152
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
26
29
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------------------- ------------------------ JULY 31,
1998 1997 1996 1996 1995 1995
---------- ---------- ----------- ---------- ----------- ----------
(UNAUDITED) (UNAUDITED)
Revenues:
Gas, condensate and natural gas
liquids....................... $ 164,538 $ 363,459 $ 256,986 $ 124,663 $ 143,304 $ 275,627
Transportation.................. 12,055 34,423 33,518 15,892 19,161 36,787
Gain on the sale of assets...... 543,365 7,856 474 474 -- --
Other........................... 3,313 609 360 127 52 285
---------- ---------- ---------- ---------- ---------- ----------
Total revenues........... 723,271 406,347 291,338 141,156 162,517 312,699
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Operating....................... 50,957 114,453 78,812 38,145 44,605 85,272
Depreciation, depletion and
amortization.................. 82,659 132,453 120,513 60,894 70,345 129,964
General and administrative...... 48,156 45,596 33,025 13,685 12,595 31,935
Taxes other than income taxes... 11,399 22,566 15,234 7,484 6,288 14,038
Litigation settlements.......... -- (96,000) (18,300) (18,300) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses............... 193,171 219,068 229,284 101,908 133,833 261,209
---------- ---------- ---------- ---------- ---------- ----------
Operating income................ 530,100 187,279 62,054 39,248 28,684 51,490
---------- ---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income................. 12,393 5,544 4,733 2,934 912 2,711
Interest expense, net........... (80,580) (97,007) (81,907) (43,370) (29,971) (68,508)
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(expense).............. (68,187) (91,463) (77,174) (40,436) (29,059) (65,797)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes........................... 461,913 95,816 (15,120) (1,188) (375) (14,307)
Income tax expense (benefit)...... 161,669 12,491 (2,700) (416) (131) (2,415)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................ 300,244 83,325 (12,420) (772) (244) (11,892)
Extraordinary item -- loss on
early extinguishment of debt,
net of tax (Note 5)............. (72,043) -- (56,637) -- -- (56,637)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 228,201 $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529)
========== ========== ========== ========== ========== ==========
Basic and diluted net income
(loss)
per share:
Income (loss) before
extraordinary item............ $ 4.49 $ 1.13 $ (0.17) $ (0.01) $ -- $ (0.16)
Extraordinary item.............. (1.08) -- (0.77) -- -- (0.77)
---------- ---------- ---------- ---------- ---------- ----------
$ 3.41 $ 1.13 $ (0.94) $ (0.01) $ -- $ (0.93)
========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding for basic and
diluted net income (loss) per
share........................... 66,905,903 74,000,000 74,000,000 74,000,000 74,000,000 74,000,000
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
27
30
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS/ TOTAL
------------------- PAID-IN CAPITAL (ACCUMULATED) TREASURY ADVANCES STOCKHOLDERS'
SHARES AMOUNT (CAPITAL DEFICIT) DEFICIT STOCK TO AFFILIATES EQUITY (DEFICIT)
---------- ------ ----------------- ------------- --------- ------------- ----------------
Balance at July 31,
1994................... 74,000,000 $740 $(107,040) $ 21,161 $ -- $ -- $ (85,139)
Net loss............... -- -- -- (68,529) -- -- (68,529)
---------- ---- --------- -------- --------- -------- ---------
Balance at July 31,
1995................... 74,000,000 740 (107,040) (47,368) -- -- (153,668)
Net loss............... -- -- -- (772) -- -- (772)
---------- ---- --------- -------- --------- -------- ---------
Balance at January 31,
1996................... 74,000,000 740 (107,040) (48,140) -- -- (154,440)
---------- ---- --------- -------- --------- -------- ---------
Elimination of
intercompany gain on
property purchased
from affiliate....... -- -- -- (3,918) -- -- (3,918)
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
affiliate............ -- -- -- -- -- (59,278) (59,278)
Net income............. -- -- -- 83,325 -- -- 83,325
---------- ---- --------- -------- --------- -------- ---------
Balance at January 31,
1997................... 74,000,000 740 (123,524) 31,267 -- (59,278) (150,795)
Purchase of treasury
stock, at cost,
16,484,434 shares.... -- -- -- -- (262,405) -- (262,405)
Advance to affiliate... -- -- (13,304) -- -- -- (13,304)
Contribution from
affiliate............ -- -- 21,513 -- -- -- 21,513
Assumption of tax
liability by
TransAmerican........ -- -- 129,549 -- -- -- 129,549
Contribution of debt
issue costs by TEC... -- -- 12,600 -- -- 12,600
Collection of advances
to affiliates........ -- -- -- -- -- 59,278 59,278
Net income............. -- -- -- 228,201 -- -- 228,201
---------- ---- --------- -------- --------- -------- ---------
Balance at January 31,
1998................... 74,000,000 $740 $ 26,834 $259,468 $(262,405) $ -- $ 24,637
========== ==== ========= ======== ========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
28
31
TRANSTEXAS GAS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
----------------------------------- ----------------------- JULY 31,
1998 1997 1996 1996 1995 1995
--------- --------- ----------- --------- ----------- ----------
(UNAUDITED) (UNAUDITED)
Operating activities:
Net income (loss)........................... $ 228,201 $ 83,325 $ (69,057) $ (772) $ (244) $ (68,529)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary item........................ 72,043 -- 56,637 -- -- 56,637
Depreciation, depletion and
amortization............................ 82,659 132,453 120,513 60,894 70,345 129,964
Amortization of debt issue costs.......... 2,030 8,387 3,558 1,295 1,524 3,787
Accretion on subordinated notes........... 4,941 1,647 -- -- -- --
Gain on litigation settlement............. -- -- (18,300) (18,300) -- --
Gain on the sale of assets................ (543,365) (7,856) (474) (474) -- --
Deferred income taxes..................... 161,670 (8,889) 6,263 (416) (1,483) 5,196
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) -- -- -- --
Changes in assets and liabilities:
Accounts receivable..................... 61,604 (42,409) (5,604) (12,860) 7,859 15,115
Receivable from affiliates.............. 3,248 449 380 272 765 873
Inventories............................. (3,953) (1,060) (3,229) (3,185) 1,753 1,709
Other current assets.................... 10,265 (2,154) (3,210) (201) (2,193) (5,202)
Accounts payable........................ 18,451 9,900 (14,150) 3,677 3,006 (14,821)
Accrued interest payable to
affiliates............................ 6,762 -- -- -- -- --
Accrued liabilities..................... (50,966) 31,134 (21,420) (3,843) (6,982) (24,559)
Transactions with affiliates, net....... 31,223 (6,825) (17,788) (5,536) 265 (11,987)
Other assets............................ 65 21,428 20 699 (885) (1,564)
Other liabilities....................... (8,371) (20,173) 5,163 (1,928) 602 7,693
--------- --------- --------- --------- --------- ---------
Net cash provided by operating
activities.......................... 21,953 221,061 72,152 52,172 74,332 94,312
--------- --------- --------- --------- --------- ---------
Investing activities:
Capital expenditures........................ (423,915) (340,651) (318,800) (155,886) (106,170) (269,084)
Proceeds from the sale of assets............ 1,062,490 92,518 20,500 20,500 -- --
Withdrawals from cash restricted for
interest.................................. 46,000 92,000 44,722 44,722 -- --
Increase in cash restricted for interest.... -- (92,000) (90,722) (46,000) -- (44,722)
Advances to affiliate....................... -- (24,750) (4,700) (4,700) -- --
Payment of advances by affiliate............ 24,750 -- 4,700 4,700 -- --
Contribution to affiliate................... (13,304) -- -- -- -- --
Production payment by affiliate............. -- -- 3,547 -- 844 4,391
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities.......................... 696,021 (272,883) (340,753) (136,664) (105,326) (309,415)
--------- --------- --------- --------- --------- ---------
Financing activities:
Issuance of long-term debt.................. 14,946 26,200 13,000 3,000 10,000 20,000
Principal payments on long-term debt........ (10,128) (19,135) (20,219) (219) -- (20,000)
Revolving credit agreement, net............. (18,351) 5,903 11,664 20,365 8,701 --
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)
Issuance of note payable to affiliate....... 486,991 -- -- -- -- --
Issuance of senior secured notes............ -- -- 800,000 -- -- 800,000
Retirement of senior secured notes.......... (892,000) -- (542,500) -- -- (542,500)
Issuance of subordinated notes.............. -- 99,445 -- -- -- --
Debt issue costs............................ (13,559) (9,187) (15,716) (1,258) (452) (14,910)
Increase in cash restricted for share
repurchases............................... (399,284) -- -- -- -- --
Withdrawals from cash restricted for share
repurchases............................... 399,284 -- -- -- -- --
Purchases of treasury stock................. (262,405) -- -- -- -- --
Transfer of litigation escrow to
affiliate................................. -- (22,484) -- -- -- --
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities.......................... (703,033) 64,135 279,030 13,055 18,249 284,224
--------- --------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents......................... 14,941 12,313 10,429 (71,437) (12,745) 69,121
Beginning cash and cash equivalents........... 23,561 11,248 819 82,685 13,564 13,564
--------- --------- --------- --------- --------- ---------
Ending cash and cash equivalents.............. $ 38,502 $ 23,561 $ 11,248 $ 11,248 $ 819 $ 82,685
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
29
32
TRANSTEXAS GAS 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
TransTexas Gas Corporation (together with its subsidiaries, the "Company"
or "TransTexas") was incorporated in Delaware in May 1993 for the purpose of
owning and operating certain oil and gas and transmission assets previously
owned and operated by TransAmerican Natural Gas Corporation ("TransAmerican")
and certain of its subsidiaries. On August 24, 1993, certain of these operations
were transferred at predecessor basis pursuant to an agreement among TransTexas,
TransAmerican and certain of its subsidiaries, and TransAmerican's sole
stockholder (the "Transfer"). As a result of the Transfer, TransTexas succeeded
to the gas and oil properties, exploration and development operations, and
natural gas gathering and transportation operations of TransAmerican and certain
subsidiaries, except for specific excluded assets (including accounts
receivable) retained by TransAmerican.
TransTexas is a subsidiary of TransAmerican Energy Corporation ("TEC"),
which is a wholly owned subsidiary of TransAmerican. TransAmerican Refining
Corporation ("TARC") is a wholly owned subsidiary of TEC. Unless otherwise
noted, the term "TransTexas" refers to TransTexas Gas Corporation and its
subsidiaries.
Change in Fiscal Year
On January 12, 1996, the Board of Directors determined to change the fiscal
year end of TransTexas 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 and
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). TransTexas' most significant financial estimates are based
on litigation, income taxes and remaining proved gas and oil reserves (see Notes
13 and 17). Actual results could differ from these estimates. Certain previously
reported financial information has been reclassified to conform with the current
presentation.
Cash and Cash Equivalents
TransTexas considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
TransTexas' inventories, consisting primarily of tubular goods, are stated
at the lower of average cost or market.
Gas and Oil Properties
TransTexas 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
30
33
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 gas and oil properties were $104 million and $159 million at
January 31, 1998 and 1997, respectively. The properties represented by these
costs were undergoing exploration activities at such date, or are properties on
which TransTexas intends to commence such activities in the future. TransTexas
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.
Other Property and Equipment
Other property and equipment are stated at cost. The cost of repairs and
minor replacements is charged to operating expense while the cost of renewals
and betterments is capitalized. At the time depreciable assets are retired or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts. Gains or losses on dispositions in
the ordinary course of business are included in the consolidated statement of
operations. Impairment of other property and equipment is reviewed whenever
events or changes in circumstances indicate that the carrying value 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 that will amortize the unrecovered cost of depreciable property,
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.
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
costs is reasonably estimable.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other
assets." Capitalized debt costs are amortized to interest expense over the
scheduled maturity of the debt utilizing the straight-line 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.
31
34
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Defined Contribution Plan
TransTexas, 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. TransTexas 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. TransTexas' contributions with respect to this plan
totaled $0.5 million, $0.5 million, $0.3 million, $0.2 million, $0.1 million and
$0.3 million for years ended January 31, 1998, 1997 and 1996, the six months
ended January 31, 1996 and 1995 and the year ended July 31, 1995, respectively.
All Company contributions are currently funded.
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
TransTexas 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. TransTexas 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, TransTexas uses quoted market prices or, to the extent that there
are no available quoted market prices, market prices for similar instruments.
Revenue Recognition
TransTexas recognizes revenues from the sales of natural gas, condensate
and natural gas liquids in the period of delivery. Revenues are recognized from
transportation of natural gas 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.
Concentration of Credit Risk
Financial instruments that potentially expose TransTexas to credit risk
consist principally of cash, trade receivables and commodity price swap
agreements. TransTexas selects depository banks based upon management's review
of the financial stability of the institution. Balances periodically exceed the
$100,000 level covered by federal deposit insurance. To date, TransTexas has not
incurred any losses due to excess deposits in any financial institution. Trade
accounts receivable are generally from companies with significant natural gas
marketing activities, which would be impacted by conditions or occurrences
affecting that industry. TransTexas 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
32
35
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
TransTexas files a consolidated tax return with TransAmerican. Income taxes
are due from or payable to TransAmerican in accordance with a tax allocation
agreement, as amended, between TransTexas, TNGC Holdings
Corporation,TransAmerican and TransAmerican's other subsidiaries (the "Tax
Allocation Agreement"). It is TransTexas' policy to record income tax expense as
though TransTexas had filed separately. Deferred income taxes are recognized, at
enacted tax rates, to reflect the future effects of tax carryforwards and
temporary differences arising between the tax bases of assets and liabilities
and their financial reporting amounts in accordance with Statement of Financial
Accounting Standards No. 109 and the Tax Allocation Agreement. Income taxes
include federal and state income taxes.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). This statement was adopted by TransTexas effective January 31, 1998. SFAS
128 simplifies the computation of earnings per share by replacing primary and
fully diluted presentations with the new basic and diluted disclosures. Net
income (loss) per share is calculated by dividing net income available for
common stockholders by the weighted average number of shares of common stock and
common stock equivalents.
Recently Issued Pronouncements
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 TransTexas effective February 1, 1998. TransTexas 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 TransTexas effective
February 1, 1998. TransTexas believes that adoption of this statement will not
have a material impact on its financial statements.
33
36
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands
of dollars):
JANUARY 31,
------------------
1998 1997
------- -------
Prepayments:
Trade..................................................... $ 7,120 $ 9,580
Insurance................................................. 3,171 2,310
Deferred loss on commodity price swap agreements............ -- 8,276
Other....................................................... 428 4,818
------- -------
$10,719 $24,984
======= =======
3. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows (in
thousands of dollars):
ESTIMATED JANUARY 31,
USEFUL LIFE -----------------------
(YEARS) 1998 1997
----------- ---------- ----------
Land.............................................. $ 1,373 $ 1,384
Gas and oil properties............................ 1,246,584 2,004,967
Gas gathering and transportation.................. 10 51,714 193,443
Equipment and other............................... 4-10 118,622 81,086
---------- ----------
$1,418,293 $2,280,880
========== ==========
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.
34
37
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS
The major components of other assets are as follows (in thousands of
dollars):
JANUARY 31,
------------------
1998 1997
------- -------
Debt issue costs, net of accumulated amortization of $2,030
and $2,875 at January 31, 1998 and 1997, respectively..... $29,818 $14,645
Other....................................................... 1,017 3,180
------- -------
$30,835 $17,825
======= =======
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands of dollars):
JANUARY 31,
--------------------
1998 1997
-------- --------
Revolving credit agreement.................................. $ 7,917 $ 26,268
11 1/2% Senior Secured Notes due 2002....................... -- 800,000
13 1/4% Senior Subordinated Notes due 2003.................. -- 101,092
13 3/4% Senior Subordinated Notes due 2001.................. 115,815 --
Notes payable, ranging from 9.43% to 14.41%, due through
2001...................................................... 19,380 14,562
-------- --------
Total long-term debt.............................. 143,112 941,922
Less current maturities................................... 10,181 5,787
-------- --------
$132,931 $936,135
======== ========
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.
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 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.
35
38
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
fiscal year ended January 31, 1998.
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 TransTexas' notes payable
at January 31, 1998 are expected to total $10.2 million, $6.4 million, $2.4
million and $0.4 million for the fiscal years ending January 31, 1999, 2000,
2001 and 2002, respectively.
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.
6. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following (in thousands of
dollars):
JANUARY 31,
--------------------
1998 1997
-------- --------
TransTexas Intercompany Loan................................ $450,000 $ --
Notes payable to affiliates................................. 36,991 --
-------- --------
$486,991 $ --
======== ========
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 Series A Senior Secured Notes") and $1.13 billion
aggregate principal amount of 13% Senior Secured Discount Notes due 2002 (the
"TEC Series A Senior Secured Discount Notes" and, together with the TEC Series A
Senior Secured Notes, the "TEC Series A Notes") for net proceeds of
approximately $1.3 billion. On January 16, 1998, TEC completed a registered
exchange offer whereby it issued $475 million aggregate principal amount of
11 1/2% Series B Senior Secured Notes due 2002 (the "TEC Senior Secured Notes")
and $1.3 billion aggregate principal amount of 13% Series B Senior Secured
Discount Notes due 2002 (the "TEC Senior Secured Discount Notes" and, together
with the TEC Series A Notes and TEC Senior Secured Notes, the "TEC Notes"). 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.
36
39
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 13.
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 balance under notes
from TransTexas was $37 million.
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 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 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.
7. LIQUIDITY
Cash flow from operations is sensitive to the level of capital expenditures
and the prices TransTexas receives for its natural gas. TransTexas' debt
covenants may limit its ability to obtain additional financing or to
37
40
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash investing and
financing activities (in thousands of dollars):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
-------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- ------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
Assumption of tax
liability by
TransAmerican........... $129,549 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
Contribution from
affiliate............... $ 21,513 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
Seller financed
obligations incurred for
capital expenditures.... $ -- $ 3,621 $ 1,095 $ 1,095 $-- $--
======== ======= ======= ======= === ===
Accounts payable and long-
term liabilities for
property and
equipment............... $ 32,666 $27,192 $ 9,191 $ 9,191 $-- $--
======== ======= ======= ======= === ===
Exchange of Subordinated
Notes................... $115,815 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
Contribution of debt issue
costs from affiliate.... $ 12,600 $ -- $ -- $ -- $-- $--
======== ======= ======= ======= === ===
38
41
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid for interest and income taxes are as follows (in thousands of
dollars):
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JANUARY 31, YEAR ENDED
------------------------------- --------------------- JULY 31,
1998 1997 1996 1996 1995 1995
------- ------- ----------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
Interest................... $52,563 $85,254 $88,468 $41,052 $29,971 $75,863
======= ======= ======= ======= ======= =======
Income taxes (paid to
TransAmerican)........... $ -- $ 7,000 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= =======
TransTexas incurred approximately $96.4 million, $112.9 million, $90.2
million, $50.8 million and $69.4 million of interest charges of which
approximately $15.8 million, $15.9 million, $8.3 million, $7.4 million and $0.9
million were 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.
9. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
JANUARY 31,
------------------
1998 1997
------- -------
Royalties................................................... $ 7,171 $27,607
Taxes other than income taxes............................... 2,562 10,136
Accrued interest............................................ 2,544 13,370
Payroll..................................................... 5,185 5,413
Litigation settlements and other............................ 1,387 1,263
Settlement values of commodity price swap agreements........ -- 13,276
Insurance................................................... 9,041 6,618
Other....................................................... 7,928 5,728
------- -------
$35,818 $83,411
======= =======
10. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of
dollars):
JANUARY 31,
------------------
1998 1997
------- -------
Litigation accrual.......................................... $15,008 $ 8,008
Litigation settlements...................................... -- 1,633
Short-term obligations expected to be refinanced:
Litigation settlements.................................... -- 2,500
Accrued capital expenditures.............................. -- 19,738
Other....................................................... 5,612 1,112
------- -------
$20,620 $32,991
======= =======
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.
39
42
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of
dollars):
SIX MONTHS ENDED YEAR
YEAR ENDED JANUARY 31, JANUARY 31, ENDED
-------------------------------- ------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- ------- ----------- ----- ----------- --------
(UNAUDITED) (UNAUDITED)
Federal:
Current..................... $(21,380) $21,380 $(8,963) $ -- $1,352 $(7,611)
Deferred.................... 144,256 (8,889) 6,263 (416) (1,483) 5,196
Income tax expense (benefit)
before extraordinary item... -- 12,491 (2,700) (416) (131) (2,415)
Tax benefit of extraordinary
item........................ -- -- (1,491) -- -- (1,491)
-------- ------- ------- ----- ------ -------
$122,876 $12,491 $(4,191) $(416) $ (131) $(3,906)
======== ======= ======= ===== ====== =======
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):
SIX MONTHS ENDED YEAR
YEAR ENDED JANUARY 31, JANUARY 31, ENDED
--------------------------------- ------------------- JULY 31,
1998 1997 1996 1996 1995 1995
-------- -------- ----------- ----- ----------- --------
(UNAUDITED) (UNAUDITED)
Federal income tax expense
(benefit) at the statutory
rate.......................... $122,876 $ 33,536 $(25,637) $(416) $(131) $(25,352)
Increase (decrease) in tax
resulting from:
Tax rate change............... -- -- -- -- -- --
State income taxes, net of
federal income tax
benefit.................... -- -- -- -- -- --
Tight sands credit............ -- (7,441) 7,842 -- -- 7,842
Valuation allowance........... -- (13,604) 13,604 -- -- 13,604
-------- -------- -------- ----- ----- --------
$122,876 $ 12,491 $ (4,191) $(416) $(131) $ (3,906)
======== ======== ======== ===== ===== ========
40
43
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of TransTexas' tax attributes are as follows (in
thousand of dollars):
JANUARY 31,
--------------------
1998 1997
-------- --------
Deferred tax liabilities:
Depreciation, depletion and amortization.................. $ 36,314 $ 82,274
Tax assumption............................................ 75,000 --
Other, net................................................ -- 1,139
-------- --------
111,314 83,413
-------- --------
Deferred tax assets:
Investment in affiliates.................................. -- 275,540
Net operating loss carryforwards.......................... 63,712 --
Contingent liabilities.................................... 6,553 3,403
Alternative minimum tax credit carryforward............... -- 48,643
Other, net................................................ 1,552 --
-------- --------
71,817 327,496
Valuation allowance......................................... -- (275,450)
-------- --------
Net deferred tax assets..................................... 71,817 52,046
-------- --------
$ 39,497 $ 31,367
======== ========
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 (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 will 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.
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.
41
44
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
42
45
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
12. 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, has provided drilling and workover
services. In June 1997, the receivable from TransAmerican under the services
agreement was paid and the services agreement was terminated.
On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services agreement,
TransTexas will provide accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican will provide
advisory services to TransTexas, TARC and TEC. TARC will pay to TransTexas
approximately $300,000 per month for services rendered 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. As of January 31,
1998, the 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
43
46
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During 1995, TransAmerican acquired an office building which it
subsequently sold to TransTexas in February for 1996 for $4 million. In February
1996, TransAmerican advanced $4 million of the proceeds from this sale to TARC
for working capital.
In order to facilitate the settlement of certain litigation in May 1996,
TransTexas advanced to TransAmerican $16.4 million of the settlement amount in
exchange for a note receivable. All amounts outstanding under this note were
repaid on June 13, 1997.
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.
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.
13. 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
44
47
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Judicial 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.
General. The resolution in any reporting period of one or more of the
foregoing matters in a manner adverse to TransTexas could have a material
adverse effect on TransTexas' results of operations and cash flows for that
period. TransTexas is also a named defendant in other ordinary course, routine
litigation incidental to its business. Although the outcome of these other
lawsuits cannot be predicted with certainty, TransTexas does not expect these
matters to have a material adverse effect on its financial position. At 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.
45
48
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Matters
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
which has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. 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.
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
46
49
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 11. 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.
Operating Leases
As of January 31, 1998, TransTexas had long-term leases covering land and
other property and equipment. Rental expense was approximately $2 million, $6
million and $4 million for the years ended January 31, 1998, 1997 and 1996,
respectively, $3 million for each of the six months ended January 31, 1996 and
1995 and $5 million for the fiscal 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):
1999...................................................... $1,521
2000...................................................... 1,423
2001...................................................... 1,090
2002...................................................... 640
2003...................................................... --
------
$4,674
======
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 its common stock to the third party if this
contingent obligation 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
47
50
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of its 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 federal income tax purposes. TransTexas does
not believe that this contingency will occur. See Note 11.
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.
14. BUSINESS SEGMENTS
TransTexas currently conducts its operations in one industry segment:
exploration and production ("E&P"). Prior to the Lobo Sale, TransTexas 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 Transportation segment was engaged in intrastate natural gas
transportation and marketing. Prior to the Lobo Sale, all of TransTexas'
significant gas and oil operations were located in Webb, Zapata and Starr
Counties, Texas. 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 debt
issue costs, certain receivables and other property and equipment. TransTexas'
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. TransTexas 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 $70 million, $59 million and $48
million, respectively, in E&P and Transportation revenues. For the Transition
Period, three customers provided approximately $25 million, $22 million and $14
million, respectively, in E&P and Transportation revenues. For the year ended
July 31, 1995, two customers provided approximately $73 million and $41 million,
respectively, in E&P and Transportation revenues.
Business segment information is as follows (in thousands of dollars):
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------ ------------ ------------
YEAR ENDED JANUARY 31, 1998
Exploration and production........ $164,538 $ 48,691 $ 62,933 $376,208 $ 715,592
Gas transportation................ 12,055 (16,601) 19,726 12,407 --
48
51
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEPRECIATION
OPERATING DEPLETION
INCOME AND CAPITAL IDENTIFIABLE
NET SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
--------- --------- ------------ ------------ ------------
Other............................. 546,678 498,010 -- 37,564 101,043
-------- -------- -------- -------- ----------
$723,271 $530,100 $ 82,659 $426,179 $ 816,635
======== ======== ======== ======== ==========
YEAR ENDED JANUARY 31, 1997
Exploration and production........ $363,459 $230,560 $122,570 $314,013 $ 884,638
Gas transportation................ 42,200 (9,018) 8,466 33,636 98,903
Other............................. 688 (34,263) 1,417 11,165 69,611
-------- -------- -------- -------- ----------
$406,347 $187,279 $132,453 $358,814 $1,053,152
======== ======== ======== ======== ==========
YEAR ENDED JANUARY 31, 1996
Exploration and production........ $256,986 $ 81,438 $111,993 $335,903 $ 739,345
Gas transportation................ 33,518 (4,362) 8,204 17,005 72,815
Other............................. 834 (15,022) 316 20,228 126,667
-------- -------- -------- -------- ----------
$291,338 $ 62,054 $120,513 $373,136 $ 938,827
======== ======== ======== ======== ==========
TRANSITION PERIOD ENDED JANUARY 31, 1996
Exploration and production........ $124,663 $ 51,443 $ 56,543 $176,386 $ 739,345
Gas transportation................ 15,892 (4,393) 4,194 13,266 72,815
Other............................. 601 (7,802) 157 15,836 126,667
-------- -------- -------- -------- ----------
$141,156 $ 39,248 $ 60,894 $205,488 $ 938,827
======== ======== ======== ======== ==========
SIX MONTHS ENDED JANUARY 31, 1995
Exploration and production........ $143,304 $ 32,860 $ 66,175 $ 99,672 $ 483,984
Gas transportation................ 19,161 2,796 4,031 6,366 63,541
Other............................. 52 (6,972) 139 4,804 47,213
-------- -------- -------- -------- ----------
$162,517 $ 28,684 $ 70,345 $110,842 $ 594,738
======== ======== ======== ======== ==========
YEAR ENDED JULY 31, 1995
Exploration and production........ $275,627 $ 62,855 $121,625 $259,189 $ 712,322
Gas transportation................ 36,787 2,827 8,041 10,105 60,916
Other............................. 285 (14,192) 298 9,196 53,332
-------- -------- -------- -------- ----------
$312,699 $ 51,490 $129,964 $278,490 $ 826,570
======== ======== ======== ======== ==========
15. 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
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
49
52
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
16. CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
YEAR ENDED JANUARY 31, 1998
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- --------
Revenues................................. $ 82,351 $575,420 $37,233 $ 28,267
Operating income (loss).................. 1,298 531,425(1) 9,586 (12,209)
Net income (loss)........................ (14,538) 262,745 (1,249) (18,757)
Net income (loss) per share -- basic and
diluted................................ (0.20) 3.61 (0.02) (0.33)
50
53
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JANUARY 31, 1997
------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- --------
Revenues.................................. $95,958 $ 86,732 $80,104 $143,553
Operating income.......................... 25,798 106,696(2) 5,858(3) 48,927
Net income (loss)......................... 3,020 71,561 (9,396) 18,140
Net income (loss) per share -- basic and
diluted................................. 0.04 0.97 (0.13) 0.25
SIX MONTHS ENDED
JANUARY 31, 1996
-------------------
1ST 2ND
QUARTER QUARTER
------- --------
Revenues.................................................... $66,336 $ 74,346
Operating income............................................ 30,893(4) 7,881
Net income (loss)........................................... 11,529 (12,301)
Net income (loss) per share -- basic and diluted............ .16 (.17)
- ---------------
(1) Operating income for the second quarter of 1998 includes a $543 million gain
on the sale of assets.
(2) Operating income for the second quarter of 1997 includes a gain on
settlement of litigation of $96.0 million.
(3) Operating income for the third quarter of 1997 includes litigation expense
of $7.5 million.
(4) Operating income for the first quarter of 1996 includes a gain on settlement
of litigation of $18.3 million.
17. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning TransTexas' gas and
oil producing activities and are prepared in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities."
Estimates of TransTexas' proved reserves and proved developed reserves were
prepared by Netherland, Sewell & Associates, Inc., an independent firm of
petroleum engineers, based on data supplied to them by TransTexas. Such
estimates are inherently imprecise and may be subject to substantial revisions
as additional information such as reservoir performance, additional drilling,
technological advancements and other factors become available.
Capitalized costs relating to gas and oil producing activities are as
follows (in thousands of dollars):
JANUARY 31,
------------------------
1998 1997
---------- ----------
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
========== ==========
51
54
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred for gas and oil producing activities are as follows (in
thousands of dollars):
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
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
======== ======== ======== ========
Results of operations for gas and oil producing activities are as follows
(in thousands of dollars):
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ---------------- ----------
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
======== ======== ======== ========
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
52
55
TRANSTEXAS GAS 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.
YEAR ENDED JANUARY 31, SIX MONTHS YEAR ENDED
---------------------------- ENDED JULY 31,
1998 1997 1996 1995
------------- ------------ ------------- -------------
GAS OIL GAS OIL GAS OIL GAS OIL
------ ---- ------ --- ------- --- ------- ---
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) (1.0) 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
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 estimates. The standardized
measure of discounted future net cash flows relating to proved gas and oil
reserves is as follows (in thousands of dollars):
YEAR ENDED JANUARY 31, SIX MONTHS ENDED YEAR ENDED
---------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
--------- ---------- ---------------- ----------
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
========= ========== ========== ==========
53
56
TRANSTEXAS GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal sources of change in the standardized measure of discounted
future net cash flows are as follows (in thousands of dollars):
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED YEAR ENDED
----------------------- JANUARY 31, JULY 31,
1998 1997 1996 1995
---------- ---------- ----------- ----------
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................. 144,907 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........................... $ 395,672 $1,057,256 $ 608,858 $ 415,064
========== ========== ========= =========
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.
54
57
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 information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
TransTexas' definitive proxy statement to be filed with the Commission within
120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
----
(a) Financial Statements, Schedules and Exhibits
(1) Report of Independent Accountants........................... 25
Consolidated Balance Sheet.................................. 26
Consolidated Statement of Operations........................ 27
Consolidated Statement of Stockholders' Equity (Deficit).... 28
Consolidated Statement of Cash Flows........................ 29
Notes to Consolidated Financial Statements.................. 30
(2) Financial Statement Schedules:
Report of Independent Accountants........................... 63
Schedule II -- Valuation and Qualifying Accounts............ 64
55
58
(3)Exhibits
3.1 -- Articles of Incorporation (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
3.2 -- By-laws of TransTexas (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
4.1 -- Indenture dated as of June 15, 1995, among TransTexas,
TTC and American Bank National Association, as Trustee
(the "Indenture Trustee"), with respect to the Senior
Secured Notes including the forms of Senior Secured Note
and Senior Secured Guarantee as exhibits (filed as an
exhibit to TransTexas' current report on Form 8-K dated
June 20, 1995, and incorporated herein by reference).
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement, effective as
of June 23, 1995, from TransTexas to James A. Taylor, as
trustee for the benefit of the Indenture Trustee (filed
as an exhibit to TransTexas' current report on Form 8-K
dated June 20, 1995, and incorporated herein by
reference).
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of June 20,
1995, from TTC to James A. Taylor, as trustee for the
benefit of the Indenture Trustee (filed as an exhibit to
TransTexas' current report on Form 8-K dated on June 20,
1995, and incorporated herein by reference).
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TransTexas in favor of the
Indenture Trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 20, 1995, and
incorporated herein by reference).
4.5 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TTC in favor of the Indenture
Trustee (filed as an exhibit to TransTexas' current
report on Form 8-K dated June 20, 1995, and incorporated
herein by reference).
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among TransTexas, the Indenture Trustee
and the Disbursement Agent (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 20,
1995, and incorporated herein by reference).
4.7 -- Pledge and Security Agreement dated as of September 19,
1996, between TransAmerican Exploration Corporation and
Fleet National Bank (previously filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
4.8 -- Registration Rights Agreement dated as of September 19,
1996, by and among TransTexas, TransAmerican,
TransAmerican Exploration Corporation and Fleet National
Bank (filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended October 31, 1996, and incorporated
herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, between
TEC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 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, between
TARC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
56
59
4.11 -- Registration Rights Agreement dated as of February 23,
1995, among TransTexas, TARC and TEC (filed as an exhibit
to Post-Effective Amendment No. 5 to the Company's
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, TransTexas and Halliburton Company (filed
as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.13 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican, TransTexas and RECO Industries, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.14 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican, TransTexas and Frito-Lay, Inc. (filed as
an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.15 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican, TransTexas and EM Sector Holdings, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.16 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican and ITT Commercial Corp. (filed as an
exhibit to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.17 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican, TransTexas and ITT Commercial
Finance Corp. (filed as an exhibit to Post-Effective
Amendment No. 5 to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas and the Purchasers of 13 1/4% Series A Senior
Subordinated Notes due 2003 (filed as an exhibit to
Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.19 -- Indenture dated December 13, 1996 between TransTexas and
Bank One, Columbus, NA, as Trustee (filed as an exhibit
to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.20 -- Registration Rights Agreement dated December 13, 1996
between TransTexas and each of the Purchasers of the
Subordinated Notes (filed as an exhibit to Post-
Effective Amendment No. 5 to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein
by reference).
4.21 -- First Supplemental Indenture dated May 29, 1997 by and
among TransTexas, TTC and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated May 29, 1997, and
incorporated herein by reference).
4.22 -- Second Supplemental Indenture dated June 13, 1997 between
TransTexas, as issuer, and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
57
60
4.23 -- Indenture dated June 13, 1997 governing TransTexas'
Senior Subordinated Notes due 2001 between TransTexas, as
issuer, and Bank One, N.A., as trustee (filed as an
exhibit to TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.24 -- Registration Rights Agreement dated June 13, 1997 between
TransTexas and the holders of TransTexas' Senior
Subordinated Notes due 2001 (filed as an exhibit
TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.25 -- Loan Agreement dated June 13, 1997 between TransTexas and
TEC (filed as an exhibit to TransTexas' current report on
Form 8-K dated June 13, 1997, and incorporated herein by
reference).
4.26 -- Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of TEC (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.27 -- Disbursement Agreement dated June 13, 1997 among
TransTexas, TEC and Firstar Bank of Minnesota, as
disbursement agent and Trustee (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.28 -- 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).
4.29 -- Intercreditor and Collateral Agency Agreement dated June
13, 1997 among Firstar Bank of Minnesota, TEC and
TransTexas (filed as an exhibit to TEC's Form 10-Q for
the quarter ended July 31, 1997, and incorporated herein
by reference).
4.30 -- Registration Rights Agreement dated August 12, 1997, by
and among TransTexas, Firstar Bank of Minnesota, N.A.,
TEC and TARC (filed as an exhibit to Post-Effective
Amendment No. 6 to TransTexas' Registration Statement on
Form S-4 (33-91494) and incorporated herein by
reference).
4.31 -- First Supplemental Indenture dated as of September 2,
1997, between TransTexas, as issuer, and Bank One, N.A.,
as trustee (filed as an exhibit to TransTexas'
Registration Statement on Form S-4 (333-33803), and
incorporated herein by reference).
*4.32 -- First Amendment to Loan Agreement dated December 30, 1997
between TransTexas and TEC.
*4.33 -- First Amendment to Disbursement Agreement dated December
30, 1997 between TransTexas, TEC and Firstar Bank of
Minnesota, as disbursement agent and Trustee.
10.1 -- Services Agreement dated August 24, 1993, by and among
TransTexas and TransAmerican (filed as an exhibit to
TransTexas' current report on Form 8-K dated August 24,
1993, and incorporated herein by reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the other
subsidiaries of TransAmerican, as amended (filed as an
exhibit to TransTexas' Registration Statement on Form S-1
(No. 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 (No. 33-82200),
and incorporated herein by reference).
58
61
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
dated August 24, 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 (No. 33-62740), and incorporated
herein by reference).
10.6 -- Gas Purchase Agreement dated October 29, 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., successor to The Coastal
Corporation (filed as an exhibit to TransTexas'
Registration Statement on Form S-1 (No. 33-62740), and
incorporated herein by reference).
10.7 -- Gas Transportation Agreement dated the Effective Date (as
therein defined), by and between TransAmerican and The
Coastal Corporation, as amended by the Amendment to Gas
Transportation Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (filed as an exhibit
to TransTexas' Registration Statement on Form S-1 (No.
33-62740), and incorporated herein by reference).
10.8 -- Firm Natural Gas Sales Agreement dated September 30,
1993, by and between TransTexas and Associated Natural
Gas, Inc. (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended October 31, 1993, and incorporated
herein by reference).
10.9 -- 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 dated August
24, 1993 and incorporated herein by reference).
10.10 -- 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 (No. 33-75050), and incorporated
herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended October 31, 1993, and incorporated herein
by reference).
10.12 -- 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' Form 10-Q for
the quarter ended January 31, 1994, and incorporated
herein by reference).
10.13 -- Agreement for Purchase of Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
10.14 -- Assignment of Proceeds Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, TTC, and John R. Stanley
(filed as an exhibit to TransTexas' current report on
Form 8-K dated August 24, 1993, and incorporated herein
by reference).
59
62
10.16 -- Amended and Restated Accounts Receivable Management and
Security Agreement between TransTexas and BNY Financial
Corporation (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended October 31, 1995, and incorporated
herein by reference).
10.17 -- Note Purchase Agreement, dated as of May 10, 1996, among
TransTexas, TCW Shared Opportunity Fund II, L.P. and
Jefferies & Company, Inc. (filed as an exhibit to the
Company's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference).
10.18 -- Master Swap Agreement, dated June 6, 1996, between
TransTexas 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).
10.19 -- Purchase Agreement, dated January 30, 1996, between
TransTexas 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).
10.20 -- Production Payment Conveyance, executed on January 30,
1996, from TransTexas 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).
10.21 -- First Supplement to Purchase Agreement, dated as of
February 12, 1996, among TransTexas, 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).
10.22 -- First Supplement to Production Payment Conveyance,
executed February 12, 1996, among TransTexas, 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 -- Purchase Agreement, dated May 14, 1996, among TransTexas,
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).
10.24 -- Production Payment Conveyance, executed May 14, 1996,
from TransTexas 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).
10.25 -- 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).
10.26 -- Employment Agreement between TransTexas and Arnold
Brackenridge 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).
10.27 -- Stock Purchase Agreement dated as of May 29, 1997 by and
between TransTexas and First Union Bank of Connecticut,
as trustee (filed as an exhibit to TransTexas' current
report on Form 8-K dated May 29, 1997, and incorporated
herein by reference.
10.28 -- Interruptible Gas Transportation Agreement dated
Effective March 1, 1997 between TransTexas, as shipper,
and Lobo Pipeline Company, as transporter (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
July 31, 1997, and incorporated herein by reference).
60
63
10.29 -- Intrastate Firm Gas Transportation Agreement dated effective March 1, 1997 between
TransTexas, as shipper, and Lobo Pipeline Company, as transporter (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein
by reference).
10.30 -- Master Services Contract dated May 30, 1997 between Conoco Inc. and TransTexas (filed
as an exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.31 -- Agreement for Services dated effective March 1, 1997 between Conoco Inc. and TransTexas
(filed as an exhibit to TransTexas' Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.32 -- Services Agreement dated June 13, 1997 among TNGC Holdings Corporation, TransAmerican,
TEC, TARC, TransTexas and TTXD (filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by reference).
10.33 -- Amendment No. 3 to Tax Allocation Agreement dated May 29, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.34 -- Amendment No. 4 to Tax Allocation Agreement dated June 13, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.35 -- Amendment No. 2 to Transfer Agreement dated May 29, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.36 -- Amendment No. 3 to Transfer Agreement dated June 13, 1997 (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31, 1997, and incorporated herein by
reference).
10.37 -- Second Amended and Restated Accounts Receivable Management Agreement dated October 14,
1997 between TransTexas and BNY Financial Corporation (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended October 31, 1997, and incorporated herein
by reference).
*10.38 -- Employment Agreement dated December 1, 1997 between TransTexas and Arnold Brackenridge.
*10.39 -- Employment Agreement Settlement dated April 28, 1998 between TransTexas and Richard
Bianchi.
*10.40 -- Severance Agreement dated November 21, 1997 between TransTexas and Lee Muncy.
*10.41 -- Purchase Agreement dated February 23, 1998 between TransTexas and TCW.
*10.42 -- Production Payment Conveyance dated February 23, 1998 between TransTexas and TCW.
*21.1 -- Schedule of Subsidiaries of TransTexas.
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Netherland, Sewell & Associates, Inc
*27.1 -- Financial Data Schedule
- ---------------
* filed herewith
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
January 31, 1998.
61
64
SIGNATURES
Pursuant to the requirements of 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 April 30, 1998.
TRANSTEXAS GAS 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 April 30, 1998.
NAME TITLE
---- -----
/s/ JOHN R. STANLEY Director and Chief Executive Officer (Principal
- --------------------------------------------- Executive Officer)
John R. Stanley
/s/ THOMAS B. MCDADE Director and Chairman of the Board
- ---------------------------------------------
Thomas B. McDade
/s/ JAMES R. LESCH Director
- ---------------------------------------------
James R. Lesch
/s/ ROBERT L. MAY Director
- ---------------------------------------------
Robert L. May
/s/ DONALD D. SYKORA Director
- ---------------------------------------------
Donald D. Sykora
/s/ EDWIN B. DONAHUE Vice President and Chief Financial Officer
- --------------------------------------------- (Principal Financial and Accounting Officer)
Edwin B. Donahue
62
65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
TransTexas Gas Corporation:
Our report on the consolidated financial statements of TransTexas Gas
Corporation is included on page 25 of this 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 55 of this 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
63
66
SCHEDULE II
TRANSTEXAS GAS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER END
DESCRIPTION OF PERIOD AT COSTS RETIREMENTS CHANGES OF PERIOD
----------- ---------- --------- ----------- ------- ----------
Year ended July 31, 1995:
Valuation allowance -- long-term
receivables....................... $ 531 $421 $ -- $-- $ 952
====== ==== ====== == ======
Transition Period ended January 31,
1996:
Valuation allowance -- long-term
receivables....................... $ 952 $278 $ -- $-- $1,230
====== ==== ====== == ======
Year ended January 31, 1997:
Valuation allowance -- long-term
receivables....................... $1,230 $516 $1,746 $-- $ --
====== ==== ====== == ======
Year ended January 31, 1998:
Valuation allowance -- long-term
receivables....................... $ -- $ -- $ -- $-- $ --
====== ==== ====== == ======
64
67
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Articles of Incorporation (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
3.2 -- By-laws of TransTexas (filed as an exhibit to the
Company's Registration Statement on Form S-1 (No.
33-75050), and incorporated herein by reference).
4.1 -- Indenture dated as of June 15, 1995, among TransTexas,
TTC and American Bank National Association, as Trustee
(the "Indenture Trustee"), with respect to the Senior
Secured Notes including the forms of Senior Secured Note
and Senior Secured Guarantee as exhibits (filed as an
exhibit to TransTexas' current report on Form 8-K dated
June 20, 1995, and incorporated herein by reference).
4.2 -- Mortgage, Deed of Trust, Assignment of Production,
Security Agreement and Financing Statement, effective as
of June 23, 1995, from TransTexas to James A. Taylor, as
trustee for the benefit of the Indenture Trustee (filed
as an exhibit to TransTexas' current report on Form 8-K
dated June 20, 1995, and incorporated herein by
reference).
4.3 -- Pipeline Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of June 20,
1995, from TTC to James A. Taylor, as trustee for the
benefit of the Indenture Trustee (filed as an exhibit to
TransTexas' current report on Form 8-K dated on June 20,
1995, and incorporated herein by reference).
4.4 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TransTexas in favor of the
Indenture Trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 20, 1995, and
incorporated herein by reference).
4.5 -- Security Agreement, Pledge and Financing Statement, dated
as of June 20, 1995, by TTC in favor of the Indenture
Trustee (filed as an exhibit to TransTexas' current
report on Form 8-K dated June 20, 1995, and incorporated
herein by reference).
4.6 -- Cash Collateral and Disbursement Agreement, dated as of
June 20, 1995, among TransTexas, the Indenture Trustee
and the Disbursement Agent (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 20,
1995, and incorporated herein by reference).
4.7 -- Pledge and Security Agreement dated as of September 19,
1996, between TransAmerican Exploration Corporation and
Fleet National Bank (previously filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended October 31,
1996, and incorporated herein by reference).
4.8 -- Registration Rights Agreement dated as of September 19,
1996, by and among TransTexas, TransAmerican,
TransAmerican Exploration Corporation and Fleet National
Bank (filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended October 31, 1996, and incorporated
herein by reference).
4.9 -- Pledge Agreement dated as of February 23, 1995, between
TEC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 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, between
TARC and First Fidelity Bank, National Association, as
Trustee (filed as an exhibit to Post-Effective Amendment
No. 5 to TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
68
EXHIBIT
NO. DESCRIPTION
------- -----------
4.11 -- Registration Rights Agreement dated as of February 23,
1995, among TransTexas, TARC and TEC (filed as an exhibit
to Post-Effective Amendment No. 5 to the Company's
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, TransTexas and Halliburton Company (filed
as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.13 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican, TransTexas and RECO Industries, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.14 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican, TransTexas and Frito-Lay, Inc. (filed as
an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.15 -- Pledge Agreement dated as of February 23, 1995, among
TransAmerican, TransTexas and EM Sector Holdings, Inc.
(filed as an exhibit to Post-Effective Amendment No. 5 to
TransTexas' Registration Statement on Form S-3
(33-91494), and incorporated herein by reference).
4.16 -- Stock Pledge Agreement dated January 27, 1995, between
TransAmerican and ITT Commercial Corp. (filed as an
exhibit to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.17 -- Registration Rights Agreement dated January 27, 1995,
among TransAmerican, TransTexas and ITT Commercial
Finance Corp. (filed as an exhibit to Post-Effective
Amendment No. 5 to TransTexas' Registration Statement on
Form S-3 (33-91494), and incorporated herein by
reference).
4.18 -- Note Purchase Agreement dated December 13, 1996 between
TransTexas and the Purchasers of 13 1/4% Series A Senior
Subordinated Notes due 2003 (filed as an exhibit to
Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.19 -- Indenture dated December 13, 1996 between TransTexas and
Bank One, Columbus, NA, as Trustee (filed as an exhibit
to Post-Effective Amendment No. 5 to TransTexas'
Registration Statement on Form S-3 (33-91494), and
incorporated herein by reference).
4.20 -- Registration Rights Agreement dated December 13, 1996
between TransTexas and each of the Purchasers of the
Subordinated Notes (filed as an exhibit to Post-
Effective Amendment No. 5 to TransTexas' Registration
Statement on Form S-3 (33-91494), and incorporated herein
by reference).
4.21 -- First Supplemental Indenture dated May 29, 1997 by and
among TransTexas, TTC and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated May 29, 1997, and
incorporated herein by reference).
4.22 -- Second Supplemental Indenture dated June 13, 1997 between
TransTexas, as issuer, and Firstar Bank of Minnesota,
N.A., as trustee (filed as an exhibit to TransTexas'
current report on Form 8-K dated June 13, 1997, and
incorporated herein by reference).
69
EXHIBIT
NO. DESCRIPTION
------- -----------
4.23 -- Indenture dated June 13, 1997 governing TransTexas'
Senior Subordinated Notes due 2001 between TransTexas, as
issuer, and Bank One, N.A., as trustee (filed as an
exhibit to TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.24 -- Registration Rights Agreement dated June 13, 1997 between
TransTexas and the holders of TransTexas' Senior
Subordinated Notes due 2001 (filed as an exhibit
TransTexas' Registration Statement on Form S-4
(333-33803), and incorporated herein by reference).
4.25 -- Loan Agreement dated June 13, 1997 between TransTexas and
TEC (filed as an exhibit to TransTexas' current report on
Form 8-K dated June 13, 1997, and incorporated herein by
reference).
4.26 -- Security and Pledge Agreement dated June 13, 1997 by
TransTexas in favor of TEC (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.27 -- Disbursement Agreement dated June 13, 1997 among
TransTexas, TEC and Firstar Bank of Minnesota, as
disbursement agent and Trustee (filed as an exhibit to
TransTexas' current report on Form 8-K dated June 13,
1997, and incorporated herein by reference).
4.28 -- 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).
4.29 -- Intercreditor and Collateral Agency Agreement dated June
13, 1997 among Firstar Bank of Minnesota, TEC and
TransTexas (filed as an exhibit to TEC's Form 10-Q for
the quarter ended July 31, 1997, and incorporated herein
by reference).
4.30 -- Registration Rights Agreement dated August 12, 1997, by
and among TransTexas, Firstar Bank of Minnesota, N.A.,
TEC and TARC (filed as an exhibit to Post-Effective
Amendment No. 6 to TransTexas' Registration Statement on
Form S-4 (33-91494) and incorporated herein by
reference).
4.31 -- First Supplemental Indenture dated as of September 2,
1997, between TransTexas, as issuer, and Bank One, N.A.,
as trustee (filed as an exhibit to TransTexas'
Registration Statement on Form S-4 (333-33803), and
incorporated herein by reference).
*4.32 -- First Amendment to Loan Agreement dated December 30, 1997
between TransTexas and TEC.
*4.33 -- First Amendment to Disbursement Agreement dated December
30, 1997 between TransTexas, TEC and Firstar Bank of
Minnesota, as disbursement agent and Trustee.
10.1 -- Services Agreement dated August 24, 1993, by and among
TransTexas and TransAmerican (filed as an exhibit to
TransTexas' current report on Form 8-K dated August 24,
1993, and incorporated herein by reference).
10.2 -- Tax Allocation Agreement dated August 24, 1993, by and
among TransAmerican, TransTexas, and the other
subsidiaries of TransAmerican, as amended (filed as an
exhibit to TransTexas' Registration Statement on Form S-1
(No. 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 (No. 33-82200),
and incorporated herein by reference).
70
EXHIBIT
NO. DESCRIPTION
------- -----------
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
dated August 24, 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 (No. 33-62740), and incorporated
herein by reference).
10.6 -- Gas Purchase Agreement dated October 29, 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., successor to The Coastal
Corporation (filed as an exhibit to TransTexas'
Registration Statement on Form S-1 (No. 33-62740), and
incorporated herein by reference).
10.7 -- Gas Transportation Agreement dated the Effective Date (as
therein defined), by and between TransAmerican and The
Coastal Corporation, as amended by the Amendment to Gas
Transportation Agreement dated February 13, 1990, by and
between TransAmerican and Texcol Gas Services, Inc.,
successor to The Coastal Corporation (filed as an exhibit
to TransTexas' Registration Statement on Form S-1 (No.
33-62740), and incorporated herein by reference).
10.8 -- Firm Natural Gas Sales Agreement dated September 30,
1993, by and between TransTexas and Associated Natural
Gas, Inc. (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended October 31, 1993, and incorporated
herein by reference).
10.9 -- 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 dated August
24, 1993 and incorporated herein by reference).
10.10 -- 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 (No. 33-75050), and incorporated
herein by reference).
10.11 -- Natural Gas Sales Agreement between TransTexas and
Associated Natural Gas, Inc. dated September 30, 1993
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended October 31, 1993, and incorporated herein
by reference).
10.12 -- 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' Form 10-Q for
the quarter ended January 31, 1994, and incorporated
herein by reference).
10.13 -- Agreement for Purchase of Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
10.14 -- Assignment of Proceeds Production Payment between
TransTexas and Southern States Exploration, Inc. dated
April 1, 1994 (filed as an exhibit to TransTexas' Form
10-Q for the quarter ended April 30, 1994, and
incorporated herein by reference).
71
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 -- Transfer Agreement dated August 24, 1993, by and among
TransAmerican, TransTexas, TTC, and John R. Stanley
(filed as an exhibit to TransTexas' current report on
Form 8-K dated August 24, 1993, and incorporated herein
by reference).
10.16 -- Amended and Restated Accounts Receivable Management and
Security Agreement between TransTexas and BNY Financial
Corporation (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended October 31, 1995, and incorporated
herein by reference).
10.17 -- Note Purchase Agreement, dated as of May 10, 1996, among
TransTexas, TCW Shared Opportunity Fund II, L.P. and
Jefferies & Company, Inc. (filed as an exhibit to the
Company's Form 10-Q for the quarter ended April 30, 1996,
and incorporated herein by reference).
10.18 -- Master Swap Agreement, dated June 6, 1996, between
TransTexas 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).
10.19 -- Purchase Agreement, dated January 30, 1996, between
TransTexas 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).
10.20 -- Production Payment Conveyance, executed on January 30,
1996, from TransTexas 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).
10.21 -- First Supplement to Purchase Agreement, dated as of
February 12, 1996, among TransTexas, 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).
10.22 -- First Supplement to Production Payment Conveyance,
executed February 12, 1996, among TransTexas, 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 -- Purchase Agreement, dated May 14, 1996, among TransTexas,
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).
10.24 -- Production Payment Conveyance, executed May 14, 1996,
from TransTexas 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).
10.25 -- 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).
10.26 -- Employment Agreement between TransTexas and Arnold
Brackenridge 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).
72
EXHIBIT
NO. DESCRIPTION
------- -----------
10.27 -- Stock Purchase Agreement dated as of May 29, 1997 by and
between TransTexas and First Union Bank of Connecticut,
as trustee (filed as an exhibit to TransTexas' current
report on Form 8-K dated May 29, 1997, and incorporated
herein by reference.
10.28 -- Interruptible Gas Transportation Agreement dated
Effective March 1, 1997 between TransTexas, as shipper,
and Lobo Pipeline Company, as transporter (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
July 31, 1997, and incorporated herein by reference).
10.29 -- Intrastate Firm Gas Transportation Agreement dated
effective March 1, 1997 between TransTexas, as shipper,
and Lobo Pipeline Company, as transporter (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
July 31, 1997, and incorporated herein by reference).
10.30 -- Master Services Contract dated May 30, 1997 between
Conoco Inc. and TransTexas (filed as an exhibit to
TransTexas' Form 10-Q for the quarter ended July 31,
1997, and incorporated herein by reference).
10.31 -- Agreement for Services dated effective March 1, 1997
between Conoco Inc. and TransTexas (filed as an exhibit
to TransTexas' Form 10-Q for the quarter ended July 31,
1997, and incorporated herein by reference).
10.32 -- Services Agreement dated June 13, 1997 among TNGC
Holdings Corporation, TransAmerican, TEC, TARC,
TransTexas and TTXD (filed as an exhibit to TransTexas'
Form 10-Q for the quarter ended July 31, 1997, and
incorporated herein by reference).
10.33 -- Amendment No. 3 to Tax Allocation Agreement dated May 29,
1997 (filed as an exhibit to TransTexas' Form 10-Q for
the quarter ended July 31, 1997, and incorporated herein
by reference).
10.34 -- Amendment No. 4 to Tax Allocation Agreement dated June
13, 1997 (filed as an exhibit to TransTexas' Form 10-Q
for the quarter ended July 31, 1997, and incorporated
herein by reference).
10.35 -- Amendment No. 2 to Transfer Agreement dated May 29, 1997
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by
reference).
10.36 -- Amendment No. 3 to Transfer Agreement dated June 13, 1997
(filed as an exhibit to TransTexas' Form 10-Q for the
quarter ended July 31, 1997, and incorporated herein by
reference).
10.37 -- Second Amended and Restated Accounts Receivable
Management Agreement dated October 14, 1997 between
TransTexas and BNY Financial Corporation (filed as an
exhibit to TransTexas' Form 10-Q for the quarter ended
October 31, 1997, and incorporated herein by reference).
*10.38 -- Employment Agreement dated December 1, 1997 between
TransTexas and Arnold Brackenridge.
*10.39 -- Employment Agreement Settlement dated April 28, 1998
between TransTexas and Richard Bianchi.
*10.40 -- Severance Agreement dated November 21, 1997 between
TransTexas and Lee Muncy.
*10.41 -- Purchase Agreement dated February 23, 1998 between
TransTexas and TCW.
*10.42 -- Production Payment Conveyance dated February 23, 1998
between TransTexas and TCW.
73
EXHIBIT
NO. DESCRIPTION
------- -----------
*21.1 -- Schedule of Subsidiaries of TransTexas.
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Netherland, Sewell & Associates, Inc
*27.1 -- Financial Data Schedule
- ---------------
* filed herewith