ITEM 1. BUSINESS
GENERAL
TransTexas Gas Corporation (debtor in possession) (the "Company" or "TransTexas"), a Delaware corporation incorporated in 1993, is engaged in the exploration for and development and production of natural gas and condensate, primarily along the Upper Texas Gulf Coast. TransTexas' business strategy is to utilize its experience in drilling and operating wells to find, develop and produce reserves at a low cost.
The Company's long-term goal is to convert unproven acreage to proved reserves by drilling in under-exploited areas. In order to meet its long-term goals, TransTexas' strategy is to drill wells in areas of the Upper Texas Gulf Coast where 3-D seismic data indicates productive potential and to drill development wells in its proven producing areas such as the Eagle Bay field and Wharton County. TransTexas' current drilling program is restricted by reduced cash flow available from operations.
As of February 1, 2003, TransTexas' net proved reserves of natural gas and natural gas equivalents, as estimated by Netherland, Sewell & Associates, Inc., an independent firm of petroleum engineers, were 54 Bcfe. As of January 31, 2003, TransTexas owned approximately 43,970 gross (35,646 net) acres of mineral interests. TransTexas' average net daily natural gas production for the year ended January 31, 2003 was approximately 29 MMcfd, for a total net production of 10.7 Bcf of natural gas. TransTexas' average net daily condensate and oil production for the year ended January 31, 2003 was approximately 2,357 Bpd, for a total net production of 860 MBbls of condensate and oil. TransTexas' average net daily production of natural gas liquids ("NGLs") for the year ended January 31, 2003 was approximately 85,744 gallons per day, for a total net production of 31.3 million gallons of natural gas liquids.
Following the separation with the Company's former Chief Executive Officer in March 2002, a change in business strategy was implemented that incorporates and promotes working interest partners to carry a significant portion of the capital expenditure requirements to evaluate and develop the Company's prospects. In conjunction with this change in management, the Company began attempting to achieve a consensus among the holders (the "Noteholders") of the $200 Million Senior Secured Notes due 2005 (the "Notes") so as to effect a consensual recapitalization. The Company held discussions with the principal Noteholders that represented approximately 90% of the Notes and engaged a financial advisor to act as an intermediary in these discussions. From August 2002 to January 2003, the Company worked with the Noteholders in an effort to obtain an agreement to recapitalize the Company. Although the Company was advised that an agreement in principle among the Noteholders had been achieved, subject to documentation, the Company was subsequently informed that these negotiations had failed.
The Company has undertaken a substantial effort to engage potential working interest partners and has generated significant industry interest in participating in its prospects. The Company is working with multiple third parties in an effort to reach agreements which should allow the Company to execute this strategy. However, absent available cash to drill, the Company has been unable to add production or reserves. See "Exploration and Production."
Available Information. The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other items with the Securities and Exchange Commission ("SEC"). The Company makes available to any stockholder, without charge, copies of its Annual Report on Form 10-K, as filed with the SEC. Stockholders may obtain copies of exhibits to the Annual Report on Form 10-K upon written request and payment of the Company's reasonable expenses in furnishing such exhibits. Requests for copies of this Form 10-K or other Company filings should be sent to: Investor Relations Department, TransTexas Gas Corporation, 1300 North Sam Houston Parkway East, Houston, Texas 77032-2949 or call (281) 987-8600. The Company maintains an Internet site located at www.transtexasgas.com that links to the SEC's site at www.sec.gov where the public may access reports, proxy and other information that the Company has filed with the SEC. In addition, the public may read and copy any materials that the Company has filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
REORGANIZATION
On November 14, 2002 (the "Petition Date"), TransTexas and its subsidiaries, Galveston Bay Pipeline Company ("Pipeline") and Galveston Bay Processing Corporation ("Processing"), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division (the "Bankruptcy Court"). The bankruptcy cases are being jointly administered. TransTexas, Pipeline and Processing are operating their businesses and managing their properties as debtors in possession. As a result of the Chapter 11 filings, absent approval from the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising prior to the Petition Date.
The bankruptcy petitions were filed in order to preserve cash and to give the Company the opportunity to restructure its debt. The consummation of a plan of reorganization is the primary objective of the Company. The plan of reorganization will set forth the means for satisfying claims, including liabilities subject to compromise, and interests in the Company. A plan of reorganization may result in, among other things, material dilution or elimination of the interests of existing security holders as a result of the issuance of securities to creditors or new investors. The consummation of a plan of reorganization will require approval of the Bankruptcy Court.
The Company expects to file its Plan of Reorganization and Disclosure Statement with the Bankruptcy Court on May 1, 2003. Additional information with respect to the Plan of Reorganization and Disclosure Statement will be provided on Form 8-K or by an amendment to this Form 10-K. At this time, it is not possible to predict the outcome of the bankruptcy proceedings or the effect on the business of the Company or on the interests of creditors, royalty owners or stockholders.
PRIOR REORGANIZATION
On April 19, 1999 (the "Prior Petition Date"), TransTexas filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On April 20, 1999, the Company's then parent, TransAmerican Energy Corporation ("TEC"), and its wholly owned subsidiary, TransAmerican Refining Corporation ("TARC"), also filed voluntary petitions for relief under Chapter 11. On May 20, 1999, the cases were transferred to the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division. TransTexas' Chapter 11 filing did not include its subsidiaries. The Company's Second Amended, Modified and Restated Plan of Reorganization dated January 25, 2000 (the "Prior Plan") was confirmed by the Bankruptcy Court on February 7, 2000.
EXPLORATION AND PRODUCTION
Under prior management, the Company's business strategy dictated that the Company remain a 100% working interest operator, with the exception of the Eagle Bay field partnership with Davis Petroleum. This strategy required substantial capital resources to fund the drilling program. In the year ended January 31, 2003, TransTexas' ability to fund its capital expenditure needs from available cash flow was limited by several factors, including the failure of the San Leon #1 well, which was initially completed in October 2001 in the Company's Eagle Bay field; a mechanical failure in October 2002 of the Company's single largest producing well, the State Tract 331-1, that further lowered production and ultimately mandated the drilling of another well into this reservoir to resume equivalent production; the rapid decline in production from the Company's Southwest Bonus field in Wharton County following an aggressive competitive development drilling program; significant leverage that mandated cash flow be used to service debt; and volatile commodity prices.
Absent available cash to drill, TransTexas was unable to add production or reserves. In March 2002, the board of directors reached a severance agreement with the Company's former Chief Executive Officer that allowed the Company to embark upon a program for the development of its properties through a revised business model. This new business model is centered upon the promotion of working interest partners who carry a significant portion of the capital expenditure requirements necessary to evaluate the prospects. The Company believes that this new strategy should allow it to traverse from a "go-it-alone" exploration and drilling company to one where multiple projects are being pursued at lower risk to the Company, with outside industry partners assuming a large portion of the capital risk of these projects and sharing their exploration and technical expertise with the Company. As a result of the change in the TransTexas' operating and development strategy, an aggressive marketing effort and the change in management, TransTexas has generated significant industry interest in participating in its prospects. However, there can be no assurance that working interest partners can be obtained on terms acceptable to the Company, or in a timely manner, to evaluate the Company's properties.
The exploration and production activities of TransTexas consist of geological and geophysical evaluation of current and prospective properties, the acquisition of mineral interests in prospects and the drilling, development and operation of leased properties for the production and sale of natural gas, condensate and crude oil. TransTexas' technical staff consists of geologists, geophysicists and engineers. 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.
Primary Operating Areas
Eagle Bay, Galveston County, Texas. TransTexas has successfully drilled and completed ten wells in the Eagle Bay field. TransTexas intends to drill additional development wells in Eagle Bay as a part of its strategy to further increase reserves and production and has identified additional drilling locations from 3-D seismic data. As of January 31, 2003, TransTexas owned a 75% working interest in approximately 3,594 net acres in the Eagle Bay area. For the fiscal year ended January 31, 2003, TransTexas sold 4.9 Bcf of natural gas, 0.7 million barrels of condensate and 31.3 million gallons of natural gas liquids from the Eagle Bay field at average net daily rates of 13 MMcfd, 2,010 Bpd and 85,744 gallons per day, respectively. Production from the Eagle Bay field represents a significant percentage of the Company's total production. See "Drilling and Production Data."
In October 2001, a new well in the Eagle Bay field, the San Leon #1, was brought on-line. With the intent of duplicating the production of the best wells in Eagle Bay and in order to try to overcome the decline in commodity prices, an attempt was made to complete this new well and produce it at the highest rate possible. Unfortunately, doing so caused production to be inconsistent and the well began to produce sand from the formation. By the end of January 2002, the well bore had become restricted to the point that production was completely curtailed. This loss of production further lowered cash flow and created the need to re-drill the lower section of the well at additional expense.
In October 2002, the Company's single largest producing well in the Eagle Bay field, the State Tract 331-1, suffered a mechanical failure that reduced cash flow and ultimately mandated the drilling of another well into this reservoir to resume equivalent production. In March 2003, the Bankruptcy Court authorized TCW Global Project Fund Ltd. and TCW DR VI
Investment Partnership, L.P. (collectively "TCW"), the owner of a production payment, to fund the drilling of this key well in the Eagle Bay field that would duplicate the previous production rates of the State Tract 331-1 well. As a result of an agreement with Davis Petroleum Corporation on April 4, 2003, the Company issued a Tenth Supplemental Production Payment to TCW and Mirant Americas Energy Capital Assets, LLC ("Mirant") for funding of $5 million to drill the State Tract 331-9 well. This well is a sidetrack of the depleted State Tract 352-1 well and is to be drilled as an in-fill development well to the State Tract 331-1 well. The State Tract 331-9 well, if successful, should allow the Company to resume increased production from the fault block in the Eagle Bay field and to take advantage of its full production capacity. The Company commenced operations on the State Tract 331-9 well on April 17, 2003.
Southwest Bonus, Wharton County, Texas. As of January 31, 2003, TransTexas had successfully drilled and completed 22 wells in the Southwest Bonus field. TransTexas has identified additional drilling locations based upon seismic data and held a 97% working interest covering approximately 4,595 net acres in the Southwest Bonus area. For the fiscal year ended January 31, 2003, TransTexas' Southwest Bonus properties produced 5.3 Bcf of natural gas, at an average net daily rate of 14 MMcfd. Production from the Southwest Bonus field represents a significant percentage of the Company's total production. See "Drilling and Production Data."
Other Areas. TransTexas also has an inventory of exploration and exploitation prospects along the Upper Texas Gulf Coast which it continues to assemble as part of its strategy to increase reserves and production. The Company's primary focus is to seek areas that it believes are under-exploited and are along the trend with existing proved fields and where seismic data indicates additional hydrocarbon potential. The Company, together with suitably capitalized and technically competent partners, intend to drill these additional exploration and exploitation prospects, which are located in the proximity of TransTexas' existing producing fields and infrastructure or along the same geological trend.
Drilling and Production Data
During the five years ended January 31, 2003, TransTexas completed approximately 63% of 82 wells. As of January 31, 2003, TransTexas had a total of 45 productive wells. TransTexas had a working interest in the following numbers of wells that were drilled during the periods indicated:
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(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.
The following table sets forth information with respect to net production and average unit prices and costs for the periods indicated:
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(1) 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.
TRANSPORTATION, PROCESSING AND MARKETING
TransTexas believes that there is currently adequate pipeline transportation capacity for its anticipated hydrocarbon production in all of its operating areas.
TransTexas has entered into various agreements for the gathering, transportation, processing and sale of substantially all of its natural gas and natural gas liquids produced from its Eagle Bay prospects. TransTexas monitors its transportation needs closely and is actively in discussions with pipeline companies regarding additional agreements in order to meet potential future production increases.
Galveston Bay Processing Corporation, a wholly owned subsidiary of TransTexas, operates onshore facilities to separate produced natural gas and condensate, dehydrate and treat natural gas for the removal of carbon dioxide and stabilize condensate from the Company's Eagle Bay field. These facilities are located approximately 60 miles east of Houston at Winnie, Texas.
TransTexas has entered into contracts with Kinder Morgan Ship Channel Pipeline, L.P., formerly Tejas Ship Channel, LLC, for transportation of its production from the Eagle Bay field to the Winnie facilities at a fixed negotiated rate. Under these contracts, the Company has agreed to deliver the first 75,000 MMBtu per day of natural gas and associated condensate from the field to Kinder Morgan Ship Channel Pipeline, L.P.
The Company also entered into a contract with a subsidiary of Duke Energy Field Services, LLC for transportation of natural gas on a firm and interruptible basis from the Winnie facility to natural gas liquids recovery facilities located in the Beaumont/Port Arthur, Texas area, and residue gas from these facilities to various distribution points. Under the agreement, the Company has agreed to deliver the first 56,250 Mcf of natural gas and 19,500 MMBtu of residue gas per day to Duke Energy Field Services. Transportation fees for natural gas and residue gas are based on fixed negotiated rates.
TransTexas and Duke Energy Field Services, LLC entered into a contract to extract natural gas liquids from the high-Btu natural gas stream leaving the Winnie facilities. TransTexas can elect, at its discretion on a monthly basis, whether to process the natural gas to recover natural gas liquids. The Company's decision whether to process the natural gas is based on prevailing market prices.
TransTexas entered into gas purchase agreements with Duke Energy Field Services, LLC and PanEnergy Marketing Company, covering the sale by TransTexas of substantially all of its gas production from the Eagle Bay field. The agreements provide that deliveries in excess of 50,000 MMBtu per day of residue gas be based on a published industry index price.
For the year ended January 31, 2003, two purchasers represented approximately 71% of the consolidated natural gas, condensate and NGL 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.
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 greater capital and human resources than TransTexas and which, in many instances, have been engaged in the energy business longer 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, 2003, TransTexas had 75 employees (including field and plant personnel), none of which are parties to a collective bargaining agreement. The Company has undertaken significant reductions in its overhead expenses and number of employees. Employees at the Company's headquarters have been reduced 65% from 116 on January 1, 2002 to 41 as of January 31, 2003. From time to time, TransTexas may engage the services of independent geological, engineering, land and other consultants when specific expertise is required.
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.
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 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.
ITEM 2. PROPERTIES
ACREAGE AND PRODUCTIVE WELLS
The following table sets forth TransTexas' total developed and undeveloped acreage and productive wells as of January 31, 2003:
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(1) Of the total productive wells, 44 gross (36 net) were gas wells and 1 gross (1 net) was an oil well.
(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.
RESERVES
As of February 1, 2003, TransTexas had total proved reserves of 45.7 Bcf of natural gas and 1,430 MBbls of condensate and oil. See Note 19 of Notes to Consolidated Financial Statements, which contains supplemental information regarding TransTexas' proved reserves. Proved reserves are the estimated quantities of natural gas, condensate and oil that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. The estimation of reserves requires substantial judgment on the part of petroleum engineers, resulting in imprecise determinations, particularly with respect to recent discoveries. The accuracy of any reserve estimate depends on the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may result in revisions of the estimate. Accordingly, estimates of reserves are often materially different from the quantities of natural gas, condensate and oil that are ultimately recovered, and these estimates will change as future production and development information becomes available. The reserve data represent estimates only and should not be construed as being exact.
TITLE TO PROPERTIES/LIENS AND CLAIMS
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 typically 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 has not obtained title opinions on all of its properties. The Company is uncertain as to the impact that failure to obtain a title opinion has on its title to developed properties. TransTexas' properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes, liens of vendors and lenders and other burdens.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
See Note 13 of Notes to Consolidated Financial Statements for a discussion of legal proceedings affecting TransTexas.
ITEM 4.
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, 2003.
In March 2002, John R. Stanley resigned as Chief Executive Officer and as Chairman and member of the Board of Directors of the Company.
Executive Officers of the Registrant
The following persons were serving as executive officers of the Company as of April 30, 2003:
Set forth below is a description of the business experience of each of the executive officers.
Arnold H. Brackenridge was elected Chief Executive Officer in March 2002 and prior to that he held the position of President and Chief Operating Officer of the Company since March 2001. Prior to his retirement in 1999, Mr. Brackenridge was President and Chief Operating Officer of the Company since May 1993. From 1984 until June 1992, Mr. Brackenridge was the President and Chief Executive Officer of Wintershall Energy, a business group of BASF Corporation.
Edwin B. Donahue has been Vice President, Chief Financial Officer and Secretary of the Company since May 1993. Mr. Donahue has been employed in various positions with the Company and TransAmerican for over 25 years.
Gregory J. Halvatzis joined the Company in February 2001 and has been Vice President of Exploration since March 2002. From 1976 until 2001, he held various exploration management positions with Cities Service, First Energy and JN Oil and Gas.
David R. Jennings has been Assistant General Counsel and Assistant Secretary since May 2000. He has been employed by the Company and its affiliates since November 1995.
John R. Thompson has been Vice President of Operations since March 2002. He has been employed by the Company and its affiliates since 1984. Prior to 1984, Mr. Thompson was employed by Texaco USA from 1979 to 1984.
Simon J. Ward has been Vice President and Treasurer of the Company since June 1999. He served as Manager of Investor Relations from 1994 until June 1999. From 1976 until 1994, he held various positions with ICO, Inc., Baker Hughes Vetco Services, Inc. and Vetco Services, Inc.
George C. Wright has been Vice President of Accounting of the Company since March 1999. He has been employed by the Company and its affiliates since June 1982.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since April 24, 2000, prices for the Class A Common Stock of TransTexas have been quoted on NASDAQ's Over The Counter Bulletin Board ("OTCBB") under the symbol "TTXG." From May 4, 1999 through March 21, 2000, prices for the Company's common stock were quoted on OTCBB under the symbol "TTGGQ." The following table sets forth, on a per-share basis for the periods indicated, the high and low sales or bid prices for TransTexas' Class A common stock as reported by the OTCBB. Over-the-counter quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
The Certificate of Designation for the Senior Preferred Stock of the Company provides for the mandatory conversion of one-half of the outstanding shares of Senior Preferred Stock into fully paid and non-assessable shares of Class A Common Stock at the rate of 0.3461 shares of Class A Common Stock for each $1.00 of liquidation preference per share, plus an amount equal to accrued and unpaid dividends, of Senior Preferred Stock if the Company fails to pay dividends on the Senior Preferred Stock as required by the Certificate of Designation for the Senior Preferred Stock on any two dividend payment dates. The Certificate of Designation for the Series A Junior Preferred Stock ("Junior Preferred Stock" and together with the Senior Preferred Stock, the "Preferred Stock") provides for the mandatory conversion of all of the outstanding shares of Junior Preferred Stock into fully paid and non-assessable shares of Class A Common Stock at the rate of 0.1168 shares of Class A Common Stock for each $1.00 of liquidation preference per share, plus an amount equal to accrued and unpaid dividends, of Junior Preferred Stock if the Company fails to pay dividends on the Senior Preferred Stock as required by the Certificate of Designation for the Senior Preferred Stock on any two dividend payment dates.
The Certificate of Designation for each of the Senior Preferred Stock and the Junior Preferred Stock required the payment to the holders of a cash dividend on the Senior Preferred Stock and an in-kind dividend on the Junior Preferred Stock, respectively, by the Company on June 15, 2002 and on September 15, 2002. The Company did not make the required dividend payments on either date. Therefore, the liquidation preference of the Senior Preferred Stock was increased to approximately $1.04 per share and the liquidation preference of the Junior Preferred Stock was increased to approximately $1.05 per share. As a result, on September 16, 2002, each two shares of Senior Preferred Stock was converted into one share of New Senior Preferred and into approximately 0.3596 shares of Class A Common Stock and each share of Junior Preferred Stock was converted into approximately 0.1227 shares of Class A Common Stock. No fractional shares were issued in the conversion.
The Board of Directors of the Company determined that the fair market value of each share of the Preferred Stock and Common Stock for purposes of the conversion was less than $0.01 per share and, therefore, no cash was paid to holders of Preferred Stock in lieu of fractional shares.
In the aggregate, 164,333,875 shares of Senior Preferred Stock representing one-half of all of the outstanding Senior Preferred Stock were converted into 59,101,243 shares of Class A Common Stock and 25,240,513 shares of Junior Preferred Stock representing all of the outstanding Junior Preferred Stock were converted into 3,097,336 shares of Class A Common Stock. Since the Company did not pay the required dividend payments, holders of the Senior Preferred Stock have the right, voting separately as a class, to elect all five directors to the Company's Board of Directors. On December 16, 2002 and March 17, 2003, the Company did not make the required cash dividend payments to the remaining holders of the Senior Preferred Stock.
On April 24, 2000, prices for the Class A Common Stock commenced quotation on the OTCBB under the symbol "TTXG." As of April 30, 2003, there were 3,082 record holders of the Class A Common Stock. The last sale price of the Class A Common Stock on April 30,2003, was $0.11.
The Company has not paid any cash dividends on its common stock since inception, except a dividend of approximately $33 million to its then parent TransAmerican from the proceeds of its initial public offering in March 1994. The terms of the Company's senior secured notes due 2005, its oil and gas credit facility, its accounts receivable facility and its Senior Preferred Stock prohibit the payment of dividends. Because of these prohibitions, the Company does not anticipate paying any dividends on its common stock in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the Company as of and for each of the periods presented. From April 19, 1999 through March 17, 2000, TransTexas operated under Chapter 11 of the United States Bankruptcy Code. The Company adopted fresh-start reporting as of January 31, 2000; therefore, the Company does not believe that the consolidated balance sheet data as of January 31, 1999 is comparable to that of later years in certain material respects. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements included elsewhere in this report.
- ----------------- (1) Interest expense for the years ended January 31, 2003 and 2000 exclude $6.7 million and $55.5 million, respectively, in interest stayed as a result of the bankruptcy filings.
(2) TransTexas' existing debt and equity instruments contain certain restrictions with respect to the payment of dividends on its common stock.
(3) Excludes long-term debt included in liabilities subject to compromise of $238.9 million and $583.1 million as of January 31, 2003 and 1999, respectively.
ITEM 7.
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 natural gas liquids. The profitability of TransTexas also depends on its ability to minimize finding and lifting costs and maintain its reserve base while maximizing production. See "Liquidity and Capital Resources."
On November 14, 2002, TransTexas, Pipeline and Processing filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division. The bankruptcy cases are being jointly administered. TransTexas, Pipeline and Processing are operating their businesses and managing their properties as debtors in possession. As a result of the Chapter 11 filings, absent approval from the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising prior to the Petition Date.
The bankruptcy petitions were filed in order to preserve cash and to give the Company the opportunity to restructure its debt. The consummation of a plan of reorganization is the primary objective of the Company. The plan of reorganization will set forth the means for satisfying claims, including liabilities subject to compromise, and interests in the Company. A plan of reorganization may result in, among other things, material dilution or elimination of the interests of existing security holders as a result of the issuance of securities to creditors or new investors. The consummation of a plan of reorganization will require approval of the Bankruptcy Court.
The Company expects to file its Plan of Reorganization and Disclosure Statement with the Bankruptcy Court on May 1, 2003. Additional information with respect to the Plan of Reorganization and Disclosure Statement will be provided on Form 8-K or by an amendment to this Form 10-K. At this time, it is not possible to predict the outcome of the bankruptcy proceedings or the effect on the business of the Company or on the interests of creditors, royalty owners or stockholders.
Management's revised business model is centered around the promotion of working interest partners who carry a significant portion of the capital expenditures necessary to evaluate the Company's properties, much of which are unevaluated as of January 31, 2003. The Company intends to finance its share of the necessary capital expenditures through cash flow from operations, production payment issuances and any supplemental fundings provided pursuant to its emergence from bankruptcy proceedings. However, there can be no assurance that working interest partners can be obtained on terms acceptable to the Company, or additional financing obtained, to evaluate the Company's properties in a timely manner.
From April 19, 1999 through March 17, 2000 (the "Effective Date"), the Company operated as a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code. Effective January 31, 2000, the Company adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7. Pursuant to fresh-start reporting, a new reporting entity was created. The new reporting entity's assets were recorded at the reorganization value based on the confirmed Plan of Reorganization, and postpetition liabilities were recorded at the present value of amounts to be paid.
TransTexas' operating data for the years ended January 31, 2003, 2002 and 2001 are as follows:
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. 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. For the year ended January 31, 2002, TransTexas recorded impairment losses related to write-downs of $195.1 million of its net capitalized costs of gas and oil properties to the cost center ceiling in accordance with the full cost method of accounting.
A summary of TransTexas' operating expenses is set forth below (in millions of dollars):
- ----------------- (1) Taxes other than income taxes include severance, property and other taxes.
TransTexas' average depletion rates have been as follows:
Effective February 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which was amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These pronouncements established accounting and reporting standards for derivative instruments and for hedging activities, which generally require recognition of all derivatives as either assets or liabilities in the balance sheet at their fair value. The accounting for changes in fair value depends on the intended use of the derivative and its resulting designation. The Company recorded a cumulative effect charge to comprehensive income of approximately $1.3 million to recognize the fair value of its liability under the Company's derivative instruments upon the adoption of SFAS 133.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 143 provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets. Under SFAS 143, the asset retirement obligation is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. Effective upon our adoption, the cumulative effect of applying SFAS 143 will be recognized as a change in accounting principle in the consolidated statements of operations.
At January 31, 2003 the Company had not previously recorded an asset retirement obligation related to its long-lived assets. As such, the Company adopted SFAS 143 effective February 1, 2003. The Company expects the impact of adopting SFAS 143 will be a decrease to earnings, net of tax, of approximately $3 million, to be reflected as a cumulative effect of a change in accounting principle in the first quarter of fiscal year 2004.
Liabilities for other contingencies are recognized in accordance with SFAS 5 upon identification of an exposure, which when fully analyzed indicates that it is both probable that an asset has been impaired or that a liability has been incurred and that such a loss amount can be reasonably estimated. Non-capital costs to remedy such contingencies or other exposures are charged to a reserve, if one exists, or otherwise to current-period operations. When a range of probable loss exists, the Company accrues the lesser end of the range.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 provides guidance for income statement classification of gains or losses from extinguishment of debt and accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. Gains or losses from extinguishments that are part of a company's recurring operations would not be reported as an extraordinary item. The Company adopted SFAS 145 effective February 1, 2003, which had no impact on the Company's financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires recognition of a liability for costs associated with an exit or disposal activity when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002 and will be used to report any future exits or disposal activities. The Company's adoption of SFAS 146 on January 1, 2003 had no effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies the requirement that a guarantor recognize a liability at the inception of the guarantee for the fair value of the obligation that the guarantor has undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material impact on the Company's financial statements.
Year Ended January 31, 2003, Compared with the Year Ended January 31, 2002
Gas, condensate and NGL revenues for the year ended January 31, 2003 decreased by $63.1 million from the prior period, due primarily to lower prices for natural gas and lower sales volumes for all products. Approximately 2.5 Bcf of the decrease in natural gas volumes for the year ended January 31, 2003 was attributable to the sale in the prior year of TransTexas' interest in the Bob West field and approximately 7.6 Bcf of the decrease is attributable to reduced production rates from wells in the Southwest Bonus field. The average monthly prices received per Mcf of gas ranged from $2.16 to $5.09 in the year ended January 31, 2003, compared to a range of $2.04 to $6.73 in the prior period.
Lease operating expenses for the year ended January 31, 2003 decreased $4.5 million from the prior period due primarily to decreases in workover costs and fewer number of productive wells due to the sale in the prior year of the Bob West field. Pipeline and gathering expenses decreased $3.2 million primarily due to lower labor costs and lower costs for natural gas used in operations. Depreciation, depletion and amortization expense for the year ended January 31, 2003 decreased $64.2 million due to a $1.33 decrease in the depletion rate. The decrease in the depletion rate is due primarily to the impairment of gas and oil properties recorded during fiscal year 2002. General and administrative expenses decreased by $3.5 million primarily as a result of lower professional fees and labor costs. However, included in the current year's general and administrative expenses is a $3.0 million charge for a severance obligation due Mr. Stanley pursuant to his employment agreement. Taxes other than income taxes decreased by $0.9 million over the prior period due primarily to decreases in property, severance and production taxes. Interest income decreased $0.5 million compared to the prior period due to lower cash balances available for investment. Interest expense for the year ended January 31, 2003 decreased $3.3 million primarily because the Company ceased to expense interest on debt reclassed to liabilities subject to compromise, effective after the Petition Date. This lower interest expense was partially offset by lower capitalized interest. Reorganization items of $0.7 million for the year ended January 31, 2003 include legal and professional fees and expenses directly related to TransTexas' Chapter 11 proceeding.
The impairment loss recorded during the year ended January 31, 2002 relates to a write-down of $195.1 million of TransTexas' net capitalized costs of gas and oil properties to the cost center ceiling in accordance with the full cost method of accounting. The cost center ceiling at January 31, 2002 decreased from that at January 31, 2001 primarily due to a decrease in prices for natural gas and condensate and a decrease in proved reserves due to production and the sale of the Bob West field. See Note 19 of Notes to Consolidated Financial Statements.
Based on the Company's reorganization value as of January 31, 2000, the fair value of the Preferred Stock and Common Stock was estimated to be zero. The remaining Senior Preferred Stock is mandatorily redeemable in 2006. As a result, the Company accretes, in the form of a non-cash dividend deducted from net income available to common stockholders and charged to retained earnings, an amount equal to the combined redemption amount totaling $243.2 million (initial liquidation value) over the period prior to redemption. In addition, earnings available to common stockholders will be reduced by dividends paid on the Preferred Stock. For the years ended January 31, 2003, 2002 and 2001, accretion of Preferred Stock totaled $43.3 million, $46.4 million and $25.7 million, respectively. At January 31, 2003, the amount remaining to be accreted on the Senior Preferred Stock is $103.5 million.
Year Ended January 31, 2002, Compared with the Year Ended January 31, 2001
Gas, condensate and NGL revenues for the year ended January 31, 2002 decreased by $54.7 million from the prior period, due primarily to lower prices and sales volumes for all products. The average monthly prices received per Mcf of gas ranged from $2.04 to $6.73 in the year ended January 31, 2002, compared to a range of $2.64 to $9.75 in the prior period. Other revenues decreased by $1.0 million for the year ended January 31, 2002 due to lower transportation and gathering revenues.
Lease operating expenses for the year ended January 31, 2002 increased $0.2 million from the prior period due primarily to increases in labor, well service and testing and rental expenses, partially offset by lower outside transportation costs. Pipeline and gathering expenses decreased $0.1 million primarily due to lower costs for natural gas used in operations and lower rental expenses, partially offset by higher labor costs. Depreciation, depletion and amortization expense for the year ended January 31, 2002 increased $9.8 million due to an increase in the depletion rate resulting from higher cost properties and unsuccessful drilling results in prior periods. General and administrative expenses decreased by $0.4 million primarily as a result of lower utility costs, rental expenses and insurance costs. Taxes other than income taxes decreased by $3.0 million over the prior period due primarily to decreases in severance and production taxes. Interest expense for the year ended January 31, 2002 increased $1.2 million due primarily to lower capitalized interest, partially offset by a decrease in the amount of interest associated with reorganization debt. The impairment loss relates to a write-down of $195.1 million of TransTexas' net capitalized costs of gas and oil properties to the cost center ceiling in accordance with the full cost method of accounting. The cost center ceiling at January 31, 2002 decreased from that at January 31, 2001 primarily due to a decrease in prices for natural gas and condensate and a decrease in proved reserves due to production and the sale of the Bob West field. See Note 19 of Notes to Consolidated Financial Statements.
Based on the Company's reorganization value as of January 31, 2000, the fair value of the Preferred Stock and Common Stock was estimated to be zero. The Senior Preferred Stock and Junior Preferred Stock are mandatorily redeemable in 2006 and 2010, respectively. As a result, the Company accretes, in the form of a non-cash dividend deducted from net income available to common stockholders and charged to retained earnings, an amount equal to the combined redemption amount totaling $243.2 million (initial liquidation value) over the period prior to redemption. In addition, earnings available to common stockholders will be reduced by dividends paid on the Preferred Stock. For the years ended January 31, 2002 and 2001, accretion of Preferred Stock totaled $46.4 million, and $25.7 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Chapter 11 Bankruptcy Proceeding
On November 14, 2002, TransTexas, Pipeline and Processing filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division (the "Bankruptcy Court"). The bankruptcy cases are being jointly administered. TransTexas, Pipeline and Processing are operating their businesses and managing their properties as debtors in possession. As a result of the Chapter 11 filings, absent approval from the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising prior to the Petition Date.
The bankruptcy petitions were filed in order to preserve cash and to give the Company the opportunity to restructure its debt. The consummation of a plan of reorganization is the primary objective of the Company. The plan of reorganization will set forth the means for satisfying claims, including liabilities subject to compromise, and interests in the Company. A plan of reorganization may result in, among other things, material dilution or elimination of the interests of existing security holders as a result of the issuance of securities to creditors or new investors. The consummation of a plan of reorganization will require approval of the Bankruptcy Court.
The Company expects to file its Plan of Reorganization and Disclosure Statement with the Bankruptcy Court on May 1, 2003. Additional information with respect to the Plan of Reorganization and Disclosure Statement will be provided on Form 8-K or by an amendment to this Form 10-K. At this time, it is not possible to predict the outcome of the bankruptcy proceedings or the effect on the business of the Company or on the interests of creditors, royalty owners or stockholders.
Long-Term Debt
On the Effective Date, the Company, as Borrower, and Processing and Pipeline, as Guarantors, entered into an Oil and Gas Revolving Credit and Term Loan Agreement, dated as of March 15, 2000 (the "Oil and Gas Facility") with GMAC Commercial Credit LLC ("GMACC"), as a Lender and as Agent. The Oil and Gas Facility consists of a term loan (the "Term Loan") in the amount of $22.5 million and a revolving facility (the "Revolving Loan") in a maximum amount of $30 million (all of which was funded on the Effective Date). The Term Loan bears interest at a rate of 14% per annum and the Revolving Loan bears interest at a rate of 13 1/2% per annum. Interest on the Term Loan and the Revolving Loan is payable monthly in arrears. Principal amortization of the Term Loan is due in 20 quarterly installments of $56,250 each beginning June 14, 2000, with the balance due March 14, 2005; however, the Company may, and in certain circumstances must, make prepayments of such amount. If, subsequent to such prepayments, the Company demonstrates sufficient collateral value meeting the requirements of the Oil and Gas Facility provisions, the Company may be entitled to borrow additional advances under the Revolving Loan. The Oil and Gas Facility is secured by substantially all of the assets of the Company. The security interest in accounts receivable and inventory securing the Oil and Gas Facility is subordinated to the security interest of GMACC under the Accounts Receivable Facility. Interim and Final Financing Orders of the Bankruptcy Court modified certain terms of the Oil and Gas Facility. Pursuant to these Interim and Final Orders, GMACC waived compliance with certain provisions of the facility. Pursuant to the Final Financing Order, the Oil and Gas Facility is due on August 7, 2003.
On the Effective Date, the Company, as Issuer, Pipeline and Processing, as Guarantors, and U.S. Bank, N.A., as successor indenture trustee to Firstar Bank, N.A. entered into an Indenture dated as of March 15, 2000, pursuant to which the Company issued the Notes. Interest on the Notes is due semi-annually on March 15 and September 15. The Notes are secured by substantially all of the assets of the Company other than accounts receivable and inventory. The Indenture contains certain covenants that restrict the Company's ability to incur indebtedness, engage in related party transactions, dispose of assets or engage in sale/leaseback transactions, issue dividends on common stock, change its line of business, consolidate or merge with or into another entity or convey, transfer or lease all or substantially all of its assets, and suffer a change of control. The
security interest in favor of the Trustee is subordinated to the Security Interest in favor of the Agent under the Oil and Gas Facility.
On the Effective Date, the Company and GMACC entered into a Third Amended and Restated Accounts Receivable Management and Security Agreement, dated as of March 15, 2000 (the "Accounts Receivable Facility"). The Accounts Receivable Facility is a revolving credit facility secured by accounts receivable and inventory. The maximum loan amount under the facility is $7.5 million, against which the Company may from time to time, subject to the conditions of the Accounts Receivable Facility, borrow, repay and reborrow. Advances under the facility bear interest at a rate per annum equal to the higher of (i) the prime commercial lending rate of The Bank of New York plus 1/2 of 1%, and (ii) the Federal Funds Rate plus 1% payable monthly in arrears. As of January 31, 2003, there were no outstanding advances under the Accounts Receivable Facility and the Company had availability for advances of approximately $1.8 million. Interim and Final Financing Orders of the Bankruptcy Court modified the maximum loan amount under the Accounts Receivable Facility and modified certain other terms of the facility. Pursuant to these Interim and Final Orders, GMACC waived compliance with certain provisions of the facility. Pursuant to the Final Financing Order, the Accounts Receivable Facility is due on August 7, 2003.
Preferred Stock
As of the Effective Date, the Company had outstanding 222,455,320 shares of Series A Senior Preferred Stock (the "Senior Preferred Stock") with a liquidation preference of $1.00 per share plus accrued and unpaid dividends. The Certificate of Designation for the Senior Preferred Stock of the Company provides for the mandatory conversion of one-half of the outstanding shares of Senior Preferred Stock into fully paid and non-assessable shares of Class A Common Stock at the rate of 0.3461 shares of Class A Common Stock for each $1.00 of liquidation preference per share, plus an amount equal to accrued and unpaid dividends, of Senior Preferred Stock if the Company fails to pay dividends on the Senior Preferred Stock as required by the Certificate of Designation for the Senior Preferred Stock on any two dividend payment dates. The Certificate of Designation for the Series A Junior Preferred Stock ("Junior Preferred Stock" and together with the Senior Preferred Stock, the "Preferred Stock") provides for the mandatory conversion of all of the outstanding shares of Junior Preferred Stock into fully paid and non-assessable shares of Class A Common Stock at the rate of 0.1168 shares of Class A Common Stock for each $1.00 of liquidation preference per share, plus an amount equal to accrued and unpaid dividends, of Junior Preferred Stock if the Company fails to pay dividends on the Senior Preferred Stock as required by the Certificate of Designation for the Senior Preferred Stock on any two dividend payment dates.
The Certificate of Designation for each of the Senior Preferred Stock and the Junior Preferred Stock required the payment to the holders of a cash dividend on the Senior Preferred Stock and an in-kind dividend on the Junior Preferred Stock, respectively, by the Company on June 15, 2002 and on September 15, 2002. The Company did not make the required dividend payments on either date. Therefore, the liquidation preference of the Senior Preferred Stock was increased to approximately $1.04 per share and the liquidation preference of the Junior Preferred Stock was increased to approximately $1.05 per share. As a result, on September 16, 2002, each two shares of Senior Preferred Stock was converted into one share of New Senior Preferred and into approximately 0.3596 shares of Class A Common Stock and each share of Junior Preferred Stock was converted into approximately 0.1227 shares of Class A Common Stock. No fractional shares were issued in the conversion. The Board of Directors of the Company determined that the fair market value of each share of the Preferred Stock and Common Stock for purposes of the conversion was less than $0.01 per share and, therefore, no cash was paid to holders of Preferred Stock in lieu of fractional shares.
In the aggregate, 164,333,875 shares of Senior Preferred Stock representing one-half of all of the outstanding Senior Preferred Stock were converted into 59,101,243 shares of Class A Common Stock and 25,240,513 shares of Junior Preferred Stock representing all of the outstanding Junior Preferred Stock were converted into 3,097,336 shares of Class A Common Stock. Since the Company did not pay the required dividend payments, holders of the Senior Preferred Stock have the right, voting separately as a class, to elect all five directors to the Company's Board of Directors. On December 16, 2002 and March 17, 2003, the Company did not make the required cash dividend payments to the remaining holders of the Senior Preferred Stock. The Company does not anticipate paying cash dividends on the Senior Preferred Stock in the future.
Production Payments
In March 2000, TransTexas entered into a production payment drilling program agreement with two unaffiliated third parties in the form of a term overriding royalty interest carved out of and burdening certain properties ("Subject Interests"). The Company has the right to offer additional interests to the production payment parties at a negotiated purchase price. The production payment calls for the repayment of the primary sum plus an amount equivalent to a 15% annual interest rate on the unpaid portion of such primary sum. In March 2002, the Company closed an Eighth Supplement to the production payment whereby the Company received $14.0 million. In June 2002, the Company closed a Ninth Supplement to the production payment whereby the Company received $13.0 million in exchange for additional properties being made subject to the production payment. As of January 31, 2003, the outstanding balance of the production payment was $18.6 million,
of which $2.2 million attributable to produced volumes is included in accrued liabilities. The Oil and Gas Facility entered into by the Company, as borrower, Processing and Pipeline, as Guarantors, and with GMACC, as a Lender and as Agent, places certain restrictions on the amount that may be outstanding under the production payment. In April 2003, the Company closed a Tenth Supplement to the production payment whereby the Company received $5.0 million.
In connection with the production payment, the Company entered into various marketing and processing agreements with one of the third parties. Pursuant to these agreements, the Company pays a nominal marketing fee with respect to the Company's production associated with the New Subject Interests. In addition, the third party pays a fee for certain processing services provided by Processing.
TransTexas is highly leveraged and has significant cash requirements for debt service and significant charges for Preferred Stock dividends to net income available for common stockholders.
In order to maintain or increase its proved oil and gas reserves, TransTexas must continue to make substantial capital expenditures for the exploration and development of its natural gas and oil prospects. For the year ended January 31, 2003, total capital expenditures incurred were $12 million, including $1 million for nonproducing leases and seismic, $7 million for capitalized interest and $4 million for drilling and development. Capital expenditures for fiscal 2004 are estimated to be approximately $25 million. Management's revised business model is centered around the promotion of working interest partners who carry a significant portion of the capital expenditures necessary to evaluate the Company's properties, much of which are unevaluated as of January 31, 2003. The Company intends to finance its share of the necessary capital expenditures through cash flow from operations, production payment issuances and any supplemental fundings provided pursuant to its emergence from bankruptcy proceedings. However, there can be no assurance that working interest partners can be obtained on terms acceptable to the Company, or additional financing obtained, to evaluate the Company's properties in a timely manner.
Should TransTexas' drilling prospects not be productive or should oil and gas prices decline for a prolonged period, absent other sources of capital, the Company would substantially reduce its capital expenditures, which would limit its ability to maintain or increase production and in turn meet its debt service requirements. Asset sales and financings are restricted under the terms of TransTexas' debt documents and Senior Preferred Stock and subject to Bankruptcy Court approval. In October 2001, TransTexas sold its interest in the Bob West field in Zapata County, Texas for a sales price of $56.5 million, exclusive of closing costs.
Potential Tax Liabilities
Part of the refinancing of TransAmerican's debt in 1993 involved the cancellation of approximately $65.9 million of accrued interest and of a contingent liability for interest of $102 million owed by TransAmerican. TransAmerican has taken the federal tax position that the entire amount of this debt cancellation is excluded from its income under the cancellation of indebtedness provision (the "COD Exclusion") of the Internal Revenue Code of 1986, as amended (the "Tax Code"), and has reduced its tax attributes (including its net operating loss and credit carryforwards) as a consequence of the COD Exclusion.
As a former member of the affiliated group for tax purposes (the "TNGC Consolidated Group") which included TNGC Holdings Corporation, the sole stockholder of TransAmerican ("TNGC"), TransAmerican, TEC, TransTexas and TARC, TransTexas will be severally liable for any tax liability resulting from any transaction of the TNGC Consolidated Group that occurred during any taxable year of the TNGC Consolidated Group during which TransTexas was a member, including the above-described transactions. During fiscal year 1997, the IRS commenced an audit of the consolidated federal income tax returns of the TNGC Consolidated Group for its taxable years ended July 31, 1994 and July 31, 1995. The Company has been advised by the IRS that they have completed their audit and do not propose any adjustments.
TransTexas expects that a significant portion of its net operating loss carryovers ("NOLs") will be eliminated and the use of those NOLs that are not eliminated will be severely restricted as a consequence of TransTexas' reorganization. In addition, certain other tax attributes of TransTexas may under certain circumstances be eliminated or reduced as a consequence of TransTexas' reorganization. The potential elimination or reduction of NOLs and such other tax attributes may substantially increase the amount of tax payable by TransTexas.
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, condensate and oil. Substantially all of TransTexas' sales of natural gas, condensate and oil are made 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. As a result of high demand for drilling services, TransTexas experienced increases in the cost of oilfield services and equipment used in exploration and development drilling, and to a lesser extent well completion and production costs.
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 of approximately 20.5 MMcfd, TransTexas estimates that a $0.10 per MMBtu change in average gas prices received would change annual operating income by approximately $0.7 million. Based on an assumed average net daily production of approximately 1,687 Bpd, TransTexas estimates that a $1.00 per barrel change in condensate prices received would change annual operating income by approximately $0.6 million.
ACCOUNTING POLICIES
The following accounting policies are important to an understanding of the Company's operating results and financial position and should be considered as an integral part of the financial review. The Company has adopted a number of accounting policies, the most important of which are discussed in Note 1 to the consolidated financial statements, "Summary of Significant Accounting Policies."
Gas and Oil Activities
The Company uses the full cost method of accounting for its gas and oil activities. Under this method of accounting, the cost of all acquisition, exploration and development activities are capitalized. Such capitalized costs and estimated future development and reclamation costs are amortized on a unit-of-production method. Costs of unevaluated gas and oil properties are excluded from capitalized costs being amortized. The Company excludes these costs until proved reserves are found or until it is determined that the costs are impaired. All excluded costs are reviewed quarterly to determine if impairment has occurred. Any impairment is transferred to costs to be amortized. 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 the effects of related income taxes. This is referred to as a "ceiling test" and the Company is required to perform this calculation based on prices and costs in effect on the last day of each quarter. If net capitalized costs of the gas and oil properties exceed the cost center ceiling, the Company must write down its properties (a non-cash charge to income) by the amount of such excess. The Company occasionally sells certain gas and oil properties. Proceeds from a sale reduce the costs in the cost center unless the sale involves a significant quantity of reserves in relation to the cost center, then the Company recognizes a gain or loss.
Hedging Agreements
From time to time, the Company enters into commodity price swap agreements to reduce its exposure to price risk in the spot market for natural gas and condensate. Beginning in February 2001, the estimated fair value of these agreements is reflected in the Company's consolidated balance sheet and represents hedges against the price it will receive for future natural gas and condensate production. Changes in the fair value of the hedging agreements are recorded directly to stockholders' equity until the hedged quantities of natural gas or condensate are produced. The Company does not use derivative instruments for trading purposes.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the reported amounts of gas and oil reserves. TransTexas' most significant financial estimates are based on remaining proved gas and oil reserves. Actual results could differ from these estimates.
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. TransTexas uses the sales method of accounting for production imbalances that arise from jointly produced properties. Volumetric production is monitored to minimize these imbalances. An imbalance liability is recorded in other liabilities if TransTexas' excess sales of production volumes exceed its share of estimated remaining recoverable reserves for such properties. Receivables are not recorded for those properties in which TransTexas has taken less than its share of production.
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from adverse changes in prices for natural gas, condensate and oil and interest rates as discussed below.
The Company's revenues, profitability, access to capital and future rate of growth are substantially dependent upon the prevailing prices of natural gas, condensate and oil. These prices are subject to wide fluctuations in response to relatively minor changes in supply and demand and a variety of additional factors beyond the Company's control. From time to time, the Company has utilized hedging transactions with respect to a portion of its gas and oil production to achieve a more predictable cash flow, as well as to reduce exposure to price fluctuations. While hedging limits the downside risk of adverse price movements, it may also limit future revenues from favorable price movements. Because gains or losses associated with hedging transactions are included in gas and oil revenues when the hedged volumes are delivered, such gains and losses are generally offset by similar changes in the realized prices of commodities.
As of January 31, 2003, the Company had entered into the following hedging arrangements (settlement price based on a published industry index of natural gas prices at Houston Ship Channel) as cash flow hedges of forecasted sales of a portion of the Company's natural gas production:
For the year ended January 31, 2003, the Company recognized hedging gains of $0.4 million, which are reflected in gas, condensate and natural gas liquids revenues. At January 31, 2003, the Company's estimated net liability of these contracts was $2.1 million.
Because substantially all of its long-term obligations at January 31, 2003 are at fixed rates, the Company considers its interest rate exposure to be minimal. The Company's borrowings under its credit facility are subject to a rate of interest that fluctuates based on short-term interest rates. The Company had no interest rate hedges at January 31, 2003.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) INDEX CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of TransTexas Gas Corporation:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations, stockholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of TransTexas Gas Corporation and its subsidiaries (debtor in possession) (the "Company") at January 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As a result of the Company's bankruptcy, there is substantial doubt about the Company's ability to continue as a going concern. Management's plans are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting for derivative instruments and hedging activities effective February 1, 2001.
PricewaterhouseCoopers LLP
Houston, Texas April 30, 2003
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of the consolidated financial statements.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of the consolidated financial statements.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of the consolidated financial statements.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
The accompanying notes are an integral part of the consolidated financial statements.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Prior to March 17, 2000 (the "Effective Date"), TransTexas was a subsidiary of TransAmerican Energy Corporation ("TEC"), whose ultimate parent company was TransAmerican Natural Gas Corporation ("TransAmerican"). The Company is engaged in the exploration, development and production of natural gas, crude oil, condensate and natural gas liquids. Unless otherwise noted, the term "TransTexas" refers to TransTexas Gas Corporation and its subsidiaries, Galveston Bay Processing Corporation ("Processing") and Galveston Bay Pipeline Company ("Pipeline"). See Note 2 for a discussion of TransTexas' reorganizations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the reported amounts of gas and oil reserves. TransTexas' most significant financial estimates are based on remaining proved gas and oil reserves. Actual results could differ from these estimates.
Cash and Cash Equivalents
TransTexas considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at January 31, 2003 and 2002 include $0.3 million and $0.2 million, respectively, restricted for payments of future goods and services provided by certain vendors.
Inventories
TransTexas' inventories, which are stated at the lower of average cost or market, consist primarily of condensate produced but not sold and tubular goods.
Gas and Oil Properties
TransTexas uses the full cost method of accounting for exploration and development costs. Under this method of accounting, the cost of all exploration and development activities are capitalized. Such capitalized costs and estimated future development and reclamation costs are amortized on a unit-of-production method. Net capitalized costs of gas and oil properties are limited to the lower of unamortized cost or the cost center ceiling, defined as the sum of the present value (10% discount rate) of estimated unescalated future net revenues from proved reserves; plus the cost of properties not being amortized, if any; plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less related income tax effects. For the year ended January 31, 2002, TransTexas recorded impairment losses related to write-downs of $195.1 million of its net capitalized costs of gas and oil properties to the cost center ceiling in accordance with the full cost method of accounting.
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 $49 million and $45 million at January 31, 2003 and 2002, 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, 2003 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
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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 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 over their estimated useful lives of 4 to 10 years.
Costs of improving leased property are amortized over the estimated useful lives of the assets or the terms of the leases, whichever is shorter.
Through January 31, 2002, we reviewed the carrying value of our long-lived assets in accordance with provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets." SFAS 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS 121 and APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 requires assets to be evaluated for impairment when events or circumstances indicate that a long-lived asset's carrying value may not be recovered. These events include market declines, changes in the manner in which we intend to use an asset or decision to sell an asset and adverse changes in the legal or business environment. Our adoption of SFAS 144 on February 1, 2002 did not have any impact on our financial position or result of operations.
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.
In June 2001, The FASB issued SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 143 provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets. Under SFAS 143, the asset retirement obligation is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. Effective upon our adoption, the cumulative effect of applying SFAS 143 will be recognized as a change in accounting principle in the consolidated statements of operations.
At January 31, 2003 the Company had not previously recorded an asset retirement obligation related to its long-lived assets. As such, the Company adopted SFAS 143 effective February 1, 2003. The Company expects the impact of adopting SFAS 143 will be a decrease to earnings, net of tax, of approximately $3 million, to be reflected as a cumulative effect of a change in accounting principle in the first quarter of fiscal year 2004.
Liabilities for other contingencies are recognized in accordance with SFAS 5 upon identification of an exposure, which when fully analyzed indicates that it is both probable that an asset has been impaired or that a liability has been incurred and that such a loss amount can be reasonably estimated. Non-capital costs to remedy such contingencies or other exposures are charged to a reserve, if one exists, or otherwise to current-period operations. When a range of probable loss exists, the Company accrues the lesser end of the range.
Debt Issue Costs
Costs related to the issuance of long-term debt are classified as "Other assets." Capitalized debt costs are amortized to interest expense over the scheduled maturity of the debt utilizing the interest method. In the event of a redemption of long-term debt, the related debt issue costs will be charged to income in the period of presentation.
Defined Contribution Plan
TransTexas maintains a defined contribution plan, which incorporates a "401(k) feature" as allowed under the Internal Revenue Code. All investment transactions are administered by 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 first day of the month following their eligibility. TransTexas matches employee contributions up to a maximum of 100% of the first 3% and 50% of the next 2% of the participant's compensation. TransTexas' contributions with respect to this plan totaled $0.2 million for each of the years ended January 31, 2003, 2002 and 2001. All Company contributions are currently funded.
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 can be determined and is different from the book value. TransTexas generally assumes that the book value of financial instruments classified as current approximates 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. TransTexas uses the sales method of accounting for production imbalances that arise from jointly produced properties. Volumetric production is monitored to minimize these imbalances. An imbalance liability is recorded in other liabilities if TransTexas' excess sales of production volumes exceed its share of estimated remaining recoverable reserves for such properties. Receivables are not recorded for those properties in which TransTexas has taken less than its share of production.
Concentrations
Financial instruments that potentially expose TransTexas to credit risk consist principally of cash and trade receivables. TransTexas selects depository banks based upon management's review of the financial stability of the institution. Balances generally 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
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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. TransTexas is not aware of any significant credit risk relating to its customers and has not experienced significant credit losses associated with such receivables.
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. Effective February 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which was amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These pronouncements established accounting and reporting standards for derivative instruments and for hedging activities, which generally require recognition of all derivatives as either assets or liabilities in the balance sheet at their fair value. The accounting for changes in fair value depends on the intended use of the derivative and its resulting designation. The Company recorded a cumulative effect charge to comprehensive income of approximately $1.3 million to recognize the fair value of its liability under the Company's derivative instruments upon the adoption of SFAS 133. A summary of the Company's comprehensive loss for the years ended January 31, 2003 and 2002 is as follows (in thousands of dollars):
As of January 31, 2003, the Company had entered into the following hedging arrangements (settlement price based on a published industry index of natural gas prices at Houston Ship Channel) as cash flow hedges of forecasted sales of a portion of the Company's natural gas production:
For the years ended January 31, 2003 and 2002, the Company recognized hedging gains of $0.4 million and $1.6 million, respectively, which are reflected in gas, condensate and natural gas liquids revenues. The Company recognized hedging losses of $9.1 million for the year ended January 31, 2001. At January 31, 2003 and 2002, the Company's estimated net liability of its hedging arrangements was $2.1 million and $2.3 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Prior to the Effective Date, TransTexas filed a consolidated tax return with TransAmerican. Income taxes were 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 was TransTexas' policy to record income tax expense as though TransTexas had filed separately. Subsequent to the Effective Date, TransTexas and its wholly owned subsidiaries file a consolidated tax return. Deferred income taxes are recognized, at enacted tax rates, to reflect the future effects of temporary differences arising between the financial reporting and tax bases of assets and liabilities. Income taxes include federal and state income taxes.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share has been calculated based on the weighted average number of shares of common stock outstanding during each period.
Recently Issued Pronouncements
For a discussion related to SFAS 143, see "Environmental Remediation Costs" under Note 1.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 provides guidance for income statement classification of gains or losses from extinguishment of debt and accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. Gains or losses from extinguishments that are part of a company's recurring operations would not be reported as an extraordinary item. The Company adopted SFAS 145 effective February 1, 2003, which had no impact on the Company's financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires recognition of a liability for costs associated with an exit or disposal activity when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002 and will be used to report any future exits or disposal activities. The Company's adoption of SFAS 146 on January 1, 2003 had no effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies the requirement that a guarantor recognize a liability at the inception of the guarantee for the fair value of the obligation that the guarantor has undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material impact on the Company's financial statements.
2. REORGANIZATIONS
On November 14, 2002 (the "Petition Date"), TransTexas, Pipeline and Processing filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division (the "Bankruptcy Court"). The bankruptcy cases are being jointly administered (see Note 13). TransTexas, Pipeline and Processing are operating their businesses and managing their properties as debtors in possession. As a result of the Chapter 11 filings, absent approval from the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising prior to the Petition Date.
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The bankruptcy petitions were filed in order to preserve cash and to give the Company the opportunity to restructure its debt. The consummation of a plan of reorganization is the primary objective of the Company. The plan of reorganization will set forth the means for satisfying claims, including liabilities subject to compromise, and interests in the Company. A plan of reorganization may result in, among other things, material dilution or elimination of the interests of existing security holders as a result of the issuance of securities to creditors or new investors. The consummation of a plan of reorganization will require approval of the Bankruptcy Court.
The Company expects to file its Plan of Reorganization and Disclosure Statement with the Bankruptcy Court on May 1, 2003. Additional information with respect to the Plan of Reorganization and Disclosure Statement will be provided on Form 8-K or by an amendment to this Form 10-K. At this time, it is not possible to predict the outcome of the bankruptcy proceedings or the effect on the business of the Company or on the interests of creditors, royalty owners or stockholders.
Management's revised business model is centered around the promotion of working interest partners who carry a significant portion of the capital expenditures necessary to evaluate the Company's properties, much of which are unevaluated as of January 31, 2003. The Company intends to finance its share of the necessary capital expenditures through cash flow from operations, production payment issuances and any supplemental fundings provided pursuant to its emergence from bankruptcy proceedings. However, there can be no assurance that working interest partners can be obtained on terms acceptable to the Company, or additional financing obtained, to evaluate the Company's properties in a timely manner.
As a result of the bankruptcy filing, a significant amount of the Company's liabilities, including secured debt, are subject to compromise. As of January 31, 2003, liabilities subject to compromise included the following (in thousands of dollars):
The consolidated financial statements as of January 31, 2003 and for the year then ended have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). As of the petition date, in accordance with SOP 90-7, the Company discontinued the accrual of interest and amortization of deferred debt issue costs related to liabilities subject to compromise. If such interest had continued to be accrued, based on contractual terms without increase for default provisions, and related deferred debt issue costs continued to be amortized, interest expense for the fiscal year ended January 31, 2003 would have been increased $6.7 million.
The accompanying financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the financial statements. As a result, there is substantial doubt about the Company's ability to continue as a going concern. The ability of TransTexas to continue as a going concern is dependent upon confirmation of a plan of reorganization, adequate sources of capital and the ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop gas and oil reserves.
Prior Reorganization
On April 19, 1999 ("Prior Petition Date"), TransTexas filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On April 20, 1999, TEC and its wholly owned subsidiary, TransAmerican Refining Corporation ("TARC") also filed voluntary petitions under Chapter 11. On May 20, 1999, the cases were transferred to the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division ("Prior Bankruptcy"). This Chapter 11 filing did not include TransTexas' subsidiaries. The Company's Second Amended, Modified and Restated Plan of Reorganization dated January 25, 2000 (the "Prior Plan") was confirmed by the Bankruptcy Court on February 7, 2000. The Effective Date of the Prior Plan is March 17, 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIQUIDITY
In order to maintain or increase proved oil and gas reserves, TransTexas is required to make substantial capital expenditures for the exploration and development of natural gas and oil prospects. Absent the November 14, 2002 Chapter 11 filing, TransTexas remains highly leveraged and a substantial portion of its cash flow will be required for debt service. In addition, cash flow from operations is dependent on the level of gas and oil prices, which are historically volatile. Management plans to fund TransTexas' 2004 debt service requirements and capital expenditures with cash flows from operating activities and borrowings under the production payment drilling program and other financings. In addition, the Company has commenced negotiations for joint venture drilling opportunities with several unrelated entities. Should these drilling prospects not be productive or should oil and gas prices decline for a prolonged period, absent other sources of capital, the Company would substantially reduce its capital expenditures, which would limit its ability to maintain or increase production and in turn meet its debt service requirements. Asset sales and financings are restricted under the terms of TransTexas' debt documents and Senior Preferred Stock.
4. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands of dollars):
5. PROPERTY AND EQUIPMENT
The major components of property and equipment, at cost, are as follows (in thousands of dollars):
In October 2001, TransTexas sold its interest in the Bob West field in Zapata County, Texas for a sales price of $56.5 million, exclusive of closing costs.
TransTexas incurred approximately $39.0 million, $46.7 million and $48.2 million of interest charges of which approximately $6.9 million, $11.4 million and $14.1 million were capitalized for the years ended January 31, 2003, 2002 and 2001, respectively. Capitalized interest is included as part of the cost of gas and oil properties. TransTexas uses capitalization rates based on its weighted average cost of borrowings used to finance such expenditures.
For the year ended January 31, 2002, TransTexas recorded impairment losses related to write-downs of $195.1 million of its net capitalized costs of gas and oil properties to the cost center ceiling in accordance with the full cost method of accounting.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
The major components of other assets are as follows (in thousands of dollars):
7. LONG-TERM DEBT AND PRODUCTION PAYMENTS
Long-Term Debt
Long-term debt consists of the following (in thousands of dollars):
(*) Subject to compromise (see Note 2).
Aggregate annual maturities of long-term debt for fiscal years 2004 to 2006 are $3.5 million, $0.9 million and $51.9 million, respectively. Prior to the Company's bankruptcy filing in November 2002, all of the Company's long-term debt was scheduled to be paid by the end of fiscal year 2006.
On the Effective Date, the Company and GMAC Commercial Credit LLC ("GMACC") entered into a Third Amended and Restated Accounts Receivable Management and Security Agreement, dated as of March 15, 2000 (the "Accounts Receivable Facility"). The Accounts Receivable Facility is a revolving credit facility secured by accounts receivable and inventory. The maximum loan amount under the facility is $7.5 million, against which the Company may from time to time, subject to the conditions of the Accounts Receivable Facility, borrow, repay and reborrow. Advances under the facility bear interest at a rate per annum equal to the higher of (i) the prime commercial lending rate of The Bank of New York plus 1/2 of 1%, and (ii) the Federal Funds Rate plus 1% payable monthly in arrears. As of January 31, 2003, there were no outstanding advances under the Accounts Receivable Facility and the Company had availability for advances of approximately $1.8 million. Interim and Final Financing Orders of the Bankruptcy Court modified the maximum loan amount under the Accounts Receivable Facility and modified certain other terms of the facility. Pursuant to these Interim and Final Orders, GMACC waived compliance with certain provisions of the facility. Pursuant to the Final Financing Order, the Accounts Receivable Facility is due on August 7, 2003.
On the Effective Date, the Company, as Borrower, and Processing and Pipeline, as Guarantors, entered into an Oil and Gas Revolving Credit and Term Loan Agreement, dated as of March 15, 2000 (the "Oil and Gas Facility") with GMACC, as a Lender and as Agent. The Oil and Gas facility consists of a term loan (the "Term Loan") in the amount of $22.5 million and a revolving facility (the "Revolving Loan") in a maximum amount of $30 million (all of which was funded on the Effective Date). The Term Loan bears interest at a rate of 14% per annum and the Revolving Loan bears interest at a rate of 13 1/2% per
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annum. Interest on the Term Loan and the Revolving Loan is payable monthly in arrears. Principal amortization of the Term Loan is due in 20 quarterly installments of $56,250 each beginning June 14, 2000, with the balance due March 14, 2005; however the Company may, and in certain circumstances must, make prepayments of such amount. If, subsequent to such prepayments, the Company demonstrates sufficient collateral value meeting the requirements of the Oil and Gas Facility provisions, the Company may be entitled to borrow additional advances under the Revolving Loan. The Oil and Gas Facility is secured by substantially all of the assets of the Company. The security interest in accounts receivable and inventory securing the Oil and Gas Facility is subordinated to the security interest of GMACC under the Accounts Receivable Facility. Interim and Final Financing Orders of the Bankruptcy Court modified certain terms of the Oil and Gas Facility. Pursuant to these Interim and Final Orders, GMACC waived compliance with certain provisions of the facility. Pursuant to the Final Financing Order, the Oil and Gas Facility is due on August 7, 2003.
On the Effective Date, the Company, as Issuer, Pipeline and Processing, as Guarantors, and U.S. Bank, N.A., as successor indenture trustee to Firstar Bank, N.A., entered into an Indenture dated as of March 15, 2000, pursuant to which the Company issued the Notes. Interest on the Notes is due semi-annually on March 15 and September 15. The Notes are secured by substantially all of the assets of the Company other than accounts receivable and inventory. The Indenture contains certain covenants that restrict the Company's ability to incur indebtedness, engage in related party transactions, dispose of assets or engage in sale/leaseback transactions, issue dividends on common stock, change its line of business, consolidate or merge with or into another entity or convey, transfer or lease all or substantially all of its assets, and suffer a change of control. The security interest in favor of the Trustee is subordinated to the Security Interest in favor of the Agent under the Oil and Gas Facility. The fair value of the Notes, based on quoted market prices on January 31, 2003, was $70 million.
On March 15, 2002, Credit Suisse First Boston Management Corporation ("CSFB") and the Company, as borrower, and Processing, as guarantor, entered into an unsecured Term Loan Agreement, wherein CSFB advanced to the Company the principal sum of $2.0 million which was due and payable, together with interest at a rate of 15% per annum, on October 15, 2002. The Company has not paid the principal and accrued interest of this loan and is in default under its terms. At January 31, 2003, the outstanding balance of this loan is included in liabilities subject to compromise. CSFB is the beneficial owner of more than 10% of each of the 15% Notes, Class A Common Stock and Senior Preferred Stock.
In December 1998, TransTexas borrowed $5.65 million from an unaffiliated third party in order to meet a portion of its December 31, 1998 interest payment obligations. In accordance with the Plan, the principal amount of the note was increased to $6.7 million, bears interest at 8% and is collateralized by a pledge of the stock of Processing and a mortgage on the Winnie, Texas processing facility. At January 31, 2003, the undiscounted principal balance outstanding of this note was $3.2 million.
Additional notes payable totaling $1.2 million and $6.8 million at January 31, 2003 and 2002, respectively, consist of amounts payable pursuant to the Prior Plan in settlement of the claims of certain creditors. Such amounts are generally payable over a five year period with stated interest rates ranging from 8% to 10%; however, these notes have been discounted to an effective interest rate of 14%.
Production Payments
In March 2000, TransTexas entered into a production payment drilling program agreement with two unaffiliated third parties in the form of a term overriding royalty interest carved out of and burdening certain properties ("Subject Interests"). The Company has the right to offer additional interests to the production payment parties at a negotiated purchase price. The production payment calls for the repayment of the primary sum plus an amount equivalent to a 15% annual interest rate on the unpaid portion of such primary sum. In March 2002, the Company closed an Eighth Supplement to the production payment whereby the Company received $14.0 million. In June 2002, the Company closed a Ninth Supplement to the production payment whereby the Company received $13.0 million in exchange for additional properties being made subject to the production payment. As of January 31, 2003, the outstanding balance of the production payment was $18.6 million, of which $2.2 million attributable to produced volumes is included in accrued liabilities. The Oil and Gas Facility places certain restrictions on the amount that may be outstanding under the production payment. In April 2003, the Company closed a Tenth Supplement to the production payment whereby the Company received $5.0 million.
In connection with the production payment, the Company entered into various marketing and processing agreements with one of the third parties. Pursuant to these agreements, the Company pays a nominal marketing fee with respect to the Company's production associated with the New Subject Interests. In addition, the third party pays a fee for certain processing services provided by Processing.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following information reflects TransTexas' noncash activities (in thousands of dollars):
Cash paid for interest is as follows (in thousands of dollars):
9. ACCRUED LIABILITIES
Accrued liabilities classified as current liabilities consist of the following (in thousands of dollars):
10. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands of dollars):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Income tax expense (benefit) includes the following (in thousands of dollars):
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):
Significant components of TransTexas' tax attributes are as follows (in thousand of dollars):
Part of the debt refinancing of TransAmerican 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 provision (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.
As a former member of the affiliated group for tax purposes (the "TNGC Consolidated Group") which included TNGC Holdings Corporation, the sole stockholder of TransAmerican ("TNGC"), TransAmerican, TEC, TransTexas and TARC, TransTexas will be severally liable for any tax liability resulting from any transaction of the TNGC Consolidated Group that occurred during any taxable year of the TNGC Consolidated Group during which TransTexas was a member, including the above described transactions. During fiscal year 1997, the IRS commenced an audit of the consolidated federal income tax returns of the TNGC Consolidated Group for its taxable years ended July 31, 1994 and July 31, 1995. The Company has been advised by the IRS that they have completed their audit and do not propose any adjustments.
TransTexas expects that a significant portion of its net operating loss carryovers ("NOLs") will be eliminated and the use of those NOLs that are not eliminated will be severely restricted as a consequence of TransTexas' reorganization. In addition, certain other tax attributes of TransTexas may under certain circumstances be eliminated or reduced as a consequence of TransTexas' reorganization. The potential elimination or reduction of NOLs and such other tax attributes may substantially increase the amount of tax payable by TransTexas.
Since the Effective Date, TransTexas had NOLs for federal income tax purposes of approximately $40.7 million that may be used in future years to offset taxable income. The NOLs will begin to expire during the years 2021 through 2024.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
In March 2002, John R. Stanley resigned as Chief Executive Officer and as Chairman and member of the Board of Directors of the Company. Mr. Stanley's employment agreement provided that the Company would pay Mr. Stanley $3.0 million in cash upon the termination of his employment. A separation agreement between Mr. Stanley and the Company provided that the Company would pay Mr. Stanley $3.0 million in installments, together with interest at a rate of 10% per annum. At January 31, 2003, the severance remaining to be paid to Mr. Stanley was $0.8 million and this amount is included in liabilities subject to compromise.
As discussed above (see Note 7), the Company and CSFB entered into an unsecured Term Loan Agreement wherein CSFB advanced to the Company the principal sum of $2.0 million. CSFB is the beneficial owner of more than 10% of each of the 15% Notes, Class A Common Stock and Senior Preferred Stock.
13. COMMITMENTS AND CONTINGENCIES
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. TransTexas believes that it is in material compliance with applicable environmental laws and regulations. Noncompliance with such laws and regulations could give rise to compliance costs and administrative penalties. It is not anticipated that TransTexas will be required in the near future to expend amounts that are material to the financial condition or operations of TransTexas by reason of environmental laws and regulations, but because such laws and regulations are frequently changed and, as a result, may impose increasingly strict requirements, TransTexas is unable to predict the ultimate cost of complying with such laws and regulations.
Legal Proceedings
Chapter 11 Bankruptcy. On November 14, 2002, TransTexas, Pipeline and Processing filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division. The bankruptcy cases are being jointly administered under the caption "In re: TransTexas Gas Corporation, et al., Debtors," Case No. 02-21926-C-11. TransTexas, Pipeline and Processing are operating their businesses and managing their properties as debtors in possession. As a result of the Chapter 11 filings, absent approval from the Bankruptcy Court, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising prior to the Petition Date.
Litigation Settlement. In October 2002, TransTexas entered into a settlement agreement with an unaffiliated oilfield service company whereby that company paid TransTexas $3.0 million. This settlement was approved by the Bankruptcy Court on December 4, 2002.
Prior Plan. TransTexas is a party to various claims and litigation arising out of the Prior Bankruptcy. Any obligations of the Company in respect of such claims and litigation arising out of the Prior Bankruptcy will be discharged or otherwise disposed of pursuant to the Prior Plan. Recovery of these obligations, if any, will be limited to any collateral held by the claimant and/or such claimant's pro rata share of amounts available to pay general unsecured claims.
General. TransTexas is a party to various claims and routine litigation arising in the normal course of its business. The resolution in any reporting period of one or more of the such claims or litigation could have a material effect on TransTexas' results of operations and cash flows for that period. Although the outcome of claims and litigation cannot be predicted with certainty, TransTexas does not expect that any of these various claims or routine litigation matters will have a material adverse effect on its financial position.
Operating Leases
As of January 31, 2003, TransTexas had long-term leases covering land and other property and equipment. Rental expense was approximately $2 million for the year ended January 31, 2003 and approximately $3 million for each of the years ended January 31, 2002 and 2001, respectively. 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, 2003, are as follows (in thousands of dollars): 2004-$73, 2005-$73, 2006-$66, 2007-$7.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Drilling Rig Commitment
During February 2001, TransTexas entered into a one-year contract with an independent contractor for utilization of a drilling rig capable of drilling wells to a depth of approximately 18,500 feet. TransTexas utilized this rig to drill wells in the Galveston Bay area. As of January 31, 2003, the balance remaining to be paid under this contract, which commenced in May 2001, was approximately $1 million. In April 2003, the independent contractor released TransTexas from any claim that it had under the 2001 contract.
Gas Delivery Agreements
TransTexas has entered into contracts with Kinder Morgan Ship Channel Pipeline, L.P., formerly Tejas Ship Channel, LLC, for transportation of its production from the Eagle Bay field to the Winnie facilities at a fixed negotiated rate. Under these contracts, the Company has agreed to deliver the first 75,000 MMBtu per day of natural gas and associated condensate to Kinder Morgan Ship Channel Pipeline, L.P.
The Company also entered into a contract with a subsidiary of Duke Energy Field Services, LLC for transportation of natural gas on a firm and interruptible basis from the Winnie facility to natural gas liquids recovery facilities located in the Beaumont/Port Arthur, Texas area, and residue gas from these facilities to various distribution points. Under the agreement, the Company has agreed to deliver the first 56,250 Mcf of natural gas and 19,500 MMBtu of residue gas per day to Duke Energy Field Services. Transportation fees for natural gas and residue gas are based on fixed negotiated rates.
14. PREFERRED STOCK DIVIDENDS AND CONVERSION TO CLASS A COMMON STOCK
The Certificate of Designation for the Senior Preferred Stock of the Company provides for the mandatory conversion of one-half of the outstanding shares of Senior Preferred Stock into fully paid and non-assessable shares of Class A Common Stock at the rate of 0.3461 shares of Class A Common Stock for each $1.00 of liquidation preference per share, plus an amount equal to accrued and unpaid dividends, of Senior Preferred Stock if the Company fails to pay dividends on the Senior Preferred Stock as required by the Certificate of Designation for the Senior Preferred Stock on any two dividend payment dates. The Certificate of Designation for the Series A Junior Preferred Stock ("Junior Preferred Stock" and together with the Senior Preferred Stock, the "Preferred Stock") provides for the mandatory conversion of all of the outstanding shares of Junior Preferred Stock into fully paid and non-assessable shares of Class A Common Stock at the rate of 0.1168 shares of Class A Common Stock for each $1.00 of liquidation preference per share, plus an amount equal to accrued and unpaid dividends, of Junior Preferred Stock if the Company fails to pay dividends on the Senior Preferred Stock as required by the Certificate of Designation for the Senior Preferred Stock on any two dividend payment dates.
The Certificate of Designation for each of the Senior Preferred Stock and the Junior Preferred Stock required the payment to the holders of a cash dividend on the Senior Preferred Stock and an in-kind dividend on the Junior Preferred Stock, respectively, by the Company on June 15, 2002 and on September 15, 2002. The Company did not make the required dividend payments on either date. Therefore, the liquidation preference of the Senior Preferred Stock was increased to approximately $1.04 per share and the liquidation preference of the Junior Preferred Stock was increased to approximately $1.05 per share. As a result, on September 16, 2002, each two shares of Senior Preferred Stock was converted into one share of New Senior Preferred and into approximately 0.3596 shares of Class A Common Stock and each share of Junior Preferred Stock was converted into approximately 0.1227 shares of Class A Common Stock. No fractional shares were issued in the conversion. The Board of Directors of the Company determined that the fair market value of each share of the Preferred Stock and Common Stock for purposes of the conversion was less than $0.01 per share and, therefore, no cash was paid to holders of Preferred Stock in lieu of fractional shares.
In the aggregate 164,333,875 shares of Senior Preferred Stock representing one-half of all of the outstanding Senior Preferred Stock were converted into 59,101,243 shares of Class A Common Stock and 25,240,513 shares of Junior Preferred Stock representing all of the outstanding Junior Preferred Stock were converted into 3,097,336 shares of Class A Common Stock. Since the Company did not pay the required dividend payments, holders of the Senior Preferred Stock have the right, voting separately as a class, to elect all five directors to the Company's Board of Directors. On December 16, 2002 and March 17, 2003, the Company did not make the required cash dividend payments to the remaining holders of the Senior Preferred Stock. The Company does not anticipate paying cash dividends on the Senior Preferred Stock in the future.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SHORT-SWING SALE
During the year ended January 31, 2001, the Company received $25,000 in cash from a stockholder as a result of such stockholder's compliance with the requirement of the Securities Exchange Act of 1934, as amended, that profits from the sale of certain securities of a company that were held less than six months by certain officers, directors and principal stockholders must be returned to the Company. The Company recorded the proceeds as an increase to additional paid-in capital.
16. BUSINESS SEGMENTS
TransTexas currently conducts its operations in one industry segment, exploration and production ("E&P"), which explores for, develops, produces and markets natural gas, condensate and natural gas liquids. All of TransTexas' significant gas and oil operations are located along the Texas Gulf Coast. 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.
For the year ended January 31, 2003, two customers provided approximately $50 million in E&P revenues. For the year ended January 31, 2002, two customers provided approximately $88 million in E&P revenues. For the year ended January 31, 2001, two customers provided approximately $124 million in E&P revenues. 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 its production at comparable prices
17. CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share data)
18. SUPPLEMENTAL GUARANTOR INFORMATION
Galveston Bay Pipeline Company and Galveston Bay Processing Corporation are guarantors of the Notes and the Oil and Gas Facility. Separate financial statements of the Guarantors are not considered to be material to holders of the Notes and GMACC. The following condensed consolidating financial statements present supplemental information of the Guarantors as of and for the years ended January 31, 2003 and 2002.
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET JANUARY 31, 2003 (IN THOUSANDS OF DOLLARS)
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET JANUARY 31, 2002 (IN THOUSANDS OF DOLLARS)
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED JANUARY 31, 2003 (IN THOUSANDS OF DOLLARS)
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED JANUARY 31, 2002 (IN THOUSANDS OF DOLLARS)
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED JANUARY 31, 2003 (IN THOUSANDS OF DOLLARS)
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED JANUARY 31, 2002 (IN THOUSANDS OF DOLLARS)
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTAL GAS AND OIL DISCLOSURE (UNAUDITED)
The accompanying tables present information concerning TransTexas' gas and oil producing activities and are prepared in accordance with SFAS 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):
Costs incurred for gas and oil producing activities are as follows (in thousands of dollars):
Results of operations for gas and oil producing activities are as follows (in thousands of dollars):
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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(1) As of January 31, 2001, proved undeveloped reserves in the amount of 5.7 Bcf of natural gas and 0.5 MMBbls of condensate became proved developed reserves in February 2001 with the casing of a well in the Eagle Bay field.
Standardized Measure Information
The calculation of estimated future net cash flows in the following table assumed the continuation of existing economic conditions and applied year-end prices (except for future price changes as allowed by contract) of gas and condensate to the expected future production of such reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing those proved reserves.
The standardized measure of discounted future net cash flows does not purport, nor should it be interpreted, to present the fair market value of TransTexas' gas and oil reserves. These estimates reflect proved reserves only and ignore, among other things, changes in prices and costs, revenues that could result from probable reserves which could become proved reserves in fiscal 2004 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):
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
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):
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Year-end wellhead prices received by TransTexas from sales of natural gas, including margins from natural gas liquids, were $6.03, $2.35 and $6.39 per Mcf for 2003, 2002 and 2001, respectively. Year-end condensate prices were $33.26, $18.61 and $28.23 per barrel for 2003, 2002 and 2001, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
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.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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.
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.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Within the 90 days prior to the date of this annual report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. This evaluation was conducted under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
b) Changes in Internal Controls. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the Company's most recent evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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* filed herewith
(b) Reports on Form 8-K:
On November 15, 2002, the Company filed a Current Report on Form 8-K to report that on November 14, 2002 it filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas, Corpus Christi Division. On November 14, 2002, the Company's subsidiaries, Galveston Bay Pipeline Company and Galveston Bay Processing Corporation also filed voluntary petitions under Chapter 11.
On April 2, 2003, the Company filed a Current Report on Form 8-K to report that on March 27, 2003 Mr. Vincent Intrieri resigned from the Company's Board of Directors.
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 May 1, 2003.
TRANSTEXAS GAS CORPORATION
By: /s/ ARNOLD H. BRACKENRIDGE ------------------------------ Arnold H. Brackenridge, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on May 1, 2003.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Arnold H. Brackenridge, certify that:
1. I have reviewed this annual report on Form 10-K of TransTexas Gas Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or other persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 1, 2003 /s/ ARNOLD H. BRACKENRIDGE -------------------------------- Arnold H. Brackenridge President, Chief Executive Officer and Chief Operating Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Ed Donahue, certify that:
1. I have reviewed this annual report on Form 10-K of TransTexas Gas Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or other persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 1, 2003 /s/ ED DONAHUE --------------------------------------- Ed Donahue Vice President, Chief Financial Officer and Secretary
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of TransTexas Gas Corporation:
Our audits of the consolidated financial statements referred to in our report dated April 30, 2003 appearing in the January 31, 2003 10-K of TransTexas Gas Corporation also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Houston, Texas April 30, 2003
TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
INDEX TO EXHIBITS
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* filed herewith