10-Q 1 h06778e10vq.txt TRANSTEXAS GAS CORPORATION - APRIL 30, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003 ---------- COMMISSION FILE NUMBER 0-30475 TRANSTEXAS GAS CORPORATION 1300 NORTH SAM HOUSTON PARKWAY EAST SUITE 310 HOUSTON, TEXAS 77032-2949 Registrant's telephone number, including area code: (281) 987-8600 DELAWARE 76-0401023 (State of incorporation) (I.R.S. Employer Identification No.) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer. Yes [ ] No [X] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The number of shares of Class A Common Stock of the registrant outstanding on June 16, 2003 was 63,448,830. ================================================================================ TRANSTEXAS GAS CORPORATION TABLE OF CONTENTS

1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of TransTexas Gas Corporation: We have reviewed the accompanying condensed consolidated balance sheet of TransTexas Gas Corporation (debtor in possession) (the "Company") as of April 30, 2003 and the related condensed consolidated statement of operations for each of the three month periods ended April 30, 2003 and 2002 and the condensed consolidated statement of cash flows for the three months ended April 30, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. The accompanying condensed 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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of January 31, 2003, and the related consolidated statement of operations, stockholders' equity (deficit), and cash flows for the year then ended (not presented herein); and in our report dated April 30, 2003, which contains an explanatory paragraph regarding the Company's ability to continue as a going concern, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. As discussed in Note 1, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" as of February 1, 2003. PricewaterhouseCoopers LLP Houston, Texas June 13, 2003 2 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 3 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 4 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)

See accompanying notes to condensed consolidated financial statements. 5 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL In the opinion of management, the accompanying unaudited condensed consolidated financial statements of TransTexas Gas Corporation (debtor in possession) (together with its subsidiaries, "TransTexas" or the "Company") contain all adjustments (consisting of normal, recurring accruals) necessary to fairly state the Company's consolidated financial position, the results of its operations and cash flows for the periods presented. TransTexas' subsidiaries are Galveston Bay Pipeline Company ("Pipeline") and Galveston Bay Processing Corporation ("Processing"). The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in TransTexas' annual report on Form 10-K for the year ended January 31, 2003. The condensed consolidated balance sheet as of January 31, 2003 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Interim results of operations and cash flows are not necessarily indicative of the Company's operations for the entire year. The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note 2, TransTexas, Pipeline and Processing filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on November 14, 2002. Comprehensive Income (Loss) A summary of the Company's comprehensive income (loss) for the three months ended April 30, 2003 and 2002 is as follows (in thousands of dollars):

A summary of the Company's accumulated other comprehensive income (loss) for the period ended April 30, 2003 is as follows (in thousands of dollars): Accumulated other comprehensive income (loss): Balance at January 31, 2003 ............................ $(2,092) Change in the fair value of hedging arrangements ....... 598 ------- $(1,494) =======

Change in the Accounting for Asset Retirement Obligations Effective February 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143 ("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, an 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. Prior to the adoption of SFAS 143, the Company provided for any estimated asset retirement obligation, net of any salvage value, as part of the calculation of depreciation, depletion and amortization. This method resulted in the recognition of the asset retirement obligation, which was recorded in accumulated depreciation, depletion and amortization, over the life of the property on a unit-of-production basis. 6 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) The Company's asset retirement obligation represents expected future costs to plug and abandon its wells, dismantle facilities and reclamate sites at the end of the related assets' useful lives. As of February 1, 2003, the Company recorded a long-term liability representing its asset retirement obligation of approximately $3.2 million, an increase in property and equipment of approximately $2.3 million, a reduction in accumulated depreciation, depletion and amortization of approximately $1.4 million and a gain on the cumulative effect of change in accounting principle of approximately $0.5 million. The following information reflects activity related to the Company's asset retirement obligation for the three months ended April 30, 2003 (in thousands of dollars): Balance, February 1, 2003 .................................. $3,204 Accretion expense .......................................... 79 ------ Balance, April 30, 2003 .................................... $3,283 ======

Assuming the Company had adopted SFAS 143 as of February 1, 2002, its asset retirement obligation at that date would have been approximately $2.7 million based on the same assumptions used when calculating the asset retirement obligation at February 1, 2003. The pro forma effect of adopting SFAS 143 on net loss available to common stockholders for the three months ended April 30, 2002 is as follows (in thousands of dollars, except share amounts):

Recently Issued Accounting Pronouncements In April 2002, the Financial Accounting Standards Board ("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. 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. As of April 30, 2003, the Company has not issued any new guarantees or modified existing guarantees. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective for the Company on August 1, 2003. The adoption of SFAS 150 is not expected to have a material impact on the Company's financial statements. 7 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 2. CHAPTER 11 FILING AND LIQUIDITY 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. 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 filed 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 on the Company's website at www.transtexasgas.com. 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 April 30, 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 working interest 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 April 30, 2003, liabilities subject to compromise included the following (in thousands of dollars): Long-term debt ............... $205,197 Note payable ................. 2,000 Accrued liabilities .......... 26,054 Other liabilities ............ 5,643 -------- $238,894 ========

Since the Petition Date, the unaudited condensed consolidated financial statements 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 quarter ended April 30, 2003 would have increased approximately $7.9 million. The accompanying unaudited condensed consolidated 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 subsequently reported in the Company's 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. 8 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Prior Reorganization On April 19, 1999, 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. 3. CREDIT AGREEMENTS AND PRODUCTION PAYMENTS Accounts Receivable Facility In March 2000, the Company and GMAC Commercial Credit LLC ("GMACC") entered into a Third Amended and Restated Accounts Receivable Management and Security Agreement (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 April 30, 2003, there were no outstanding advances under the Accounts Receivable Facility and the Company had availability for advances of approximately $2.8 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. 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 April 2003, the Company closed a Tenth Supplement to the production payment whereby the Company received $5.0 million. As of April 30, 2003, the outstanding balance of the production payment was $18.3 million, of which $2.9 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 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 Subject Interests. In addition, the third party pays a fee for certain processing services provided by Processing. 4. PREFERRED STOCK DIVIDENDS On March 17, 2003, the Company did not make the required cash dividend payments to the remaining holders of its Series A Senior Preferred Stock ("Senior Preferred Stock"). The Company does not anticipate paying cash dividends on the Senior Preferred Stock in the future. 9 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 5. HEDGING AGREEMENTS As of April 30, 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 three months ended April 30, 2003, the Company paid approximately $1.1 million of reorganization items consisting primarily of legal and professional fees directly related to the Company's Chapter 11 bankruptcy proceeding. 7. COMMITMENTS AND CONTINGENCIES 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. 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. 10 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) General. TransTexas is a party to various claims and routine litigation arising in the normal course of its business. The resolution of 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. 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. Potential Tax Liabilities 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 in the future. Since the Effective Date, TransTexas had NOLs for federal income tax purposes of approximately $84.6 million that may be used in future years to offset taxable income. The NOLs will begin to expire during the years 2021 through 2024. 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. In April 2003, the independent contractor released TransTexas from any claim that it had under the 2001 contract. Gas Delivery Commitments 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. 11 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 8. 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 April 30, 2003, the severance remaining to be paid to Mr. Stanley was $0.8 million and this amount is included in liabilities subject to compromise. 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 April 30, 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. 9. SUPPLEMENTAL GUARANTOR INFORMATION Galveston Bay Pipeline Company and Galveston Bay Processing Corporation are guarantors of the 15% Notes and the Oil and Gas Facility. Separate financial statements of the Guarantors are not considered to be material to holders of the 15% Notes and GMACC. The following unaudited condensed consolidating financial statements present supplemental information of the Guarantors as of April 30, 2003 and January 31, 2003 and for the three months ended April 30, 2003 and 2002. 12 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET APRIL 30, 2003 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

13 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET JANUARY 31, 2003 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

14 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2003 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

15 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2002 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

16 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED APRIL 30, 2003 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

17 TRANSTEXAS GAS CORPORATION (DEBTOR IN POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED APRIL 30, 2002 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of TransTexas included elsewhere in this report. The Company filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on November 14, 2002 (the "Petition Date"), which is more fully described in the "Liquidity and Capital Resources" section below. RESULTS OF OPERATIONS General TransTexas' results of operations are dependent upon natural gas production volumes and unit prices from sales of natural gas, condensate and natural gas liquids ("NGLs"). The profitability of TransTexas also depends on its ability to minimize finding and lifting costs and maintain its reserve base while maximizing production. TransTexas' operating data for the three months ended April 30, 2003 and 2002 are as follows:

A summary of TransTexas' operating expenses is set forth below (in millions of dollars):

TransTexas' average depletion rates have been as follows:

Three Months Ended April 30, 2003 Compared with the Three Months Ended April 30, 2002 Gas, condensate and NGL revenues for the three months ended April 30, 2003 decreased $7.5 million from the prior period, due primarily to a decrease in sales volumes for all products. The average monthly prices received per Mcf of gas ranged from $5.23 to $8.85 in the three months ended April 30, 2003, compared to a range of $2.16 to $2.71 in the prior period. The decrease in sales volumes is due primarily to the normal decline in production, reduced production from the State Tract 331-1 due to mechanical problems and the lack of drilling new wells. In an attempt to increase production in the Eagle Bay field, the Company commenced drilling the State Tract 331-9 in April 2003. 19 Lease operating expenses for the three months ended April 30, 2003 decreased $0.7 million from the prior period due primarily to a decrease in outside transportation and well service costs. Pipeline and gathering expenses decreased $0.5 million from the prior period due primarily to lower labor costs and lower rental expense. Depreciation, depletion and amortization expense for the three months ended April 30, 2003 decreased $5.1 million due to lower sales volumes for all products that was partially offset by a $0.16 per Mcfe increase in the depletion rate. General and administrative expenses decreased $2.8 million primarily due to the accrual of $3.0 million related to the separation agreement with John R. Stanley in March 2002 (see Note 8) and a decrease in the number of employees at the corporate headquarters offset by an increase in professional fees and insurance. Taxes other than income taxes decreased by $0.2 million over the prior period due primarily to lower severance and production taxes. Interest expense for the three months ended April 30, 2003 decreased by $8.3 million from the prior period primarily because the Company ceased to expense interest on debt reclassified to liabilities subject to compromise, effective after the Petition Date. 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 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 filed 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 on the Company's website at www.transtexasgas.com. 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. Notes Payable In March 2000, the Company and GMAC Commercial Credit LLC ("GMACC") entered into a Third Amended and Restated Accounts Receivable Management and Security Agreement (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 April 30, 2003, there were no outstanding advances under the Accounts Receivable Facility and the Company had availability for advances of approximately $2.8 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. 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 April 2003, the Company closed a Tenth Supplement to the production payment whereby the Company received $5.0 million. As of April 30, 2003, the 20 outstanding balance of the production payment was $18.3 million, of which $2.9 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 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 Subject Interests. In addition, the third party pays a fee for certain processing services provided by Processing. Preferred Stock Dividends On 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. Potential Tax Liabilities 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 in the future. Since the Effective Date, TransTexas had NOLs for federal income tax purposes of approximately $84.6 million that may be used in future years to offset taxable income. The NOLs will begin to expire during the years 2021 through 2024. 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 the bankruptcy proceeding and litigation. ITEM 3. 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 April 30, 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: 21

For the three months ended April 30, 2003, the Company recognized hedging losses of $2.1 million, which are reflected in gas, condensate and natural gas liquids revenues. For the three months ended April 30, 2002, the Company recognized hedging gains of $0.8 million. At April 30, 2003, the Company's estimated net liability of these contracts was $1.5 million. Because substantially all of its long-term obligations at April 30, 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 April 30, 2003. New Accounting Principles For a discussion of new accounting principles, see "Recently Issued Accounting Pronouncements" under Note 1 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q. ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures. Within the 90 days prior to the date of this quarterly 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. 22 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 7 to the unaudited condensed consolidated financial statements for a discussion of TransTexas' legal proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NUMBER DESCRIPTION ------ ----------- 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: 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. On May 2, 2003, the Company filed a Current Report on Form 8-K to report that it had submitted its disclosure statement and plan for reorganization to the United States Bankruptcy Court. 23 SIGNATURE Pursuant to the requirements 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. TRANSTEXAS GAS CORPORATION By: /s/ Ed Donahue --------------------------------------- Ed Donahue Vice President, Chief Financial Officer and Secretary June 16, 2003 24 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Arnold H. Brackenridge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TransTexas Gas Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: June 16, 2003 /s/ ARNOLD H. BRACKENRIDGE -------------------------------------- Arnold H. Brackenridge President, Chief Executive Officer and Chief Operating Officer 25 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Ed Donahue, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TransTexas Gas Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: June 16, 2003 /s/ ED DONAHUE --------------------------------------- Ed Donahue Vice President, Chief Financial Officer and Secretary 26 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

TRANSTEXAS GAS CORP 10-Q