S&P Cuts TransAmerican Energy Rtgs,Still on Watch Neg.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 11/2/98-- Standard & Poor's today lowered its ratings on TransAmerican Energy Corp. (TEC) and its subsidiary, TransTexas Gas Corp. (see list below). All ratings remain on CreditWatch with negative implications, were they were placed Sept. 1, 1998.

Standard & Poor's views TEC and its subsidiaries, TransTexas Gas Corp. and TransAmerican Refining Corp., as comprising a single economic entity.

The downgrade reflects continuing delays and increases in the estimate of investment needed to complete the capital improvement program at TransAmerican Refining's refinery in Norco, La. The refinery, which had been mothballed for more than 11 years, is being reactivated and converted to a highly complex unit -- this project faces considerable construction and technical risks.

On Oct. 30, 1998, TEC reached an agreement with the majority of its noteholders to allow it to subordinate their claims to $150 million in new funds from a group of investors. While the newly infused funds could provide sufficient funding to finally complete the capital improvement program, serious doubt remains as to whether the refinery could achieve the level of complexity and returns originally expected. For example, defective engineering quality in key units raises the specter of deficient coherence between refining units severely affecting operations.

Further, inadequate contractor estimates have led to high cost overruns. TransAmerican Refining now estimates that it will require $121 million to $145 million of additional funding to complete its refinery refurbishment program. As a result, even if the refinery were to operate efficiently, the increased equipment and funding costs have severely affected the prospects for earnings and interest protection measures.

TEC's very limited financial flexibility affords scant protection against major operating problems related to the refinery restart. Also, prospectively, weak refining margins could result in further worsening of cash flow expectations upon completion of the refinery, to levels insufficient to meet increased debt service.

The lowered rating of the existing secured notes to two notches below the corporate credit rating reflects that under the terms of the new $150 million investment, the existing noteholders will become structurally subordinated to the claims of new creditors. Substantially all of the assets of TransAmerican Refining will be transferred to a newly formed subsidiary -- TARC Operating -- in exchange for a lien on part of TARC Operating's common stock. The new funds will be invested into TARC Operating, and this subsidiary will be permitted to incur additional debt. As a result, the existing noteholders' claims will be subordinated to all current and future creditor claims, including those of preferred stockholders of TARC Operating, Standard & Poor's said. -- CreditWire

RATINGS LOWERED AND REMAINING ON CREDITWATCH

Rating

To From TransAmerican Energy Corp.

Corporate credit rating B- B+

Senior secured debt rating CCC  B+

TransTexas Gas Corp.

Corporate credit rating B- B+

Subordinated debt  CCC B-