LNG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004 for Cheniere Energy, Inc., a Delaware corporation. The company operates in two primary segments: LNG receiving terminal development (preliminary stage for Sabine Pass and Corpus Christi sites) and oil and gas exploration and development in the Gulf of Mexico. As of May 6, 2004, there were 18,880,592 shares of common stock outstanding.

Key Financial Metrics

Note: The company had a $1,000,000 note payable at December 31, 2003, which was repaid in January 2004. No long-term debt is outstanding as of March 31, 2004.

Material Changes vs. Prior Period

• Net Loss vs. Net Income: The company reported a net loss of $1.07 million in Q1 2004, compared to a net income of $3.12 million in Q1 2003. The 2003 income was driven by a $4.76 million gain on the sale of LNG assets and a $423,454 gain on the sale of a limited partnership interest, neither of which occurred in 2004.
• Revenue Growth: Oil and gas sales revenue increased 202% to $332,345, driven by higher production volumes (57,638 Mcfe vs. 14,487 Mcfe), despite a decrease in average natural gas prices.
• Expense Increases: LNG terminal development expenses surged 884% to $3.88 million due to accelerated development at Sabine Pass and Corpus Christi sites. General and administrative expenses increased 214% to $1.64 million due to staff expansion and professional fees.
• Liquidity Improvement: Cash and cash equivalents increased significantly from $1.26 million to $14.59 million, primarily due to a private placement of common stock in January 2004 raising approximately $13.9 million in net proceeds and a $2.5 million reimbursement from Freeport LNG.

Guidance, Outlook, and Risks

• Outlook: Management anticipates FERC approval and completion of the permitting process for LNG terminals near the end of 2004, with construction to begin shortly thereafter. The company expects to meet liquidity requirements for the next 12 months through cash balances, equity issuances, and borrowings under its $5 million line of credit.
• Freeport LNG Partnership: Cheniere holds a 30% interest in Freeport LNG. In Q1 2004, the partnership recorded significant income due to a $10 million nonrefundable capacity reservation fee from ConocoPhillips. Cheniere recognized $2.16 million in equity income from this partnership.
• Corpus Christi LNG: A minority partner (BPU LNG) funded 100% of project expenses up to $4.5 million. As of March 31, 2004, the partner had contributed $4.0 million. Cheniere expects to begin funding its share of expenses in May 2004.
• Risks:
  • Commodity Prices: The LNG business premise relies on sustained U.S. natural gas prices of $3.00 per Mcf or more. Prices below this level could materially adversely affect development.
  • Capital Requirements: The company must raise additional capital to meet obligations under exploration agreements and fund terminal development. Failure to do so could materially affect operations.
  • Regulatory Approval: Progress depends on obtaining FERC approval and other permits.
• Unusual Items: The Q1 2004 results include $1.83 million in non-cash compensation related to stock awards and a $2.5 million reimbursement from Freeport LNG recorded as income because the investment basis had been reduced to zero.

Investor Verification Checklist

• Verify the status of FERC applications for the Sabine Pass and Corpus Christi LNG terminals.
• Confirm the closing of the ConocoPhillips transaction with Freeport LNG and the receipt of the $10 million capacity reservation fee.
• Monitor the funding status of the Corpus Christi LNG project, specifically the transition to Cheniere funding its 66.7% share of expenses starting May 2004.
• Review the utilization of the $5 million line of credit and the $1.12 million standby letter of credit.
• Assess the impact of natural gas price fluctuations on the viability of the LNG terminal business model.