LNG

Cheniere Energy, Inc. - Form 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2002. Cheniere Energy, Inc. is an oil and gas exploration and development company transitioning toward the development of a liquefied natural gas (LNG) receiving terminal in Freeport, Texas. The company recently sold substantially all of its proved oil and gas reserves in April 2002, retaining only overriding royalty interests in new discoveries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Oil and gas sales dropped significantly to $21,998 for the quarter (from $395,540 in 2001) and $221,557 for the nine-month period (from $2,142,028 in 2001). This is primarily due to the April 2002 sale of the West Cameron Block 49 producing properties.
• Reduced Losses: The net loss for the quarter decreased to $1.47 million from $5.06 million in the prior year. The nine-month loss decreased to $6.37 million from $9.75 million. Improvements were driven by the absence of a $2.97 million ceiling test write-down recorded in 2001 and a $340,257 gain on the sale of properties in 2002.
• Expense Shifts: General and Administrative (G&A) expenses increased due to engineering and regulatory work for the Freeport LNG terminal. Conversely, production costs and depreciation, depletion, and amortization (DD&A) related to oil and gas properties decreased sharply following the asset sale.
• Investment in Affiliate: Cheniere's equity in the net loss of its unconsolidated affiliate, Gryphon Exploration Company, was zero for the quarter ended September 30, 2002, compared to a $929,482 loss in the prior year. This is because Cheniere's investment basis in Gryphon was reduced to zero in the second quarter of 2002.

Outlook, Risks, and Management Commentary

• Liquidity and Going Concern: Management explicitly states that cash balances and operating cash flows are not adequate to meet future liquidity requirements. There is uncertainty regarding the company's ability to continue as a going concern. The company requires approximately $8 million to fund permitting and regulatory work for the LNG terminal in 2002 and 2003.
• Financing Strategy: Future liquidity is expected to be met through the sale of oil and gas interests, the sale of the LNG project interest, or additional equity offerings. A $750,000 note payable related to an option sale is due in July 2003.
• LNG Project Progress: In August 2002, Cheniere agreed to sell a 60% interest in its Freeport LNG project to Freeport LNG Development, L.P., retaining a 40% interest. The transaction involves $5 million in cash payments to Cheniere and up to $9 million in project preparation costs by the partner.
• Legal Proceedings: A lawsuit filed by Fairfield Industries regarding a seismic license was settled in March 2002. Cheniere's obligations were discharged through the transfer of Gryphon common stock.
• Accounting Changes: The company early adopted FAS 145, reclassifying the loss on early extinguishment of debt as an ordinary loss rather than an extraordinary item.

Investor Verification Checklist

• Capital Adequacy: Verify the company's ability to raise the required $8 million for LNG project development before the July 2003 note maturity.
• LNG Transaction Closing: Confirm the closing of the 60% interest sale to Freeport LNG Development, L.P., scheduled for December 13, 2002, and the receipt of the initial $1 million payment.
• Gryphon Ownership: Monitor the dilution of Cheniere's interest in Gryphon (currently 9.3% on an as-converted basis) and the impact of Gryphon's cash calls on Cheniere's future equity value.
• Going Concern Status: Review subsequent filings for any updates on the "going concern" uncertainty and potential equity dilution from new financing.
• Asset Retirement Obligations: Assess the impact of the upcoming adoption of FAS 143 (Asset Retirement Obligations) effective January 1, 2003.