LNG

Cheniere Energy, Inc. - 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2003. Cheniere Energy, Inc. is an independent energy company engaged in the exploration and production of oil and gas and the development of liquefied natural gas (LNG) receiving terminals. The company operates primarily in the Gulf of Mexico and is developing LNG projects in Freeport and Corpus Christi, Texas.

Key Financial Metrics

Material Changes vs. Prior Period

• Turnaround to Profitability: The company reported a net income of $1.5 million for the six months ended June 30, 2003, compared to a net loss of $4.9 million in the same period in 2002. This $6.4 million swing was primarily driven by non-operating gains.
• Asset Sales and Gains: Significant gains were recorded from the sale of LNG assets ($4.76 million) and a limited partnership interest ($423,454) related to the Freeport LNG project. In the prior year, a gain of $340,257 was recorded on the sale of proved oil and gas properties.
• Accounting Method Change: The company switched from the equity method to the cost method for its investment in Gryphon Exploration Company effective January 1, 2003. Consequently, the $2.18 million equity in net loss of the unconsolidated affiliate recorded in 2002 was eliminated in 2003.
• Operating Expenses: LNG terminal development expenses decreased by $712,777 year-over-year due to the sale of a 60% interest in the Freeport LNG project, shifting costs to the new partnership structure.
• Production: Oil and gas revenues increased slightly to $231,420 from $199,559, driven by higher average sales prices ($5.91/Mcfe vs $2.47/Mcfe), despite lower production volumes due to the sale of West Cameron Block 49 properties in 2002.

Guidance, Outlook, and Risks

• Liquidity Strategy: Management expects to meet liquidity requirements through cash flow from operations, divestiture of properties, sales of working interests, and debt or equity offerings. The company operates on a going concern basis.
• Financing: On July 25, 2003 (subsequent to period end), the company established a $5 million line of credit with an initial borrowing base of $2 million. Financial advisors were engaged in July 2003 to arrange construction financing for LNG terminals.
• Project Status:
  • Freeport LNG: Cheniere retained a 30% interest after selling portions of the project. The partner is funding permit costs up to $9 million.
  • Corpus Christi LNG: A new limited partnership was formed in May 2003. Cheniere holds a 66.7% interest, while partner BPU LNG holds 33.3% and is funding initial expenses.
• Risks: Key risks include the ability to secure financing for LNG projects, obtain regulatory approvals, and the uncertainty of hydrocarbon discoveries. The company has no derivative transactions to hedge commodity price risk.

Investor Verification Checklist

• Verify the timing and conditions of the remaining $3.75 million cash payments due from the Freeport LNG partnership.
• Confirm the status of the $5 million line of credit established in July 2003 and any drawdowns.
• Assess the sustainability of the net income, noting it was driven largely by one-time asset sale gains rather than core operating cash flow (which remained negative).
• Review the progress of the Corpus Christi LNG project and the commitment of the partner (BPU LNG) to fund the initial $4.5 million in expenses.
• Monitor the company's ability to raise additional capital, as future operations depend heavily on external financing for LNG development.